-----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, WTz9L1ChrFYN5N8WBbSWmEg5NainVan4hOCn6uf6heCLaABJSy6NXVGU8Qc0qROq 9w6sb/PdX9jfZTe8pNRbCg== 0000950131-99-001968.txt : 19990402 0000950131-99-001968.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950131-99-001968 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NALCO CHEMICAL CO CENTRAL INDEX KEY: 0000069598 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS CHEMICAL PRODUCTS [2890] IRS NUMBER: 361520480 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04957 FILM NUMBER: 99581140 BUSINESS ADDRESS: STREET 1: ONE NALCO CTR CITY: NAPERVILLE STATE: IL ZIP: 60563 BUSINESS PHONE: 7083051000 MAIL ADDRESS: STREET 1: ONE NALCO CENTER CITY: NAPERVILLE STATE: IL ZIP: 60563-1198 10-K405 1 FORM 10-K 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to Commission File Number 1-4957 NALCO CHEMICAL COMPANY Incorporated in the State of Delaware I.R.S. Employer Identification No. 36-1520480 One Nalco Center, Naperville, Illinois 60563-1198 Telephone 630-305-1000 Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Which Title of Each Class Registered Common Stock par value $0.1875 per Chicago Stock Exchange New York Stock share Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant was $1,812,008,725 at March 5, 1999.* The number of shares outstanding of each of the issuer's classes of Common Stock, as of March 5, 1999 was 65,725,414 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 1998 Annual Report to Shareholders are incorporated by reference into Parts I and II. Portions of the Registrant's Proxy Statement dated March 29, 1999 for the April 29, 1999 Annual Meeting of Shareholders are incorporated by reference into Part III. - -------------- * Excludes reported beneficial ownership by all directors and executive officers of the Registrant; however, this determination does not constitute an admission of affiliate status for any of these stockholders. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS PART I
Page ---- Item 1 Business........................................................ 1 Executive Officers of the Registrant............................ 3 Item 2 Properties...................................................... 4 Item 3 Legal Proceedings............................................... 6 Item 4 Submission of Matters to a Vote of Security Holders............. 6 PART II Market for the Registrant's Common Stock and Related Security Item 5 Holder Matters.................................................. 6 Item 6 Selected Financial Data......................................... 6 Management's Discussion and Analysis of Financial Condition and Item 7 Results of Operations........................................... 6 Item 7A Quantitative and Qualitative Disclosures About Market Risk...... 7 Item 8 Financial Statements and Supplementary Data..................... 7 Changes in and Disagreements with Accountants on Accounting and Item 9 Financial Disclosure............................................ 7 PART III Item 10 Directors and Executive Officers of the Registrant.............. 7 Item 11 Executive Compensation.......................................... 7 Item 12 Security Ownership of Certain Beneficial Owners and Management.. 7 Item 13 Certain Relationships and Related Transactions.................. 8 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K. 8
PART I ITEM 1. BUSINESS. Nalco Chemical Company was incorporated in 1928 in Delaware and has its principal executive offices at One Nalco Center, Naperville, Illinois 60563- 1198. Its telephone number is 630-305-1000. As used in this report, "Company" and "Nalco" refer to Nalco Chemical Company and its consolidated subsidiaries. Nalco is engaged in the manufacture and sale of highly specialized Service Chemicals. Specified financial information by business segment and geographic area is shown in Note 2 of the Notes to Consolidated Financial Statements in the Company's 1998 Annual Report to Shareholders and is incorporated herein by reference. Nalco is in the business of providing services, chemicals, technology, equipment, and systems (monitoring and surveillance) used in water treatment, pollution control, energy conservation, steelmaking, papermaking, mining and mineral processing, electricity generation, other industrial processes and commercial building utility systems. Service Chemicals are developed, formulated and manufactured to meet specific customer needs. They are part of value added programs designed to help customers maintain a high level of operating performance and efficiency in their facilities, improve the quality of customers' end products or help customers meet environmental discharge limits in a cost-effective way. Nalco products are used for purposes such as: control of scale, corrosion, foam and fouling in cooling systems, boilers and other equipment; clarification of water; separation of liquids and solids; improved combustion; control of dust; lubrication and corrosion protection in rolling, drawing and forming of metals; improving production of pulp and qualities of paper; recovery of minerals; and specialized process applications in a variety of industries. Cleaners, sanitizers, metal and plastic finishing compounds, odor control programs, facility maintenance chemicals, and functional fluids are provided to manufacturers and commercial and institutional markets. The quality and on-site availability of technical expertise provided through highly qualified Nalco personnel are very important considerations to customers. The effective use of the Company's products requires a substantial amount of problem solving, monitoring and technical assistance on the part of Nalco employees. Service Chemicals are usually marketed through Nalco's own organization because of the high degree of technical service required. The worldwide field sales force is trained in the application and use of Nalco Service Chemicals, and is supported by a marketing and research staff of specialists in the technology and use of various Nalco Service Chemicals. Competitive conditions vary for Nalco depending on the industries served and the products involved. Management believes the Company is one of the most important worldwide suppliers of water treatment products and Service Chemical programs, based on estimated sales of comparable products for industrial customers on the process side (e.g., the manufacturing process, which a plant uses to produce its end product) and the water treatment side (e.g., boilers for power generation or cooling systems for process temperature control). The Company sells its products and Service Chemical programs in more than 120 countries, and is the largest or second largest supplier of those products in most of the countries it does business. All aspects of this business are considered to be very competitive, and companies providing similar products or programs range in size from very large multinational companies to small local manufacturers. The number of competitors varies by product application and ranges from a few large companies to hundreds of small local companies. The Company's principal method of competition is based on quality service, product performance and technology through safe, practical applied science. In January 1998, the Company completed the acquisitions of USF Houseman Waterbehandeling BV (Houseman), a Dutch water treatment company based in Bergen op Zoom, Holland, and Trident Chemical Company (Trident) of Baton Rouge, Louisiana. Houseman provides boiler and cooling water chemicals and services to office buildings, retail outlets and manufacturing facilities throughout Holland, Spain and Belgium. Houseman has annual sales of more than $4 million. Trident manufactures and markets water treatment chemicals and services to refinery, petrochemical and utility customers throughout the Gulf Coast region of the United States. Trident has annual sales of approximately $8 million. 1 In February 1998, the Company completed the merger of its South African water treatment interest with those of Chemical Services Limited. The merged entity, Nalco-Chemserve, is South Africa's largest specialty chemicals company. Annual 1998 sales were approximately $29 million. In March 1998, the Company completed the acquisition of Polo Citrus Corporation, a company which specializes in dust control products and applications and process aids which control dust during mining, processing, handling and transportation of minerals, sand and gravel, coal and other large materials. Polo Citrus has annual sales of approximately $3 million. In April 1998, the Company completed the acquisitions of Paper Chemicals, Inc., and the related business of Paper Chemicals of Alabama, Inc., in Texarkana, Texas; Texo Corporation in Cincinnati, Ohio; and UNICO Corporation, in Seoul, South Korea. Paper Chemicals provides specialty chemical products to the pulping, bleaching and recovery process areas of the pulp and paper industries, and has annual sales in excess of $30 million dollars. Texo provides specialty and performance chemicals to manufacturers and commercial and institutional customers, and has annual sales of over $30 million. UNICO provides wastewater treatment products for basic and middle markets and is a supplier of paper retention aids, and has annual sales in excess of $8 million. In May 1998, the Company acquired the water treatment business of Diversey Lever Limited in the United Kingdom which serves the needs of middle market customers such as educational institutions, hospitals, light industries and food and beverage facilities. Annual sales are in excess of $1 million. In June 1998, the Company acquired the water treatment business of Bycosin AB in Karlstad, Sweden and Pacific Chemicals, a division of Pace International, L.P., in Seattle, Washington. Bycosin, with annual sales of approximately $1 million, serves the water treatment needs of steel manufacturers, pulp and papermakers, office buildings, universities, textile plants and utilities throughout Sweden. Pacific Chemicals supplies water treatment products and services, and cleaning and sanitizing chemical programs to the aviation, seafood, hotel and office building industries throughout the northwestern United States. Annual sales are approximately $3 million. In July 1998, the Company acquired CSC-Kemico (S.E.A.) Sdn. Bhd., a Malaysian water treatment company, and the water treatment chemical business of Inland Aqua-Tech, a Spokane, Washington based middle market water treatment company. CSC-Kemico serves middle market customers in the palm oil, electronic, food and beverage, light industrial and office building industries with annual sales in excess of $2 million. Inland Aqua-Tech provides water treatment chemicals to textile plants, computer chip manufacturers, food and beverage plants, hospitals, office buildings and light industrial customers. Annual sales are approximately $2 million. In August 1998, the Company acquired ChemAsia Industries Sdn. Bhd. and United ChemAsia Sdn. Bhd., which are located in Malaysia and which serve customers in the palm oil, electronics, textiles, food and beverage, light industrial and office buildings industries. Annual sales are in excess of $4 million. In October 1998, the Company acquired ACP Products and Services which is located in North Hampton, England. ACP supplies water treatment products and services to the middle market as well as industrial cleaners, sanitizers, metal finishing, forming, drawing and lubricating compounds. Annual sales are in excess of $1 million. In December 1998, the Company acquired DuBois Chemical Italiana SpA, a provider of water treatment products and services to the middle market throughout Italy and which has annual sales of approximately $5 million; Tampereen Prossessi-Insinoorit Oy, a water treatment chemicals and services company serving basic industries in Finland and which has annual sales of approximately $1 million; and Odor Enviro Technology LLC, located in Bountiful, Utah and Enviro Fresh, Inc., located in Salt Lake City, Utah, both of which provide odor control products with annual sales of approximately $1 million. There were no other significant changes in the markets served or in the methods of distribution since the beginning of 1998. 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. 2 Other Matters The principal raw materials used by Nalco ordinarily are available in adequate quantities from several sources of supply in the United States and in foreign countries. Purchases of chemicals are made in the ordinary course of business and in accordance with the requirements of production. Inventories of Service Chemicals are maintained in Nalco-owned facilities and in warehouses situated throughout the United States and in countries in which subsidiaries operate. Shipments to customers may be made from either manufacturing plants or warehouse stocks. Nalco owns or is licensed under a large number of patents relating to a number of products and processes. Nalco's rights under such patents and licenses are of significant importance in the operation of the business, but no single patent or license is believed to be material with respect to its business. Over 800 patents existed at the end of 1998 with remaining durations ranging from less than one year to 20 years with an average duration of about 10 years. Nalco's business is considered nonseasonal. Large dollar amounts of backlogs are unusual since chemicals are normally shipped within a few days of the receipt of orders. The dollar amount of the normal backlog of orders is not considered to be significant in relation to the total annual dollar volume of sales of Nalco. The Company does not depend upon either a single customer, or very few customers, for a material part of the business. Nalco's laboratories are involved in research and development of chemical products and in providing technical support, including chemical analyses of water and process samples. Research and development expenses of continuing operations amounted to $43.7 million in 1998, compared to $43.0 million in 1997 and $41.9 million in 1996. There were approximately 7,000 persons employed full time by Nalco at the end of 1998. 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 1999. Compliance with increasingly stringent regulations should not have a material effect upon earnings but may strengthen the competitive position of Nalco because of available capital and technical resources. Although inflation is not a significant factor domestically, the Company adjusts selling prices to maintain profit margins wherever possible. Investments are made in modern plants and equipment that will increase productivity and thereby minimize the effect of rising costs. In addition, the last-in, first-out (LIFO) valuation method is used for some of the Company's inventories, so that changing material costs are recognized in reported income and pricing decisions. The impact of inflation in foreign exchange movements at foreign subsidiaries is managed by minimizing assets exposed to currency movements and by increasing sales prices to parallel increases in local inflation rates. The Company emphasizes working capital management, frequent dividend remittance, timely settlement of intercompany account balances, foreign currency borrowings and selected hedging. In most hyperinflationary economies, the rate of local currency devaluation is related to and approximately equal to the local inflation rate. Therefore, Nalco attempts to increase its local selling prices to help offset the impact of devaluation on exposed assets and the impact of increases in local content costs. Executive Officers of the Registrant The executive officers of the Registrant are named below together with their principal occupation. During the last 5 years all of the executive officers have been employed by the Company. E. J. Mooney has been Chairman of the Board and Chief Executive Officer of the Company since 1994 and was President from 1990 to December 1998. 3 W. S. Weeber has been Vice Chairman of the Board since December 1998 and Executive Vice President, Operations Staff since 1993. S. D. Newlin has been President since December 1998. He was Group Vice President, President, Specialty Division since January 1998. He had been Group Vice President, President, Nalco Europe since 1994. G. M. Brannon has been Group Vice President, President, Industrial Division since January 1, 1998. He had been Group Vice President, President, Nalco Pacific since February 1997. He was Vice President, President, Nalco Pacific from 1994 to 1997. G. Pinzon has been Group Vice President, President, Nalco Latin America since February 1997. He had been Vice President, President, Nalco Latin America since 1994. J. T. Burns has been Group Vice President and President, Pulp and Paper Division since February 1999. He was Vice President, President, Pulp and Paper Division from December 1998 through January 1999. He had been Vice President, President, Pacific Division from January 1998 through December 1998. He was President of Nalco Canada from 1994 to 1998. W. J. Roe has been Group Vice President and President, Process and Pacific Divisions since February 1999. He had been Vice President, President, Process Division since January 1998 and then was also named President, Pacific Division in December 1998. He was General Manager of the Mining and Mineral Processing Chemicals Group from 1994 to 1998. W. E. Buchholz has been Senior Vice President and Chief Financial Officer since February 1997. He had been Vice President and Chief Financial Officer since 1993. The corporate officers of the Registrant are usually elected at the annual meeting of directors and hold office for a term of one year. There is no family relationship between any of the executive officers. No arrangement or understanding exists between the executive officers and any other person pursuant to which such officers were selected as officers of the Registrant. For further information on the executive officers of the Registrant, please refer to the Inside Back Cover of the Company's 1998 Annual Report to Shareholders, which is incorporated herein by reference. ITEM 2. PROPERTIES. Nalco has facilities used to produce and store inventories and service customer needs at 17 domestic and 24 foreign locations. Primary domestic manufacturing plants are located in:
Land Area Building Area (Acres) (Sq.Ft.) --------- ------------- Carson, California................................ 21 84,000 Chicago, Illinois................................. 39 750,000 Garyville, Louisiana.............................. 225 170,000 Paulsboro, New Jersey............................. 14 34,000 Chagrin Falls, Ohio............................... 13 28,000
Other domestic manufacturing and/or warehouse facilities are located in: Oklahoma City, Oklahoma; Charlotte, North Carolina; Jonesboro, Georgia; Cincinnati, Ohio; Jackson, Michigan; Baton Rouge, Louisiana; Hopewell, Virginia; Texarkana, Texas; Montgomery, Alabama; Eagan, Minnesota; Vancouver, Washington; and Oakland, California. 4 The general offices of the Company are located on a 146-acre site in Naperville, Illinois. This facility includes three five-story buildings totaling 417,000 square feet. About 317,000 square feet is used for office space and the balance is used for support services and storage. A power plant with a cogeneration system (steam and electricity) serves both the Corporate and Technical Centers and has 31,000 square feet of space. The primary domestic research facility is located in Naperville, Illinois. The Naperville Technical Center is adjacent to the Corporate Center and houses process simulation areas in buildings which total 235,000 square feet. Primary foreign manufacturing plants, 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 90,000 Burlington, Canada................................ 14 138,000 Cheshire, England................................. 15 226,000 Biebesheim, Germany............................... 28 103,000 Cisterna di Latina, Italy......................... 25 115,000 Celra, Spain...................................... 25 109,000 Anaco, Venezuela.................................. 43 82,000
Other foreign facilities are located in: Perth, Australia; Buenos Aires, Argentina; Santiago, Chile; Suzhou, The People's Republic of China; Soledad, Colombia; Lerma, Mexico; West Bengal, India; Bogor, Indonesia; Kashima, Japan; Tilburg, the Netherlands; Auckland, New Zealand; Calamba, Laguna, Philippines; Dammam, Saudi Arabia; Jurong Town, Singapore; Hsin Chu Hsien, Taiwan; and Maracaibo, Venezuela. The Company also has a 72,000 square-foot business and technical center on a 12-acre site in Oegstgeest, the Netherlands. This facility serves customers throughout Europe. In addition to the property mentioned above, Nalco occupies general and sales offices and warehouses which are rented under short-term leases. Except for land leased in Charlotte, North Carolina; the Philippines; Saudi Arabia; Chile; The People's Republic of China; Eagan, Minnesota; Oakland, California; Cincinnati, Ohio; and Maracaibo, Venezuela, 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 equipped with modern and efficient equipment, and are in good operating condition and suitable for the purposes for which they are being used. In 1998, the Company opened a new manufacturing facility in Eagan, Minnesota and Oakland, California. It purchased facilities in Hopewell, Virginia; Texarkana, Texas; Montgomery, Alabama; and Baton Rouge, Louisiana. Consolidation of operations continued in 1998 with the conversion of the Jonesboro, Georgia manufacturing plant to warehousing operations. In January 1999 the Company sold a vacant parcel of land at its Kashima, Japan site. The operations of the Kashima site were not affected by this sale. In February 1999 the Company sold a vacant parcel of land in Biebesheim, Germany. The operations of the Biebesheim site were not affected by this sale. The Company sold its general and sales office in Maurepas, France and is now renting office space in Maurepas. Capital expenditures for 1999 should approximate $100 million compared to the $115 million spent in 1998, if planned sales and earnings for 1999 are reached. 5 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 1998 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, 1998 was 4,767. Dividends and Common Stock market prices, included in the Quarterly Summary appearing on page 43 of the Company's 1998 Annual Report to Shareholders, are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. Selected Financial Data, including net sales, earnings from continuing operations, earnings from continuing operations per common share, total assets, long-term debt and cash dividends paid, are reported in the Eleven Year Summary on pages 40 and 41 of the Company's 1998 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--1998 vs. 1997," "Management's Discussion and Analysis--1997 vs. 1996" and "Management's Discussion and Analysis--Financial Condition," on pages 17 to 20 of the Company's 1998 Annual Report to Shareholders, is incorporated herein by reference. Liquidity and Capital Resources Management's discussion of liquidity and capital resources, which is included in the section titled "Management's Discussion and Analysis--Cash Flows" on pages 20 and 21 of the Company's 1998 Annual Report to Shareholders, is incorporated herein by reference. Year 2000 Compliance Management's discussion of the effects of the Year 2000 Issue, which is included in the section titled "Management's Discussion and Analysis--Year 2000 Compliance" on pages 21 and 22 of the Company's 1998 Annual Report to Shareholders, is incorporated herein by reference. EURO Currency Management's discussion of the effects of the Euro currency, which is included in the section titled "Management's Discussion and Analysis--Euro Conversion" on page 22 of the Company's Annual Report to Shareholders, is incorporated herein by reference. 6 Forward-Looking Statements Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Annual Report contain forward-looking statements that are based on current expectations, estimates and assumptions regarding the worldwide economy, technological innovation, competitive activity, interest rates, pricing, currency movements, and the development of certain markets. These statements are not guarantees of future results or events, and involve certain risks and uncertainties which are difficult to predict and many of which are beyond the control of the Company. Actual results and events could differ materially from those anticipated by the forward-looking statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Management's discussion of its market risk exposures and its risk management strategies, which is included in the section titled "Management's Discussion and Analysis--1998 vs. 1997" on page 18 of the Company's 1998 Annual Report to Shareholders, is incorporated herein by reference. The Registrant's market-risk-sensitive instruments do not subject the Registrant to material market risk exposures. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Report of Independent Accountants, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements of the Registrant and its subsidiaries, included in the Company's 1998 Annual Report to Shareholders, are incorporated herein by reference. The Quarterly Summary in the Company's 1998 Annual Report to Shareholders is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Item 10 information is set forth in Part I, Item 1, under Executive Officers of the Registrant and also in the Company's Proxy Statement dated March 29, 1999, under Election of Directors through Election of Directors-- Meeting of the Board and Committees of the Board, which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The information contained under Election of Directors--Directors' Remuneration and Retirement Policies through Election of Directors--Change in Control in the Company's Proxy Statement dated March 29, 1999, 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 29, 1999, with respect to security ownership of certain beneficial owners and management, is incorporated herein by reference in response to this item. 7 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) The following consolidated financial statements of the Registrant and its subsidiaries included in the Company's 1998 Annual Report to Shareholders are incorporated herein by reference in Item 8: Statements of Consolidated Financial Condition December 31, 1998 and 1997 Statements of Consolidated Earnings Years ended December 31, 1998, 1997 and 1996 Statements of Consolidated Cash Flows Years ended December 31, 1998, 1997 and 1996 Statements of Consolidated Common Shareholders' Equity Years ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Quarterly Summary (Unaudited) Years ended December 31, 1998 and 1997 Report of Independent Accountants (2) The following consolidated financial statement schedule for the years 1998, 1997 and 1996 is submitted herewith: Report of Independent Accountants on Financial Statement Schedule Schedule II--Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 8 (3) Exhibits Exhibit 3A -- Restated Certificate of Incorporation(/2/) Exhibit 3B -- Certificates of Correction and Amendment to the Restated Certificate of Incorporation(/6/) Exhibit 3C -- Certificate of Designations, Preferences and Rights of Series B ESOP Convertible Preferred Stock(/4/) Exhibit 3D -- Certificate of Designations, Preference and Rights of Series C Junior Participating Preferred Stock(/12/) Exhibit 3E -- By-laws(/9/) Exhibit 10A -- Form of Key Executive Agreement 10B -- Agreements to Restore Benefits Reduced by Excess ERISA-Related Limits(/1/) 10C -- Form of Death Benefit Agreement(/2/) 10D -- Management Incentive Plan(/8/) 10E -- Restricted Stock Plan(/6/) 10F -- 1982 Stock Option Plan as amended April 26, 1984, January 30, 1987, February 12, 1993, and October 17, 1996(/10/) 10G -- Deferred Compensation Plan for Directors(/3/) 10H -- Supplemental Retirement Income Plan(/5/) 10I -- 1990 Stock Option Plan as amended April 23, 1992, February 12, 1993, and October 17, 1996(/10/) 10J -- Stock Option Plan for Non-Employee Directors(/7/) 10K -- Directors Benefit Protection Trust of Nalco Chemical Company(/5/) 10L -- Management Benefit Protection Trust of Nalco Chemical Company(/5/) 10M -- Restricted Stock Trust of Nalco Chemical Company(/5/) 10N -- Performance Share Plan as amended effective February 16, 1996 and October 17, 1996(/10/) 10O -- Employee Stock Compensation Plan as amended effective January 1, 1996 and October 17, 1996(/10/) 10P -- Non-Employee Directors Stock Compensation Plan(/8/) Exhibit 11 -- Computation of Earnings Per Share Exhibit 13 -- Those portions of the 1998 Annual Report to Shareholders expressly incorporated herein by reference Exhibit 21 -- Subsidiaries of the Registrant Exhibit 23 -- Consent of Independent Accountants Exhibit 27A -- Financial Data Schedule Exhibit 99A -- Notice of Annual Meeting and Proxy Statement(/13/) Exhibit 99B -- September 16, 1996 Letter to Shareholders with Summaries of the Preferred Share Purchase Rights Agreement(/11/) Exhibit 99C -- Form 11-K Annual Report
Exhibit Nos. 10A-10P constitute management contracts, compensation plans, or arrangements covering directors and officers of the Company. (b) Reports on Form 8-K filed in the fourth quarter of 1998 are: None - -------- (/1/Incorporated)herein by reference from the Registrant's Form 10-K for the year ended 1986. (/2/Incorporated)herein by reference from the Registrant's Form 10-K for the year ended 1987. (/3/Incorporated)herein by reference from the Registrant's Form 8-K dated July 24, 1986. (/4/Incorporated)herein by reference from the Registrant's Form 8-K dated May 15, 1989. (/5/Incorporated)herein by reference from the Registrant's Form 10-K for the year ended 1990. (/6/Incorporated)herein by reference from the Registrant's Form 10-K for the year ended 1991. (/7/Incorporated)herein by reference from the Registrant's Form 10-K for the year ended 1992. (/8/Incorporated)herein by reference from the Registrant's Notice of Annual Meeting and Proxy Statement dated March 18, 1996. 9 (/9/Incorporated)herein by reference from the Registrant's Form 10-Q for the quarter ended June 30, 1998. (/10/Incorporated)herein by reference from the Registrant's Form 10-Q for the quarter ended September 30, 1996. (/11/Incorporated)herein by reference from the Registrant's Form 8-K dated June 24, 1996. (/12/Incorporated)herein by reference from the Registrant's Form 8-A dated June 24, 1996. (/13/Incorporated)herein by reference from the Registrant's Notice of Annual Meeting and Proxy Statement dated March 29, 1999. 10 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 Date: March 30, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 30, 1999 by the following persons on behalf of the Registrant and in the capacities indicated.
