-----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, JLISwy6EGwDe62DUc67+j9WZ8aJJrk3YtrehulqkJ+eWiq1IQx/1gQldkq737dym XpM1SVt88KSN4t3mdTReHg== 0000950131-96-001395.txt : 19960506 0000950131-96-001395.hdr.sgml : 19960506 ACCESSION NUMBER: 0000950131-96-001395 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NALCO CHEMICAL CO CENTRAL INDEX KEY: 0000069598 STANDARD INDUSTRIAL CLASSIFICATION: 2890 IRS NUMBER: 361520480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04957 FILM NUMBER: 96543003 BUSINESS ADDRESS: STREET 1: ONE NALCO CTR CITY: NAPERVILLE STATE: IL ZIP: 60563 BUSINESS PHONE: 7083051000 MAIL ADDRESS: STREET 1: ONE NALCO CENTER CITY: NAPERVILLE STATE: IL ZIP: 60563-1198 10-K 1 FORM 10-K 1995 - - ------------------------------------------------------------------------------- - - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 ---------------- FORM 10-K (MARK ONE) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 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 708-305-1000 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE ON WHICH REGISTERED TITLE OF EACH CLASS 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. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant was $2,131,839,113 at February 20, 1996.* The number of shares outstanding of each of the issuer's classes of Common Stock, as of February 20, 1996 was 67,277,099 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1995 Annual Report to Shareholders are incorporated by reference into Parts I and II. Portions of the Registrant's Proxy Statement dated March 18, 1996 for the April 18, 1996 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
PAGE ---- PART I Item 1 Business........................................................ 1 Executive Officers of the Registrant............................ 3 Item 2 Properties...................................................... 4 Item 3 Legal Proceedings............................................... 5 Item 4 Submission of Matters to a Vote of Security Holders............. 5 PART II Item 5 Market for the Registrant's Common Stock and Related Security Holder Matters.................................................. 5 Item 6 Selected Financial Data......................................... 5 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................... 5 Item 8 Financial Statements and Supplementary Data..................... 6 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................ 6 PART III Item 10 Directors and Executive Officers of the Registrant.............. 6 Item 11 Executive Compensation.......................................... 6 Item 12 Security Ownership of Certain Beneficial Owners and Management.. 6 Item 13 Certain Relationships and Related Transactions.................. 6 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K. 7
PART I ITEM 1. BUSINESS. Nalco Chemical Company was incorporated in 1928 in Delaware and has its principal executive offices at One Nalco Center, Naperville, Illinois 60563. Its telephone number is 708-305-1000, and beginning August 3, 1996 the telephone number will be 630-305-1000. As used in this report, "Company" and "Nalco" refer to Nalco Chemical Company and its consolidated subsidiaries. Nalco is engaged in the manufacture and sale of highly specialized Service Chemicals. Specified financial information by geographic area is shown in Note 2 of the Notes to Consolidated Financial Statements in the Company's 1995 Annual Report to Shareholders and is incorporated herein by reference. Nalco's business includes the production and sale of chemicals, technology, services, and systems (monitoring and surveillance) used in water treatment, pollution control, energy conservation, steelmaking, papermaking, mining and mineral processing, electricity generation, other industrial processes, and commercial building utility systems. Service Chemicals are developed and formulated to meet specific customer needs. In general, they are part of value added programs designed to help customers maintain a high level of operating performance and efficiency in their facilities, improve the quality of customers' end products, or help customers meet environmental discharge limits in a cost-effective way. Nalco products are used for purposes such as: control of scale, corrosion, foam and fouling in cooling systems, boilers, and other equipment; clarification of water; improved combustion; separation of liquids and solids; control of dust; lubrication and corrosion protection in rolling, drawing and forming of metals; improved production of pulp and qualities of paper; recovery of minerals; and specialized process applications in a variety of industries. The quality and on-site availability of technical expertise provided through highly qualified Nalco personnel are very important considerations to customers since the effective use of the Company's products requires a substantial amount of problem solving, monitoring, and technical assistance on the part of Nalco employees. Service Chemicals are usually marketed through Nalco's own organization because of the high degree of technical service required. The worldwide field sales force is trained in the application and use of Nalco Service Chemicals, and is supported by a marketing staff of specialists in the technology and use of various Nalco Service Chemicals. Competitive conditions vary for Nalco depending on the industries served and the products involved. Management believes the Company is one of the most important worldwide suppliers of water treatment products and service chemical programs, based on estimated sales of comparable products for industrial customers on the process side (e.g., the manufacturing process, which a plant uses to produce its end product) and the water treatment side (e.g., boilers for power generation or cooling systems for process temperature control). The Company sells its water treatment products and service chemical programs in more than 100 countries, and is the largest or second largest supplier of those products in most of the countries it does business. All aspects of this business are considered to be very competitive, and companies providing similar products or programs range in size from very large multinational companies to small local manufacturers. The number of competitors varies by product application and ranges from a few large companies to hundreds of small local companies. The Company's principal method of competition is based on quality service, product performance and technology through safe, practical applied science. On February 2, 1996, Nalco announced its plan to dispose of its superabsorbent chemicals business. The results of this business are now reported as discontinued operations. The operations and the net assets of this business are held for sale. Nalco does not anticipate a loss from the operations from this business during the phase out period nor a loss on the ultimate disposition of this business. This business generated annual revenue of approximately $96 million for the year 1995. Effective October 1995, Nalco purchased an additional 25 percent of the common shares of Nalco Chemical India, Ltd., and now owns 65 percent of this company. In November 1995, Nalco purchased the pulp and paper chemical business of Texo Corporation. 1 ITEM 1. BUSINESS. (CONT'D) There were no other significant changes in the markets served or in the methods of distribution since the beginning of 1995. Although no single Service Chemicals product represents a material portion of the business, historically, new product and new market developments have been designed to increase market penetration and to maintain sales and earnings growth. OTHER MATTERS Primarily as a result of the formation of the Nalco/Exxon joint venture, the Company adopted a worldwide consolidation plan in 1994 for manufacturing and support operations. The production volume reduction caused by redundancies associated with the joint venture formation required the Company to downsize, close, and consolidate operations. The Company's South Chicago plant was closed, and several European and Latin American manufacturing and support operations have been or will also be closed or downsized. In addition, certain support functions will be regionalized on a pan-European basis in order to more efficiently serve customers. All of these activities are in process, and should be largely completed by the end of 1996. The principal raw materials used by Nalco ordinarily are available in adequate quantities from several sources of supply in the United States and in foreign countries. Purchases of chemicals are made in the ordinary course of business and in accordance with the requirements of production. Inventories of Service Chemicals are maintained in Nalco-owned facilities and in warehouses situated throughout the United States and in countries in which subsidiaries operate. Shipments to customers may be made from either manufacturing plants or warehouse stocks. Nalco owns or is licensed under a large number of patents relating to a number of products and processes. Nalco's rights under such patents and licenses are of significant importance in the operation of the business, but no single patent or license is believed to be material with respect to its business. Over 700 patents existed at the end of 1995 with remaining durations ranging from less than one year to 17 years with an average duration of about 10 years. Nalco's business is considered nonseasonal. Large dollar amounts of backlogs are unusual since chemicals are normally shipped within a few days of the receipt of orders. The dollar amount of the normal backlog of orders is not considered to be significant in relation to the total annual dollar volume of sales of Nalco. The Company does not depend upon either a single customer, or very few customers, for a material part of the business. Nalco's laboratories are involved in research and development of chemical products and in providing technical support, including chemical analyses of water and process samples. Research and development expenses of continuing operations amounted to $39.8 million in 1995, compared to $45.7 million in 1994, and $49.7 million in 1993. There were approximately 6,100 persons employed full time by Nalco at the end of 1995. Compliance with Federal, State, and local regulations relating to the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect upon the capital expenditures, earnings, or competitive position of Nalco. There are no material capital expenditures for environmental control facilities anticipated during 1996. Compliance with increasingly stringent regulations should not have a material effect upon earnings but may strengthen the competitive position of Nalco because of available capital and technical resources. Although inflation is not a significant factor domestically, the Company adjusts selling prices to maintain profit margins wherever possible. Investments are made in modern plants and equipment that will increase productivity and thereby minimize the effect of rising costs. In addition, the last-in, first-out (LIFO) valuation 2 ITEM 1. BUSINESS. (CONT'D) method is used for some of the Company's inventories, so that changing material costs are recognized in reported income and pricing decisions. The impact of inflation in foreign exchange movements at foreign subsidiaries is managed by minimizing assets exposed to currency movements and by increasing sales prices to parallel increases in local inflation rates. The Company emphasizes working capital management, frequent dividend remittance, timely settlement of intercompany account balances, foreign currency borrowings, and selected hedging. In most hyperinflationary economies, the rate of local currency devaluation is related to and approximately equal to the local inflation rate. Therefore, Nalco attempts to increase its local selling prices to help offset the impact of devaluation on exposed assets and the impact of increases in local content costs. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Registrant are named below together with their principal occupation. During the last 5 years all of the executive officers have been employed by the Company, as indicated, except for W. E. Buchholz. E. J. Mooney has been Chief Executive Officer of the Company since April 1994, Chairman of the Board since July 1994, and President since 1990. He had been Chief Operating Officer since 1992 and an Executive Vice President since 1988. M. B. Harp was elected Executive Vice President, Operations on January 1, 1995. He had been Executive Vice President, International Operations since 1993 and a Group Vice President since 1988. W. S. Weeber has been Executive Vice President, Operations Staff since 1993. He had been a Group Vice President since 1986. P. Dabringhausen has been Group Vice President and President, Process Chemicals Division since 1993. He had been a Vice President since 1991, and was President, Nalco Pacific from 1989 to 1992. S. D. Newlin has been Group Vice President, President, Nalco Europe since 1994. He had been Vice President, President, Nalco Pacific since 1992. During 1992 he was General Manager, Pulp and Paper Chemicals Group; and from 1990 to 1992 he was General Manager of UNISOLV(R). J. D. Tinsley has been Group Vice President and President, Water and Waste Treatment Division since 1993. During 1992 he was a Group Vice President and President, Process Chemicals Division, and from 1986 to 1992 he was Vice President, Corporate Development. W. E. Buchholz has been Vice President and Chief Financial Officer since 1993. He was formerly Vice President--Finance and Chief Financial Officer for Cincinnati Milacron, Inc. (a manufacturer of industrial equipment, supplies and services for the metal cutting and plastic processing industries) since 1987. The corporate officers of the Registrant are usually elected at the annual meeting of directors and hold office for a term of one year. There is no family relationship between any of the executive officers. No arrangement or understanding exists between the executive officers and any other person pursuant to which such officers were selected as officers of the Registrant. For further information on the executive officers of the Registrant, please refer to page 38 of the Company's 1995 Annual Report to Shareholders, which is incorporated herein by reference. 3 ITEM 2. PROPERTIES. Nalco has facilities used to produce and store inventories and service customer needs at 8 domestic and 27 foreign locations. Primary domestic manufacturing plants are located in:
LAND AREA BUILDING AREA (ACRES) (SQ. FT.) --------- ------------- Carson, California................................ 21 84,000 Jonesboro, Georgia................................ 12 35,000 Chicago, Illinois................................. 42 856,000 Garyville, Louisiana.............................. 251 235,000 Paulsboro, New Jersey............................. 14 33,000
Other domestic manufacturing and/or warehouse facilities are located in: Oklahoma City, Oklahoma; Clarksburg, West Virginia; and Vancouver, Washington. The general offices of the Company are located on a 146-acre site in Naperville, Illinois. This facility includes three five-story buildings totaling 417,000 square feet. About 317,000 square feet is used for office space and the balance is used for support services and storage. A power plant with a cogeneration system (steam and electricity) serves both the Corporate and Technical Centers and has 31,000 square feet of space. The Company's primary research facility is located in Naperville, Illinois. The Technical Center is adjacent to the Corporate Center and houses process simulation areas and a technical library in buildings which total 235,000 square feet. Primary foreign manufacturing plants, which also generally include laboratory and office facilities, are located in:
LAND AREA BUILDING AREA (ACRES) (SQ. FT.) --------- ------------- Botany, Australia................................. 10 102,000 Suzano, Brazil.................................... 14 81,000 Burlington, Canada................................ 14 138,000 Soledad, Colombia................................. 6 27,000 Cheshire, England................................. 15 226,000 Biebesheim, Germany............................... 28 103,000 Cisterna di Latina, Italy......................... 25 88,000 Celra, Spain...................................... 25 109,000 Anaco, Venezuela.................................. 43 76,000
Other foreign facilities are located in: Perth, Australia; Vienna, Austria; Buenos Aires, Argentina; Edmonton, Canada; Santiago, Chile; Lerma, Mexico; Quito, Ecuador; West Bengal, India; Bogor, Indonesia; Kashima, Japan; Tilburg, the Netherlands; Auckland, New Zealand; Calamba, Laguna, Philippines; Dammam, Saudi Arabia; Jurong Town, Singapore; Hsin Chu Hsien, Taiwan; and Maracaibo, Venezuela. The Company also has a 72,000 square-foot business and technical center on a 12-acre site in Oegstgeest, the Netherlands. This facility serves customers throughout Europe. In addition to the property mentioned above, Nalco occupies general and sales offices and warehouses which are rented under short-term leases. Except for land leased in the Philippines, Saudi Arabia, Chile, Ecuador and Argentina, all other real property (including all production facilities) is owned by Nalco. While the plants are of varying ages, the Company believes that they are well maintained, are equipped with modern and efficient equipment, and are in good operating condition and suitable for the purposes for which they are being used. 4 ITEM 2. PROPERTIES. (CONT'D) As part of the worldwide consolidation plan for manufacturing and support operations adopted by the Company during 1994, certain facilities have been or will be closed. These included the South Chicago plant located on South Harbor Avenue in Chicago, Illinois, and plants located in Douvrin--Billy Berclau, France, and Jordbro, Sweden. Capital expenditures for 1996 should approximate $110.0 million compared to the $126.7 million spent in 1995, if planned sales and earnings for 1996 are reached. ITEM 3. LEGAL PROCEEDINGS. For information on this item, please refer to Note 19 of the Notes to Consolidated Financial Statements in the Company's 1995 Annual Report to Shareholders, which is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. The Registrant's Common Stock is listed on the New York and Chicago Stock Exchanges. The number of holders of record of Common Stock, par value $0.1875 per share, at December 31, 1995 was 5,669. Dividends and Common Stock market prices included in the Quarterly Summary in the Company's 1995 Annual Report to Shareholders are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. Selected Financial Data including net sales, earnings from continuing operations, earnings from continuing operations per common share, total assets, long-term debt, and cash dividends paid are reported in the Eleven Year Summary in the Company's 1995 Annual Report to Shareholders and are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Financial Condition and Results of Operations Management's discussion and analysis of financial condition and results of operations which is included in the section titled "Management's Discussion and Analysis--1995 vs. 1994," "Management's Discussion and Analysis--1994 vs. 1993," and "Management's Discussion and Analysis--Financial Condition" in the Company's 1995 Annual Report to Shareholders is incorporated herein by reference. Liquidity and Capital Resources Management's discussion of liquidity and capital resources which is included in the section titled "Management's Discussion and Analysis--Cash Flows" in the Company's 1995 Annual Report to Shareholders is incorporated herein by reference. 5 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 1995 Annual Report to Shareholders, are incorporated herein by reference. The Quarterly Summary in the Company's 1995 Annual Report to Shareholders is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Item 10 information is set forth in Part I, Item 1, under Executive Officers of the Registrant and also in the Company's Proxy Statement dated March 18, 1996, under Election of Directors through Election of Directors--Meetings of the Board and Committees of the Board, which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information contained under Election of Directors--Directors' Remuneration and Retirement Policies through Election of Directors--Change in Control in the Company's Proxy Statement dated March 18, 1996, with respect to executive compensation and transactions, is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information contained under Shares Outstanding and Voting Rights in the Company's Proxy Statement dated March 18, 1996, with respect to security ownership of certain beneficial owners and management, is incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. 6 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 1995 Annual Report to Shareholders are incorporated herein by reference in Item 8: Statements of Consolidated Financial Condition December 31, 1995 and 1994 Statements of Consolidated Earnings Years ended December 31, 1995, 1994 and 1993 Statements of Consolidated Cash Flows Years ended December 31, 1995, 1994 and 1993 Statement of Consolidated Common Shareholders' Equity Years ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements Quarterly Summary (Unaudited) Years ended December 31, 1995 and 1994 Report of Independent Accountants
(2) The following consolidated financial statement schedule for the years 1995, 1994 and 1993 is submitted herewith: Report of Independent Accountants on Financial Statement Schedule Schedule II--Valuation and Qualifying Accounts 7 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(7) Exhibit 3C -- Certificate of Designations, Preferences and Rights of Series B ESOP Convertible Preferred Stock(4) Exhibit 3D -- By-laws(9) Exhibit 10A -- Form of Key Executive Agreement(1) 10B -- Agreements to Restore Benefits Reduced by Excess ERISA-Related Limits(1) 10C -- Form of Death Benefit Agreement(2) 10D -- Management Incentive Plan(2) 10E -- Restricted Stock Plan(7) 10F -- 1982 Stock Option Plan as amended April 16, 1984, January 30, 1987, and February 12, 1993(9) 10G -- Deferred Compensation Plan for Directors(3) 10H -- Supplemental Retirement Income Plan(6) 10I -- 1990 Stock Option Plan as amended April 23, 1992, and February 12, 1993(9) 10J -- Stock Option Plan for Non-Employee Directors(9) 10K -- Directors Benefit Protection Trust of Nalco Chemical Company(6) 10L -- Management Benefit Protection Trust of Nalco Chemical Company(6) 10M -- Restricted Stock Trust of Nalco Chemical Company(6) 10N -- Performance Share Plan(8) Exhibit 11 -- Computation of Earnings Per Share Exhibit 13 -- Those portions of the 1995 Annual Report to Shareholders expressly incorporated herein by reference Exhibit 21 -- Subsidiaries of the Registrant Exhibit 23 -- Consent of Independent Accountants Exhibit 27 -- Financial Data Schedule Exhibit 99A -- Notice of Annual Meeting and Proxy Statement(10) Exhibit 99B -- August 7, 1986 and June 26, 1989 Letters to Shareholders with Summaries of the Preferred Share Purchase Rights Agreement as amended(5) Exhibit 99C -- Form 11-K Annual Report
