| Nalco Holding CO ITEM 1A RISK FACTORS If we are unable to respond to the changing needs of a particular industry and to anticipate, respond to or utilize changing technologies and develop new offerings, it could become more difficult for us to respond to our customers &apos needs and cause us to be less competitive |
| We have historically been able to maintain our market positions and margins through continuous innovation of products and development of new offerings to create value for our customers |
| Recent innovations and development that we have relied on include our 3D TRASAR system for controlling and monitoring chemical feed and our recent relationship with USFilter, which permits us to sell equipment solutions as part of a bundled offering to our water treatment customers |
| We may not be successful in continuing to make similar innovations in the future |
| Our future operating results will depend to a significant extent on our ability to continue to introduce new products and applications and to develop new offerings that offer distinct value for our customers |
| Many of our products may be affected by rapid technological change and new product introductions and enhancements |
| We expect to continue to enhance our existing products and identify, develop and manufacture new products with improved capabilities and make improvements in our productivity in order to maintain our competitive position |
| We intend to devote sizeable resources to the development of new technologically advanced products and systems and to continue to devote a substantial amount of expenditures to the research and development functions of our business |
| However, we cannot assure you that: [spacer |
| gif] • we will be successful in developing new products or systems or bringing them to market in a timely manner; [spacer |
| gif] • products or technologies developed by others will not render our offerings obsolete or non-competitive; [spacer |
| gif] • the market will accept our innovations; [spacer |
| gif] • our competitors will not be able to produce our core non-patented products at a lower cost; [spacer |
| gif] • we will have sufficient resources to research and develop all promising new technologies and products; or [spacer |
| gif] • significant research and development efforts and expenditures for products will ultimately prove successful |
| Our ability to anticipate, respond to and utilize changing technologies is crucial because we compete with many companies in each of the markets in which we operate |
| For example, we compete with hundreds of companies in the water treatment chemicals market, including our largest global competitor, GE Water Technologies |
| Other companies, including Ecolab, Inc, are expected to enter or increase their presence in our markets |
| Our ability to compete effectively is based on a number of considerations, such as product and service innovation, product and service quality, distribution capability and price |
| Moreover, water treatment for industrial customers depends on the particular needs of the industry |
| For example, the paper industry requires a specific water quality for bleaching paper; certain industrial boilers require demineralized water; the pharmaceuticals industry requires ultra pure water for processing; and, in the case of municipal services, water treatment includes clarification for re-use, sludge dewatering and membrane ultra filtration |
| We may not have sufficient financial resources to respond to the changing needs of a particular industry and to continue to make investments in our business, which could cause us to become less competitive |
| Our substantial leverage could harm our business by limiting our available cash and our access to additional capital |
| We are highly leveraged |
| As of December 31, 2005, our total consolidated indebtedness was dlra3cmam266dtta8 million and we had dlra250dtta0 million of borrowing capacity available under our revolving credit facility (excluding dlra28dtta2 million of outstanding letters of credit) |
| Our high degree of leverage could have important consequences for you, including the following: [spacer |
| gif] • It may limit our and our subsidiaries &apos ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes on favorable terms or at all; 19 _________________________________________________________________ [spacer |
| gif] • A substantial portion of our subsidiaries &apos cash flows from operations must be dedicated to the payment of principal and interest on their and our indebtedness and thus will not be available for other purposes, including operations, capital expenditures and future business opportunities; [spacer |
| gif] • It may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to those of our competitors that are less highly-leveraged; [spacer |
| gif] • It may restrict our ability to make strategic acquisitions or cause us to make non-strategic divestitures; and [spacer |
| gif] • We may be more vulnerable than a less leveraged company to a downturn in general economic conditions or in our business, or we may be unable to carry out capital spending that is important to our growth |
| At December 31, 2005, we had dlra1cmam278dtta6 million of variable rate debt |