Name Title ---- ----- W. E. Buchholz Senior Vice President and Chief Financial ___________________________________________ Officer W. E. Buchholz R. L. Ratliff Controller ___________________________________________ R. L. Ratliff J. L. Ballesteros Director ___________________________________________ J. L. Ballesteros H. G. Bernthal Director ___________________________________________ H. G. Bernthal H. Corless Director ___________________________________________ H. Corless H. M. Dean Director ___________________________________________ H. M. Dean J. P. Frazee, Jr. Director ___________________________________________ J. P. Frazee, Jr. A. L. Kelly Director ___________________________________________ A. L. Kelly B. S. Kelly Director ___________________________________________ B. S. Kelly F. A. Krehbiel Director ___________________________________________ F. A. Krehbiel E. J. Mooney Director ___________________________________________ E. J. Mooney S. D. Newlin Director ___________________________________________ S. D. Newlin Director ___________________________________________ S. A. Penrose W. A. Pogue Director ___________________________________________ W. A. Pogue J. J. Shea Director ___________________________________________ J. J. Shea W. S. Weeber Director ___________________________________________ W. S. Weeber
11 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors of Nalco Chemical Company Our audits of the consolidated financial statements referred to in our report dated February 6, 1999 appearing on page 42 of the 1998 Annual Report to Shareholders of Nalco Chemical Company (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Chicago, Illinois February 6, 1999 12 NALCO CHEMICAL COMPANY AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Col. A Col. B Col. C Col. D Col. E ------ ---------- ------------------------ ------------- ---------- Additions ------------------------ (2) (1) Charged Balance At Charged To Other Balance At Beginning To Costs Accounts-- Deductions-- End Description of Period and Expenses Describe Describe Of Period ----------- ---------- ------------ ----------- ------------- ---------- Reserves deducted in the Statements of Consolidated Financial Condition from the assets to which they apply Allowance for doubtful accounts Year Ended: $683,000(A) December 31, 1998... $4,170,000 $3,602,000 6,000(C) $2,411,000(B) $6,050,000 ========== ========== =========== ============= ========== $ 938,000(B) December 31, 1997... $4,936,000 $ 630,000 $ 22,000(A) 480,000(C) $4,170,000 ========== ========== =========== ============= ========== $738,000(A) December 31, 1996... $4,439,000 $ 388,000 17,000(C) $ 646,000(B) $4,936,000 ========== ========== =========== ============= ==========
- -------- Note A--Valuation of assets acquired. Note B--Excess of accounts written off over recoveries. Note C--Foreign currency translation adjustments. 13 EX-10.A 2 FORM OF KEY EXECUTIVE AGREEMENT EXHIBIT 10A KEY EXECUTIVE AGREEMENT THIS AGREEMENT between Nalco Chemical Company, a Delaware corporation ("Nalco"), and (Name) ("Executive"), dated this 1st day of , 19 . Background Nalco wishes to attract and retain well-qualified executive and key personnel and to assure both itself and the Executive of continuity of management in the event of any actual or threatened change in control of Nalco; Executive desires to continue his/her employment with Nalco and to retain his/her position in the event of any actual or threatened change in control of Nalco; Accordingly, the parties agree as follows: Agreement 1. Operation of Agreement. The "effective date of this Agreement" shall be the date on which a Change in Control (as described in Section 2) occurs. 2. Change in Control: The term "Change in Control" shall mean the occurrence at any time of any of the following events: (a) Nalco is merged or consolidated or reorganized into or with another corporation or other legal person, and as a result of such merger, consolidation, or reorganization less than 80% of the outstanding voting securities or other capital interests of the surviving, resulting, or acquiring corporation or other legal person are owned in the aggregate by the stockholders of Nalco immediately prior to such merger, consolidation, or reorganization; or (b) Nalco sells all or substantially all of its business and/or assets to any other corporation or other legal person, less than 80% of the outstanding voting securities or other capital interests of which are owned in the aggregate by the stockholders of Nalco, directly or indirectly, immediately prior to or after (2) such sale; or (c) A report is filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form, or report) each as promulgated pursuant to the Securities Exchange Act of 1934 ("Exchange Act") disclosing that any person (as the term "Person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of 20% or more of the issued and outstanding shares of voting securities of Nalco; or (d) During any period of two consecutive years, individuals who at the beginning of any such period constitute the Board of Directors of Nalco cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election by Nalco's stockholders, of each new Director of Nalco was approved by a vote of at least two-thirds of such Directors of Nalco then still in office who were Directors of Nalco at the beginning of any such period. 3. Employment. Nalco hereby agrees to continue the Executive in its employ for the period commencing on the effective date of this Agreement and ending on the earlier to occur of the third anniversary of such date or the 62nd birthday of the Executive (the "employment period"), to exercise such authority and perform such executive duties as are commensurate with the authority being exercised and duties being performed by the Executive immediately prior to the effective date of this Agreement, which services shall be performed at the location where the Executive was employed immediately prior to the effective date of this Agreement. The Executive agrees that during the employment period he/she shall devote his/her full business time exclusively to his/her aforesaid executive duties and perform such duties faithfully and efficiently. 4. Compensation, Compensation Plans, Perquisites. During the employment period, the Executive shall be compensated as follows: (a) He/she shall receive an annual salary (to be paid in equal semi- monthly installments) which is not less than his/her annual salary immediately prior to (3) the effective date of this Agreement, with the opportunity for increases, from time to time, which are in accordance with and commensurate with Nalco's regular practices. (b) He/she shall be eligible to participate each year on a reasonable basis in bonus, stock option, restricted stock, Management Incentive Plan, Performance Share Plan, and other incentive compensation plans which provide opportunities to receive compensation which are the greater of the opportunities provided by Nalco for executives with comparable duties or the opportunities under any such plans under which he/she was participating immediately prior to the effective date of this Agreement. (c) He/she shall be entitled to receive all employee benefits which are the greater of the employee benefits provided by Nalco to executives with comparable duties or the employee benefits to which he/she was entitled immediately prior to the effective date of this Agreement. 5. Termination. The term "Termination" shall mean any one of the following: (a) termination by Nalco of the employment of the Executive with Nalco for any reason other than cause. The term "cause" means willful and material breach of this Agreement by the Executive, provided however that unless the Executive's actions are materially damaging Nalco, the Executive shall be given notice of breach and a reasonable opportunity to cure the breach before notice of termination is given. Resignation by the Executive upon occurrence of any of the events listed in Sections 5(b), 5(c), 5(d) or 5(e) shall not constitute "cause," or (b) the Executive's death, or physical or mental incapacity which would entitle Executive to permanent disability benefits under Nalco's appropriate plans; or (c) resignation of the Executive following a significant change in the nature or scope of the Executive's authorities or duties from those described in Section 3, a reduction in total compensation from that provided in Section 4, or the breach by Nalco of any provision of this Agreement; or (4) (d) resignation of the Executive following a reasonable determination by the Executive that, as a result of a change in control of Nalco and a change in circumstances thereafter significantly affecting his/her position, he/she is unable to exercise the authorities, powers, functions, or duties attached to his/her position and contemplated by Section 3 of this Agreement; or (e) resignation of the Executive, for any reason, within 90 days after the first anniversary of the date on which a Change of Control occurs. 6. Termination Payment. In the event of Termination of the Executive: (a) Nalco shall pay to the Executive, within 30 days of Termination (without actuarial reduction), (i) a lump sum equal to salary payments for the remainder of the employment period at the same salary rate in effect on the date of Termination; (ii) an amount of annual bonus (including, but not limited to, the Management Incentive Plan) covering the monthly periods from January 1 of the year of Termination through the end of the employment period, at the greater of (A) the bonus rate for the bonus year immediately prior to the date of Termination, or (B) the estimated bonus rate (assuming a 100% performance rate) for the remaining portion of the employment period; and (iii) under Performance Share Plans granted before the date of Change of Control, all amounts which would have been awarded but for the Termination (assuming 100% payout), the stock portion of the grants to be paid in cash. (b) the Executive shall be entitled to and shall receive from Nalco (i) in addition to the benefits provided under any pension benefit plan maintained by Nalco, the pension benefits the Executive would have accrued under such plan if the Executive had remained in the employ of Nalco through the employment period, which benefits will be paid concurrently with, and in addition to, the benefits provided under such pension plan. (c) the Executive shall be entitled to and shall receive all employee benefits (including, but not limited to, coverage under any medical insurance, life (5) insurance arrangements or programs) to which the Executive would have been entitled under all employee benefit plans, programs or arrangements maintained by Nalco if the Executive had remained in the employ of Nalco through the employment period. 7. Non-Competition. The Executive agrees to continue all non-competition and confidentiality provisions during the employment period as specified in his/her existing employment agreement, except in the event of Termination in which case the non-competition provisions shall not apply. 8. Taxes. In the event it shall be determined that any payment, benefit or distribution (or combination thereof) by Nalco, any affiliate or associated company, trusts established by Nalco, any affiliate or associated company, for the benefit of its employees, to or for the Executive's benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (a "Payment") would be subject to the excise tax imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties hereinafter collectively referred to as the "Excise Tax"), the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount calculated such that the sum of the Payment and the Gross-Up Payment, net of all applicable taxes, would be the same as what the Payment would be, net of all applicable taxes, if no Excise Tax were payable. The Company shall pay the Gross-Up Payment to the Executive not later than ten days before the date the Excise Tax is due and payable (excluding any extensions of time for filing obtained by the Employee). In the event the employee does not receive the Gross- Up Payment when due, interest shall accrue on any unpaid portion at the rate of 12% per year, compounded monthly . 9. Legal Fees and Expenses: (a) It is the intent of Nalco that the Executive shall not be required to incur the expenses associated with the enforcement of his/her rights under this Agreement by litigation or other legal action, because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Executive hereunder. Accordingly, if it should appear to the Executive that (6) Nalco has failed to comply with any of its obligations under this Agreement, or in the event that Nalco or any other person takes any action to declare this Agreement void and/or unenforceable, or institutes any litigation designed to deny, and/or to recover from, the Executive the benefits intended to be provided to the Executive hereunder, Nalco irrevocably authorizes the Executive from time to time to retain counsel of his/her choice, at the expense of Nalco as hereafter provided, to represent the Executive in connection with the initiation or defense of any litigation, arbitration, and/or other legal action, whether by or against Nalco or any director, officer, stockholder, or other person affiliated with Nalco, in any jurisdiction. Nalco shall pay and be solely responsible for any and all attorneys' and related fees and expenses incurred by the Executive as a result of Nalco's failure to perform this Agreement or any provision hereof or as a result of Nalco or any person contesting the validity and/or enforceability of this Agreement or any provision hereof. (b) Within thirty (30) days after the effective date of this Agreement, the total value of performance of Nalco's obligations under this Agreement shall be secured by an irrevocable clean letter of credit, a conformed copy of which is attached hereto as Exhibit I and is incorporated herein by reference (the "Letter of Credit") issued by The First National Bank of Chicago (the "Bank") for the benefit of the Executive and providing that the total amount of all payments due to be paid by Nalco to the Executive under this Agreement shall be paid on a regular, periodic basis upon presentation by the Executive to the Bank of a statement or statements prepared by the Executive's counsel that such payments are due and owing, and that Nalco has not performed its obligation to make such payments. Nalco shall pay all amounts and take all action necessary to maintain the Letter of Credit during the employment period and for two years thereafter and notwithstanding Nalco's complete discharge of such obligations, in the event such Letter of Credit shall be terminated or not renewed, Nalco shall obtain a replacement irrevocable clean letter of credit on substantially the same terms and conditions as contained in the Letter of Credit drawn upon a commercial bank or other financial institution having total assets of at least $6 billion selected by Nalco or any similar arrangement which, in any case, assures the Executive of the benefits of this Agreement. (7) 10. Notices. Any notices, requests, demands, and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he/she has filed in writing with Nalco or, in the case of Nalco, at its principal executive offices. 11. Non-Alienation. The Executive shall not have any right to pledge, hypothecate, anticipate, or in any way create a lien upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law. 12. Governing Law. The provisions of this Agreement shall be construed in accordance with the laws of the State of Illinois. 13. Amendment. This Agreement may be amended or canceled by mutual agreement of the parties in writing without the consent of any other person and, so long as the Executive lives, no person, other than the parties hereto, shall have any rights under or interest in this Agreement or the subject matter hereof. 14. Successors to the Company. Except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of Nalco and any successor of Nalco. 15. Severability. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. Agreed: Nalco Chemical Company - -------------------- --------------------------------------- (Name of Executive) (Name of Nalco Authorized Signatory) (Title of Executive) (Title) EX-11 3 COMPUTATION OF EARNINGS PER SHARE EXHIBIT (11) STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE NALCO CHEMICAL COMPANY AND SUBSIDIARIES (Amounts in thousands, except per share data)
Year Ended December 31 ---------------------------- 1998 1997 1996 -------- -------- -------- Basic Average shares outstanding...................... 65,847 66,700 67,280 ======== ======== ======== Earnings from continuing operations............. $ 37,934 $163,380 $145,936 Earnings from discontinued operations, net of taxes.......................................... -- -- 8,546 -------- -------- -------- Earnings before effect of accounting change..... 37,934 163,380 154,482 Cumulative effect of change in accounting for business process reengineering costs, net of taxes.......................................... -- (4,544) -- -------- -------- -------- Net earnings.................................... 37,934 158,836 154,482 Dividends on preferred stock, net of taxes...... (11,473) (11,466) (11,363) -------- -------- -------- Net earnings to common shareholders............. $ 26,461 $147,370 $143,119 ======== ======== ======== Per share amounts: Earnings from continuing operations............. $ .40 $ 2.28 $ 2.00 Earnings from discontinued operations, net of taxes.......................................... -- -- .13 Cumulative effect of change in accounting for business process reengineering costs, net of taxes.......................................... -- (.07) -- -------- -------- -------- Net earnings to common shareholders............. $ .40 $ 2.21 $ 2.13 ======== ======== ======== Diluted Average shares outstanding during the year per Basic EPS...................................... 65,847 66,700 67,280 Effect of dilutive securities: Assumed conversion of preferred stock......... -- 7,760 7,930 Stock options and contingently issuable shares....................................... 421 805 319 -------- -------- -------- Totals...................................... 66,268 75,265 75,529 ======== ======== ======== Earnings from continuing operations.............. $ 37,934 $163,380 $145,936 Earnings from discontinued operations, net of taxes........................................... -- -- 8,546 -------- -------- -------- Earnings before effect of accounting change...... 37,934 163,380 154,482 Cumulative effect of change in accounting for business process reengineering costs, net of taxes........................................... -- (4,544) -- -------- -------- -------- Net earnings..................................... 37,934 158,836 154,482 Dividends on preferred stock, net of taxes....... (11,473) -- -- Additional ESOP expense resulting from assumed conversion of preferred stock, net of taxes..... -- (4,464) (4,515) Income tax adjustment on assumed common dividends....................................... -- (1,041) (920) -------- -------- -------- Net earnings to common shareholders.............. $ 26,461 $153,331 $149,047 ======== ======== ======== Per share amounts: Earnings from continuing operations............. $ .40 $ 2.10 $ 1.86 Earnings from discontinued operations, net of taxes.......................................... -- -- .11 Cumulative effect of change in accounting for business process reengineering costs, net of taxes.......................................... -- (.06) -- -------- -------- -------- Net earnings to common shareholders............. $ .40 $ 2.04 $ 1.97 ======== ======== ========
EX-13 4 PORTIONS OF THE 1998 ANNUAL REPORT TO SHAREHOLDERS Exhibit 13 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Nalco Chemical Company In our opinion, the accompanying statements of consolidated financial condition and the related consolidated statements of earnings, of cash flows and of common shareholders' equity present fairly, in all material respects, the financial position of Nalco Chemical Company and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP R. R. Ross Chicago, Illinois Engagement Partner February 6, 1999 MANAGEMENT'S DISCUSSION AND ANALYSIS 1998 vs 1997 Sales were $1,574 million in 1998, an increase of 10 percent over last year's sales of $1,434 million. Changes in volume, mix and price increased sales by 4 percent over 1997, while acquisitions and the consolidation of Nalco-Chemserve resulted in a 9 percent gain. Nalco-Chemserve was formed at the beginning of 1998 by merging Nalco's affiliated company in South Africa with the water treatment interests of Chemical Services Limited. In connection with the merger, Nalco obtained a controlling interest in Nalco-Chemserve and, accordingly, consolidated its results effective January 1, 1998. Effective July 1, 1997, the Company adopted the policy of reporting freight revenues as a component of sales rather than offsetting freight costs that are included as a component of cost of sales. The full-year impact of this change in 1998 increased sales by $32 million or 2 percent over 1997. Continued strengthening of the U.S. dollar compared to most foreign currencies during 1998 reduced 1998 sales by approximately $73 million or 5 percent. Nalco established a new sales and marketing organization effective January 1, 1998, going from five to six operating Divisions. Sales for 1998 and 1997 by Division were as follows:
1998 vs 1997 (in millions) 1998 1997 Increase - ----------------------------------- ------------- Industrial $ 462.5 $ 408.8 13% Specialty 351.7 301.6 17 Pulp & Paper 358.4 333.8 7 Process 196.6 189.7 4 Latin America 85.8 82.7 4 Pacific 118.5 117.1 1 - ----------------------------------- Total $1,573.5 $1,433.7 10 - -----------------==================