Exhibit Nos. 10A-10N 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 1995 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 1989. (6) Incorporated herein by reference from the Registrant's Form 10-K for the year ended 1990. (7) Incorporated herein by reference from the Registrant's Form 10-K for the year ended 1991. (8) Incorporated herein by reference from the Registrant's March 16, 1992 Proxy Statement. (9) Incorporated herein by reference from the Registrant's Form 10-K for the year ended 1992. (10) Incorporated herein by reference from the Registrant's Notice of Annual Meeting and Proxy Statement dated March 18, 1996. 8 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Nalco Chemical Company E. J. Mooney By __________________________________ E. J. Mooney Chairman, Chief Executive Officer and President Date: March 29, 1996 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW ON MARCH 29, 1996 BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
NAME TITLE ---- ----- W. E. Buchholz Vice President and Chief Financial Officer ___________________________________________ W. E. Buchholz R. L. Ratliff Controller ___________________________________________ R. L. Ratliff J. L. Ballesteros Director ___________________________________________ J. L. Ballesteros H. G. Bernthal Director ___________________________________________ J. L. Bernthal H. Corless Director ___________________________________________ H. Corless H. M. Dean Director ___________________________________________ H. M. Dean J. P. Frazee, Jr. Director ___________________________________________ J. P. Frazee, Jr. A. L. Kelly Director ___________________________________________ A. L. Kelly F. A. Krehbiel Director ___________________________________________ F. A. Krehbiel E. J. Mooney Director ___________________________________________ E. J. Mooney W. A. Pogue Director ___________________________________________ W. A. Pogue J. J. Shea Director ___________________________________________ J. J. Shea
9 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Nalco Chemical Company Our audits of the consolidated financial statements referred to in our report dated February 2, 1996 appearing on page 13 of the 1995 Annual Report to Shareholders of Nalco Chemical Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Price Waterhouse LLP Chicago, Illinois February 2, 1996 10 NALCO CHEMICAL COMPANY AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL. E ------ ---------- ----------------------- ------------ ---------- ADDITIONS ----------------------- (1) (2) CHARGED BALANCE AT CHARGED TO OTHER BALANCE BEGINNING TO 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: December 31, 1995... $5,605,000 $ (648,000) $ 518,000(A) $4,439,000 ========== ========== ========== ========== December 31, 1994... $4,470,000 $1,845,000 $ 710,000(A) $5,605,000 ========== ========== ========== ========== December 31, 1993... $5,879,000 $ 716,000 $2,125,000(A) $4,470,000 ========== ========== ========== ==========
- - -------- Note A--Excess of accounts written off over recoveries. 11 EX-11 2 COMPUTATION OF EARNINGS EXHIBIT (11) STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE NALCO CHEMICAL COMPANY AND SUBSIDIARIES
YEAR ENDED DECEMBER 31 --------------------------- 1995 1994 1993 -------- ------- -------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) PRIMARY Average shares outstanding during the year...... 67,495 68,460 69,125 Net effect of dilutive stock options and shares contingently issuable--based on the treasury stock method using average market price........ 410 569 738 -------- ------- -------- TOTALS........................................ 67,905 69,029 69,863 ======== ======= ======== Earnings from continuing operations............. $135,664 $73,248 $128,777 Earnings from discontinued operations, net of taxes.......................................... 18,034 23,863 23,920 -------- ------- -------- Earnings before extraordinary loss and effect of accounting change.............................. 153,698 97,111 152,697 Extraordinary loss from retirement of debt, net of taxes....................................... -- -- (10,600) Cumulative effect of change in accounting for postretirement benefits other than pensions, net of taxes................................... -- -- (56,462) -------- ------- -------- Net earnings.................................... 153,698 97,111 85,635 Preferred stock dividends, net of taxes......... (11,208) (11,026) (10,813) -------- ------- -------- Net earnings to common shareholders............. $142,490 $86,085 $ 74,822 ======== ======= ======== Per share amounts: Earnings from continuing operations............. $ 1.83 $ .90 $ 1.69 Earnings from discontinued operations, net of taxes.......................................... .27 .35 .34 -------- ------- -------- Earnings before extraordinary loss and effect of accounting change.............................. 2.10 1.25 2.03 Extraordinary loss from retirement of debt, net of taxes....................................... -- -- (.15) Cumulative effect of change in accounting for postretirement benefits other than pensions, net of taxes................................... -- -- (.81) -------- ------- -------- Net earnings to common shareholders............. $ 2.10 $ 1.25 $ 1.07 ======== ======= ========
EX-21 3 SUBSIDIARIES EXHIBIT (21) NALCO CHEMICAL COMPANY AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT Subsidiaries of the registrant, all of which are wholly-owned unless otherwise indicated, are as follows:
STATE OR OTHER JURISDICTION OF INCORPORATION COMPANY OR ORGANIZATION ------- ------------------- Domestic: Aluminate Sales Corporation............................... Illinois Chicago Chemical Company.................................. Illinois Board Chemistry, Inc...................................... Illinois East End Properties Corporation........................... Illinois Energy Chemicals Holdings, Inc............................ Delaware Energy Chemicals Holdings, Inc............................ Illinois Nalco Delaware............................................ Delaware Nalco Foreign Sales Corporation........................... U.S. Virgin Islands Nalco FT, Inc............................................. Delaware Nalco International Sales Company......................... Delaware Nalco Japan Company, Ltd.................................. Delaware Nalco Leasing Corporation................................. Delaware Nalco Neighborhood Development Corporation................ Delaware Nalco Resources Investment Company........................ Texas NalFirst Financial Corporation............................ Delaware(1) NalFirst Holding Inc...................................... Delaware(1) NalFirst Leasing Corporation.............................. Delaware(1) Nalgreen, Inc............................................. Delaware Oil Products & Chemical Company, Inc...................... Illinois The Flox Company.......................................... Minnesota Visco Products Company.................................... Texas Foreign: Deutsche Nalco-Chemie, G.m.b.H............................ Germany Nalco Anadolu A.S......................................... Turkey Nalco Applied Services of Europe B.V...................... Netherlands Nalco Argentina, S.A...................................... Argentina Nalco Australia Pty. Limited.............................. Australia Nalco Belgium N.V./S.A.................................... Belgium Nalco Brazil Ltda......................................... Brazil Nalco Canada, Inc......................................... Canada Nalco Chemical A.B........................................ Sweden Nalco Chemical B.V........................................ Netherlands Nalco Chemical Company (Philippines) Inc.................. Philippines Nalco Chemical Company (Thailand) Limited................. Thailand Nalco Chemical Gesellschaft m.b.H......................... Austria Nalco Chemical (H.K.) Limited............................. Hong Kong Nalco Chemie.............................................. Czechoslovakia Nalco de Venezuela, C.A................................... Venezuela Nalco Ecuador, S.A........................................ Ecuador Nalco Chemical Egypt...................................... Egypt Nalco Espanola, S.A....................................... Spain
EX-23 4 CONSENT 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 Form S-8 (Numbers 33-54377, 33-38033, 33-38032, 33-29149, 2-97721, 2-97131, 2-82642) of our report dated February 2, 1996, which appears on page 13 of the 1995 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, 1995. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 10 of this Form 10-K. We also consent to the incorporation by reference in the Registration Statement of our report dated March 21, 1996 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, 1995. Price Waterhouse LLP Chicago, Illinois March 29, 1996 EX-13 5 ANNUAL REPORT REPORT OF INDEPENDENT ACCOUNTANTS Price Waterhouse LLP To the Board of Directors [LOGO OF PW APPEARS HERE] 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, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, 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. As discussed in the notes to the financial statements, the Company changed its method of accounting for postretirement benefits other than pensions in 1993. /s/ Price Waterhouse LLP - - ------------------------ Chicago, Illinois February 2, 1996 /s/ R. R. Ross - - ------------------------ R. R. Ross Engagement Partner 13 MANAGEMENT'S DISCUSSION AND ANALYSIS Sales* (millions of dollars) [GRAPH APPEARS HERE} *Based on continuing operations. Amounts for 1991-1994 include the Company's petroleum chemical operations. 1995 vs 1994 . On February 2, 1996, the Company announced its plan to dispose of its superabsorbent chemicals business. Accordingly, its results are now reported as discontinued operations. The operations and the net assets of this business are held for sale. Since the Company's entrance into this business in 1987, the market for this product has changed significantly, and is now characterized by price sensitivity and little opportunity for product or service differentiation. This business no longer fits the Company's strategy of delivering value to its customers through on-site expertise and innovative products and services. The Company does not anticipate a loss from operations from the superabsorbent chemicals business during the phase out period nor a loss on the ultimate disposition of the business, and therefore has not recognized any loss provision related to the disposal. Earnings from the discontinued operation were $18 million in 1995, down $6 million from 1994. (See Note 3). Effective September 1, 1994, Nalco and Exxon Chemical Company (Exxon), a division of Exxon Corporation, formed Nalco/Exxon Energy Chemicals, L.P. (Nalco/Exxon), a joint venture partnership to provide specialty chemical products and services to the petroleum and chemicals industries worldwide. Nalco's investment in the joint venture is accounted for by the equity method. (See Note 11). At the time of formation of Nalco/Exxon, Nalco transferred the business and sales volume of its U.S. Petroleum Chemicals Division and certain petroleum chemical product lines of its international operations to the joint venture. While this formation did not change Nalco's net assets or results of operations, several historical captions in the consolidated financial statements were affected. Because 1994 results have not been reclassified to exclude petroleum chemical operations, the following unaudited statement of consolidated earnings for the year ended December 31, 1994 is presented. It reflects results of operations on a comparable basis with 1995; that is, Nalco petroleum chemical operations are excluded for the first eight months of 1994 and recognized as if they were accounted for by the equity method.
Reclassified (in millions) 1995 1994 ........................................................................... NET SALES $1,214.5 $1,110.0 Operating costs and expenses Cost of products sold 531.3 482.3 Selling and service 399.5 364.3 Research and development 39.8 39.6 Administrative and general 38.4 39.2 Formation and consolidation - 68.2 ........................................................................... 1,009.0 993.6 ........................................................................... OPERATING EARNINGS 205.5 116.4 Interest and other income 7.2 16.5 Interest expense (16.2) (20.8) Equity in earnings of partnership 16.9 19.9 ........................................................................... EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 213.4 132.0 Income taxes 77.7 58.8 ........................................................................... EARNINGS FROM CONTINUING OPERATIONS 135.7 73.2 Earnings from discontinued operations, net of taxes 18.0 23.9 ........................................................................... NET EARNINGS $ 153.7 $ 97.1 - - -------------------------------------------------------====================
Sales from continuing operations were $1,215 million in 1995, a 3 percent decline from reported sales of $1,247 million for 1994. On a comparable basis, however, sales for 1995 were 9 percent higher than the year before. Sales for 1995 and 1994 by major operating unit were as follows:
1995 vs 1994 Increase (in millions) 1995 1994 (Decrease) ............................................................ Water and Waste Treatment $ 372.9 $ 363.9 2% Process Chemicals 317.1 281.6 13 Europe 285.8 259.0 10 Latin America 92.6 80.4 15 Pacific 146.1 125.1 17 ............................................... 1,214.5 1,110.0 9 Petroleum Chemicals - 136.8 - ............................................... Total $1,214.5 $1,246.8 (3) ............................................................
14 Depreciation (millions of dollars) [GRAPH APPEARS HERE] The following discussion of results of operations compares 1995 to the reclassified 1994 results presented above. Sales by the Water and Waste Treatment Division were up 2 percent, with solid improvements reported by the UNISOLV and WATERGY Groups. A more modest increase was reported by the Basic Industry Group. The Process Chemicals Division posted a 13 percent sales improvement as double-digit gains were posted by all three groups in the Division. Sales by the Europe Division were up 10 percent. The weaker dollar compared to a year ago accounted for part of this increase, but double-digit gains in local currencies were reported by subsidiaries in Italy and Spain, as well as the Division's Pan European Paper business. The Latin America Division turned in a 15 percent sales improvement, as double-digit gains were reported by subsidiary companies in Argentina, Brazil, and Chile. Slightly more than two-thirds of the increase for the Division was attributable to Nalcomex (Mexico), a former affiliate, which became a wholly owned subsidiary in the fourth quarter 1994. Sales by the Pacific Division rose 17 percent, as double-digit gains were reported by all but two of the subsidiary companies in the Division. Cost of products sold was 43.7 percent of sales for 1995, compared with 43.5 percent of sales for 1994. Increased raw material costs, partly offset by higher selling prices, accounted for slightly lower gross margins reported by operations in North America in 1995. However, gross margins of the International Divisions were slightly higher than last year on a combined basis. Operating expenses in 1995 rose $35 million, or 8 percent over 1994, excluding the $68 million charge in 1994 for formation and consolidation expenses discussed below. Selling and service expenses accounted for this increase, primarily to support growth in Latin America, the Pacific, and the worldwide paper market. The increase was also partly attributable to the weaker dollar used to translate expenses of most international subsidiaries, mainly those in Europe. Worldwide, research expenses were comparable to 1994, as increased expenses in Europe and the Pacific were offset by lower expenses in the United States and Latin America. Higher European and Pacific research costs reflect a full year of operations in 1995 for new facilities opened during 1994. The reduction in research expenses in the United States was mainly attributable to lower employee benefit costs. As a percent to sales, research expenses were 3.3 percent in 1995 compared to 3.6 percent in 1994. Administrative expenses for 1995 were down slightly from 1994 as a result of lower provisions for incentive plans and employee benefit costs. Primarily as a result of the formation of the Nalco/Exxon joint venture, the Company adopted a worldwide consolidation plan for manufacturing and support operations during 1994. As a result of this plan, the Company recorded a pretax provision for formation and consolidation expenses of $68 million ($54 million after tax, or 70 cents per share on a fully diluted basis). (See Note 4). Interest and other income for 1995 was down $9 million from 1994. This was primarily attributable to a $5 million gain on the sale of the Company's automotive paint spray booth business in 1994. Also contributing to the decrease was a drop in interest income as a result of lower invested cash balances, and lower realized exchange and unrealized translation gains reported by the Company's subsidiary in Brazil. Interest expense totaled $16 million in 1995, a decrease of $5 million from 1994, which was also mainly attributable to the Company's Brazilian subsidiary. This change, along with the change in realized exchange and unrealized translation gains discussed above, was the result of a monetary control program instituted by the Brazilian government in mid-1994. Nalco's equity in earnings of Nalco/Exxon was $17 million, a $3 million decline from the $20 million combined earnings reported by Nalco petroleum chemical operations from January to August 1994 and the Company's equity in the joint venture's earnings. This decrease reflects the weak petroleum market in the United States, as well as start-up and consolidation expenses for the joint venture. The effective tax rate for 1995 was 36.4 percent, comparable to the 1994 effective tax rate based on the reclassified results for 1994 presented above, excluding the formation and consolidation expense of $68 million and related net tax benefit of $14 million. Earnings from continuing operations as a percent to sales was 11.2 percent in 1995. Based on the reclassified results above and excluding the net formation and consolidation expense, earnings from continuing operations as a percent to sales was 11.5 percent in 1994. Operating Earnings* (millions of dollars) [GRAPH APPEARS HERE] *Amounts for 1991-1994 include the Company's petroleum chemical operations. **Excludes $68 million pretax provision for formation and consolidation expenses. 15 Market Value of Nalco Common Share at Year-End Closing Price (in dollars) [GRAPH APPEARS HERE] The Company makes limited use of derivative financial instruments such as interest rate swaps and foreign exchange contracts. Interest rate swaps are used to reduce the potential impact of increases in interest rates on floating rate long-term debt, while foreign exchange contracts are used to minimize exposure and reduce risk from exchange rate fluctuations. The Company does not hold or issue financial instruments for trading purposes. (See Note 17). The Company is involved in environmental clean-up activities in connection with former waste disposal sites and plant locations and litigation in the normal course of business. (See Note 19). This involvement has not had, nor is it expected to have, a material effect on the Company's earnings or financial position. In 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires companies to review long-lived assets, including identifiable intangibles and goodwill, for indicators of impairment. The Company is required to adopt SFAS 121 effective January 1, 1996. Management believes that the effect of this adoption will not have any material impact on the results of operations or the financial position of the Company. In 1995, the Financial Accounting Standards Board also issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which requires companies to account for employee stock-based compensation plans using a fair value based method of accounting. However, SFAS 123 allows companies to continue to apply the intrinsic value based method prescribed under Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," provided certain pro forma disclosures are made with respect to a fair value method. The Company is required to adopt SFAS 123 effective January 1, 1996, and although it has not yet determined the complete impact of the pronouncement, it has decided it will continue to apply the intrinsic value method under APB 25. 1994 vs. 1993 As previously discussed, the formation of the Nalco/Exxon joint venture in September 1994 did not change Nalco's net assets or results of operations, but several historical captions in the consolidated financial statements were affected. Because 1993 results have not been reclassified to exclude petroleum chemical operations, the following unaudited statement of consolidated earnings for the year ended December 31, 1993 is presented. It reflects results of operations on a comparable basis with 1994; that is, Nalco petroleum chemical operations are excluded for the last four months of 1993 and recognized as if they were accounted for by the equity method.
