-----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, V5zzjjfWF3CljE8r6fEe1MvmT/Vpcn1IM5AE16dP7JCTeOw6xfiI7VH5veQKm+mC +SlKVwz4UZLXz9zE7voDCg== 0000950131-99-002066.txt : 19990403 0000950131-99-002066.hdr.sgml : 19990403 ACCESSION NUMBER: 0000950131-99-002066 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NALCO CHEMICAL CO CENTRAL INDEX KEY: 0000069598 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS CHEMICAL PRODUCTS [2890] IRS NUMBER: 361520480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-04957 FILM NUMBER: 99586028 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-K405/A 1 AMENDMENT TO FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-K/A (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, 1998 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: Title of Each Class Name of Each Exchange on Which Registered Common Stock par value Chicago Stock Exchange $0.1875 per share New York Stock 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. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant was $1,812,008,725 at March 5, 1999.* The number of shares outstanding of each of the issuer's classes of Common Stock, as of March 5, 1999 was 65,725,414 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1998 Annual Report to Shareholders are incorporated by reference into Parts I and II. Portions of the Registrant's Proxy Statement dated March 29, 1999 for the April 29, 1999 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 II
Page ---- Financial Statements and Item 8 Supplementary Data...... 1 PART IV Exhibits, Financial Statement Schedules and Item 14 Reports on Form 8-K..... 1
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 1998 Annual Report to Shareholders, are incorporated herein by reference. The Quarterly Summary in the Company's 1998 Annual Report to Shareholders is incorporated herein by reference. 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 1998 Annual Report to Shareholders are incorporated herein by reference in Item 8: Statements of Consolidated Financial Condition December 31, 1998 and 1997 Statements of Consolidated Earnings Years ended December 31, 1998, 1997 and 1996 Statements of Consolidated Cash Flows Years ended December 31, 1998, 1997 and 1996 Statements of Consolidated Common Shareholders' Equity Years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Quarterly Summary (Unaudited) Years ended December 31, 1998 and 1997 Report of Independent Accountants (2) The following consolidated financial statement schedule for the years 1998, 1997 and 1996 is submitted herewith: Report of Independent Accountants on Financial Statement Schedule Schedule II--Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (3) Exhibits Exhibit 3A -- Restated Certificate of Incorporation(/2/)* Exhibit 3B -- Certificates of Correction and Amendment to the Restated Certificate of Incorporation(/6/)* Exhibit 3C -- Certificate of Designations, Preferences and Rights of Series B ESOP Convertible Preferred Stock(/4/)* Exhibit 3D -- Certificate of Designations, Preference and Rights of Series C Junior Participating Preferred Stock(/12/)* Exhibit 3E -- By-laws(/9/)* Exhibit 10A -- Form of Key Executive Agreement* 10B -- Agreements to Restore Benefits Reduced by Excess ERISA-Related Limits(/1/)* 10C -- Form of Death Benefit Agreement(/2/)* 10D -- Management Incentive Plan(/8/)*
1 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 1998 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 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 1998 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/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, 1998. (/10/Incorporated)herein by reference from the Registrant's Form 10-Q for the quarter ended September 30, 1996. (/11/Incorporated)herein by reference from the Registrant's Form 8-K dated June 24, 1996. (/12/Incorporated)herein by reference from the Registrant's Form 8-A dated June 24, 1996. (/13/Incorporated)herein by reference from the Registrant's Notice of Annual Meeting and Proxy Statement dated March 29, 1999. *Exhibit was filed with Form 10-K for the year ended December 31, 1998. 2 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 By /s/ E. J. Mooney ---------------------------------- E. J. Mooney Chairman, Chief Executive Officer Date: April 1, 1999 3 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 6, 1999 appearing on page 42 of the 1998 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. PricewaterhouseCoopers LLP Chicago, Illinois February 6, 1999 4 NALCO CHEMICAL COMPANY AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Col. A Col. B Col. C Col. D Col. E ------ ---------- ----------------------- ------------ ---------- Additions ----------------------- (2) (1) Charged To Balance At Charged To Other Balance Beginning Costs Accounts-- Deductions-- At End Description of Period and Expenses Describe Describe Of Period ----------- ---------- ------------ ---------- ------------ ---------- Reserves deducted in the Statements of Consolidated Financial Condition from the assets to which they apply Allowance for doubtful accounts Year Ended: $683,000(A) December 31, 1998 $4,170,000 $3,602,000 6,000(C) $2,411,000(B) $6,050,000 ========== ========== ======== ========== ========== $ 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 ========== ========== ======== ========== ==========
- -------- Note A--Valuation of assets acquired. Note B--Excess of accounts written off over recoveries. Note C--Foreign currency translation adjustments. 5 EX-13 2 PORTIONS OF THE 1998 ANNUAL REPORT EXHIBIT (13) 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, 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. PricewaterhouseCoopers LLP R. R. Ross Chicago, Illinois Engagement Partner February 6, 1999 - ------------------------------------------------------------------------- Statements of Consolidated Earnings
Years Ended December 31 ------------------------------ (in millions, except per share figures) 1998 1997 1996 - --------------------------------------------------------------------------------- Net Sales $1,573.5 $1,433.7 $1,303.5 Operating costs and expenses Cost of products sold 714.1 629.6 568.6 Selling, administrative and research expenses 618.0 561.4 518.2 Cost reduction program 180.0 - - -------- -------- -------- 1,512.1 1,191.0 1,086.8 -------- -------- -------- Operating Earnings 61.4 242.7 216.7 Interest and other income 2.4 0.7 2.6 Interest expense (26.5) (15.3) (14.4) Equity in earnings of partnership 22.6 28.2 24.5 -------- -------- -------- Earnings from Continuing Operations Before Income Taxes 59.9 256.3 229.4 Income taxes 22.0 92.9 83.5 -------- -------- -------- Earnings from Continuing Operations 37.9 163.4 145.9 Earnings from discontinued operations, net of taxes - - 8.6 -------- -------- -------- Earnings Before Effect of Accounting Change 37.9 163.4 154.5 Cumulative effect of change in accounting for business process reengineering costs, net of taxes - (4.5) - -------- -------- -------- Net Earnings $ 37.9 $ 158.9 $ 154.5 ======== ======== ======== Earnings Per Common Share--Basic Earnings from continuing operations $ .40 $ 2.28 $ 2.00 Discontinued operations, net of taxes - - .13 Cumulative effect of change in accounting for business process reengineering costs, net of taxes - (.07) - -------- -------- -------- Net earnings $ .40 $ 2.21 $ 2.13 ======== ======== ======== Earnings Per Common Share--Diluted Earnings from continuing operations $ .40 $ 2.10 $ 1.86 Discontinued operations, net of taxes - - .11 Cumulative effect of change in accounting for business process reengineering costs, net of taxes - (.06) - -------- -------- -------- Net earnings $ .40 $ 2.04 $ 1.97 ======== ======== ======== Average Shares Outstanding (in thousands) Basic 65,847 66,700 67,280 ======== ======== ======== Diluted 66,268 75,265 75,529 ======== ======== ========
The notes to consolidated financial statements on pages 27 through 39 are an integral part of these statements. - ------------------------------------------------------------------------------- Statements of Consolidated Financial Condition
December 31 ------------------- (in millions, except per share figures) 1998 1997 - ------------------------------------------------------------------------------- Assets Current Assets Cash and cash equivalents $ 31.2 $ 49.7 Receivables, less allowances of $6.1 in 1998 and $4.2 in 1997 276.7 241.6 Inventories Finished products 97.4 68.2 Materials and work in process 24.4 26.3 -------- -------- 121.8 94.5 Prepaid expenses, taxes and other current assets 47.9 23.2 -------- -------- Total Current Assets 477.6 409.0 Other Assets Investment in and advances to partnership 124.5 122.9 Goodwill, less accumulated amortization of $40.5 in 1998 and $29.5 in 1997 376.3 249.4 Miscellaneous 155.0 167.1 -------- -------- Total Other Assets 655.8 539.4 Net Property, Plant and Equipment 517.3 492.5 -------- -------- Total Assets $1,650.7 $1,440.9 ======== ======== Liabilities and Shareholders' Equity Current Liabilities Short-term debt $ 75.8 $ 22.1 Accounts payable 124.9 108.1 Accrued compensation 34.0 33.9 Other accrued expenses 90.2 57.5 Income taxes 26.4 34.0 -------- -------- Total Current Liabilities 351.3 255.6 Long-Term Debt 496.2 335.3 Deferred Income Taxes 15.6 37.2 Accrued Pension Benefits 63.2 40.8 Accrued Postretirement Benefits 123.0 100.7 Other Liabilities 15.5 18.6 Commitments and Contingent Liabilities - - Shareholders' Equity Preferred stock--par value $1.00 per share 0.4 0.4 Capital in excess of par value of shares 179.1 184.1 Unearned ESOP compensation (140.5) (151.1) -------- -------- 39.0 33.4 Common stock--par value $.1875 per share; 80.3 shares issued 15.1 15.1 Capital in excess of par value of shares 48.0 40.8 Common stock reacquired--at cost (449.7) (420.4) Retained earnings 1,033.2 1,072.7 Accumulated other comprehensive income (99.7) (88.9) -------- -------- Total Shareholders' Equity 585.9 652.7 -------- -------- Total Liabilities and Shareholders' Equity $1,650.7 $1,440.9 ======== ========
