<PAGE>
1997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
COMMISSION FILE NUMBER 1-4957
NALCO CHEMICAL COMPANY
INCORPORATED IN THE STATE OF DELAWARE
I.R.S. EMPLOYER IDENTIFICATION NO. 36-1520480
ONE NALCO CENTER, NAPERVILLE, ILLINOIS 60563-1198
TELEPHONE 630-305-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
COMMON STOCK PAR VALUE $0.1875 PER CHICAGO STOCK EXCHANGE NEW YORK STOCK
SHARE EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $2,584,316,152 at February 20, 1998.*
The number of shares outstanding of each of the issuer's classes of Common
Stock, as of February 20, 1998 was 66,146,687 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1997 Annual Report to Shareholders are
incorporated by reference into Parts I and II.
Portions of the Registrant's Proxy Statement dated March 16, 1998 for the
April 16, 1998 Annual Meeting of Shareholders are incorporated by reference
into Part III.
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* 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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TABLE OF CONTENTS
PART I
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Item 1 Business.......................................................... 1
Executive Officers of the Registrant.............................. 3
Item 2 Properties........................................................ 4
Item 3 Legal Proceedings................................................. 5
Item 4 Submission of Matters to a Vote of Security Holders............... 5
PART II
Item 5 Market for the Registrant's Common Stock and Related Security
Holder Matters.................................................... 5
Item 6 Selected Financial Data........................................... 5
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 6
Item 7A Quantitative and Qualitative Disclosures About Market Risk........ 6
Item 8 Financial Statements and Supplementary Data....................... 6
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 7
PART III
Item 10 Directors and Executive Officers of the Registrant................ 7
Item 11 Executive Compensation............................................ 7
Item 12 Security Ownership of Certain Beneficial Owners and Management.... 7
Item 13 Certain Relationships and Related Transactions.................... 7
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K... 7
</TABLE>
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PART I
ITEM 1. BUSINESS.
Nalco Chemical Company was incorporated in 1928 in Delaware and has its
principal executive offices at One Nalco Center, Naperville, Illinois 60563-
1198. Its telephone number is 630-305-1000. As used in this report, "Company"
and "Nalco" refer to Nalco Chemical Company and its consolidated subsidiaries.
Nalco is engaged in the manufacture and sale of highly specialized Service
Chemicals. Specified financial information by geographic area is shown in Note
2 of the Notes to Consolidated Financial Statements in the Company's 1997
Annual Report to Shareholders and is incorporated herein by reference.
Nalco is in the business of providing services, chemicals, technology,
equipment, and systems (monitoring and surveillance) used in water treatment,
pollution control, energy conservation, steelmaking, papermaking, mining and
mineral processing, electricity generation, other industrial processes and
commercial building utility systems. Service Chemicals are developed,
formulated and manufactured to meet specific customer needs. They are part of
value added programs designed to help customers maintain a high level of
operating performance and efficiency in their facilities, improve the quality
of customers' end products or help customers meet environmental discharge
limits in a cost-effective way. Nalco products are used for purposes such as:
control of scale, corrosion, foam and fouling in cooling systems, boilers and
other equipment; clarification of water; separation of liquids and solids;
improved combustion; control of dust; lubrication and corrosion protection in
rolling, drawing and forming of metals; improving production of pulp and
qualities of paper; recovery of minerals; and specialized process applications
in a variety of industries. The quality and on-site availability of technical
expertise provided through highly qualified Nalco personnel are very important
considerations to customers. The effective use of the Company's products
requires a substantial amount of problem solving, monitoring and technical
assistance on the part of Nalco employees.
Service Chemicals are usually marketed through Nalco's own organization
because of the high degree of technical service required. The worldwide field
sales force is trained in the application and use of Nalco Service Chemicals,
and is supported by a marketing and research staff of specialists in the
technology and use of various Nalco Service Chemicals.
Competitive conditions vary for Nalco depending on the industries served and
the products involved. Management believes the Company is one of the most
important worldwide suppliers of water treatment products and Service Chemical
programs, based on estimated sales of comparable products for industrial
customers on the process side (e.g., the manufacturing process, which a plant
uses to produce its end product) and the water treatment side (e.g., boilers
for power generation or cooling systems for process temperature control). The
Company sells its products and Service Chemical programs in more than 120
countries, and is the largest or second largest supplier of those products in
most of the countries it does business. All aspects of this business are
considered to be very competitive, and companies providing similar products or
programs range in size from very large multinational companies to small local
manufacturers. The number of competitors varies by product application and
ranges from a few large companies to hundreds of small local companies. The
Company's principal method of competition is based on quality service, product
performance and technology through safe, practical applied science.
In January 1997, the Company acquired the stock of International Water
Consultants Beheer B.V. (IWC) and the assets of Nutmeg Technologies, Inc.
(Nutmeg). IWC, which serves the water treatment needs of customers in the
Netherlands, Belgium, Germany and the Commonwealth of Independent States,
reported 1996 revenues of approximately $20 million. Nutmeg, a water treatment
company which serves markets mainly in the Northeast United States, had 1996
sales of approximately $9 million.
In May 1997, the Company acquired the pulp and paper enzyme business of Ciba
Specialty Chemicals, Inc. The enzyme technology which was acquired is used in
paper mills to enhance fiber quality and water drainage during the paper
making process. Also in May 1997, the Company increased its investment in
Taiwan Nalco Chemical Co. Ltd. from 55 percent to 79 percent.
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In August 1997, the Company acquired a majority interest in Green Label
Products Inc. (Green Label). Green Label is located in Gainesville, Georgia
and supplies odor control products, technology and application systems for
chemically neutralizing objectionable odors of various processes.
During October 1997, the Company acquired the assets of Chemical
Technologies, Incorporated (CTI). CTI, with annual sales of approximately $18
million, is located in Jackson, Michigan and is a manufacturer and marketer of
synthetic fluids and lubricants that are used in cooling and lubricating
tooling employed in the machining of metal products. Also during October 1997,
the Company acquired Gamus Quimica, Ltda., a Brazilian manufacturer and
marketer of water treatment chemical products with annual sales of about $2
million.
During November 1997, the Company acquired Chemco Water Technology, Inc.
(Chemco). Chemco, which is located in Vancouver, Washington, manufactures and
markets boiler and cooling water treatment chemicals and services to steel,
paper, co-generation, chemical, petrochemical, food and beverage facilities
throughout the United States. Chemco has annual sales of approximately $7
million.
In November 1997, the Company announced it had signed a letter of intent to
sell its 50 percent interest in Nalco Fuel Tech.
In January 1998, the Company completed the acquisitions of USF Houseman
Waterbehandeling BV (Houseman), a Dutch water treatment company based in
Bergen op Zoom, Holland, and Trident Chemical Company (Trident) of Baton
Rouge, Louisiana. Houseman provides boiler and cooling water chemicals and
services to office buildings, retail outlets and manufacturing facilities
throughout Holland, Spain and Belgium. Houseman has annual sales of more than
$3 million. Trident manufactures and markets water treatment chemicals and
services to refinery, petrochemical and utility customers throughout the Gulf
Coast region of the United States. Trident had 1997 annual sales of
approximately $9 million.
In February 1998, the Company completed the merger of its South African
water treatment interest with those of Chemical Services Limited. The merged
entity, Nalco-Chemserve, is South Africa's largest specialty chemicals
company. Estimated 1998 sales are anticipated to be approximately $35 million.
There were no other significant changes in the markets served or in the
methods of distribution since the beginning of 1997.
Although no single Service Chemicals product represents a material portion
of the business, historically, new product and new market developments have
been designed to increase market penetration and to maintain sales and
earnings growth.
OTHER MATTERS
The principal raw materials used by Nalco ordinarily are available in
adequate quantities from several sources of supply in the United States and in
foreign countries. Purchases of chemicals are made in the ordinary course of
business and in accordance with the requirements of production.
Inventories of Service Chemicals are maintained in Nalco-owned facilities
and in warehouses situated throughout the United States and in countries in
which subsidiaries operate. Shipments to customers may be made from either
manufacturing plants or warehouse stocks.
Nalco owns or is licensed under a large number of patents relating to a
number of products and processes. Nalco's rights under such patents and
licenses are of significant importance in the operation of the business, but
no single patent or license is believed to be material with respect to its
business. Over 800 patents existed at the end of 1997 with remaining durations
ranging from less than one year to 20 years with an average duration of about
10 years.
Nalco's business is considered nonseasonal. Large dollar amounts of backlogs
are unusual since chemicals are normally shipped within a few days of the
receipt of orders. The dollar amount of the normal backlog of orders is not
considered to be significant in relation to the total annual dollar volume of
sales of Nalco.
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The Company does not depend upon either a single customer, or very few
customers, for a material part of the business.
Nalco's laboratories are involved in research and development of chemical
products and in providing technical support, including chemical analyses of
water and process samples. Research and development expenses of continuing
operations amounted to $43.0 million in 1997, compared to $41.9 million in
1996 and $39.8 million in 1995.
There were approximately 6,900 persons employed full time by Nalco at the
end of 1997.
Compliance with Federal, State, and local regulations relating to the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, has not had a material effect upon the capital
expenditures, earnings or competitive position of Nalco. There are no material
capital expenditures for environmental control facilities anticipated during
1998. Compliance with increasingly stringent regulations should not have a
material effect upon earnings but may strengthen the competitive position of
Nalco because of available capital and technical resources.
Although inflation is not a significant factor domestically, the Company
adjusts selling prices to maintain profit margins wherever possible.
Investments are made in modern plants and equipment that will increase
productivity and thereby minimize the effect of rising costs. In addition, the
last-in, first-out (LIFO) valuation method is used for some of the Company's
inventories, so that changing material costs are recognized in reported income
and pricing decisions. The impact of inflation in foreign exchange movements
at foreign subsidiaries is managed by minimizing assets exposed to currency
movements and by increasing sales prices to parallel increases in local
inflation rates. The Company emphasizes working capital management, frequent
dividend remittance, timely settlement of intercompany account balances,
foreign currency borrowings and selected hedging. In most hyperinflationary
economies, the rate of local currency devaluation is related to and
approximately equal to the local inflation rate. Therefore, Nalco attempts to
increase its local selling prices to help offset the impact of devaluation on
exposed assets and the impact of increases in local content costs.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Registrant are named below together with their
principal occupation. During the last 5 years all of the executive officers
have been employed by the Company.
E. J. Mooney has been Chairman of the Board and Chief Executive Officer of
the Company since 1994 and President since 1990.
M. B. Harp has been Executive Vice President, Operations since 1995. He had
been Executive Vice President, International Operations since 1993.
W. S. Weeber has been Executive Vice President, Operations Staff since 1993.
P. Dabringhausen has been Group Vice President, President, Pulp & Paper
Division since January 1, 1998. He had been Group Vice President and
President, Process Chemicals Division since 1993.
S. D. Newlin has been Group Vice President, President, Specialty Division
since January 1, 1998. He had been Group Vice President, President, Nalco
Europe since 1994, and from 1992 to 1994 he was Vice President, President,
Nalco Pacific.
G. M. Brannon has been Group Vice President, President, Industrial Division
since January 1, 1998. He had been Group Vice President, President, Nalco
Pacific since February 1997. He was Vice President, President Nalco Pacific
from 1994 to 1997, and from 1990 to 1994 he was General Manager of the Utility
Chemicals Group.
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G. Pinzon has been Group Vice President, President, Nalco Latin America
since February 1997. He had been Vice President, President, Nalco Latin
America since 1994. He was Division Vice President, Latin America from 1989 to
1994, and Company Manager of Nalco de Venezuela, C.A. from 1992 to 1994.
W. E. Buchholz has been Senior Vice President and Chief Financial Officer
since February 1997. He had been Vice President and Chief Financial Officer
since 1993.
The corporate officers of the Registrant are usually elected at the annual
meeting of directors and hold office for a term of one year.
There is no family relationship between any of the executive officers. No
arrangement or understanding exists between the executive officers and any
other person pursuant to which such officers were selected as officers of the
Registrant.
For further information on the executive officers of the Registrant, please
refer to the Inside Back Cover of the Company's 1997 Annual Report to
Shareholders, which is incorporated herein by reference.
ITEM 2. PROPERTIES.
Nalco has facilities used to produce and store inventories and service
customer needs at 11 domestic and 26 foreign locations. Primary domestic
manufacturing plants are located in:
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LAND BUILDING
AREA AREA
(ACRES) (SQ.FT.)
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Carson, California....................................... 21 84,000
Jonesboro, Georgia....................................... 12 35,000
Chicago, Illinois........................................ 39 750,000
Garyville, Louisiana..................................... 225 170,000
Paulsboro, New Jersey.................................... 14 34,000
Chagrin Falls, Ohio...................................... 13 28,000
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Other domestic manufacturing and/or warehouse facilities are located in:
Oklahoma City, Oklahoma; Charlotte, North Carolina; Jackson, Michigan; Baton
Rouge, Louisiana; and Vancouver, Washington.
The general offices of the Company are located on a 146-acre site in
Naperville, Illinois. This facility includes three five-story buildings
totaling 417,000 square feet. About 317,000 square feet is used for office
space and the balance is used for support services and storage. A power plant
with a cogeneration system (steam and electricity) serves both the Corporate
and Technical Centers and has 31,000 square feet of space.
The primary domestic research facility is located in Naperville, Illinois.
The Naperville Technical Center is adjacent to the Corporate Center and houses
process simulation areas in buildings which total 235,000 square feet.
Primary foreign manufacturing plants are located in:
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AREA AREA
(ACRES) (SQ.FT.)
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Botany, Australia........................................ 10 102,000
Suzano, Brazil........................................... 14 90,000
Burlington, Canada....................................... 14 138,000
Cheshire, England........................................ 15 226,000
Biebesheim, Germany...................................... 28 103,000
Cisterna di Latina, Italy................................ 25 115,000
Celra, Spain............................................. 25 109,000
Anaco, Venezuela......................................... 43 82,000
</TABLE>
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Other foreign facilities are located in: Perth, Australia; Vienna, Austria;
Buenos Aires, Argentina; Santiago, Chile; Suzhou, The People's Republic of
China; Soledad, Colombia; Lerma, Mexico; West Bengal, India; Bogor, Indonesia;
Kashima, Japan; Tilburg, the Netherlands; Auckland, New Zealand; Calamba,
Laguna, Philippines; Dammam, Saudi Arabia; Jurong Town, Singapore; Hsin Chu
Hsien, Taiwan; and Maracaibo, Venezuela.
The Company also has a 72,000 square-foot business and technical center on a
12-acre site in Oegstgeest, the Netherlands. This facility serves customers
throughout Europe.
In addition to the property mentioned above, Nalco occupies general and
sales offices and warehouses which are rented under short-term leases. Except
for land leased in Charlotte, North Carolina; the Philippines; Saudi Arabia;
Chile and The People's Republic of China, all other real property (including
all production facilities) is owned by Nalco.
While the plants are of varying ages, the Company believes that they are
well maintained, are equipped with modern and efficient equipment, and are in
good operating condition and suitable for the purposes for which they are
being used.
In 1997, the Company opened a new manufacturing facility in Charlotte, North
Carolina and purchased facilities in Jackson, Michigan and Vancouver,
Washington. In January 1998, the Company purchased a facility located in Baton
Rouge, Louisiana.
Consolidation of operations continued in 1997 with the closing of the
Clarksburg, West Virginia plant at year end.
Capital expenditures for 1998 should approximate $100.0 million compared to
the $101.4 million spent in 1997, if planned sales and earnings for 1998 are
reached.
ITEM 3. LEGAL PROCEEDINGS.
For information on this item, please refer to Note 19 of the Notes to
Consolidated Financial Statements in the Company's 1997 Annual Report to
Shareholders, which is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
The Registrant's Common Stock is listed on the New York and Chicago Stock
Exchanges. The number of holders of record of Common Stock, par value $0.1875
per share, at December 31, 1997 was 5,047. Dividends and Common Stock market
prices, included in the Quarterly Summary appearing on page 39 of the
Company's 1997 Annual Report to Shareholders, are incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data, including net sales, earnings from continuing
operations, earnings from continuing operations per common share, total
assets, long-term debt and cash dividends paid, are reported in the Eleven
Year Summary on pages 36 and 37 of the Company's 1997 Annual Report to
Shareholders and are incorporated herein by reference.
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128 (SFAS 128), "Earnings Per Share." In accordance with the requirements of
SFAS 128, the Company has restated all prior period earnings per share data
presented.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Financial Condition and Results of Operations
Management's discussion and analysis of financial condition and results of
operations, which is included in the section titled "Management's Discussion
and Analysis--1997 vs. 1996," "Management's Discussion and Analysis--1996 vs.
1995" and "Management's Discussion and Analysis--Financial Condition," on
pages 17 to 19 of the Company's 1997 Annual Report to Shareholders, is
incorporated herein by reference.
Liquidity and Capital Resources
Management's discussion of liquidity and capital resources, which is
included in the section titled "Management's Discussion and Analysis--Cash
Flows" on pages 20 and 21 of the Company's 1997 Annual Report to Shareholders,
is incorporated herein by reference.
Year 2000 Compliance
Management's discussion of the effects of the Year 2000 Issue, which is
included in the section titled "Management's Discussion and Analysis--Year
2000 Compliance" on page 21 of the Company's 1997 Annual Report to
Shareholders, is incorporated herein by reference.
EURO Currency
The Company has initiated actions to determine the requirements of
customers, vendors and government/regulatory agencies in regard to the
European Economic and Monetary Union's (EMU) conversion to a single currency
(EURO). Accordingly, no estimates are currently available for incremental
costs, if any, that would be incurred to enable the Company to be compliant
with any requirements that may be generated by the EMU's conversion to a
single currency.
Forward-Looking Statements
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Annual Report contain forward-looking
statements that are based on current expectations, estimates and assumptions
regarding the worldwide economy, technological innovation, competitive
activity, interest rates, pricing, currency movements, and the development of
certain markets. These statements are not guarantees of future results or
events, and involve certain risks and uncertainties which are difficult to
predict and many of which are beyond the control of the Company. Actual
results and events could differ materially from those anticipated by the
forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Management's discussion of its market risk exposures and its risk management
strategies, which is included in the section titled "Management's Discussion
and Analysis--1997 vs. 1996" on pages 17 and 18 of the Company's 1997 Annual
Report to Shareholders, is incorporated herein by reference.
The Registrant's market-risk-sensitive instruments do not subject the
Registrant to material market risk exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Report of Independent Accountants, the Consolidated Financial Statements
and the Notes to Consolidated Financial Statements of the Registrant and its
subsidiaries, included in the Company's 1997 Annual Report to Shareholders,
are incorporated herein by reference.
The Quarterly Summary in the Company's 1997 Annual Report to Shareholders is
incorporated herein by reference.