Reclassified (in millions) 1994 1993 ................................................................................ NET SALES $1,246.8 $1,215.7 Operating costs and expenses Cost of products sold 543.7 520.7 Selling and service 405.3 388.1 Research and development 45.7 45.3 Administrative and general 47.8 48.7 Formation and consolidation 68.2 - ................................................................................ 1,110.7 1,002.8 ................................................................................ OPERATING EARNINGS 136.1 212.9 Interest and other income 16.6 14.9 Interest expense (21.8) (27.5) Equity in earnings of partnership 6.9 8.3 ................................................................................ EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 137.8 208.6 Income taxes 64.6 79.8 ................................................................................ EARNINGS FROM CONTINUING OPERATIONS 73.2 128.8 Earnings from discontinued operations, net of taxes 23.9 23.9 ................................................................................ EARNINGS BEFORE EXTRAORDINARY LOSS AND EFFECT OF ACCOUNTING CHANGE $ 97.1 $ 152.7 - - -------------------------------------------------------=========================
16 Sales from continuing operations were $1,247 million in 1994, a 3 percent decline from reported sales for 1993. On a comparable basis, however, sales for 1994 were 3 percent higher than the year before. Sales for 1994, 1993 as reported, and reclassified 1993 by major operating unit were as follows:
1994 vs Reclassified 1994 vs 1993 1993 Reclassified Increase Increase (in millions) 1994 1993 1993 (Decrease) (Decrease) ................................................................................................... Water and Waste Treatment $ 344.8 $ 335.2 $ 335.2 3% 3% Process Chemicals 258.7 247.7 247.7 4 4 Petroleum Chemicals 85.3 136.1 89.9 (37) (5) International 558.0 572.6 542.9 (3) 3 .................................................................... Total $1,246.8 $1,291.6 $1,215.7 (3) 3
The following discussion of results of operations compares 1994 to the reclassified 1993 results presented above. Sales by the three units comprising U.S. Operations rose 2 percent in 1994, as seven of the eleven marketing groups posted higher sales. Sales by International Operations were up 3 percent. Sales by European subsidiaries were down 3 percent, primarily as a result of lower sales to the Middle East by our subsidiary company in Italy. In Latin America, sales increased 19 percent over 1993 with gains reported by all operations in the region, most notably Argentina, the Caribbean, and Venezuela, which reported double-digit advances. About one-fifth of the increase in Latin America was attributable to sales by Nalcomex (Mexico), a former affiliate, which became a wholly owned subsidiary in the fourth quarter 1994. In the Pacific, double-digit sales gains by all subsidiaries in the region, except Australia and Taiwan, contributed to a 10 percent improvement over 1993. Cost of products sold was 43.6 percent of sales for 1994, compared with 42.8 percent of sales for 1993. Slightly lower selling prices, combined with increased raw material costs and manufacturing expenses, accounted for lower gross margins reported by U.S. Operations in 1994. Gross margins of our foreign subsidiaries, primarily in Europe, were also slightly lower than in 1993. Operating expenses in 1994 rose $17 million, or 3 percent over 1993, excluding the $68 million charge in 1994 for formation and consolidation expenses. Selling and service expenses were up $17 million, or 4 percent over last year, which was primarily attributable to growth in our International Operations, principally in the Pacific and Latin America. Worldwide, research expenses increased 1 percent over 1993, which was also mainly to support growth overseas. The European Business and Technical Center in the Netherlands and a technical center in Singapore were opened during 1994 to better serve our customers in Europe and the Pacific. Research expenses were 3.7 percent of sales in 1994 and 1993. Administrative expenses for 1994 were down slightly from 1993 as lower provisions for incentive plans were partly offset by higher salaries and benefits. As previously disclosed, the Company recorded a pretax provision for formation and consolidation expenses of $68 million ($54 million after tax, or 70 cents per share on a fully diluted basis) in 1994. (See Note 4). Interest and other income for 1994 was $17 million, a $2 million improvement over 1993. This increase was primarily the result of a $5 million gain on the sale of the Company's automotive paint spray booth business. This business had generated annual revenues of approximately $10 million. Interest income, however, was $1 million lower than in 1993. Results for 1993 also included a $2 million gain on the sale of an investment in a mutual insurance company. Interest expense totaled $22 million in 1994, a decrease of $6 million from 1993, which was mainly attributable to lower average borrowing levels and a monetary control program instituted by the Brazilian government that resulted in lower interest expense reported by our subsidiary company in Brazil. Nalco's equity in earnings of Nalco/Exxon for the last four months of 1994 was $7 million, compared to $8 million in 1993 for the Nalco petroleum chemical operations. Start-up costs incurred by Nalco/Exxon in 1994, coupled with unusually good results for the Nalco petroleum chemical operations in the fourth quarter 1993, account for this variation. Excluding the formation and consolidation expense of $68 million and related net tax benefit of $14 million, the effective tax rate was 38.2 percent. This compares to the actual 1993 effective tax rate of 38.9 percent, and a 38.3 percent effective tax rate based on the reclassified results for 1993 presented above. Shareholders' Equity (millions of dollars) [GRAPH APPEARS HERE] 17 Cash Provided by Operating Activities (millions of dollars) [GRAPH APPEARS HERE] Earnings from continuing operations as a percent to sales was 5.9 percent in 1994. Excluding the net formation and consolidation expense, earnings as a percent to sales would have been 10.2 percent. Based on the reclassified results above, earnings from continuing operations as a percent to sales was 10.6 percent in 1993. Earnings from the Company's discontinued superabsorbent chemicals operation were $24 million in both 1994 and 1993. During the first quarter 1993, the Company recorded an extraordinary loss of $11 million as a result of the early repayment of long-term debt. (See Note 15). Effective January 1, 1993, the Company implemented, on the immediate recognition basis, Statement of Financial Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions." The adoption of SFAS 106 resulted in a non-recurring charge to 1993 earnings of $57 million, net of $33 million of income tax benefits. (See Note 6). Also effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes," and Statement of Financial Accounting Standards No. 112 (SFAS 112), "Employers' Accounting for Postemployment Benefits." Adoption of these pronouncements did not have a material effect on the Company's earnings or financial position. FINANCIAL CONDITION Total assets increased $88 million, or 7 percent during 1995. Accounts receivable were $14 million, or 7 percent higher than at the end of 1994. This reflects higher worldwide sales levels in the fourth quarter 1995, most notably in North America and the Pacific. Inventories increased $8 million, or 9 percent over year-ago levels. This was primarily attributable to operations in North America and the Pacific to support the sales growth in those regions. Prepaid expenses, taxes, and other current assets were down $7 million from 1994, which was mainly due to a decrease in deferred tax assets related to the Company's accrual for formation and consolidation expenses. Investment in and advances to partnership rose $17 million during 1995, which primarily reflected Nalco's $17 million of equity in the earnings of Nalco/Exxon. The $47 million net carrying amount of assets of discontinued operations consists primarily of buildings and manufacturing equipment of the superabsorbent chemicals business. To support asset growth, liabilities increased $52 million, or 7 percent, which consisted primarily of a net increase in short-term and long-term debt of approximately $50 million. Of this increase, $45 million was raised through the issuance of commercial paper. Shareholders' equity increased $36 million, or 7 percent during 1995, primarily because net earnings of $154 million exceeded the sum of dividends (totaling $78 million) plus common stock repurchases of 1.3 million shares at a cost of $42 million. Treasury stock transactions for stock option, benefit, and other plans totaled $12 million, and the stronger U.S. dollar in relation to the Mexican peso and most Pacific currencies compared to the end of 1994 resulted in a $9 million increase in foreign currency translation adjustments. Nalco's return on average shareholders' equity was 24.1 percent in 1995, slightly higher than the 22.9 percent in 1994 based on earnings from continuing operations and before the net $54 million charge for formation and consolidation expenses in 1994. CASH FLOWS One of Nalco's most significant financial strengths is its ability to consistently generate strong cash flow from operations. Net cash provided by operating activities was $213 million in 1995, which was generated primarily from net earnings before noncash charges for depreciation and amortization. Return on Shareholders' Equity* (percent) [GRAPH APPEARS HERE] *Based on continuing operations, excluding net charge for formation and consolidation expenses in 1994, and before extraordinary loss and effect of accounting change in 1993. 18 Capital Additions (millions of dollars) [GRAPH APPEARS HERE] Significant cash flow requirements in 1995 included capital investments of $127 million, dividends of $78 million, and $42 million for the reacquisition of common stock. In 1994, cash from operations of $249 million was slightly lower than the 1993 total of $256 million. Over two-thirds of the 1995 capital investments of $127 million was attributable to investments in the United States, which included $26 million for PORTA- FEED(R) units, $17 million for field equipment, and $13 million for transportation equipment. The Company plans to continue to invest in internal growth in 1996 and it is expected that capital investment will exceed $100 million, but be less than the 1995 level. Other significant investing activities in 1995 included the acquisition of an additional 25 percent interest of Nalco Chemical India, Ltd., a former affiliated company, for approximately $10 million net of cash acquired, and the purchase of the pulp and paper chemical business of Texo Corporation for $14 million. Additional cash investments in Nalco/Exxon totaled $8 million in 1995. Investing activities in 1994 totaled $164 million, which included $126 million for investments in property, plant, and equipment. Over 60 percent of the capital spending in 1994 was for investments in the United States and included $19 million for PORTA-FEED units, $18 million for field equipment, and $14 million for transportation equipment. The most significant investment overseas was $18 million to complete the construction of the Nalco Europe Business and Technical Center in the Netherlands, which was opened in mid-1994. Investing activities in 1994 also included the purchase of the remaining 60 percent interest of Nalcomex (Mexico), a former affiliated company, for approximately $18 million, and cash investments in Nalco/Exxon of $26 million. Net cash provided by investing activities during 1993 was negligible. Investments in property, plant, and equipment of $118 million were offset by the cash proceeds received from the liquidation of marketable securities and the sale of Adco Products, Inc. Domestic investments accounted for about two-thirds of the capital spending for 1993, including $18 million for PORTA-FEED units, $17 million for field equipment, and $18 million for transportation equipment. The largest foreign expenditure for 1993 was $11 million for the construction of the European Business and Technical Center. Net financing activities of $61 million in 1995 included dividends paid on common stock of $67 million or $.99 per share. Since the Company's founding in 1928, it has paid 270 consecutive quarterly dividends, and expects to continue its policy of paying regular cash dividends. The Company continued its stock repurchase program in 1995 by reacquiring 1.3 million shares of common stock at a cost of $42 million. In 1994, the Company reacquired 1.8 million shares of common stock at a cost of $61 million, and 1.7 million shares were repurchased for $59 million in 1993. Management believes that the stock repurchase program represents a sound economic investment for Nalco's shareholders. Other financing transactions in 1995 consisted primarily of additional short-term borrowings of $46 million. Among the most significant financing activities in 1994 and 1993 were payments for cash dividends and the repurchase of common stock. Financing activities in 1993 also included the repayment of $160 million of commercial paper borrowings. Management expects that internal growth in existing businesses will be financed principally from internally generated funds. For general purposes and to support the ESOP loans and the issuance of commercial paper, Nalco also has a $260 million Revolving Credit Agreement with ten banks. The credit arrangements were unused at December 31, 1995. (See Note 14). In addition, most foreign subsidiaries have established short-term borrowing facilities in local currency and use them as the need arises. Net debt (short-term and long-term borrowings less cash and cash equivalents) totaled $278 million, $222 million, and $189 million at December 31, 1995, 1994, and 1993, respectively. The Company has $66 million of debt which matures in February 1996. A commitment to refinance $38 million of this debt has been received from the lenders, and it is expected that the remaining $28 million will be repaid with proceeds from the issuance of commercial paper. Dividends Per Common Share (in dollars) [GRAPH APPEARS HERE] 19 STATEMENTS OF CONSOLIDATED EARNINGS
December 31 ------------------------------ (in millions, except per share figures) 1995 1994 1993 ........................................................................... NET SALES $1,214.5 $1,246.8 $1,291.6 Operating costs and expenses Cost of products sold 531.3 543.7 555.0 Selling and service 399.5 405.3 410.2 Research and development 39.8 45.7 49.7 Administrative and general 38.4 47.8 52.9 Formation and consolidation - 68.2 - ........................................................................... 1,009.0 1,110.7 1,067.8 ........................................................................... OPERATING EARNINGS 205.5 136.1 223.8 Interest and other income 7.2 16.6 14.4 Interest expense (16.2) (21.8) (27.5) Equity in earnings of partnership 16.9 6.9 - ........................................................................... EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 213.4 137.8 210.7 Income taxes 77.7 64.6 81.9 ........................................................................... EARNINGS FROM CONTINUING OPERATIONS 135.7 73.2 128.8 Earnings from discontinued operations, net of taxes 18.0 23.9 23.9 ........................................................................... EARNINGS BEFORE EXTRAORDINARY LOSS AND EFFECT OF ACCOUNTING CHANGE 153.7 97.1 152.7 Extraordinary loss from retirement of debt, net of taxes - - (10.6) Cumulative effect of change in accounting for postretirement benefits other than pensions, net of taxes - - (56.5) ........................................................................... NET EARNINGS $ 153.7 $ 97.1 $ 85.6 - - ---------------------------------------------============================== EARNINGS PER COMMON SHARE--PRIMARY Earnings from continuing operations $ 1.83 $ .90 $ 1.69 Discontinued operations, net of taxes .27 .35 .34 Extraordinary loss from retirement of debt, net of taxes - - (.15) Cumulative effect of change in accounting for postretirement benefits other than pensions, net of taxes - - (.81) ........................................................................... Net earnings $ 2.10 $ 1.25 $ 1.07 - - ----------------------------------------------============================= EARNINGS PER COMMON SHARE--FULLY DILUTED Earnings from continuing operations $ 1.71 $ .88 $ 1.57 Discontinued operations, net of taxes .24 .31 .31 Extraordinary loss from retirement of debt, net of taxes - - (.14) Cumulative effect of change in accounting for postretirement benefits other than pensions, net of taxes - - (.72) ........................................................................... Net earnings $ 1.95 $ 1.19 $ 1.02 - - ---------------------------------------------============================== AVERAGE SHARES OUTSTANDING (IN THOUSANDS) Primary 67,905 69,029 69,863 - - ---------------------------------------------============================== Fully Diluted 75,947 77,160 78,127 - - ---------------------------------------------==============================
The notes to consolidated financial statements on pages 24 through 33 are an integral part of these statements. 20 STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION
December 31 ------------------- (in millions, except per share figures) 1995 1994 ........................................................................ ASSETS CURRENT ASSETS Cash and cash equivalents $ 38.1 $ 45.1 Receivables, less allowances of $4.4 in 1995 and $5.6 in 1994 220.3 205.9 Inventories Finished products 62.4 51.4 Materials and work in process 29.0 32.4 ........................................................................ 91.4 83.8 ........................................................................ Prepaid expenses, taxes, and other current assets 20.2 27.3 ........................................................................ TOTAL CURRENT ASSETS 370.0 362.1 OTHER ASSETS Investment in and advances to partnership 126.2 109.4 Discontinued operations - net 47.1 - Goodwill, less accumulated amortization of $18.6 in 1995 and $15.1 in 1994 131.0 114.4 Miscellaneous 175.8 172.4 ........................................................................ TOTAL OTHER ASSETS 480.1 396.2 NET PROPERTY, PLANT, AND EQUIPMENT 520.0 523.9 ........................................................................ TOTAL ASSETS $1,370.1 $1,282.2 - - -----------------------------------------------------=================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt $ 95.0 $ 21.6 Accounts payable 126.9 109.1 Accrued compensation 27.3 31.3 Accrued formation and consolidation expenses 22.7 43.2 Other accrued expenses 49.2 51.7 Income taxes 34.7 17.4 ........................................................................ TOTAL CURRENT LIABILITIES 355.8 274.3 LONG-TERM DEBT 221.5 245.3 DEFERRED INCOME TAXES 53.3 56.8 ACCRUED POSTRETIREMENT BENEFITS 97.7 95.2 OTHER LIABILITIES 61.5 66.4 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 191.7 194.0 Unearned ESOP compensation (166.6) (168.7) ........................................................................ 25.5 25.7 Common stock--par value $.1875 per share; 80.3 shares issued 15.1 15.1 Capital in excess of par value of shares 27.8 25.5 Retained earnings 916.2 840.6 Minimum pension liability adjustment (6.0) (5.7) Foreign currency translation adjustments (48.0) (39.3) Common stock reacquired--at cost (350.3) (317.7) ........................................................................ TOTAL SHAREHOLDERS' EQUITY 580.3 544.2 ........................................................................ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,370.1 $1,282.2 - - -----------------------------------------------------===================
The notes to consolidated financial statements on pages 24 through 33 are an integral part of these statements. 21 STATEMENTS OF CONSOLIDATED CASH FLOWS