The notes to consolidated financial statements on pages 27 through 39 are an integral part of these statements. - ----------------------------------------------------------------------------
Statements of Consolidated Cash Flows Years Ended December 31 --------------------------------- (in millions) 1998 1997 1996 - ------------------------------------------------------------------------------------ Cash Provided by (Used for) Operating Activities Net earnings $ 37.9 $ 158.9 $ 154.5 Adjustments to reconcile net earnings to cash provided by operating activities Cost reduction program, net of cash payments 75.9 - - Cumulative effect of change in accounting for business process reengineering costs - 4.5 - Depreciation and amortization 100.6 103.2 98.3 Equity in earnings of partnership, net of distributions (12.4) (17.4) (14.0) Noncurrent deferred income taxes (21.3) (5.0) (9.0) Other--net 12.9 11.2 9.1 Changes in current assets and liabilities Receivables (14.7) (25.2) 6.4 Inventories (15.5) (12.1) (0.1) Accounts payable (0.1) 0.7 (15.9) Other (34.1) (5.1) (0.4) ------- ------- ------- Net Cash Provided by Operating Activities 129.2 213.7 228.9 ------- ------- ------- Cash Provided by (Used for) Investing Activities Additions to property, plant and equipment (115.3) (101.4) (92.5) Business purchases (148.8) (79.6) (83.4) (Investments in) advances from partnership 7.9 19.1 18.0 Proceeds from sale of business 1.1 - 41.2 Other investing activities 5.1 (4.9) 7.2 ------- ------- ------- Net Cash (Used for) Investing Activities (250.0) (166.8) (109.5) ------- ------- ------- Cash Provided by (Used for) Financing Activities Cash dividends, net of taxes (77.4) (78.2) (78.7) Proceeds from long-term debt 166.1 102.8 59.2 Payments of long-term debt (1.2) (4.2) (12.1) Increase (decrease) in short-term debt 48.8 (3.8) (69.5) Common stock reacquired (43.4) (75.7) (26.3) Other financing transactions 8.7 27.3 9.9 ------- ------- ------- Net Cash Provided by (Used for) Financing Activities 101.6 (31.8) (117.5) Effect of foreign exchange rate changes on cash and cash equivalents 0.7 (4.2) (1.2) ------- ------- ------- Increase (decrease) in cash and cash equivalents (18.5) 10.9 0.7 Cash and cash equivalents at the beginning of the year 49.7 38.8 38.1 ------- ------- ------- Cash and Cash Equivalents at the End of the Year $ 31.2 $ 49.7 $ 38.8 ======= ======= =======
The notes to consolidated financial statements on pages 27 through 39 are an integral part of these statements. - ------------------------------------------------------------------------------- Statements of Consolidated Common Shareholders' Equity
(in millions, except per share figures) - -------------------------------------------------------------------------------------------------------------------- Common Stock Capital in Reacquired Common Excess of ----------------------- Stock Par Value Number Retained Issued of Shares of Shares Cost Earnings - -------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1996 $ 15.1 $ 27.8 13.2 $(350.3) $ 916.2 Net earnings 154.5 Other comprehensive income: Minimum pension liability adjustment Currency translation adjustments --net of tax of $0.5 Comprehensive income Dividends on preferred stock (11.4) --net of tax benefit of $3.9 Dividends on common stock ($1.00 per share) (67.3) Treasury stock transactions 0.7 (26.3) Stock issued under option, benefit and other plans 3.4 (0.6) 12.4 ------ ------ -------- ------- -------- Balance at December 31, 1996 15.1 31.2 13.3 (364.2) 992.0 Net earnings Other comprehensive income: 158.9 Minimum pension liability adjustment --net of tax benefit of $0.8 Currency translation adjustments --net of tax benefit of $0.1 Comprehensive income 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 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) 1,072.7 Net earnings Other comprehensive income: 37.9 Minimum pension liability adjustment --net of tax benefit of $3.2 Currency translation adjustments Comprehensive income Dividends on preferred stock --net of tax benefit of $3.2 (11.5) Dividends on common stock ($1.00 per share) (65.9) Treasury stock transactions 1.2 (43.4) Stock issued under option, benefit and other plans 7.2 (0.7) 14.1 ------ ------ -------- ------- -------- Balance at December 31, 1998 $ 15.1 $ 48.0 14.8 $(449.7) $1,033.2 ====== ====== ======== ======= ========
(in millions, except per share figures) - ------------------------------------------------------------------------------------------------------------- Accumulated Other Comprehensive Income --------------------------------------------- Minimum Pension Foreign Currency Comprehensive Liability Adjustment Translation Adjustments Income - ------------------------------------------------------------------------------------------------------------- Balance at January 1, 1996 $ (6.0) $(48.0) Net earnings $ 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 ------ Comprehensive income $162.5 ====== Dividends on preferred stock --net of tax benefit of $3.9 Dividends on common stock ($1.00 per share) Treasury stock transactions Stock issued under option, benefit and other plans ------ ------ Balance at December 31, 1996 (6.1) (39.9) Net earnings $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) ------ Comprehensive income $116.0 ====== Dividends on preferred stock --net of tax benefit of $3.5 Dividends on common stock ($1.00 per share) Treasury stock transactions Stock issued under option, benefit and other plans ------ ------ Balance at December 31, 1997 (7.3) (81.6) Net earnings $ 37.9 Other comprehensive income: Minimum pension liability adjustment --net of tax benefit of $3.2 (5.3) (5.3) Currency translation adjustments (5.5) (5.5) ------ Comprehensive income $ 27.1 ====== Dividends on preferred stock --net of tax benefit of $3.2 Dividends on common stock ($1.00 per share) Treasury stock transactions Stock issued under option, benefit and other plans ------ ------ Balance at December 31, 1998 $(12.6) $(87.1) ====== ======
The notes to consolidated financial statements on pages 27 through 39 are an integral part of these statements. 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, its majority-owned subsidiaries and Nalco- Chemserve, in which Nalco has a controlling interest. 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 98 percent of total foreign subsidiary net assets at the end of 1998. 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 1998, 1997 and 1996, were $1 million, $4 million and $2 million, respectively. INVENTORY VALUATION--Inventories are valued at the lower of cost or market. Approximately 73 percent of the inventories at the end of 1998 are valued using the average cost or first-in, first-out (FIFO) method. The remaining inventories are valued using the last-in, first-out (LIFO) method. If the FIFO method of accounting had been used for all inventories, reported inventory amounts would have been approximately $23 million and $24 million higher at December 31, 1998 and 1997, 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. When appropriate, the Company 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 recognizes stock-based compensation costs under the intrinsic value based method of accounting as prescribed by Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." INCOME TAXES--Income taxes are recognized during the year in which transactions enter into the determination of financial statement income, with deferred income taxes being provided for the tax effect of temporary differences between the carrying amount of assets and liabilities and their tax bases. Deferred income taxes are provided on the undistributed earnings of foreign subsidiaries and affiliated companies except to the extent such earnings are considered to be permanently reinvested in the subsidiary or affiliate. Where it is contemplated that earnings will be remitted, credit for foreign taxes already paid generally will offset applicable U.S. income taxes. In cases where foreign tax credits will not offset U.S. income taxes, appropriate provisions are included in the consolidated statements of earnings. Repatriation of permanently reinvested earnings would not materially increase the Company's tax liabilities. RETIREMENT PLANS--The cost of retirement plans is computed on the basis of accepted actuarial methods (using the projected unit credit method for the principal plan) and includes current service costs, amortization of increases in prior service costs over the expected future service of active participants as of the date such costs are first recognized, and amortization of the initial unrecognized net pension asset or liability on a straight-line basis over 18 years. 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 ($43.7 million in 1998, $43.0 million in 1997, and $41.9 million in 1996) are charged to expense as incurred. NOTE 2--BUSINESS SEGMENT 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. The Company has determined that its reportable segments are those that are based on the Company's method of internal reporting. Effective January 1, 1998, the Company established a new sales and marketing organization based on the nature of the customer served, the product application, or the geographic location of the customer. This organization is comprised of the following reportable segments: INDUSTRIAL DIVISION--Serves the water and waste treatment needs of basic industry customers in North America, Europe, the Middle East and South Africa. SPECIALTY DIVISION--Serves the water and waste treatment needs of middle market customers in North America and Europe. PULP AND PAPER DIVISION--Serves the process chemical needs of pulp and paper customers in North America and Europe. PROCESS DIVISION--Serves the process chemical needs of all industries, except pulp and paper, worldwide. LATIN AMERICA DIVISION--Serves the water and waste treatment needs of all industries and the process chemical needs of the pulp and paper industries in South and Central America, the Caribbean and Mexico. PACIFIC DIVISION--Serves the water and waste treatment needs of all industries and the process chemical needs of the pulp and paper industries in the Pacific Rim. The accounting policies of the segments are the same as those described in "Note 1--Summary of Significant Accounting Policies." The Company evaluates the performance of its segments based on "direct contribution" (net sales, less cost of products sold, selling and research expenses directly attributable to each segment). There are no intersegment revenues. With the exception of net sales for the year ended December 31, 1997, the Company has not disclosed prior years' segment data on a comparative basis, because management found it impracticable to obtain the comparative data for prior years. Prior to 1998, the Company was comprised of one reportable segment. The following table presents net sales by reportable segment for the years ended December 31, 1998 and 1997:
(in millions) 1998 1997 - --------------------------------------------------- Industrial $ 462.5 $ 408.8 Specialty 351.7 301.6 Pulp and Paper 358.4 333.8 Process 196.6 189.7 Latin America 85.8 82.7 Pacific 118.5 117.1 - --------------------------------------------------- Total $1,573.5 $1,433.7 - ---------------------------========================
The following table presents direct contribution by reportable segment and reconciles the total segment direct contribution to earnings from continuing operations before income taxes for the year ended December 31, 1998:
(in millions) 1998 - --------------------------------------------------- Segment direct contribution: Industrial $ 115.5 Specialty 82.4 Pulp and Paper 85.7 Process 41.7
Latin America 16.9 Pacific 22.8 - ------------------------------------------------------------------ Total segment direct contribution 365.0 Income (expenses) not allocated to segments: Unallocated operating costs and expenses (123.6) Cost reduction program (180.0) - ------------------------------------------------------------------ Operating Earnings 61.4 Interest and other income 2.4 Interest expense (26.5) Equity in earnings of partnership 22.6 - ------------------------------------------------------------------ Earnings from Continuing Operations Before Income Taxes $ 59.9 - -----------------------------------------------------------=======
Asset information by reportable segment has not been reported, since the Company does not produce such information internally. In addition, although depreciation expense is a component of each reportable segment's direct contribution, it is not discretely identifiable. The following table presents net sales for the United States and all other countries based on the location of the use of product:
(in millions) 1998 1997 1996 - ------------------------------------------------------------------- United States $ 900.1 $ 792.2 $ 705.6 Other 673.4 641.5 597.9 - ------------------------------------------------------------------- Total $1,573.5 $1,433.7 $1,303.5 - -----------------------------------================================
The following table presents net property, plant and equipment located in the United States and all other countries:
(in millions) 1998 1997 1996 - ------------------------------------------------------------------- United States $ 335.8 $ 320.9 $ 327.5 Other 181.5 171.6 194.5 - ------------------------------------------------------------------- Total $ 517.3 $ 492.5 $ 522.0 - -----------------------------------================================
Net sales and property, plant and equipment were not material in any individual country other than the United States. NOTE 3--COST REDUCTION PROGRAM In the fourth quarter 1998, management approved and began implementing a cost reduction program to cut its overall cost structure by $30 million annually. Virtually all of the Company's global operations were affected by this plan, including sales, marketing, manufacturing and support services. The program included redesigning, combining and streamlining operations to improve efficiency and customer focus. Approximately 500 positions were eliminated during the fourth quarter 1998, mainly as a result of a voluntary enhanced early retirement program, and an additional 100 positions are scheduled for elimination in early 1999. As a result of the cost reduction program, the Company recorded a pretax provision of $180 million, which included $127 million for pension costs and $19 million for other postretirement benefit costs associated with the early retirement program. The pension costs resulted in the Company making cash payments in the fourth quarter 1998 and early 1999 to the Company's principal U.S. retirement plan and directly to employees for obligations under a supplementary, non-qualified pension plan. The cost of other postretirement benefits represents a non-cash charge, which will be paid out in future years. (See Note 5). Also included in the provision for the cost reduction program were $21 million for severance and other termination payments; $7 million for legal and consulting fees, contract termination charges (principally leases), and other costs related to program; and $6 million for non-cash asset write-offs of abandoned property and equipment. Most cost reduction plan activities were completed by the end of 1998 and all are expected to be concluded by mid-1999. As of December 31, 1998, $127 million had been charged against the provision for the cost reduction program. The following talk sets forth the details of activity for 1998:
Balance at 1998 Cash Noncash December 31, (in millions) Provision Payments Charges 1998 - -------------------------------------------------------------------------------- Pension benefits $127.6 $ (94.4) $ - $33.2 Other postretirement benefits 18.8 (18.8) - Termination benefits 20.7 (7.4) - 13.3 Legal, consulting and other 7.4 (2.3) - 5.1 Asset write-offs 5.5 - (4.1) 1.4 - -------------------------------------------------------------------------------- Total $180.0 $(104.1) $(22.9) $53.0 - ------------------------------------============================================
Of the remaining balance of $53 million at December 31, 1998, $34 million was included in the statement of consolidated financial condition in other accrued expenses and $19 million in accrued pension benefits. NOTE 4--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. Excluding the aforementioned gain on the sale, net earnings from discontinued operations totaled $6 million in 1996 which included the pretax operating earnings of the discontinued operations, less applicable income taxes of $4 million. 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 5--PENSION AND OTHER POSTRETIREMENT BENEFIT 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 U.S. plan represents approximately 63 percent of the benefit obligation and 70 percent of the total market value of plan assets. The Company also provides a supplementary, non-qualified, unfunded plan for U.S. employees whose pension benefits exceed ERISA limitations. In addition, the Company has defined benefit postretirement plans that provide medical, dental and life insurance benefits for substantially all U.S. retirees and eligible dependents. The Company retains the right to change or terminate these benefits. As part of the Company's plan to reduce future operating expenses, a voluntary enhanced early retirement program was offered in the fourth quarter 1998. (See Note 3). This program resulted in charges totaling $146 million for special termination benefits, settlements and curtailments, all of which have been included in the Company's $180 million charge for the cost reduction program. No contributions had been made by the Company to its principal U.S. plan during the period from 1985 to 1997. However, as a result of the early retirement program, the Company contributed $72 million to the plan in 1998, and expects to contribute an additional $30 million in 1999. The Company also made payments totaling $36 million for the settlement of obligations under the supplementary, non-qualified plan. The following table details the changes in the funded status of defined benefit pension and other postretirement benefit plans, and sets forth amounts recognized and not recognized in the statements of consolidated financial condition:
Pension Benefits Other Benefits ------------------ ------------------ (in millions) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Change in benefit obligation Benefit obligation at beginning of year $ 370.4 $338.3 $ 77.8 $ 64.9 Service cost 16.7 15.0 2.3 2.1 Interest cost 28.2 26.8 5.8 5.5 Participant contributions 0.7 0.9 0.4 0.3 Plan amendments 1.2 1.9 - - Actuarial loss 135.9 25.4 5.3 9.0 Benefits paid (50.9) (28.9) (3.7) (4.0) Special termination benefits 59.2 - 22.9 - Settlements (174.7) - - - Curtailments (14.0) - (4.1) - Foreign currency exchange rate changes 2.2 (9.0) - - - ------------------------------------------------------------------------------------------------------------------------------ Benefit obligation at end of year 374.9 370.4 106.7 77.8 - ------------------------------------------------------------------------------------------------------------------------------ Change in plan assets Fair value of plan assets at beginning of year 340.2 322.8 - - Actual return on plan assets 31.8 41.7 - - Employer contributions 119.7 5.7 3.3 3.7 Participant contributions 0.7 0.9 0.4 0.3 Benefits paid (225.6) (28.9) (3.7) (4.0) Foreign currency exchange rate changes 0.1 (2.0) - - - ------------------------------------------------------------------------------------------------------------------------------ Fair value of plan assets at end of year 266.9 340.2 - - - ------------------------------------------------------------------------------------------------------------------------------ Funded status (108.0) (30.2) (106.7) (77.8) Unrecognized net actuarial (gains) losses 69.6 18.0 (20.2) (26.8) Unrecognized prior service costs 9.7 16.1 - - Unrecognized net transition asset (8.9) (16.6) - - - ------------------------------------------------------------------------------------------------------------------------------ Net amount recognized $ (37.6) $(12.7) $(126.9) $(104.6) - --------------------------------------------------------------------------------------======================================== Amounts recognized in the statements of consolidated financial condition consist of: Pension Benefits Other Benefits ---------------- -------------- (in millions) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ Prepaid benefit cost $ 2.5 $ 8.9 $ - $ - Other accrued expenses - - (3.9) (3.9) Accrued benefit liability (63.2) (40.8) (123.0) (100.7) Intangible asset 2.7 7.3 - - Accumulated other comprehensive income 20.4 11.9 - - -------------------------------------- Net amount recognized $ (37.6) $(12.7) $(126.9) $(104.6) ======================================
The projected benefit obligation (PBO), accumulated benefit obligation (ABO) and fair value of plan assets for defined benefit pension plans with ABOs in excess of plan assets were $62 million, $52 million and $14 million, respectively, at December 31, 1998. At December 31, 1997, the PBO and ABO for such plans were $44 million and $35 million, respectively, and none of the plans held assets. Net pension and other postretirement benefit expense for all defined benefit plans was comprised of:
Pension Benefits Other Benefits ------------------------- ----------------------- (in millions) 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------ Service cost $ 16.7 $ 15.0 $ 16.1 $ 2.3 $ 2.1 $ 2.2 Interest cost 28.2 26.8 25.6 5.8 5.5 5.1 Expected return on plan assets (30.1) (28.6) (27.7) - - - Amortization of prior service cost 1.6 2.1 2.1 - - - Amortization of net transition asset (2.9) (2.9) (2.9) - - - Recognized net actuarial (gain) loss 1.5 1.2 1.7 (1.3) (1.7) (1.5) Special termination benefits 64.2 0.2 - 22.9 - - Settlement charge 61.9 - - - - - Curtailment charge (credit) 1.5 - - (4.1) - - - ------------------------------------------------------------------------------------------ Net benefit expense $142.6 $ 13.8 $ 14.9 $25.6 $ 5.9 $ 5.8 - --------------------------------------====================================================
As previously noted, the 1998 amounts in the table above include $146 million for special termination benefits, settlements and curtailments resulting from the early retirement program offered to employees in the fourth quarter 1998. Of that amount, $127 million was attributable to pension benefits and $19 million was attributable to other postretirement benefits. The $146 million charge was reported as a component of the $180 million cost reduction program expense. The assumptions used for the U.S. defined benefit plans as of the end of the last three years were as follows:
Pension Benefits Other Benefits ----------------------------- ----------------------------- 1998 1997 1996 1998 1997 1996 ------------------------------------------------------------------ Discount rates 6.75% 7.5% 8.0% 6.75% 7.5% 8.0% Rates of increase in compensation levels 4.0 4.0 4.0 4.0 4.0 4.0 Rates of return on plan assets 9.5 9.5 9.5 - - - - --------------------------------------------------------------------------------------------------------------------------------- The assumptions used for the foreign defined benefit pension plans as of the end of the last three years were as follows: 1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------------- Discount rates 5.0 - 6.5% 6.0 - 7.25% 6.5 - 9.0% Rates of increase in compensation levels 3.0 - 5.0 3.0 - 6.0 4.0 - 6.25 Rates of return on plan assets 5.5 - 7.25 6.0 - 8.75 6.5 - 9.75 - ---------------------------------------------------------------------------------------------------------------------------------
The Company has assumed a health care cost trend rate of 6.5% for 1999, decreasing ratably to 5.0% in 2002 and thereafter. A one-percentage-point change in assumed health care cost trend rates would have the following effects on 1998 service and interest costs and the accumulated postretirement benefit obligation at December 31, 1998:
One-Percentage-Point (in millions) Increase Decrease - ----------------------------------------------------------------- Effect on total of service and interest cost components $ 1.2 $ (1.0) Effect on postretirement benefit obligation 12.5 (11.2) - -----------------------------------------------------------------
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) 1998 1997 1996 - -------------------------------------------- ------ ------ ------ Preferred stock dividends $ 14.7 $ 15.0 $ 15.3 Interest expense on ESOP debt $ 7.8 $ 8.7 $ 9.4 ESOP benefit expense $ - $ 4.1 $ 3.2 ESOP contribution payments $ 4.2 $ 5.5 $ 5.1 Preferred shares at year end: Allocated 152.4 140.0 124.2 Committed-to-be-released 12.2 22.9 24.9 Suspense 208.7 220.9 243.8 - -------------------------------------------- ------ ------ ------
No provision was recorded for ESOP benefit expense in 1998 because the expected debt service requirements of the ESOP will not require any contributions by the Company. NOTE 7--STOCK OPTION AND PERFORMANCE PLANS Nalco's Employee Stock Compensation 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. 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 had a term of ten years, and were exercisable upon grant. Options may be exercised in whole or in part for cash, shares of common stock, or a combination thereof. The 1990 Stock Option Plan for Non-Employee Directors authorizes the granting of stock options to outside directors for the purchase of up to 500,000 common shares. The option price under the plan cannot be less than the fair market value on the date of the grant. These options become exercisable upon grant, and expire ten years from the grant date. Information regarding these stock option plans for 1998, 1997 and 1996 is as follows:
1998 1997 1996 ----------------------------- ----------------------------- ----------------------------- Weighted-Average Weighted-Average Weighted-Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ----------------------------- ----------------------------- ----------------------------- At the beginning of the year 7,577,371 $33.69 7,473,363 $32.77 6,657,723 $32.17 Granted 3,513,900 $37.97 1,002,700 $36.48 1,595,200 $31.64 Exercised (494,300) $29.23 (754,492) $28.17 (500,460) $20.54 Expired or cancelled (687,900) $38.13 (144,200) $34.04 (279,100) $34.04 At the end of the year 9,909,071 $35.13 7,577,371 $33.69 7,473,363 $32.77 Options exercisable at end of year 6,637,813 $33.67 5,231,142 $33.34 4,574,896 $32.33 Weighted-average fair value of options granted during the year $7.94 $9.02 $6.53
The following table summarizes information about fixed stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable --------------------------------------------------- ------------------------------- Weighted-Average Range of Number Remaining Weighted-Average Number Weighted-Average Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price --------------- ----------- ---------------- ---------------- ----------- ---------------- $20.16 to $24.25 298,500 0.4 yrs. $20.92 298,500 $20.92 $29.56 to $31.97 1,794,050 7.8 $31.32 1,520,428 $31.25 $32.69 to $35.75 2,705,200 6.0 $34.46 2,705,200 $34.46 $36.00 to $39.94 5,111,321 7.0 $37.65 2,113,685 $36.20 ---------- --------- $20.16 to $39.94 9,909,071 6.7 $35.13 6,637,813 $33.67 ========== =========
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 Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," 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) 1998 1997 1996 - ------------------------------------------------------------------------- Net earnings As reported $37.9 $158.9 $154.5 Pro forma 28.9 151.4 146.1 - ------------------------------------------------------------------------- Earnings per share Basic As reported $0.40 $ 2.21 $ 2.13 Pro forma 0.26 2.10 2.00 Diluted As reported 0.40 2.04 1.97 Pro forma 0.26 1.94 1.86 - -------------------------------------------------------------------------
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 1998, 1997 and 1996, respectively: dividend yield of 2.5 percent, 2.8 percent and 3.2 percent; expected volatility of 16.2 percent, 20.0 percent and 20.7 percent; risk-free interest rate of 5.4 percent, 6.3 percent and 6.5 percent; and expected lives of 6.3, 6.3 and 6.6 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 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 were not significant in 1998 and totaled $3 million in 1997 and $2 million in 1996. NOTE 8--INCOME TAXES The sources of earnings from continuing operations before income taxes were as follows:
(in millions) 1998 1997 1996 - ----------------------------------------------------- Domestic $14.3 $185.7 $168.6 Foreign 45.6 70.6 60.8 ----- ------ ------ Total $59.9 $256.3 $229.4 ===== ====== ======
The components of income tax provisions (benefits) attributable to earnings from continuing operations are summarized as follows:
(in millions) 1998 1997 1996 - ---------------------------------------------------- Current Federal $ 18.1 $58.2 $50.9 State 5.3 11.1 10.4 Foreign 21.9 25.6 20.6 ------ ----- ----- 45.3 94.9 81.9 ------ ----- ----- Deferred Federal (18.6) (3.8) (3.0) State (3.1) (0.6) (0.1) Foreign (1.6) 2.4 4.7 ------ ----- ----- (23.3) (2.0) 1.6 ------ ----- ----- Total $ 22.0 $92.9 $83.5 ====== ===== =====
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 $74 million, $103 million and $84 million during 1998, 1997 and 1996, respectively. The effective income tax rate varies from the federal statutory rate because of the factors indicated below:
1998 1997 1996 - ----------------------------------------------------------------- Statutory U.S. federal tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 2.7 2.6 2.9 Other (1.0) (1.4) (1.5) ---- ---- ---- Effective tax rate 36.7% 36.2% 36.4% ==== ==== ====
Details of the 1998 and 1997 deferred tax assets and liabilities are as follows:
(in millions) 1998 1997 - ------------------------------------------------------------------ Deferred tax assets: Postretirement benefits $ (51.5) $(42.5) Pension benefits (20.4) (3.6) Other (48.8) (42.5) ------- ------- Total (120.7) (88.6) ------- ------- Deferred tax liabilities: Depreciation 60.6 57.9 Leveraged lease investments 28.6 29.2 Other 29.5 26.5 ------- ------- Total 118.7 113.6 ------- ------- Net deferred tax (asset) liability $ (2.0) $ 25.0 ======= ======= Included in: Prepaid expenses, taxes and other current assets $ (7.8) $ (6.2) Miscellaneous other assets (7.9) (5.8) Income taxes (1.9) (0.2) Deferred income taxes 15.6 37.2 ------- ------- Net deferred tax (asset) liability $ (2.0) $ 25.0 ======= =======
NOTE 9--EARNINGS PER SHARE Basic earnings per share (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. At December 31, 1998, there were 373,195 shares of preferred stock outstanding which were convertible to approximately 7.5 million common shares. The preferred stock was not included in the computation of diluted EPS for 1998 since it would have resulted in an antidilutive effect. 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) 1998 1997 1996 - ---------------------------------------------------------------------------------------- Earnings from continuing operations $ 37.9 $ 163.4 $ 145.9 Dividends on preferred stock, net of taxes (11.5) (11.5) (11.3) - ---------------------------------------------------------------------------------------- Earnings from continuing operations available to common shareholders used in basic EPS 26.4 151.9 134.6 Assumed conversion of preferred stock - 11.5 11.3 Additional ESOP expense resulting from assumed conversion of preferred stock, net of taxes - (4.5) (4.5) Income tax adjustment on assumed common dividends - (1.0) (0.9) - ---------------------------------------------------------------------------------------- Earnings from continuing operations available to common shareholders used in diluted EPS $ 26.4 $ 157.9 $ 140.5 - -------------------------------------------------------================================= Average shares outstanding used in basic EPS 65,847 66,700 67,280 Effect of dilutive securities: Assumed conversion of preferred stock - 7,760 7,930 Stock options and contingently issuable shares 421 805 319 - ---------------------------------------------------------------------------------------- Average shares outstanding used in diluted EPS 66,268 75,265 75,529 - -------------------------------------------------------=================================
The following options to purchase shares of common stock were outstanding during each year, but were not included in the computation of diluted EPS because the exercise price was greater than the average market price:
1998 1997 1996 - ------------------------------------------------------------------------------- Number of options (thousands) 5,357 - 3,139 Weighted-average exercise price $37.56 $ - $35.52 - -------------------------------------------------------------------------------
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) in 1997, which was comprised of unamortized capitalized business process reengineering costs. NOTE 11--ACQUISITIONS The Company acquired seventeen businesses in 1998, eight businesses in 1997 and two businesses in 1996 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 acquired business was included in the consolidated financial results of the Company from its respective acquisition date. In addition, during 1998 the Company increased its investments in Taiwan Nalco Chemical Co. Ltd. from 79 percent to 82 percent and Nalco Chemical India, Ltd. from 65 percent to 80 percent. During 1997 the Company increased its investment in Taiwan Nalco Chemical Co. from 55 percent to 79 percent. The combined purchase price of these acquisitions, net of cash acquired, was approximately $149 million in 1998, $80 million in 1997 and $83 million in 1996. On a preliminary basis, the purchase price exceeded the fair value of the net tangible assets of those businesses which were acquired during 1998 by about $132 million which was allocated to goodwill and other intangible assets. The Company does not anticipate that the final purchase allocations will differ significantly from the preliminary purchase price allocations recorded. The purchase price exceeded the fair value of the net tangible assets which were acquired during 1997 and 1996 by $70 million and $75 million, respectively. Effective January 1998, the Company merged its South African affiliate company with the water treatment interests of Chemical Services Limited, South Africa's largest specialty chemicals company, to form Nalco-Chemserve. In connection with the merger, Nalco obtained a controlling interest in Nalco-Chemserve and, accordingly, has consolidated the results of Nalco-Chemserve from January 1, 1998. 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 $125 million at December 31, 1998 included $45 million in demand notes payable to Nalco/Exxon. There were $35 million of demand notes payable to Nalco/Exxon at December 31, 1997. 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 1998, 1997 and 1996:
(in millions) 1998 1997 1996 - -------------------------------------------------------------------------- Nalco/Exxon: Net sales $487.8 $455.6 $436.6 Earnings before income taxes 42.7 51.1 42.4 Net income 34.6 42.6 35.7 Nalco's equity interest 60% 60% 60% ------ ------ ------ Nalco's equity in net income 20.8 25.6 21.4 Amortization and income preference, net 1.8 2.6 3.1 ------ ------ ------ Equity in earnings of partnership $ 22.6 $ 28.2 $ 24.5 ====== ====== ====== Distributions received from partnership $ 10.2 $ 9.2 $ 8.4 ====== ====== ======
In the fourth quarter 1998, Nalco/Exxon began implementing a cost reduction program which included provisions for employee terminations and impaired assets. The Company's equity portion of Nalco/Exxon's cost reduction program was over $2 million. The Company's investment in Nalco/Exxon at December 31, 1998 included $7 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 2 percent, 4 percent and 6 percent earnings preference in 1998, 1997 and 1996, respectively, which has been included in equity earnings. Condensed balance sheet information for the Nalco/Exxon joint venture at December 31, 1998 and 1997 was as follows:
(in millions) 1998 1997 - -------------------------------------------------------------- Current assets $154.9 $164.7 Noncurrent assets 223.3 203.8 Current liabilities 83.2 89.9 Noncurrent liabilities 31.5 33.7 - --------------------------------------------------------------
The Company has an agreement with Nalco/Exxon to provide certain administrative services to the partnership. Fees earned by the Company in 1998, 1997 and 1996 were $14 million, $14 million and $15 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 1998, 1997 or 1996. 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) 1998 1997 - --------------------------------------------------------------------- Land $ 35.5 $ 34.8 Buildings 208.7 199.4 Equipment 980.9 901.0 -------- -------- 1,225.1 1,135.2 Allowances for depreciation (707.8) (642.7) -------- -------- Net property, plant and equipment $ 517.3 $ 492.5 ======== ========
NOTE 14--SHORT-TERM DEBT Short-term debt consists of the following:
(in millions) 1998 1997 - ---------------------------------------------------------------- Notes payable $10.8 $18.9 Current maturities of long-term debt 5.0 3.2 Commercial paper borrowings 60.0 - ----- ----- Total $75.8 $22.1 ===== =====
The weighted-average interest rate on short-term debt was 5.8 percent and 9.1 percent at December 31, 1998 and 1997, 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 four-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, 1998. NOTE 15--LONG-TERM DEBT Long-term debt consists of the following:
(in millions) 1998 1997 - -------------------------------------------------------- ESOP loans $140.5 $151.1 Commercial paper borrowings 148.0 143.0 Unsecured notes, due 2008 149.5 - Other 63.2 44.4 ------ ------ 501.2 338.5 Less current portion (5.0) (3.2) ------ ------ Total $496.2 $335.3 ====== ======
