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