| Despite our current leverage, we may still be able to incur substantially more debt |
| This could further exacerbate the risks that we and our subsidiaries face |
| We and our subsidiaries may be able to incur substantial additional indebtedness in the future |
| The terms of the indentures governing our subsidiaries &apos notes do not fully prohibit us or our subsidiaries from doing so |
| Nalco Companyapstas revolving credit facility provides commitments of up to dlra250dtta0 million, all of which would have been available for future borrowings as of December 31, 2005 (excluding dlra28dtta2 million of outstanding letters of credit) |
| If new debt is added to our current debt levels, the related risks that we and our subsidiaries now face could intensify |
| Our subsidiaries &apos debt agreements contain restrictions that limit our flexibility in operating our business |
| Nalco Companyapstas senior credit agreement and the indentures governing our subsidiaries &apos existing notes contain a number of significant covenants that, among other things, restrict our or our subsidiaries &apos ability to: [spacer |
| gif] • incur additional indebtedness; [spacer |
| gif] • pay dividends on or make other distributions or repurchase certain capital stock; [spacer |
| gif] • make certain investments; [spacer |
| gif] • enter into certain types of transactions with our affiliates; [spacer |
| gif] • limit dividends or other payments by restricted subsidiaries; [spacer |
| gif] • use assets as security in other transactions; and [spacer |
| gif] • sell certain assets or merge with or into other companies |
| In addition, under the senior credit agreement, Nalco Holdings LLC is required to satisfy and maintain specified financial ratios and tests |
| Events beyond our control may affect its ability to comply with those provisions and Nalco Holdings LLC may not be able to meet those ratios and tests |
| The breach of any of these covenants would result in a default under the senior credit agreement and the lenders could elect to declare all amounts borrowed under the senior credit agreement, together with accrued interest, to be due and payable and could proceed against the collateral securing that indebtedness |
| The terms of Nalco Company’s senior credit agreement fully prohibit Nalco Holdings LLC and its subsidiaries from paying dividends or otherwise transferring their assets to us |
| Our operations are conducted through our subsidiaries and our ability to make payments on any obligations we may have is dependent on the earnings and the distribution of funds from our subsidiaries |
| However, the terms of Nalco Companyapstas senior credit agreement fully prohibit Nalco Holdings LLC and its subsidiaries from paying dividends or otherwise transferring their assets to us |
| Accordingly, under the terms of the credit agreement, Nalco Holdings LLC and its subsidiaries may not make dividends to Nalco Holding Company to enable it to pay dividends on our common stock |
| 20 _________________________________________________________________ Our significant non-US operations expose us to global economic and political changes that could impact our profitability |
| We have significant operations outside the United States, including joint ventures and other alliances |
| We conduct business in approximately 130 countries and, in 2005, approximately 55prca of our net sales originated outside the United States |
| There are inherent risks in our international operations, including: [spacer |
| gif] • exchange controls and currency restrictions; [spacer |
| gif] • currency fluctuations and devaluations, such as the recent currency crisis in Argentina; [spacer |
| gif] • tariffs and trade barriers; [spacer |
| gif] • export duties and quotas; [spacer |
| gif] • changes in local economic conditions, such as the economic decline in Venezuela; [spacer |
| gif] • changes in laws and regulations; [spacer |
| gif] • difficulties in managing international operations and the burden of complying with foreign laws; [spacer |
| gif] • exposure to possible expropriation or other government actions; [spacer |
| gif] • restrictions on our ability to repatriate dividends from our subsidiaries; and [spacer |
| gif] • unsettled political conditions and possible terrorist attacks against American interests |
| Our international operations also expose us to different local political and business risks and challenges |
| For example, in certain countries we are faced with periodic political issues that could result in currency risks or the risk that we are required to include local ownership or management in our businesses |
| We are also periodically faced with the risk of economic uncertainty, such as recent strikes and currency exchange controls in Venezuela, which has impacted our business in these countries |
| Other risks in international business also include difficulties in staffing and managing local operations, including our obligations to design local solutions to manage credit risk to local customers and distributors |
| Our overall success as a global business depends, in part, upon our ability to succeed in differing economic, social and political conditions |