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. At December 31, 1998, $88 million of the ESOP 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 $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 $15 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 6.1 percent at December 31, 1998. Commercial paper borrowings of $148 million and $143 million at December 31, 1998 and 1997, respectively, were classified as long-term based on the Company's intent to refinance these borrowings on a long-term basis. Interest rates on the commercial paper outstanding at December 31, 1998 ranged from 4.8 percent to 5.2 percent with a weighted-average rate of 5.0 percent. In May 1998, the Company issued $150 million of 6.25% unsecured notes under a shelf registration statement filed with the Securities and Exchange Commission in April 1998. The notes mature in May 2008. Notes up to $250 million remain available under the shelf registration statement. The $63 million in other long-term debt includes $36 million owed by a foreign subsidiary at a variable interest rate (an effective rate of 5.1% at December 31, 1998). The remaining $27 million was borrowed by various foreign subsidiaries at interest rates ranging from 3.6 percent to 21.2 percent with a weighted-average rate of 8.5 percent. Interest paid by Nalco was $25 million, $14 million and $14 million in 1998, 1997 and 1996, respectively. The following table presents the projected annual maturities of long-term debt for the next five years after 1998: (in millions) - ----------------------- 1999 $ 5.0 2000 10.4 2001 - 2002 - 2003 - - ----------------------- The amounts above include approximately $15 million in maturities related to the ESOP loans. NOTE 16--SHAREHOLDERS' EQUITY Information on preferred and common shares is summarized in the following table:
(dollars in millions, except per share amounts) 1998 1997 - --------------------------------------------------------------------- Preferred stock, par value $1.00 per share; authorized 2,000,000 shares; Series B ESOP Convertible Preferred Stock--outstanding; 373,195 shares-1998 and 383,774 shares-1997 $ 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 14,758,440 shares and 14,251,003 shares held in treasury at December 31, 1998 and 1997, respectively. In 1996, Nalco's Board of Directors authorized the repurchase of up to 3 million shares of the Company's common stock. During 1998, the repurchase of those shares was completed and the Board of Directors authorized the repurchase of an additional 3 million 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 1998, 10,579 preferred shares were converted to 213,484 common shares of Nalco stock. During 1997 and 1996, 9,077 and 6,572 preferred shares were converted to 182,417 and 132,179 common shares, respectively. Approximately 8,000,000 common shares have been reserved for the conversion of preferred stock. In 1996, the Board of Directors approved a 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 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. The Company was a counterparty to one interest rate swap with a notional value of $43 million at December 31, 1998, and $51 million at December 31, 1997. This swap fixes interest payments on a corresponding amount of floating rate ESOP notes at 7.3 percent until February 1999. The average interest rate received on this interest rate swap was 4.6 percent in both 1998 and 1997. 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. The Company's currency swap agreements were designed to hedge foreign currency intercompany loans that have maturities up to seven 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 selected net asset exposures. These contracts usually have maturities of six months, but occasionally may have maturities of up to eighteen months. The Company had foreign exchange contracts with notional values of $51 million and $64 million at December 31, 1998 and 1997, 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, 1998 or December 31, 1997. 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, 1998 and 1997:
1998 1997 ---------------------------------------- Carrying Fair Carrying Fair (in millions) Amount Value Amount Value - --------------------------------------------------------------------------- Nonderivatives: Cash and cash equivalents $ 31.2 $ 31.2 $ 49.7 $ 49.7 Short-term debt 75.8 75.8 22.1 22.1 Long-term debt 496.2 502.8 335.3 336.0 Derivatives: Miscellaneous other assets 3.8 1.6 7.0 4.6 - ---------------------------------------------------------------------------
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. The fair value of the Company's 6.25% fixed-rate notes was based on the quoted market price. 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 14 waste sites where some financial contribution is or may be required. These agencies have also identified many other parties who may be responsible for clean-up costs at the waste disposal sites. Nalco's financial contribution to remediate these sites is expected to be minor. There has been no significant financial impact on Nalco up to the present, nor is it anticipated that there will be in the future, as a result of these matters. Nalco has 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, 1998, the Company had undiscounted reserves of approximately $1 million for the maximum amount of known environmental clean-up costs. The Company's 1998 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. Quarterly Summary (Unaudited)
1998 1997 ---------------------------------------------- ------------------------------------------- (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 $ 367.1 $ 403.0 $ 408.4 $ 395.0 $ 334.6 $ 354.4 $ 371.0 $ 373.7 Gross earnings 202.2 221.8 221.7 213.7 189.8 201.8 206.0 206.5 Earnings (loss) before accounting change 38.0 42.0 40.7 (82.8)* 35.8 40.1 44.2 43.3 Cumulative effect of accounting change - - - - - - - (4.5) Net earnings (loss) 38.0 42.0 40.7 (82.8)* 35.8 40.1 44.2 38.8 Per common share Earnings (loss) - basic Before accounting change .53 .59 .58 (1.31) .49 .56 .62 .61 Accounting change - - - - - - - (.07) Net earnings (loss) .53 .59 .58 (1.31) .49 .56 .62 .54 Earnings (loss) - diluted Before accounting change .49 .55 .54 (1.31) .46 .51 .57 .56 Accounting change - - - - - - - (.06) Net earnings (loss) .49 .55 .54 (1.31) .46 .51 .57 .50 Dividends .25 .25 .25 .25 .25 .25 .25 .25 Market price High 40 15/16 40 15/16 36 3/8 34 3/8 38 7/8 40 41 13/16 42 7/16 Low 36 3/4 34 1/8 27 3/8 27 11/16 35 1/8 34 1/4 38 5/16 37 1/2 - ---------------------------------------------------------------------------------------------------------------------------------
* Includes after tax charges of $117.0 million for cost reduction program expenses recognized by the Company and Nalco/Exxon. EX-23 3 CONSENT OF INDEPENDENT ACCOUNTANTS 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 6, 1999, which appears on page 42 of the 1998 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, 1998. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 12 of this Form 10-K. We also consent to the incorporation by reference in the Registration Statement of our report dated March 26, 1999 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, 1998. PricewaterhouseCoopers LLP Chicago, Illinois March 30, 1999 EX-99.C 4 FORM 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, 1998 OR [ ] Transition report pursuant to section 15(d) of the Securities Exchange Act of 1934 For the Transition period from __________________ to _________________ Commission file number 1-4957 PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN OF NALCO CHEMICAL COMPANY NALCO CHEMICAL COMPANY One Nalco Center Naperville, Illinois 60563-1198 (Issuer and address of principal executive offices) NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN --------------------- FINANCIAL STATEMENTS AND SCHEDULES ------------- DECEMBER 31, 1998 and 1997 -------------------------- 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 4-13 Supplementary Schedules: Item 27a--Schedule of Assets Held for Investment Purposes at December 31, 1998 Schedule I Item 27d--Schedule of Reportable Transactions for the Year Ended December 31, 1998 Schedule II
Note: All other schedules have been omitted because they are not applicable Report of Independent Accountants --------------------------------- March 26, 1999 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, 1998 and 1997, and the changes in net assets available for benefits for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the plan's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audits 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. PricewaterhouseCoopers LLP 1 NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS ---------------------------------------------------- AS OF DECEMBER 31, 1998 and 1997 --------------------------------
1998 1997 ---------------------- --------------------- Investments, at fair value: Nalco Chemical Company common stock $ 75,104,971 $ 98,123,822 Mutual funds 82,272,901 98,974,383 Group annuity contract deposits 36,944,097 50,965,924 Bank commingled investment funds 63,761,859 41,540,862 Collective short-term investment funds 26,512,592 10,500,682 ------------ ------------ 284,596,420 300,105,673 Loans receivable from participants 5,417,307 5,604,934 Due from Nalco Chemical Company Employee Stock Ownership Plan 3,795,959 89,410 Accrued income receivable 153,686 246,199 ------------ ------------ Net assets available for plan benefits $293,963,372 $306,046,216 ============ ============
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, 1998 and 1997
1998 1997 ------------ ------------ Sources of net assets: Contributions by employees $ 17,325,559 $ 14,403,378 Dividend income 3,429,577 3,774,078 Interest income 4,208,514 4,492,750 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 5,077,002 934,736 Participant loan repayments 3,164,231 3,000,833 Net (depreciation)/appreciation of investments (3,799,826) 30,169,423 ------------ ------------ Total sources of net assets 29,405,057 56,775,198 Applications of net assets: Administrative expenses (36,661) (71,324) Participant loans (2,817,529) (2,954,444) Withdrawals by participants (38,633,711) (32,809,447) ------------ ------------ (Decrease)/Increase in net assets available for plan benefits (12,082,844) 20,939,983 Net assets available for plan benefits at beginning of period 306,046,216 285,106,233 ------------ ------------ Net assets available for plan benefits at end of period $293,963,372 $306,046,216 ============ ============