December 31 --------------------------- (in millions) 1995 1994 1993 ............................................................................... CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES Net earnings $ 153.7 $ 97.1 $ 85.6 Adjustments to reconcile net earnings to cash provided by operating activities Extraordinary loss from retirement of debt - - 10.6 Cumulative effect of change in accounting for postretirement benefits other than pensions - - 56.5 Formation and consolidation expenses - 68.2 - Depreciation and amortization 89.2 89.2 86.5 Equity in earnings of partnership, net of distributions (10.8) (6.9) - Noncurrent deferred income taxes (13.0) (3.8) (2.8) Other--net 0.6 6.8 10.4 Changes in current assets and liabilities Receivables (20.5) 10.2 (31.6) Inventories (10.2) (19.3) (4.4) Accounts payable 21.5 22.8 15.4 Other 2.0 (15.2) 29.7 ............................................................................... NET CASH PROVIDED BY OPERATING ACTIVITIES 212.5 249.1 255.9 ............................................................................... CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES Additions to property, plant, and equipment (126.7) (125.6) (117.8) Business purchases (23.8) (20.4) - Investments in partnership (8.2) (26.3) - Purchases of marketable securities and restricted investments - - (210.2) Sales of marketable securities and restricted investments - - 314.2 Proceeds from sale of business - 6.4 15.7 Other investing activities 2.6 1.6 (1.4) ............................................................................... NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (156.1) (164.3) 0.5 ............................................................................... CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES Cash dividends, net of taxes (78.1) (75.7) (71.9) Proceeds from long-term debt 6.8 2.2 1.3 Payments of long-term debt (3.3) (7.7) (168.7) Increase (decrease) in short-term debt 46.4 8.0 (18.4) Common stock reacquired (42.4) (61.3) (58.5) Other financing transactions 9.8 13.4 20.6 ............................................................................... NET CASH (USED FOR) FINANCING ACTIVITIES (60.8) (121.1) (295.6) Effect of foreign exchange rate changes on cash and cash equivalents (2.6) 3.3 (0.2) ............................................................................... (Decrease) in cash and cash equivalents (7.0) (33.0) (39.4) Cash and cash equivalents at the beginning of the year 45.1 78.1 117.5 ............................................................................... CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 38.1 $ 45.1 $ 78.1 - - ----------------------------------------------------===========================
The notes to consolidated financial statements on pages 24 through 33 are an integral part of these statements. 22 STATEMENT OF CONSOLIDATED COMMON SHAREHOLDERS' EQUITY
Common Stock Capital in Minimum Foreign Reacquired Common Excess of Pension Currency ------------------- (in millions, except Stock Par Value Retained Liability Translation Number per share figures) Issued of Shares Earnings Adjustment Adjustments of Shares Cost .................................................................................................................................. BALANCE AT JANUARY 1, 1993 $15.1 $ 9.6 $807.6 $ - $(50.4) 10.3 $(214.6) Net earnings 85.6 Net loss by foreign subsidiaries in December 1992 (2.1) Dividends on preferred stock --net of tax benefit of $4.9 (10.8) Dividends on common stock ($0.885 per share) (61.1) Treasury stock transactions 1.7 (58.5) Stock issued under option, benefit, and other plans 1.0 (0.6) 13.5 Minimum pension liability adjustment (7.1) Currency translation adjustments 1.1 .................................................................................................................................. BALANCE AT DECEMBER 31, 1993 15.1 10.6 819.2 (7.1) (49.3) 11.4 (259.6) Net earnings 97.1 Dividends on preferred stock --net of tax benefit of $4.6 (11.0) Dividends on common stock ($0.945 per share) (64.7) Treasury stock transactions 12.3 1.5 (67.4) Stock issued under option, benefit, and other plans 2.6 (0.5) 9.3 Minimum pension liability adjustment 1.4 Currency translation adjustments 10.0 .................................................................................................................................. BALANCE AT DECEMBER 31, 1994 15.1 25.5 840.6 (5.7) (39.3) 12.4 (317.7) Net earnings 153.7 Dividends on preferred stock --net of tax benefit of $4.2 (11.2) Dividends on common stock ($0.99 per share) (66.9) Treasury stock transactions 1.3 (42.4) Stock issued under option, benefit, and other plans 2.3 (0.5) 9.8 Minimum pension liability adjustment (0.3) Currency translation adjustments (8.7) .................................................................................................................................. BALANCE AT DECEMBER 31, 1995 $15.1 $27.8 $916.2 $ (6.0) $(48.0) 13.2 $(350.3) - - ----------------------------------------------------==============================================================================
The notes to consolidated financial statements on pages 24 through 33 are an integral part of these statements. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION POLICY . Nalco's consolidated financial statements include the accounts of the parent company and its majority-owned subsidiaries. All intercompany balances and transactions are eliminated. In 1993, the fiscal year end of the consolidated foreign subsidiaries was changed from November 30 to December 31. As a result of the change, the Company recorded the results of its foreign operations for the month of December 1992 directly to retained earnings. Investments in partnerships and affiliated companies are reported on the equity method. Certain amounts in the prior years' financial statements 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 87 percent of total foreign subsidiary net assets at the end of 1995. These financial statements are translated at current and average exchange rates, with any resulting translation adjustments included in the currency translation adjustment account in shareholders' equity. The remaining subsidiaries operate in countries with highly inflationary environments and their statements are translated using a combination of current, average, and historical exchange rates, with the resulting translation impact included in results of operations. Transactions executed in different currencies resulting in exchange adjustments are included in results of operations. The impact of foreign currency exchange transactions, included in interest and other income in 1995, 1994, and 1993, was not significant. INVENTORY VALUATION . Inventories are valued at the lower of cost or market. Approximately 39 percent of the inventories at the end of 1995 are valued using the last-in, first-out (LIFO) method. The remaining inventories are valued using the average cost or first-in, first-out (FIFO) method. If the FIFO method of accounting had been used for all inventories, reported inventory amounts would have been $25 million higher at both December 31, 1995 and 1994. GOODWILL . Goodwill consists of costs in excess of the fair value of tangible net assets of acquired companies and is generally amortized over 40 years using the straight-line method. The Company annually evaluates whether the projected earnings and undiscounted cash flows of each of the acquired companies is sufficient to recover the carrying value of the net investment, including goodwill, in order to determine if an impairment has occurred. Management is currently of the opinion that no such impairment exists. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 121 requires companies to review long-lived assets, including identifiable intangibles and goodwill, for indicators of impairment. If those indicators suggest an impairment issue exists, future cash flows from the investment must be estimated for comparison to the carrying value. An impairment loss would be recorded if the carrying value exceeded the total future cash flows. The Company is required to adopt SFAS 121 effective January 1, 1996. Management believes that the effect of this adoption will not have any material impact on the results of operations or the financial position of the Company. 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 24 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. An adjustment to expense is made when the computed amount is less than 80 percent of the cumulative expense that would be recognized under the "shares allocated" method. EARNINGS PER SHARE - Primary earnings per common share is computed by dividing net earnings (after deducting preferred stock dividends, net of income taxes) by the weighted average number of shares and share equivalents outstanding during the year. Fully diluted earnings per share is based upon the weighted average number of common shares and share equivalents, plus the weighted average number of common shares resulting from the assumed conversion of the Series B ESOP Convertible Preferred Stock (preferred stock). Earnings for purposes of computing fully diluted earnings per share are reduced for additional ESOP debt service expense resulting from the assumed replacement of preferred stock dividends with common stock dividends, net of related tax benefits. NOTE 2: BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA Nalco is engaged in the worldwide manufacture and sale of highly specialized Service Chemical programs. This includes production and service related to the sale and application of chemicals and technology used in water treatment, pollution control, energy conservation, oil production and refining, steelmaking, papermaking, mining, and other industrial processes. Within Nalco, sales between geographic areas are made at prevailing market prices to customers minus an amount intended to compensate the sister Nalco company for providing quality customer service. Operating earnings represent sales less cost of products sold and operating expenses. In computing operating earnings by geographic area, none of the following items is considered: general corporate expenses, interest income or expense, equity in earnings of partnerships and affiliated companies, or income taxes. Identifiable assets are those directly associated with operations of the geographic area. Corporate assets consist mainly of cash and cash equivalents; marketable securities; investments in unconsolidated partnership, affiliates, and leveraged leases; and capital assets used for corporate purposes. Corporate assets for 1995 also include the net assets of discontinued operations, which are classified as North American identifiable assets for years 1994 and 1993.
GEOGRAPHIC AREA DATA (in millions) 1995 1994 1993 ................................................................... SALES North America $ 723.6 $ 769.7 $ 802.4 Europe 285.8 288.9 315.6 Latin America 92.6 90.6 81.3 Pacific 146.1 127.7 116.7 Sales between areas (33.6) (30.1) (24.4) ................................................................... $1,214.5 $1,246.8 $1,291.6 - - -----------------------------------================================ OPERATING EARNINGS North America $ 159.7 $ 136.2 $ 172.5 Europe 20.0 (10.2) 41.8 Latin America 20.8 16.1 16.7 Pacific 16.3 14.3 14.4 Expenses not allocated to areas (11.3) (20.3) (21.6) ................................................................... $ 205.5 $ 136.1 $ 223.8 - - -----------------------------------================================ IDENTIFIABLE ASSETS North America $ 526.1 $ 485.2 $ 566.6 Europe 257.8 245.2 227.4 Latin America 60.4 66.9 45.4 Pacific 171.3 147.9 126.3 Corporate 354.5 337.0 246.7 ................................................................... $1,370.1 $1,282.2 $1,212.4 - - -----------------------------------================================
Sales and operating earnings for 1994 and 1993 include results for the Company's U.S. Petroleum Chemicals Division and certain petroleum chemical product lines of its international operations which were transferred to Nalco/Exxon effective September 1, 1994. Sales included were approximately $137 million in 1994 and $243 million in 1993. (See Note 11). The decrease in operating earnings in 1994 was mainly attributable to the pretax provision of $68 million for formation and consolidation expenses. (See Note 4). Of that amount, approximately $34 million was included in European operations. NOTE 3: DISCONTINUED OPERATIONS On February 2, 1996, the Company announced its plan to discontinue the operations of its superabsorbent chemicals business. The operations and the net assets of this business are held for sale. The Company does not anticipate a loss from operations from the superabsorbent chemicals business during the phase out period nor a loss on the ultimate disposition of the business, and therefore has not recognized any loss provision related to the disposal. Operating profits generated during the phase out period and any gain on the disposition would be recognized in the Company's results when realized. The amounts the Company will ultimately realize could differ from the estimates used in arriving at the assumption that no loss will arise on the disposal of the discontinued operations. The net carrying amount of assets of discontinued operations, which is segregated under Other Assets on the 1995 25 Statement of Consolidated Financial Condition, consists primarily of accounts receivable, inventory, buildings, and manufacturing equipment. Sales from the discontinued operation, which are excluded from consolidated sales, amounted to $96 million in 1995, $99 million in 1994, and $98 million in 1993. Discontinued operations results totaled $18 million in 1995, and $24 million in both 1994 and 1993. Results included the pretax operating earnings of the discontinued operation, less allocated income taxes of $11 million in 1995, and $15 million in both 1994 and 1993. The effective income tax rate for discontinued operations differs from the federal statutory rate primarily because of state income taxes, net of federal tax benefit. NOTE 4: FORMATION AND CONSOLIDATION EXPENSES The Company adopted a worldwide consolidation plan for manufacturing and support operations during 1994, primarily as a result of the formation of Nalco/Exxon discussed in Note 11. The production volume reduction caused by redundancies associated with the joint venture formation required the Company to downsize, close, and consolidate operations. The Company's South Chicago plant was closed, and several European and Latin American manufacturing and support operations have been or will be closed or downsized. In addition, certain support functions are being regionalized on a pan-European basis in order to more efficiently serve customers. Certain redundant assets that were not contributed to the joint venture have been written down to net realizable value, and assets associated with other programs have been or will be written off. All of these activities are in process, and should be largely completed by the end of 1996. As a result of these plans, the Company recorded a pretax provision of $68 million ($54 million after tax, or 70 cents per share on a fully diluted basis) in 1994. Included in this provision is the cost of termination benefits for the elimination of over 400 positions, primarily in the United States and Europe, including manufacturing and support personnel, which will require approximately $27 million in cash. Costs associated with facility closings and the disposition of assets that are no longer productive total approximately $24 million, including $21 million for non-cash asset write-offs and $3 million in cash payments associated with asset disposals. The remaining $17 million of the pretax costs represents anticipated cash payments for post-closure plant environmental remediation, legal and consulting fees, and other exit costs. Cash expenditures charged against the provision to date have been funded through operating cash flows, and the Company anticipates that future cash expenditures will be similarly funded. A tax benefit of $14 million, net of tax costs associated with the contribution of assets to various joint venture entities, was included in the Company's 1994 income tax provision related to the formation and consolidation expenses. Charges against the provision for formation and consolidation expenses totaled $25 million in 1994 and $20 million in 1995, and over 300 employees had been terminated as of December 31, 1995. The following table sets forth the details of activity in the accrual for formation and consolidation expenses for 1995:
Balance at Balance at December 31, Provision Cash Noncash December 31, (in millions) 1994 Adjustment Payments Charges 1995 .............................................................................................. Termination benefits $17.6 $ -- $ (9.5) $ -- $ 8.1 Asset write-downs 13.1 -- (2.3) (3.7) 7.1 Legal and consulting 3.3 2.0 (3.8) -- 1.5 Environmental remediation 9.2 (2.0) (1.2) -- 6.0 .............................................................................................. Total $43.2 $ -- $(16.8) $(3.7) $22.7 - - ------------------------------------==========================================================
NOTE 5: PENSION PLANS The Company has several noncontributory defined benefit pension plans covering most employees in the United States and those with eight foreign subsidiaries. The principal domestic plan represents approximately 70 percent of the projected benefit obligation (PBO) and 82 percent of the total market value of assets. This plan provides benefits that are based on years of service and the employee's highest paid 48 months during the last 120 months before termination of employment. Approximately 95 percent of the assets in the plan at December 31, 1995 was invested in stocks, bonds, and insurance contracts, and the remaining assets were invested in professionally managed real estate trusts and partnerships. No contributions have been made since 1984 due to the present funded position of the plan, and none are anticipated in 1996. Five of the eight foreign pension plans are unfunded, generally because amounts contributed are not deductible for tax purposes. Employees in the United States whose pension benefits exceed ERISA limitations are covered by a supplementary non-qualified, unfunded pension plan which is being provided for by charges to earnings sufficient to meet the projected benefit obligation. The accruals for the cost of this plan are based on substantially the same actuarial methods and economic assumptions as those used for the principal plan. Net pension expense for all defined benefit plans included in operating results was comprised of:
(in millions) 1995 1994 1993 .............................................................................. Service cost for benefits earned $ 12.4 $ 17.4 $ 16.4 Interest costs on the PBO 23.7 24.3 23.1 Actual return on plan assets (60.7) (0.2) (41.7) Net amortizations and deferrals 35.8 (23.7) 17.1 .............................................................................. Net pension expense for defined benefit plans $ 11.2 $ 17.8 $ 14.9 - - --------------------------------------------------============================
26 Assumptions for the plans as of the end of the last three years were as follows:
U.S. Plans ------------------------------ 1995 1994 1993 .................................................................................. Weighted-average discount rates 7.25% 9.0% 7.5% Rates of increase in compensation levels 4.0 4.8 4.8 Rates of return on plan assets 9.5 9.0 9.0 - - ---------------------------------------------------------------------------------- Foreign Plans ------------------------------ 1995 1994 1993 .................................................................................. Weighted-average discount rates 6.0-9.0% 7.0-9.0% 6.5-9.0% Rates of increase in compensation levels 4.0-6.5 4.5-6.5 4.5-6.5 Rates of return on plan assets 6.0-9.5 7.0-9.5 7.0-9.5 - - ----------------------------------------------------------------------------------