In 1997, the Company adopted SFAS 128, "Earnings Per Share." In accordance
with the requirements of SFAS 128, the Company has restated all prior period
earnings per share data presented.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Item 10 information is set forth in Part I, Item 1, under Executive Officers
of the Registrant and also in the Company's Proxy Statement dated March 16,
1998, under Election of Directors through Election of Directors--Meeting of
the Board and Committees of the Board, which is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information contained under Election of Directors--Directors'
Remuneration and Retirement Policies through Election of Directors--Change in
Control in the Company's Proxy Statement dated March 16, 1998, with respect to
executive compensation and transactions, is incorporated herein by reference
in response to this item.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained under Shares Outstanding and Voting Rights in the
Company's Proxy Statement dated March 16, 1998, with respect to security
ownership of certain beneficial owners and management, is incorporated herein
by reference in response to this item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) The following consolidated financial statements of the Registrant and
its subsidiaries included in the Company's 1997 Annual Report to Shareholders
are incorporated herein by reference in Item 8:
Statements of Consolidated Financial Condition
December 31, 1997 and 1996
Statements of Consolidated Earnings
Years ended December 31, 1997, 1996 and 1995
Statements of Consolidated Cash Flows
Years ended December 31, 1997, 1996 and 1995
Statements of Consolidated Common Shareholders' Equity
Years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Quarterly Summary (Unaudited)
Years ended December 31, 1997 and 1996
Report of Independent Accountants
(2) The following consolidated financial statement schedule for the years
1997, 1996 and 1995 is submitted herewith:
Report of Independent Accountants on Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
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(3) Exhibits
Exhibit 3A --Restated Certificate of Incorporation(/2/)
Exhibit 3B --Certificates of Correction and Amendment to the Restated
Certificate of Incorporation(/6/)
Exhibit 3C --Certificate of Designations, Preferences and Rights of Series
B ESOP Convertible Preferred Stock(/4/)
Exhibit 3D --Certificate of Designations, Preference and Rights of Series C
Junior Participating Preferred Stock(/12/)
Exhibit 3E --By-laws(/9/)
Exhibit 10A --Form of Key Executive Agreement(/1/)
10B --Agreements to Restore Benefits Reduced by Excess ERISA-Related
Limits(/1/)
10C --Form of Death Benefit Agreement(/2/)
10D --Management Incentive Plan(/8/)
10E --Restricted Stock Plan(/6/)
10F --1982 Stock Option Plan as amended April 26, 1984, January 30,
1987, February 12, 1993, and October 17, 1996(/10/)
10G --Deferred Compensation Plan for Directors(/3/)
10H --Supplemental Retirement Income Plan(/5/)
10I --1990 Stock Option Plan as amended April 23, 1992, February 12,
1993, and October 17, 1996(/10/)
10J --Stock Option Plan for Non-Employee Directors(/7/)
10K --Directors Benefit Protection Trust of Nalco Chemical
Company(/5/)
10L --Management Benefit Protection Trust of Nalco Chemical
Company(/5/)
10M --Restricted Stock Trust of Nalco Chemical Company(/5/)
10N --Performance Share Plan as amended effective February 16, 1996
and October 17, 1996(/10/)
10O --Employee Stock Compensation Plan as amended effective January
1, 1996 and October 17, 1996(/10/)
10P --Non-Employee Directors Stock Compensation Plan (/8/)
Exhibit 11 --Computation of Earnings Per Share
Exhibit 13 --Those portions of the 1997 Annual Report to Shareholders
expressly incorporated herein by reference
Exhibit 21 --Subsidiaries of the Registrant
Exhibit 23 --Consent of Independent Accountants
Exhibit 27A --Financial Data Schedule
Exhibit 27B --Restated Financial Data Schedules
Exhibit 99A --Notice of Annual Meeting and Proxy Statement(/13/)
Exhibit 99B --September 16, 1996 Letter to Shareholders with Summaries of
the Preferred Share Purchase Rights Agreement(/11/)
Exhibit 99C --Form 11-K Annual Report
Exhibit Nos. 10A-10P constitute management contracts, compensation plans, or
arrangements covering directors and officers of the Company.
(b) Reports on Form 8-K filed in the fourth quarter of 1997 are: None
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(/1/Incorporated)herein by reference from the Registrant's Form 10-K for the
year ended 1986.
(/2/)Incorporated herein by reference from the Registrant's Form 10-K for the
year ended 1987.
(/3/)Incorporated herein by reference from the Registrant's Form 8-K dated
July 24, 1986.
(/4/)Incorporated herein by reference from the Registrant's Form 8-K dated May
15, 1989.
(/5/)Incorporated herein by reference from the Registrant's Form 10-K for the
year ended 1990.
(/6/)Incorporated herein by reference from the Registrant's Form 10-K for the
year ended 1991.
(/7/)Incorporated herein by reference from the Registrant's Form 10-K for the
year ended 1992.
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(/8/Incorporated)herein by reference from the Registrant's Notice of Annual
Meeting and Proxy Statement dated March 18, 1996.
(/9/)Incorporated herein by reference from the Registrant's Form 10-Q for the
quarter ended June 30, 1996.
(/1//Incorporated0herein/by)reference from the Registrant's Form 10-Q for the
quarter ended September 30, 1996.
(/1//Incorporated1herein/by)reference from the Registrant's Form 8-K dated
June 24, 1996.
(/1//Incorporated2herein/by)reference from the Registrant's Form 8-A dated
June 24, 1996.
(/1//Incorporated3herein/by)reference from the Registrant's Notice of Annual
Meeting and Proxy Statement dated March 16, 1998.
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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, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON MARCH 27, 1998 BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED.
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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
B. S. Kelly Director
___________________________________________
B. S. Kelly
F. A. Krehbiel Director
___________________________________________
F. A. Krehbiel
E. J. Mooney Director
___________________________________________
E. J. Mooney
S. A. Penrose Director
___________________________________________
S. A. Penrose
W. A. Pogue Director
___________________________________________
W. A. Pogue
J. J. Shea Director
___________________________________________
J. J. Shea
</TABLE>
10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Nalco Chemical Company
Our audits of the consolidated financial statements referred to in our
report dated February 2, 1998 appearing on page 38 of the 1997 Annual Report
to Shareholders of Nalco Chemical Company (which report and consolidated
financial statements are incorporated by reference in this Annual Report on
Form 10-K) also included an audit of the Financial Statement Schedule listed
in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement
Schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
Price Waterhouse LLP
Chicago, Illinois
February 2, 1998
11
<PAGE>
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
--------------
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ---------- --------------------- ------------ ----------
ADDITIONS
---------------------
(1) (2)
CHARGED CHARGED TO
BALANCE AT TO COSTS OTHER BALANCE AT
BEGINNING AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ---------- --------- ---------- ------------ ----------
<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:
$938,000(B)
December 31, 1997....... $4,936,000 $ 630,000 $ 22,000(A) 480,000(C) $4,170,000
========== ========= ======== ======== ==========
$738,000(A)
December 31, 1996....... $4,439,000 $ 388,000 17,000(C) $646,000(B) $4,936,000
========== ========= ======== ======== ==========
December 31, 1995....... $5,605,000 $(648,000) $ 73,000(C) $591,000(B) $4,439,000
========== ========= ======== ======== ==========
</TABLE>
- - --------
Note A--Valuation of assets acquired.
Note B--Excess of accounts written off over recoveries.
Note C--Foreign currency translation adjustments.
12
<PAGE>
EXHIBIT (11)
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1997 1996 1995
-------- -------- --------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
BASIC
Average shares outstanding..................... 66,700 67,280 67,495
======== ======== ========
Earnings from continuing operations............ $163,380 $145,936 $135,664
Earnings from discontinued operations, net of
taxes......................................... -- 8,546 18,034
-------- -------- --------
Earnings before effect of accounting change.... 163,380 154,482 153,698
Cumulative effect of change in accounting for
business process reengineering costs, net of
taxes......................................... (4,544) -- --
-------- -------- --------
Net earnings................................... 158,836 154,482 153,698
Dividends on preferred stock, net of taxes..... (11,466) (11,363) (11,208)
-------- -------- --------
Net earnings to common shareholders............ $147,370 $143,119 $142,490
======== ======== ========
Per share amounts:
Earnings from continuing operations............ $ 2.28 $ 2.00 $ 1.84
Earnings from discontinued operations, net of
taxes......................................... -- .13 .27
Cumlative effect of change in accounting for
business process reengineering costs, net of
taxes......................................... (.07) -- --
-------- -------- --------
Net earnings to common shareholders............ $ 2.21 $ 2.13 $ 2.11
======== ======== ========
</TABLE>
<PAGE>
EXHIBIT (11)
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1997 1996 1995
-------- -------- --------
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
DILUTED
Average shares outstanding during the year per
Basic EPS..................................... 66,700 67,280 67,495
Effect of dilutive securities:
Assumed conversion of preferred stock.......... 7,760 7,930 8,037
Stock options and contingently issuable shares. 805 319 410
-------- -------- --------
TOTALS....................................... 75,265 75,529 75,942
======== ======== ========
Earnings from continuing operations............ $163,380 $145,936 $135,664
Earnings from discontinued operations, net of
taxes......................................... -- 8,546 18,034
-------- -------- --------
Earnings before effect of accounting change.... 163,380 154,482 153,698
Cumulative effect of change in accounting for
business process reengineering costs, net of
taxes......................................... (4,544) -- --
-------- -------- --------
Net earnings................................... 158,836 154,482 153,698
Additional ESOP expense resulting from assumed
conversion of preferred stock, net of taxes... (4,464) (4,515) (4,643)
Income tax adjustment on assumed common
dividends..................................... (1,041) (920) (793)
-------- -------- --------
Net earnings to common shareholders............ $153,331 $149,047 $148,262
======== ======== ========
Per share amounts:
Earnings from continuing operations............ $ 2.10 $ 1.86 $ 1.71
Earnings from discontinued operations, net of
taxes......................................... -- .11 .24
Cumulative effect of change in accounting for
business process reengineering costs, net of
taxes......................................... (.06) -- --
-------- -------- --------
Net earnings to common shareholders............ $ 2.04 $ 1.97 $ 1.95
======== ======== ========
</TABLE>
<PAGE>
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
APPENDIX TO 1997 FORM 10-K
GRAPHS AND IMAGE MATERIAL
1997 ANNUAL REPORT TO SHAREHOLDERS
The following is a list and narrative description of graphs included in those
portions of the 1997 Annual Report to Shareholders expressly incorporated herein
by reference.
In the portion of the Annual Report to Shareholders titled "Management's
Discussion and Analysis" the following graphs appear:
Sales, based on continuing operations, in millions of dollars. The values
depicted in the graph are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1995 $1,215
1996 $1,304
1997 $1,434
</TABLE>
Earnings before income taxes, based on continuing operations, in millions of
dollars. The values depicted in the graph are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1995 $213
1996 $229
1997 $256
</TABLE>
Depreciation, in millions of dollars. The values depicted in the graph are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1995 $85
1996 $92
1997 $93
</TABLE>
<PAGE>
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
APPENDIX TO 1997 FORM 10-K
GRAPHS AND IMAGE MATERIAL
1997 ANNUAL REPORT TO SHAREHOLDERS
Market Value of Nalco Common Share at Year-End Closing Price, in dollars.
The values depicted in the graph are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1995 $30.125
1996 $36.125
1997 $39.563
</TABLE>
Shareholders' Equity, in millions of dollars. The values depicted in the graph
are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1995 $580
1996 $655
1997 $653
</TABLE>
Return on Shareholders' Equity, based on continuing operations, and before
effect of change in accounting principle in 1997, in percentages. The values
depicted in the graph are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1995 24.1%
1996 23.5%
1997 24.7%
</TABLE>
Cash Provided by Operating Activities, in millions of dollars. The values
depicted in the graph are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1995 $213
1996 $229
1997 $214
</TABLE>
<PAGE>
NALCO CHEMICAL COMPANY AND SUBSIDIARIES
APPENDIX TO 1997 FORM 10-K
GRAPHS AND IMAGE MATERIAL
1997 ANNUAL REPORT TO SHAREHOLDERS
Capital Additions, in millions of dollars. The values depicted in the graph are
as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1995 $127
1996 $ 93
1997 $101
</TABLE>
Dividends per Common Share, in dollars. The values depicted in the graph are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1995 $0.99
1996 $1.00
1997 $1.00
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
1997 vs 1996
Sales were $1,434 million in 1997, an increase of 10 percent over last year's
sales of $1,304 million. Changes in volume, mix and price increased sales 6
percent over 1996, while acquisitions resulted in a 5 percent gain over last
year. Effective July 1, 1997, the Company adopted the policy of reporting
freight revenues as a component of sales rather than offsetting freight costs
that are included as a component of cost of products sold. This resulted in
recognizing additional revenues of approximately $28 million for the year 1997.
Adverse foreign currency translation effects resulting from the stronger U.S.
dollar compared to virtually all European and Asian currencies reduced 1997
sales by approximately $39 million or 3 percent. Sales for 1997 and 1996 by
major operating unit were as follows:
<TABLE>
<CAPTION>
1997 vs 1996
(in millions) 1997 1996 Increase
- - -------------------------------------------------------- --------
<S> <C> <C> <C>
Water and Waste Treatment $ 470.6 $ 412.7 14%
Process Chemicals 379.4 346.4 10
Europe 317.2 289.3 10
Latin America 113.1 107.3 5
Pacific 153.4 147.8 4
-------- --------
Total $1,433.7 $1,303.5 10
======== ========
</TABLE>
The Water and Waste Treatment Division reported a 14 percent gain over 1996.
Slightly more than three-fourths of the increase was attributable to sales by
acquired companies and the aforementioned change in the reporting of freight
revenues. Modest improvements posted by the other four marketing groups in the
Division accounted for the balance of the change. Sales by the Process Chemicals
Division rose 10 percent over last year, with acquisitions and freight revenues
representing slightly over one-third of the increase. Excluding freight, the
General Industry and Pulp Technologies Groups reported double-digit gains while
the Paper Group posted a more modest improvement. The Europe Division reported a
10 percent sales gain with most operations in the Division posting solid
improvements in local currencies. Acquisitions and freight revenues had an 11
percent positive effect on Europe Division sales, but this was largely offset by
a nearly 9 percent negative impact due to the stronger U.S. dollar compared to
European currencies. The Latin America Division reported a 5 percent sales
increase with double-digit gains posted by operations in Chile, Mexico and
Venezuela. Acquisitions and the change in reporting of freight revenues were
insignificant for the Division's sales, as well as for the Pacific Division.
Pacific Division sales were up 4 percent over 1996 despite a nearly 10 percent
negative translation impact resulting from the stronger U.S. dollar compared to
Asian currencies. Double-digit gains in local currencies were reported by
operations in China, Japan, Korea, Indonesia, the Philippines,
Singapore/Malaysia and Thailand.
Cost of products sold was 43.9 percent of sales for 1997, which reflects the
classification of approximately $28 million of freight revenue as a component of
sales rather than as an offset to cost of products sold. On a comparable basis,
cost of products sold would have been 42.8 percent of sales as compared to 43.6
percent for 1996. This improvement was attributable to the Company's North
American operations, and reflected lower raw material costs and tighter control
of manufacturing expenses.
Selling, administrative and research expenses were up $43 million or 8 percent
over 1996, with acquisitions accounting for over two-thirds of this increase.
Higher selling and service expenses in select markets account for most of the
remaining change. The translation effect of changes in foreign currency exchange
rates moderated the increase in expenses by approximately $15 million.
Interest and other income for 1997 decreased $2 million from 1996. Unfavorable
foreign currency exchange adjustments, primarily related to operations in the
Pacific, accounted for most of the decrease.
Interest expense of $15 million in 1997 was up $1 million over 1996, and
reflected increased average borrowing levels to finance acquisitions and the
repurchase of the Company's common stock.
Nalco's equity in earnings of its Nalco/Exxon Energy Chemicals, L.P.
(Nalco/Exxon) joint venture was $28 million, a $3 million improvement over the
$25 million reported in 1996. The increase reflects improved margins and
continuing benefits of cost controls.
If Nalco's portion of Nalcos/Exxon's income tax expense was reclassified from
equity in earnings of partnership to income taxes, the effective tax rate for
1997 and 1996 would have been 37.5 percent and 37.6 percent, respectively.
Earnings from continuing operations as a percent to sales was 11.4 percent in
1997 compared to 11.2 percent for the year 1996.
The Company recognized a one-time after-tax charge of $4.5 million during the
fourth quarter of 1997, which was comprised of unamortized capitalized business
process reengineering costs. (See Note 10).
Because the Company conducts its business worldwide, its earnings and cash flows
are subject to fluctuations due to changes in foreign currency exchange
- 17 -
<PAGE>
rates. The Company continually monitors its exposure to exchange rate risks, and
reduces its exposure to changing foreign currency exchange rates through both
operational and financial market actions. The Company's products are
manufactured in several locations around the world, and its customers are served
by locally-based sales engineers. This results in a cost base that is well
diversified over a number of international currencies as well as the U.S.
dollar. This diverse base of local currencies serves to partially offset the
earnings effect of potential changes in the translated value of the Company's
local currency denominated revenues. However, the primary operational method of
mitigating the effect of foreign currency devaluations is the aggressive pursuit
of local currency price increases. The Company also attempts to reduce its
exposure to exchange rate fluctuations with regard to transactions through
timely settlement of intercompany balances, the use of foreign currency
borrowings, balance sheet structure and selective hedging.
The Company makes limited use of derivative financial instruments such as
interest rate swaps and foreign exchange contracts. Interest rate swaps are used
to reduce the potential impact of increases in interest rates on floating rate
long-term debt, while foreign exchange contracts are used to minimize exposure
and reduce risk from exchange rate fluctuations. The Company does not hold or
issue financial instruments for trading purposes. (See Note 17).
The Company is involved in environmental clean-up activities in connection with
former waste disposal sites and plant locations and litigation in the normal
course of business. (See Note 19). This involvement has not had, nor is it
expected to have, a material effect on the Company's earnings or financial
position.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128 (SFAS 128), "Earnings per Share," which establishes
standards for computing and presenting earnings per share (EPS) and simplifies
the standards for computing EPS previously found in Accounting Principles Board
Opinion No. 15 (APB 15), "Earnings per Share." As prescribed by SFAS 128, the
Company retroactively adopted this standard in the fourth quarter 1997, and has
restated all prior-period EPS data presented. The adoption of SFAS 128 had
little or no impact on previously reported EPS.
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income," which
establishes standards for reporting comprehensive income and its components.
Comprehensive income is defined as all changes in shareholders' equity during a
period except those resulting from investments by shareholders and distributions
to shareholders. Comprehensive income includes net earnings, foreign currency
translation adjustments, minimum pension liability adjustments, and unrealized
gains and losses on certain investments in debt and equity securities. The
Company adopted SFAS 130 in 1997, and all prior-period financial statements
presented have been reclassified to reflect application of the provisions of
SFAS 130. The adoption of SFAS 130 had no impact on the Company's consolidated
results of operations, financial condition or cash flows.