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, 1998 and 1997 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. The Plan includes eight 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, the EuroPacific Fund, and the Equity Index 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 contributions 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). 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. 4 At December 31, 1998, employees participating in the Plan had invested in the available funds as follows (some have investments in more that one fund):
1998 1997 ---- ---- Total employees participating 3,123 3,175 Nalco Stock Fund 2,232 2,410 U.S. Government Money Market Fund 252 236 Stable Capital Fund 1,227 1,443 Bond Index Fund 512 403 Balanced Fund 1,141 1,135 Growth and Income Fund 2,019 2,236 Equity Index Fund 1,884 1,723 EuroPacific Fund 861 950
The Company believes that the Plan will continue without interruption, but reserves the right to terminate the Plan at any time. In the event of termination of the Plan, the Nalco Chemical Company Profit Sharing, Investment and Pay Deferral Plan Trust (the Trust) will continue until all of the funds held by The Northern Trust Company (the Trustee) have been distributed to the participants or their beneficiaries. Such distribution will be made in accordance with the provisions of the plan document in effect on the date of its termination. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES: - ----------------------------------------- Basis of Accounting - ------------------- The financial statements of the Plan are prepared on the accrual basis of accounting, except for benefit payments to former participants which are recorded when paid as noted below. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires the use of certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and the periods in which certain items of revenue and expense are included. Actual results may differ from such estimates. Withdrawals by Participants - --------------------------- Withdrawals by participants include benefit payments and transfers out of the plan. 5 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, 1998 and 1997, 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:
1998 1997 ---- ---- Nalco Stock Fund $ 2,921,359 $244,098 U.S. Government Money Market Fund 406,770 --- Stable Capital Fund 3,542,950 267,323 Bond Index Fund 1,001,777 --- Balanced Fund 1,238,192 5,193 Growth and Income Fund 2,362,312 155,336 Equity Index Fund 3,478,265 25,192 EuroPacific Fund 1,254,898 30,375 ----------- -------- $16,206,523 $727,517 =========== ========
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, 1998 and 1997, and have been included in the benefits paid for the respective years on the Form 5500. 6 NOTE 3 - INVESTMENTS: - --------------------- The cost of investments and number of shares or units held at December 31, 1998 and 1997 were as follows:
1998 1997 -------------------------------------------------------------- Shares or Units Cost Shares or Units Cost -------------------------------------------------------------- Nalco Chemical Company Common Stock 2,422,741 $ 39,900,109 2,480,223 $ 37,146,056 American Balanced Fund 1,139,171 16,815,917 1,139,119 16,371,281 American EuroPacific Fund 363,485 9,468,874 456,076 11,570,309 Dreyfus Government Money Market Instruments 3,735,295 3,735,295 2,676,600 2,676,600 Hartford Annuity Contract Deposit ---- ---- 2,563,076 2,563,076 Life of Georgia Contract Deposit ---- ---- 6,282,171 6,282,171 Pacific Mutual Contract Deposit 3,358,097 3,358,097 3,149,032 3,149,032 Provident Contract Deposit ---- ---- 3,723,764 3,723,764 Sun Life America Contract Deposit ---- ---- 2,191,985 2,191,985 Allamerica Group Annuity Contract Deposit 2,443,220 2,443,220 4,522,389 4,522,389 Ohio National Group Annuity Contract Deposit 3,180,910 3,180,910 2,979,775 2,979,775 Protective Life Group Annuity Contract Deposit ---- ---- 2,892,390 2,892,390 Chase Bank Group Annuity Contract Deposit 2,011,812 2,011,812 ---- ---- 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 5,892,661 5,892,661 5,553,351 5,553,351 Union Bank of Switzerland Group Annuity Contract Deposit 2,021,363 2,021,363 ---- ---- Principal Mutual Group Annuity Contract Deposit 4,632,360 4,632,360 5,581,170 5,581,170 Transamerica Group Annuity Contract Deposit 1,622,541 1,622,541 1,526,821 1,526,821 Union Bank of Switzerland Group Annuity Contract Deposit 1,781,133 1,781,133 ---- ---- Neuberger & Berman Guardian Fund 2,241,807 51,243,797 2,570,243 58,104,493 Barclays Equity Index Fund 1,677,253 37,609,255 1,437,519 26,606,279 Barclays Government/Corporate Bond Index Fund 503,477 6,881,435 294,949 3,553,220 The Northern Trust Company Collective Short-Term Investment Fund 26,512,592 26,512,592 10,500,682 10,500,682 ------------ ------------ Total $229,111,371 $217,494,844 ============ ============
7 Individual investments that represent 5% or more of the fair value of net assets available for plan benefits at December 31, 1998 are as follows:
Shares or Units Cost Fair Value ----------------------------------------------- Nalco Chemical Company Common Stock 2,422,741 $39,900,109 $75,104,971 Barclays Equity Index Fund 1,677,253 37,609,255 56,355,707 Neuberger & Berman Guardian Fund 2,241,807 51,243,797 50,261,302 Northern Trust Collective Short-Term Investment Funds 26,512,592 26,512,592 26,512,592 American Balanced Fund 1,139,171 16,815,917 17,953,331
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. 8 NOTE 6 - GROUP ANNUITY CONTRACTS: - --------------------------------- The fair value of group annuity contract deposits at December 31, 1998 and 1997 was comprised of the following:
December 31, 1998 1997 ----------- ----------- Chase Bank contract deposit, #401039, due 10/15/2006 (5.83% in 1998) $ 2,011,812 ---- Hartford contract deposit, GA10156, due 12/21/1998 (4.87% in 1997) ---- $ 2,563,076 Life of Georgia contract deposit, FR101, due 9/9/1999 (5.93% in 1997) ---- 6,282,171 Pacific Mutual contract deposit, G-2608401, due 6/1/1998 (6.65% in 1998 and 1997) 3,358,097 3,149,032 Provident contract deposit, #627-0569-201A, due 6/1/1999 (6.21% in 1997) ---- 3,723,764 Sun Life America contract deposit, #4656, due 7/25/1998 (6.58% in 1997) ---- 2,191,985 Allamerica contract deposit, GA-91636A, due 2/25/2001 (8.05% in 1998 and 1997) 2,443,220 4,522,389 Ohio National contract deposit, #5708, due 12/1/1997 (6.75% in 1998 and 1997) 3,180,910 2,979,775 Protective Life contract deposit, GA1191, due 6/1/1998 (5.85% in 1997) ---- 2,892,390 J.P. Morgan contract deposit, NALCO-01, due 6/1/2000 (3.93% in 1998 and 5.50% 10,000,000 10,000,000 in 1997) New York Life contract deposit, #30481, due 6/30/1999 (6.11% in 1998 and 1997) 5,892,661 5,553,351 Union Bank of Switzerland contract deposit, #2462, due 3/15/2008 (5.89% in 1998) 2,021,363 ---- Union Bank of Switzerland contract deposit, #2437 (6.15% in 1998) 1,781,133 ---- Transamerica Life contract deposit, S1393-00, due 1/30/1998 (6.13% in 1997) ---- 1,526,821 Transamerica Life contract deposit, #76772-00, due 7/15/2002 (6.08% in 1998) 1,622,541 ---- Principal Mutual contract deposit, #4-23183, due 12/31/2000 (6.41% in 1998 and 1997) 4,632,360 5,581,170 ----------- ----------- $36,944,097 $50,965,924 =========== ===========
Average yields for the above contracts are not calculated as the rates are guaranteed. No valuation reserve was established in 1998 or 1997 as the companies listed all maintain at least an A+ credit rating. 9 NOTE 7 - STATEMENTS OF NET ASSETS: - ---------------------------------- The statements of net assets available for plan benefits by fund as of December 31, 1998 and 1997 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, 1998 -----------------------
U.S. Govt Nalco Stock Money Mkt Stable Capital Bond Index Balanced Fund Fund Fund Fund Fund ----------- ---------- -------------- ---------- ------------- Investments, at fair value: Nalco Chemical Company common stock $74,698,933 Mutual funds $3,735,295 $17,953,331 Group annuity contract deposits $36,944,097 Bank commingled mutual funds $7,406,152 Collective short-term investment fund 1,967,849 19 24,362,769 6 60 ----------- ---------- ----------- ---------- ----------- 76,666,782 3,735,314 61,306,866 7,406,158 17,953,391 Loans receivable from participants Due from Nalco Chemical Company Employee Stock Ownership Plan 3,795,959 Accrued income receivable 8,372 12,208 131,400 ----------- ---------- ----------- ---------- ----------- Net assets available for plan benefits $80,471,113 $3,747,522 $61,438,266 $7,406,158 $17,953,391 =========== ========== =========== ========== ===========
Growth & Equity Index EuroPacific Loan Clearing Income Fund Fund Fund Account Account Total ------------- ----------- ----------- --------- ----------- ------------ Investments, at fair value: Nalco Chemical Company common stock $406,038 $ 75,104,971 Mutual funds $50,261,302 $10,322,973 82,272,901 Group annuity contract deposits 36,944,097 Bank commingled mutual funds $56,355,707 63,761,859 Collective short-term investment fund 258 140 98 181,393 26,512,592 ----------- ----------- ----------- ---------- -------- ------------ 50,261,560 56,355,847 10,323,071 587,431 284,596,420 Loans receivable from participants $5,417,307 5,417,307 Due from Nalco Chemical Company Employee Stock Ownership Plan 3,795,959 Accrued income receivable 1 1 1,704 153,686 ----------- ----------- ----------- ---------- -------- ------------ Net assets available for plan benefits $50,261,561 $56,355,848 $10,323,071 $5,417,307 $589,135 $293,963,372 =========== =========== =========== ========== ======== ============