The following table sets forth the funded status and amounts recognized in the consolidated statements of financial condition at year end for plans in which assets exceed the accumulated benefit obligation (ABO):
December 31 ---------------- (in millions) 1995 1994 ............................................................. Actuarial present value of: Vested benefit obligation $194.1 $159.1 Non-vested benefit obligation 15.6 15.6 ............................................................. Total ABO 209.7 174.7 Effect of future salary increases 88.6 59.3 ............................................................. Total PBO 298.3 234.0 Plan assets at fair market value 311.1 271.3 ............................................................. Plan assets in excess of the PBO 12.8 37.3 Unrecognized net (asset) from date of adoption (24.7) (28.2) Unrecognized prior service cost 11.0 12.2 Unrecognized net actuarial losses (gains) 16.4 (4.2) ............................................................. Net pension assets recognized $ 15.5 $ 17.1 - - ---------------------------------------------===============
The following table sets forth the funded status and amounts recognized in the consolidated statements of financial condition at year end for plans in which the ABO exceeds assets:
December 31 --------------- (in millions) 1995 1994 ............................................................ Actuarial present value of: Vested benefit obligation $ 26.5 $ 21.2 Non-vested benefit obligation 3.2 2.7 ............................................................ Total ABO 29.7 23.9 Effect of future salary increases 12.6 11.8 ............................................................ Total PBO 42.3 35.7 Plan assets at fair market value - - ............................................................ Plan assets (less) than the PBO (42.3) (35.7) Unrecognized net liability from date of adoption 2.6 3.1 Unrecognized prior service cost 7.4 8.3 Unrecognized net actuarial losses 14.3 13.5 Adjustment to recognize minimum liability (19.3) (19.9) ............................................................ Net pension (liabilities) recognized $(37.3) $(30.7) - - ---------------------------------------------===============
In accordance with Statement of Financial Accounting Standards No. 87 (SFAS 87), "Employers' Accounting for Pensions," the Company has recorded a minimum pension liability for certain plans, representing the excess of the ABO over plan assets and accrued pension costs. A corresponding amount was recognized as an intangible asset, except to the extent that these additional liabilities exceeded related unrecognized prior service cost and net transition obligation, in which case the increase in liabilities was charged directly to shareholders' equity. The excess minimum pension liability resulted in after-tax charges to shareholders' equity of $6 million, net of income taxes of $4 million, each year for 1995 and 1994. NOTE 6: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Nalco has defined benefit postretirement plans that provide medical, dental, and life insurance benefits for substantially all United States retirees and eligible dependents. Nalco retains the right to change or terminate these benefits. Effective January 1, 1993, the Company implemented, on the immediate recognition basis, Statement of Financial Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for Postretirement Benefits Other than Pensions." This statement requires that the cost of these benefits be recognized in the financial statements during an employee's active working career with the Company. Nalco's previous practice was to expense these costs as incurred. The adoption of SFAS 106 resulted in a noncash charge of $57 million, net of $33 million of income tax benefits in 1993. Net postretirement benefit expense for all defined benefit plans included in operating results was comprised of:
(in millions) 1995 1994 1993 ........................................................ Service cost for benefits earned $ 1.8 $ 3.3 $ 3.4 Interest cost 5.5 6.8 7.0 Net amortization (1.7) - - ........................................................ $ 5.6 $10.1 $10.4 - - ------------------------------------====================
27 The components of the accrued postretirement benefit liability as of the end of the last two years were as follows:
(in millions) 1995 1994 ........................................................................................ Actuarial present value of postretirement benefit obligations: Retirees $ 34.8 $37.3 Fully eligible active plan participants 7.3 8.9 Other active plan participants 26.9 25.4 ........................................................................................ Accumulated postretirement benefit obligation 69.0 71.6 Unrecognized net gain 31.4 26.4 ........................................................................................ Accrued postretirement benefit liability 100.4 98.0 Less current portion 2.7 2.8 ........................................................................................ Noncurrent liability $ 97.7 $95.2 - - --------------------------------------------------------------------------==============
The assumptions used to measure the accumulated postretirement benefit obligation are as follows:
1995 1994 1993 ........................................................................................ Weighted-average discount rate 7.25% 9.0% 7.5% Health care cost trend rate 8.0 11.0 11.5 - - ----------------------------------------------------------------------------------------
The health care cost trend rate will decrease 0.5 percent per year to an ultimate rate of 5.0 percent. A one-percentage-point increase in the assumed health care cost trend rate would have increased the 1995 postretirement benefit expense by approximately $1 million and would have increased the 1995 accumulated postretirement benefit obligation by $7 million. NOTE 7: EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) Nalco's ESOP gives most United States employees an additional opportunity to share in the ownership of the Company's stock. Preferred shares are allocated to eligible employees based on a percentage of pretax earnings. Selected information about the ESOP is as follows:
(dollars in millions, shares in thousands) 1995 1994 1993 ........................................................................................ Preferred stock dividends $15.4 $ 15.6 $ 15.7 Interest expense on ESOP debt 11.2 10.6 10.3 ESOP benefit expense 2.5 1.9 1.2 ESOP contribution payments 2.1 - - Preferred shares at year end: Allocated 107.2 88.0 Committed-to-be-released 23.6 23.9 Suspense 268.6 292.3 - - ----------------------------------------------------------------------------------------
NOTE 8: STOCK OPTION AND PERFORMANCE PLANS Nalco's 1990 Stock Option Plan for key management employees authorized the granting of stock options for the purchase of up to 6,000,000 shares of Nalco common stock. Nalco's 1982 Stock Option Plan authorized the granting of either incentive stock options or non-qualified options for the purchase of up to 6,000,000 shares of Nalco's common stock. No additional grants will be made under the 1982 plan. The option price under both plans cannot be less than the fair market value on the date of grant. Options granted since 1989 become exercisable ratably over the three years following the grant date, and will expire 10 years after the date granted. Options granted prior to 1989 have a term of 10 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 changes in shares under option to employees are summarized as follows:
1995 1994 1993 ................................................................................ At beginning of year 4,167,223 4,259,477 4,348,644 Options granted - average price per share 1995-$34.44; 1994-$35.37; 1993-$36.31 2,765,200 403,700 491,600 Options exercised - average price per share 1995-$19.41; 1994-$17.70; 1993-$17.81 (358,700) (413,655) (518,734) Options expired or cancelled (110,000) (82,299) (62,033) At end of year - average price per share 1995-$32.19; 1994-$29.67; 1993-$28.09 6,463,723 4,167,223 4,259,477 Options exercisable at end of year 3,390,024 - - --------------------------------------------------------------------------------
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 and options expire 10 years from the grant date. A total of 36,000 options was granted under the directors' plan during 1995 at an option price of $33.81 per share, a total of 36,000 options was granted under the directors' plan during 1994 at an option price of $32.69 per share, and a total of 36,000 options was granted under the directors' plan during 1993 at an option price of $32.94 per share. These options were exercisable upon grant, and 2,000 shares were exercised during 1995, at an average price per share of $33.81. A Performance Share Plan for designated officers and other key executives was approved by shareholders in 1992. 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. 28 No significant charge to earnings was made for all stock-related plans in 1995 or 1994. In 1993, $4 million was charged to earnings for stock-related plans. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." SFAS 123 requires companies to account for employee stock-based compensation plans using a fair value based method of accounting. However, SFAS 123 allows companies to continue to apply the intrinsic value based method prescribed under Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," provided certain pro forma disclosures are made with respect to a fair value method. The Company is required to adopt SFAS 123 effective January 1, 1996. The Company has not yet determined the impact of this pronouncement, but has decided it will continue to apply the intrinsic value method under APB 25. NOTE 9: INCOME TAXES Effective January 1, 1993, Nalco adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." The cumulative effect of the change in the method of accounting for income taxes as of the beginning of 1993 was not material. The sources of earnings from continuing operations before income taxes were as follows:
(in millions) 1995 1994 1993 ........................................... Domestic $162.1 $132.5 $143.5 Foreign 51.3 5.3 67.2 ........................................... Total $213.4 $137.8 $210.7 - - -----------------==========================
The significant decrease in foreign source earnings in 1994 is primarily attributable to formation and consolidation expenses. (See Note 4). The components of income tax provisions attributable to earnings from continuing operations are summarized as follows:
(in millions) 1995 1994 1993 ............................................ Current Federal $38.2 $ 41.7 $42.7 State 8.6 10.8 7.2 Foreign 29.5 28.7 26.8 ............................................ 76.3 81.2 76.7 ............................................ Deferred Federal 5.6 (3.0) 2.7 State 0.1 (0.3) 0.8 Foreign (4.3) (13.3) 1.7 ............................................ 1.4 (16.6) 5.2 ............................................ Total $77.7 $ 64.6 $81.9 - - ------------------==========================
Current foreign taxes listed above include taxes withheld by foreign governments on distributions from subsidiaries and affiliates (principally dividends and service fees). Current foreign taxes in 1994 also include $11.3 million of taxes on partnership formation. Nalco made income tax payments of $77 million, $92 million, and $87 million during 1995, 1994, and 1993, respectively. The effective income tax rate varies from the federal statutory rate because of the factors indicated below:
1995 1994 1993 ........................................................................... Statutory U.S. federal tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 2.6 4.9 2.5 Foreign taxes on formation and consolidation -- 8.2 -- Foreign earnings subject to higher (lower) rates (1.2) (1.4) 0.7 Other -- 0.1 0.7 ........................................................................... Effective tax rate 36.4% 46.8% 38.9% - - -----------------------------------------------------======================
Details of the 1995 and 1994 deferred tax assets and liabilities are as follows:
(in millions) 1995 1994 ........................................................................... Deferred tax assets: Postretirement benefits $ 40.8 $ 42.3 Formation and consolidation expenses 9.0 15.2 Other 42.7 32.6 ........................................................................... Total 92.5 90.1 ........................................................................... Deferred tax liabilities: Depreciation 66.3 74.4 Leveraged lease investments 29.9 34.8 Other 26.1 15.7 ........................................................................... Total 122.3 124.9 ........................................................................... Net deferred tax liability $ 29.8 $ 34.8 - - ----------------------------------------------------------================= Included in: Prepaid expenses, taxes, and other current assets $ (9.0) $(13.4) Miscellaneous other assets (8.8) -- Income taxes (5.7) (8.6) Deferred income taxes 53.3 56.8 ........................................................................... $ 29.8 $ 34.8 - - ----------------------------------------------------------=================
Deferred tax assets are to be reduced by a valuation allowance if it is "more likely than not" that some portion or all of the deferred tax assets will not be realized. No valuation allowance was necessary as a result of management's evaluation of the likelihood that all of the deferred tax assets will be realized. NOTE 10: ACQUISITIONS Effective October 1995, the Company purchased an additional 25 percent of the common shares of Nalco Chemical India, Ltd. (Nalco India) from ICI India, Ltd. for approximately $11 million. The purchase price exceeded the fair value of the net assets acquired by $9 million. Nalco already owned 40 percent of the common shares of Nalco India and had been accounting for earnings on the equity basis. The operations of this former affiliated company were consolidated effective October 1995. In November 1995, the Company purchased the pulp and paper chemical business of Texo Corporation for $14 million. 29 The purchase price exceeded the fair value of the net assets acquired by $13 million. In October 1994, the Company purchased the remaining 60 percent of the common shares of Nalcomex, S.A. de C.V. in Mexico for $18 million. The purchase price exceeded the fair value of the net assets acquired by $9 million. Nalco already owned 40 percent of the common shares of Nalcomex and had been accounting for earnings on the equity basis. The operations of this former affiliated company were consolidated effective October 1994. The pro forma impact as if these acquisitions had occurred at the beginning of the respective years is not significant. NOTE 11: INVESTMENT IN AND ADVANCES TO PARTNERSHIP The Company's investment in partnership consists of its 60 percent interest in Nalco/Exxon, a joint venture partnership which was formed on September 1, 1994. In connection with the formation of Nalco/Exxon in 1994, the Company invested cash of $26 million and transferred inventories of $13 million; property, plant, and equipment of $70 million; and employee related liabilities of $20 million. The assets transferred consisted of Nalco's U.S. Petroleum Chemicals Division and certain petroleum chemical product lines of its international operations, while Exxon transferred similar assets to the joint venture. Additional assets contributed by the Company to the joint venture in 1995 consisted primarily of cash of $8 million. 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 year 1995 and its initial four months of operations in 1994:
(in millions) 1995 1994 .......................................................... Nalco/Exxon: Net sales $420.8 $156.0 Earnings before income taxes 32.4 12.8 Net income 28.0 10.7 Nalco's equity interest 60% 60% .......................................................... Nalco's equity in net income 16.8 6.4 Amortization and income preference, net 0.1 0.5 .......................................................... Equity in earnings of partnership $ 16.9 $ 6.9 - - -------------------------------------------=============== Distributions received from partnership $ 6.1 $ - - - -------------------------------------------===============
The Company's investment in Nalco/Exxon at December 31, 1995 included $3.2 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 an 8 percent and 10 percent earnings preference in 1995 and 1994, respectively, which has been included in equity earnings. Condensed balance sheet information for the Nalco/Exxon joint venture at December 31, 1995 and 1994 was as follows:
(in millions) 1995 1994 ........................................ Current assets $192.3 $140.0 Noncurrent assets 124.2 101.6 Current liabilities 80.9 45.0 Noncurrent liabilities 40.8 36.8 - - ----------------------------------------
The Company entered into a four year agreement with Nalco/Exxon on September 1, 1994 to provide certain administrative services to the partnership. Fees earned by the Company in 1995 and 1994 were $16 million and $5 million, respectively. In the normal course of business, the Company supplies Nalco/Exxon with certain products, and purchases certain products from Nalco/Exxon. These transactions are generally at cost and were not significant in 1995 or 1994. NOTE 12: FINANCE SUBSIDIARIES Nalco has four finance subsidiaries, one wholly-owned and three 80%-owned, which were established to increase the return on financial assets. These subsidiaries are the lessor of a diversified portfolio of leveraged leases involving creditworthy lessees. Amounts related to the finance subsidiaries which are included in the Statements of Consolidated Financial Condition and Earnings are as follows:
(in millions) 1995 1994 1993 ...................................................... AT YEAR END Leveraged lease investments $36.3 $44.1 $44.6 Current liabilities 1.1 1.7 1.8 Deferred income taxes and other 29.9 34.8 35.6 ...................................................... Net assets $ 5.3 $ 7.6 $ 7.2 ...................................................... FOR THE YEAR Net earnings $ 2.3 $ 1.4 $ 1.5 Dividends received by Nalco 0.3 0.3 0.3 - - ------------------------------------------------------
Investments in leased property represent future rentals and residuals, net of nonrecourse debt. The leased assets are financed primarily by nonrecourse loans which are secured by the lessees' rental obligations and the leased property, but ownership of the property is retained by the finance subsidiaries. Such loans amounted to approximately $51 million at December 31, 1995 and $56 million at December 31, 1994. Income from leveraged lease transactions is reported on the financing method, which requires income recognition over the life of the lease at a level rate of return on the positive net investment. NOTE 13: PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment (including major improvements) are recorded at cost. Depreciation of buildings and equipment is calculated over their estimated useful lives generally using the straight-line method. The estimated 30 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) 1995 1994 ......................................................... Land $ 38.7 $ 37.6 Buildings 202.0 208.3 Equipment 860.9 821.2 ......................................................... 1,101.6 1,067.1 Allowances for depreciation (581.6) (543.2) ......................................................... Net property, plant, and equipment $ 520.0 $ 523.9 - - --------------------------------------======== ========
NOTE 14: SHORT-TERM DEBT Short-term debt consists of the following:
(in millions) 1995 1994 .................................................... Commercial paper borrowings $45.0 $ - Current maturities of long-term debt 28.2 0.1 Notes payable 21.8 21.5 .................................................... $95.0 $21.6 - - ----------------------------------------============