1996 vs 1995
Sales from continuing operations were $1,304 million in 1996, an increase of 7
percent over 1995 sales of $1,215 million. Sales by Diversey Water Technologies
(DWT), a middle market water treatment business which was acquired by the
Company in mid-1996, accounted for slightly less than one-third of the
improvement. Sales for 1996 and 1995 by major operating unit were as follows:
<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 posted a 10 percent gain over 1995, with
slightly more than half of the increase attributable to sales by DWT. Sales by
the Process Chemicals Division were up 10 percent over 1995, as the Pulp and
Paper Group reported a double-digit gain. The Latin America Division reported a
16 percent sales gain, as solid double-digit improvements were posted by all but
two of the operating units in the region. Reported sales by the Pacific Division
were only up 1 percent over 1995, because some business was transferred as of
the beginning of 1996 to the Nalco/Exxon joint venture. On a comparable basis,
Pacific Division sales increased 12 percent, as solid double-digit improvements
were posted by operations in Indonesia and Korea. Sales by Nalco's former
affiliate company in India, which became a majority owned subsidiary in the
fourth quarter of 1995, also contributed to the sales growth
- 18 -
<PAGE>
in the Division. Sales by the Europe Division were up 1 percent over 1995.
Higher sales in local currencies by most operating units in the region, combined
with sales by the European operations of DWT, were largely offset by sales
decreases due to the stronger U.S. dollar compared to 1995 and business now with
the Nalco/Exxon joint venture.
Cost of products sold was 43.6 percent of sales for 1996, compared with 43.7
percent of sales for 1995. This slight improvement was mainly attributable to
higher margins of the newly acquired DWT. Changes in product mix resulted in
slightly lower gross margins for the Company's existing North American
operations, and gross margins of the three International Divisions were also
slightly lower than 1995 on a combined basis.
Selling, administrative and research expenses in 1996 were up $41 million or 8
percent over 1995. Expenses of DWT and other operations acquired since late
1995, as well as increased spending to support growth in Latin America, the
Pacific, and the paper market, accounted for most of the increase.
Interest and other income for 1996 was down $5 million from 1995. Contributing
to this decline were translation losses resulting from the devaluation of the
Venezuelan bolivar, lower interest income reflecting a decrease in invested
balances, and a gain on the sale of assets recognized in 1995.
Interest expense of $14 million in 1996 was down $2 million from 1995, which was
mainly attributable to lower interest rates.
Nalco's equity in earnings of Nalco/Exxon was $25 million, an $8 million
increase over the $17 million reported in 1995. The increase reflected strong
growth in the joint venture's international operations, improved operating
efficiencies, and business transferred to the joint venture as of the beginning
of 1996.
If the Company's share of the Nalco/Exxon joint venture's income tax expense was
reclassified from equity in earnings of partnership to income taxes, the
effective tax rate for 1996 and 1995 would have been 37.6 percent and 37.0
percent, respectively.
Earnings from continuing operations as a percent to sales was 11.2 percent in
1996, which was unchanged from the rate for 1995.
In late October 1996, the Company completed the sale of its discontinued
superabsorbent chemicals business, realizing a gain of $3 million, net of income
taxes. Earnings from the discontinued operation, exclusive of the $3 million net
gain on the sale, were $6 million in 1996 and $18 million in 1995. (See Note 3).
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION
Total assets increased $46 million or 3 percent during 1997.
Accounts receivable were up $8 million or 4 percent. Most of this increase was
attributable to the accounts receivable of operations which were acquired by the
Company in 1997. (See Note 11). Higher worldwide sales levels in the fourth
quarter 1997 also contributed to the increase. Conversely, the stronger U.S.
dollar reduced the carrying value of the accounts receivable of the Company's
international operations. If translation rates were unchanged from year-end
1996, accounts receivable would have been about 10 percent higher than the $242
million reported at the end of 1997.
Inventories were up $4 million or 4 percent over year-ago levels, with
acquisitions accounting for approximately three-fourths of the increase. Year-
end 1997 inventories would have been about 12 percent higher than reported if
foreign currency translation rates were constant from a year ago.
The $47 million increase in goodwill was attributable to acquisitions made
during 1997, partly offset by additional amortization and the translation effect
of the stronger U.S. dollar in relation to various foreign currencies compared
to the end of 1996.
Total liabilities increased $48 million or 7 percent during 1997 mostly because
of a net increase in short-term and long-term debt which was used primarily to
finance acquisitions and repurchases of the Company's common stock.
Shareholders' equity decreased $2 million during 1997. The translation impact of
the stronger U.S. dollar resulted in a $42 million increase in foreign currency
translation adjustments and a corresponding decrease in shareholders' equity.
Common stock repurchases of 2.0 million shares at a cost of $76 million were
partly offset by treasury stock transactions for stock option, benefit and other
plans totaling $29 million. Net earnings of $159 million exceeded dividends
totaling $78 million.
Nalco's return on average shareholders' equity was 24.7 percent in 1997,
slightly higher than the 23.5 percent in 1996 based on earnings from continuing
operations.
- 19 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
CASH FLOWS
One of Nalco's most significant financial strengths is its ability to
consistently generate strong cash flow from operations. Net cash provided by
operating activities was $214 million in 1997, which was generated primarily
from net earnings before noncash charges such as depreciation and amortization.
Significant cash flow requirements in 1997 included capital investments of $101
million, business purchases of approximately $80 million, dividends of $78
million, and $76 million for the reacquisition of common stock.
In 1996, cash provided by operations was $229 million compared to the 1995 total
of $213 million.
Approximately two-thirds of the 1997 capital investments of $101 million was
attributable to investments in North America, which included $16 million for
field equipment, an initial investment of $10 million for the implementation of
the Company's new global management information systems, $9 million for PORTA-
FEED units and $9 million for transportation equipment. The Company plans to
continue to invest in internal growth in 1998 and it is expected that capital
investments will exceed $100 million.
Other significant investing activities in 1997 included the acquisition of
several businesses that operate in the Company's core markets of water treatment
and process chemicals, as well as an additional 24 percent interest in Nalco's
subsidiary company in Taiwan, for a total of approximately $80 million, net of
cash acquired. (See Note 11). Investing activities related to the Company's
Nalco/Exxon joint venture partnership included an additional $12 million of
borrowings from the joint venture.
Investments in North America accounted for over 60% of the 1996 capital
investments of $93 million, which included $18 million for PORTA-FEED units and
$10 million for transportation equipment. Investments in manufacturing
facilities and related support equipment for operations in Argentina and The
People's Republic of China totaled $8 million.
Other significant investing activities in 1996 included the acquisitions of DWT
and the water treatment chemicals business of Albright & Wilson U.K. Limited for
approximately $83 million, net of cash acquired. Borrowings from Nalco/Exxon
totaled $23 million during 1996, and the Company received $41 million from the
sale of the discontinued superabsorbent chemicals business.
Investing activities in 1995 totaled $156 million, which included $127 million
for investments in property, plant and equipment. Over two-thirds of the capital
spending in 1995 was for investments in the United States and included $26
million for PORTA-FEED units, $17 million for field equipment and $13 million
for transportation equipment. Investing activities in 1995 also included the
purchase of an additional 25 percent interest of Nalco Chemical India, Ltd., the
purchase of the pulp and paper chemical business of Texo Corporation, and
additional cash investments in Nalco/Exxon.
Net financing activities of $32 million in 1997 included dividends paid on
common stock of $67 million or $1.00 per share. Since the Company's founding in
1928, it has paid 278 consecutive quarterly dividends, and expects to continue
its policy of paying regular cash dividends. The Company continued its stock
repurchase program in 1997 by reacquiring 2.0 million shares of common stock at
a cost of $76 million. In 1996, the Company reacquired 0.7 million shares of
common stock at a cost of $26 million, and 1.3 million shares were repurchased
for $42 million in 1995. Cash received from treasury stock issued under option,
benefit and other plans totaled $22 million in 1997 and $10 million in both 1996
and 1995. Management believes that the stock repurchase program represents a
sound economic investment for Nalco's shareholders.
Other financing activities in 1997 consisted primarily of a net increase in
short-term and long-term debt of $95 million.
- 20 -
<PAGE>
Among the most significant financing activities in 1996 and 1995 were payments
for cash dividends and the repurchase of common stock.
Management expects that internal growth in existing businesses will be financed
principally from internally generated funds. For general purposes and to support
the ESOP loans and the issuance of commercial paper, Nalco has a $350 million
Revolving Credit Agreement with eleven banks. The credit arrangements were
unused at December 31, 1997. (See Note 14). With the agreement of the banks,
with two weeks notice, this credit can be increased to $600 million. In
addition, most foreign subsidiaries have established short-term borrowing
facilities in local currency and use them as the need arises. Net debt (short-
term and long-term borrowings less cash and cash equivalents) totaled $308
million, $245 million and $278 million at December 31, 1997, 1996 and 1995,
respectively.
Management believes that Nalco's strong cash flow, together with its unused debt
capacity, provides ample capability for the Company to pursue investment
opportunities ranging from internal growth to acquisitions and stock repurchase.
MANAGEMENT'S DISCUSSION AND ANALYSIS
YEAR 2000 COMPLIANCE
The potential computer system problems that may arise due to the year 2000 (the
Year 2000 Issue) result from computer programs that were designed to use two
digits rather than four to define years. Programs that use dates in calculations
or sorting may yield unexpected results or fail completely when encountering the
year "00" in 2000.
The Company's Board of Directors authorized the investment of approximately $50
million for the worldwide implementation of new business and management
information systems. The systems, based on software purchased from SAP America,
Inc., will provide an integrated suite of core business applications to support
all major functions worldwide including human resources, finance, environmental
health and safety, sales and marketing, and manufacturing and logistics. The new
systems are Year 2000 compliant, and will position the Company well to provide
uninterrupted service to all of its customers in the year 2000 and beyond. It is
expected that more than 80 percent of the estimated cost of implementation will
be capitalized. At the time the systems are placed in service, the capitalized
costs will be amortized over the systems' estimated useful lives. Implementation
by geographic region is planned to occur beginning in 1998 and concluding in
2001.
The Company is conducting a program to detect problems that may result from the
Year 2000 Issue, including problems with any of the Company's current legacy
systems that will not be replaced by the year 2000, as well as computerized
equipment used at customers' sites. The program also addresses problems that may
arise with suppliers, customers, service providers and other third parties.
Management fully expects this program, in conjunction with the implementation of
the new systems discussed above, to sufficiently address and deal globally with
problems in a timely fashion to ensure no disruption in operations. However,
failures by other parties to address their own Year 2000 Issue could have a
material impact on the Company's ability to conduct its business, although no
specific risks have been identified at this time. Costs of conducting this
program are being expensed as incurred and are not expected to have a material
impact on the results of operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis and other sections of this Annual
Report contain forward-looking statements that are based on current
expectations, estimates and assumptions regarding the worldwide economy,
technological innovation, competitive activity, interest rates, pricing,
currency movements, and the development of certain markets. These statements are
not guarantees of future results or events, and involve certain risks and
uncertainties which are difficult to predict and many of which are beyond the
control of the Company. Actual results and events could differ materially from
those anticipated by the forward-looking statements.
- 21 -
<PAGE>
- - --------------------------------------------------------------------------------
Statements of Consolidated Earnings
<TABLE>
<CAPTION>
Years Ended December 31
--------------------------------------
(in millions, except per share figures) 1997 1996 1995
- - -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $1,433.7 $1,303.5 $1,214.5
Operating costs and expenses
Cost of products sold 629.6 568.6 531.3
Selling, administrative and research expenses 561.4 518.2 477.7
-------- -------- --------
1,191.0 1,086.8 1,009.0
-------- -------- --------
Operating Earnings 242.7 216.7 205.5
Interest and other income 0.7 2.6 7.2
Interest expense (15.3) (14.4) (16.2)
Equity in earnings of partnership 28.2 24.5 16.9
-------- -------- --------
Earnings from Continuing Operations
Before Income Taxes 256.3 229.4 213.4
Income taxes 92.9 83.5 77.7
-------- -------- --------
Earnings from Continuing Operations 163.4 145.9 135.7
Earnings from discontinued operations,
net of taxes - 8.6 18.0
-------- -------- --------
Earnings Before Effect of Accounting Change 163.4 154.5 153.7
Cumulative effect of change in accounting for
business process reengineering costs,
net of taxes (4.5) - -
-------- -------- --------
Net Earnings $ 158.9 $ 154.5 $ 153.7
======== ======== ========
Earnings Per Common Share--Basic
Earnings from continuing operations $ 2.28 $ 2.00 $ 1.84
Discontinued operations, net of taxes - .13 .27
Cumulative effect of change in accounting for
business process reengineering costs,
net of taxes (.07) - -
-------- -------- --------
Net earnings $ 2.21 $ 2.13 $ 2.11
======== ======== ========
Earnings Per Common Share--Diluted
Earnings from continuing operations $ 2.10 $ 1.86 $ 1.71
Discontinued operations, net of taxes - .11 .24
Cumulative effect of change in accounting for
business process reengineering costs,
net of taxes (.06) - -
-------- -------- --------
Net earnings $ 2.04 $ 1.97 $ 1.95
======== ======== ========
Average Shares Outstanding (in thousands)
Basic 66,700 67,280 67,495
======== ======== ========
Diluted 75,265 75,529 75,942
======== ======== ========
</TABLE>
The notes to consolidated financial statements on pages 26 through 35 are an
integral part of these statements.
- 22 -
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------
Statements of Consolidated Financial Condition
December 31
---------------------
(in millions, except per share figures) 1997 1996
- - -------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 49.7 $ 38.8
Receivables, less allowances
of $4.2 in 1997 and $4.9 in 1996 241.6 233.4
Inventories
Finished products 68.2 61.4
Materials and work in process 26.3 29.4
-------- --------
94.5 90.8
Prepaid expenses, taxes and other current assets 23.2 22.2
-------- --------
Total Current Assets 409.0 385.2
Other Assets
Investment in and advances to partnership 122.9 126.0
Goodwill, less accumulated amortization
of $29.5 in 1997 and $24.7 in 1996 249.4 202.5
Miscellaneous 167.1 158.8
-------- --------
Total Other Assets 539.4 487.3
Net Property, Plant and Equipment 492.5 522.0
-------- --------
Total Assets $1,440.9 $1,394.5
======== ========
Liabilities and Shareholders' Equity
Current Liabilities
Short-term debt $ 22.1 $ 31.3
Accounts payable 108.1 114.6
Accrued compensation 33.9 32.3
Other accrued expenses 57.5 65.7
Income taxes 34.0 45.8
-------- --------
Total Current Liabilities 255.6 289.7
Long-Term Debt 335.3 252.6
Deferred Income Taxes 37.2 42.9
Accrued Pension Benefits 40.8 38.6
Accrued Postretirement Benefits 100.7 98.5
Other Liabilities 18.6 17.7
Commitments and Contingent Liabilities - -
Shareholders' Equity
Preferred stock--par value $1.00 per share 0.4 0.4
Capital in excess of par value of shares 184.1 188.6
Unearned ESOP compensation (151.1) (162.6)
-------- --------
33.4 26.4
Common stock--par value $.1875 per share;
80.3 shares issued 15.1 15.1
Capital in excess of par value of shares 40.8 31.2
Common stock reacquired--at cost (420.4) (364.2)
Retained earnings 1,072.7 992.0
Accumulated other comprehensive income (88.9) (46.0)
-------- --------
Total Shareholders' Equity 652.7 654.5
-------- --------
Total Liabilities and Shareholders' Equity $1,440.9 $1,394.5
======== ========
</TABLE>
The notes to consolidated financial statements on pages 26 through 35 are an
integral part of these statements.
- 23 -
<PAGE>
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------
Statements of Consolidated Cash Flows
Years Ended December 31
---------------------------
(in millions) 1997 1996 1995
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Provided by (Used for) Operating Activities
Net earnings $ 158.9 $ 154.5 $ 153.7
Adjustments to reconcile net earnings to
cash provided by operating activities
Cumulative effect of change in accounting for
business process reengineering costs 4.5 - -
Depreciation and amortization 103.2 98.3 89.2
Equity in earnings of partnership,
net of distributions (17.4) (14.0) (10.8)
Noncurrent deferred income taxes (5.0) (9.0) (13.0)
Other--net 11.2 9.1 0.6
Changes in current assets and liabilities
Receivables (25.2) 6.4 (20.5)
Inventories (12.1) (0.1) (10.2)
Accounts payable 0.7 (15.9) 21.5
Other (5.1) (0.4) 2.0
------- ------- -------
Net Cash Provided by Operating Activities 213.7 228.9 212.5
------- ------- -------
Cash Provided by (Used for) Investing Activities
Additions to property, plant and equipment (101.4) (92.5) (126.7)
Business purchases (79.6) (83.4) (23.8)
(Investments in) advances from partnership 19.1 18.0 (8.2)
Proceeds from sale of business - 41.2 -
Other investing activities (4.9) 7.2 2.6
------- ------- -------
Net Cash (Used for)
Investing Activities (166.8) (109.5) (156.1)
------- ------- -------
Cash Provided by (Used for) Financing Activities
Cash dividends, net of taxes (78.2) (78.7) (78.1)
Proceeds from long-term debt 102.8 59.2 6.8
Payments of long-term debt (4.2) (12.1) (3.3)
Increase (decrease) in short-term debt (3.8) (69.5) 46.4
Common stock reacquired (75.7) (26.3) (42.4)
Other financing transactions 27.3 9.9 9.8
------- ------- -------
Net Cash (Used for) Financing Activities (31.8) (117.5) (60.8)
Effect of foreign exchange rate changes
on cash and cash equivalents (4.2) (1.2) (2.6)
------- ------- -------
Increase(decrease) in cash
and cash equivalents 10.9 0.7 (7.0)
Cash and cash equivalents at the
beginning of the year 38.8 38.1 45.1
------- ------- -------
Cash and Cash Equivalents
at the End of the Year $ 49.7 $ 38.8 $ 38.1
======= ======= =======
</TABLE>
The notes to consolidated financial statements on pages 26 through 35 are an
integral part of these statements.