| We may not continue to succeed in developing and implementing policies and strategies that are effective in each location where we do business, which could negatively affect our profitability |
| Environmental, safety and production and product regulations or concerns could subject us to liability for fines or damages, require us to modify our operations and increase our manufacturing and delivery costs |
| We are subject to the requirements of environmental and occupational safety and health laws and regulations in the United States and other countries |
| These include obligations to investigate and clean up environmental contamination on or from properties or at off-site locations where we are identified as a responsible party |
| Additionally, the US Environmental Protection Agency is conducting a civil and criminal investigation of environmental practices at our Louisiana manufacturing facility |
| We have also been named as a defendant in a series of multi-party and individual lawsuits based on claims of exposure to hazardous materials |
| We cannot predict with certainty the outcome of any such tort claims or the involvement we might have in such matters in the future and there can be no assurance that the discovery of previously unknown conditions will not require significant expenditures |
| In each of these chemical exposure cases, our insurance carriers have accepted the claims on our behalf and our financial exposure is limited to the amount of our deductible; however, we cannot predict the number of claims that we may have to defend in the future and we may not be able to continue to maintain such insurance |
| 21 _________________________________________________________________ The UK Health and Safety Executive (‘‘HSE’’) has sent us notice that it intends to initiate legal proceedings against our UK subsidiary under the Health and Safety at Work Act |
| The place of these proceedings is not indicated in the notice |
| This notice references a legionella outbreak that is claimed to have originated at cooling towers owned by one of the subsidiary’s customers |
| The HSE indicates that the proceedings will relate to the cleaning of these cooling towers |
| The Company has not received any specific charges or claims for relief, but will, in any event, defend and refute any contention that it has violated any law |
| We have made and will continue to make capital and other expenditures to comply with environmental requirements |
| Although we believe we are in material compliance with environmental law requirements, we may not have been and will not at all times be in complete compliance with all of these requirements, and may incur material costs, including fines or damages, or liabilities in connection with these requirements in excess of amounts we have reserved |
| In addition, these requirements are complex, change frequently and have tended to become more stringent over time |
| In the future, we may discover previously unknown contamination that could subject us to additional expense and liability |
| In addition, future requirements could be more onerous than current requirements |
| The activities at our production facilities are subject to a variety of federal, state, local and foreign laws and regulations (‘‘production regulations’’) |
| Similarly, the solid, air and liquid waste streams produced from our production facilities are subject to a variety of regulations (‘‘waste regulations’’) and many of our products and the handling of our products are governmentally regulated or registered (‘‘product regulations’’) |
| Each of the production, waste and product regulations is subject to expansion or enhancement |
| Any new or tightened regulations could lead to increases in the direct and indirect costs we incur in manufacturing and delivering products to our customers |
| For example, the European Commission is currently considering imposing new chemical registration requirements on the manufacturers and users of all chemicals, not just those which are considered to be harmful or hazardous |
| Should such regulations, referred to as REACH, be imposed, all chemical companies will be faced with additional costs to conduct their businesses in European Commission countries |
| Similarly, certain of our products are used to assist in the generation of tax credits for our customers, and the termination or expiration of such tax credits could impact the sale of these products |
| In addition to an increase in costs in manufacturing and delivering products, a change in production regulations or product regulations could result in interruptions to our business and potentially cause economic or consequential losses should we be unable to meet the demands of our customers for products |
| We may not be able to achieve all of our expected cost savings |
| A variety of risks could cause us not to achieve the benefits of our expected cost savings, including, among others, the following: [spacer |
| gif] • higher than expected severance costs related to staff reductions; [spacer |
| gif] • higher than expected retention costs for employees that will be retained; [spacer |
| gif] • delays in the anticipated timing of activities related to our cost-saving plan, including the reduction of inefficiencies in our administrative and overhead functions; and [spacer |