The Industrial Division reported a 13 percent gain over 1997. Approximately two- thirds of the increase was attributable to sales by acquired businesses and the consolidation of Nalco-Chemserve. Modest gains by three of the marketing groups in the Division and freight revenues accounted for most of the balance. The Specialty Division posted a 17 percent improvement in sales over 1997, with acquisitions accounting for slightly over three-fourths of the increase. Sales for the Pulp and Paper Division were up 7 percent over last year with acquisitions accounting for most of the increase. Freight revenues were partly offset by the translation impact of the stronger U.S. dollar compared to the Canadian dollar and most European currencies. The Division was negatively affected by lower pulp and paper production in the U.S. and Europe. The 4 percent increase in Process Division sales was attributable to acquisitions and freight revenues, with the translation effect of the stronger U.S. dollar compared to most foreign currencies offsetting nearly half the gains from those components. Excluding acquisitions, freight revenues and translation effects, sales for the Division were down slightly from last year, reflecting low demand and prices for metals and continued slowness in the coal industry in the U.S. Sales by the Latin America Division were up 4 percent over last year. The translation impact of the stronger U.S. dollar reduced sales about 10 percent. The Division's results were also adversely affected by lower production volumes in many of the industries it serves. Pacific Division sales were up only slightly over last year as a result of currency translation rate changes which offset the double-digit improvements in local currencies posted by most operations in the Division, as well as the impact of acquisitions which increased the Division's sales 7 percent. Cost of products sold was 45.4 percent of sales for 1998, compared to 43.9 percent for last year. The increase in 1998 is mainly attributable to the full- year effect of reporting freight revenues as a component of sales rather than a reduction of cost of products sold. Lower margins of businesses acquired during 1998 also contributed to the change. Adjusting for the impact of freight revenues and acquisitions, cost of products sold would have been 43.6 percent of sales. Selling, administrative and research expenses were up $57 million or 10 percent over 1997, with acquisitions accounting for approximately 85 percent of this increase. Increased selling and service effort in select markets accounted for most of the remaining change. The increase in expenses was moderated by the effect of changes in currency translation rates which reduced expenses by about 5 percent from a year ago. During the fourth quarter 1998, the Company began implementing a cost reduction program to cut its overall cost structure by $30 million annually. Virtually all of the Company's global operations were affected by the program, including sales, marketing, manufacturing and support services. The program included the redesigning, combining and streamlining of operations to improve efficiency and customer focus. Approximately 500 positions were eliminated during the fourth quarter 1998, mainly as a result of a voluntary enhanced early retirement program, and an additional 100 positions are scheduled for elimination in early 1999. As a result of this program, the Company recorded a pretax provision of $180 million. (See Note 3). Pension and other postretirement benefit costs associated with the early retirement program represented more than 80 percent of the total provision, while severance and termination benefits accounted for slightly over 10 percent. The balance of the provision represented write-offs of abandoned property and equipment, legal and consulting expenses associated with implementation of the program, and contract termination costs. Of the $180 million provision, approximately 15 percent is of a non-cash nature, which is attributable to asset write-offs and the cost of postretirement benefits other than pensions which will be paid out in future years. Interest and other income increased by nearly $2 million over 1997. Reduced foreign currency exchange adjustments, primarily in the Pacific region, accounted for most of this improvement. Interest expense rose $11 million over 1997, which was the result of higher average borrowing levels to finance acquisitions and repurchase of the Company's common stock. The Company's equity in earnings of its Nalco/Exxon Energy Chemicals, L. P. (Nalco/Exxon) joint venture declined $6 million from the $28 million reported in 1997. The decrease is partly the result of the slowdown in global demand for oil and oil-related products. In addition, Nalco/Exxon began implementing a cost reduction program which included employee terminations and reduced capital spending and manufacturing costs. The Company's equity portion of Nalco/Exxon's cost reduction program totaled over $2 million. As a result of the $117 million net earnings impact of the Nalco and Nalco/Exxon cost reduction programs, earnings per share from continuing operations on a diluted basis for 1998 was 40 cents compared to $2.10 in 1997. Because the assumed conversion of the Company's Series B ESOP Convertible Preferred Stock (preferred stock) had an antidilutive effect, it was excluded from the computation of diluted earnings per share for 1998. Excluding the $117 million effect of cost reduction programs and assuming conversion of the preferred stock, diluted earnings per share would have been $2.02 for 1998. Because the Company conducts its business worldwide, its earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates. The Company continually monitors its exposure to exchange rate risks, and reduces its exposure to changing foreign currency exchange rates through both operational and financial market actions. The Company's products are manufactured in several locations around the world, and its customers are served by locally-based sales engineers. This results in a cost base that is well diversified over a number of international currencies as well as the U.S. dollar. This diverse base of local currencies serves to partially offset the earnings effect of potential changes in the translated value of the Company's local currency denominated revenues. However, the primary operational method of mitigating the effect of foreign currency devaluations is the pursuit of local currency price increases. The Company also attempts to reduce its exposure to exchange rate fluctuations with regard to transactions through timely settlement of intercompany balances, the use of foreign currency borrowings, balance sheet structure and selective hedging. The Company makes limited use of derivative financial instruments such as interest rate swaps and foreign exchange contracts. Interest rate swaps are used to reduce the potential impact of increases in interest rates on floating rate long-term debt, while foreign exchange contracts are used to minimize exposure and reduce risk from exchange rate fluctuations. The Company does not hold or issue financial instruments for trading purposes. (See Note 17). In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires the recognition of all derivatives as either assets or liabilities in the statement of financial position and the measurement of those instruments at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivatives and the resulting designations. SFAS 133 is effective for fiscal years beginning after June 15, 1999, but earlier application is permitted as of the beginning of any fiscal quarter subsequent to June 17, 1998. The Company presently believes that the application of SFAS 133, when adopted, will not have a material effect on the Company's results of operations, financial position or cash flows. 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 results of operations, financial position or cash flows. In March 1998, the Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use and provides guidance for determining whether computer software is for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998, and should be applied to internal-use computer software costs incurred in those fiscal years for all projects, including those projects in progress upon initial application of SOP 98-1. In April 1998, the AcSEC issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 requires that the costs of start-up activities, including organization costs, be expensed as incurred. SOP 98-5 requires adoption of its provisions for fiscal years beginning after December 15, 1998. Initial application of SOP 98-5 should be as of the beginning of the fiscal year in which it is adopted and should be reported as the cumulative effect of a change in accounting principle. The Company will adopt SOP 98-1 and SOP 98-5 in January 1999, and it does not expect their application will have a material effect on the Company's results of operations, financial position or cash flows. On January 15, 1999, Brazil's central bank abandoned its support of the Brazilian real and allowed the exchange rate of the real to float, which resulted in a significant devaluation of the real. Based on current forecasts, the Company recognizes that the real could continue to depreciate during 1999. The Company expects that unsettled conditions for customers will continue during 1999 due to the economic conditions that existed prior to the devaluation and that pricing pressures may be increased due to the devaluation. The Company does not anticipate that the devaluation of the real during 1999 will have a material effect on the Company's results of operations, financial position or cash flows. 1997 vs 1996 Sales were $1,434 million in 1997, an increase of 10 percent over 1996 sales of $1,304 million. Changes in volume, mix and price increased sales 6 percent over 1996, while acquisitions resulted in a 5 percent gain. Effective July 1, 1997, the Company adopted the policy of reporting freight revenues as a component of sales rather than offsetting freight costs that are included as a component of cost of products sold. This resulted in recognizing additional revenues of approximately $28 million for the year 1997. Adverse foreign currency translation effects resulting from the stronger U.S. dollar compared to virtually all European and Asian currencies reduced 1997 sales by approximately $39 million or 3 percent. Reported sales for 1997 and 1996 were as follows:
1997 vs 1996 (in millions) 1997 1996 Increase - --------------------------- -------- -------- ------------- Water and Waste Treatment $ 470.6 $ 412.7 14% Process Chemicals 379.4 346.4 10 Europe 317.2 289.3 10 Latin America 113.1 107.3 5 Pacific 153.4 147.8 4 - --------------------------- -------- -------- Total $1,433.7 $1,303.5 10 - --------------------------- ======== ========
The Water and Waste Treatment Division reported a 14 percent gain over 1996, with slightly more than three-fourths of the increase attributable to sales by acquired companies and the aforementioned change in the reporting of freight revenues. Sales by the Process Chemicals Division rose 10 percent over 1996, with acquisitions and freight revenues representing slightly over one-third of the increase. Excluding freight, the General Industry and Pulp Technologies Groups reported double-digit gains while the Paper Group posted a more modest improvement. The Europe Division reported a 10 percent sales gain with most operations in the Division posting solid improvements in local currencies. Acquisitions and freight revenues had an 11 percent positive effect on Europe Division sales, but this was largely offset by a nearly 9 percent negative impact due to the stronger U.S. dollar compared to European currencies. The Latin America Division reported a 5 percent sales increase with double-digit gains posted by operations in Chile, Mexico and Venezuela. Pacific Division sales were up 4 percent over 1996 despite a nearly 10 percent negative translation impact resulting from the stronger U.S. dollar compared to Asian currencies. Double-digit gains in local currencies were reported by operations in China, Japan, Korea, Indonesia, the Philippines, Singapore/Malaysia and Thailand. Cost of products sold was 43.9 percent of sales for 1997, which reflects the classification of approximately $28 million of freight revenue as a component of sales rather than as an offset to cost of products sold. On a comparable basis, cost of products sold would have been 42.8 percent of sales as compared to 43.6 percent for 1996. This improvement was attributable to the Company's North American operations, and reflected lower raw material costs and tighter control of manufacturing expenses. Selling, administrative and research expenses were up $43 million or 8 percent over 1996, with acquisitions accounting for over two-thirds of this increase. Higher selling and service expenses in select markets account for most of the remaining change. The translation effect of changes in foreign currency exchange rates moderated the increase in expenses by approximately $15 million. Interest and other income for 1997 decreased $2 million from 1996. Unfavorable foreign currency exchange adjustments, primarily related to operations in the Pacific, accounted for most of the decrease. Interest expense of $15 million in 1997 was up $1 million over 1996, and reflected increased average borrowing levels to finance acquisitions and the repurchase of the Company's common stock. Nalco's equity in earnings of Nalco/Exxon was $28 million, a $3 million improvement over the $25 million reported in 1996. The increase reflected improved margins and continuing benefits of cost controls. Earnings from continuing operations as a percent to sales was 11.4 percent in 1997 compared to 11.2 percent for the year 1996. The Company recognized a one-time after-tax charge of $4.5 million during the fourth quarter of 1997, which was comprised of unamortized capitalized business process reengineering costs. (See Note 10). MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL CONDITION Total assets increased $210 million or 15 percent during 1998. Accounts receivable were up $35 million or 15 percent. Approximately two-thirds of this change was attributable to the accounts receivable of operations which were acquired by the Company in 1998 and the consolidation of Nalco-Chemserve. (See Note 11). The increase was also partly attributable to slightly higher days sales outstanding. Inventories were up $27 million or 29 percent over year-ago levels, with acquisitions accounting for slightly less than one-half of the increase. The $127 million increase in goodwill was the result of acquisitions made during 1998, partly offset by additional amortization and the translation effect of the stronger U.S. dollar in relation to various foreign currencies compared to the end of 1997. Total liabilities rose $277 million or 35 percent during 1998 mostly because of a net increase of $215 million in short-term and long-term debt which was used primarily to finance acquisitions and repurchases of the Company's common stock. Obligations associated with the Company's cost reduction program also contributed to the increase. Shareholders' equity decreased $67 million during 1998. Common stock repurchases of 1.2 million shares at a cost of $43 million were partly offset by treasury stock transactions for stock option, benefit and other plans totaling $21 million. Net earnings were $38 million compared to dividends totaling $77 million. Nalco's return on average shareholders' equity, excluding net cost reduction program charges of $117 million, was 22.7 percent in 1998, compared to the 24.7 percent in 1997 before the effect of the change in accounting principle. MANAGEMENT'S DISCUSSION AND ANALYSIS CASH FLOWS One of Nalco's most significant financial strengths is its ability to consistently generate strong cash flow from operations. Net cash provided by operating activities was $129 million in 1998, which was generated primarily from net earnings and noncash charges such as depreciation and amortization. This amount was slightly more than one-half of the average cash provided by operations over the previous five years, primarily because of the charge for the Company's cost reduction program. (See Note 3). Significant cash flow requirements in 1998 included business purchases of $149 million, capital investments of $115 million, dividends of $77 million, and $43 million for the reacquisition of common stock. In 1997, cash provided by operations was $214 million compared to the 1996 total of $229 million. The most significant investing activity in 1998 was the acquisition of several businesses that operate in the Company's core markets of water treatment and process chemicals, as well as additional interests in Nalco's subsidiary companies in Taiwan and India for a total of $149 million, net of cash acquired. (See Note 11). Investing activities related to the Company's Nalco/Exxon joint venture partnership included $10 million of borrowings provided by the joint venture. Over two-thirds of the 1998 capital investments of $115 million was attributable to investments in North America, which included $15 million for field equipment, $10 million for the Company's new global management information systems, $14 million for PORTA-FEED(R) units and $12 million for transportation equipment. The Company plans to continue to invest in internal growth in 1999 and it is expected that capital investments will approach $100 million. Investments in North America accounted for approximately two-thirds of the 1997 capital investments of $101 million, which included $16 million for field equipment, $9 million for PORTA-FEED units, the initial investment of $10 million for the implementation of the Company's new global management information systems and $9 million for transportation equipment. Other significant investing activities in 1997 included the acquisition of several businesses and an additional investment in the Company's subsidiary in Taiwan for a total of approximately $80 million, net of cash acquired. Borrowings from Nalco/Exxon totaled $12 million during 1997. Investing activities in 1996 totaled $110 million, which included $93 million for investments in property, plant and equipment. About 60% of the capital spending in 1996 was for investments in North America, and included $18 million for PORTA-FEED units, $10 million for transportation equipment and $8 million for manufacturing facilities in Argentina and the People's Republic of China. Other significant investing activities in 1996 included the acquisition of two businesses for $83 million, net of cash acquired. The Company received $41 million from the sale of the discontinued superabsorbent chemicals business, and $23 million was borrowed from Nalco/Exxon during 1996. Net financing activities of $102 million in 1998 included dividends paid on common stock of $66 million or $1.00 per share. Since the Company's founding in 1928, it has paid 282 consecutive quarterly dividends, and expects to continue its policy of paying regular cash dividends. The Company continued its stock repurchase program in 1998 by reacquiring 1.2 million shares of common stock at a cost of $43 million. In 1997, the Company reacquired 2.0 million shares of common stock at a cost of $76 million, and 0.7 million shares were repurchased for $26 million in 1996. Cash received from treasury stock issued under option, benefit and other plans totaled $14 million in 1998, $22 million in 1997 and $10 million in 1996. Management believes that the stock repurchase program represents a sound economic investment for Nalco's shareholders. Other financing activities in 1998 included proceeds from issuing $150 million of 6.25% unsecured notes which mature in May 2008. The notes were issued under a shelf registration statement filed with the Securities and Exchange Commission in April 1998, and up to $250 million of debt capacity remains available under the shelf registration statement. Borrowings under the Company's commercial paper program increased $65 million during 1998. Among the most significant financing activities in 1997 and 1996 were payments for cash dividends and the repurchase of common stock and a net increase in short-term and long-term debt during 1997 in the amount of $95 million. Management expects that internal growth in existing businesses will be financed principally from internally generated funds. For general purposes and to support the ESOP loans and the issuance of commercial paper, Nalco has a $350 million Revolving Credit Agreement with eleven banks. The credit arrangements were unused at December 31, 1998. (See Note 14). With the agreement of the banks, with two weeks notice, this credit can be increased to $600 million. In addition, most foreign subsidiaries have established short-term borrowing facilities in local currency and use them as the need arises. Net debt (short- term and long-term borrowings less cash and cash equivalents) totaled $541 million, $308 million and $245 million at December 31, 1998, 1997 and 1996, respectively. Management believes that Nalco's strong cash flow, together with its unused debt capacity, provides ample capability for the Company to pursue investment opportunities ranging from internal growth to acquisitions and stock repurchase. MANAGEMENT'S DISCUSSION AND ANALYSIS YEAR 2000 COMPLIANCE Many information and operational systems in use today may be unable to interpret dates subsequent to the year 1999 to the extent such systems allow only two digits to indicate the year. As a result, the inability of such systems to distinguish between the year 2000 and the year 1900 during this changeover could have adverse consequences on the operations of the Company, its constituent parts and the integrity of information processing. This potential problem is referred to as the "Y2K issue." The Company began addressing Y2K compliance primarily with a review of its internal information technology systems beginning in mid-1995. This led to a decision by the Company to acquire new systems software (primarily based on software purchased from SAP America, Inc. and other vendors), together with internal upgrades of existing systems. This worldwide business systems replacement and remediation project began in 1996. The major consideration for this upgrade was improvement of the Company's business systems. However, it was also intended to substantially improve the Company's ability to be Y2K compliant. New systems for business processing have been used in Canada since mid-1998, and the Company is on schedule to convert to these systems in the U.S. early in 1999. In Europe, Nalco has completed and tested an upgrade of its BPCS(R) business processing software, which provides full Y2K compliance. The Company's European operations have been running on this Y2K compliant system since April 1998. In Australia, Nalco is upgrading its VAX(R)-based business processing software to provide full Y2K compliance. The upgrade is expected to be completed, tested and implemented by the end of third quarter 1999. In Asia, Nalco is implementing a new version of its PC-based business processing software that addresses Y2K compliance, and completion is expected by mid-1999. In Latin America (except Venezuela), Nalco has modified or replaced its PC-based systems to ensure Y2K compliance. In Venezuela, Nalco is replacing its noncompliant BPCS software with a Y2K compliant PC-based system, and completion is expected by mid-1999. As Nalco addressed