The weighted average interest rate on short-term debt was 7.8% and 12.2% at December 31, 1995 and 1994, respectively. The rate for 1994 excludes the effect of short-term borrowings in the highly inflationary economy of Brazil. For general purposes and to support the ESOP loans and the issuance of commercial paper, Nalco has a $260 million Revolving Credit Agreement with ten banks. This agreement is structured as a five-year revolving credit. Borrowings under the credit agreement would be 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 .10 percent. The credit arrangements were unused at December 31, 1995 and 1994. NOTE 15: LONG-TERM DEBT Long-term debt consists of the following:
(in millions) 1995 1994 ....................................... ESOP loans $171.9 $174.1 Other 77.8 71.3 ....................................... 249.7 245.4 Less current portion (28.2) (0.1) ....................................... Total $221.5 $245.3 - - ------------------------===============
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. $88 million of borrowings are variable rate notes which are presently remarketed on a monthly basis with a final maturity on December 31, 2008. Any notes which cannot be successfully remarketed will be purchased by the Company or one of its subsidiaries. The Company entered into an interest rate swap agreement which effectively converted the $88 million of variable rate notes into fixed-rate debt of 7.3 percent. The notional value of the swap agreement decreased to $78 million in February 1995, and will decrease to $59 million, $51 million, and $43 million in February 1996, 1997, and 1998, respectively. The remaining borrowings are 8.1 percent fixed-rate loans with a final maturity in the year 2000. The $78 million in other long-term debt includes $47 million owed by two foreign subsidiaries at variable interest rates. The balance was borrowed by the parent company and various foreign subsidiaries. During 1993, the Company repaid $160 million of commercial paper borrowings which had been classified as long-term debt. The early retirement of this debt resulted in an extraordinary loss of $11 million net of tax benefits of $6 million. Interest paid by Nalco was $15 million, $20 million, and $33 million in 1995, 1994, and 1993, respectively. The following table presents the projected annual maturities of long-term debt for the next five years after 1995:
(in millions) ........................................ 1996 $28.2 1997 12.0 1998 12.0 1999 12.0 2000 10.2 - - ----------------------------------------
The amounts above include approximately $74 million in maturities related to the ESOP loans. The Company has a commitment from its lenders to refinance $38 million of a $66 million ESOP loan which was to mature in February 1996. The new loan has a final maturity of December 31, 2008. Accordingly, the Company has classified this portion of the loan as long-term. NOTE 16: SHAREHOLDERS' EQUITY Information on preferred and common shares is summarized in the following table:
(dollars in millions, except per share amounts) 1995 1994 ............................................................... Preferred stock, par value $1.00 per share; authorized 2,000,000 shares; Series B ESOP Convertible Preferred Stock--outstanding; 399,423 shares-1995 and 404,224 shares-1994 $ 0.4 $ 0.4 Series A 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 - - ---------------------------------------------------------------
31 There were 13,163,155 shares and 12,387,441 shares held in treasury at December 31, 1995 and 1994, respectively. In 1994, Nalco's Board of Directors authorized the repurchase of up to 2 million shares of the Company's common stock. During 1995, the Company repurchased approximately 1.3 million of those shares. The Company issued 415,800 shares of preferred stock to the ESOP in 1989 for $481.00 per share, the preference price upon liquidation. This preferred stock ranks senior to Series A Junior Participating 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 $495.43 per share, and at prices declining annually to $481.00 per share on or after May 15, 1997. Also, the shares of preferred stock may be required to be redeemed by Nalco under certain circumstances. During 1995, 4,801 preferred shares were converted to 96,212 common shares of Nalco stock. During 1994 and 1993, 3,582 and 3,226 preferred shares were converted to 72,212 and 61,566 common shares, respectively. Approximately 8,000,000 common shares have been reserved for the conversion of preferred stock. In 1986, the Board of Directors declared a dividend distribution of one Preferred Share Purchase Right (Right) for each outstanding share of common stock. The Rights, as amended in 1989, are not exercisable or transferrable 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, each Right other than that held by the acquiring party will entitle the holder to receive, upon exercise at a price of $50, common stock of either Nalco or the acquiring company having a value equal to two times that price. The Rights are redeemable at $.025 each at any time before a 15 percent or greater position has been acquired, and expire on August 31, 1996. NOTE 17: FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Nalco has limited involvement with derivative financial instruments and does not trade them. The Company does use derivatives to fix the cost of issuing debt and to manage well defined interest rate and foreign exchange exposures. Notional Amounts and Credit Exposures of Derivatives - The notional amounts of derivatives summarized below do not represent amounts exchanged by the parties and, thus, are not a measure of the exposure of the Company through its use of derivatives. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivatives, which relate primarily to interest rates and foreign exchange rates. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings. Interest Rate Risk Management - Interest rate swap agreements are used to reduce the potential impact of increases in interest rates on floating rate long-term debt. As of December 31, 1995 and 1994, the Company was a counterparty to six interest rate swaps: 1. One interest rate swap with a notional value of $78 million at December 31, 1995 and $88 million at December 31, 1994 fixes interest payments on a corresponding amount of floating rate ESOP notes at 7.3 percent until February 1999. The notional amount decreases to $59 million, $51 million, and $43 million in 1996, 1997, and 1998, respectively. The average interest rate received on this interest rate swap was 4.9 percent and 3.5 percent in 1995 and 1994, respectively. 2. Three interest rate swaps entered into in 1991 were designed to fix interest rate payments at 8.5 percent on $160 million of floating rate debt used to acquire affiliated companies in that year. In 1993, with cash from the sale of other subsidiaries, Nalco elected to repay the $160 million of debt, and therefore entered into two interest rate swaps with an aggregate notional value of $160 million which offset the three 1991 interest rate swaps. Nalco receives 4.6 percent on these two swaps in exchange for paying a floating rate of interest equal to the floating rate received on the 1991 swaps. All five of these agreements mature in March 1996. The average interest rate received on the 1991 interest rate swaps and the average rate paid on the 1993 interest rate swaps was 6.0 percent in 1995 and 4.4 percent in 1994. Foreign Exchange Risk Management - The Company enters into various types of foreign exchange contracts in managing its intercompany foreign exchange risk, including currency swaps and forward exchange contracts. The Company's currency swap agreements were designed to hedge foreign currency intercompany loans that have maturities up to ten years. Gains and losses related to these swaps are offset with gains and losses on the underlying foreign currency loans. Forward exchange contracts are used to hedge various intercompany transactions with 32 foreign subsidiaries and usually have maturities of six months, but occasionally may mature in one year. The Company had foreign exchange contracts with a notional value of $115 million and $160 million at December 31, 1995 and 1994, 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, 1995. The net deferred realized and unrealized loss was $0.5 million at December 31, 1994. 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, 1995 and 1994:
1995 1994 ---------------- ---------------- Carrying Fair Carrying Fair (in millions) Amount Value Amount Value ................................................................. Nonderivatives: Cash and cash equivalents $ 38.1 $ 38.1 $ 45.1 $ 45.1 Short-term debt 95.0 95.0 21.6 21.6 Long-term debt 221.5 224.4 245.3 246.3 Derivatives: Miscellaneous other assets 3.3 3.3 8.7 5.3 Other liabilities 3.1 7.7 9.0 12.4 - - -----------------------------------------------------------------
The following methods and assumptions were used to estimate the fair values of financial instruments: Cash and cash equivalents - The carrying amount approximates fair value because of the short-term maturities of such instruments. Short-term debt - The carrying amount approximates fair value because of the short-term maturities of such instruments. Long-term debt - The carrying amount of term borrowings at variable interest rates approximates fair value. The fair value of the Company's fixed-rate ESOP borrowings was estimated using discounted cash flow analyses, based on the Company's current borrowing rates for similar types of borrowing arrangements. Derivatives - The fair value of derivatives, including currency swaps, foreign currency forward exchange contracts, and interest rate swaps was estimated based on current settlement prices, quoted market prices of comparable contracts, and pricing models or formulas using current assumptions. NOTE 19: CONTINGENCIES AND LITIGATION Nalco has been named as a potentially responsible party (PRP) by the Environmental Protection Agency (EPA) or state enforcement agencies at 15 waste sites where some financial contribution is or may be required. These agencies have also identified many other parties who may be responsible for clean-up costs at the waste disposal sites. Nalco's financial contribution to remediate these sites is expected to be minor. There has been no significant financial impact on Nalco up to the present, nor is it anticipated that there will be in the future, as a result of these matters. Nalco has and will continue to make provisions for these costs if the Company's liability becomes probable and when costs can be reasonably estimated. As of December 31, 1995, the Company had undiscounted reserves of approximately $1 million for the maximum amount of known environmental clean-up costs. The Company's 1995 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. In 1994, Nalco provided $9 million for estimated post-closure costs at 15 locations for site remediation as part of the formation and consolidation plan described in Note 4. These facilities, which were used for manufacturing and/or warehousing, are in the process of being prepared for disposal or alternative uses. In addition, the Company retained some liability for potential future environmental costs at active locations contributed to Nalco/Exxon. In 1995, the Company charged approximately $1 million against this provision, and reevaluated its estimates of the remaining post-closure costs for the aforementioned facilities. As a result, the provision was reduced by $2 million. 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. 33 ELEVEN YEAR SUMMARY
(Dollar amounts in millions except per share figures) 1995 1994 1993 - - ------------------------------------------------------------------------------------------------------ NET SALES $1,214.5 $1,246.8 $1,291.6 Operating costs and expenses Cost of products sold 531.3 543.7 555.0 Selling and service 399.5 405.3 410.2 Research and development 39.8 45.7 49.7 Administrative and general 38.4 47.8 52.9 Formation and consolidation -- 68.2 -- - - ------------------------------------------------------------------------------------------------------ TOTAL OPERATING COSTS AND EXPENSES 1,009.0 1,110.7 1,067.8 - - ------------------------------------------------------------------------------------------------------ OPERATING EARNINGS 205.5 136.1 223.8 Interest and other income 7.2 16.6 14.4 Interest expense (16.2) (21.8) (27.5) Equity in earnings of partnership 16.9 6.9 -- - - ------------------------------------------------------------------------------------------------------ EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 213.4 137.8 210.7 Income taxes 77.7 64.6 81.9 - - ------------------------------------------------------------------------------------------------------ EARNINGS FROM CONTINUING OPERATIONS 135.7 73.2 128.8 Earnings (loss) from discontinued operations 18.0 23.9 23.9 - - ------------------------------------------------------------------------------------------------------ EARNINGS BEFORE EXTRAORDINARY LOSS AND EFFECT OF ACCOUNTING CHANGE 153.7 97.1 152.7 Extraordinary loss from retirement of debt, net of taxes -- -- (10.6) Cumulative effect of change in accounting for postretirement benefits other than pensions, net of taxes -- -- (56.5) - - ------------------------------------------------------------------------------------------------------ NET EARNINGS $ 153.7 $ 97.1 $ 85.6 - - ----------------------------------------------------------------------================================ PER SHARE OF COMMON STOCK Earnings from continuing operations--fully diluted $ 1.71 $ .88 $ 1.57 Discontinued operations .24 .31 .31 Extraordinary item -- -- (.14) Accounting change -- -- (.72) Net earnings 1.95 1.19 1.02 Cash dividends paid .99 .945 .885 - - ------------------------------------------------------------------------------------------------------ FINANCIAL RATIOS Earnings as a percent to sales* 11.2% 5.9% 10.0% Earnings as a percent to shareholders' equity* 24.1 13.2 24.2 Effective income tax rate* 36.4 46.8 38.9 Common stock dividends paid as a percent to earnings* 49.2 88.4 47.4 Research and development expenses as a percent to sales* 3.3 3.7 3.8 Current ratio 1.0 TO 1 1.3 to 1 2.0 to 1 - - ------------------------------------------------------------------------------------------------------ FINANCIAL POSITION DATA Working capital $ 14.2 $ 87.8 $ 185.4 Total assets 1,370.1 1,282.2 1,212.4 Property, plant, and equipment (cost) 1,101.6 1,067.1 1,129.9 Long-term debt 221.5 245.3 252.1 Deferred income taxes 53.3 56.8 58.1 Shareholders' equity 580.3 544.2 550.6 - - ------------------------------------------------------------------------------------------------------ OTHER DATA Working capital provided from operations $ 219.2 $ 250.1 $ 245.6 Capital investments 126.7 125.6 117.8 Depreciation and amortization* 84.8 84.8 82.2 Dividends on common stock 66.9 64.7 61.1 Cost of common stock repurchased 42.4 61.3 58.5 Wages, salaries, commissions, and benefits 387.4 411.1 413.6 Common shares outstanding at year end (thousands) 67,124 67,900 68,905 Market price per share of common stock at year end $ 30.125 $ 33.50 $ 37.50 Number of common shareholders of record 5,669 6,005 6,111 Number of employees at year end 6,081 5,935 6,802 - - ------------------------------------------------------------------------------------------------------
NOTE: Shares outstanding and per share amounts have been restated to reflect the two-for-one stock split in 1991. * Based on earnings from continuing operations before extraordinary loss and effect of accounting change. 34
1992 1991 1990 1989 1988 1987 1986 1985 - - --------------------------------------------------------------------------------------------------------------------------------- $1,286.9 $1,164.4 $1,013.1 $ 899.1 $ 843.0 $ 738.3 $658.5 $ 658.6 557.4 513.1 449.8 406.2 388.4 341.7 298.3 301.2 397.7 357.2 291.7 252.9 236.5 204.9 185.8 172.4 47.5 45.7 40.2 35.5 32.3 30.7 29.2 29.9 53.3 47.0 50.2 47.2 50.0 38.9 41.4 34.3 -- -- -- -- -- -- -- -- - - --------------------------------------------------------------------------------------------------------------------------------- 1,055.9 963.0 831.9 741.8 707.2 616.2 554.7 537.8 - - --------------------------------------------------------------------------------------------------------------------------------- 231.0 201.4 181.2 157.3 135.8 122.1 103.8 120.8 18.3 18.9 19.9 27.0 20.6 14.9 12.6 10.9 (40.3) (27.1) (11.5) (9.7) (9.5) (8.2) (6.0) (3.9) -- -- -- -- -- -- -- -- - - --------------------------------------------------------------------------------------------------------------------------------- 209.0 193.2 189.6 174.6 146.9 128.8 110.4 127.8 81.8 74.2 72.9 66.3 53.1 51.9 48.1 54.3 - - --------------------------------------------------------------------------------------------------------------------------------- 127.2 119.0 116.7 108.3 93.8 76.9 62.3 73.5 17.8 18.8 14.4 11.6 12.2 3.4 1.4 (0.2) - - --------------------------------------------------------------------------------------------------------------------------------- 145.0 137.8 131.1 119.9 106.0 80.3 63.7 73.3 -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- - - --------------------------------------------------------------------------------------------------------------------------------- $ 145.0 $ 137.8 $ 131.1 $ 119.9 $ 106.0 $ 80.3 $ 63.7 $ 73.3 ================================================================================================================================= $1.57 $ 1.47 $ 1.42 $ 1.32 $ 1.20 $ .97 $ .79 $ .93 .22 .24 .18 .14 .15 .04 .02 -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 1.79 1.71 1.60 1.46 1.35 1.01 .81 .93 .84 .83 .755 .68 .645 .60 .60 .60 - - --------------------------------------------------------------------------------------------------------------------------------- 9.9% 10.2% 11.5% 12.0% 11.1% 10.4% 9.5% 11.2% 22.6 24.4 26.6 23.5 20.1 17.9 15.7 20.1 39.1 38.4 38.4 38.0 36.1 40.3 43.6 42.5 46.2 48.6 45.3 47.1 53.8 61.4 75.6 63.9 3.7 3.9 4.0 3.9 3.8 4.2 4.4 4.5 2.5 to 1 2.0 to 1 2.3 to 1 2.3 to 1 2.1 to 1 1.8 to 1 1.7 to 1 1.8 to 1 - - --------------------------------------------------------------------------------------------------------------------------------- $ 314.3 $ 256.3 $ 229.7 $ 218.5 $ 174.4 $ 121.8 $ 86.7 $ 80.7 1,350.6 1,324.4 1,037.0 938.5 838.9 781.8 621.9 571.1 1,044.2 957.8 840.3 720.1 648.7 607.5 547.6 499.0 413.8 394.1 282.2 214.0 100.8 72.8 38.4 36.5 107.3 90.8 77.8 62.7 53.7 47.3 42.3 34.4 576.3 528.7 455.6 443.7 477.5 446.8 407.5 384.2 - - --------------------------------------------------------------------------------------------------------------------------------- $ 226.7 $ 218.5 $ 192.4 $ 159.1 $ 148.4 $ 132.9 $ 113.2 $ 113.0 131.0 136.8 114.9 86.4 61.6 57.2 63.6 59.9 75.4 62.1 45.5 37.8 40.4 38.5 37.8 32.9 58.8 57.8 52.9 51.0 50.5 47.2 47.1 47.0 14.3 -- 80.5 111.7 21.5 11.6 -- -- 403.7 376.6 326.0 282.5 263.8 231.3 203.7 195.4 70,021 69,828 69,292 72,199 77,129 78,298 78,542 78,308 $34.625 $ 41.625 $ 28.25 $ 24.75 $17.625 $16.625 $ 13.75 $13.375 6,129 5,543 5,099 5,224 5,477 5,668 5,821 6,156 6,714 6,832 5,862 5,489 5,381 5,085 4,868 5,065 - - ---------------------------------------------------------------------------------------------------------------------------------
35
QUARTERLY SUMMARY (UNAUDITED) 1995 1994 ---------------------------------------- --------------------------------------- (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 $292.5 $302.3 $310.0 $309.7 $309.9 $326.0 $319.6 $291.3 Gross earnings 164.0 170.2 174.1 174.9 173.8 182.2 180.3 166.8 Earnings from continuing operations 32.9 32.4 35.5 34.9 27.3 26.9 1.7* 17.3* Discontinued operations 4.9 4.7 5.0 3.4 6.5 6.2 5.8 5.4 Net earnings 37.8 37.1 40.5 38.3 33.8 33.1 7.5* 22.7* Per common share Earnings-fully diluted Continuing operations .41 .41 .45 .45 .34 .33 - .21 Discontinued operations .07 .06 .07 .04 .08 .08 .08 .07 Net earnings .48 .47 .52 .49 .42 .41 .08 .28 Dividends .24 .25 .25 .25 .225 .24 .24 .24 Market price High 35-5/8 38-1/8 38-5/8 34-3/8 37-7/8 34-1/2 34-7/8 34 Low 33 32-7/8 32-5/8 28-1/8 33 31 29-3/4 31-1/4 - - -------------------------------------------------------------------------------------------------------------------------------- *Includes an after tax charge for formation and consolidation expenses of $35.5 million and $18.5 million in the third and fourth quarters of 1994, respectively.