- 24 -
<PAGE>
- - --------------------------------------------------------------------------------
Statements of Consolidated Common Shareholders' Equity
(in millions, except per share figures)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
--------------------------------------------------
Common Stock
Capital in Reacquired
Common Excess of --------------------
Stock Par Value Number
Issued of Shares of Shares Cost
-------------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $15.1 $25.5 12.4 $(317.7)
Net earnings
Other comprehensive income:
Minimum pension liability adjustment
--net of tax benefit of $0.2
Currency translation adjustments
--net of tax benefit of $0.9
Dividends on preferred stock
--net of tax benefit of $4.2
Dividends on common stock
($0.99 per share)
Treasury stock transactions 1.3 (42.4)
Stock issued under option,
benefit and other plans 2.3 (0.5) 9.8
------ ----- --------- -------
Balance at December 31, 1995 15.1 27.8 13.2 (350.3)
Net earnings
Other comprehensive income:
Minimum pension liability adjustment
Currency translation adjustments
--net of tax of $0.5
Dividends on preferred stock
--net of tax benefit of $3.9
Dividends on common stock
($1.00 per share)
Treasury stock transactions 0.7 (26.3)
Stock issued under option,
benefit and other plans 3.4 (0.6) 12.4
------ ----- --------- -------
Balance at December 31, 1996 15.1 31.2 13.3 (364.2)
Net earnings
Other comprehensive income:
Minimum pension liability adjustment
--net of tax benefit of $0.8
Currency translation adjustments
--net of tax benefit of $0.1
Dividends on preferred stock
--net of tax benefit of $3.5
Dividends on common stock
($1.00 per share)
Treasury stock transactions 2.0 (75.7)
Stock issued under option,
benefit and other plans 9.6 (1.0) 19.5
------ ----- --------- -------
Balance at December 31, 1997 $15.1 $40.8 14.3 $(420.4)
====== ===== ========= =======
</TABLE>
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
-----------------------
Minimum Foreign
Pension Currency
Retained Liability Translation Comprehensive
Earnings Adjustment Adjustments Income
--------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 $ 840.6 $(5.7) $(39.3)
Net earnings 153.7 $153.7
Other comprehensive income:
Minimum pension liability adjustment
--net of tax benefit of $0.2 (0.3) (0.3)
Currency translation adjustments
--net of tax benefit of $0.9 (8.7) (8.7)
Dividends on preferred stock
--net of tax benefit of $4.2 (11.2)
Dividends on common stock
($0.99 per share) (66.9)
Treasury stock transactions
Stock issued under option,
benefit and other plans
--------- ----- ------ ------
Balance at December 31, 1995 916.2 (6.0) (48.0) $144.7
======
Net earnings 154.5 $154.5
Other comprehensive income:
Minimum pension liability adjustment (0.1) (0.1)
Currency translation adjustments
--net of tax of $0.5 8.1 8.1
Dividends on preferred stock
--net of tax benefit of $3.9 (11.4)
Dividends on common stock
($1.00 per share) (67.3)
Treasury stock transactions
Stock issued under option,
benefit and other plans
--------- ----- ------ ------
Balance at December 31, 1996 992.0 (6.1) (39.9) $162.5
======
Net earnings 158.9 $158.9
Other comprehensive income:
Minimum pension liability adjustment
--net of tax benefit of $0.8 (1.2) (1.2)
Currency translation adjustments
--net of tax benefit of $0.1 (41.7) (41.7)
Dividends on preferred stock
--net of tax benefit of $3.5 (11.5)
Dividends on common stock
($1.00 per share) (66.7)
Treasury stock transactions
Stock issued under option,
benefit and other plans
--------- ----- ------ ------
Balance at December 31, 1997 $1,072.7 $(7.3) $(81.6) $116.0
========= ===== ====== ======
</TABLE>
The notes to consolidated financial statements on pages 26 through 35 are an
integral part of these statements.
- 25 -
<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 are reported on the equity method.
Certain amounts in the prior years' financial statements and notes thereto have
been reclassified to conform to the current year presentation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK--Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed completely to
perform as contracted. Management believes the likelihood of incurring material
losses due to concentration of credit risk is remote. The principal financial
instruments subject to credit risk are as follows:
Cash and cash equivalents, short-term marketable securities - Nalco has a
formal policy of placing these instruments in investment grade companies or
financial institutions and limiting the size of an investment with any single
entity.
Receivables - A large number of customers in diverse industries and
geographies, as well as the practice of establishing reasonable credit lines,
limits credit risk. The allowances for doubtful accounts are adequate to cover
potential credit risk losses.
Foreign exchange contracts and derivatives - The Company has formal policies
which establish credit limits and investment grade credit criteria of "A" or
better for all counterparties.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents include all cash balances
and highly liquid investments with original maturities of three months or less.
DERIVATIVES--Gains and losses on hedges of existing assets or liabilities are
included in the carrying amounts of those assets or liabilities and are
ultimately recognized in income as part of those carrying amounts. Gains and
losses related to qualifying hedges of firm commitments also are deferred and
are recognized in income or as adjustments of carrying amounts when the hedged
transaction occurs.
FOREIGN CURRENCY TRANSLATION--The local currency has been designated as the
functional currency in financial statements of companies which account for
approximately 88 percent of total foreign subsidiary net assets at the end of
1997. These financial statements are translated at current and average exchange
rates, with any resulting translation adjustments included in the currency
translation adjustment account in shareholders' equity. The remaining
subsidiaries operate in countries with highly inflationary environments and
their statements are translated using a combination of current, average, and
historical exchange rates, with the resulting translation impact included in
results of operations. Transactions executed in different currencies resulting
in exchange adjustments are included in results of operations. Foreign currency
exchange losses, included in interest and other income in 1997, 1996 and 1995,
were $4 million, $2 million and $1 million, respectively.
INVENTORY VALUATION--Inventories are valued at the lower of cost or market.
Approximately 38 percent of the inventories at the end of 1997 are valued using
the last-in, first-out (LIFO) method. The remaining inventories are valued using
the average cost or first-in, first-out (FIFO) method. If the FIFO method of
accounting had been used for all inventories, reported inventory amounts would
have been approximately $24 million and $25 million higher at December 31, 1997
and 1996, respectively.
GOODWILL--Goodwill consists of costs in excess of the fair value of net tangible
and identified intangible assets of acquired companies and is amortized over
periods ranging from 15 years to 40 years using the straight-line method. The
Company annually evaluates whether the projected earnings and undiscounted cash
flows of each of the acquired companies is sufficient to recover the carrying
value of the net investment, including goodwill, in order to determine if an
impairment has occurred. Management is currently of the opinion that no such
impairment exists.
STOCK-BASED COMPENSATION--The Company has adopted the "disclosure method"
provisions of Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock-Based Compensation." As permitted under SFAS 123, the
Company continues to recognize stock-based compensation costs under the
intrinsic value based method of accounting as prescribed by Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees."
INCOME TAXES--Income taxes are recognized during the year in which transactions
enter into the determination of financial statement income, with deferred income
taxes being provided for the tax effect of temporary differences between the
carrying amount of assets and liabilities and their tax bases.
Deferred income taxes are provided on the undistributed earnings of foreign
subsidiaries and affiliated companies except to the extent such earnings are
considered to be permanently reinvested in the subsidiary or affiliate. Where it
is contemplated that earnings will be remitted, credit for foreign taxes already
paid generally will offset applicable U.S. income taxes. In cases where foreign
tax credits will not offset U.S. income taxes, appropriate provisions are
included in the Consolidated Statements of Earnings. Repatriation of permanently
reinvested earnings would not materially increase the Company's tax liabilities.
- 26 -
<PAGE>
RETIREMENT PLANS--The cost of retirement plans is computed on the basis of
accepted actuarial methods (using the projected unit credit method for the
principal plan) and includes current service costs, amortization of increases in
prior service costs over the expected future service of active participants as
of the date such costs are first recognized, and amortization of the initial
unrecognized net pension asset or liability on a straight-line basis over 18
years.
The costs of health and life insurance postretirement benefits are accrued as
earned. Annual expense represents a combination of interest and service cost
provisions. Most postretirement benefits are not funded.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)--ESOP contribution expense is based upon
non-level debt payments made by the ESOP to meet the plan funding requirements.
RESEARCH AND DEVELOPMENT--Research and development costs ($43.0 million in 1997,
$41.9 million in 1996, and $39.8 million in 1995) are charged to expense as
incurred.
NOTE 2--BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA
Nalco is engaged in the worldwide manufacture and sale of highly specialized
Service Chemical programs. This includes production and service related to the
sale and application of chemicals and technology used in water treatment,
pollution control, energy conservation, oil production and refining,
steelmaking, papermaking, mining, and other industrial processes.
Within Nalco, sales between geographic areas are made at prevailing market
prices to customers minus an amount intended to compensate the sister Nalco
company for providing quality customer service.
Operating earnings represent sales less cost of products sold and operating
expenses. In computing operating earnings by geographic area, none of the
following items is considered: general corporate expenses, interest income or
expense, equity in earnings of partnerships and affiliated companies, or income
taxes.
Identifiable assets are those directly associated with operations of the
geographic area. Corporate assets consist mainly of cash and cash equivalents;
marketable securities; investments in unconsolidated partnership, affiliates,
and leveraged leases; and capital assets used for corporate purposes. Corporate
assets for 1995 also include the net assets of discontinued operations, which
were sold in 1996.
GEOGRAPHIC AREA DATA
<TABLE>
<CAPTION>
(in millions) 1997 1996 1995
- - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales
North America $ 898.5 $ 797.4 $ 723.6
Europe 317.2 289.3 285.8
Latin America 113.1 107.3 92.6
Pacific 153.4 147.8 146.1
Sales between areas (48.5) (38.3) (33.6)
-------- -------- --------
$1,433.7 $1,303.5 $1,214.5
======== ======== ========
Operating Earnings
North America $ 177.3 $ 154.4 $ 132.9
Europe 41.4 34.6 38.9
Latin America 19.2 21.7 22.1
Pacific 20.0 20.4 22.9
Expenses not allocated to areas (15.2) (14.4) (11.3)
-------- -------- --------
$ 242.7 $ 216.7 $ 205.5
======== ======== ========
Identifiable Assets
North America $ 615.6 $ 550.9 $ 526.1
Europe 272.9 271.6 259.9
Latin America 76.5 67.3 60.4
Pacific 158.5 185.4 171.3
Corporate 317.4 319.3 342.8
-------- -------- --------
$1,440.9 $1,394.5 $1,360.5
======== ======== ========
</TABLE>
NOTE 3--DISCONTINUED OPERATIONS
In October 1996, the Company completed the sale of its discontinued
superabsorbent chemicals business. The gain on the sale was $3 million, net of
income taxes of $1 million.
The results of the superabsorbent chemicals business have been classified as
discontinued operations in the accompanying financial statements. Sales from the
discontinued operation, which are excluded from consolidated sales, amounted to
$63 million in 1996 and $96 million in 1995. Excluding the aforementioned gain
on the sale, net earnings from discontinued operations totaled $6 million in
1996 and $18 million in 1995 which included the pretax operating earnings of the
discontinued operations, less applicable income taxes of $4 million in 1996 and
$11 million in 1995. The effective income tax rate for discontinued operations
differs from the federal statutory rate primarily because of state income taxes,
net of federal tax benefit.
NOTE 4--PENSION PLANS
The Company has several noncontributory defined benefit pension plans covering
most employees in the United States and those with six foreign subsidiaries. The
principal domestic plan represents approximately 69 percent of the projected
benefit obligation (PBO) and 79 percent of the total market value of assets.
This plan provides benefits that are based on years of service and the
employee's highest paid 48 months during the last 120 months before termination
of employment. Approximately 96 percent of the assets in the plan at December
31, 1997 were invested in stocks, bonds, and insurance contracts, and the
remaining assets were invested in professionally managed real estate trusts and
partnerships. No contributions have been made since 1984 due to the present
funded position of the plan and none are anticipated in 1998. Three of the six
foreign pension plans are unfunded, generally because amounts contributed are
not deductible for tax purposes.
- 27 -
<PAGE>
Employees in the United States whose pension benefits exceed ERISA limitations
are covered by a supplementary non-qualified, unfunded pension plan which is
being provided for by charges to earnings sufficient to meet the PBO. The
accruals for the cost of this plan are based on substantially the same actuarial
methods and economic assumptions as those used for the principal plan.
Net pension expense for all defined benefit plans included in operating results
was comprised of:
<TABLE>
<CAPTION>
(in millions) 1997 1996 1995
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned $ 16.0 $ 16.8 $ 12.4
Interest costs on the PBO 26.8 25.6 23.7
Actual return on plan assets (41.7) (31.8) (60.7)
Net amortizations and deferrals 12.7 4.3 35.8
--------- --------- --------
Net pension expense for defined benefit plans $ 13.8 $ 14.9 $ 11.2
========= ========= ========
Assumptions for the plans as of the end of the last three years were as follows:
U.S. Plans
---------------------------------
1997 1996 1995
- - ---------------------------------------------------------------------------------------------------------------------
Weighted-average discount rates 7.5% 8.0% 7.25%
Rates of increase in compensation levels 4.0 4.0 4.0
Rates of return on plan assets 9.5 9.5 9.5
- - ---------------------------------------------------------------------------------------------------------------------
Foreign Plans
---------------------------------
1997 1996 1995
--------- --------- --------
Weighted-average discount rates 6.0-7.25% 6.5-9.0% 6.0-9.0%
Rates of increase in compensation levels 3.0-6.0 4.0-6.25 4.0-6.5
Rates of return on plan assets 6.0-8.75 6.5-9.75 6.0-9.5
- - ---------------------------------------------------------------------------------------------------------------------
</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) 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $239.0 $220.5
Non-vested benefit obligation 23.0 17.6
------ ------
Total ABO 262.0 238.1
Effect of future salary increases 64.9 58.3
------ ------
Total PBO 326.9 296.4
Plan assets at fair market value 340.2 322.8
------ ------
Plan assets in excess of the PBO 13.3 26.4
Unrecognized net (asset)
from date of adoption (18.4) (21.6)
Unrecognized prior service cost 10.3 9.7
Unrecognized net actuarial losses (gains) 3.7 (2.2)
------ ------
Net pension assets recognized $ 8.9 $ 12.3
====== ======
</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
the ABO exceeds assets:
<TABLE>
<CAPTION>
(in millions) 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of:
Vested benefit obligation $ 31.9 $ 26.2
Non-vested benefit obligation 3.3 4.7
------ ------
Total ABO 35.2 30.9
Effect of future salary increases 8.3 11.0
------ ------
Total PBO 43.5 41.9
Plan assets at fair market value - -
------ ------
Plan assets (less) than the PBO (43.5) (41.9)
Unrecognized net liability
from date of adoption 1.8 2.2
Unrecognized prior service cost 5.8 6.6
Unrecognized net actuarial losses 14.3 12.8
Adjustment to recognize minimum liability (19.2) (18.3)
------ ------
Net pension (liabilities) recognized $(40.8) $(38.6)
====== ======
</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 Statement of Financial Accounting Standards No. 87 (SFAS 87),
"Employers' Accounting for Pensions," the Company has recorded a minimum pension
liability for certain plans, representing the excess of the ABO over plan assets
and accrued pension costs. A corresponding amount was recognized as an
intangible asset, except to the extent that these additional liabilities
exceeded related unrecognized prior service cost and net transition obligation,
in which case the increase in liabilities was charged directly to shareholders'
equity. The excess minimum pension liability resulted in after-tax charges to
shareholders' equity of approximately $7 million and $6 million in 1997 and
1996, respectively.
- 28 -
<PAGE>
NOTE 5--POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Nalco has defined benefit postretirement plans that provide medical, dental and
life insurance benefits for substantially all United States retirees and
eligible dependents. Nalco retains the right to change or terminate these
benefits.
Net postretirement benefit expense for all defined benefit plans included in
operating results was comprised of:
<TABLE>
<CAPTION>
(in millions) 1997 1996 1995
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned $ 2.1 $ 2.2 $ 1.8
Interest cost 5.5 5.1 5.5
Net amortization (1.7) (1.5) (1.7)
----- ------ ------
$ 5.9 $ 5.8 $ 5.6
===== ====== ======
The components of the accrued postretirement benefit liability as of the end of the last two years were
as follows:
(in millions) 1997 1996
- - --------------------------------------------------------------------------------------------------------- ------ ------
Actuarial present value of postretirement
benefit obligations:
Retirees $ 39.2 $ 32.8
Fully eligible active plan participants 10.3 8.3
Other active plan participants 28.3 23.8
------ ------
Accumulated postretirement benefit obligation 77.8 64.9
Unrecognized net gain 26.8 37.5
------ ------
Accrued postretirement benefit liability 104.6 102.4
Less current portion 3.9 3.9
------ ------
Noncurrent liability $100.7 $ 98.5
====== ======
</TABLE>
The assumptions used to measure the accumulated postretirement benefit
obligation were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Weighted-average discount rate 7.5% 8.0% 7.25%
Health care cost trend rate 7.0 7.5 8.0
</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 1997 postretirement benefit
expense by approximately $1 million and would have increased the 1997
accumulated postretirement benefit obligation by $7 million.
NOTE 6--EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
Nalco's ESOP gives most United States employees an additional opportunity to
share in the ownership of the Company's stock. Preferred shares are allocated to
eligible employees based on a percentage of pretax earnings.
Selected information about the ESOP is as follows:
<TABLE>
<CAPTION>
(dollars in millions, shares in thousands) 1997 1996 1995
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Preferred stock dividends $ 15.0 $ 15.3 $ 15.4
Interest expense on ESOP debt $ 8.7 $ 9.4 $ 11.2
ESOP benefit expense $ 4.1 $ 3.2 $ 2.5
ESOP contribution payments $ 5.5 $ 5.1 $ 2.1
Preferred shares at year end:
Allocated 140.0 124.2 107.2
Committed-to-be-released 22.9 24.9 23.6
Suspense 220.9 243.8 268.6
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 7--STOCK OPTION AND PERFORMANCE PLANS
Nalco's 1996 Stock Option Plan and its 1990 Stock Option Plan for key management
employees authorized the granting of stock options for the purchase of up to
8,000,000 shares and 6,000,000 shares, respectively, of Nalco common stock. The
Company's 1982 Stock Option Plan authorized the granting of either incentive
stock options or non-qualified options for the purchase of up to 6,000,000
shares of Nalco's common stock. No additional grants will be made under the 1982
plan. The option price under these plans cannot be less than the fair market
value on the date of grant. Options granted since 1989 generally become
exercisable ratably over the three years following the grant date, and will
expire ten years after the date granted. Options granted prior to 1989 have a
term of ten years, and were exercisable upon grant. Options may be exercised in
whole or in part for cash, shares of common stock, or a combination thereof.
The 1990 Stock Option Plan for Non-Employee Directors authorizes the granting of
stock options to outside directors for the purchase of up to 500,000 common
shares. The option price under the plan cannot be less than the fair market
value on the date of the grant. These options become exercisable upon grant, and
expire ten years from the grant date.
- 29 -
<PAGE>
Information regarding these stock option plans for 1997, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- --------------------------- ---------------------------
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 7,473,363 $32.77 6,657,723 $32.17 4,327,223 $29.73
Granted 1,002,700 $36.48 1,595,200 $31.64 2,801,200 $34.43
Exercised (754,492) $28.17 (500,460) $20.54 (360,700) $19.49
Expired or cancelled (144,200) $34.04 (279,100) $34.04 (110,000) $35.02
At the end of the year 7,577,371 $33.69 7,473,363 $32.77 6,657,723 $32.17
Options exercisable at
end of year 5,231,142 $33.34 4,574,896 $32.33 3,584,024 $30.08
Weighted-average fair
value of options
granted during
the year $9.02 $6.53 $8.98
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1997:
<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>
$19.09 TO $20.16 390,350 1.1 yrs $20.04 390,350 $20.04
$23.38 to $29.81 170,800 3.8 $26.75 170,800 $26.75
$31.69 to $34.44 3,952,200 7.4 $33.42 2,514,438 $33.54
$35.75 to $36.50 3,064,021 6.0 $36.17 2,155,554 $36.03
--------- ---------
$19.09 to $36.50 7,577,371 6.5 $33.69 5,231,142 $33.34
========= =========
</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) 1997 1996 1995
- - --------------------------------------------------------------
<S> <C> <C> <C> <C>
Net earnings As reported $158.9 $154.5 $153.7
Pro forma 151.4 146.1 149.0
- - --------------------------------------------------------------
Earnings per share
Basic As reported $ 2.21 $ 2.13 $ 2.11
Pro forma 2.10 2.00 2.04
Diluted As reported 2.04 1.97 1.95
Pro forma 1.94 1.86 1.89
- - --------------------------------------------------------------
</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 1997, 1996 and 1995, respectively: dividend yield of 2.8
percent, 3.2 percent and 3.2 percent; expected volatility of 20.0 percent, 20.7
percent and 21.4 percent; risk-free interest rate of 6.3 percent, 6.5 percent
and 7.4 percent; and expected lives of 6.3, 6.6 and 6.0 years.