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 Nalco Stock Money Mkt Stable Capital Bond Index Balanced Fund Fund Fund Fund Fund ----------- ---------- -------------- ---------- ----------- Investments, at fair value: Nalco Chemical Company common stock $98,123,822 Mutual Funds $2,676,600 $17,861,388 Group annuity contract deposits $50,965,924 Bank commingled mutual funds $3,964,109 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 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 =========== ========== =========== ========== ===========
Growth & Equity Index EuroPacific Loan Clearing Income Fund Fund Fund Account Account Total ----------- ------------ ----------- ------------ --------- --------- Investments, at fair value: Nalco Chemical Company $ 98,123,822 common stock $66,569,298 $11,867,097 98,974,383 Mutual Funds Group annuity contract 50,965,924 deposits Bank commingled mutual $37,576,753 41,540,862 funds Collective short-term investment fund $159,460 10,500,682 ----------- ----------- ----------- ---------- -------- ---------- 66,569,298 37,576,753 11,867,097 159,460 300,105,673 Loans receivable from $5,604,934 5,604,934 participants Due from Nalco Chemical Company Employee Stock Ownership Plan 89,410 Accrued income receivable 1,172 246,199 ----------- ----------- ----------- ---------- -------- ----------- Net assets available for plan benefits $66,569,298 $37,576,753 $11,867,097 $5,604,934 $160,632 $306,046,216 =========== ============ =========== ========== ======== ============
12 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, 1998 and 1997 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, 1998 ------------------------------------
U.S. Govt Nalco Stock Money Mkt Stable Capital Bond Index Balanced Fund Fund Fund Fund Fund ------------- ------------ --------------- ----------- ------------ Sources of net assets: Contributions by employees $ 666,434 $230,784 $1,570,134 $ 343,829 $ 1,456,081 Dividend income 2,317,710 641,462 Interest income 84,931 159,560 3,464,421 6 60 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 5,077,002 Participant loan repayments 300,782 42,228 696,019 56,158 264,756 Net transfers authorized by Participants 1,531,117 2,362,533 6,953,308 3,408,608 (1,585,343) Net realized/unrealized Appreciation (depreciation) of investments (19,208,377) 449,168 1,239,363 ------------ --------- --------- ---------- ---------- Total sources of net assets (9,230,401) 2,795,105 12,683,882 4,257,769 2,016,379 Applications of net assets: Administrative expenses Loans to participants (265,316) (70,520) (653,718) (85,903) (209,479) Withdrawals by participants (9,805,686) (1,664,793) (10,573,657) (729,817) (1,714,897) ------------ ----------- ------------ ---------- ----------- Increase (decrease) in net assets available for plan benefits (19,301,403) 1,059,792 1,456,507 3,442,049 92,003 Net assets available for plan benefits at beginning of period 99,772,516 2,687,730 59,981,759 3,964,109 17,861,388 ------------ ----------- ------------ ---------- ----------- Net assets available for plan benefits at end of period $ 80,471,113 $ 3,747,522 $ 61,438,266 $7,406,158 $17,953,391 ============ =========== ============ ========== ===========
Growth & Equity Index EuroPacific Loan Clearing Income Fund Fund Fund Account Account Total ------------- ------------- ------------ ----------- ------------ ----------- Sources of net assets: Contributions by employees $ 4,991,481 $ 4,264,730 $ 1,046,285 $ 2,755,801 $ 17,325,559 Dividend income 327,015 140,419 2,971 3,429,577 Interest income 260 141 98 $ 481,831 17,206 4,208,514 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 5,077,002 Participant loan repayments 946,033 628,373 188,647 41,235 3,164,231 Net transfers authorized by Participants (17,381,895) 7,611,540 (2,899,868) 0 Net realized/unrealized Appreciation of investments 926,877 11,462,110 1,332,169 (1,136) (3,799,826) ------------ ----------- ----------- ---------- ----------- ------------ Total sources of net assets (10,190,229) 23,966,894 (192,250) 481,831 2,816,077 29,405,057 Applications of net assets: Administrative expenses (36,661) (36,661) Loans to participants (770,324) (588,593) (126,675) (47,001) (2,817,529) Withdrawals by participants (5,347,184) (4,599,206) (1,225,101) (669,458) (2,303,912) (38,633,711) ------------ ----------- ----------- ---------- ----------- ------------ Increase (decrease) in net assets available for plan benefits (16,307,737) 18,779,095 (1,544,026) (187,627) 428,503 (12,082,844) Net assets available for plan benefits at beginning of period 66,569,298 37,576,753 11,867,097 5,604,934 160,632 306,046,216 ------------ ----------- ----------- ---------- ----------- ------------ Net assets available for plan benefits at end of period $ 50,261,561 $56,355,848 $10,323,071 $5,417,307 $ 589,135 $293,963,372 ============ =========== =========== ========== =========== ============
14 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 Stock Money Mkt Stable Capital Bond Index Balanced Growth & Fund Fund 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 Participant loan repayments 314,074 36,515 751,828 25,393 232,327 962,815 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 5,193,304 2,274,766 1,803,323 1,370,273 6,234,769 18,118,568 Applications of net assets: Administrative expenses Loans to participants (325,059) (79,929) (680,636) (34,575) (242,850) (1,032,061) Withdrawals by participants (9,181,013) (1,427,545) (10,243,931) (271,173) (1,193,170) (6,124,036) ----------- ----------- ------------ ---------- ----------- ----------- 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 Index EuroPacific Loan Clearing 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 Participant loan repayments 460,623 188,787 28,471 3,000,833 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 17,961,070 2,587,522 459,017 772,586 56,775,198 Applications of net assets: Administrative expenses (71,324) (71,324) Loans to participants (449,899) (190,632) 81,197 (2,954,444) Withdrawals by participants (2,416,924) (789,133) (126,621) (1,035,901) (32,809,447) ----------- ----------- ---------- --------- ------------ 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 =========== =========== ========== ========= ============
16 SCHEDULE I ---------- NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ ITEM 27A--SCHEDULE OF --------------------- ASSETS HELD FOR INVESTMENT PURPOSES ----------------------------------- AS OF DECEMBER 31, 1998 -----------------------
Identity of Issuer Description of Investment Fair Value Cost - ----------------------------------------------- ------------------------------------------------------ ------------ ------------ *Nalco Chemical Company 2,422,741 shares of common stock $ 75,104,971 $ 39,900,109 Chase Bank Group annuity contract deposit, #401039, 5.83%, 2,011,812 2,011,812 due 10/15/2006 Union Bank of Switzerland Group annuity contract deposit, #2462, 5.89%, due 2,021,363 2,021,363 3/15/2008 Pacific Mutual Group annuity contract deposit, G-2608401, 6.65%, 3,358,097 3,358,097 due 6/1/1998 Union Bank of Switzerland Group annuity contract deposit, #2437, 6.15%, 1,781,133 1,781,133 Allamerica Group annuity contract deposit, GA-91636A, 8.05%, due 2,443,220 2,443,221 2/25/2001 Ohio National Group annuity contract deposit, #5708, 6.75%, due 3,180,910 3,180,910 12/1/1997 J.P. Morgan Group annuity contract deposit, NALCO-01, 3.93%, due 10,000,000 10,000,000 6/1/2000 New York Life Group annuity contract deposit, #30481, 6.11%, due 5,892,661 5,892,661 6/30/1999 Principal Mutual Group annuity contract deposit, #4-23183, 6.41%, due 4,632,360 4,632,360 12/31/2000 Transamerica Life Group annuity contract deposit, #76772-00, 6.08%, due 1,622,541 1,622,541 7/15/2002 American American EuroPacific Growth Fund - 363,485 shares 10,322,973 9,468,874 American Balanced Fund - 1,139,171 shares 17,953,331 16,815,917 Dreyfus U.S. Government Money Market Fund 3,735,295 3,735,295 Neuberger & Berman Guardian Fund - 2,241,807 shares 50,261,302 51,243,797 Barclays Global Investors Barclays Equity Index Fund - 1,677,253 shares 56,355,707 37,609,255 Barclays Bond Index Fund - 503,477 shares 7,406,152 6,881,435 *The Northern Trust Company Collective Short-Term Investment Fund 26,512,592 26,512,592 *Participant loans Participant loans, average interest rate of 9.27% 5,417,307 5,417,307 ------------ ------------ . $290,013,727 $234,528,679 ============ ============ *Party-in-interest to the Plan
SCHEDULE II ----------- NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ ITEM 27D--SCHEDULE OF REPORTABLE TRANSACTIONS --------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1998 ------------------------------------
Expenses Value of Incurred Cost Asset on With of Transaction Net Gain Identity of Party Involved Description of Asset Purchase Price Selling Price Transaction Asset Date (Loss) - -------------------------- -------------------- -------------- ------------- ----------- ------- ---- --------- Category (iii) - A series of security transactions - -------------------------------------------------- in excess of 5% of the current value of plan assets: ---------------------------------------------------- Neuberger & Berman Management Neuberger & Berman Guardian Equity Fund: 84 purchases 14,202,384 14,202,384 14,202,384 172 sales 23,923,988 21,065,580 23,923,988 2,858,408 The Northern Trust Company Collective Short-Term Investment Fund: 350 purchases 120,659,457 120,659,457 120,659,457 401 sales 97,958,848 97,958,848 97,958,848 Barclays Global Investors Barclays Equity Index Fund: 163 purchases 21,245,791 21,245,791 21,245,791 97 sales 13,928,946 10,242,815 13,928,946 3,686,131 There were no reportable category (i), (ii), or (iv) transactions for the year ended December 31, 1998.
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 BY /s/ J.F. LAMBE ----------------------------- Member, Employee Benefit Plan Administration Committee Dated: March 30, 1999 -----END PRIVACY-ENHANCED MESSAGE-----