36 CORPORATE OFFICERS Edward J. Mooney (54) Chairman and Chief Executive Officer 27 years of service Milford B. Harp (58) Executive Vice President, Operations 32 years of service W. Steven Weeber (53) Executive Vice President, Operations Staff 29 years of service Peter Dabringhausen (57) Group Vice President President, Process Chemicals Division 26 years of service Stephen D. Newlin (43) Group Vice President, President Nalco Europe 20 years of service J. David Tinsley (55) Group Vice President President, Water and Waste Treatment Division 30 years of service Ronald J. Allain (55) Senior Vice President, Research and Development 25 years of service David R. Bertran (52) Senior Vice President, Manufacturing and Logistics 12 years of service James F. Lambe (50) Senior Vice President, Human Resources 26 years of service John D. Berthoud (52) Vice President, Marketing and Quality Management 25 years of service George M. Brannon (44) Vice President, President Nalco Pacific 20 years of service William E. Buchholz (53) Vice President, Chief Financial Officer 3 years of service William E. Parry (45) Vice President, General Counsel 1 year of service Gilberto Pinzon (55) Vice President, President Nalco Latin America 26 years of service Anthony J. Sadowski (57) Vice President, Environmental Health and Safety 29 years of service Dale W. Walker (59) Vice President, Corporate Sales 36 years of service Robert L. Ratliff (47) Controller 20 years of service William G. Marshall (49) Treasurer 15 years of service Suzzanne J. Gioimo (52) Secretary 26 years of service Craig J. Holderness (43) Assistant Treasurer 18 years of service Elizabeth R. Ewing (36) Assistant Treasurer (As of March 1, 1996) 38 NALCO CHEMICAL COMPANY AND SUBSIDIARIES APPENDIX TO 1995 FORM 10-K GRAPHS AND IMAGE MATERIAL 1995 ANNUAL REPORT TO SHAREHOLDERS The following is a list and narrative description of graphs included in those portions of the 1995 Annual Report to Shareholders expressly incorporated herein by reference. In the portion of the Annual Report to Shareholders titled "Management's Discussion and Analysis" the following graphs appear: Sales, based on continuing operations, in millions of dollars. The amounts for 1991-1994 include the Company's petroleum chemical operations. The values depicted in the graph are as follows:
Year Amount ---- ------ 1991 $1,164 1992 $1,287 1993 $1,292 1994 $1,247 1995 $1,215 Depreciation, in millions of dollars. The values depicted in the graph are as follows: Year Amount ---- ------ 1991 $65 1992 $76 1993 $83 1994 $85 1995 $85
Operating earnings, in millions of dollars. The amounts for 1991-1994 include the Company's petroleum chemical operations. The amount for 1994 excludes a $68 million pretax provision for formation and consolidation expenses. The values depicted in the graph are as follows:
Year Amount ----- ------ 1991 $201 1992 $231 1993 $224 1994 $204 1995 $206
NALCO CHEMICAL COMPANY AND SUBSIDIARIES APPENDIX TO 1995 FORM 10-K GRAPHS AND IMAGE MATERIAL 1995 ANNUAL REPORT TO SHAREHOLDERS Market Value of Nalco Common Share at Year-End Closing Price, in dollars. The values depicted in the graph are as follows:
Year Amount ---- ------ 1991 $41.625 1992 $34.625 1993 $ 37.50 1994 $ 33.50 1995 $30.125 Shareholders' Equity, in millions of dollars. The values depicted in the graph are as follows: Year Amount ---- ------ 1991 $529 1992 $576 1993 $551 1994 $544 1995 $580 Cash Provided by Operating Activities, in millions of dollars. The values depicted in the graph are as follows: Year Amount ---- ------ 1991 $199 1992 $208 1993 $256 1994 $249 1995 $213
Return on Shareholders' Equity, based on continuing operations, excluding net charge for formation and consolidation expenses in 1994, and before extraordinary loss and effect of accounting change in 1993, in percentages. The values depicted in the graph are as follows: Year Amount ---- ------ 1991 24.4% 1992 22.6% 1993 24.2% 1994 22.9% 1995 24.1% NALCO CHEMICAL COMPANY AND SUBSIDIARIES APPENDIX TO 1995 FORM 10-K GRAPHS AND IMAGE MATERIAL 1995 ANNUAL REPORT TO SHAREHOLDERS Capital Additions, in millions of dollars. The values depicted in the graph are as follows:
Year Amount ---- ------ 1991 $137 1992 $131 1993 $118 1994 $126 1995 $127 Dividends per Common Share, in dollars. The values depicted in the graph are as follows: Year Amount ---- ------ 1991 $ 0.83 1992 $ 0.84 1993 $0.885 1994 $0.945 1995 $ 0.99
EX-27 6 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF CONSOLIDATED FINANCIAL CONDITION AT DECEMBER 31, 1995 AND THE STATEMENT OF CONSOLIDATED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1995 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 38,100,000 0 224,700,000 (4,400,000) 91,400,000 370,000,000 1,101,600,000 (581,600,000) 1,370,100,000 355,800,000 221,500,000 15,100,000 0 400,000 564,800,000 1,370,100,000 1,214,500,000 1,214,500,000 531,300,000 531,300,000 0 0 16,200,000 213,400,000 77,700,000 135,700,000 18,000,000 0 0 153,700,000 2.10 1.95
EX-99.C 7 FORM 11-K 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 30, 1995 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, 1995 and 1994 -------------------------- NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ FINANCIAL STATEMENTS AND SCHEDULES ------------- INDEX -----
Page ---- Report of Independent Accountants 1 Statements of Net Assets Available for Plan Benefits 2 Statements of Changes in Net Assets Available for Plan Benefits 3 Notes to Financial Statements 4-11 Supplementary Schedules: Assets Held for Investment Schedule I Reportable Transactions Schedule II
Note: All other schedules have been omitted because they are not applicable. Price Waterhouse LLP [LOGO OF PW APPEARS HERE] Report of Independent Accountants --------------------------------- March 21, 1996 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, 1995 and 1994, and the changes in net assets available for benefits for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the plan's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Our audit was 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 audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. [SIGNATURE OF PRICE WATERHOUSE LLP]
NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS ---------------------------------------------------- AS OF DECEMBER 31, 1995 and 1994 -------------------------------- 1995 1994 ---- ---- Investments, at fair value: Nalco Chemical Company common stock $100,518,780 $124,075,759 Mutual funds 60,607,197 42,640,935 Group annuity contract deposits 54,727,955 83,365,821 Bank commingled investment funds 12,549,164 6,153,424 Collective short-term investment funds 22,810,487 12,147,013 ------------ ------------ 251,213,583 268,382,952 Loans receivable from participants 5,369,879 5,617,080 Due from Nalco Chemical Company Employee Stock Ownership Plan -- 57,754 Accrued income receivable 1,949,817 54,104 ------------ ------------ Net assets available for plan benefits $258,533,279 $274,111,890 ============ ============
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, 1995 and 1994 ---------------------------------------------- 1995 1994 ---- ---- Sources of net assets: Contributions by employees 11,807,207 $ 13,207,318 Dividend income 5,909,331 4,266,586 Interest Income 6,333,726 6,734,447 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 265,060 177,551 Net realized/unrealized appreciation of investments 2,867,189 -- ------------ ------------ Total sources of net assets 27,182,513 24,385,902 Applications of net assets: Net realized/unrealized depreciation of investments -- (15,661,843) Account expenses (69,477) (44,581) Withdrawals by participants (42,691,647) (17,980,137) ------------ ------------ Decrease in net assets available for plan benefits (15,578,611) (9,300,659) Net assets available for plan benefits at beginning of period 274,111,890 283,412,549 Net assets available for plan benefits at end of period $258,533,279 $274,111,890 ============ ============
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, 1995 and 1994 -------------------------- NOTE 1 - DESCRIPTION OF THE PLAN: - - -------------------------------- The Nalco Chemical Company Profit Sharing, Investment and Pay Deferral Plan (the Plan) is a voluntary contribution, individual account plan, which covers substantially all Nalco Chemical Company (the Company) employees. No service requirement exists before an employee is eligible to participate in the Plan. Pursuant to section 6 of the Plan document, profit sharing contributions are at the discretion of the Company. The Company has not contributed to the Plan since January 1, 1990. The Plan also accepts transfers of Company common stock and cash from the Employee Stock Ownership Plan for retirees. Beginning in 1993, the Plan expanded to include seven investment alternatives: the Nalco Stock Fund, the U.S. Government Money Market Fund, the Stable Capital Fund, the Bond Index Fund, the Balanced Fund, the Growth and Income Fund, and the Equity Index Fund. In 1995, an international equity fund was added, the EuroPacific Fund. A participant who has attained the age of 50 can transfer once per calendar year a minimum of 10% of his balance from the Nalco Stock Fund to any of the other funds in the Plan. The maximum allowable transfer is determined by the Employee Benefit Plan Administration Committee (EBPAC). Participants electing to make tax-deferred contributions through cash or salary deductions have the option of investing these contributions in a combination of any of the funds. Participants can transfer assets acquired with their individual funds at their discretion. A participant can also make contributions which are not tax-deferred through payroll deductions or a lump-sum investment. All participant contributions vest immediately, and participants are entitled to their entire account balance upon retirement, termination, disability, or death as a lump-sum payment (or in semi- annual stock installments for shares in the Nalco Stock Fund). Effective June 1, 1993, participants are allowed to borrow from the Plan, provided the amount does not exceed the lesser of one-half the vested Plan balance of the participant, or $50,000. The length of the loan is decided by the employee, subject to certain governmental restrictions, and the interest charged is determined by EBPAC and communicated to the participants in writing. At December 31, 1995, employees participating in the Plan had invested in the available funds as follows (some have investments in more than one fund):
1995 1994 ---- ---- Total employees participating 3,314 4,224 Nalco Stock Fund 2,805 3,255 U.S. Government Money Market Fund 208 203 Stable Capital Fund 1,903 2,379 Bond Index Fund 306 305 Balanced Fund 801 725 Growth and Income Fund 3,209 2,052 Equity Index Fund 962 656 EuroPacific Fund 423 --
-4- The Company believes that the Plan will continue without interruption, but reserves the right to terminate the Plan at any time. In the event of termination of the Plan, the Nalco Chemical Company Profit Sharing, Investment and Pay Deferral Plan Trust (the Trust) will continue until all of the funds held by The Northern Trust Company (the Trustee) have been distributed to the participants or their beneficiaries. Such distribution will be made in accordance with the provisions of the Plan 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. Withdrawals by Participants - - --------------------------- Withdrawals by participants includes benefit payments, transfers out of the plan, and net loan activity. Valuation of Investments - - ------------------------ All investments, except for group annuity contract deposits, are valued by the Trustee based on the closing market value on the last business day of the plan year. The group annuity contract deposits are stated at estimated fair value, which represents contributions made under the contracts at original cost plus interest at the contract rate. The insurance companies are contractually liable for the contract value provided the investment remains with the insurance company. Amounts Due Participants: - - ------------------------- In accordance with ERISA requirements for reporting by employee benefit plans, benefit payments to former participants are recorded when paid. Accordingly, at December 31, 1995 and December 31, 1994, the following amounts have been allocated to the individual accounts of former participants, but not recorded as liabilities on the Statements of Net Assets Available for Plan benefits or withdrawals by participants in the Statements of Changes in Net Assets Available for Plan Benefits:
1995 1994 ---- ---- Nalco Stock Fund $ 8,208,607 $20,279,907 U.S. Government Money Market Fund 122,832 254,612 Stable Capital Fund 32,572,418 43,170,030 Bond Index Fund 1,217,764 821,707 Balanced Fund 2,503,391 1,994,839 Growth and Income Fund 10,183,784 7,062,957 Equity Index Fund 2,080,864 876,817 EuroPacific Fund 758,694 -- ----------- ----------- $57,648,354 $74,460,869 =========== ===========
-5- The above 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, 1995 and 1994, and have been included in the benefits paid for the respective years on the Form 5500. NOTE 3 - PLAN AMENDMENTS: - - ------------------------- In 1994, the Plan document was amended and restated to include the provisions required by certain tax regulations. These amendments did not affect the operations of the Plan as the Plan previously complied with such tax regulations. NOTE 4 - INVESTMENTS: - - --------------------- The cost of investments and number of shares or units held at December 31, 1995 and 1994 were as follows:
1995 1994 --------------------------------------------------- Shares or Shares or Units Cost Units Cost --------------------------------------------------- Nalco Chemical Company common stock 3,336,723 $ 45,355,634 3,703,754 $ 53,041,047 American Balanced Fund 601,822 7,809,304 525,784 6,677,936 American EuroPacific Fund 139,496 3,073,456 ---- ---- Dreyfus Government Money Market Instruments 1,120,759 1,120,759 1,042,639 1,042,639 Fidelity Investments - Hartford Annuity Contract deposit 2,443,354 2,443,354 10,612,748 10,612,748 Life of Georgia Contract deposit 5,610,737 5,610,737 5,277,280 5,277,280 Pacific Mutual Contract deposit 5,536,568 5,536,568 10,382,705 10,382,705 Provident Contract deposit 6,150,722 6,150,722 16,548,213 16,548,213 Sun Life America Contract deposit 5,519,295 5,519,295 5,280,757 5,280,757 Allamerica Group Annuity Contract deposit 3,873,151 3,873,151 ---- ---- Ohio National Group Annuity Contract deposit 5,229,712 5,229,712 ---- ---- Protective Life Group Annuity Contract deposit 5,162,583 5,162,583 ---- ---- John Hancock Mutual Life Insurance Company Group Annuity Contract deposit 5,160,833 5,160,833 20,923,971 20,923,971 Neuberger & Berman Guardian Fund 2,073,127 40,241,819 1,935,759 35,320,110 State Mutual Life Assurance Company Group Annuity Contract deposit ---- ---- 14,340,146 14,340,146 J. P. Morgan Group Annuity Contract deposit 10,041,000 10,041,000 ---- ---- Wells Fargo Equity Index Fund 626,968 7,917,347 365,780 4,057,520 Wells Fargo Government/Corporate Bond Index Fund 212,773 2,278,191 189,710 1,954,767 The Northern Trust Company Collective Short- Term Investment Fund 22,810,487 22,810,487 12,147,014 12,147,014 ------------ ------------ Total $185,334,952 $197,606,853 ============ ============