The effects of applying SFAS 123 in the above pro forma disclosures are not
indicative of future amounts as they do not include the effects of awards
granted prior to 1995, some of which would have had income statement effects in
1995, 1996 and 1997 due to the three-year vesting period associated with the
fixed stock option awards. Additionally, future amounts are likely to be
affected by the number of grants awarded since additional awards are generally
expected to be made at varying amounts.
In 1996, the Performance Share Plan for designated officers and other key
executives was amended and reapproved by the shareholders. It provides for the
annual assignment of performance shares which are contingent upon future
earnings growth of the Company. Performance awards shall be paid half in cash
and half in the Company's common stock, except that any payments made after
1,000,000 shares have been issued shall be made only in cash and only with
respect to contingent performance shares already assigned. The cash portion of
an award shall be paid after determination of the award; however, the right to
receive common shares shall not vest to a participant until three years after
the end of a performance period.
Charges to earnings for compensatory stock related plans totaled $3 million in
1997 and $2 million in 1996. No significant charge to earnings was made for such
plans in 1995.
- 30 -
<PAGE>
NOTE 8--INCOME TAXES
The sources of earnings from continuing operations before income taxes were as
follows:
<TABLE>
<CAPTION>
(in millions) 1997 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $185.7 $168.6 $162.1
Foreign 70.6 60.8 51.3
------ ------ ------
Total $256.3 $229.4 $213.4
====== ====== ======
</TABLE>
The components of income tax provisions attributable to earnings from continuing
operations are summarized as follows:
<TABLE>
<CAPTION>
(in millions) 1997 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $58.2 $50.9 $38.2
State 11.1 10.4 8.6
Foreign 25.6 20.6 29.5
----- ----- -----
94.9 81.9 76.3
----- ----- -----
Deferred
Federal (3.8) (3.0) 5.6
State (0.6) (0.1) 0.1
Foreign 2.4 4.7 (4.3)
----- ----- -----
(2.0) 1.6 1.4
----- ----- -----
Total $92.9 $83.5 $77.7
===== ===== =====
</TABLE>
Current foreign taxes listed above include taxes withheld by foreign governments
on distributions from subsidiaries and affiliates (principally dividends and
service fees).
Nalco made income tax payments of $103 million, $84 million and $77 million
during 1997, 1996 and 1995, respectively.
The effective income tax rate varies from the federal statutory rate because of
the factors indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory U.S. federal tax rate 35.0% 35.0% 35.0%
State income taxes, net
of federal tax benefit 2.6 2.9 2.6
Other (1.4) (1.5) (1.2)
---- ---- ----
Effective tax rate 36.2% 36.4% 36.4%
==== ==== ====
</TABLE>
Details of the 1997 and 1996 deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
(in millions) 1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Postretirement benefits $ 42.5 $ 41.2
Other 46.1 50.0
------ ------
Total 88.6 91.2
------ ------
Deferred tax liabilities:
Depreciation 57.9 59.2
Leveraged lease investments 29.2 29.6
Other 26.5 29.0
------ ------
Total 113.6 117.8
------ ------
Net deferred tax liability $ 25.0 $ 26.6
====== ======
Included in:
Prepaid expenses, taxes
and other current assets $ (6.2) $ (7.1)
Miscellaneous other assets (5.8) (6.5)
Income taxes (0.2) (2.7)
Deferred income taxes 37.2 42.9
------ ------
$ 25.0 $ 26.6
====== ======
</TABLE>
NOTE 9--EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued SFAS 128,
"Earnings per Share." SFAS 128 establishes standards for computing and
presenting earnings per share (EPS) and simplifies the standards for computing
EPS previously found in APB 15, "Earnings per Share." It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures.
SFAS 128 was effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application was not
permitted. In accordance with the requirements of SFAS 128, the Company has
restated all prior-period EPS data presented.
Basic EPS is computed by dividing net earnings (after deducting preferred stock
dividends, net of income taxes) by the weighted-average number of common shares
outstanding during the year. Diluted EPS is based upon the weighted-average
number of common shares and dilutive potential common shares outstanding, plus
the weighted-average number of common shares resulting from the assumed
conversion of the Series B ESOP Convertible Preferred Stock (preferred stock).
Earnings for purposes of computing diluted EPS are reduced for additional ESOP
debt service expense resulting from the assumed replacement of preferred stock
dividends with common stock dividends, net of related tax benefits.
The following table reconciles the numerators and denominators of the basic and
diluted EPS computations for earnings from continuing operations:
<TABLE>
<CAPTION>
(dollars in millions, shares in thousands) 1997 1996 1995
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings from continuing operations $ 163.4 $ 145.9 $ 135.7
Dividends on preferred stock, net of taxes (11.5) (11.3) (11.2)
- - --------------------------------------------------------------------------------
Earnings from continuing operations available
to common shareholders used in basic EPS 151.9 134.6 124.5
Assumed conversion of preferred stock 11.5 11.3 11.2
Additional ESOP expense resulting from assumed
conversion of preferred stock, net of taxes (4.5) (4.5) (4.7)
Income tax adjustment on assumed common dividends (1.0) (0.9) (0.8)
- - --------------------------------------------------------------------------------
Earnings from continuing operations available to
common shareholders used in diluted EPS $ 157.9 $ 140.5 $ 130.2
- - -----------------------------------------------------===========================
Average shares outstanding used in basic EPS 66,700 67,280 67,495
Effect of dilutive securities:
Assumed conversion of preferred stock 7,760 7,930 8,037
Stock options and contingently
issuable shares 805 319 410
- - --------------------------------------------------------------------------------
Average shares outstanding used in diluted EPS 75,265 75,529 75,942
- - -----------------------------------------------------===========================
</TABLE>
- 31 -
<PAGE>
NOTE 10 -- ACCOUNTING CHANGE
In November 1997, the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus on Issue 97-13 (EITF 97-13), "Accounting for
Costs Incurred in Connection with a Consulting Contract or an Internal Project
That Combines Business Process Reengineering and Information Technology
Transformation." The consensus clarified the accounting for third-party and
internally generated costs associated with projects that combine business
process reengineering activities and information technology transformation,
requiring that such costs be expensed as incurred. Additionally, the transition
provisions of EITF 97-13 required any unamortized previously capitalized costs
for business process reengineering activities to be written off in the quarter
that contained November 20, 1997 and to be reported as a cumulative effect of a
change in accounting principle.
As a result of EITF 97-13, the Company recorded a noncash pretax charge of $7
million ($4.5 million after tax, or 6 cents per share on a diluted basis), which
was comprised of unamortized capitalized business process reengineering costs.
NOTE 11--ACQUISITIONS
During 1997, the Company acquired eight businesses that operate in Nalco's core
markets of water treatment and process chemicals. Each of the acquisitions was
accounted for as a purchase and, accordingly, the operating results of each
business were included in the consolidated results of the Company from its
respective acquisition date. Also in 1997, the Company increased its investment
in Taiwan Nalco Chemical Co. Ltd. from 55 percent to 79 percent. The combined
purchase price for these acquisitions was approximately $80 million, net of cash
acquired. On a preliminary basis, the purchase price exceeded the fair value of
the net tangible assets acquired by about $70 million, which was allocated to
goodwill and other intangible assets. The Company does not anticipate that the
final purchase price allocations will differ significantly from the preliminary
purchase price allocations recorded.
In 1996, the Company acquired two water treatment businesses for a combined
purchase price of $83 million, net of cash acquired. The purchase price exceeded
the fair value of the net tangible assets acquired by $75 million.
The pro forma impact as if these acquisitions had occurred at the beginning of
the respective years is not significant.
NOTE 12--INVESTMENT IN AND ADVANCES TO PARTNERSHIP
The Company's investment in partnership consists of its 60 percent interest in
Nalco/Exxon, a joint venture partnership which was formed in 1994.
The Company's investment in Nalco/Exxon of $123 million at December 31, 1997
included $35 million in demand notes payable to Nalco/Exxon. There were $23
million of demand notes payable to Nalco/Exxon at December 31, 1996.
All significant management decisions of the joint venture require agreement by
both the Company and Exxon. In addition, certain provisions of the joint venture
agreement provide Exxon with an option to cause Nalco/Exxon to redeem a portion
of the Company's interest in Nalco/Exxon such that subsequent to such
redemption, the Company and Exxon shall share equally in the results of the
joint venture. As a result of the Company not exercising control over
Nalco/Exxon, its investment in the joint venture is accounted for by the equity
method.
The following table summarizes the Company's equity in earnings of Nalco/Exxon
and distributions from the partnership for the years 1997, 1996 and 1995:
<TABLE>
<CAPTION>
(in millions) 1997 1996 1995
- - -------------------------------------------------------------------
<S> <C> <C> <C>
Nalco/Exxon:
Net sales $455.6 $436.6 $420.8
Earnings before income taxes 51.1 42.4 32.4
Net income 42.6 35.7 28.0
Nalco's equity interest 60% 60% 60%
------ ------ ------
Nalco's equity in net income 25.6 21.4 16.8
Amortization and income preference, net 2.6 3.1 0.1
------ ------ ------
Equity in earnings of partnership $ 28.2 $ 24.5 $ 16.9
====== ====== ======
Distributions received from partnership $ 9.2 $ 8.4 $ 6.1
====== ====== ======
</TABLE>
The Company's investment in Nalco/Exxon at December 31, 1997 included $8
million for the net excess of the Company's investment over its equity in the
joint venture's net assets which is being amortized to equity earnings over the
life of the related assets. In addition, the Company received a 4 percent, 6
percent and 8 percent earnings preference in 1997, 1996 and 1995, respectively,
which has been included in equity earnings.
Condensed balance sheet information for the Nalco/Exxon joint venture at
December 31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
(in millions) 1997 1996
- - -------------------------------------------------------------------
<S> <C> <C>
Current assets $164.7 $159.6
Noncurrent assets 203.8 171.9
Current liabilities 89.9 79.4
Noncurrent liabilities 33.7 31.2
- - -------------------------------------------------------------------
</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 1997, 1996 and 1995 were $14 million, $15 million and $16
million, respectively.
In the normal course of business, the Company supplies Nalco/Exxon with certain
products, and purchases certain products from Nalco/Exxon. These transactions
are generally at cost and were not significant in 1997, 1996 or 1995.
- 32 -
<PAGE>
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>
(in millions) 1997 1996
- - -------------------------------------------- --------- ---------
<S> <C> <C>
Land $ 34.8 $ 38.6
Buildings 210.7 205.6
Equipment 889.7 925.2
-------- --------
1,135.2 1,169.4
Allowances for depreciation (642.7) (647.4)
-------- --------
Net property, plant and equipment $ 492.5 $ 522.0
======== ========
</TABLE>
NOTE 14--SHORT-TERM DEBT
Short-term debt consists of the following:
<TABLE>
(in millions) 1997 1996
- - -------------------------------------------- -------- --------
<S> <C> <C>
Notes payable $ 18.9 $ 21.9
Current maturities of long-term debt 3.2 6.4
Commercial paper borrowings - 3.0
-------- --------
$ 22.1 $ 31.3
======== ========
</TABLE>
The weighted-average interest rate on short-term debt was 9.1 percent and 7.7
percent at December 31, 1997 and 1996, respectively.
For general purposes and to support the ESOP loans and the issuance of
commercial paper, Nalco has a $350 million Revolving Credit Agreement with
eleven banks. This agreement is structured as a five-year revolving credit.
Borrowings under the agreement are at rates which, at Nalco's option, vary with
the prime rate, CD rate, LIBOR or money market rates. The credit line carries a
facility fee of .08 percent. The credit arrangements were unused at December 31,
1997.
NOTE 15--LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
(in millions) 1997 1996
- - ----------------------------- ------- -------
<S> <C> <C>
ESOP loans $151.1 $162.6
Commercial paper borrowings 143.0 50.0
Other 44.4 46.4
------ ------
338.5 259.0
Less current portion (3.2) (6.4)
------ ------
Total $335.3 $252.6
====== ======
</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 $51 million in 1997, and will decrease to $43 million in 1998 with
final maturity in 1999. The remaining borrowings are comprised of a $38 million
variable rate loan which matures in 2008 and a $25 million loan with a fixed
rate of 8.1 percent and a final maturity in the year 2000. The weighted-average
interest rate of all ESOP loans was 6.5 percent at December 31, 1997.
Commercial paper outstanding at December 31, 1997 is classified as long-term
since the Company intends to refinance these borrowings on a long-term basis.
Interest rates ranged from 5.7 percent to 6.1 percent with a weighted-average
rate of 5.8 percent.
The $44 million in other long-term debt includes $37 million owed by a foreign
subsidiary at a variable interest rate (an effective rate of 5.2% at December
31, 1997), with the balance borrowed by various foreign subsidiaries.
Interest paid by Nalco was $14 million, $14 million and $15 million in 1997,
1996 and 1995, respectively.
The following table presents the projected annual maturities of long-term debt
for the next five years after 1997:
<TABLE>
(in millions)
- - -------------
<S> <C>
1998 $ 3.2
1999 13.3
2000 10.2
2001 --
2002 --
</TABLE>
The amounts above include approximately $25 million in maturities related to the
ESOP loans.
- 33 -
<PAGE>
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) 1997 1996
- - --------------------------------------------------------------------------------
<S> <C> <C>
Preferred stock, par value $1.00 per share;
authorized 2,000,000 shares;
Series B ESOP Convertible
Preferred Stock--outstanding;
383,774 shares-1997 and 392,851
shares-1996 $ 0.4 $ 0.4
Series C Junior Participating
Preferred Stock--none issued
Common stock, par value $.1875 per share;
authorized 200,000,000 shares;
issued 80,287,568 shares 15.1 15.1
- - --------------------------------------------------------------------------------
</TABLE>
There were 14,251,003 shares and 13,263,648 shares held in treasury at December
31, 1997 and 1996, respectively.
In 1996, Nalco's Board of Directors authorized the repurchase of up to 3,000,000
shares of the Company's common stock. During 1997, the Company repurchased
approximately 1,950,000 of those shares.
The Company issued 415,800 shares of preferred stock to the ESOP in 1989 for
$481.00 per share, the preference price upon liquidation. This preferred stock
ranks senior to Series C Junior Participating Preferred Stock and common stock
as to the payment of dividends and the distribution of assets on liquidation,
dissolution and winding up of Nalco. Dividends on each share of preferred stock
are cumulative and will be paid quarterly at the rate of 8 percent or $38.48 per
annum. Full conversion of preferred shares occurs upon a holder's retirement or
separation of service from the Company, and effective in 1999 participants in
the ESOP may partially convert their stock upon reaching age 55. The conversion
ratio and number of votes per share of preferred stock are subject to adjustment
under certain conditions. The preferred stock entitles a participant to 20 votes
per share, voting together with the holders of common stock, and initially was
convertible into 20 shares of common stock. The shares of preferred stock are
redeemable by Nalco at $481.00 per share, and may be required to be redeemed by
Nalco under certain circumstances. During 1997, 9,077 preferred shares were
converted to 182,417 common shares of Nalco stock. During 1996 and 1995, 6,572
and 4,801 preferred shares were converted to 132,179 and 96,212 common shares,
respectively. Approximately 8,000,000 common shares have been reserved for the
conversion of preferred stock.
In 1996, the 1986 Preferred Share Purchase Rights expired. Also in 1996, the
Board of Directors approved a new Shareholder Rights Plan and declared a
dividend distribution of one Preferred Share Purchase Right (Right) for each
outstanding share of common stock. The Rights are not exercisable or
transferable apart from the common stock until a person or group has acquired,
or makes a tender offer for 15 percent or more of the common stock. If Nalco is
acquired in a merger or other business combination transaction or 50 percent or
more of Nalco's assets or earning power are sold, each Right other than that
held by the acquiring party will entitle the holder to receive, upon exercise at
a price of $125, subject to adjustment, common stock of either Nalco or the
acquiring company having a value equal to two times that price. The Rights are
redeemable at $.01 each at any time before a 15 percent or greater position has
been acquired, and expire on August 31, 2006. In connection with the expiration
of the 1986 Preferred Share Purchase Rights and the distribution of the 1996
Rights, the Company's Series A Junior Participating Preferred Stock was
cancelled and its Series C Junior Participating Preferred Stock was authorized.
NOTE 17--FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Nalco has limited involvement with derivative financial instruments and does not
trade them. The Company does use derivatives to fix the cost of issuing debt and
to manage well-defined interest rate and foreign exchange exposures.
Notional Amounts and Credit Exposures of Derivatives
The notional amounts of derivatives summarized below do not represent amounts
exchanged by the parties and, thus, are not a measure of the exposure of the
Company through its use of derivatives. The amounts exchanged are calculated
on the basis of the notional amounts and the other terms of the derivatives,
which relate primarily to interest rates and foreign exchange rates.
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to financial instruments, but it does not expect any
counterparties to fail to meet their obligations given their high credit
ratings.
Interest Rate Risk Management
Interest rate swap agreements are used to reduce the potential impact of
increases in interest rates on floating rate long-term debt. As of December 31,
1997 the Company was a counterparty to one interest rate swap with a notional
value of $51 million at December 31, 1997 and $59 million at December 31, 1996.
This swap fixes interest payments on a corresponding amount of floating rate
ESOP notes at 7.3 percent until February 1999. The notional amount decreases to
$43 million in 1998. The average interest rate received on this interest rate
swap was 4.6 percent and 4.5 percent in 1997 and 1996, respectively.
Foreign Exchange Risk Management
The Company enters into various types of foreign exchange contracts in
managing its intercompany foreign exchange risk, including currency swaps,
forward exchange contracts and option contracts.
- 34 -
<PAGE>
The Company's currency swap agreements were designed to hedge foreign currency
intercompany loans that have maturities up to eight years. Gains and losses
related to these swaps are offset with gains and losses on the underlying
foreign currency loans. Forward exchange and option contracts are used to
hedge various intercompany transactions with foreign subsidiaries and usually
have maturities of six months, but occasionally may have maturities of up to
eighteen months.
The Company had foreign exchange contracts with a notional value of $64
million and $69 million at December 31, 1997 and 1996, respectively.
Deferred realized and unrealized gains and losses from firm foreign currency
commitments, based on dealer-quoted prices, are included in the Statements of
Consolidated Financial Condition as either miscellaneous other assets or
accounts payable. They are recognized in earnings as part of the underlying
transaction when it is recognized. There was no net deferred realized and
unrealized gain or loss at December 31, 1997 or December 31, 1996.
NOTE 18--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------
Carrying Fair Carrying Fair
(in millions) Amount Value Amount Value
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonderivatives:
Cash and cash equivalents $ 49.7 $ 49.7 $ 38.8 $ 38.8
Short-term debt 22.1 22.1 31.3 31.3
Long-term debt 335.3 336.0 252.6 253.8
Derivatives:
Miscellaneous other assets 7.0 4.6 1.6 -
Other liabilities - - - 2.7
- - --------------------------------------------------------------------------------
</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 and option contracts, and interest rate swaps was
estimated based on current settlement prices, quoted market prices of
comparable contracts, and pricing models or formulas using current
assumptions.