its internal information processing and business system needs, it also established a formalized structure for managing its Y2K issue. A Y2K compliance team was initiated in early 1998, consisting of a multidisciplined team cutting across all critical operating areas within the Company. This team is headed by a senior executive officer of the Company. At the same time, Nalco accelerated its focus on two critical areas: plant process control systems and equipment containing embedded chips provided to customers. Team leadership regularly reports to the Company's Board of Directors. Consequently, Nalco now has in place a global Company-wide program to address the Y2K issue. This effort encompasses software, hardware, electronic data interchange, networks, PCs, manufacturing and other facilities, and supplier and customer readiness, along with embedded chip issues both internally and at customer locations. Y2K compliance progress is tracked along functional lines for all areas at Nalco worldwide. The Company's plant process control systems have been inventoried and assessed. Where needed, remediation plans have been made and are being implemented, and these systems are expected to be Y2K compliant by the third quarter 1999 or earlier. Any of the Company's products that contain microprocessors or software or embedded chips have been or are being tested, and upgrades identified for those which are noncompliant. The Company is continuously in the process of assessing its customer sites for the Y2K compliance status of Nalco-provided equipment containing embedded chips. The Company continues to look at the Y2K compliance efforts of its equipment, service and material suppliers. It is surveying suppliers and other service providers to ensure that the supply chain is not interrupted. The Company has sent questionnaires to all of its significant suppliers regarding their Y2K compliance status, and is attempting to identify any problem areas with respect to them, particularly with respect to those suppliers identified as critical to ongoing operations. Those suppliers identified as "mission critical" are scheduled for additional in-person and/or on-site review and assessment. The Company believes that its area of greatest risk relates to significant suppliers failing to remediate their Y2K issues in a timely manner, which may cause supply interruption for its customers. The Company has strong relationships with certain significant suppliers at most of the locations in which it operates. These relationships may be material to some local operations and, in the aggregate, may be material to the Company. If a number of significant suppliers are not Y2K compliant, this could have a material adverse effect on the Company's results of operations, financial position or cash flows. The Company is dependent upon its customers for sales and cash flow. Interruptions in the operations of Nalco's customers resulting from their Y2K failures could result in reduced sales, increased inventory or receivable levels, and cash flow reductions. While these events are possible, Nalco has a sophisticated customer base which is wide and diverse, and the Company does not expect Y2K failures by its customers to have a material impact on the Company's consolidated financial position, results of operations or cash flows. The Company is currently looking at development of basic contingency plans to restore the material functions of each of its systems or activities in the event of a Y2K failure. It is expected that contingency plans would cover all material levels of activity within each business location and functional area. Management does not expect the financial impact of the Company's Y2K compliance efforts to be material to the Company's consolidated financial position, results of operations or cash flows. It is currently estimated that the aggregate cost of the Company's Y2K compliance efforts will not exceed $3 million. These costs are expensed as incurred and are funded through operating cash flows. These amounts do not include any costs associated with the implementation of contingency plans, which continue to be developed. The costs associated with the replacement of computer systems, hardware or equipment, substantially all of which would be capitalized, are not included in the above estimate. Replacement systems consist primarily of the SAP(TM) software, related hardware and implementation costs, and are estimated to have a total cost of over $50 million. The Company's share of SAP costs is estimated at approximately $40 million, with the balance being borne by the Company's joint venture, Nalco/Exxon. The Company's Y2K readiness program is an ongoing process and the estimates of costs and completion dates for various components of the Y2K program described above are subject to change. The estimates and conclusions herein contain forward-looking statements and are based on management's best estimates of future events. Risks to achieving material Y2K compliance include the availability of resources; the Company's ability to discover and correct potential Y2K-sensitive or critical problems which could have a serious impact on specific facilities of the Company or its customers; and the ability of suppliers, customers and those external agencies which may have a material impact on the Company to bring their systems into Y2K compliance. BPCS is a registered trademark of System Software Associates, Inc. VAX is a registered trademark of Digital Equipment Corporation. SAP is a trademark of SAP AG. MANAGEMENT'S DISCUSSION AND ANALYSIS EURO CONVERSION On January 1, 1999, eleven of fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies ("legacy currencies") and the European Union's common currency, the euro. As of that date, the euro was traded on currency exchanges and could be used in business transactions. The legacy currencies will remain legal tender in the participating countries for a transition period between January 1, 1999 and at least January 1, 2002 (but not later than July 1, 2002). Beginning in January 2002, new euro-denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation. The Company identified issues associated with the conversion to the euro, including, among others, the need to adapt computer and financial systems to accommodate euro-denominated transactions and the impact of one common currency on pricing. Since financial systems and processes currently accommodate multiple currencies, the Company does not anticipate system conversion costs to be material. Since the euro conversion may affect cross-border competition by creating cross-border price transparency, the Company will be assessing its pricing strategies to ensure it remains competitive in a broader European market. Based on information currently available and the Company's current assessment, Nalco does not expect that the conversion to the euro will have a material adverse effect on its business or financial condition. MANAGEMENT'S DISCUSSION AND ANALYSIS FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis and other sections of this Annual Report contain forward-looking statements that are based on current expectations, estimates and assumptions regarding the worldwide economy, technological innovation, competitive activity, interest rates, pricing, currency movements, and the development of certain markets. These statements are not guarantees of future results or events, and involve certain risks and uncertainties which are difficult to predict and many of which are beyond the control of the Company. Actual results and events could differ materially from those anticipated by the forward-looking statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION POLICY--Nalco's consolidated financial statements include the accounts of the parent company, its majority-owned subsidiaries and Nalco- Chemserve, in which Nalco has a controlling interest. All intercompany balances and transactions are eliminated. Investments in partnerships are reported on the equity method. Certain amounts in the prior years' financial statements and notes thereto have been reclassified to conform to the current year presentation. USE OF ESTIMATES--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK--Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Management believes the likelihood of incurring material losses due to concentration of credit risk is remote. The principal financial instruments subject to credit risk are as follows: Cash and cash equivalents, short-term marketable securities - Nalco has a formal policy of placing these instruments in investment grade companies or financial institutions and limiting the size of an investment with any single entity. Receivables - A large number of customers in diverse industries and geographies, as well as the practice of establishing reasonable credit lines, limits credit risk. The allowances for doubtful accounts are adequate to cover potential credit risk losses. Foreign exchange contracts and derivatives - The Company has formal policies which establish credit limits and investment grade credit criteria of "A" or better for all counterparties. CASH AND CASH EQUIVALENTS--Cash and cash equivalents include all cash balances and highly liquid investments with original maturities of three months or less. DERIVATIVES--Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Gains and losses related to qualifying hedges of firm commitments also are deferred and are recognized in income or as adjustments of carrying amounts when the hedged transaction occurs. FOREIGN CURRENCY TRANSLATION--The local currency has been designated as the functional currency in financial statements of companies which account for approximately 98 percent of total foreign subsidiary net assets at the end of 1998. These financial statements are translated at current and average exchange rates, with any resulting translation adjustments included in the currency translation adjustment account in shareholders' equity. The remaining subsidiaries operate in countries with highly inflationary environments and their statements are translated using a combination of current, average, and historical exchange rates, with the resulting translation impact included in results of operations. Transactions executed in different currencies resulting in exchange adjustments are included in results of operations. Foreign currency exchange losses, included in interest and other income in 1998, 1997 and 1996, were $1 million, $4 million and $2 million, respectively. INVENTORY VALUATION--Inventories are valued at the lower of cost or market. Approximately 73 percent of the inventories at the end of 1998 are valued using the average cost or first-in, first-out (FIFO) method. The remaining inventories are valued using the last-in, first-out (LIFO) method. If the FIFO method of accounting had been used for all inventories, reported inventory amounts would have been approximately $23 million and $24 million higher at December 31, 1998 and 1997, respectively. GOODWILL--Goodwill consists of costs in excess of the fair value of net tangible and identified intangible assets of acquired companies and is amortized over periods ranging from 15 years to 40 years using the straight-line method. When appropriate, the Company evaluates whether the projected earnings and undiscounted cash flows of each of the acquired companies is sufficient to recover the carrying value of the net investment, including goodwill, in order to determine if an impairment has occurred. Management is currently of the opinion that no such impairment exists. STOCK-BASED COMPENSATION--The Company recognizes stock-based compensation costs under the intrinsic value based method of accounting as prescribed by Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." INCOME TAXES--Income taxes are recognized during the year in which transactions enter into the determination of financial statement income, with deferred income taxes being provided for the tax effect of temporary differences between the carrying amount of assets and liabilities and their tax bases. Deferred income taxes are provided on the undistributed earnings of foreign subsidiaries and affiliated companies except to the extent such earnings are considered to be permanently reinvested in the subsidiary or affiliate. Where it is contemplated that earnings will be remitted, credit for foreign taxes already paid generally will offset applicable U.S. income taxes. In cases where foreign tax credits will not offset U.S. income taxes, appropriate provisions are included in the consolidated statements of earnings. Repatriation of permanently reinvested earnings would not materially increase the Company's tax liabilities. RETIREMENT PLANS--The cost of retirement plans is computed on the basis of accepted actuarial methods (using the projected unit credit method for the principal plan) and includes current service costs, amortization of increases in prior service costs over the expected future service of active participants as of the date such costs are first recognized, and amortization of the initial unrecognized net pension asset or liability on a straight-line basis over 18 years. The costs of health and life insurance postretirement benefits are accrued as earned. Annual expense represents a combination of interest and service cost provisions. Most postretirement benefits are not funded. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)--ESOP contribution expense is based upon non-level debt payments made by the ESOP to meet the plan funding requirements. RESEARCH AND DEVELOPMENT--Research and development costs ($43.7 million in 1998, $43.0 million in 1997, and $41.9 million in 1996) are charged to expense as incurred. NOTE 2--BUSINESS SEGMENT DATA Nalco is engaged in the worldwide manufacture and sale of highly specialized Service Chemical programs. This includes production and service related to the sale and application of chemicals and technology used in water treatment, pollution control, energy conservation, oil production and refining, steelmaking, papermaking, mining, and other industrial processes. The Company has determined that its reportable segments are those that are based on the Company's method of internal reporting. Effective January 1, 1998, the Company established a new sales and marketing organization based on the nature of the customer served, the product application, or the geographic location of the customer. This organization is comprised of the following reportable segments: INDUSTRIAL DIVISION--Serves the water and waste treatment needs of basic industry customers in North America, Europe, the Middle East and South Africa. SPECIALTY DIVISION--Serves the water and waste treatment needs of middle market customers in North America and Europe. PULP AND PAPER DIVISION--Serves the process chemical needs of pulp and paper customers in North America and Europe. PROCESS DIVISION--Serves the process chemical needs of all industries, except pulp and paper, worldwide. LATIN AMERICA DIVISION--Serves the water and waste treatment needs of all industries and the process chemical needs of the pulp and paper industries in South and Central America, the Caribbean and Mexico. PACIFIC DIVISION--Serves the water and waste treatment needs of all industries and the process chemical needs of the pulp and paper industries in the Pacific Rim. The accounting policies of the segments are the same as those described in "Note 1--Summary of Significant Accounting Policies." The Company evaluates the performance of its segments based on "direct contribution" (net sales, less cost of products sold, selling and research expenses directly attributable to each segment). There are no intersegment revenues. With the exception of net sales for the year ended December 31, 1997, the Company has not disclosed prior years' segment data on a comparative basis, because management found it impracticable to obtain the comparative data for prior years. Prior to 1998, the Company was comprised of one reportable segment. The following table presents net sales by reportable segment for the years ended December 31, 1998 and 1997:
(in millions) 1998 1997 - ---------------- -------- -------- Industrial $ 462.5 $ 408.8 Specialty 351.7 301.6 Pulp and Paper 358.4 333.8 Process 196.6 189.7 Latin America 85.8 82.7 Pacific 118.5 117.1 - ---------------- -------- -------- Total $1,573.5 $1,433.7 - ---------------- ======== ========
The following table presents direct contribution by reportable segment and reconciles the total segment direct contribution to earnings from continuing operations before income taxes for the year ended December 31, 1998:
(in millions) 1998 - --------------------------------------------------------- -------- Segment direct contribution: Industrial $ 115.5 Specialty 82.4 Pulp and Paper 85.7 Process 41.7 Latin America 16.9
Pacific 22.8 - --------------------------------------------------------- ------- Total segment direct contribution 365.0 Income (expenses) not allocated to segments: Unallocated operating costs and expenses (123.6) Cost reduction program (180.0) - --------------------------------------------------------- ------- Operating Earnings 61.4 Interest and other income 2.4 Interest expense (26.5) Equity in earnings of partnership 22.6 - --------------------------------------------------------- ------- Earnings from Continuing Operations Before Income Taxes $ 59.9 - --------------------------------------------------------- =======
Asset information by reportable segment has not been reported, since the Company does not produce such information internally. In addition, although depreciation expense is a component of each reportable segment's direct contribution, it is not discretely identifiable. The following table presents net sales for the United States and all other countries based on the location of the use of product:
(in millions) 1998 1997 1996 - ------------------------------------------------ -------- -------- -------- United States $ 900.1 $ 792.2 $ 705.6 Other 673.4 641.5 597.9 - ------------------------------------------------ -------- -------- -------- Total $1,573.5 $1,433.7 $1,303.5 - ------------------------------------------------ ======== ======== ========
The following table presents net property, plant and equipment located in the United States and all other countries:
(in millions) 1998 1997 1996 - ------------------------------------------------ -------- -------- -------- United States $ 335.8 $ 320.9 $ 327.5 Other 181.5 171.6 194.5 - ------------------------------------------------ -------- -------- -------- Total $ 517.3 $ 492.5 $ 522.0 - ------------------------------------------------ ======== ======== ========
Net sales and property, plant and equipment were not material in any individual country other than the United States. NOTE 3--COST REDUCTION PROGRAM In the fourth quarter 1998, management approved and began implementing a cost reduction program to cut its overall cost structure by $30 million annually. Virtually all of the Company's global operations were affected by this plan, including sales, marketing, manufacturing and support services. The program included redesigning, combining and streamlining operations to improve efficiency and customer focus. Approximately 500 positions were eliminated during the fourth quarter 1998, mainly as a result of a voluntary enhanced early retirement program, and an additional 100 positions are scheduled for elimination in early 1999. As a result of the cost reduction program, the Company recorded a pretax provision of $180 million, which included $127 million for pension costs and $19 million for other postretirement benefit costs associated with the early retirement program. The pension costs resulted in the Company making cash payments in the fourth quarter 1998 and early 1999 to the Company's principal U.S. retirement plan and directly to employees for obligations under a supplementary, non-qualified pension plan. The cost of other postretirement benefits represents a non-cash charge, which will be paid out in future years. (See Note 5). Also included in the provision for the cost reduction program were $21 million for severance and other termination payments; $7 million for legal and consulting fees, contract termination charges (principally leases), and other costs related to program; and $6 million for non-cash asset write-offs of abandoned property and equipment. Most cost reduction plan activities were completed by the end of 1998 and all are expected to be concluded by mid-1999. As of December 31, 1998, $127 million had been charged against the provision for the cost reduction program. The following talk sets forth the details of activitiy for 1998:
Balance at 1998 Cash Noncash December 31, (in millions) Provision Payments Charges 1998 - ------------------------------- --------- --------- -------- ------------ Pension benefits $127.6 $ (94.4) $ - $33.2 Other postretirement benefits 18.8 (18.8) - Termination Benefits 20.7 (7.4) - 13.3 Legal, consulting and other 7.4 (2.3) - 5.1 Asset write-offs 5.5 - (4.1) 1.4 - ------------------------------- ------ ------- ------ ----- Total $180.0 $(104.1) $(22.9) $53.0 - ------------------------------- ====== ======= ====== =====
Of the remaining balance of $53 million at December 31, 1998, $34 million was included in the statement of consolidated financial condition in other accrued expenses and $19 million in accrued expenses and $19 million in accrued pension benefits. NOTE 4--DISCONTINUED OPERATIONS In October 1996, the Company completed the sale of its discontinued superabsorbent chemicals business. The gain on the sale was $3 million, net of income taxes of $1 million. The results of the superabsorbent chemicals business have been classified as discontinued operations in the accompanying financial statements. Sales from the discontinued operation, which are excluded from consolidated sales, amounted to $63 million in 1996. Excluding the aforementioned gain on the sale, net earnings from discontinued operations totaled $6 million in 1996 which included the pretax operating earnings of the discontinued operations, less applicable income taxes of $4 million. The effective income tax rate for discontinued operations differs from the federal statutory rate primarily because of state income taxes, net of federal tax benefit. NOTE 5--PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The Company has several noncontributory defined benefit pension plans covering most employees in the United States and those with six foreign subsidiaries. The principal U.S. plan represents approximately 63% of the benefit obligation and 70% of the total market value of plan assets. The Company also provides a supplementary, non-qualified, unfunded plan for U.S. employees whose pension benefits exceed ERISA limitations. In addition, the Company has defined benefit postretirement plans that provide medical, dental and life insurance benefits for substantially all U.S. retirees and eligible dependents. The Company retains the right to change or terminate these benefits. As part of the Company's plan to reduce future operating expenses, a voluntary enhanced early retirement program was offered in the fourth quarter 1998. (See Note 3). This program resulted in charges totaling $146 million for special termination benefits, settlements and curtailments, all of which have been included in the Company's $180 million charge for the cost reduction program. No contributions had been made by the Company to its principal U.S. plan during the period from 1985 to 1997. However, as a result of the early retirement program, the Company contributed $72 million to the plan in 1998, and expects to contribute an additional $30 million in 1999. The Company also made payments totaling $36 million for the settlement of obligations under the supplementary, non-qualified plan. The following table details the changes in the funded status of defined benefit pension and other postretirement benefit plans, and sets forth amounts recognized and not recognized in the statements of consolidated financial condition:
Pension Benefits Other Benefits ------------------ ------------------ (in millions) 1998 1997 1998 1997 - -------------------------------------------------------------------------------------- -------- -------- -------- -------- Change in benefit obligation Benefit obligation at beginning of year $ 370.4 $338.3 $ 77.8 $ 64.9 Service cost 16.7 15.0 2.3 2.1 Interest cost 28.2 26.8 5.8 5.5 Participant contributions 0.7 0.9 0.4 0.3 Plan amendments 1.2 1.9 - - Actuarial loss 135.9 25.4 5.3 9.0 Benefits paid (50.9) (28.9) (3.7) (4.0) Special termination benefits 59.2 - 22.9 - Settlements (174.7) - - - Curtailments (14.0) - (4.1) - Foreign currency exchange rate changes 2.2 (9.0) - - - ----------------------------------------------------------------------------------------------------------------------------- Benefit obligation at end of year 374.9 370.4 106.7 77.8 - ----------------------------------------------------------------------------------------------------------------------------- Change in plan assets Fair value of plan assets at beginning of year 340.2 322.8 - - Actual return on plan assets 31.8 41.7 - - Employer contributions 119.7 5.7 3.3 3.7 Participant contributions 0.7 0.9 0.4 0.3 Benefits paid (225.6) (28.9) (3.7) (4.0) Foreign currency exchange rate changes 0.1 (2.0) - - - ----------------------------------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year 266.9 340.2 - - - ----------------------------------------------------------------------------------------------------------------------------- Funded status (108.0) (30.2) (106.7) (77.8) Unrecognized net actuarial (gains) losses 69.6 18.0 (20.2) (26.8) Unrecognized prior service costs 9.7 16.1 - - Unrecognized net transition asset (8.9) (16.6) - - - ----------------------------------------------------------------------------------------------------------------------------- Net amount recognized $ (37.6) $(12.7) $(126.9) $(104.6) - ----------------------------------------------------------------------------------------===================================== Amounts recognized in the statements of consolidated financial condition consist of: Pension Benefits Other Benefits ------------------ ----------------- (in millions) 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Prepaid benefit cost $ 2.5 $ 8.9 $ - $ - Other accrued expenses - - (3.9) (3.9) Accrued benefit liability (63.2) (40.8) (123.0) (100.7) Intangible asset 2.7 7.3 - - Accumulated other comprehensive income 20.4 11.9 - - ------------------------------------- Net amount recognized $ (37.6) $(12.7) $(126.9) $(104.6) =====================================
The projected benefit obligation (PBO), accumulated benefit obligation (ABO) and fair value of plan assets for defined benefit pension plans with ABOs in excess of plan assets were $62 million, $52 million and $14 million, respectively, at December 31, 1998. At December 31, 1997, the PBO and ABO for such plans were $44 million and $35 million, respectively, and none of the plans held assets. Net pension and other postretirement benefit expense for all defined benefit plans was comprised of:
Pension Benefits Other Benefits ------------------------- ----------------------- (in millions) 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------- Service cost $ 16.7 $ 15.0 $ 16.1 $ 2.3 $ 2.1 $ 2.2 Interest cost 28.2 26.8 25.6 5.8 5.5 5.1 Expected return on plan assets (30.1) (28.6) (27.7) - - - Amortization of prior service cost 1.6 2.1 2.1 - - - Amortization of net transition asset (2.9) (2.9) (2.9) - - - Recognized net actuarial (gain) loss 1.5 1.2 1.7 (1.3) (1.7) (1.5) Special termination benefits 64.2 0.2 - 22.9 - - Settlement charge 61.9 - - - - - Curtailment charge (credit) 1.5 - - (4.1) - - - ------------------------------------------------------------------------------------------ Net benefit expense $142.6 $ 13.8 $ 14.9 $25.6 $ 5.9 $ 5.8 - ----------------------------------------==================================================
As previously noted, the 1998 amounts in the table above include $146 million for special termination benefits, settlements and curtailments resulting from the early retirement program offered to employees in the fourth quarter 1998. Of that amount, $127 million was attributable to pension benefits and $19 million was attributable to other postretirement benefits. The $146 million charge was reported as a component of the $180 million cost reduction program expense. The assumptions used for the U.S. defined benefit plans as of the end of the last three years were as follows:
Pension Benefits Other Benefits ----------------------- ----------------------- 1998 1997 1996 1998 1997 1996 ------------------------------------------------ Discount rates 6.75% 7.5% 8.0% 6.75% 7.5% 8.0% Rates of increase in compensation levels 4.0 4.0 4.0 4.0 4.0 4.0 Rates of return on plan assets 9.5 9.5 9.5 - - - - ------------------------------------------------------------------------------------------
The assumptions used for the foreign defined benefit pension plans as of the end of the last three years were as follows:
1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- Discount rates 5.0 - 6.5% 6.0 - 7.25% 6.5 - 9.0% Rates of increase in compensation levels 3.0 - 5.0 3.0 - 6.0 4.0 - 6.25 Rates of return on plan assets 5.5 - 7.25 6.0 - 8.75 6.5 - 9.75 - ----------------------------------------------------------------------------------------------------------------------------
The Company has assumed a health care cost trend rate of 6.5% for 1999, decreasing ratably to 5.0% in 2002 and thereafter. A one-percentage-point change in assumed health care cost trend rates would have the following effects on 1998 service and interest costs and the accumulated postretirement benefit obligation at December 31, 1998:
One-Percentage-Point (in millions) Increase Decrease - ------------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components $ 1.2 $ (1.0) Effect on postretirement benefit obligation 12.5 (11.2) - -------------------------------------------------------------------------------------------------------------
NOTE 6--EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) Nalco's ESOP gives most United States employees an additional opportunity to share in the ownership of the Company's stock. Preferred shares are allocated to eligible employees based on a percentage of prefix earnings. Selected information about the ESOP is as follows:
(dollars in millions, shares in thousands) 1998 1997 1996 - -------------------------------------------------------------------- Preferred stock dividends $ 14.7 $ 15.0 $ 15.3 Interest expense on ESOP debt $ 7.8 $ 8.7 $ 9.4 ESOP benefit expense $ - $ 4.1 $ 3.2 ESOP contribution payments $ 4.2 $ 5.5 $ 5.1 Preferred shares at year end: Allocated 152.4 140.0 124.2 Committed-to-be-released 12.2 22.9 24.9 Suspense 208.7 220.9 243.8 - --------------------------------------------------------------------
No provision was recorded for ESOP benefit expense in 1998 because the expected debt service requirements of the ESOP will not require any contributions by the Company. NOTE 7--STOCK OPTION AND PERFORMANCE PLANS Nalco's Employee Stock Compensation Plan and its 1990 Stock Option Plan for key management employees authorized the granting of stock options for the purchase of up to 8,000,000 shares and 6,000,000 shares, respectively, of Nalco common stock. The Company's 1982 Stock Option Plan authorized the granting of either incentive stock options or non-qualified options for the purchase of up to 6,000,000 shares of Nalco's common stock. The option price under these plans cannot be less than the fair market value on the date of grant. Options granted since 1989 generally become exercisable ratably over the three years following the grant date, and will expire ten years after the date granted. Options granted prior to 1989 had a term of ten years, and were exercisable upon grant. Options may be exercised in whole or in part for cash, shares of common stock, or a combination thereof. The 1990 Stock Option Plan for Non-Employee Directors authorizes the granting of stock options to outside directors for the purchase of up to 500,000 common shares. The option price under the plan cannot be less than the fair market value on the date of the grant. These options become exercisable upon grant, and expire ten years from the grant date. Information regarding these stock option plans for 1998, 1997 and 1996 is as follows:
1998 1997 1996 ------------------------------ ------------------------------------ ---------------------------------- Weighted-Average Weighted-Average Weighted-Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------------ ---------------- ----------------- ---------------- ---------------- --------------- At the beginning of the year 7,577,371 $33.69 7,473,363 $32.77 6,657,723 $32.17 Granted 3,513,900 $37.97 1,002,700 $36.48 1,595,200 $31.64 Exercised (494,300) $29.23 (754,492) $28.17 (500,460) $20.54 Expired or cancelled (687,900) $38.13 (144,200) $34.04 (279,100) $34.04 At the end of the year 9,909,071 $35.13 7,577,371 $33.69 7,473,363 $32.77 Options exercisable at end of year 6,637,813 $33.67 5,231,142 $33.34 4,574,896 $32.33 Weighted-average fair value of options granted during the year $7.94 $9.02 $6.53
The following table summarizes information about fixed stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ---------------------------------------------------- ------------------------------ Weighted-Average Range of Number Remaining Weighted-Average Number Weighted-Average Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price - ---------------- ----------- ---------------- ---------------- ----------- --------------- $20.16 to $24.25 298,500 0.4 yrs. $20.92 298,500 $20.92 $29.56 to $31.97 1,794,050 7.8 $31.32 1,520,428 $31.25 $32.69 to $35.75 2,705,200 6.0 $34.46 2,705,200 $34.46 $36.00 to $39.94 5,111,321 7.0 $37.65 2,113,685 $36.20 --------- --------- $20.16 to $39.94 9,909,071 6.7 $35.13 6,637,813 $33.67 ========= =========
The Company applies APB 25 and related Interpretations in accounting for the aforementioned stock plans. Accordingly, no compensation cost has been recognized for its fixed stock option plans while compensation expense has been recognized for its compensatory plans. Had compensation cost for the Company's fixed stock option plans been determined based on the fair value based method, as defined in Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
(in millions, except per share data) 1998 1997 1996 - ------------------------------------------------------------------------------- Net earnings As reported $37.9 $158.9 $154.5 Pro forma 28.9 151.4 146.1 - ------------------------------------------------------------------------------- Earnings per share Basic As reported $0.40 $ 2.21 $ 2.13 Pro forma 0.26 2.10 2.00 Diluted As reported 0.40 2.04 1.97 Pro forma 0.26 1.94 1.86 - -------------------------------------------------------------------------------
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: dividend yield of 2.5 percent, 2.8 percent and 3.2 percent; expected volatility of 16.2 percent, 20.0 percent and 20.7 percent; risk-free interest rate of 5.4 percent, 6.3 percent and 6.5 percent; and expected lives of 6.3, 6.3 and 6.6 years. The effects of applying SFAS 123 in the above pro forma disclosures are not indicative of future amounts as they do not include the effects of awards granted prior to 1995, some of which would have had income statement effects in 1996 and 1997 due to the three-year vesting period associated with the fixed stock option awards. Additionally, future amounts are likely to be affected by the number of grants awarded since additional awards are generally expected to be made at varying amounts. In 1996, the Performance Share Plan for designated officers and other key executives was amended and reapproved by the shareholders. It provides for the annual assignment of performance shares which are contingent upon future earnings growth of the Company. Performance awards shall be paid half in cash and half in the Company's common stock, except that any payments made after 1,000,000 shares have been issued shall be made only in cash and only with respect to contingent performance shares already assigned. The cash portion of an award shall be paid after determination of the award; however, the right to receive common shares shall not vest to a participant until three years after the end of a performance period. Charges to earnings for compensatory stock related plans were not significant in 1998 and totaled $3 million in 1997 and $2 million in 1996. NOTE 8--INCOME TAXES The sources of earnings from continuing operations before income taxes were as follows:
(in millions) 1998 1997 1996 - --------------- ------ ------ ------ Domestic $14.3 $185.7 $168.6 Foreign 45.6 70.6 60.8 ----- ------ ------ Total $59.9 $256.3 $229.4 ===== ====== ======
The components of income tax provisions (benefits) attributable to earnings from continuing operations are summarized as follows:
(in millions) 1998 1997 1996 - --------------- ------- ------ ------ Current Federal $ 18.1 $58.2 $50.9 State 5.3 11.1 10.4 Foreign 21.9 25.6 20.6 ------ ----- ----- 45.3 94.9 81.9 ------ ----- ----- Deferred Federal (18.6) (3.8) (3.0) State (3.1) (0.6) (0.1) Foreign (1.6) 2.4 4.7 ------ ----- ----- (23.3) (2.0) 1.6 ------ ----- ----- Total $ 22.0 $92.9 $83.5 ====== ===== =====
Current foreign taxes listed above include taxes withheld by foreign governments on distributions from subsidiaries and affiliates (principally dividends and service fees). Nalco made income tax payments of $74 million, $103 million and $84 million during 1998, 1997 and 1996, respectively. The effective income tax rate varies from the federal statutory rate because of the factors indicated below:
1998 1997 1996 ----- -------- -------- Statutory U.S. federal tax rate 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit 2.7 2.6 2.9 Other (1.0) (1.4) (1.5) ----- ------- ------- Effective tax rate 36.7% 36.2% 36.4% ===== ====== ======
Details of the 1998 and 1997 deferred tax assets and liabilities are as follows:
(in millions) 1998 1997 - ---------------------------------------------------------------------------------- ------- ------- Deferred tax assets: Postretirement benefits $ (51.5) $(42.5) Pension benefits (20.4) (3.6) Other (48.8) (42.5) ------- ------- Total (120.7) (88.6) ------- -------
Deferred tax liabilities: Depreciation 60.6 57.9 Leveraged lease investments 28.6 29.2 Other 29.5 26.5 ------- ------- Total 118.7 113.6 ------- ------- Net deferred tax (asset) liability $ (2.0) $ 25.0 ======== ======= Included in: Prepaid expenses, taxes and other current assets $ (7.8) $ (6.2) Miscellaneous other assets (7.9) (5.8) Income taxes (1.9) (0.2) Deferred income taxes 15.6 37.2 ------- ------- Net deferred tax (asset) liability $ (2.0) $ 25.0 ======== =======
NOTE 9--EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing net earnings (after deducting preferred stock dividends, net of income taxes) by the weighted- average number of common shares outstanding during the year. Diluted EPS is based upon the weighted-average number of common shares and dilutive potential common shares outstanding, plus the weighted average number of common shares resulting from the assumed conversion of the Series B ESOP Convertible Preferred Stock (preferred stock). Earnings for purposes of computing diluted EPS are reduced for additional ESOP debt service expense resulting from the assumed replacement of preferred stock dividends with common stock dividends, net of related tax benefits. At December 31, 1998, there were 373,195 shares of preferred stock outstanding which were convertible to approximately 7.5 million common shares. The preferred stock was not included in the computation of diluted EPS for 1998 since it would have resulted in an antidilutive effect. The following table reconciles the numerators and denominators of the basic and diluted EPS computations for earnings from continuing operations:
(dollars in millions, shares in thousands) 1998 1997 1996 - --------------------------------------------------------------------------------- Earnings from continuing operations $ 37.9 $ 163.4 $ 145.9 Dividends on preferred stock, net of taxes (11.5) (11.5) (11.3) - --------------------------------------------------------------------------------- Earnings from continuing operations available to common shareholders used in basic EPS 26.4 151.9 134.6 Assumed conversion of preferred stock - 11.5 11.3 Additional ESOP expense resulting from assumed conversion of preferred stock, net of taxes - (4.5) (4.5) Income tax adjustment on assumed common dividends - (1.0) (0.9) - -------------------------------------------------------------------------------- Earnings from continuing operations available to common shareholders used in diluted EPS $ 26.4 $ 157.9 $ 140.5 - -----------------------------------------------------============================ Average shares outstanding used in basic EPS 65,847 66,700 67,280 Effect of dilutive securities: Assumed conversion of preferred stock - 7,760 7,930 Stock options and contingently issuable shares 421 805 319 - --------------------------------------------------------------------------------- Average shares outstanding used in diluted EPS 66,268 75,265 75,529 - -----------------------------------------------------============================
The following options to purchase shares of common stock were outstanding during each year, but were not included in the computation of diluted EPS because the exercise price was greater than the average market price:
1998 1997 1996 - --------------------------------------------------------------------------------- Number of options (thousands) 5,357 - 3,139 Weighted-average exercise price $37.56 $ - $35.52 - ---------------------------------------------------------------------------------
NOTE 10 -- ACCOUNTING CHANGE In November 1997, the Emerging Issues Task Force of the Financial Accounting Standards Board reached a consensus on Issue 97-13 (EITF 97-13), "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation." The consensus clarified the accounting for third-party and internally generated costs associated with projects that combine business process reengineering activities and information technology transformation, requiring that such costs be expensed as incurred. Additionally, the transition provisions of EITF 97-13 required any unamortized previously capitalized costs for business process reengineering activities to be written off in the quarter that contained November 20, 1997 and to be reported as a cumulative effect of a change in accounting principle. As a result of EITF 97-13, the Company recorded a noncash pretax charge of $7 million ($4.5 million after tax, or 6 cents per share on a diluted basis) in 1997, which was comprised of unamortized capitalized business process reengineering costs. NOTE 11--ACQUISITIONS The Company acquired seventeen businesses in 1998, eight businesses in 1997 and two businesses in 1996 that operate in Nalco's core markets of water treatment and process chemicals. Each of the acquisitions was accounted for as a purchase and, accordingly, the operating results of each acquired business was included in the consolidated financial results of the Company from its respective acquisition date. In addition, during 1998 the Company increased its investments in Taiwan Nalco Chemical Co. Ltd. from 79 percent to 82 percent and Nalco Chemical India, Ltd. from 65 percent to 80 percent. During 1997 the Company increased its investment in Taiwan Nalco Chemical Co. from 55 percent to 79 percent. The combined purchase price of these acquisitions, net of cash acquired, was approximately $149 million in 1998, $80 million in 1997 and $83 million in 1996. On a preliminary basis, the purchase price exceeded the fair value of the net tangible assets of those businesses which were acquired during 1998 by about $132 million which was allocated to goodwill and other intangible assets. The Company does not anticipate that the final purchase allocations will differ significantly from the preliminary purchase price allocations recorded. The purchase price exceeded the fair value of the net tangible assets which were acquired during 1997 and 1996 by $70 million and $75 million, respectively. Effective January 1998, the Company merged its South African affiliate company with the water treatment interests of Chemical Services Limited, South Africa's largest specialty chemicals company, to form Nalco-Chemserve. In connection with the merger, Nalco obtained a controlling interest in Nalco-Chemserve and, accordingly, has consolidated the results of Nalco-Chemserve from January 1, 1998. The pro forma impact as if these acquisitions had occurred at the beginning of the respective years is not significant. NOTE 12--INVESTMENT IN AND ADVANCES TO PARTNERSHIP The Company's investment in partnership consists of its 60 percent interest in Nalco/Exxon, a joint venture partnership which was formed in 1994. The Company's investment in Nalco/Exxon of $125 million at December 31, 1998 included $45 million in demand notes payable to Nalco/Exxon. There were $35 million of demand notes payable to Nalco/Exxon at December 31, 1997. All significant management decisions of the joint venture require agreement by both the Company and Exxon. In addition, certain provisions of the joint venture agreement provide Exxon with an option to cause Nalco/Exxon to redeem a portion of the Company's interest in Nalco/Exxon such that subsequent to such redemption, the Company and Exxon shall share equally in the results of the joint venture. As a result of the Company not exercising control over Nalco/Exxon, its investment in the joint venture is accounted for by the equity method. The following table summarizes the Company's equity in earnings of Nalco/Exxon and distributions from the partnership for the years 1998, 1997 and 1996:
(in millions) 1998 1997 1996 - ----------------------------------------- ------- ------- ------- Nalco/Exxon: Net sales $487.8 $455.6 $436.6 Earnings before income taxes 42.7 51.1 42.4 Net income 34.6 42.6 35.7 Nalco's equity interest 60% 60% 60% ------ ------ ------ Nalco's equity in net income 20.8 25.6 21.4 Amortization and income preference, net 1.8 2.6 3.1 ------ ------ ------ Equity in earnings of partnership $ 22.6 $ 28.2 $ 24.5 ====== ====== ====== Distributions received from partnership $ 10.2 $ 9.2 $ 8.4 ====== ====== ======
In the fourth quarter 1998, Nalco/Exxon began implementing a cost reduction program which included provisions for employee terminations and impaired assets. The Company's equity portion of Nalco/Exxon's cost reduction program was over $2 million. The Company's investment in Nalco/Exxon at December 31, 1998 included $7 million for the net excess of the Company's investment over its equity in the joint venture's net assets which is being amortized to equity earnings over the life of the related assets. In addition, the Company received a 2 percent, 4 percent and 6 percent earnings preference in 1998, 1997 and 1996, respectively, which has been included in equity earnings. Condensed balance sheet information for the Nalco/Exxon joint venture at December 31, 1998 and 1997 was as follows:
(in millions) 1998 1997 - ------------------------ ------ ------ Current assets $154.9 $164.7 Noncurrent assets 223.3 203.8 Current liabilities 83.2 89.9 Noncurrent liabilities 31.5 33.7 - ------------------------ ------ ------
The Company has an agreement with Nalco/Exxon to provide certain administrative services to the partnership. Fees earned by the Company in 1998, 1997 and 1996 were $14 million, $14 million and $15 million, respectively. In the normal course of business, the Company supplies Nalco/Exxon with certain products, and purchases certain products from Nalco/Exxon. These transactions are generally at cost and were not significant in 1998, 1997 or 1996. NOTE 13--PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment (including major improvements) are recorded at cost. Depreciation of buildings and equipment is calculated over their estimated useful lives generally using the straight-line method. The estimated useful lives of the major classes of depreciable assets are as follows: buildings 15 to 40 years; equipment 3 to 15 years. Property, plant and equipment consists of the following:
(in millions) 1998 1997 - ----------------------------------- --------- --------- Land $ 35.5 $ 34.8 Buildings 208.7 199.4 Equipment 980.9 901.0 -------- -------- 1,225.1 1,135.2 Allowances for depreciation (707.8) (642.7) -------- -------- Net property, plant and equipment $ 517.3 $ 492.5 ======== ========
NOTE 14--SHORT-TERM DEBT Short-term debt consists of the following:
(in millions) 1998 1997 - -------------------------------------- ------ ------ Notes payable $10.8 $18.9 Current maturities of long-term debt 5.0 3.2 Commercial paper borrowings 60.0 - ----- ----- Total $75.8 $22.1 ===== =====
The weighted-average interest rate on short-term debt was 5.8 percent and 9.1 percent at December 31, 1998 and 1997, respectively. For general purposes and to support the ESOP loans and the issuance of commercial paper, Nalco has a $350 million Revolving Credit Agreement with eleven banks. This agreement is structured as a four-year revolving credit. Borrowings under the agreement are at rates which, at Nalco's option, vary with the prime rate, CD rate, LIBOR or money market rates. The credit line carries a facility fee of .08 percent. The credit arrangements were unused at December 31, 1998. NOTE 15--LONG-TERM DEBT Long-term debt consists of the following:
(in millions) 1998 1997 - ---------------------------------------------- ESOP loans $140.5 $151.1 Commercial paper borrowings 148.0 143.0 Unsecured notes, due 2008 149.5 - Other 63.2 44.4 ------ ------ 501.2 338.5 Less current portion (5.0) (3.2) ------ ------ Total $496.2 $335.3 ====== ======
In 1989, the ESOP borrowed $200 million to purchase preferred stock from the Company. Nalco borrowed $66 million which was subsequently loaned to the ESOP, and guaranteed the balance of $134 million. Borrowings related to the ESOP are reflected as long-term debt with a corresponding reduction of shareholders' equity (unearned ESOP compensation). The ESOP is repaying the loans and interest over a projected 20-year period ending December 31, 2008 using Company contributions and dividends from preferred stock. As the principal amount of the borrowings is repaid, the debt and the unearned ESOP compensation are being reduced. At December 31, 1998, $88 million of the ESOP borrowings are variable rate notes which are presently remarketed on a monthly basis with a final maturity on December 31, 2008. Any notes which cannot be successfully remarketed will be purchased by the Company or one of its subsidiaries. The Company entered into an interest rate swap agreement which effectively converted the $88 million of variable rate notes into fixed-rate debt of 7.3 percent. The notional value of the swap agreement decreased to $43 million in 1998 with final maturity in 1999. The remaining borrowings are comprised of a $38 million variable rate loan which matures in 2008 and a $15 million loan with a fixed rate of 8.1 percent and a final maturity in the year 2000. The weighted-average interest rate of all ESOP loans was 6.1 percent at December 31, 1998. Commercial paper borrowings of $148 million and $143 million at December 31, 1998 and 1997, respectively, were classified as long-term based on the Company's intent to refinance these borrowings on a long-term basis. Interest rates on the commercial paper outstanding at December 31, 1998 ranged from 4.8 percent to 5.2 percent with a weighted-average rate of 5.0 percent. In May 1998, the Company issued $150 million of 6.25% unsecured notes under a shelf registration statement filed with the Securities and Exchange Commission in April 1998. The notes mature in May 2008. Notes up to $250 million remain available under the shelf registration statement. The $63 million in other long-term debt includes $36 million owed by a foreign subsidiary at a variable interest rate (an effective rate of 5.1% at December 31, 1998). The remaining $27 million was borrowed by various foreign subsidiaries at interest rates ranging from 3.6 percent to 21.2 percent with a weighted-average rate of 8.5 percent. Interest paid by Nalco was $25 million, $14 million and $14 million in 1998, 1997 and 1996, respectively. The following table presents the projected annual maturities of long-term debt for the next five years after 1998: (in millions) - ----------------------- 1999 $ 5.0 2000 10.4 2001 - 2002 - 2003 - - ----------------------- The amounts above include approximately $15 million in maturities related to the ESOP loans. NOTE 16--SHAREHOLDERS' EQUITY Information on preferred and common shares is summarized in the following table:
(dollars in millions, except per share amounts) 1998 1997 - -------------------------------------------------------------- Preferred stock, par value $1.00 per share; authorized 2,000,000 shares; Series B ESOP Convertible Preferred Stock--outstanding; 373,195 shares-1998 and 383,774 shares-1997 $ 0.4 $ 0.4 Series C Junior Participating Preferred Stock--none issued Common stock, par value $.1875 per share; authorized 200,000,000 shares; issued 80,287,568 shares 15.1 15.1 - ---------------------------------------------------------------
There were 14,758,440 shares and 14,251,003 shares held in treasury at December 31, 1998 and 1997, respectively. In 1996, Nalco's Board of Directors authorized the repurchase of up to 3 million shares of the Company's common stock. During 1998, the repurchase of those shares was completed and the Board of Directors authorized the repurchase of an additional 3 million shares. The Company issued 415,800 shares of preferred stock to the ESOP in 1989 for $481.00 per share, the preference price upon liquidation. This preferred stock ranks senior to Series C Junior Participating Preferred Stock and common stock as to the payment of dividends and the distribution of assets on liquidation, dissolution and winding up of Nalco. Dividends on each share of preferred stock are cumulative and will be paid quarterly at the rate of 8 percent or $38.48 per annum. Full conversion of preferred shares occurs upon a holder's retirement or separation of service from the Company, and effective in 1999 participants in the ESOP may partially convert their stock upon reaching age 55. The conversion ratio and number of votes per share of preferred stock are subject to adjustment under certain conditions. The preferred stock entitles a participant to 20 votes per share, voting together with the holders of common stock, and initially was convertible into 20 shares of common stock. The shares of preferred stock are redeemable by Nalco at $481.00 per share, and may be required to be redeemed by Nalco under certain circumstances. During 1998, 10,579 preferred shares were converted to 213,484 common shares of Nalco stock. During 1997 and 1996, 9,077 and 6,572 preferred shares were converted to 182,417 and 132,179 common shares, respectively. Approximately 8,000,000 common shares have been reserved for the conversion of preferred stock. In 1996, the Board of Directors approved a Shareholder Rights Plan and declared a dividend distribution of one Preferred Share Purchase Right (Right) for each outstanding share of common stock. The Rights are not exercisable or transferable apart from the common stock until a person or group has acquired, or makes a tender offer for 15 percent or more of the common stock. If Nalco is acquired in a merger or other business combination transaction or 50 percent or more of Nalco's assets or earning power are sold, each Right other than that held by the acquiring party will entitle the holder to receive, upon exercise at a price of $125, subject to adjustment, common stock of either Nalco or the acquiring company having a value equal to two times that price. The Rights are redeemable at $.01 each at any time before a 15 percent or greater position has been acquired, and expire on August 31, 2006. In connection with the distribution of the 1996 Rights, the Company's Series A Junior Participating Preferred Stock was cancelled and its Series C Junior Participating Preferred Stock was authorized. NOTE 17--FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Nalco has limited involvement with derivative financial instruments and does not trade them. The Company does use derivatives to fix the cost of issuing debt and to manage well-defined interest rate and foreign exchange exposures. Notional Amounts and Credit Exposures of Derivatives The notional amounts of derivatives summarized below do not represent amounts exchanged by the parties and, thus, are not a measure of the exposure of the Company through its use of derivatives. The amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivatives, which relate primarily to interest rates and foreign exchange rates. The Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings. Interest Rate Risk Management Interest rate swap agreements are used to reduce the potential impact of increases in interest rates on floating rate long-term debt. The Company was a counterparty to one interest rate swap with a notional value of $43 million at December 31, 1998, and $51 million at December 31, 1997. This swap fixes interest payments on a corresponding amount of floating rate ESOP notes at 7.3 percent until February 1999. The average interest rate received on this interest rate swap was 4.6 percent in both 1998 and 1997. Foreign Exchange Risk Management The Company enters into various types of foreign exchange contracts in managing its intercompany foreign exchange risk, including currency swaps, forward exchange contracts and option contracts. The Company's currency swap agreements were designed to hedge foreign currency intercompany loans that have maturities up to seven years. Gains and losses related to these swaps are offset with gains and losses on the underlying foreign currency loans. Forward exchange and option contracts are used to hedge various intercompany transactions with foreign subsidiaries and selected net asset exposures. These contracts usually have maturities of six months, but occasionally may have maturities of up to eighteen months. The Company had foreign exchange contracts with notional values of $51 million and $64 million at December 31, 1998 and 1997, respectively. Deferred realized and unrealized gains and losses from firm foreign currency commitments, based on dealer-quoted prices, are included in the statements of consolidated financial condition as either miscellaneous other assets or accounts payable. They are recognized in earnings as part of the underlying transaction when it is recognized. There was no net deferred realized and unrealized gain or loss at December 31, 1998 or December 31, 1997. NOTE 18--FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and fair values of the Company's financial instruments at December 31, 1998 and 1997:
1998 1997 --------------------------------- Carrying Fair Carrying Fair (in millions) Amount Value Amount Value - ------------------------------------------------------------------ Nonderivatives: Cash and cash equivalents $ 31.2 $ 31.2 $ 49.7 $ 49.7 Short-term debt 75.8 75.8 22.1 22.1 Long-term debt 496.2 502.8 335.3 336.0 Derivatives: Miscellaneous other assets 3.8 1.6 7.0 4.6 - ------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair values of financial instruments: Cash and cash equivalents - The carrying amount approximates fair value because of the short-term maturities of such instruments. Short-term debt - The carrying amount approximates fair value because of the short-term maturities of such instruments. Long-term debt - The carrying amount of term borrowings at variable interest rates approximates fair value. The fair value of the Company's fixed-rate ESOP borrowings was estimated using discounted cash flow analyses, based on the Company's current borrowing rates for similar types of borrowing arrangements. The fair value of the Company's 6.25% fixed-rate notes was based on the quoted market price. Derivatives - The fair value of derivatives, including currency swaps, foreign currency forward exchange and option contracts, and interest rate swaps was estimated based on current settlement prices, quoted market prices of comparable contracts, and pricing models or formulas using current assumptions. NOTE 19--CONTINGENCIES AND LITIGATION Nalco has been named as a potentially responsible party (PRP) by the Environmental Protection Agency (EPA) or state enforcement agencies at 14 waste sites where some financial contribution is or may be required. These agencies have also identified many other parties who may be responsible for clean-up costs at the waste disposal sites. Nalco's financial contribution to remediate these sites is expected to be minor. There has been no significant financial impact on Nalco up to the present, nor is it anticipated that there will be in the future, as a result of these matters. Nalco has made and will continue to make provisions for these costs if the Company's liability becomes probable and when costs can be reasonably estimated. As of December 31, 1998, the Company had undiscounted reserves of approximately $1 million for the maximum amount of known environmental clean-up costs. The Company's 1998 expenditures relating to environmental compliance and clean-up activities were not significant. These environmental reserves represent management's current estimate of its proportional clean-up costs and are based upon negotiation and agreement with enforcement agencies, its previous experience with respect to clean-up activities, a detailed review by the Company of known conditions, and information about other PRPs. They are not reduced by any possible recoveries from insurance companies or other PRPs not specifically identified. Although management cannot determine whether or not a material effect on future operations is reasonably likely to occur, given the evolving nature of environmental regulations, it believes that the recorded reserve levels are appropriate estimates of the potential liability. Although settlement will require future cash outlays, it is not expected that such outlays will materially impact the Company's liquidity position. It is the Company's policy to accrue for estimated post-closure and site remediation costs when the decision has been made by management to close a facility. In the ordinary course of its business, Nalco is also a party to a number of lawsuits and is subject to various claims, the outcome of which, in the opinion of management, should not have a material effect on the consolidated financial position of Nalco. Quarterly Summary (Unaudited)
1998 1997 ------------------------------------------ -------------------------------------- (dollar amounts in millions, First Second Third Fourth First Second Third Fourth except per share figures) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter - ------------------------------------------------------------------------------------------------------------------- Sales $ 367.1 $ 403.0 $ 408.4 $ 395.0 $ 334.6 $ 354.4 $ 371.0 $ 373.7 Gross earnings 202.2 221.8 221.7 213.7 189.8 201.8 206.0 206.5 Earnings (loss) before accounting change 38.0 42.0 40.7 (82.8)* 35.8 40.1 44.2 43.3 Cumulative effect of accounting change - - - - - - - (4.5) Net earnings (loss) 38.0 42.0 40.7 (82.8)* 35.8 40.1 44.2 38.8 Per common share Earnings (loss) - basis Before accounting change .53 .59 .58 (1.31) .49 .56 .62 .61 Accounting change - - - - - - - (.07) Net earnings (loss) .53 .59 .58 (1.31) .49 .56 .62 .54 Earnings (loss) - diluted Before accounting change .49 .55 .54 (1.31) .46 .51 .57 .56 Accounting change - - - - - - - (.06) Net earnings (loss) .49 .55 .54 (1.31) .46 .51 .57 .50 Dividends .25 .25 .25 .25 .25 .25 .25 .25 Market price High 40 15/16 40 15/16 36 3/8 34 3/8 38 7/8 40 41 13/16 42 7/16 Low 36 3/4 34 1/8 27 3/8 27 11/16 35 1/8 34 1/4 38 5/16 37 1/2 - ------------------------------------------------------------------------------------------------------------------
* Includes after tax charges of $116.9 million for cost reduction program expenses recognized by the Company and Nalco/Exxon.
- ---------------------------------------------------------------- Eleven Year Summary (dollar amounts in millions, except per share figures) 1998 1997 1996 - ---------------------------------------------------------------- Net Sales $1,573.5 $1,433.7 $1,303.5 Operating costs and expenses Cost of products sold 714.1 629.6 568.6 Selling, administrative and research expenses 618.0 561.4 518.2 Formation and consolidation - - - Cost reduction program 180.0 - - - ---------------------------------------------------------------- Total operating costs and expenses 1,512.1 1,191.0 1,086.8 - ---------------------------------------------------------------- Operating Earnings 61.4 242.7 216.7 Interest and other income 2.4 0.7 2.6 Interest expense (26.5) (15.3) (14.4) Equity in earnings of 22.6 28.2 24.5 partnership - ---------------------------------------------------------------- Earnings from Continuing Operations Before Income Taxes 59.9 256.3 229.4 Income taxes 22.0 92.9 83.5 - ---------------------------------------------------------------- Earnings from Continuing Operations 37.9 163.4 145.9 Earnings from discontinued operations - - 8.6 - ---------------------------------------------------------------- Earnings Before Extraordinary Loss and Effect of Accounting Changes 37.9 163.4 154.5 Extraordinary loss from retirement of debt, net of taxes - - - Cumulative effect of change in accounting for postretirement benefits other than pensions, net of taxes - - - Cumulative effect of change in accounting for business process reengineering costs, net of taxes - (4.5) - - ---------------------------------------------------------------- Net Earnings $ 37.9 $ 158.9 $ 154.5 - ---------------------------====================================== Per Share of Common Stock Earnings from continuing operations--diluted .40 $ 2.10 $ 1.86 Discontinued operations - - .11 Extraordinary item - - - Accounting change - (.06) - Net earnings .40 2.04 1.97 Cash dividends paid 1.00 1.00 1.00 - ---------------------------------------------------------------- Financial Ratios Earnings as a percent to sales* 2.4% 11.4% 11.2% Earnings as a percent to shareholders' equity* 5.8 24.7 23.5 Effective income tax rate* 36.7 36.2 36.4 Common stock dividends paid as a percent to earnings* 173.9 40.9 46.1 Research and development expenses as a percent to sales* 2.8 3.0 3.2 Current ratio 1.4 to 1 1.6 to 1 1.3 to 1 - ---------------------------------------------------------------- Financial Position Data Working capital $ 126.3 $ 153.4 $ 95.5 Total assets 1,650.7 1,440.9 1,394.5 Property, plant and equipment (cost) 1,225.1 1,135.2 1,169.4 Long-term debt 496.2 335.3 252.6 Deferred income taxes 15.6 37.2 42.9 Shareholders' equity 585.9 652.7 654.5 - ---------------------------------------------------------------- Other Data Working capital provided from operations $ 190.9 $ 254.1 $ 237.2 Capital investments 115.3 101.4 92.5 Depreciation and amortization* 100.6 103.2 94.9 Dividends on common stock 65.9 66.7 67.3 Cost of common stock repurchased 43.4 75.7 26.3 Wages, salaries, commissions and benefits 488.0 450.6 427.9 Common shares outstanding at year end (thousands) 65,529 66,037 67,024 Market price per share of common stock at year end $ 31.00 $ 39.563 $ 36.125 Number of common shareholders of record 4,767 5,047 5,349 Number of employees at year end 7,030 6,905 6,502 - ----------------------------------------------------------------
NOTE: Shares outstanding and per share amounts have been restated to reflect the two-for-one stock split in 1991. NOTE: Certain assets have been reclassified for the years 1992 to 1995 to conform to the current year presentation. * Based on earnings from continuing operations before extraordinary loss and effect of accounting changes.
