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