NOTE 19--CONTINGENCIES AND LITIGATION
Nalco has been named as a potentially responsible party (PRP) by the
Environmental Protection Agency (EPA) or state enforcement agencies at 13 waste
sites where some financial contribution is or may be required.
These agencies have also identified many other parties who may be responsible
for clean-up costs at the waste disposal sites. Nalco's financial contribution
to remediate these sites is expected to be minor. There has been no significant
financial impact on Nalco up to the present, nor is it anticipated that there
will be in the future, as a result of these matters. Nalco has made and will
continue to make provisions for these costs if the Company's liability becomes
probable and when costs can be reasonably estimated. As of December 31, 1997,
the Company had undiscounted reserves of approximately $2 million for the
maximum amount of known environmental clean-up costs. The Company's 1997
expenditures relating to environmental compliance and clean-up activities were
not significant. These environmental reserves represent management's current
estimate of its proportional clean-up costs and are based upon negotiation and
agreement with enforcement agencies, its previous experience with respect to
clean-up activities, a detailed review by the Company of known conditions, and
information about other PRPs. They are not reduced by any possible recoveries
from insurance companies or other PRPs not specifically identified. Although
management cannot determine whether or not a material effect on future
operations is reasonably likely to occur, given the evolving nature of
environmental regulations, it believes that the recorded reserve levels are
appropriate estimates of the potential liability. Although settlement will
require future cash outlays, it is not expected that such outlays will
materially impact the Company's liquidity position.
It is the Company's policy to accrue for estimated post-closure and site
remediation costs when the decision has been made by management to close a
facility.
In the ordinary course of its business, Nalco is also a party to a number of
lawsuits and is subject to various claims, the outcome of which, in the opinion
of management, should not have a material effect on the consolidated financial
position of Nalco.
- 35 -
<PAGE>
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Eleven Year Summary
(dollar amounts in millions,
except per share figures) 1997 1996 1995
- - -----------------------------------------------------------------------------------------------------------------
Net Sales $ 1,433.7 $ 1,303.5 $ 1,214.5
Operating costs and expenses
Cost of products sold 629.6 568.6 531.3
Selling, administrative and research expenses 561.4 518.2 477.7
Formation and consolidation - - -
- - -----------------------------------------------------------------------------------------------------------------
Total operating costs and expenses 1,191.0 1,086.8 1,009.0
- - -----------------------------------------------------------------------------------------------------------------
Operating Earnings 242.7 216.7 205.5
Interest and other income 0.7 2.6 7.2
Interest expense (15.3) (14.4) (16.2)
Equity in earnings of partnership 28.2 24.5 16.9
- - -----------------------------------------------------------------------------------------------------------------
Earnings from Continuing
Operations Before Income Taxes 256.3 229.4 213.4
Income taxes 92.9 83.5 77.7
- - -----------------------------------------------------------------------------------------------------------------
Earnings from Continuing Operations 163.4 145.9 135.7
Earnings from discontinued operations - 8.6 18.0
- - -----------------------------------------------------------------------------------------------------------------
Earnings Before Extraordinary Loss and
Effect of Accounting Changes 163.4 154.5 153.7
Extraordinary loss from retirement of
debt, net of taxes - - -
Cumulative effect of change in accounting
for postretirement benefits other than
pensions, net of taxes - - -
Cumulative effect of change in accounting
for business process reengineering costs,
net of taxes (4.5) - -
- - -----------------------------------------------------------------------------------------------------------------
Net Earnings $ 158.9 $ 154.5 $ 153.7
=================================================================================================================
Per Share of Common Stock
Earnings from continuing operations--diluted $ 2.10 $ 1.86 $ 1.71
Discontinued operations - .11 .24
Extraordinary item - - -
Accounting change (.06) - -
Net earnings 2.04 1.97 1.95
Cash dividends paid 1.00 1.00 .99
- - -----------------------------------------------------------------------------------------------------------------
Financial Ratios
Earnings as a percent to sales* 11.4% 11.2% 11.2%
Earnings as a percent to shareholders' equity* 24.7 23.5 24.1
Effective income tax rate* 36.2 36.4 36.4
Common stock dividends paid as a percent to earnings* 40.9 46.1 49.2
Research and development expenses as a percent to sales 3.0 3.2 3.3
Current ratio 1.6 to 1 1.3 to 1 1.0 to 1
- - -----------------------------------------------------------------------------------------------------------------
Financial Position Data
Working capital $ 153.4 $ 95.5 $ 14.2
Total assets 1,440.9 1,394.5 1,360.5
Property, plant and equipment (cost) 1,135.2 1,169.4 1,101.6
Long-term debt 335.3 252.6 221.5
Deferred income taxes 37.2 42.9 53.3
Shareholders' equity 652.7 654.5 580.3
- - -----------------------------------------------------------------------------------------------------------------
Other Data
Working capital provided from operations $ 254.1 $ 237.2 $ 219.2
Capital investments 101.4 92.5 126.7
Depreciation and amortization* 103.2 94.9 84.8
Dividends on common stock 66.7 67.3 66.9
Cost of common stock repurchased 75.7 26.3 42.4
Wages, salaries, commissions and benefits 450.6 427.9 387.4
Common shares outstanding at year end (thousands) 66,037 67,024 67,124
Market price per share of common stock at year end $ 39.563 $ 36.125 $ 30.125
Number of common shareholders of record 5,047 5,349 5,669
Number of employees at year end 6,905 6,502 6,081
- - -----------------------------------------------------------------------------------------------------------------
</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 changes.
- 36 -
<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1,246.8 $ 1,291.6 $ 1,286.9 $ 1,164.4 $ 1,013.1 $ 899.1 $ 843.0 $ 738.3
543.7 555.0 557.4 513.1 449.8 406.2 388.4 341.7
498.8 512.8 498.5 449.9 382.1 335.6 318.8 274.5
68.2 - - - - - - -
- - --------------------------------------------------------------------------------------------------------------------------
1,110.7 1,067.8 1,055.9 963.0 831.9 741.8 707.2 616.2
- - --------------------------------------------------------------------------------------------------------------------------
136.1 223.8 231.0 201.4 181.2 157.3 135.8 122.1
16.6 14.4 18.3 18.9 19.9 27.0 20.6 14.9
(21.8) (27.5) (40.3) (27.1) (11.5) (9.7) (9.5) (8.2)
6.9 - - - - - - -
- - --------------------------------------------------------------------------------------------------------------------------
137.8 210.7 209.0 193.2 189.6 174.6 146.9 128.8
64.6 81.9 81.8 74.2 72.9 66.3 53.1 51.9
- - --------------------------------------------------------------------------------------------------------------------------
73.2 128.8 127.2 119.0 116.7 108.3 93.8 76.9
23.9 23.9 17.8 18.8 14.4 11.6 12.2 3.4
- - --------------------------------------------------------------------------------------------------------------------------
97.1 152.7 145.0 137.8 131.1 119.9 106.0 80.3
- (10.6) - - - - - -
- (56.5) - - - - - -
- - - - - - - -
- - --------------------------------------------------------------------------------------------------------------------------
$ 97.1 $ 85.6 $ 145.0 $ 137.8 $ 131.1 $ 119.9 $ 106.0 $ 80.3
==========================================================================================================================
$ .88 $ 1.57 $ 1.57 $ 1.47 $ 1.42 $ 1.32 $ 1.20 $ .97
.31 .31 .22 .24 .18 .14 .15 .04
- (.14) - - - - - -
- (.72) - - - - - -
1.19 1.02 1.79 1.71 1.60 1.46 1.35 1.01
.945 .885 .84 .83 .755 .68 .645 .60
- - --------------------------------------------------------------------------------------------------------------------------
5.9% 10.0% 9.9% 10.2% 11.5% 12.0% 11.1% 10.4%
13.2 24.2 22.6 24.4 26.6 23.5 20.1 17.9
46.8 38.9 39.1 38.4 38.4 38.0 36.1 40.3
88.4 47.4 46.2 48.6 45.3 47.1 53.8 61.4
3.7 3.8 3.7 3.9 4.0 3.9 3.8 4.2
1.3 to 1 2.0 to 1 2.5 to 1 2.0 to 1 2.3 to 1 2.3 to 1 2.1 to 1 1.8 to 1
- - --------------------------------------------------------------------------------------------------------------------------
$ 87.8 $ 185.4 $ 314.3 $ 256.3 $ 229.7 $ 218.5 $ 174.4 $ 121.8
1,269.2 1,202.3 1,338.2 1,324.4 1,037.0 938.5 838.9 781.8
1,067.1 1,129.9 1,044.2 957.8 840.3 720.1 648.7 607.5
245.3 252.1 413.8 394.1 282.2 214.0 100.8 72.8
56.8 58.1 107.3 90.8 77.8 62.7 53.7 47.3
544.2 550.6 576.3 528.7 455.6 443.7 477.5 446.8
- - --------------------------------------------------------------------------------------------------------------------------
$ 250.1 $ 245.6 $ 226.7 $ 218.5 $ 192.4 $ 159.1 $ 148.4 $ 132.9
125.6 117.8 131.0 136.8 114.9 86.4 61.6 57.2
84.8 82.2 75.4 62.1 45.5 37.8 40.4 38.5
64.7 61.1 58.8 57.8 52.9 51.0 50.5 47.2
61.3 58.5 14.3 - 80.5 111.7 21.5 11.6
411.1 413.6 403.7 376.6 326.0 282.5 263.8 231.3
67,900 68,905 70,021 69,828 69,292 72,199 77,129 78,298
$ 33.50 $ 37.50 $ 34.625 $ 41.625 $ 28.25 $ 24.75 $ 17.625 $ 16.625
6,005 6,111 6,129 5,543 5,099 5,224 5,477 5,668
5,935 6,802 6,714 6,832 5,862 5,489 5,381 5,085
- - --------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 37 -
<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, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP R. R. Ross
Chicago, Illinois Engagement Partner
February 2, 1998
- 38 -
<PAGE>
Quarterly Summary (Unaudited)
<TABLE>
<CAPTION>
1997 1996
------------------------------------- -----------------------------------
(dollar amounts in millions, First Second Third Fourth First Second Third Fourth
except per share figures) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 334.6 $ 354.4 $ 371.0 $ 373.7 $ 301.9 $ 318.6 $ 343.3 $ 339.7
Gross earnings 189.8 201.8 206.0 206.5 166.9 179.0 196.3 192.7
Earnings from continuing operations 35.8 40.1 44.2 43.3 30.0 34.5 41.0 40.4
Discontinued operations - - - - 1.8 2.5 1.5 2.8
Cumulative effect of accounting change - - - (4.5) - - - -
Net earnings 35.8 40.1 44.2 38.8 31.8 37.0 42.5 43.2
Per common share
Earnings - diluted
Continuing operations .46 .51 .57 .56 .38 .44 .52 .52
Discontinued operations - - - - .02 .03 .02 .03
Accounting change - - - (.06) - - - -
Net earnings .46 .51 .57 .50 .40 .47 .54 .55
Dividends .25 .25 .25 .25 .25 .25 .25 .25
Market price
High 38 7/8 40 41 13/16 42 7/16 33 1/4 32 7/8 36 1/4 39
Low 35 1/8 34 1/4 38 5/16 37 1/2 28 1/8 29 1/8 28 1/2 34 1/2
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
- 39 -
<PAGE>
CORPORATE OFFICERS
E. J. Mooney (56)
Chairman and Chief Executive Officer
29 years of service
Milford B. Harp (60)
Executive Vice President,
Operations
34 years of service
W. Steven Weeber (55)
Executive Vice President,
Operations Staff
31 years of service
George M. Brannon (46)
Group Vice President,
President Industrial Division
22 years of service
Peter Dabringhausen (59)
Group Vice President,
President Pulp and Paper Division
28 years of service
Stephen D. Newlin (45)
Group Vice President,
President Specialty Division
22 years of service
Gilberto Pinzon (57)
Group Vice President,
President Latin America Division
28 years of service
Ronald J. Allain (57)
Senior Vice President,
Research and Development
27 years of service
David R. Bertran (54)
Senior Vice President,
Manufacturing and Logistics
14 years of service
William E. Buchholz (55)
Senior Vice President,
Chief Financial Officer
5 years of service
James F. Lambe (52)
Senior Vice President,
Human Resources
29 years of service
J. David Tinsley (57)
Senior Vice President,
Corporate Sales
32 years of service
John D. Berthoud (54)
Vice President, Marketing
and Quality Management
27 years of service
<PAGE>
J. Terry Burns (50)
Vice President,
President Pacific Division
21 years of service
William E. Parry (47)
Vice President
General Counsel
3 years of service
William J. Roe (44)
Vice President,
President Process Division
19 years of service
Anthony J. Sadowski (59)
Vice President,
Environmental Health
and Safety
31 years of service
Dale W. Walker (61)
Vice President
38 years of service
Robert L. Ratliff (49)
Controller
22 years of service
William G. Marshall (51)
Treasurer
17 years of service
Suzzanne J. Gioimo (54)
Secretary
28 years of service
Elizabeth R. Ewing (38)
Assistant Treasurer
2 years of service
Craig J. Holderness (45)
Assistant Treasurer
20 years of service
Michael K. Mrozak (42)
Assistant Controller,
Financial Reporting
13 years of service
Lee J. Plankis (51)
Assistant Controller,
Planning and Analysis
16 years of service
(As of March 1, 1998)
<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
Chem Technologies, Incorporated........................... Delaware
Chemco Water Technology, Inc. ............................ Delaware
Chicago Chemical Company.................................. Illinois
Board Chemistry, Inc. .................................... Illinois
Nalco Delaware............................................ Delaware
Nalco Diversified Technologies, Inc. ..................... Delaware
Nalco Foreign Sales Corporation........................... U.S. Virgin Islands
Nalco FT, Inc............................................. Delaware
Nalco Japan Company, Ltd. ................................ Delaware
Nalco Leasing Corporation................................. Delaware
Nalco Neighborhood Development Corporation................ Delaware
Nalco Resources Investment Company........................ Texas
Nalco TWO, Inc. .......................................... Delaware
NalFirst Holding Inc. .................................... Delaware(1)
NalFirst Leasing Corporation.............................. Delaware(1)
Nalgreen, Inc............................................. Delaware
NalTech, Inc. ............................................ Delaware
Odor Control Technology, Inc. ............................ Georgia(2)
Oil Products & Chemical Company, Inc. .................... Illinois
The Flox Company.......................................... Minnesota
Trident Chemical Company, Inc. ........................... Delaware
Visco Products Company.................................... Texas
Foreign:
Alfoc Ltd................................................. United Kingdom
Deutsche Nalco GmbH....................................... Germany
Deutsche Nalco-Chemie, G.m.b.H. .......................... Germany
Deutsche Nalco Equipment G.m.b.H. ........................ Germany
Diversey Water Technologies Limited....................... United Kingdom
Diversey Water Technologies, Ltd. ........................ Canada
DWT SRL................................................... Italy
Gamus Quimica, Ltda. ..................................... Brazil
Houseman Waterbehandeling B.V. ........................... Netherlands
International Water Consultant B.V. ...................... Netherlands
International Water Consultant Beheer B.V. ............... Netherlands
IWC Chemische Produkten B.V. ............................. Netherlands
IWC Consultant GmbH....................................... Germany
Nalco Anadolu A.S. ....................................... Turkey
Nalco Applied Services of Europe B.V. .................... Netherlands
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF
INCORPORATION
COMPANY OR ORGANIZATION
------- ---------------
<S> <C>
Nalco Argentina, S.A. ....................................... Argentina
Nalco Australia Pty. Limited................................. Australia
Nalco Belgium N.V./S.A. ..................................... Belgium
Nalco Brazil Ltda. .......................................... Brazil
Nalco Canada, Inc. .......................................... Canada
Nalco Chemical A.B. ......................................... Sweden
Nalco Chemical B.V. ......................................... Netherlands
Nalco Chemical Company (Philippines) Inc. ................... Philippines
Nalco Chemical Company (Thailand) Limited.................... Thailand
Nalco Chemical Gesellschaft m.b.H............................ Austria
Nalco Chemical (H.K.) Limited................................ Hong Kong
Nalco Chemie................................................. Czechoslovakia
Nalco de Venezuela, C.A. .................................... Venezuela
Nalco de Venezuela Holding, S.A. ............................ Venezuela
Nalco Ecuador, S.A. ......................................... Ecuador
Nalco Chemical Egypt......................................... Egypt
Nalco Espanola, S.A. ........................................ Spain
Nalco Europe B.V. ........................................... Netherlands
Nalco France................................................. France
Nalco Chem................................................... Russia
Nalco Gulf Limited........................................... Dubai
Nalco Hellas S.A. ........................................... Greece
Nalco Holdings Australia Pty. Limited........................ Australia
Nalco Holding B.V............................................ Netherlands
Nalco Investments Australia, Pty. Limited.................... Australia
Nalco Investments U.K. Limited............................... United Kingdom
Nalco Italiana, S.p.A........................................ Italy
Nalco Japan Technical Center Co. Ltd......................... Japan
Nalco Kemiai Kft............................................. Hungary
Nalco Korea Co., Ltd. ....................................... South Korea
Nalco Limited................................................ United Kingdom
Nalco Marketing, S.A. ....................................... Spain
Nalco New Zealand, Ltd. ..................................... New Zealand
Nalco Norge A/S.............................................. United Kingdom
Nalco Pacific Pte. Ltd. ..................................... Singapore
Nalco Poland................................................. Poland
Nalco Portuguesa (Q.I.) Ltda. ............................... Portugal
Nalco Productos Quimicos de Chile S.A. ...................... Chile
Nalco Saudi Co., Ltd. ....................................... Saudi Arabia (3)
Nalcochemical (Malaysia) SDN BHD............................. Malaysia
Nalcomex, S.A. de C.V. ...................................... Mexico
Nalfleet, Inc. .............................................. United Kingdom
Nalfloc Ltd. ................................................ United Kingdom
Nal-Lite Produtos Quimicos Ltda.............................. Brazil
NCC Mauritius Limited........................................ Mauritius
P.T. Nalco Perkasa........................................... Indonesia (4)
Quimica Nalco de Colombia, S.A. ............................. Colombia
Suomen Nalco Oy.............................................. Finland
Taiwan Nalco Chemical Co., Ltd. ............................. Taiwan (5)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OR
OTHER
JURISDICTION
OF
INCORPORATION
OR
COMPANY ORGANIZATION
------- -------------
<S> <C>
Deryshares, B.V. ............................................... Netherlands
Nalco Chemical India, Ltd. ..................................... India (6)
Nalco Chemical Company (Suzhou) Ltd. ........................... China (7)
</TABLE>
- - --------
Note (1)--80% of voting securities owned by Registrant
Note (2)--66% of voting securities owned by Registrant
Note (3)--60% of voting securities owned by Registrant
Note (4)--51% of voting securities owned by Registrant
Note (5)--79% of voting securities owned by Registrant
Note (6)--65% of voting securities owned by Registrant
Note (7)--95% of voting securities owned by Registrant
<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 2, 1998, which appears on page 38 of the 1997 annual
Report to Shareholders of Nalco Chemical Company, which is incorporated by
reference in Nalco Chemical Company's Annual Report on Form 10-K for the year
ended December 31, 1997. We also consent to the incorporation by reference of
our report on the Financial Statement Schedule, which appears on page 11 of
this Form 10-K. We also consent to the incorporation by reference in the
Registration Statement of our report dated March 20, 1998 appearing on page 1
of the Annual Report of the Nalco Chemical Company Profit Sharing, Investment
and Pay Deferral Plan on Form 11-K for the year ended December 31, 1997.
PRICE WATERHOUSE LLP
Chicago, Illinois
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND THE
CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1997 OF
NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 49,700,000
<SECURITIES> 0
<RECEIVABLES> 245,800,000
<ALLOWANCES> (4,200,000)
<INVENTORY> 94,500,000
<CURRENT-ASSETS> 409,000,000
<PP&E> 1,135,200,000
<DEPRECIATION> (642,700,000)
<TOTAL-ASSETS> 1,440,900,000
<CURRENT-LIABILITIES> 255,600,000
<BONDS> 335,300,000
<COMMON> 15,100,000
0
400,000
<OTHER-SE> 637,200,000
<TOTAL-LIABILITY-AND-EQUITY> 1,440,900,000
<SALES> 1,433,700,000
<TOTAL-REVENUES> 1,433,700,000
<CGS> 629,600,000
<TOTAL-COSTS> 629,600,000
<OTHER-EXPENSES> 1,191,000,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,300,000
<INCOME-PRETAX> 256,300,000
<INCOME-TAX> 92,900,000
<INCOME-CONTINUING> 163,400,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (4,500,000)
<NET-INCOME> 158,900,000
<EPS-PRIMARY> 2.21
<EPS-DILUTED> 2.04
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT DECEMBER 31, 1995 AND THE
CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1995 OF NALCO
CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 38,100,000
<SECURITIES> 0
<RECEIVABLES> 224,700,000
<ALLOWANCES> (4,400,000)
<INVENTORY> 91,400,000
<CURRENT-ASSETS> 370,000,000
<PP&E> 1,101,600,000
<DEPRECIATION> (581,600,000)
<TOTAL-ASSETS> 1,370,100,000
<CURRENT-LIABILITIES> 355,800,000
<BONDS> 221,500,000
0
400,000
<COMMON> 15,100,000
<OTHER-SE> 564,800,000
<TOTAL-LIABILITY-AND-EQUITY> 1,370,100,000
<SALES> 1,214,500,000
<TOTAL-REVENUES> 1,214,500,000
<CGS> 531,300,000
<TOTAL-COSTS> 531,300,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,200,000
<INCOME-PRETAX> 213,400,000
<INCOME-TAX> 77,700,000
<INCOME-CONTINUING> 135,700,000
<DISCONTINUED> 18,000,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 153,700,000
<EPS-PRIMARY> 2.11
<EPS-DILUTED> 1.95
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT MARCH 31, 1996
AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED
MARCH 31, 1996 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 37,700,000
<SECURITIES> 0
<RECEIVABLES> 216,300,000
<ALLOWANCES> (4,400,000)
<INVENTORY> 96,700,000
<CURRENT-ASSETS> 368,500,000
<PP&E> 1,120,500,000
<DEPRECIATION> (598,300,000)
<TOTAL-ASSETS> 1,370,700,000
<CURRENT-LIABILITIES> 344,200,000
<BONDS> 209,500,000
0
400,000
<COMMON> 15,100,000
<OTHER-SE> 588,300,000
<TOTAL-LIABILITY-AND-EQUITY> 1,370,700,000
<SALES> 301,900,000
<TOTAL-REVENUES> 301,900,000
<CGS> 135,000,000
<TOTAL-COSTS> 135,000,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,700,000
<INCOME-PRETAX> 47,000,000
<INCOME-TAX> 17,000,000
<INCOME-CONTINUING> 30,000,000
<DISCONTINUED> 1,800,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,800,000
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.40
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT JUNE 30, 1996
AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE SIX MONTHS ENDED
JUNE 30, 1996 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 37,700,000
<SECURITIES> 0
<RECEIVABLES> 234,900,000
<ALLOWANCES> (4,300,000)
<INVENTORY> 94,700,000
<CURRENT-ASSETS> 433,600,000
<PP&E> 1,143,300,000
<DEPRECIATION> (613,300,000)
<TOTAL-ASSETS> 1,459,700,000
<CURRENT-LIABILITIES> 317,400,000
<BONDS> 306,700,000
0
400,000
<COMMON> 15,100,000
<OTHER-SE> 605,300,000
<TOTAL-LIABILITY-AND-EQUITY> 1,459,700,000
<SALES> 620,500,000
<TOTAL-REVENUES> 620,500,000
<CGS> 274,600,000
<TOTAL-COSTS> 274,600,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,000,000
<INCOME-PRETAX> 101,200,000
<INCOME-TAX> 36,700,000
<INCOME-CONTINUING> 64,500,000
<DISCONTINUED> 4,300,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,800,000
<EPS-PRIMARY> 0.94
<EPS-DILUTED> 0.87
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT SEPTEMBER 30,
1996 AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 45,600,000
<SECURITIES> 0
<RECEIVABLES> 232,400,000
<ALLOWANCES> (5,000,000)
<INVENTORY> 92,500,000
<CURRENT-ASSETS> 434,900,000
<PP&E> 1,152,300,000
<DEPRECIATION> (631,700,000)
<TOTAL-ASSETS> 1,451,900,000
<CURRENT-LIABILITIES> 340,400,000
<BONDS> 253,000,000
0
400,000
<COMMON> 15,100,000
<OTHER-SE> 628,100,000
<TOTAL-LIABILITY-AND-EQUITY> 1,451,900,000
<SALES> 963,800,000
<TOTAL-REVENUES> 963,800,000
<CGS> 421,600,000
<TOTAL-COSTS> 421,600,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,300,000
<INCOME-PRETAX> 165,600,000
<INCOME-TAX> 60,100,000
<INCOME-CONTINUING> 105,500,000
<DISCONTINUED> 5,800,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 111,300,000
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.42
</TABLE>
<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>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<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
0
400,000
<COMMON> 15,100,000
<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> 2.13
<EPS-DILUTED> 1.97
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT MARCH 31, 1997
AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE THREE MONTHS ENDED
MARCH 31, 1997 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 41,000,000
<SECURITIES> 0
<RECEIVABLES> 249,400,000
<ALLOWANCES> (5,100,000)
<INVENTORY> 90,100,000
<CURRENT-ASSETS> 396,300,000
<PP&E> 1,161,100,000
<DEPRECIATION> (653,900,000)
<TOTAL-ASSETS> 1,411,900,000
<CURRENT-LIABILITIES> 313,000,000
<BONDS> 241,900,000
0
400,000
<COMMON> 15,100,000
<OTHER-SE> 644,000,000
<TOTAL-LIABILITY-AND-EQUITY> 1,411,900,000
<SALES> 334,600,000
<TOTAL-REVENUES> 334,600,000
<CGS> 144,800,000
<TOTAL-COSTS> 144,800,000
<OTHER-EXPENSES> 136,400,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,600,000
<INCOME-PRETAX> 56,400,000
<INCOME-TAX> 20,600,000
<INCOME-CONTINUING> 35,800,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,800,000
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.46
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT JUNE 30, 1997
AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE SIX MONTHS ENDED
JUNE 30, 1997 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 47,100,000
<SECURITIES> 0
<RECEIVABLES> 254,000,000
<ALLOWANCES> (5,000,000)
<INVENTORY> 90,400,000
<CURRENT-ASSETS> 403,900,000
<PP&E> 1,151,200,000
<DEPRECIATION> (649,900,000)
<TOTAL-ASSETS> 1,427,400,000
<CURRENT-LIABILITIES> 304,300,000
<BONDS> 248,500,000
0
400,000
<COMMON> 15,100,000
<OTHER-SE> 658,500,000
<TOTAL-LIABILITY-AND-EQUITY> 1,427,400,000
<SALES> 689,000,000
<TOTAL-REVENUES> 689,000,000
<CGS> 297,400,000
<TOTAL-COSTS> 297,400,000
<OTHER-EXPENSES> 278,800,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,400,000
<INCOME-PRETAX> 119,800,000
<INCOME-TAX> 43,900,000
<INCOME-CONTINUING> 75,900,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75,900,000
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 0.97
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AT SEPTEMBER 30,
1997 AND THE CONDENSED CONSOLIDATED STATEMENT OF EARNINGS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1997 OF NALCO CHEMICAL COMPANY AND SUBSIDIARIES AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 63,900,000
<SECURITIES> 0
<RECEIVABLES> 247,800,000
<ALLOWANCES> (4,700,000)
<INVENTORY> 88,700,000
<CURRENT-ASSETS> 418,600,000
<PP&E> 1,146,200,000
<DEPRECIATION> (653,600,000)
<TOTAL-ASSETS> 1,426,600,000
<CURRENT-LIABILITIES> 309,500,000
<BONDS> 245,700,000
400,000
0
<COMMON> 15,100,000
<OTHER-SE> 657,600,000
<TOTAL-LIABILITY-AND-EQUITY> 1,426,600,000
<SALES> 1,060,000,000
<TOTAL-REVENUES> 1,060,000,000
<CGS> 462,400,000
<TOTAL-COSTS> 462,400,000
<OTHER-EXPENSES> 418,500,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,100,000
<INCOME-PRETAX> 188,600,000
<INCOME-TAX> 68,500,000
<INCOME-CONTINUING> 120,100,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 120,100,000
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.54
</TABLE>
<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 11-K
(Mark
One)
[X] ANNUAL REPORT PURSUANT TO SECTION 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
COMMISSION FILE NO. 1-4957
PROFIT SHARING, INVESTMENT
AND PAY DEFERRAL PLAN
OF NALCO CHEMICAL
NALCO CHEMICAL COMPANY
ONE NALCO CENTER
NAPERVILLE, ILLINOIS 60563-1198
(ISSUER AND ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
NALCO CHEMICAL COMPANY
PROFIT SHARING, INVESTMENT
AND PAY DEFERRAL PLAN
FINANCIAL STATEMENTS
AND SCHEDULES
----------------
DECEMBER 31, 1997 AND 1996
<PAGE>
NALCO CHEMICAL COMPANY
PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN
FINANCIAL STATEMENTS AND SCHEDULES
INDEX
<TABLE>
<CAPTION>
PAGE(S)
-----------
<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....................................... 4-11
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 20, 1998
To the Employee Benefit Plan
Administration Committee of
Nalco Chemical Company:
In our opinion, the accompanying statements of net assets available for plan
benefits and the related statements of changes in net assets available for
plan benefits present fairly, in all material respects, the net assets
available for benefits of the Nalco Chemical Company Profit Sharing,
Investment and Pay Deferral Plan at December 31, 1997 and 1996, and the
changes in net assets available for benefits for the years then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the plan's management; our responsibility
is to express an opinion of these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional information included in
the supplementary schedules is presented for purposes of additional analysis
and is not a required part of the basic financial statements but is additional
information required by ERISA. Such information has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
PRICE WATERHOUSE LLP
1
<PAGE>
NALCO CHEMICAL COMPANY
----------------
PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
AS OF DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Investments, at fair value:
Nalco Chemical Company common stock................ $ 98,123,822 $103,167,292
Mutual funds....................................... 98,974,383 80,842,233
Group annuity contract deposits.................... 50,965,924 54,277,887
Bank commingled investment funds................... 41,540,862 25,382,090
Collective short-term investment funds............. 10,500,682 15,966,425
------------ ------------
300,105,673 279,635,927
Loans receivable from participants................... 5,604,934 5,272,538
Due from Nalco Chemical Company Employee Stock
Ownership Plan...................................... 89,410 --
Accrued income receivable............................ 246,199 197,768
------------ ------------
Net assets available for plan benefits............... $306,046,216 $285,106,233
============ ============
</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, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Sources of net assets:
Contributions by employees....................... $ 14,403,378 $ 12,995,367
Dividend income.................................. 3,774,078 4,255,329
Interest Income.................................. 4,492,750 4,739,023
Transfers from Nalco Chemical Company Employee
Stock Ownership Plan............................ 934,736 941,886
Net realized/unrealized appreciation of
investments..................................... 30,169,423 31,980,537
------------ ------------
Total sources of net assets........................ 53,774,365 54,912,142
Applications of net assets:
Administrative expenses.......................... (71,324) (68,265)
Withdrawals by participants...................... (32,763,058) (28,270,923)
------------ ------------
Increase in net assets available for plan benefits. 20,939,983 26,572,954
Net assets available for plan benefits at beginning
of period......................................... 285,106,233 258,533,279
------------ ------------
Net assets available for plan benefits at end of
period............................................ $306,046,216 $285,106,233
============ ============
</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, 1997 AND 1996
NOTE 1--DESCRIPTION OF THE PLAN:
The Nalco Chemical Company Profit Sharing, Investment and Pay Deferral Plan
(the Plan) is a voluntary contribution, individual account plan, which covers
substantially all Nalco Chemical Company (the Company) employees. No service
requirement exists before an employee is eligible to participate in the Plan.
Pursuant to section 6 of the Plan document, profit sharing contributions are
at the discretion of the Company. The Company has not contributed to the Plan
since January 1, 1990. The Plan also accepts transfers of Company common stock
and cash from the Employee Stock Ownership Plan for retirees.
Beginning in 1993, the Plan expanded to include seven investment
alternatives: the Nalco Stock Fund, the U.S. Government Money Market Fund, the
Stable Capital Fund, the Bond Index Fund, the Balanced Fund, the Growth and
Income Fund, and the Equity Index Fund. In 1995, an international equity fund
was added, the EuroPacific Fund. A participant who has attained the age of 50
can transfer once per calendar year a minimum of 10% of his balance from the
Nalco Stock Fund to any of the other funds in the Plan. The maximum allowable
transfer is determined by the Employee Benefit Plan Administration Committee
(EBPAC). Participants electing to make tax-deferred contributions through cash
or salary deductions have the option of investing these contributions in a
combination of any of the funds. Participants can transfer assets acquired
with their individual funds at their discretion.
A participant can also make contributions which are not tax-deferred through
payroll deductions or a lump-sum investment. All participant contributions
vest immediately, and participants are entitled to their entire account
balance upon retirement, termination, disability, or death as a lump-sum
payment (or in semi-annual stock installments for shares in the Nalco Stock
Fund).
Effective June 1, 1993, participants are allowed to borrow from the Plan,
provided the amount does not exceed the lesser of one-half the vested Plan
balance of the participant, or $50,000. The length of the loan is decided by
the employee, subject to certain governmental restrictions, and the interest
charged is determined by EBPAC and communicated to the participants in
writing.
At December 31, 1997, employees participating in the Plan had invested in
the available funds as follows (some have investments in more than one fund):
<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
Total employees participating................................. 3,175 3,204
Nalco Stock Fund............................................ 2,410 2,556
U.S. Government Money Market Fund........................... 236 223
Stable Capital Fund......................................... 1,443 1,652
Bond Index Fund............................................. 403 356
Balanced Fund............................................... 1,135 1,011
Growth and Income Fund...................................... 2,236 2,129
Equity Index Fund........................................... 1,723 1,415
EuroPacific Fund............................................ 950 788
</TABLE>
The Company believes that the Plan will continue without interruption, but
reserves the right to terminate the Plan at any time. In the event of
termination of the Plan, the Nalco Chemical Company Profit Sharing,
4
<PAGE>
Investment and Pay Deferral Plan Trust (the Trust) will continue until all of
the funds held by The Northern Trust Company (the Trustee) have been
distributed to the participants or their beneficiaries. Such distribution will
be made in accordance with the provisions of the plan document in effect on
the date of its termination.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:
Basis of Accounting
The financial statements of the Plan are prepared on the accrual basis of
accounting, except for benefit payments to former participants which are
recorded when paid as noted below.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of certain estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities and the periods in which
certain items of revenue and expense are included. Actual results may differ
from such estimates.
Withdrawals by Participants
Withdrawals by participants include benefit payments, transfers out of the
plan, and net loan activity.
Valuation of Investments
All investments, except for group annuity contract deposits, are valued by
the Trustee based on the closing market value on the last business day of the
plan year. The group annuity contract deposits are stated at estimated fair
value, which represents contributions made under the contracts at original
cost plus interest at the contract rate. The insurance companies are
contractually liable for the contract value provided the investment remains
with the insurance company.
Amounts Due Participants
In accordance with ERISA requirements for reporting by employee benefit
plans, benefit payments to former participants are recorded when paid.
Accordingly, at December 31, 1997 and December 31, 1996, the following amounts
have been allocated to the individual accounts of withdrawing participants,
but not recorded as liabilities on the Statements of Net Assets Available for
Plan Benefits or withdrawals by participants in the Statements of Changes in
Net Assets Available for Plan Benefits:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Nalco Stock Fund..................................... $244,098 $ 705,187
U.S. Government Money Market Fund.................... -- 4,894
Stable Capital Fund.................................. 267,323 1,101,967
Bond Index Fund...................................... -- 2,415
Balanced Fund........................................ 5,193 21,814
Growth and Income Fund............................... 155,336 561,128
Equity Index Fund.................................... 25,192 208,747
EuroPacific Fund..................................... 30,375 137,143
-------- ----------
$727,517 $2,743,295
======== ==========
</TABLE>
The preceding accounting treatment results in a difference between these
financial statements and the Form 5500 as these amounts have been recorded as
liabilities as of December 31, 1997 and 1996, and have been included in the
benefits paid for the respective years on the Form 5500.
5
<PAGE>
NOTE 3--INVESTMENTS:
The cost of investments and number of shares or units held at December 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
SHARES OR SHARES OR
UNITS COST UNITS COST
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Nalco Chemical Company Common
Stock......................... 2,480,223 $ 37,146,056 2,855,842 $ 40,377,018
American Balanced Fund......... 1,139,119 16,371,281 897,776 12,221,073
American EuroPacific Fund...... 456,076 11,570,309 393,984 9,438,990
Dreyfus Government Money Market
Instruments................... 2,676,600 2,676,600 1,913,427 1,913,427
Hartford Annuity Contract
Deposit....................... 2,563,076 2,563,076 2,493,039 2,493,039
Life of Georgia Contract
Deposit....................... 6,282,171 6,282,171 5,935,391 5,935,391
Pacific Mutual Contract
Deposit....................... 3,149,032 3,149,032 2,952,635 2,952,635
Provident Contract Deposit..... 3,723,764 3,723,764 3,506,039 3,506,039
Sun Life America Contract
Deposit....................... 2,191,985 2,191,985 2,056,298 2,056,298
Allamerica Group Annuity
Contract Deposit.............. 4,522,389 4,522,389 4,185,459 4,185,459
Ohio National Group Annuity
Contract Deposit.............. 2,979,775 2,979,775 2,792,475 2,792,475
Protective Life Group Annuity
Contract Deposit.............. 2,892,390 2,892,390 2,732,537 2,732,537
John Hancock Mutual Life
Insurance Company Group
Annuity Contract Deposit...... -- -- 2,729,307 2,729,307
J.P. Morgan Group Annuity
Contract Deposit.............. 10,000,000 10,000,000 10,000,000 10,000,000
New York Life Group Annuity
Contract Deposit.............. 5,553,351 5,553,351 5,233,580 5,233,580
New York Life Group Annuity
Contract Deposit.............. -- -- 1,538,896 1,538,896
Principal Mutual Group Annuity
Contract Deposit.............. 5,581,170 5,581,170 5,244,967 5,244,967
Transamerica Group Annuity
Contract Deposit.............. 1,526,821 1,526,821 2,877,266 2,877,266
Neuberger & Berman Guardian
Fund.......................... 2,570,243 58,104,493 2,169,599 44,705,133
Barclays Equity Index Fund..... 1,437,519 26,606,279 1,147,067 17,686,050
Barclays Government/Corporate
Bond Index Fund............... 294,949 3,553,220 236,123 2,629,958
The Northern Trust Company
Collective Short-Term
Investment Fund............... 10,500,682 10,500,682 15,966,425 15,966,425
------------ ------------
Total...................... $217,494,844 $199,215,963
============ ============
</TABLE>
Individual investments that represent 5% or more of the fair value of net
assets available for plan benefits at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
SHARES OR
UNITS COST FAIR VALUE
--------- ----------- -----------
<S> <C> <C> <C>
Barclays Equity Index Fund................. 1,437,519 $26,606,279 $37,576,753
Nalco Chemical Company Common Stock........ 2,480,223 37,146,056 98,123,822
American Balanced Fund..................... 1,139,119 16,371,281 17,861,388
Neuberger & Berman Guardian Fund........... 2,570,243 58,104,493 66,569,298
</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.
6
<PAGE>
NOTE 6--GROUP ANNUITY CONTRACTS:
The fair value of group annuity contract deposits at December 31, 1997 and
1996 was comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
John Hancock Mutual Life Insurance Company
contract deposit, GAC7892, due 12/1/97 (5.77% in
1996)............................................ -- $ 2,729,307
Hartford contract deposit, GA10156, due 12/21/98
(4.87% in 1997 and 1996)......................... $ 2,563,076 2,493,039
Life of Georgia contract deposit, FR101, due
9/9/99
(5.93% in 1997 and 6.15% in 1996)................ 6,282,171 5,935,391
Pacific contract deposit, G2608401, due 6/1/98
(6.65% in 1997 and 1996)......................... 3,149,032 2,952,635
Provident contract deposit, #627-0569-201A, due
6/1/99
(6.21% in 1997 and 1996)......................... 3,723,764 3,506,039
Sun Life America contract deposit, #4656, due
7/25/98
(6.58% in 1997 and 1996)......................... 2,191,985 2,056,298
Allamerica contract deposit, GA91636A, due
11/30/99
(8.05% in 1997 and 1996)......................... 4,522,389 4,185,459
Ohio National contract deposit, #5708, due
11/30/99
(6.75% in 1997 and 1996)......................... 2,979,775 2,792,475
Protective Life contract deposit, GA1191, due
6/1/98
(5.85% in 1997 and 1996)......................... 2,892,390 2,732,537
J.P. Morgan contract deposit, NALCO-01, due
6/1/2000
(5.50% in 1997 and 6.08% in 1996)................ 10,000,000 10,000,000
New York Life contract deposit, #30481, due
6/30/99
(6.11% in 1997 and 1996)......................... 5,553,351 5,233,580
New York Life contract deposit, #30481-002, due
7/12/97
(5.90% in 1996).................................. -- 1,538,896
Principal Mutual contract deposit, #4-23183, due
12/31/2000
(6.41% in 1997 and 1996)......................... 5,581,170 5,244,967
Transamerica contract deposit, S1393-00, due
1/30/98
(6.13% in 1997 and 1996)......................... 1,526,821 2,877,264
----------- -----------
$50,965,924 $54,277,887
=========== ===========
</TABLE>
Average yields for the above contracts are not calculated as the rates are
guaranteed. No valuation reserve was established in 1997 or 1996 as the
companies listed all maintain at least an A+ credit rating.
7
<PAGE>
NOTE 7--STATEMENTS OF NET ASSETS:
The statements of net assets available for plan benefits by fund as of
December 31, 1997 and 1996 are as follows:
NALCO CHEMICAL COMPANY
----------------
PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN
STATEMENT OF NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
U.S. GOVT STABLE
NALCO STOCK MONEY MKT CAPITAL BOND INDEX BALANCED GROWTH & EQUITY
FUND FUND FUND FUND FUND INCOME FUND INDEX FUND
----------- ---------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investments, at fair
value:
Nalco Chemical Company
common stock.......... $98,123,822
Mutual Funds........... $2,676,600 $17,861,388 $66,569,298
Group annuity contract
deposits.............. $50,965,924
Bank commingled mutual
funds................. $3,964,109 $37,576,753
Collective short-term
investment fund....... 1,548,151 8,793,071
----------- ---------- ----------- ---------- ----------- ----------- -----------
99,671,973 2,676,600 59,758,995 3,964,109 17,861,388 66,569,298 37,576,753
Loans receivable from
participants...........
Due from Nalco Chemical
Company Employee Stock
Ownership Plan......... 89,410
Accrued income
receivable............. 11,133 11,130 222,764
----------- ---------- ----------- ---------- ----------- ----------- -----------
Net assets available for
plan benefits.......... $99,772,516 $2,687,730 $59,981,759 $3,964,109 $17,861,388 $66,569,298 $37,576,753
=========== ========== =========== ========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
EUROPACIFIC LOAN CLEARING
FUND ACCOUNT ACCOUNT TOTAL
----------- ---------- -------- ------------
<S> <C> <C> <C> <C>
Investments, at fair value:
Nalco Chemical Company common
stock........................... $ 98,123,822
Mutual Funds..................... $11,867,097 98,974,383
Group annuity contract deposits.. 50,965,924
Bank commingled mutual funds..... 41,540,862
Collective short-term investment
fund............................ $159,460 10,500,682
----------- ---------- -------- ------------
11,867,097 159,460 300,105,673
Loans receivable from
participants.................... $5,604,934 5,604,934
Due from Nalco Chemical Company
Employee Stock Ownership Plan... 89,410
Accrued income receivable........ 1,172 246,199
----------- ---------- -------- ------------
Net assets available for plan
benefits........................ $11,867,097 $5,604,934 $160,632 $306,046,216
=========== ========== ======== ============
</TABLE>
8
<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, 1996
<TABLE>
<CAPTION>
U.S. GOVT. STABLE
NALCO MONEY MKT. CAPITAL BOND INDEX BALANCED
STOCK FUND FUND FUND FUND FUND
------------ ---------- ----------- ---------- -----------
<S> <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
Group annuity contract
deposits.............. $54,277,887
Bank commingled mutual
funds................. $2,899,584
Collective short-term
investment fund....... 923,478 14,643,455
------------ ---------- ----------- ---------- -----------
Loans receivable from
participants........... 104,077,223 1,913,427 68,921,342 2,899,584 13,062,639
Accrued income
receivable............. 8,061 7,011 181,661
------------ ---------- ----------- ---------- -----------
Net assets available for
plan benefits.......... $104,085,284 $1,920,438 $69,103,003 $2,899,584 $13,062,639
============ ========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
GROWTH & EQUITY EUROPACIFIC LOAN CLEARING
INCOME FUND INDEX FUND FUND ACCOUNT ACCOUNT TOTAL
----------- ----------- ----------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Investments, at fair
value:
Nalco Chemical Company
common stock.......... $ 13,547 $103,167,292
Mutual Funds........... $55,606,827 $10,259,340 80,842,233
Group annuity contract
deposits.............. 54,277,887
Bank commingled mutual
funds................. $22,482,506 25,382,090
Collective short-term
investment fund....... 399,492 15,966,425
----------- ----------- ----------- ---------- -------- ------------
55,606,827 22,482,506 10,259,340 413,039 279,635,927
Loans receivable from
participants........... $5,272,538 5,272,538
Accrued income
receivable............. 1,035 197,768
----------- ----------- ----------- ---------- -------- ------------
Net assets available for
plan benefits.......... $55,606,827 $22,482,506 $10,259,340 $5,272,538 $414,074 $285,106,233
=========== =========== =========== ========== ======== ============
</TABLE>
9
<PAGE>
NOTE 8--STATEMENTS OF CHANGES IN NET ASSETS:
The statements of changes in net assets available for plan benefits by fund
for the years ended December 31, 1997 and 1996 are as follows:
NALCO CHEMICAL COMPANY
----------------
PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
U.S. GOVT
NALCO MONEY MKT STABLE BOND INDEX BALANCED GROWTH &
STOCK FUND FUND CAPITAL FUND FUND FUND INCOME FUND
------------ ----------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sources of net assets:
Contributions by
employees............. $ 685,190 $ 146,442 $ 1,983,419 $ 210,068 $ 1,267,695 $ 5,085,028
Dividend income........ 2,636,406 548,267 394,153
Interest income........ 70,793 113,949 3,832,273
Transfers from Nalco
Chemical Company
Employee Stock
Ownership Plan........ 934,736
Net transfers
authorized by
participants.......... (8,883,795) 1,977,860 (4,764,197) 871,764 1,854,982 2,339,787
Net
realized/unrealized
appreciation of
investments........... 9,435,900 263,048 2,331,498 9,336,785
------------ ----------- ------------ ---------- ----------- -----------
Total sources of net
assets.............. 4,879,230 2,238,251 1,051,495 1,344,880 6,002,442 17,155,753
Applications of net
assets:
Administrative
expenses..............
Withdrawals by
participants.......... (9,191,998) (1,470,959) (10,172,739) (280,355) (1,203,693) (6,193,282)
------------ ----------- ------------ ---------- ----------- -----------
Increase (decrease) in
net assets available
for plan benefits...... (4,312,768) 767,292 (9,121,244) 1,064,525 4,798,749 10,962,471
Net assets available for
plan benefits at
beginning of period.... 104,085,284 1,920,438 69,103,003 2,899,584 13,062,639 55,606,827
------------ ----------- ------------ ---------- ----------- -----------
Net assets available for
plan benefits at end of
period................. $ 99,772,516 $ 2,687,730 $ 59,981,759 $3,964,109 $17,861,388 $66,569,298
============ =========== ============ ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
EQUITY EUROPACIFIC LOAN CLEARING
INDEX FUND FUND ACCOUNT ACCOUNT TOTAL
----------- ----------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Sources of net assets:
Contributions by
employees............. $ 3,077,632 $ 1,221,567 $ 726,337 $ 14,403,378
Dividend income........ 194,558 694 3,774,078
Interest income........ $ 459,017 16,718 4,492,750
Transfers from Nalco
Chemical Company
Employee Stock
Ownership Plan........ 934,736
Net transfers
authorized by
participants.......... 6,310,004 293,698 (103) 0
Net
realized/unrealized
appreciation of
investments........... 8,112,811 688,912 469 30,169,423
----------- ----------- ---------- --------- ------------
Total sources of net
assets.............. 17,500,447 2,398,735 459,017 744,115 53,774,365
Applications of net
assets:
Administrative
expenses.............. (71,324) (71,324)
Withdrawals by
participants.......... (2,406,200) (790,978) (126,621) (926,233) (32,763,058)
----------- ----------- ---------- --------- ------------
Increase (decrease) in
net assets available
for plan benefits...... 15,094,247 1,607,757 332,396 (253,442) 20,939,983
Net assets available for
plan benefits at
beginning of period.... 22,482,506 10,259,340 5,272,538 414,074 285,106,233
----------- ----------- ---------- --------- ------------
Net assets available for
plan benefits at end of
period................. $37,576,753 $11,867,097 $5,604,934 $ 160,632 $306,046,216
=========== =========== ========== ========= ============
</TABLE>
10
<PAGE>
NALCO CHEMICAL COMPANY
----------------
PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS BY FUND
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
U.S. GOVT GROWTH
NALCO STOCK MONEY MKT STABLE BOND INDEX BALANCED & INCOME
FUND FUND CAPITAL FUND FUND FUND FUND
------------ ---------- ------------ ---------- ----------- -----------
<S> <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
Dividend income........ 3,099,842 424,394 565,562
Interest income........ 77,157 62,414 4,140,330
Transfers from Nalco
Chemical Company
Employee Stock
Ownership Plan........ 941,886
Net transfers
authorized by
participants.......... (11,876,137) 837,002 (2,983,492) 170,806 2,775,143 (4,632,297)
Net
realized/unrealized
appreciation
(depreciation) of
investments........... 18,404,557 55,858 1,002,573 7,865,115
------------ ---------- ------------ ---------- ----------- -----------
Total sources of net
assets.............. 11,406,038 1,020,414 3,684,959 443,507 5,233,578 9,161,213
Applications of net
assets:
Administrative
expenses.............. 2,815
Withdrawals by
participants.......... (8,360,795) (225,295) (11,604,902) (92,946) (686,717) (3,142,509)
------------ ---------- ------------ ---------- ----------- -----------
Increase (decrease) in
net assets available
for plan benefits..... 3,045,243 795,119 (7,917,128) 350,561 4,546,861 6,018,704
Net assets available
for plan benefits at
beginning of period... 101,040,041 1,125,319 77,020,131 2,549,023 8,515,778 49,588,123
------------ ---------- ------------ ---------- ----------- -----------
Net assets available
for plan benefits at
end of period......... $104,085,284 $1,920,438 $ 69,103,003 $2,899,584 $13,062,639 $55,606,827
============ ========== ============ ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
EQUITY EUROPACIFIC LOAN CLEARING
INDEX FUND FUND ACCOUNT ACCOUNT TOTAL
----------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Sources of net assets:
Contributions by
employees............. $ 2,085,277 $ 819,745 $ 71,349 $ 12,995,367
Dividend income........ 160,966 4,565 4,255,329
Interest income........ $ 446,323 12,799 4,739,023
Transfers from Nalco
Chemical Company
Employee Stock
Ownership Plan........ 941,886
Net transfers
authorized by
participants.......... 7,847,638 5,704,703 (125,137) 2,281,771 0
Net
realized/unrealized
appreciation
(depreciation) of
investments........... 3,544,864 1,108,492 (922) 31,980,537
----------- ----------- ---------- ---------- ------------
Total sources of net
assets.............. 13,477,779 7,793,906 321,186 2,369,562 54,912,142
Applications of net
assets:
Administrative
expenses.............. (71,080) (68,265)
Withdrawals by
participants.......... (995,415) (761,255) (418,529) (1,982,560) (28,270,923)
----------- ----------- ---------- ---------- ------------
Increase (decrease) in
net assets available
for plan benefits...... 12,482,364 7,032,651 (97,343) 315,922 26,572,954
Net assets available for
plan benefits at
beginning of period.... 10,000,142 3,226,689 5,369,881 98,152 258,533,279
----------- ----------- ---------- ---------- ------------
Net assets available for
plan benefits at end of
period................. $22,482,506 $10,259,340 $5,272,538 $ 414,074 $285,106,233
=========== =========== ========== ========== ============
</TABLE>
11
<PAGE>
NALCO CHEMICAL COMPANY
----------------
SCHEDULE I--PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN
ASSETS HELD FOR INVESTMENT
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
IDENTITY OF ISSUER DESCRIPTION OF INVESTMENT COST FAIR VALUE
- - ------------------ ------------------------- ---- ----------
<S> <C> <C> <C>
*Nalco Chemical Company 2,480,223 shares of common stock $ 37,146,056 $ 98,123,822
Hartford Group annuity contract deposit, 2,563,076 2,563,076
GA10156, 4.87%, due 12/21/98
Life of Georgia Group annuity contract deposit, 6,282,171 6,282,171
FR101, 5.93%, due 9/9/99
Pacific Group annuity contract deposit, 3,149,032 3,149,032
G2608401, 6.65%, due 6/1/98
Provident Group annuity contract deposit, 3,723,764 3,723,764
#627-05692-01A, 6.21%, due 6/1/99
Sun Life America Group annuity contract deposit, 2,191,985 2,191,985
#4656, 6.58%, due 7/25/98
Allamerica Group annuity contract deposit, 4,522,389 4,522,389
GA91636A, 8.05%, due 11/30/99
Ohio National Group annuity contract deposit, 2,979,775 2,979,775
#5708, 6.75%, due 11/30/99
Protective Life Group annuity contract deposit, 2,892,390 2,892,390
GA1191, 5.85%, due 6/1/98
J.P. Morgan Group annuity contract deposit, 10,000,000 10,000,000
NALCO-01, 5.50%, due 6/1/2000
New York Life Group annuity contract deposit, 5,553,351 5,553,351
#30481, 6.11%, due 6/30/99
Principal Mutual Group annuity contract deposit, 5,581,170 5,581,170
#4-23183, 6.41%, due 12/31/2000
Transamerica Group annuity contract deposit, 1,526,821 1,526,821
S1393-00, 6.13%, due 1/30/98
American American EuroPacific Growth Fund-- 11,570,309 11,867,097
456,076 shares
American Balanced Fund--1,139,119 shares 16,371,281 17,861,388
Dreyfus U.S. Government Money Market Fund 2,676,600 2,676,600
Neuberger & Berman Guardian Fund--2,570,243 shares 58,104,493 66,569,298
Barclays Global Investors Barclays Equity Index Fund--1,437,519 shares 26,606,279 37,576,753
Barclays Bond Index Fund--294,949 shares 3,553,220 3,964,109
*The Northern Trust Company Collective Short-Term Investment Fund 10,500,682 10,500,682
*Participant loans Participant loans, average interest rate of 8.64% 5,604,934 5,604,934
------------ ------------
$223,099,778 $305,710,607
============ ============
</TABLE>
- - --------
*Party-in-interest to the Plan.
12
<PAGE>
NALCO CHEMICAL COMPANY
---------------
SCHEDULE II--PROFIT SHARING, INVESTMENT AND PAY DEFERRAL PLAN
REPORTABLE TRANSACTIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
CATEGORY (III)--A SERIES OF SECURITY TRANSACTIONS IN EXCESS OF 5% OF THE
CURRENT VALUE OF PLAN ASSETS:
<TABLE>
<CAPTION>
EXPENSES VALUE OF
INCURRED ASSET ON
IDENTITY OF PARTY PURCHASE SELLING WITH COST OF TRANSACTION NET GAIN
INVOLVED DESCRIPTION OF ASSET PRICE PRICE TRANSACTION ASSET DATE (LOSS)
- - ----------------------- ---------------------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Neuberger & Berman Man- Neuberger & Berman
agement Guardian Equity Fund
139 purchases $21,802,364 $21,802,364 $21,802,364
118 sales $11,347,288 8,442,781 11,347,288 $2,904,507
The Northern Trust Com- Collective Short-Term
pany Investment Fund:
279 purchases 75,451,265 75,451,265 75,451,265
364 sales 80,917,008 80,917,008 80,917,008
Barclays Global Invest- Barclays Equity
ors Index Fund:
164 purchases 14,371,898 14,371,898 14,371,898
86 sales 7,390,461 5,451,668 7,390,461 1,938,793
Nalco Chemical Company Nalco Chemical Company
Common Stock:
5 purchases 2,440,901 $2,669 2,440,901 2,440,901
11 sales 14,634,855 19,604 5,408,633 14,634,855 9,206,618
</TABLE>
There were no reportable category (i), (ii), or (iv) transactions for the
year ended December 31, 1997
13
<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 30, 1998