- --------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 1988 - --------------------------------------------------------------------------------------- $1,214.5 $1,246.8 $1,291.6 $1,286.9 $1,164.4 $1,013.1 $ 899.1 $ 843.0 531.3 543.7 555.0 557.4 513.1 449.8 406.2 388.4 477.7 498.8 512.8 498.5 449.9 382.1 335.6 318.8 - 68.2 - - - - - - - - - - - - - - - --------------------------------------------------------------------------------------- 1,009.0 1,110.7 1,067.8 1,055.9 963.0 831.9 741.8 707.2 - --------------------------------------------------------------------------------------- 205.5 136.1 223.8 231.0 201.4 181.2 157.3 135.8 7.2 16.6 14.4 18.3 18.9 19.9 27.0 20.6 (16.2) (21.8) (27.5) (40.3) (27.1) (11.5) (9.7) (9.5) 16.9 6.9 - - - - - - - --------------------------------------------------------------------------------------- 213.4 137.8 210.7 209.0 193.2 189.6 174.6 146.9 77.7 64.6 81.9 81.8 74.2 72.9 66.3 53.1 - --------------------------------------------------------------------------------------- 135.7 73.2 128.8 127.2 119.0 116.7 108.3 93.8 18.0 23.9 23.9 17.8 18.8 14.4 11.6 12.2 - --------------------------------------------------------------------------------------- 153.7 97.1 152.7 145.0 137.8 131.1 119.9 106.0 - - (10.6) - - - - - - - (56.5) - - - - - - - - - - - - - - --------------------------------------------------------------------------------------- $ 153.7 $ 97.1 $ 85.6 $ 145.0 $ 137.8 $ 131.1 $ 119.9 $ 106.0 ======================================================================================= $ 1.71 $ .88 $ 1.57 $ 1.57 $ 1.47 $ 1.42 $ 1.32 $ 1.20 .24 .31 .31 .22 .24 .18 .14 .15 - - (.14) - - - - - - - (.72) - - - - - 1.95 1.19 1.02 1.79 1.71 1.60 1.46 1.35 .99 .945 .885 .84 .83 .755 .68 .645 - --------------------------------------------------------------------------------------- 11.2% 5.9% 10.0% 9.9% 10.2% 11.5% 12.0% 11.1% 24.1 13.2 24.2 22.6 24.4 26.6 23.5 20.1 36.4 46.8 38.9 39.1 38.4 38.4 38.0 36.1 49.2 88.4 47.4 46.2 48.6 45.3 47.1 53.8 3.3 3.7 3.8 3.7 3.9 4.0 3.9 3.8 1.0 to 1 1.3 to 1 2.0 to 1 2.5 to 1 2.0 to 1 2.3 to 1 2.3 to 1 2.1 to 1 - --------------------------------------------------------------------------------------- $ 14.2 $ 87.8 $ 185.4 $ 314.3 $ 256.3 $ 229.7 $ 218.5 $ 174.4 1,360.5 1,269.2 1,202.3 1,338.2 1,324.4 1,037.0 938.5 838.9 1,101.6 1,067.1 1,129.9 1,044.2 957.8 840.3 720.1 648.7 221.5 245.3 252.1 413.8 394.1 282.2 214.0 100.8 53.3 56.8 58.1 107.3 90.8 77.8 62.7 53.7 580.3 544.2 550.6 576.3 528.7 455.6 443.7 477.5 - --------------------------------------------------------------------------------------- $ 219.2 $ 250.1 $ 245.6 $ 226.7 $ 218.5 $ 192.4 $ 159.1 $ 148.4 126.7 125.6 117.8 131.0 136.8 114.9 86.4 61.6 84.8 84.8 82.2 75.4 62.1 45.5 37.8 40.4 66.9 64.7 61.1 58.8 57.8 52.9 51.0 50.5 42.4 61.3 58.5 14.3 - 80.5 111.7 21.5 387.4 411.1 413.6 403.7 376.6 326.0 282.5 263.8 67,124 67,900 68,905 70,021 69,828 69,292 72,199 77,129 $ 30.125 $ 33.50 $ 37.50 $ 34.625 $ 41.625 $ 28.25 $ 24.75 $17.625 5,669 6,005 6,111 6,129 5,543 5,099 5,224 5,477 6,081 5,935 6,802 6,714 6,832 5,862 5,489 5,381 - ---------------------------------------------------------------------------------------
CORPORATE OFFICERS E. J. Mooney (57) Chairman and Chief Executive Officer 30 years of service W. Steven Weeber (56) Vice Chairman and Executive Vice President, Operations Staff 32 years of service Stephen D. Newlin (46) President 23 years of service George M. Brannon(47) Group Vice President and President, Industrial Division 23 years of service J. Terry Burns (51) Group Vice President and President, Pulp and Paper Division 22 years of service Gilberto Pinzon (58) Group Vice President and President, Nalco Latin America 29 years of service William J. Roe (45) Group Vice President and President, Process and Pacific Divisions 20 years of service Ronald J. Allain (58) Senior Vice President, Research and Development 28 years of service John D. Berthoud (55) Senior Vice President, Sales and Marketing 28 years of service David R. Bertran (55) Senior Vice President, Manufacturing and Logistics 15 years of service William E. Buchholz (56) Senior Vice President and Chief Financial Officer 6 years of service James F. Lambe (53) Senior Vice President, Human Resources 30 years of service Michael E. Kahler (41) Vice President and President, Specialty Division 19 years of service CORPORATE OFFICERS (cont'd) William E. Parry (48) Vice President and General Counsel 4 years of service Anthony J. Sadowski (60) Vice President, Environmental Health and Safety 32 years of service Robert L. Ratliff (50) Controller 23 years of service William G. Marshall (52) Treasurer 18 years of service Suzzanne J. Gioimo (55) Corporate Secretary and President of The Nalco Foundation 29 years of service Elizabeth R. Ewing (39) Assistant Treasurer 3 years of service Michael K. Mrozak (43) Assistant Controller, Financial Reporting 14 years of service Lee J. Plankis (52) Assistant Controller, Planning and Analysis 17 years of service NALCO CHEMICAL COMPANY AND SUBSIDIARIES APPENDIX TO 1998 FORM 10-K GRAPHS AND IMAGE MATERIAL 1998 ANNUAL REPORT TO SHAREHOLDERS The following is a list and narrative description of graphs included in those portions of the 1998 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: GRAPH 1995 1996 1997 1998 - ------------------------------------------------------------------------------ Sales* (millions of dollars) 1,215 1,304 1,434 1,574 * Based on continuing operations. Earnings Before Income Taxes* (millions of dollars) 213 229 256 242 * Based on continuing operations, excluding pretax charges of $182.4 million for cost reduction programs at Nalco and Nalco/Exxon in 1998. Market Value of Nalco Common Share at Year-End Closing Price (in dollars) 30 1/8 36 1/8 39 9/16 31 Shareholders' Equity (millions of dollars) 580 655 653 586 Return on Shareholders' Equity* (percent) 24.1 23.5 24.7 22.7 * Based on continuing operations, excluding net charges for cost reduction programs at Nalco and Nalco/Exxon in 1998 and effect of change in accounting principle in 1997. Cash Provided by Operating Activities (millions of dollars) 213 229 214 129 Dividends Per Common Share (in dollars) .99 1.00 1.00 1.00 Capital Additions (millions of dollars) 127 93 101 115 Depreciation (millions of dollars) 85 92 93 87 EX-21 5 SUBSIDIARIES OF THE REGISTRANT EXHIBIT (21) NALCO CHEMICAL COMPANY AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT Subsidiaries of the registrant, all of which are wholly-owned unless otherwise indicated, are as follows:
State or Other Jurisdiction of Incorporation Company or Organization ------- ------------------- Domestic: ADX....................................................... Michigan Aluminate Sales Corporation............................... Illinois Chem Technologies, Incorporated........................... Delaware Chemco Water Technology, Inc.............................. Delaware Chicago Chemical Company.................................. Illinois Board Chemistry, Inc...................................... Illinois Nalco Delaware............................................ Delaware Nalco Diversified Technologies, Inc....................... Delaware Nalco Foreign Sales Corporation........................... U.S. Virgin Islands Nalco FT, Inc............................................. Delaware Nalco Japan Company, Ltd.................................. Delaware Nalco Leasing Corporation................................. Delaware Nalco Neighborhood Development Corporation................ Delaware Nalco Resources Investment Company........................ Texas Nalco TWO, Inc............................................ Delaware NalFirst Holding Inc...................................... Delaware(1) NalFirst Leasing Corporation.............................. Delaware(1) Nalgreen, Inc............................................. Delaware NalTech, Inc.............................................. Delaware Odor Control Technology, Inc.............................. Georgia(2) Oil Products & Chemical Company, Inc...................... Illinois Paper Chemicals of Alabama, Inc........................... Alabama Paper Chemicals, Inc...................................... Texas Texo Corporation.......................................... Delaware The Flox Company.......................................... Minnesota Trident Chemical Company, Inc............................. Delaware Visco Products Company.................................... Texas Foreign: Alfoc Ltd................................................. United Kingdom Chemasia Industries SDN. BHD.............................. Malaysia CSC Kemico (South East Asia) SDN. BHD..................... Malaysia Deutsche Nalco GmbH....................................... Germany Deutsche Nalco-Chemie, G.m.b.H............................ Germany Deutsche Nalco Equipment G.m.b.H.......................... Germany Deutsche Nalco Produktion Verwaltungs G.m.b.H............. Germany Deutsche Nalco Produktions G.m.b.H & Co. KG............... Germany Dubois Chemical Italiana S.p.A............................ Italy Nalco Diversified Technologies Limited.................... United Kingdom Nalco Diversified Technologies, Ltd....................... Canada DWT SRL................................................... Italy Gamus Quimica, Ltda....................................... Brazil
State or Other Jurisdiction of Incorporation or Company Organization ------- -------------- Houseman Waterbehandeling B.V.................................. Netherlands International Water Consultant B.V............................. Netherlands International Water Consultant Beheer B.V...................... Netherlands IWC Chemische Produkten B.V.................................... Netherlands IWC Consultant GmbH............................................ Germany Nalco Anadolu A.S.............................................. Turkey Nalco Applied Services of Europe B.V........................... Netherlands Nalco Argentina, S.A........................................... Argentina Nalco Australia Pty. Limited................................... Australia Nalco Belgium N.V./S.A......................................... Belgium Nalco Brazil Ltda.............................................. Brazil Nalco Canada, Inc.............................................. Canada Nalco Chemical A.B............................................. Sweden Nalco Chemical B.V............................................. Netherlands Nalco Chemical Company (Philippines) Inc....................... Philippines Nalco Chemical Company (Thailand) Limited...................... Thailand Nalco Chemical Gesellschaft m.b.H.............................. Austria Nalco Chemical (H.K.) Limited.................................. Hong Kong Nalco Chemie................................................... Czechoslovakia Nalco de Venezuela, C.A........................................ Venezuela Nalco de Venezuela Holding, S.A................................ Venezuela Nalco Diversified Technologies Brazil Ltda..................... Brazil Nalco Diversified Technologies, S.A. de C. V................... Mexico Nalco Chemical Egypt........................................... Egypt Nalco Espanola, S.A............................................ Spain Nalco Europe B.V............................................... Netherlands Nalco France................................................... France Nalco Chem..................................................... Russia Nalco Chemical Holding, S.L.................................... Spain Nalco Gulf Limited............................................. Dubai Nalco Hellas S.A............................................... Greece Nalco Holdings Australia Pty. Limited.......................... Australia Nalco Holding B.V.............................................. Netherlands Nalco Investments Australia, Pty. Limited...................... Australia Nalco Investments U.K. Limited................................. United Kingdom Nalco Italiana, S.p.A.......................................... Italy Nalco Italiana Produzioni S.R.L................................ Italy Nalco Italiana Services S.R.L.................................. Italy Nalco Japan Technical Center Co. Ltd........................... Japan Nalco Kemiai Kft............................................... Hungary Nalco Korea Co., Ltd........................................... South Korea Nalco Limited.................................................. United Kingdom Nalco Manufacturing S.A........................................ Spain Nalco Marketing, S.A........................................... Spain Nalco New Zealand, Ltd......................................... New Zealand Nalco Norge A/S................................................ United Kingdom Nalco Pacific Pte. Ltd......................................... Singapore Nalco Poland................................................... Poland Nalco Portuguesa (Q.I.) Ltda................................... Portugal
State or Other Jurisdiction of Incorporation Company or Organization ------- ---------------- Nalco Productos Quimicos de Chile S.A........................ Chile Nalco Saudi Co., Ltd......................................... Saudi Arabia (3) Nalco Chemical (Malaysia) SDN BHD............................ Malaysia Nalco Services, Ltd.......................................... United Kingdom Nalcomex, S.A. de C.V........................................ Mexico Nalfleet, Inc................................................ United Kingdom Nalfloc Ltd.................................................. United Kingdom NCC Mauritius Limited........................................ Mauritius P.T. Nalco Perkasa........................................... Indonesia (4) Quimica Nalco de Colombia, S.A............................... Colombia Suomen Nalco Oy.............................................. Finland Taiwan Nalco Chemical Co., Ltd............................... Taiwan Deryshares, B.V.............................................. Netherlands Nalco Chemical India, Ltd.................................... India (6) Nalco Chemical Company (Suzhou) Ltd.......................... China (7) Unico Corporation............................................ South Korea United Chemasia SDN. BHD..................................... Malaysia
- -------- Note (1)--80% of voting securities owned by Registrant Note (2)--66% of voting securities owned by Registrant Note (3)--60% of voting securities owned by Registrant Note (4)--51% of voting securities owned by Registrant Note (6)--80% of voting securities owned by Registrant Note (7)--95% of voting securities owned by Registrant EX-23 6 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT (23) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of this Registration Statement on Form S-3 (Numbers 33-57363, 33-53111, 2-97721, 33-9934 and 2-97721) and Form S-8 (Numbers 333-06955, 333- 06963, 33-54377, 33-38033, 33-38032, 33-29149, 2-97721, 2-97131 and 2-82642) of our report dated February 6, 1999, which appears on page 42 of the 1998 Annual Report to Shareholders of Nalco Chemical Company, which is incorporated by reference in Nalco Chemical Company's Annual Report on Form 10-K for the year ended December 31, 1998. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 12 of this Form 10-K. We also consent to the incorporation by reference in the Registration Statement of our report dated March 26, 1999 appearing on page 1 of the Annual Report of the Nalco Chemical Company Profit Sharing, Investment and Pay Deferral Plan on Form 11-K for the year ended December 31, 1998. PRICEWATERHOUSECOOPERS LLP Chicago, Illinois March 30, 1999 EX-27.A 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1998 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1998 DEC-31-1998 31,200,000 0 282,800,000 (6,100,000) 121,800,000 477,600,000 1,225,100,000 (707,800,000) 1,650,700,000 351,300,000 496,200,000 0 400,000 15,100,000 570,400,000 1,650,700,000 1,573,500,000 1,573,500,000 714,100,000 714,100,000 0 0 26,500,000 59,900,000 22,000,000 37,900,000 0 0 0 37,900,000 0.40 0.40
EX-99.C 8 FORM 11K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 11-K (Mark One) [X] Annual Report pursuant to Section 15(d) of the Securities Exchange Act of 1934 For the Fiscal year ended December 31, 1998 OR [ ] Transition report pursuant to section 15(d) of the Securities Exchange Act of 1934 For the Transition period from __________________ to _________________ Commission file number 1-4957 PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN OF NALCO CHEMICAL COMPANY NALCO CHEMICAL COMPANY One Nalco Center Naperville, Illinois 60563-1198 (Issuer and address of principal executive offices) NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN --------------------- FINANCIAL STATEMENTS AND SCHEDULES ------------- DECEMBER 31, 1998 and 1997 -------------------------- NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ FINANCIAL STATEMENTS AND SCHEDULES ------------- INDEX -----
Page(s) ----------- Report of Independent Accountants 1 Statements of Net Assets Available for Plan Benefits 2 Statements of Changes in Net Assets Available for Plan Benefits 3 Notes to Financial Statements 4-13 Supplementary Schedules: Item 27a--Schedule of Assets Held for Investment Purposes at December 31, 1998 Schedule I Item 27d--Schedule of Reportable Transactions for the Year Ended December 31, 1998 Schedule II
Note: All other schedules have been omitted because they are not applicable Report of Independent Accountants --------------------------------- March 26, 1999 To the Employee Benefit Plan Administration Committee of Nalco Chemical Company: In our opinion, the accompanying statements of net assets available for plan benefits and the related statements of changes in net assets available for plan benefits present fairly, in all material respects, the net assets available for benefits of the Nalco Chemical Company Profit Sharing, Investment and Pay Deferral Plan at December 31, 1998 and 1997, and the changes in net assets available for benefits for the years then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the plan's management; our responsibility is to express an opinion of these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional information included in the supplementary schedules is presented for purposes of additional analysis and is not a required part of the basic financial statements but is additional information required by ERISA. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. 1 NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS ---------------------------------------------------- AS OF DECEMBER 31, 1998 and 1997 --------------------------------
1998 1997 ---------------------- --------------------- Investments, at fair value: Nalco Chemical Company common stock $ 75,104,971 $ 98,123,822 Mutual funds 82,272,901 98,974,383 Group annuity contract deposits 36,944,097 50,965,924 Bank commingled investment funds 63,761,859 41,540,862 Collective short-term investment funds 26,512,592 10,500,682 ------------ ------------ 284,596,420 300,105,673 Loans receivable from participants 5,417,307 5,604,934 Due from Nalco Chemical Company Employee Stock Ownership Plan 3,795,959 89,410 Accrued income receivable 153,686 246,199 ------------ ------------ Net assets available for plan benefits $293,963,372 $306,046,216 ============ ============
The accompanying notes are an integral part of these financial statements. 2 NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS FOR THE YEARS ENDED DECEMBER 31, 1998 and 1997
1998 1997 ------------ ------------ Sources of net assets: Contributions by employees $ 17,325,559 $ 14,403,378 Dividend income 3,429,577 3,774,078 Interest income 4,208,514 4,492,750 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 5,077,002 934,736 Participant loan repayments 3,164,231 3,000,833 Net (depreciation)/appreciation of investments (3,799,826) 30,169,423 ------------ ------------ Total sources of net assets 29,405,057 56,775,198 Applications of net assets: Administrative expenses (36,661) (71,324) Participant loans (2,817,529) (2,954,444) Withdrawals by participants (38,633,711) (32,809,447) ------------ ------------ (Decrease)/Increase in net assets available for plan benefits (12,082,844) 20,939,983 Net assets available for plan benefits at beginning of period 306,046,216 285,106,233 ------------ ------------ Net assets available for plan benefits at end of period $293,963,372 $306,046,216 ============ ============
The accompanying notes are an integral part of these financial statements. 3 NALCO CHEMICAL COMPANY PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 and 1997 NOTE 1 - DESCRIPTION OF THE PLAN: The Nalco Chemical Company Profit Sharing, Investment and Pay Deferral Plan (the Plan) is a voluntary contribution, individual account plan, which covers substantially all Nalco Chemical Company (the Company) employees. No service requirement exists before an employee is eligible to participate in the Plan. Pursuant to section 6 of the Plan document, profit sharing contributions are at the discretion of the Company. The Company has not contributed to the Plan since January 1, 1990. The Plan also accepts transfers of Company common stock and cash from the Employee Stock Ownership Plan for retirees. The Plan includes eight investment alternatives: the Nalco Stock Fund, the U.S. Government Money Market Fund, the Stable Capital Fund, the Bond Index Fund, the Balanced Fund, the Growth and Income Fund, the EuroPacific Fund and the Equity Index Fund. A participant who has attained the age of 50 can transfer once per calendar year a minimum of 10% of his balance from the Nalco Stock Fund to any of the other funds in the Plan. The maximum allowable transfer is determined by the Employee Benefit Plan Administration Committee (EBPAC). Participants electing to make tax-deferred contributions through cash or salary deductions have the option of investing these contributions in a combination of any of the funds. Participants can transfer assets acquired with their contributions at their discretion. A participant can also make contributions which are not tax-deferred through payroll deductions or a lump-sum investment. All participant contributions vest immediately, and participants are entitled to their entire account balance upon retirement, termination, disability, or death as a lump-sum payment (or in semi- annual stock installments for shares in the Nalco Stock Fund). Participants are allowed to borrow from the Plan, provided the amount does not exceed the lesser of one-half the vested Plan balance of the participant, or $50,000. The length of the loan is decided by the employee, subject to certain governmental restrictions, and the interest charged is determined by EBPAC and communicated to the participants in writing. 4 At December 31, 1998, employees participating in the Plan had invested in the available funds as follows (some have investments in more that one fund):
1998 1997 ---- ---- Total employees participating 3,123 3,175 Nalco Stock Fund 2,232 2,410 U.S. Government Money Market Fund 252 236 Stable Capital Fund 1,227 1,443 Bond Index Fund 512 403 Balanced Fund 1,141 1,135 Growth and Income Fund 2,019 2,236 Equity Index Fund 1,884 1,723 EuroPacific Fund 861 950