-6- Individual investments that represent 5% or more of the fair value of net assets available for plan benefits at December 31, 1995 are as follows:
Shares or Units Cost Fair Value ---------------------------------------------- Nalco Chemical Company common stock 3,336,723 $43,355,634 $100,518,780 The Northern Trust Company Collective Short- Term Investment Fund 22,810,487 22,810,487 22,810,487 Neuberger & Berman Commingled Guardian Fund 2,073,127 40,241,819 47,744,107
NOTE 5 - 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 6 - 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. NOTE 7 - GROUP ANNUITY CONTRACTS: - - --------------------------------- The fair value of group annuity contract deposits at December 31, 1995 and 1994 was comprised of the following:
December 31, 1995 1994 ---- ---- John Hancock Mutual Life Insurance Company contract deposit, GAC5588, due 6/1/95 (9.5% in 1994) $ ---- $20,923,972 John Hancock Mutual Life Insurance Company contract deposit, GAC7892, due 12/1/97 (5.77% in 1995) 5,160,833 ---- Fidelity Management Trust Company: Hartford contract deposit, GA10156, due 12/21/98 (4.87% in 1995; 6.63% in 1994) 2,443,354 10,612,748 Life of Georgia contract deposit, FR101, open (6.15% in 1995; 6.65% in 1994) 5,610,737 5,277,280 Pacific contract deposit, G2608041, due 6/1/98 (6.65% in 1995 and 1994) 5,536,568 10,382,705 Provident contract deposits, #627-0569201A, due 6/1/97 (6.21% in 1995 and 1994); #627-05692-02A, due 6/1/98 (7.00% in 1995 and 1994) 6,150,722 16,548,213 Sun Life America contract deposit, FA464, due 12/1/95 (4.45% in 1995 and 1994) 5,519,295 5,280,757 Allamerica contract deposit, GA91636A, due 11/30/96 (8.05% in 1995 and 1994) 3,873,151 14,340,146 Ohio National contract deposit, 5708, due 12/1/97 (6.75% in 1995) 5,229,712 ---- Protective Life contract deposit, GA1191, due 6/1/97 (5.85% in 1995) 5,162,583 ---- J. P. Morgan contract deposit, NALCO-01, due 6/1/2000 (6.08% in 1995) 10,041,000 ---- ----------- ----------- $54,727,955 $83,365,821 =========== ===========
Average yields for the preceding contracts are not calculated as the rates are guaranteed. No valuation reserve was established in 1995 or 1994 as the companies listed all maintain at least an A+ credit rating. -7- NOTE 8 - STATEMENTS OF NET ASSETS: - - ---------------------------------- The statements of net assets available for plan benefits by fund as of December 31, 1995 and 1994, 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, 1995 -----------------------
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 $100,495,795 Mutual funds $1,120,759 $8,515,778 Group annuity contract deposits $54,727,955 Bank commingled mutual funds $2,549,022 Collective short-term investment fund 538,239 22,199,352 1 ------------ ---------- ----------- ---------- ---------- 101,034,034 $1,120,759 76,927,307 2,549,023 8,515,778 Loans receivable from participants Accrued income receivable 6,007 4,560 92,824 ------------ ---------- ----------- ---------- ---------- Net assets available for plan benefits $101,040,041 $1,125,319 $77,020,131 $2,549,023 $8,515,778 ============ ========== =========== ========== ==========
Growth & Equity Index EuroPacific Clearing Income Fund Fund Fund Loan Account Account Total ----------- ---- ---- ------------ ------- ----- Investments, at fair value: Nalco Chemical Company common stock $22,985 $100,518,780 Mutual funds $47,744,107 $3,226,553 60,607,197 Group annuity contract deposits 54,727,955 Bank commingled mutual funds $10,000,142 12,549,164 Collective short-term investment fund 135 2 72,758 22,810,487 ----------- ----------- ---------- ---------- ------- ------------ 47,744,107 10,000,142 3,226,688 2 95,743 251,213,583 Loans receivable from participants $5,369,879 5,369,879 Accrued income receivable 1,844,016 1 2,409 1,949,817 ----------- ----------- ---------- ---------- ------- ------------ Net assets available for plan benefits $49,588,123 $10,000,142 $3,226,689 $5,369,881 $98,152 $258,533,279 =========== =========== ========== ========== ======= ============
-8- NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND ----------------------------------------------------------- AS OF DECEMBER 31, 1994 -----------------------
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 $124,075,759 Mutual funds $1,042,639 $6,309,403 Group annuity contract deposits $83,365,821 Bank commingled mutual funds $1,910,378 Collective short-term investment fund 1,044,977 10,342,920 ------------ ---------- ----------- ---------- ---------- 125,120,736 1,042,639 93,708,741 1,910,378 6,309,403 Loans receivable from participants Due from Nalco Chemical Company Employee Stock Ownership Plan 57,754 Accrued income receivable 8,280 4,069 40,309 ------------ ---------- ----------- ---------- ---------- Net assets available for plan benefits $125,186,770 $1,046,708 $93,749,050 $1,910,378 $6,309,403 ============ ========== =========== ========== ==========
Growth & Equity Index Clearing Income Fund Fund Loan Account Account Total ----------- ---- ------------ ------- ----- Investments, at fair value: Nalco Chemical Company common stock $124,075,759 Mutual funds $35,288,893 42,640,935 Group annuity contract deposits 83,365,821 Bank commingled mutual funds $4,243,046 6,153,424 Collective short-term investment fund $759,116 12,147,013 ----------- ---------- ---------- -------- ------------ 35,288,893 4,243,046 759,116 268,382,952 Loans receivable from participants $5,617,080 5,617,080 Due from Nalco Chemical Company Employee Stock Ownership Plan 57,754 Accrued income receivable 1,446 54,104 ----------- ---------- ---------- -------- ------------ Net assets available for plan benefits $35,288,893 $4,243,046 $5,617,080 $760,562 $274,111,890 =========== ========== ========== ======== ============
-9- NOTE 9 - STATEMENTS OF CHANGES IN NET ASSETS: - - --------------------------------------------- The statements of changes in net assets available for benefits by fund for the year ended December 31, 1995 and 1994 are as follows: NALCO CHEMICAL COMPANY ---------------------- STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND ---------------------------------------------------------------------- DECEMBER 31, 1995 -----------------
U.S. Govt Nalco Stock Money Mkt Stable Capital Bond Index Balanced Growth & Fund Fund Fund Fund Fund Income Fund ---- ---- ---- ---- ---- ----------- Sources of net assets: Contributions by employees $ 837,162 $ 316,842 $ 3,506,154 $ 159,149 $ 753,065 $ 4,730,669 Dividend income 3,408,420 299,279 2,137,624 Interest income 66,061 61,669 5,776,349 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 265,060 Net transfers authorized by participants (3,511,076) (93,073) (10,976,567) 174,565 47,412 907,330 Net realized/unrealized appreciation (depreciation) of investments (10,351,426) 360,554 1,400,454 9,091,198 ------------ ---------- ------------ ---------- ---------- ----------- Total sources of net assets (9,285,799) 285,438 (1,694,064) 694,268 2,500,210 16,866,821 Applications of net assets: Account expenses (3,180) Withdrawals by participants (14,860,930) (206,827) (15,031,673) (55,623) (293,835) (2,567,591) ------------ ---------- ------------ ---------- ---------- ----------- Increase (decrease) in net assets available for plan benefits (24,146,729) 78,611 (16,728,917) 638,645 2,206,375 14,299,230 Net assets available for plan benefits at beginning of period 125,186,770 1,046,708 93,749,048 1,910,378 6,309,403 35,288,893 ------------ ---------- ------------ ---------- ---------- ----------- Net assets available for plan benefits at end of period $101,040,041 $1,125,319 $ 77,020,131 $2,549,023 $8,515,778 $49,588,123 ============ ========== ============ ========== ========== ===========
Equity Index EuroPacific Clearing Fund Fund Loan Account Account Total ---- ---- ------------ ------- ----- Sources of net assets: Contributions by employees $ 984,267 $ 516,223 $ 3,676 $ 11,807,207 Dividend income 64,008 5,909,331 Interest income 137 $ 415,553 13,957 6,333,726 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 265,060 Net transfers authorized by participants 3,038,757 (198,667) 8,013,690 0 Net realized/unrealized appreciation (depreciation) of investments 2,100,958 265,451 2,867,189 ----------- ----------- ---------- ----------- ------------ Total sources of net assets 6,123,982 3,443,448 216,886 8,031,323 27,182,513 Applications of net assets: Account expenses (66,297) (69,477) Withdrawals by participants (366,886) (216,759) (464,085) (8,627,438) (42,691,647) ----------- ----------- ---------- ----------- ------------ Increase (decrease) in net assets available for plan benefits 5,757,096 3,226,689 (247,199) (662,412) (15,578,611) Net assets available for plan benefits at beginning of period 4,243,046 5,617,080 760,564 274,111,890 ----------- ----------- ---------- ----------- ------------ Net assets available for plan benefits at end of period $10,000,142 $3,226,689 $5,369,881 $ 98,152 $258,533,279 =========== ========== ========== =========== ============
-10- NALCO CHEMICAL COMPANY ---------------------- STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND ---------------------------------------------------------------------- DECEMBER 31, 1994 -----------------
U.S. Govt Stable Nalco Stock Money Mkt Capital Bond Index Balanced Growth & Fund Fund Fund Fund Fund Income Fund ------------ ---------- ----------- ---------- ---------- ----------- Sources of net assets: Contributions by employees $ 1,117,236 $ 153,225 $ 4,864,554 $ 255,495 $ 885,729 $ 5,037,766 Dividend income 3,506,287 302,764 457,535 Interest income 70,442 35,912 6,286,877 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 177,551 Net transfers authorized by participants (2,618,386) 8,425 514,792 (638,352) (556,819) 5,288,834 ------------ ---------- ----------- ---------- ---------- ----------- Total sources of net assets 2,253,130 197,562 11,666,223 (382,857) 631,674 10,784,135 Applications of net assets: Net realized/unrealized appreciation (depreciation) of investments (14,921,941) (83,590) (294,081) (394,023) Account expenses Withdrawals by participants (5,139,717) (71,567) (12,877,025) (150,303) (692,885) (2,621,381) ------------ ---------- ----------- ---------- ---------- ----------- Increase (decrease) in net assets available for plan benefits (17,808,528) 125,995 (1,210,802) (616,750) (355,292) 7,768,731 Net assets available for plan benefits at beginning of period 142,995,298 920,713 94,959,850 2,527,128 6,664,695 27,520,162 ------------ ---------- ----------- ---------- ---------- ----------- Net assets available for plan benefits at end of period $125,186,770 $1,046,708 $93,749,048 $1,910,378 $6,309,403 $35,288,893 ============ ========== =========== ========== ========== ===========
Equity Index Loan Clearing Fund Account Account Total ------------ ---------- -------- ------------ Sources of net assets: Contributions by employees $ 893,314 $ 13,207,319 Dividend income 4,266,586 Interest income $ 331,955 $ 9,260 6,734,446 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 177,551 Net transfers authorized by participants 139,996 (2,141,040) 2,550 ---------- ---------- -------- ------------ Total sources of net assets 1,033,310 (1,809,085) 11,810 24,385,902 Applications of net assets: Net realized/unrealized appreciation (depreciation) of investments 31,792 (15,661,843) Account expenses (44,581) (44,581) Withdrawals by participants (322,810) 3,394,375 501,176 (17,980,137) ---------- ---------- -------- ------------ Increase (decrease) in net assets available for plan benefits 742,292 1,585,290 468,405 (9,300,659) Net assets available for plan benefits at beginning of period 3,500,754 4,031,790 292,159 283,412,549 ---------- ---------- -------- ------------ Net assets available for plan benefits at end of period $4,243,046 $5,617,080 $760,564 $274,111,890 ========== ========== ======== ============
-11- SCHEDULE I ---------- NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ ASSETS HELD FOR INVESTMENT -------------------------- AS OF DECEMBER 31, 1995 -----------------------
Identity of Issuer Description of Investment Cost Fair Value - - ------------------ ------------------------- ------------ ------------ Nalco Chemical Company 3,336,723 shares of common stock $ 45,355,634 $100,518,780 John Hancock Mutual Life Insurance Group annuity contract deposit, 5,160,833 5,160,833 Company GAC7892, 5.77%, due 12/1/97 Fidelity Management Trust Company: Hartford Group annuity contract deposit, GA10156, 4.87%, due 12/21/98 2,443,354 2,443,354 Life of Georgia Group annuity contract deposit, FR101, 6.15%, open 5,610,737 5,610,737 Pacific Group annuity contract deposit, G2608401, 6.65%, due 6/1/98 5,536,568 5,536,568 Provident Group annuity contract deposits, #627-05692-01A, 6.21%, due 6/1/97 #627-05692-02A, 7.00%, due 6/1/98 6,150,722 6,150,722 Sun Life America Group annuity contract deposit, FA464, 4.45%, due 12/1/95 5,519,295 5,519,295 Allamerica Group annuity contract deposit, GA91636A, 8.05%, due 11/30/96 3,873,151 3,873,151 Ohio National Group annuity contract deposit, 5708, 6.75%, due 12/1/97 5,229,712 5,229,712 Protective Life Group annuity contract deposit, GA1191, 5.85%, due 6/1/97 5,162,583 5,162,583 American American EuroPacific Growth Fund - 139,496 shares 3,073,456 3,226,553 American Balanced Fund - 601,822 shares 7,809,304 8,515,778 Dreyfus U.S. Government Money Market Fund 1,120,759 1,120,759 Neuberger & Berman Guardian Fund - 2,073,127 shares 40,241,819 47,744,107 J.P. Morgan Group annuity contract deposit, NALCO-01, 6.08%, due 6/1/2000 10,041,000 10,041,000 Wells Fargo Wells Fargo Equity Index Fund - 626,968 shares 7,917,347 10,000,142 Wells Fargo Bond Index Fund - 212,773 shares 2,278,191 2,549,022 The Northern Trust Company Collective short-term investment fund 22,810,487 22,810,487 *Participant loans Particpant loans, average interest rate of 8.36% 5,369,879 5,369,879 ------------ ------------ * Party-in-interest to the Plan. $190,704,831 $256,583,462 ============ ============
12 SCHEDULE II ----------- NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ REPORTABLE TRANSACTIONS ----------------------- FOR THE YEAR ENDED DECEMBER 31, 1995 SCHEDULE II ------------------------------------- -----------
Expenses Value of Incurred Asset on Identity of Purchase Selling With Cost of Transaction Net Gain Party Involved Description of Asset Price 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 Neuberger & Berman Guardian Management Equity Fund: 153 purchases $ 14,827,808 $ 14,827,808 $ 14,827,808 100 sales $11,510,748 $ 9,946,971 $ 11,510,748 $1,563,777 The Northern Trust Collective Short-Term Company Investment Fund: 311 purchases $100,276,206 $100,276,206 $100,276,206 442 sales $89,612,724 $ 89,612,724 $ 89,612,724 John Hancock Life Group Annuity Contracts Insurance Company 6 purchases $ 808,233 $ 808,233 $ 808,233 2 sales $21,732,205 $ 21,732,205 $ 21,732,205
There were no reportable category (i), (ii), or (iv) transactions for the year ended December 31, 1995. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. PROFIT SHARING, PAY DEFERRAL AND INVESTMENT PLAN OF NALCO CHEMICAL COMPANY BY /s/ W.E. Buchholz ------------------------------ Member, Employee Benefit Plan Administration Committee Dated: March 29, 1996 -------------- 14 -----END PRIVACY-ENHANCED MESSAGE-----