| gif] • other unexpected costs associated with operating the business |
| We have experienced, and may continue to experience, difficulties in securing the supply of certain raw materials we and our competitors need to manufacture some of our products and increases in raw material costs |
| In 2004 and 2005, certain of the raw materials used by us and other chemical companies have faced supply limitation |
| If these limitations continue or become more severe, we risk shortfalls in our sales and the potential of claims from our customers if we are unable to fully meet contractual requirements |
| Also, limitations on raw materials and rising prices for underlying products have resulted in price increases for raw materials we purchase, and we risk further price increases for these materials |
| Our 22 _________________________________________________________________ margins have been impacted by such raw materials price increases and will continue to be impacted if we are unable to pass such increases through to our customers |
| Our pension plans are currently underfunded and we may have to make significant cash payments to the plans, reducing the cash available for our business |
| We sponsor various pension plans worldwide that are underfunded and require significant cash payments |
| For example, in 2004 and 2005, we contributed dlra13dtta7 million and dlra30dtta0 million, respectively, to our pension plans |
| We may also opt to make additional voluntary contributions to various pension plans worldwide in 2006 |
| As of December 31, 2005, our worldwide pension plans were underfunded by dlra434dtta2 million (based on the actuarial assumptions used for purposes of Statement of Financial Accounting Standards (SFAS) Nodtta 87, Employers’ Accounting for Pensions) |
| Our US pension plans are subject to the Employee Retirement Income Security Act of 1974, or ERISA Under ERISA, the Pension Benefit Guaranty Corporation, or PBGC, has the authority to terminate an underfunded pension plan under certain circumstances |
| In the event our US pension plans are terminated for any reason while the plans are underfunded, we will incur a liability to the PBGC that may be equal to the entire amount of the underfunding |
| Prior to the closing of the Acquisition, the PBGC requested and received information from us regarding our business, the Transactions and our pension plans |
| The PBGC took no further action with respect to their inquiry |
| We have recorded a significant amount of goodwill and other identifiable intangible assets, and we may never realize the full value of our intangible assets |
| We have recorded a significant amount of goodwill and other identifiable intangible assets, including customer relationships, trademarks and developed technologies |
| Goodwill and other net identifiable intangible assets were approximately dlra3dtta4 billion as of December 31, 2005, or 62prca of our total assets |
| Goodwill, which represents the excess of cost over the fair value of the net assets of the businesses acquired, was approximately dlra2dtta2 billion as of December 31, 2005, or 40prca of our total assets |
| Goodwill and net identifiable intangible assets are recorded at fair value on the date of acquisition and, in accordance with SFAS Nodtta 142, Goodwill and Other Intangible Assets, will be reviewed at least annually for impairment |
| Impairment may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products and services sold by our business, and a variety of other factors |
| Some of the products and services we sell to our customers, including but not limited to those in the synthetic fuel industry, are dependent upon laws and regulations, and changes to such laws or regulations could impact the demand for our products and services |
| The amount of any quantified impairment must be expensed immediately as a charge to results of operations |
| Depending on future circumstances, it is possible that we may never realize the full value of our intangible assets |
| Any future determination of impairment of a significant portion of goodwill or other identifiable intangible assets would have an adverse effect on our financial condition and results of operations |
| Our future success will depend in part on our ability to protect our intellectual property rights, and our inability to enforce these rights could permit others to offer products competitive with ours, which could reduce our ability to maintain our market position and maintain our margins |
| We rely on the patent, trademark, copyright and trade secret laws of the United States and other countries to protect our intellectual property rights |
| However, we may be unable to prevent third parties from using our intellectual property without authorization |
| The use of our intellectual property by others could reduce any competitive advantage we have developed or otherwise harm our business |
| If we had to litigate to protect these rights, any proceedings could be costly, and we may not prevail |
| We have obtained and applied for several US and foreign trademark registrations, and will continue to evaluate the registration of additional service marks and trademarks, as appropriate |