The Company believes that the Plan will continue without interruption, but reserves the right to terminate the Plan at any time. In the event of termination of the Plan, the Nalco Chemical Company Profit Sharing, Investment and Pay Deferral Plan Trust (the Trust) will continue until all of the funds held by The Northern Trust Company (the Trustee) have been distributed to the participants or their beneficiaries. Such distribution will be made in accordance with the provisions of the plan document in effect on the date of its termination. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES: - ----------------------------------------- Basis of Accounting - ------------------- The financial statements of the Plan are prepared on the accrual basis of accounting, except for benefit payments to former participants which are recorded when paid as noted below. Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires the use of certain estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities and the periods in which certain items of revenue and expense are included. Actual results may differ from such estimates. Withdrawals by Participants - --------------------------- Withdrawals by participants include benefit payments and transfers out of the plan. 5 Valuation of Investments - ------------------------ All investments, except for group annuity contract deposits, are valued by the Trustee based on the closing market value on the last business day of the plan year. The group annuity contract deposits are stated at estimated fair value, which represents contributions made under the contracts at original cost plus interest at the contract rate. The insurance companies are contractually liable for the contract value provided the investment remains with the insurance company. Amounts Due Participants - ------------------------ In accordance with ERISA requirements for reporting by employee benefit plans, benefit payments to former participants are recorded when paid. Accordingly, at December 31, 1998 and 1997, the following amounts have been allocated to the individual accounts of withdrawing participants, but not recorded as liabilities on the Statements of Net Assets Available for Plan Benefits or withdrawals by participants in the Statements of Changes in Net Assets Available for Plan Benefits:
1998 1997 ---- ---- Nalco Stock Fund $ 2,921,359 $244,098 U.S. Government Money Market Fund 406,770 --- Stable Capital Fund 3,542,950 267,323 Bond Index Fund 1,001,777 --- Balanced Fund 1,238,192 5,193 Growth and Income Fund 2,362,312 155,336 Equity Index Fund 3,478,265 25,192 EuroPacific Fund 1,254,898 30,375 ----------- -------- $16,206,523 $727,517 =========== ========
The preceding accounting treatment results in a difference between these financial statements and the Form 5500 as these amounts have been recorded as liabilities as of December 31, 1998 and 1997, and have been included in the benefits paid for the respective years on the Form 5500. 6 NOTE 3 - INVESTMENTS: - --------------------- The cost of investments and number of shares or units held at December 31, 1998 and 1997 were as follows:
1998 1997 -------------------------------------------------------------- Shares or Units Cost Shares or Units Cost -------------------------------------------------------------- Nalco Chemical Company Common Stock 2,422,741 $ 39,900,109 2,480,223 $ 37,146,056 American Balanced Fund 1,139,171 16,815,917 1,139,119 16,371,281 American EuroPacific Fund 363,485 9,468,874 456,076 11,570,309 Dreyfus Government Money Market Instruments 3,735,295 3,735,295 2,676,600 2,676,600 Hartford Annuity Contract Deposit ---- ---- 2,563,076 2,563,076 Life of Georgia Contract Deposit ---- ---- 6,282,171 6,282,171 Pacific Mutual Contract Deposit 3,358,097 3,358,097 3,149,032 3,149,032 Provident Contract Deposit ---- ---- 3,723,764 3,723,764 Sun Life America Contract Deposit ---- ---- 2,191,985 2,191,985 Allamerica Group Annuity Contract Deposit 2,443,220 2,443,220 4,522,389 4,522,389 Ohio National Group Annuity Contract Deposit 3,180,910 3,180,910 2,979,775 2,979,775 Protective Life Group Annuity Contract Deposit ---- ---- 2,892,390 2,892,390 Chase Bank Group Annuity Contract Deposit 2,011,812 2,011,812 ---- ---- J.P. Morgan Group Annuity Contract Deposit 10,000,000 10,000,000 10,000,000 10,000,000 New York Life Group Annuity Contract Deposit 5,892,661 5,892,661 5,553,351 5,553,351 Union Bank of Switzerland Group Annuity Contract Deposit 2,021,363 2,021,363 ---- ---- Principal Mutual Group Annuity Contract Deposit 4,632,360 4,632,360 5,581,170 5,581,170 Transamerica Group Annuity Contract Deposit 1,622,541 1,622,541 1,526,821 1,526,821 Union Bank of Switzerland Group Annuity Contract Deposit 1,781,133 1,781,133 ---- ---- Neuberger & Berman Guardian Fund 2,241,807 51,243,797 2,570,243 58,104,493 Barclays Equity Index Fund 1,677,253 37,609,255 1,437,519 26,606,279 Barclays Government/Corporate Bond Index Fund 503,477 6,881,435 294,949 3,553,220 The Northern Trust Company Collective Short-Term Investment Fund 26,512,592 26,512,592 10,500,682 10,500,682 ------------ ------------ Total $229,111,371 $217,494,844 ============ ============
7 Individual investments that represent 5% or more of the fair value of net assets available for plan benefits at December 31, 1998 are as follows:
Shares or Units Cost Fair Value ----------------------------------------------- Nalco Chemical Company Common Stock 2,422,741 $39,900,109 $75,104,971 Barclays Equity Index Fund 1,677,253 37,609,255 56,355,707 Neuberger & Berman Guardian Fund 2,241,807 51,243,797 50,261,302 Northern Trust Collective Short-Term Investment Funds 26,512,592 26,512,592 26,512,592 American Balanced Fund 1,139,171 16,815,917 17,953,331
NOTE 4 - TRANSACTIONS WITH RELATED PARTY: - ----------------------------------------- Certain expenses pertaining to the operation of the Plan are paid by the Company and are not charged against the assets or income of the Plan. In addition, various administrative, legal, and accounting services are performed by Company personnel on behalf of the Plan. No charges are made to the Plan for these services. NOTE 5 - INCOME TAX STATUS: - --------------------------- The Internal Revenue Service issued a letter of determination dated July 17, 1995 stating the Plan is qualified under section 401(a) of the Internal Revenue Code (the Code) and is, therefore, exempt from federal income taxation under section 501(a) of the Code. Participants are not subject to federal income tax until amounts are distributed to them. 8 NOTE 6 - GROUP ANNUITY CONTRACTS: - --------------------------------- The fair value of group annuity contract deposits at December 31, 1998 and 1997 was comprised of the following:
December 31, 1998 1997 ----------- ----------- Chase Bank contract deposit, #401039, due 10/15/2006 (5.83% in 1998) $ 2,011,812 ---- Hartford contract deposit, GA10156, due 12/21/1998 (4.87% in 1997) ---- $ 2,563,076 Life of Georgia contract deposit, FR101, due 9/9/1999 (5.93% in 1997) ---- 6,282,171 Pacific Mutual contract deposit, G-2608401, due 6/1/1998 (6.65% in 1998 and 1997) 3,358,097 3,149,032 Provident contract deposit, #627-0569-201A, due 6/1/1999 (6.21% in 1997) ---- 3,723,764 Sun Life America contract deposit, #4656, due 7/25/1998 (6.58% in 1997) ---- 2,191,985 Allamerica contract deposit, GA-91636A, due 2/25/2001 (8.05% in 1998 and 1997) 2,443,220 4,522,389 Ohio National contract deposit, #5708, due 12/1/1997 (6.75% in 1998 and 1997) 3,180,910 2,979,775 Protective Life contract deposit, GA1191, due 6/1/1998 (5.85% in 1997) ---- 2,892,390 J.P. Morgan contract deposit, NALCO-01, due 6/1/2000 (3.93% in 1998 and 5.50% 10,000,000 10,000,000 in 1997) New York Life contract deposit, #30481, due 6/30/1999 (6.11% in 1998 and 1997) 5,892,661 5,553,351 Union Bank of Switzerland contract deposit, #2462, due 3/15/2008 (5.89% in 1998) 2,021,363 ---- Union Bank of Switzerland contract deposit, #2437 (6.15% in 1998) 1,781,133 ---- Transamerica Life contract deposit, S1393-00, due 1/30/1998 (6.13% in 1997) ---- 1,526,821 Transamerica Life contract deposit, #76772-00, due 7/15/2002 (6.08% in 1998) 1,622,541 ---- Principal Mutual contract deposit, #4-23183, due 12/31/2000 (6.41% in 1998 and 1997) 4,632,360 5,581,170 ----------- ----------- $36,944,097 $50,965,924 =========== ===========
Average yields for the above contracts are not calculated as the rates are guaranteed. No valuation reserve was established in 1998 or 1997 as the companies listed all maintain at least an A+ credit rating. 9 NOTE 7 - STATEMENTS OF NET ASSETS: - ---------------------------------- The statements of net assets available for plan benefits by fund as of December 31, 1998 and 1997 are as follows: NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND ----------------------------------------------------------- AS OF DECEMBER 31, 1998 -----------------------
U.S. Govt Nalco Stock Money Mkt Stable Capital Bond Index Balanced Fund Fund Fund Fund Fund ----------- ---------- -------------- ---------- ------------- Investments, at fair value: Nalco Chemical Company common stock $74,698,933 Mutual funds $3,735,295 $17,953,391 Group annuity contract deposits $36,944,097 Bank commingled mutual funds $7,406,152 Collective short-term investment fund 1,967,849 19 24,362,769 6 60 ----------- ---------- ----------- ---------- ----------- 76,666,782 3,735,314 61,306,866 7,406,158 17,953,391 Loans receivable from participants Due from Nalco Chemical Company Employee Stock Ownership Plan 3,795,959 Accrued income receivable 8,372 12,208 131,400 ----------- ---------- ----------- ---------- ----------- Net assets available for plan benefits $80,471,113 $3,747,522 $61,438,266 $7,406,158 $17,953,391 =========== ========== =========== ========== ===========
Growth & Equity Index EuroPacific Loan Clearing Income Fund Fund Fund Account Account Total ------------- ----------- ----------- --------- ----------- ------------ Investments, at fair value: Nalco Chemical Company common stock $406,038 $ 75,104,971 Mutual funds $50,261,302 $10,322,973 82,272,901 Group annuity contract deposits 36,944,097 Bank commingled mutual funds $56,355,707 63,761,859 Collective short-term investment fund 258 140 98 181,393 26,512,592 ----------- ----------- ----------- ---------- -------- ------------ 50,261,560 56,355,847 10,323,071 587,431 284,596,420 Loans receivable from participants $5,417,307 5,417,307 Due from Nalco Chemical Company Employee Stock Ownership Plan 3,795,959 Accrued income receivable 1 1 1,704 153,686 ----------- ----------- ----------- ---------- -------- ------------ Net assets available for plan benefits $50,261,561 $56,355,848 $10,323,071 $5,417,307 $589,135 $293,963,372 =========== =========== =========== ========== ======== ============
NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND ----------------------------------------------------------- AS OF DECEMBER 31, 1997 -----------------------
U.S. Govt Nalco Stock Money Mkt Stable Capital Bond Index Balanced Fund Fund Fund Fund Fund ----------- ---------- -------------- ---------- ----------- Investments, at fair value: Nalco Chemical Company common stock $98,123,822 Mutual Funds $2,676,600 $17,861,388 Group annuity contract deposits $50,965,924 Bank commingled mutual funds $3,964,109 Collective short-term investment fund 1,548,151 8,793,071 ----------- ---------- ----------- ----------- ----------- 99,671,973 2,676,600 59,758,995 3,964,109 17,861,388 Loans receivable from participants Due from Nalco Chemical Company Employee Stock Ownership Plan 89,410 Accrued income receivable 11,133 11,130 222,764 ----------- ---------- ----------- --------- ----------- Net assets available for plan benefits $99,772,516 $2,687,730 $59,981,759 $3,964,109 $17,861,388 =========== ========== =========== ========== ===========
Growth & Equity Index EuroPacific Loan Clearing Income Fund Fund Fund Account Account Total ----------- ------------ ----------- ------------ --------- --------- Investments, at fair value: Nalco Chemical Company $ 98,123,822 common stock $66,569,298 $11,867,097 98,974,383 Mutual Funds Group annuity contract 50,965,924 deposits Bank commingled mutual $37,576,753 41,540,862 funds Collective short-term investment fund 10,500,682 ----------- ----------- ----------- ---------- $159,460 ---------- -------- 66,569,298 37,576,753 11,867,097 159,460 300,105,673 Loans receivable from $5,604,934 5,604,934 participants Due from Nalco Chemical Company Employee Stock Ownership Plan 89,410 Accrued income receivable 1,172 246,199 ----------- ----------- ----------- ---------- -------- ----------- Net assets available for plan benefits $66,569,298 $37,576,753 $11,867,097 $5,604,934 $160,632 $306,046,216 =========== ============ =========== ========== ======== ============
12 NOTE 8 - STATEMENTS OF CHANGES IN NET ASSETS: - --------------------------------------------- The statements of changes in net assets available for plan benefits by fund for the years ended December 31, 1998 and 1997 are as follows: NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND ---------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1998 ------------------------------------
U.S. Govt Nalco Stock Money Mkt Stable Capital Bond Index Balanced Fund Fund Fund Fund Fund ------------- ------------ --------------- ----------- ------------ Sources of net assets: Contributions by employees $ 666,434 $230,784 $5,570,134 $ 343,829 $ 1,456,081 Dividend income 2,317,710 641,462 Interest income 84,931 159,560 3,464,421 6 60 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 5,077,002 Participant loan repayments 300,782 42,228 696,019 56,158 264,756 Net transfers authorized by Participants 1,531,117 2,362,533 6,953,308 3,408,608 (1,585,343) Net realized/unrealized Appreciation of investments (19,208,377) 449,168 1,239,363 ------------ --------- --------- ---------- ---------- Total sources of net assets (9,230,401) 2,795,105 12,683,882 4,257,769 2,016,379 Applications of net assets: Administrative expenses Loans to participants (265,316) (70,520) (653,718) (85,903) (209,479) Withdrawals by participants (9,805,686) (1,664,793) (10,573,657) (729,817) (1,714,897) ------------ ----------- ------------ ---------- ----------- Increase (decrease) in net assets available for plan benefits (19,301,403) 1,059,792 1,456,507 3,442,049 92,003 Net assets available for plan benefits at beginning of period 99,772,516 2,687,730 59,981,759 3,964,109 17,861,388 ------------ ----------- ------------ ---------- ----------- Net assets available for plan benefits at end of period $ 80,471,113 $ 3,747,522 $ 61,438,266 $7,406,158 $17,953,391 ============ =========== ============ ========== ===========
Growth & Equity Index EuroPacific Loan Clearing Income Fund Fund Fund Account Account Total ------------- ------------- ------------ ----------- ------------ ----------- Sources of net assets: Contributions by employees $ 4,991,481 $ 4,264,730 $ 1,046,285 $ 2,755,801 $ 17,325,559 Dividend income $ 327,015 140,419 2,971 3,429,577 Interest income 260 141 98 $ 481,831 17,206 4,208,514 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 5,077,002 Participant loan repayments 946,033 628,373 188,647 41,235 3,164,231 Net transfers authorized by Participants (17,381,895) 7,611,540 (2,899,868) 0 Net realized/unrealized Appreciation of investments 926,877 11,462,110 1,332,169 (1,136) (3,799,826) ------------ ----------- ----------- ---------- ----------- ------------ Total sources of net assets (10,190,229) 23,966,894 (1,238,535) 481,831 2,816,077 29,405,057 Applications of net assets: Administrative expenses (36,661) (36,661) Loans to participants (770,324) (588,593) (126,675) (47,001) (2,817,529) Withdrawals by participants (5,347,184) (4,599,206) (1,225,101) (669,458) (2,303,912) (38,633,711) ------------ ----------- ----------- ---------- ----------- ------------ Increase (decrease) in net assets available for plan benefits (16,307,737) 18,779,095 (1,544,026) (187,627) 428,503 (12,082,844) Net assets available for plan benefits at beginning of period 66,569,298 37,576,753 11,867,097 5,604,934 160,632 306,046,216 ------------ ----------- ----------- ---------- ----------- ------------ Net assets available for plan benefits at end of period $ 50,261,561 $56,355,848 $10,323,071 $5,417,307 $ 589,135 $293,963,372 ============ =========== =========== ========== =========== ============
14 NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND ---------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 1997 ------------------------------------
U.S. Govt Nalco Stock Money Mkt Stable Capital Bond Index Balanced Growth & Fund Fund Fund Fund Fund Income Fund ---- ---- ---- ---- ---- ----------- Sources of net assets: Contributions by employees $ 685,190 $ 146,442 $ 1,983,419 $ 210,068 $ 1,267,695 $ 5,085,028 Dividend income 2,636,406 548,267 394,153 Interest income 70,793 113,949 3,832,273 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 934,736 Participant loan repayments 314,074 36,515 751,828 25,393 232,327 962,815 Net transfers authorized by participants (8,883,795) 1,977,860 (4,764,197) 871,764 1,854,982 2,339,787 Net realized/unrealized appreciation of investments 9,435,900 263,048 2,331,498 9,336,785 ----------- ----------- ------------ ---------- ----------- ----------- Total sources of net assets 5,193,304 2,274,766 1,803,323 1,370,273 6,234,769 18,118,568 Applications of net assets: Administrative expenses Loans to participants (325,059) (79,929) (680,636) (34,575) (242,850) (1,032,061) Withdrawals by participants (9,181,013) (1,427,545) (10,243,931) (271,173) (1,193,170) (6,124,036) ----------- ----------- ------------ ---------- ----------- ----------- Increase (decrease) in net assets available for plan benefits (4,312,768) 767,292 (9,121,244) 1,064,525 4,798,749 10,962,471 Net assets available for plan benefits at beginning of period 104,085,284 1,920,438 69,103,003 2,899,584 13,062,639 55,606,827 ------------ ----------- ------------ ---------- ----------- ----------- Net assets available for plan benefits at end of period $ 99,772,516 $ 2,687,730 $ 59,981,759 $3,964,109 $17,861,388 $66,569,298 ============ =========== ============ ========== =========== ===========
Equity Index EuroPacific Loan Clearing Fund Fund Account Account Total ---- ---- ------- ------- ----- Sources of net assets: Contributions by employees $ 3,077,632 $ 1,221,567 $ 726,337 $ 14,403,378 Dividend income 194,558 694 3,774,078 Interest income $ 459,017 16,718 4,492,750 Transfers from Nalco Chemical Company Employee Stock Ownership Plan 934,736 Participant loan repayments 460,623 188,787 28,471 3,000,833 Net transfers authorized by participants 6,310,004 293,698 (103) 0 Net realized/unrealized appreciation of investments 8,112,811 688,912 469 30,169,423 ----------- ----------- ---------- --------- ------------ Total sources of net assets 17,961,070 2,587,522 459,017 772,586 56,775,198 Applications of net assets: Administrative expenses (71,324) (71,324) Loans to participants (449,899) (190,632) 81,197 (2,954,444) Withdrawals by participants (2,416,924) (789,133) (126,621) (1,035,901) (32,809,447) ----------- ----------- ---------- --------- ------------ Increase (decrease) in net assets available for plan benefits 15,094,247 1,607,757 332,396 (253,442) 20,939,983 Net assets available for plan benefits at beginning of period 22,482,506 10,259,340 5,272,538 414,074 285,106,233 ----------- ----------- ---------- --------- ------------ Net assets available for plan benefits at end of period $37,576,753 $11,867,097 $5,604,934 $ 160,632 $306,046,216 =========== =========== ========== ========= ============
16 SCHEDULE I ---------- NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ ASSETS HELD FOR INVESTMENT -------------------------- AS OF DECEMBER 31, 1998 -----------------------
Identity of Issuer Description of Investment Fair Value Cost - ----------------------------------------------- ------------------------------------------------------ ------------ ------------ *Nalco Chemical Company 2,422,741 shares of common stock $ 75,104,971 $ 39,900,109 Chase Bank Group annuity contract deposit, #401039, 5.83%, 2,011,812 2,011,812 due 10/15/2006 Union Bank of Switzerland Group annuity contract deposit, #2462, 5.89%, due 2,021,363 2,021,363 3/15/2008 Pacific Mutual Group annuity contract deposit, G-2608401, 6.65%, 3,358,097 3,358,097 due 6/1/1998 Union Bank of Switzerland Group annuity contract deposit, #2437, 6.15%, 1,781,133 1,781,133 Allamerica Group annuity contract deposit, GA-91636A, 8.05%, due 2,443,220 2,443,221 2/25/2001 Ohio National Group annuity contract deposit, #5708, 6.75%, due 3,180,910 3,180,910 12/1/1997 J.P. Morgan Group annuity contract deposit, NALCO-01, 3.93%, due 10,000,000 10,000,000 6/1/2000 New York Life Group annuity contract deposit, #30481, 6.11%, due 5,892,661 5,892,661 6/30/1999 Principal Mutual Group annuity contract deposit, #4-23183, 6.41%, due 4,632,360 4,632,360 12/31/2000 Transamerica Life Group annuity contract deposit, #76772-00, 6.08%, due 1,622,541 1,622,541 7/15/2002 American American EuroPacific Growth Fund - 363,485 shares 10,322,973 9,468,874 American Balanced Fund - 1,139,171 shares 17,953,331 16,815,917 Dreyfus U.S. Government Money Market Fund 3,735,295 3,735,295 Neuberger & Berman Guardian Fund - 2,241,807 shares 50,261,302 51,243,797 Barclays Global Investors Barclays Equity Index Fund - 1,677,253 shares 56,355,707 37,609,255 Barclays Bond Index Fund - 503,477 shares 7,406,152 6,881,435 *The Northern Trust Company Collective Short-Term Investment Fund 26,512,592 26,512,592 *Participant loans Participant loans, average interest rate of 9.27% 5,417,307 5,417,307 ------------ ------------ . $290,013,727 $234,528,679 ============ ============ *Party-in-interest to the Plan
SCHEDULE II ----------- NALCO CHEMICAL COMPANY ---------------------- PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN ------------------------------------------------ REPORTABLE TRANSACTIONS ----------------------- FOR THE YEAR ENDED DECEMBER 31, 1998 ------------------------------------
Expenses Value of Incurred Asset on With Transaction Net Gain Identity of Party Involved Description of Asset Purchase Price Selling Price Transaction Cost of Date (Loss) - -------------------------- -------------------- -------------- ------------- ----------- ------- ---- --------- Asset ------- Category (iii) - A series of security transactions - -------------------------------------------------- in excess of 5% of the current value of plan assets: ---------------------------------------------------- Neuberger & Berman Management Neuberger & Berman Guardian Equity Fund: 84 purchases 14,202,384 14,202,384 14,202,384 172 sales 23,923,988 21,065,580 23,923,988 2,858,408 The Northern Trust Company Collective Short-Term Investment Fund: 350 purchases 120,659,457 120,659,457 120,659,457 401 sales 97,958,848 97,958,848 97,958,848 Barclays Global Investors Barclays Equity Index Fund: 163 purchases 21,245,791 21,245,791 21,245,791 97 sales 13,928,946 10,242,815 13,928,946 3,686,131 There were no reportable category (i), (ii), or (iv) transactions for the year ended December 31, 1998.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the trustees (or other persons who administer the employee benefit plan) have duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. PROFIT SHARING, PAY DEFERRAL AND INVESTMENT PLAN OF NALCO CHEMICAL COMPANY BY /s/ J.F. LAMBE ----------------------------- Member, Employee Benefit Plan Administration Committee Dated: March 30, 1999 -----END PRIVACY-ENHANCED MESSAGE-----