| Our pending applications may not be approved by the applicable governmental authorities and, even if the applications are approved, third parties may seek to oppose or otherwise challenge these registrations |
| 23 _________________________________________________________________ A failure to obtain trademark registrations in the United States and in other countries could limit our ability to protect our trademarks and impede our marketing efforts in those jurisdictions |
| Our Sponsors have significant influence on us and may have conflicts of interest with us or you in the future |
| As of December 31, 2005, our Sponsors beneficially own approximately 37dtta2prca of our common stock |
| In addition, our Sponsors have the right to designate collectively four nominees for election to the board of directors |
| Representatives of our Sponsors occupy three of the nine seats on our board of directors |
| As a result, our Sponsors have significant influence over our decisions to enter into any corporate transaction and may be able to prevent any transaction that requires the approval of our board of directors or the equityholders, regardless of whether or not other members of our board of directors or equityholders believe that any such transactions are in their own best interests |
| Additionally, our Sponsors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us |
| Our Sponsors may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us |
| Future sales of our shares could depress the market price of our common stock |
| The market price of our common stock could decline as a result of sales of a large number of shares of common stock in the market or the perception that such sales could occur |
| These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate |
| As of December 31, 2005 we had 142cmam737cmam451 shares of common stock outstanding |
| Of those shares, 85cmam755cmam818 shares are freely tradable |
| The 56cmam981cmam633 remaining shares may be sold subject to the volume, manner of sale and other conditions of Rule 144 |
| The Sponsors and their affiliates, which collectively beneficially owned 53cmam124cmam191 shares as of December 31, 2005, will have the ability to cause us to register the resale of their shares |
| In addition, subject to certain conditions, certain members of our management who hold units of Nalco LLC will be able to sell back or ‘‘put’’ to Nalco LLC their class A units, along with those of their class B units, class C units and class D units that have vested, in exchange for our shares of common stock owned by Nalco LLC In November 2004, we provided a warrant to Nalco LLC that entitles it to acquire up to 6cmam191cmam854 shares of our common stock for dlra0dtta01 per share, which will allow Nalco LLC to deliver our shares in satisfaction of such ‘‘put’’ rights |
| In December 2005, 1cmam074cmam082 shares were delivered to Nalco LLC pursuant to the warrant |
| As a result, as of December 31, 2005, an additional 5cmam117cmam772 shares of our common stock may still be delivered pursuant to the warrant in the future |
| The market price of our common stock may be volatile, which could cause the value of your investment to decline |
| Securities markets worldwide experience significant price and volume fluctuations |
| This market volatility, as well as general economic, market or potential conditions, could reduce the market price of our common stock in spite of our operating performance |
| In addition, our operating results could be below the expectations of securities analysts and investors, and in response, the market price of our common stock could decrease significantly |
| Provisions in our amended and restated certificate of incorporation and bylaws and Delaware law may discourage a takeover attempt |
| Provisions contained in our amended and restated certificate of incorporation and bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders |
| Provisions of our amended and restated certificate of incorporation and bylaws impose various procedural and other requirements, which could make it more difficult for stockholders to effect certain corporate actions |
| For example, our amended and restated certificate of incorporation authorizes our board of directors to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock, without any vote or action by our stockholders |
| Thus, 24 _________________________________________________________________ our board of directors can authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our common stock |
| These rights may have the effect of delaying or deterring a change of control of our company |
| In addition, a change of control of our company may be delayed or deterred as a result of our having three classes of directors |
| Additionally, Section 203 of the Delaware General Corporation Law provides that, subject to specified exceptions, a Delaware corporation shall not engage in business combinations with any entity that acquires enough shares of our common stock without the consent of our board of directors to be considered an ‘‘interested stockholder’’ under Delaware law for a three-year period following the time that the stockholder became an interested stockholder |
| These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock |