<PAGE> 1
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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, 1994
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 1-4462
------------------------
STEPAN COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Delaware 36-1823834
--------------------------------------------- ---------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Northfield, Illinois 60093
--------------------------------------------- ---------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number including area code: 708-446-7500
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
--------------------------------------------- ---------------------------------------------
<S> <C>
Common Stock, $1 par value American Stock Exchange
Chicago Stock Exchange
5 1/2% Convertible Preferred Stock, no par Chicago Stock Exchange
value
</TABLE>
Securities registered pursuant to Section 12 (g) of the Act:
None
---------------
(Title of Class)
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K 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. [ ]
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, AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
------ ------
AGGREGATE MARKET VALUE AT FEBRUARY 28, 1995, OF VOTING STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT: $111,119,000.*
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
STOCK AS OF FEBRUARY 28, 1995:
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT FEBRUARY 28, 1995
--------------------------------------------- ---------------------------------------------
<S> <C>
Common Stock, $1 par value 9,964,000 shares
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
PART OF FORM 10-K DOCUMENT INCORPORATED
---------------------------------- ----------------------------------
<S> <C>
Part I, Item 1 1994 Annual Report to Stockholders
Part II, Items 5-8 1994 Annual Report to Stockholders
Part III, Items 10-12 Proxy Statement dated March 31,
1995
</TABLE>
*Based on reported ownership by all directors, officers and beneficial
owners of more than 5% of registrant's voting stock. However, this determination
does not constitute an admission of affiliate status for any of these holders.
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<PAGE> 2
PART I
ITEM 1. BUSINESS
Stepan Company and its subsidiaries (the "Company") produce basic and
intermediate chemicals which are sold to other manufacturers and then made into
a variety of end products. The Company sells three groups of products:
surfactants, polymers and specialty products. Surfactants refer to chemical
agents which affect the interaction between two surfaces; they can provide
actions such as detergency (i.e., the ability of water to remove soil from
another surface), wetting and foaming, dispersing, emulsification (aiding two
dissimilar liquids to mix), demulsification and viscosity modifications.
Surfactants are the basic cleaning agent in detergents for washing clothes,
dishes, carpets, fine fabrics, floors and walls. Surfactants are also used for
the same purpose in shampoos and conditioners, toothpaste, cosmetics and other
personal care products. Commercial and industrial applications include
emulsifiers for agricultural pesticides, emulsion polymers such as floor
polishes and latex foams and coatings, wetting and foaming agents for wallboard
manufacturing and surfactants for enhanced oil recovery. Polymers refer to
intermediate chemicals including phthalic anhydride, polyols and urethane foam
systems used in plastics, building materials and refrigeration industries.
Specialty products consist of flavor and pharmaceutical intermediates, fine
chemicals, esters, synthetic lubricants and other specialty products.
In February 1990, Stepan Company sold its paper chemical business which
reported moderate losses since its purchase in 1985.
In the first quarter of 1990, Stepan Company capitalized $1.6 million of
loans to Stepan Mexico, increasing Stepan Company's ownership from 40% to 98%.
Stepan Mexico S.A. de C.V. is a manufacturer of surfactant chemicals.
In 1991, Stepan Company purchased the ACCOSOFT(R) line of fabric softeners
from Karlshamns U.S.A., Inc. The Company also purchased from ICI Americas, Inc.
the U.S. portion of the sulfonate and sulfonate blend line used in agricultural
products and industrial coatings.
In 1993, Stepan Company entered into a 50 percent joint venture with
Coldequim, S.A. called Stepan Colombiana de Quimicos, Ltda in Colombia, South
America. Under the agreement, Stepan Colombiana will manufacture selected
surfactants and market the Company's complete line of surfactants in the Andean
Pact countries of Colombia, Venezuela, Peru, Bolivia and Ecuador.
In 1994, Stepan Company entered into a 50 percent joint venture with United
Coconut Chemicals, Inc. and United Coconut Planters International in the
Philippines. The venture, called Stepan Philippines, Inc., will manufacture
selected surfactants for sale in the Philippines and Asia/Pacific markets
commencing in 1996.
MARKETING AND COMPETITION
Principal markets for all products are manufacturers of cleaning or washing
compounds (including detergents, shampoos, toothpaste and household cleaners),
paints, cosmetics, beverages, agricultural pesticides and herbicides, plastics,
furniture, building materials and automotive and refrigeration equipment. Sales
of the Company tend not to be seasonal.
The Company does not sell directly to the retail market, but sells to a
wide range of manufacturers in many industries and has many competitors. The
principal methods of competition are product performance, price and adaptability
to the specific needs of individual customers. These factors allow the Company
to compete on a basis other than solely price, reducing the severity of
competition as experienced in the sale of commodity chemicals having identical
performance characteristics. The Company is one of the largest merchant
producers of surfactants in the United States. In the case of surfactants, much
of the Company's competition comes from the internal divisions of larger
companies, as well as several large national and regional producers. In the
manufacture of polymers, the Company competes with the chemical divisions of
several large companies, as well as with other small specialty chemical
manufacturers. In recent years, the Company also faces some competition from
foreign imports of phthalic anhydride. In specialty products, the
1
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Company competes with several large firms plus numerous small companies. The
Company does not expect any significant changes in the competitive environment
in the foreseeable future.
MAJOR CUSTOMER AND BACKLOG
The Company does not have any one single customer whose business represents
more than 10% of the Company's consolidated revenue. Most of the Company's
business is essentially on a "spot delivery basis" and does not involve a
significant backlog. The Company does have some contract arrangements with
certain customers, but purchases are generally contingent on purchaser
requirements.
ENERGY SOURCES
Substantially all of the Company's manufacturing plants operate on
electricity and interruptable gas purchased from local utilities. During peak
heating demand periods, gas service to all plants may be temporarily interrupted
for varying periods ranging from a few days to several months. The plants
operate on fuel oil during these gas interruption periods. The Company has not
experienced any plant shutdowns or adverse effects upon its business in recent
years that were caused by a lack of available energy sources.
RAW MATERIALS
The most important raw materials used by the Company are of a petroleum or
vegetable nature. For 1995, the Company has commitments from suppliers to cover
its forecasted requirements and is not substantially dependent upon any one
supplier.
RESEARCH AND DEVELOPMENT
The Company maintains an active research and development program to assist
in the discovery and commercialization of new knowledge with the intent that
such effort will be useful in developing a new product or in bringing about a
significant improvement to an existing product or process. Total expenses for
research and development during 1994, 1993 and 1992 were $12,281,000,
$12,613,000 and $11,320,000, respectively. During 1994 and 1993, the research
and development staff consisted of 170 and 162 employees, respectively. The
balance of expenses reflected on the Consolidated Statements of Income relates
to technical services which include routine product testing, quality control and
sales support service.
ENVIRONMENTAL COMPLIANCE
Compliance with applicable federal, state and local regulations regarding
the discharge of materials into the environment, or otherwise relating to the
protection of the environment, resulted in capital expenditures by the Company
of approximately $4,960,000 during 1994. Such capital expenditures in 1995
should approximate $8,850,000. These expenditures represented approximately 11%
of the Company's capital expenditures in 1994 and are expected to be 21% of such
expenditures in 1995. These expenditures, when incurred, are depreciated and
charged on a straight-line basis to pre-tax earnings over their respective
useful lives which are typically 10 years. Compliance with such regulations is
not expected to have a material adverse effect on the Company's earnings and
competitive position in the foreseeable future.
EMPLOYMENT
At December 31, 1994 and 1993, the Company employed worldwide 1,265 and
1,302 persons, respectively.
FOREIGN OPERATIONS
See Note 13, Geographic Data, on page 29 of the Company's 1994 Annual
Report to Stockholders.
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PRODUCT GROUPS
The manufacture of basic and intermediate chemicals constitutes the
Company's only industry segment. The Company's three groups of products and
their contribution to sales for the three years ended December 31, 1994, were:
<TABLE>
<CAPTION>
SPECIALTY
SURFACTANTS POLYMERS PRODUCTS
----------- -------- ---------
<S> <C> <C> <C>
1994......................................... 74% 18% 8%
1993......................................... 74% 18% 8%
1992......................................... 73% 20% 7%
</TABLE>
ITEM 2. PROPERTIES
The Company's corporate headquarters and central research laboratories are
located in Northfield, Illinois. The Northfield facilities contain approximately
70,000 square feet on an 8 acre site. In addition, the Company leases 49,000
square feet of office space in a nearby office complex.
The Canadian sales office is located in Mississagua, Canada and is
approximately 2,300 square feet of leased space. Stepan Mexico maintains a
leased sales office in Mexico City, Mexico.
Surfactants are produced at four plants in the United States and three
wholly owned subsidiaries: one in France, Canada and Mexico. The principal plant
is located on a 626 acre site at Millsdale (Joliet), Illinois. A second plant is
located on a 39 acre tract in Fieldsboro, New Jersey. West Coast operations are
conducted on an 8 acre site in Anaheim, California. A fourth plant is located on
a 162 acre site in Winder, Georgia. The plant, laboratory and office of Stepan
Europe are located on a 20 acre site near Grenoble, France. Stepan Canada, Inc.
is located on a 70 acre leased, with an option to purchase, site in Longford
Mills, Ontario, Canada. Stepan Mexico is located on a 13 acre site in Matamoros,
Mexico. The phthalic anhydride, polyurethane systems and polyurethane polyols
plants are also located at Millsdale. Specialty products are mainly produced at
a plant located on a 19 acre site in Maywood, New Jersey.
The Company owns all of the foregoing facilities except the leased office
space and Canadian plant site mentioned above. The Company believes these
properties are adequate for its operations.
ITEM 3. LEGAL PROCEEDINGS
As previously reported in the Company's Form 10-K/A for the year ended
December 31, 1992, the Company was named as a potentially responsible party
("PRP") for its Maywood, New Jersey Property and property adjacent thereto
("sites"). The Company now believes that the Feasibility Study, which sets forth
alternative recommendations as to remediation at the sites, and the Company's
Maywood, New Jersey site, will be published for public comment in the second
calendar quarter of 1995. Following the public comment period, the United States
Environmental Protection Agency ("USEPA") will publish the Record of Decision,
which will set the remediation program to be followed at the sites, and the
Company's Maywood, New Jersey property. While it is probable that the Company
will incur some clean-up costs, until publication of the Record of Decision, the
Company cannot estimate what its future liability, if any, would be.
In addition, the Company received from Region II of the USEPA, a demand for
payment of past oversight costs incurred by the government at the sites and the
Company's Maywood, New Jersey property. The demand is for approximately one
million seventy-six thousand dollars ($1,076,000.) The Company believes that
part of this amount is the responsibility of other PRPs at the sites, and is in
the process of meeting with the USEPA to resolve this issue.
As reported previously in the Company's Form 10-K/A for the year ended
December 31, 1992, the Company was named as a PRP at the D'Imperio site located
in Hamilton Township, New Jersey, as well as being named as a party defendant in
United States of America v. Jerome Lightman, et. al. (92 CV 4710 [JBS]), a cost
recovery action. The offer to settle, as previously reported, was not accepted
because of the
3
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inability of the PRPs at this site to resolve other outstanding issues.
Consequently, the Company and the other twenty PRPs are engaged in litigation
regarding each party's share of costs at this site.
As reported previously in the Company's Form 10-K/A for the year ended
December 31, 1992, the Company and its wholly-owned Mexican subsidiary were
named as party defendants in an action brought in Brownsville, Texas entitled
Alvear et. al. v. Leonard Electronics Products Co. et. al. Discovery has
continued to proceed in this case, and based on current time schedules, the case
is scheduled for trial commencing August 15, 1995. The Company cannot estimate
what its liability, if any, will be with regard to this case.
As reported previously in the Company's Form 10-K/A for the year ended
December 31, 1992, the Company was named as a PRP at the American Chemical
Services Site located in Griffith, Indiana, and was named as a party defendant
in an action entitled In the Matter of American Chemical Services Superfund
Site. In December 1994, the Company settled its alleged obligations under this
case on a de minimis basis. The settlement was fully reserved for and did not
have a material impact upon the financial condition of the Company.
As reported previously in the Company's Form 10-K/A for the year ended
December 31, 1992, the Company was named as a third party defendant in an action
entitled General Electric Company v. Buzby Brothers Materials Corporation et.
al. (No. 87-4263 [JHR]). Subject to court approval, the Company settled its
alleged liability in this action under a court-sealed settlement in January
1995. The settlement was fully reserved for and did not have a material impact
upon the financial condition of the Company.
As previously reported in the Company's Form 10-K/A for the year ended
December 31, 1992, the Company was a named PRP at the Ewan site, Shamong
Township, New Jersey. The USEPA has combined operable unit 1 and operable unit 2
(drum removal and liquid/soil removal) into one operating unit. The contractor
hired by the PRP group has commenced remediation at this site.
As previously reported in the Company's 1992 Forms 10-K and 10-K/A and the
Company's Form 10-Qs for the quarters ended March 31 1994, June 30, 1994 and
September 30, 1994, the Company was named as a PRP at other sites located
primarily in the Eastern part of the United States of America. While named as a
PRP at these sites, the Company has contested its involvement at these sites. To
date, the Company has received no further communication regarding these sites,
or the Company's involvement at these sites.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
No matters were submitted to stockholders during the fourth quarter of the
fiscal year ended December 31, 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers are elected annually by the Board of Directors at the
first meeting following the Annual Meeting of Stockholders to serve until the
next annual meeting of the Board and until their respective successors are duly
elected and qualified.
Effective January 1, 1995, James A. Hartlage, who was formerly Senior Vice
President--Technology as of February, 1992, was appointed Senior Vice
President--Technology and Operations. Earl H. Wagener, formerly Vice
President--Product Development, was appointed Vice President--Research and
Development.
As of October 29, 1992, pursuant to Section 3(b) Rule 3b-7 of the
Securities Exchange Act of 1934, Mark S. Barg is deemed an executive officer of
the Company. Mark Barg has served in the capacity of Vice President--Logistics
for the last five years. Effective April 28, 1992, Charles W. Given, formerly
Vice President--Marketing, was appointed Vice President and General
Manager--Surfactants. Ronald L. Siemon, formerly Vice President--Polyurethanes,
was appointed Vice President and General Manager--Polymers.
Effective January 1, 1992, Walter J. Klein, formerly the Vice President and
Corporate Controller, was appointed Vice President--Finance. Charles P. Riley,
Jr., who previously held the position of Vice President--Manufacturing and
Engineering, assumed the position of Vice President--Administration and
Regulatory Affairs. Mickey Mirghanbari, who previously served in the capacity of
Vice President for Plant
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Operations, assumed the position of Vice President--Manufacturing and
Engineering. All other executive officers have remained in their current
capacity for over five years.
The Executive Officers of the Company, their ages as of February 28, 1995,
and certain other information are as follows:
<TABLE>
<CAPTION>
YEAR FIRST
NAME AGE TITLE ELECTED OFFICER
--------------------------------------- --- -------------------------------- ---------------
<S> <C> <C> <C>
F. Quinn Stepan........................ 57 Chairman, President and 1967
Chief Executive Officer
James A. Hartlage...................... 57 Senior Vice 1980
President--Technology
and Operations
Charles W. Given....................... 58 Vice President and General 1992
Manager--Surfactants
Ronald L. Siemon....................... 57 Vice President and General 1992
Manager--Polymers
Charles P. Riley, Jr. ................. 62 Vice President--Administration 1980
and Regulatory Affairs
Jeffrey W. Bartlett.................... 51 Vice President, General Counsel 1983
and Corporate Secretary
Walter J. Klein........................ 48 Vice President--Finance 1985
Mickey Mirghanbari..................... 57 Vice President--Manufacturing 1992
and Engineering
Earl H. Wagener........................ 54 Vice President--Research 1995
and Development
Mark S. Barg........................... 53 Vice President--Logistics Not applicable
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
(a) The Company's common stock is listed and traded on both the American
Stock Exchange and the Chicago Stock Exchange. See page 30 of the Company's 1994
Annual Report to Stockholders for market price information which is incorporated
by reference herein.
The Company's 5 1/2 percent convertible preferred stock is listed and
traded on the Chicago Stock Exchange. See Note 6 on page 27 of the Company's
1994 Annual Report to Stockholders for the description of the preferred
stockholders' rights which is incorporated by reference herein.
From time to time the Company purchases shares of its common stock in the
open market and in block transactions from dealers for the purpose of funding
option grants under its stock option plans and deferred compensation plans for
directors and officers.
(b) On February 28, 1995, there were 1,784 holders of common stock of the
Company.
(c) See page 30 of the Company's 1994 Annual Report to Stockholders for
dividend information which is incorporated by reference herein. Also see Note 3
on page 25 of the Company's 1994 Annual Report to Stockholders which sets forth
the restrictive covenants covering dividends.
ITEM 6. SELECTED FINANCIAL DATA
See pages 30 and 31 of the Company's 1994 Annual Report to Stockholders for
a ten year summary of selected financial information which is incorporated by
reference herein.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
See pages 14 through 18 of the Company's 1994 Annual Report to Stockholders
which is incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages 19 through 29 of the Company's 1994 Annual Report to Stockholders
for the Company's consolidated financial statements, notes to the consolidated
financial statements and auditors' report which are incorporated by reference
herein.
See page 31 of the Company's 1994 Annual Report to Stockholders for
selected quarterly financial data which is incorporated by reference herein.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors
See pages 3 through 5 of the Company's Proxy Statement dated March 31,
1995, for the Annual Meeting of Stockholders which are incorporated by
reference herein.
(b) Executive Officers
See Executive Officers of the Registrant in Part I above.
ITEM 11. EXECUTIVE COMPENSATION
See page 7 of the Company's Proxy Statement dated March 31, 1995, for the
Annual Meeting of Stockholders which is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See pages 1 through 6 of the Company's Proxy Statement dated March 31,
1995, for the Annual Meeting of Stockholders which are incorporated by reference
herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) & (d) Financial Statements and Schedules
See the Index to the Consolidated Financial Statements and Supplemental
Schedule filed herewith.
(b) Reports on Form 8-K
A report on Form 8-K was filed on November 11, 1994, regarding actions
by the Board of Directors to increase the quarterly dividend, to effect
a two-for-one stock split on the Company's common stock and to approve
modifications to the Company's Bylaws regarding stockholders' rights to
call special meetings and the related written notification
requirements.
(c) Exhibits
See Exhibit Index filed herewith.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
STEPAN COMPANY
By: JEFFREY W. BARTLETT
Vice President,
General Counsel and
Corporate Secretary
March 24, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<S> <C> <C>
F. QUINN STEPAN Chairman, President, Chief March 24, 1995
------------------------------------- Executive Officer and Director
F. Quinn Stepan
JAMES J. GAVIN, JR. Director March 24, 1995
-------------------------------------
James J. Gavin, Jr.
THOMAS F. GROJEAN Director March 24, 1995
-------------------------------------
Thomas F. Grojean
JAMES A. HARTLAGE Senior Vice March 24, 1995
------------------------------------- President--Technology
James A. Hartlage and Operations and Director
WALTER J. KLEIN Vice President--Finance, March 24, 1995
------------------------------------- Principal
Walter J. Klein Financial and Accounting Officer
PAUL H. STEPAN Director March 24, 1995
-------------------------------------
Paul H. Stepan
ROBERT D. CADIEUX Director March 24, 1995
-------------------------------------
Robert D. Cadieux
</TABLE>
JEFFREY W. BARTLETT, PURSUANT TO POWERS OF ATTORNEY EXECUTED BY EACH OF THE
DIRECTORS AND OFFICERS LISTED ABOVE, DOES HEREBY EXECUTE THIS REPORT ON BEHALF
OF EACH OF SUCH DIRECTORS AND OFFICERS IN THE CAPACITY IN WHICH THE NAME OF EACH
APPEARS ABOVE.
JEFFREY W. BARTLETT
March 24, 1995
7
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INDEX TO THE
CONSOLIDATED FINANCIAL STATEMENTS
AND
SUPPLEMENTAL SCHEDULE
A copy of Stepan Company's Annual Report to Stockholders for the year ended
December 31, 1994, has been filed as an exhibit to this Annual Report on Form
10-K. Pages 19 through 29 of such Annual Report to Stockholders contain the
Consolidated Balance Sheets as of December 31, 1994 and 1993, the Consolidated
Statements of Income, Stockholders' Equity and Cash Flows and Notes to
Consolidated Financial Statements for the three years ended December 31, 1994,
and the Auditors' Report covering the aforementioned financial statements. These
consolidated financial statements and the Auditors' Report thereon are
incorporated herein by reference.
Supplemental Schedule II -- Allowance for Doubtful Accounts -- to
Consolidated Financial Statements, which is required to comply with Regulation
S-X, and the Auditors' Report on such Supplemental Schedule are included on
pages 9 and 10 of this 10-K.
The individual financial statements of the Registrant have been omitted
because the Registrant is primarily an operating company and all subsidiaries
included in the consolidated financial statements being filed, in the aggregate,
do not have minority equity interests and/or indebtedness to any person other
than the parent in amounts which together exceed 5% of the total consolidated
assets at the date of the latest balance sheet filed.
Certain supplemental schedules are not submitted because they are not
applicable or not required, or because the required information is included in
the financial statements or notes thereto.
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STEPAN COMPANY
SUPPLEMENTAL SCHEDULE TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1994
AS REQUIRED TO COMPLY WITH REGULATION S-X
SCHEDULE II--ALLOWANCE FOR DOUBTFUL ACCOUNTS:
An analysis of the allowance for doubtful accounts for the three years
ended December 31, 1994, is summarized as follows:
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Balance, Beginning of Year.......................................... $1,739 $1,444 $1,592
Provision charged to income.................................... 291 621 119
Accounts written off, net of recoveries........................ (445) (326) (267)
------ ------ ------
Balance, End of Year................................................ $1,585 $1,739 $1,444
====== ====== ======
</TABLE>
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULE
To Stepan Company:
We have audited in accordance with generally accepted auditing standards,
the financial statements included in Stepan Company's Annual Report to
Stockholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 10, 1995. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The supplemental
schedule listed in the index of financial statements is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
February 10, 1995
10
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ----------------------------------------------------------------------------------
<S> <C>
(3)a Copy of the Certificate of Incorporation, and the Certificates of Amendment of
Certificate of Incorporation dated May 6, 1968, April 20, 1972, April 16, 1973,
December 2, 1983. Filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1983, and incorporated herein by reference.
(3)b Copy of the Bylaws of the Company as amended through May 6, 1987. (Note 1)
(3)c Copy of Certificate of Amendment, dated April 28, 1993, to Article IV of
Certificate of Incorporation. (Note 7)
(3)d Copy of Certificate of Amendment, dated May 5, 1987, to Article X of Certificate
of Incorporation. (Note 1)
(4)i Copy of Revolving Credit and Term Loan Agreement dated February 20, 1990, with The
First National Bank of Chicago and the amendment dated March 21, 1990. (Note 3)
(4)m Copy of Second Amendment dated September 20, 1991, amending Revolving Credit and
Term Loan Agreement dated February 20, 1990 (see (4)i above). (Note 4)
(4)m(1) Copy of Third Amendment dated December 29, 1992, amending Revolving Credit and
Term Loan Agreement dated February 20, 1990 (see (4)i and (4)m above). (Note 8)
(4)m(2) Copy of Fourth Amendment dated May 31, 1994, amending Revolving Credit and Term
Loan Agreement dated February 20, 1990 (see (4)i, (4)m and (4)m(1) above).
(4)n(1) Copy of Certificate of Designation, Preferences and Rights of the 5 1/2%
Convertible Preferred Stock, without Par Value and the Amended Certificate dated
August 12, 1992 and April 28, 1993. (Note 7)
(4)n(2) Copy of Issuer Tender Offer Statement on Schedule 13E-4 dated August 13, 1992.
(Note 6)
(4)n(3) Copy of Amendment No. 1 to Schedule 13E-4 (see also (4)n(2) above) dated September
23, 1992. (Note 6)
(4)n(4) Copy of the Company's Form 8-A dated August 13, 1992. (Note 6)
In accordance with 601 (b)(4)(iii) of Regulation S-K, certain debt instruments are
omitted, where the amount of securities authorized under such instruments does not
exceed 10% of the total consolidated assets of the Registrant. Copies of such
instruments will be furnished to the Commission upon request.
(10)a Description of the 1965 Directors Deferred Compensation Plan. (Note 2)
(10)b Copy of the 1969 Management Incentive Compensation Plan as amended and restated as
of January 1, 1992. (Note 5)
(10)d Copy of the 1982 Stock Option Plan. (Note 2)
(10)e Copy of Leveraged Employee Stock Ownership Plan. (Note 3)
(10)f Copy of the Company's 1992 Stock Option Plan. (Note 5)
(11) Statement re computation of per share earnings.
(13) Copy of the Company's 1994 Annual Report to Stockholders.
(18) Letter re change in accounting principle for the year ended December 31, 1992.
(Note 8)
(21) Subsidiaries of Registrant at December 31, 1994.
(23) Consent of Independent Public Accountants.
(24) Power of Attorney.
(27) Financial Data Schedule.
</TABLE>
11
<PAGE> 13
------------
NOTES TO EXHIBIT INDEX
<TABLE>
<CAPTION>
NOTE NO.
--------
<C> <S>
1. Filed with the Company's Annual Report on Form 10-K for the year ended December 31,
1987, and incorporated herein by reference.
2. Filed with the Company's Annual Report on Form 10-K for the year ended December 31,
1988, and incorporated herein by reference.
3. Filed with the Company's Annual Report on Form 10-K for the year ended December 31,
1989, and incorporated herein by reference.
4. Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1991, and incorporated herein by reference.
5. Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1992, and incorporated herein by reference.
6. Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992, and incorporated herein by reference.
7. Filed with the Company's Current Report on Form 8-K filed on April 28, 1993, and
incorporated herein by reference.
8. Filed with the Company's Annual Report on Form 10-K for the year ended December 31,
1992, and incorporated herein by reference.
</TABLE>
12
<PAGE> 1
EXHIBIT (4)m(2)
May 31, 1994
Stepan Company
Edens and Winnetka Road
Northfield, Illinois 60093
Attention: Mr. Walter J. Klein
Re: Amendment No. 4 to Amended and Restated Revolving Credit
and Term Loan Agreement dated as of February 20, 1990
Ladies and Gentlemen:
We make reference to that certain Amended and Restated Revolving Credit
and Term Loan Agreement dated as of February 20, 1990, as amended (the
"Agreement") among Stepan Company (the "Company"), certain banks parties
thereto (collectively, the "Banks") and The First National Bank of Chicago, as
Agent. Capitalized terms used and not otherwise herein defined shall have the
meanings attributed to them in the Agreement.
The Company has requested that the Agreement be amended in order to (i)
extend the Revolving Credit Termination Date, (ii) amend the applicable margins
and (iii) amend certain other provisions of the Agreement as more fully set
forth hereinafter. This is to advise the Company that the Banks hereby consent
to such amendments, subject to the terms and conditions set forth herein.
Accordingly, the Company and the Banks hereby agree to amend the Agreement as
follows:
1. The definition of "Revolving Credit Termination Date" set forth in
Article I of the Agreement is restated in its entirety as follows:
'"Revolving Credit Termination Date" means May 31, 1998.'
2. Clause (ii) of the definition of "Eurodollar Rate" set forth in
Article I of the Agreement is restated in its entirety as follows:
"(ii) .55% per annum through the Revolving Credit Termination Date
and .85% per annum thereafter."
3. The Agreement provides for Fixed CD Rate pricing as set forth in
the definition "Fixed CD Rate" and thereinafter. The Company and the Banks
hereby agree that such pricing shall not be available after the Effective Date
(as hereinafter defined). From and after the Effective Date, all references in
the Agreement to Fixed CD Rate and Fixed CD Rate pricing options shall be
deemed deleted.
<PAGE> 2
The amendments contained herein shall become effective as of May 31,
1994 (the "Effective Date") upon receipt by the Agent of the following:
(a) Copies of this Amendment duly executed by the parties hereto; and
(b) Copies, certified by the Secretary or Assistant Secretary of the
Company, of its Board of Directors' resolutions authorizing the
execution of this Amendment.
The Company represents and warrants to the Banks that, as of the
Effective Date, (i) the representations and warranties set forth in
Article V of the Agreement are true and correct and (ii) no Default or
Unmatured Default exists.
It is understood and agreed that all of the terms, conditions and
covenants of the Agreement, except as specifically amended herein, shall
remain binding upon the Borrower in all respects.
IN WITNESS WHEREOF, the Company, the Banks and the Agent have
executed this Amendment as of the date first above written.
STEPAN COMPANY
By: Walter J. Klein
Title: Vice President - Finance
Edens and Winnetka Road
Northfield, Illinois 60093
Attention: Treasury Department
THE FIRST NATIONAL BANK OF CHICAGO,
Individually and as Agent
By: Karen F. Kizer
Title: Senior Vice President
One First National Plaza
Chicago, Illinois 60670
HARRIS TRUST AND SAVINGS BANK
By: R. Michael Newton
Title: Vice President
111 West Monroe Street
Chicago, Illinois 60690
Attention: R. Michael Newton
<PAGE> 3
ABN-AMRO Bank N.V.
Chicago Branch
By: SHERI F. KEMPEL
Title: Group Vice President
135 S. LaSalle Street
Suite 425
Chicago, Illinois 60603
Attention: Sheri F. Kempel
By: JOHN ELLENWOOD
Title: Vice President
<PAGE> 1
EXHIBIT (11)
STEPAN COMPANY
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1994 1993(B)
------- -------
<S> <C> <C>
COMPUTATION OF PER SHARE EARNINGS
-----------------------------------------------------------------------
Net income............................................................. $13,845 $10,776
Deduct dividends on preferred stock.................................... 1,076 1,097
------- -------
Income applicable to common stock...................................... $12,769 $ 9,679
======= =======
Weighted average number of shares outstanding.......................... 9,924 9,894
Per share earnings*.................................................... $ 1.287 $ .978
======= =======
COMPUTATION OF PER SHARE PRIMARY EARNINGS
-----------------------------------------------------------------------
Income applicable to common stock...................................... $12,769 $ 9,679
======= =======
Weighted average number of shares outstanding.......................... 9,924 9,894
Add net shares issuable from assumed exercise of options
(under treasury stock method)........................................ 142 206
------- -------
Shares applicable to primary earnings.................................. 10,066 10,100
======= =======
Per share primary earnings*............................................ $ 1.269 $ .958
======= =======
Dilutive effect........................................................ 1.4% 2.0%
======= =======
COMPUTATION OF PER SHARE FULLY DILUTED EARNINGS
-----------------------------------------------------------------------
Net income............................................................. $13,845 $ 9,679(A)
======= =======
Weighted average number of shares outstanding.......................... 9,924 9,894
Add net shares issuable from assumed exercise of options
(under treasury stock method)........................................ 154 206
Add weighted average shares issuable from assumed conversion of
convertible preferred stock.......................................... 894 --(A)
------- -------
Shares applicable to fully diluted earnings............................ 10,972 10,100
======= =======
Per share fully diluted earnings*...................................... $ 1.262 $ .958
======= =======
Dilutive effect........................................................ 1.9% 2.0%
======= =======
</TABLE>
------------
(A) For 1993, the assumed conversion of convertible preferred stock would have
been antidilutive. Accordingly, the dividends and shares issuable from
assumed conversion have been excluded pursuant to APB No. 15.
(B) All share and per share data have been restated for the two-for-one common
stock split effective December 15, 1994.
* Rounded
This calculation is submitted in accordance with Regulation S-K, item
601(b)(11).
<PAGE> 1
EXHIBIT (13)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
1994 COMPARED WITH 1993
Sales for 1994 grew one percent to a record $444 million despite a one
percent decline in sales volume. Sales by product group were:
<TABLE>
<CAPTION>
Percent
(Dollars in Thousands) 1994 1993 Change
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Surfactants $329,186 $324,809 +1
Polymers 78,778 79,071 --
Specialty products 35,984 34,945 +3
------------------------------------------------------------------------------------------------
Total $443,948 $438,825 +1
============================================================================================
</TABLE>
Surfactants are a principal ingredient in consumer and industrial cleaning
products such as detergents, shampoos, lotions, toothpaste and cosmetics. Other
applications include lubricating ingredients and emulsifiers for spreading of
insecticides and herbicides. Surfactant sales rose one percent despite a four
percent decline in sales volume. The moderate growth in sales was primarily
contributed by foreign subsidiaries, as domestic sales were essentially flat
between years. Domestic volume, representing 83 percent of total surfactant
sales volume, was down seven percent from the prior year as a result of product
reformulation by large national customers. Partially offsetting this was a
significant volume growth in the broad commercial customer base. Sales of
foreign subsidiaries, representing 17 percent of surfactant sales volume, grew
six percent as a result of a strong volume gain. Mexico contributed a 46 percent
year-to-year volume increase, followed by a 13 percent and a six percent
increase from Canada and Europe, respectively. The weakened Canadian dollar has
negatively affected the subsidiary's reported sales growth. The continued
competitive pressure on prices in Europe has erased the revenue growth fueled by
stronger sales volume and the strengthening French franc.
The polymer product group includes phthalic anhydride, polyurethane systems
and polyurethane polyols. Phthalic anhydride is used in polyester resins, alkyd
resins and plasticizers for applications in construction materials and
components of automotive, boating and other consumer products. Polyurethane
systems provide thermal insulation and are sold to the construction, industrial
and appliance markets. Polyurethane polyols are used in the manufacture of
laminate board for the construction industry. Polymer sales were essentially
unchanged from a year ago, although sales volume rose eight percent. Phthalic
anhydride, which represents 57 percent of polymer volume, reported a 16 percent
increase in sales due to a 13 percent increase in volume and higher selling
prices. Higher selling prices were driven by improved market conditions and
higher raw material costs. The increase in phthalic anhydride volume was the
result of strong domestic demand, lower levels of competing foreign imports and
high production levels attributable to refurbishments made to our manufacturing
facility. Polyurethane polyols, which represent 38 percent of total polymer
volume, posted 15 percent sales growth due entirely to improved volume.
Polyurethane systems sales fell 44 percent as volume dropped 45 percent due to
delays in the roll-out of new products with more favorable environmental
characteristics.
Specialty products include flavors, lubricant additives, oil field
chemicals and emulsifiers and solubilizers used in the food and pharmaceutical
industry. Specialty products revenues grew three percent with most of the
improvement coming from higher volume.
Gross profit in 1994 was $81.1 million, or 18.3 percent of net sales, an
increase from $80.0 million, or 18.2 percent of net sales in 1993. Surfactant
gross profit was $61.3 million for 1994, a decrease of three percent from 1993.
Domestic surfactants were down $3.5 million, or seven percent, as a result of
the reduced sales to larger national customers. Foreign operations were up $1.9
million as Mexico and Canada continued to post stronger sales over prior years.
Negatively impacting the result was Stepan Europe which continued to face
increasingly competitive price pressure in a recovering European economy.
Polymer gross profit rose $3.4 million to $13.1 million for 1994 representing a
35 percent increase from 1993. Phthalic anhydride
14
<PAGE> 2
contributed most of the increased polymer gross profit, as a result of
significantly improved margins and volume. Insurance recoveries of $1.1 million
related to 1993 production outages also contributed to the improved margin.
Despite the significant sales drop in polyurethane systems, gross
profit only declined 26 percent due primarily to the development of lower cost
formulations. While polyurethane polyols posted higher sales and volume,
increased manufacturing expenses, raw material costs and export freight costs
more than offset the volume gains. Specialty products gross profit fell $.7
million to $6.7 million for 1994 representing a nine percent decline from 1993.
Despite the increased sales, the decline in gross profit was largely
attributable to reduced royalty income compared to a year earlier.
Average raw material costs climbed six percent during 1994 and are expected
to rise modestly during 1995 as the economy continues to grow. Labor costs
increased at a modest rate reflecting the recent low levels of inflation which
are expected to continue in the near term. Depreciation expense increased to
$27.0 million in 1994 from $25.7 million in 1993 as a result of bringing into
service capacity expansion projects in recent years, as well as continuing
capital spending for plant improvements.
Operating income, pre-tax income before net interest expense, was $29.6
million in 1994, an 8.4 percent increase from 1993. Operating expenses declined
three percent reflecting lower administrative expenses in 1994. Administrative
expenses decreased $1.3 million, or seven percent due primarily to $3.1 million
of insurance recoveries relating to legal costs previously incurred in defending
environmental cases against the company. See Note 12 of the Notes to
Consolidated Financial Statements. Net of these favorable recoveries, provision
for legal and environmental costs was $.7 million in 1994 compared with $2.2
million recorded in 1993. Marketing expenses increased a modest one percent
which was essentially offset by a decrease in research and product development
expenses. Excluding the insurance recoveries, operating expenses for 1994
increased $1.8 million, or a moderate three percent. Continued insurance
reimbursement of ongoing environmental legal defense costs is expected to
minimize the company's share of future defense costs. Other cost containment
efforts, including a voluntary early retirement program offered in 1994, are
expected to keep 1995 operating expense increases to a modest level.
Net income in 1994 benefited from a substantially lower tax rate than
1993. The effective tax rate was 38.5 percent in 1994 compared to 45.1 percent
in 1993. The 1993 tax rate was unusually high because of a U.S. tax rate hike
and the resulting upward restatement of deferred tax liabilities. A recognition
in the current year of tax benefits on loss carryforwards of foreign
subsidiaries also contributed to the lower tax provision. See Note 5 of the
Notes to the Consolidated Financial Statements for a reconciliation of the
statutory to the effective tax rate.
Net income for 1994 rose 28 percent to $13.8 million, or $1.29 per share,
compared to $10.8 million, or $.98 per share in 1993. As a result of the
two-for-one common stock split on December 15, 1994, earnings per share for 1993
and prior have been restated.
1993 COMPARED WITH 1992
Sales for 1993 grew one percent to a record $439 million. The increase was
the result of a one percent increase in sales volume. Sales by product group
were:
<TABLE>
<CAPTION>
Percent
(Dollars in Thousands) 1993 1992 Change
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Surfactants $324,809 $317,522 +2
Polymers 79,071 87,060 -9
Specialty products 34,945 31,182 +12
------------------------------------------------------------------------------------------------
Total $438,825 $435,764 +1
================================================================================================
</TABLE>
Surfactant sales volume rose two percent. Domestic volume represented 87
percent of total surfactant sales volume and grew by two percent over 1992.
Sales of foreign subsidiaries representing 13 percent
15
<PAGE> 3
of surfactant sales volume declined by two percent. Mexico's sales decreased
as a result of a 13 percent drop in volume which was largely offset by
increased sales volume in Canada. Europe's sales decreased two percent,
despite higher volume as a result of a six percent decline in the value of the
French franc and increased competitive pressure on prices. The weaker Canadian
dollar also negatively affected the foreign subsidiaries' revenue growth.
Polymer sales declined due to a nine percent decrease in volume. Phthalic
anhydride, which represents 54 percent of polymer volume, experienced a 17
percent decrease in sales due primarily to increased competition from imports
which forced volumes and selling prices down. Polyurethane polyols, which
represent 35 percent of total polymer volume, experienced an eight percent
decline in volume due to lower export business. Polyurethane systems sales
increased seven percent as a result of higher volume and improved selling
prices.
Specialty products revenues grew 12 percent with most of the improvement
coming from higher volume. Average selling prices were essentially unchanged.
Gross profit in 1993 was $80.0 million, or 18.2 percent of net sales, a
decrease from $81.8 million, or 18.8 percent of net sales in 1992. Surfactants
gross profit was $63.0 million for 1993, a decrease of one percent from 1992.
Domestic surfactants were down $.3 million, or one percent, as a result of a
slight decrease in gross profit margins. Foreign operations were down $.2
million as Stepan Europe continued to face increased competitive pressure in a
recessionary European economy. Canada and Mexico both showed improvement over
1992. Polymers gross profit dropped by $4.7 million to $9.7 million for 1993
representing a 33 percent decrease from 1992. Phthalic anhydride accounted for
most of the decreased polymer gross profit showing significantly reduced gross
profit margins as a result of increased competition from imports in the
marketplace. Higher repair and maintenance expenses in the production of
phthalic anhydride also contributed to the lower margins. Polyurethane polyols
gross profit also decreased despite higher margins as a result of lower volumes.
Polyurethane systems gross profit increased on improved margins. Specialty
products gross profit grew by $3.4 million to $7.4 million for 1993 representing
an 85 percent increase over 1992. Contributing to this performance were higher
selling prices for lubricant additives, higher volumes for oil field chemicals
and improved margins for food ingredients.
Raw material costs declined slightly during 1993. Labor costs increased at
a modest rate reflecting the recent low levels of inflation. Depreciation
expense increased to $25.7 million in 1993 from $22.4 million in 1992 as a
result of bringing into service significant capacity expansion projects in
recent years, as well as continuing capital spending for plant improvements.
Operating income, pre-tax income before net interest expense, was $27.3
million in 1993, a 13.8 percent increase from 1992. Operating income in 1992
included a $6.5 million charge relating to environmental expenses and the write
down of the company's investment in Mexico. See Note 11 of the Notes to the
Consolidated Financial Statements. Excluding the environmental and restructuring
charge in 1992, operating expenses for 1993 increased $1.5 million or three
percent. Administrative expenses decreased $1.7 million or nine percent
primarily due to decreased legal costs and lower office space costs
as 1992 was unusually high due to the consolidating of personnel into a newly
leased corporate facility. Marketing expenses increased four percent largely due
to increased travel by sales personnel and a higher bad debt provision. Research
and development costs increased by 17 percent due to planned staffing increases
as well as greater travel requirements of research personnel. Cost containment
efforts undertaken in prior years have resulted in a moderate increase in
operating expenses in 1993.
The effective tax rate was 45.1 percent in 1993 compared to 40.0 percent in
1992 on income before the effects of accounting changes. The increase in the tax
provision was attributable to the higher corporate tax rate which resulted from
the Revenue Reconciliation Act of 1993. Previously deferred tax liabilities were
restated to reflect the higher tax rate resulting in an addition to
16
<PAGE> 4
the 1993 provision. See Note 5 of the Notes to the Consolidated Financial
Statements for a reconciliation of the statutory to the effective tax rate.
Net income for 1993 increased three percent to $10.8 million, or $.98 per
share, compared to 1992 net income of $10.4 million, or $.95 per share before
accounting changes. The 1992 net income reflected the retroactive adoption of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" and a change from the deferred method to the flow-through method of
accounting for investment tax credits. The cumulative effect of these changes
was a favorable $5.4 million, or $.51 per share in 1992. See Note 5 of the
Notes to the Consolidated Financial Statements for a further explanation of
the accounting changes. Net income for 1992 was $15.8 million, or $1.46 per
share.
FOURTH QUARTER, 1994 COMPARED WITH 1993
For the quarter ended December 31, 1994, the company announced net income
of $3.6 million, or $.34 per share, compared to a net loss of $.4 million, or
$.08 per share in the fourth quarter of 1993 (as restated for the two-for-one
common stock split on December 15, 1994). Net sales for the quarter increased 11
percent to $113.6 million from $102.5 million recorded in 1993. Gross profit was
$20.3 million, up 32 percent in the fourth quarter compared to the same quarter
of 1993. Polymers made the largest contribution as a result of considerably
higher phthalic anhydride sales volume and margins. Surfactants recorded higher
quarterly gross profit due to increased domestic surfactant sales and higher
foreign sales volume, most notably in Mexico. Specialty products also posted
higher gross profit. Total operating expenses, including net interest expense,
declined seven percent in the fourth quarter compared with the same quarter of
1993. The decline was favorably impacted by insurance recoveries of $1.1 million
related to previously incurred legal and environmental costs.
LIQUIDITY AND FINANCIAL CONDITION
Cash provided by operating activities totaled $51.0 million during 1994, up
by $15.7 million compared to $35.3 million for 1993. Contributing heavily to the
1994 increase was $12.9 million in customer prepayments under long-term
contracts. During 1994, working capital items comprised a $5.7 million use of
cash compared to $6.1 million during 1993. Net income, adjusted for non-cash
items, increased by $2.4 million from year to year.
Capital expenditures for 1994 totaled $42.9 million, up by $17.5 million
from $25.4 million during 1993 when spending was at a five-year low. The
company's 1995 capital spending program calls for approximately $42 million in
expenditures, including $38 million at domestic facilities.
Total debt increased by $.7 million during 1994, closing the year at $97.8
million. From year to year, domestic borrowings increased by $2.4 million while
debt of foreign subsidiaries decreased by $1.7 million. During 1994, the company
repaid a $1.0 million note to its Colombian joint venture. The year-end ratio of
long-term debt to long-term debt plus shareholder's equity was 44.7 percent for
1994, compared to 46.2 percent for 1993 and 47.6 percent for 1992.
The company maintains contractual relationships with its domestic banks
which provide for $45 million of revolving credit which may be drawn upon as
needed for general corporate purposes. During 1994, the company negotiated an
extension of the revolving portion of this loan facility to May 31, 1998. See
Note 3 of the Notes to the Consolidated Financial Statements for a discussion of
the terms of this agreement. The company also meets domestic short-term
liquidity requirements through uncommitted bank lines of credit and bankers'
acceptances.
The company's foreign subsidiaries maintain committed and uncommitted bank
lines of credit in their respective countries to meet working capital
requirements as well as to fund capital expenditure programs.
The company anticipates that cash from operations and from available credit
facilities will be sufficient to meet
17
<PAGE> 5
anticipated capital expenditure programs, dividend requirements and other
planned financial commitments for both its domestic operations and its foreign
subsidiaries during 1995 and for the foreseeable future.
ENVIRONMENTAL AND LEGAL MATTERS
The company is subject to extensive federal, state and local environmental
laws and regulations. Although the company's environmental policies and
practices are designed to ensure compliance with these laws and regulations,
future developments and increasingly stringent environmental regulation could
require the company to make additional unforeseen environmental expenditures.
The company will continue to invest in the equipment and facilities necessary to
comply with existing and future regulations. During 1994, company expenditures
for capital projects related to the environment were $5.0 million and should
approximate $8.9 million for 1995. These projects are capitalized and typically
depreciated over ten years. Capital spending on such projects is likely to
continue at these levels in future years. Recurring costs associated with the
operation and maintenance of environmental protection facilities for ongoing
operations were approximately $7.1 million for 1994 compared to $8.0 million for
1993. While difficult to project, it is not anticipated that these recurring
expenses will increase significantly in the future.
The company has been named by the government as a potentially responsible
party at 15 waste disposal sites where clean-up costs have been or may be
incurred under the federal Comprehensive Environmental Response, Compensation
and Liability Act and similar state statutes. In addition, damages are being
claimed against the company in general liability actions for alleged personal
injury or property damage in the case of some disposal and plant sites. The
company believes that it has made adequate provisions for the costs it may incur
with respect to the sites. The company has estimated a range of possible
environmental and legal losses from $5.5 million to $21.6 million at December
31, 1994, compared to $4.4 million to $22.8 million at December 31, 1993. At
December 31, 1994, the company's reserve was $6.9 million for legal and
environmental matters compared to $7.2 million at December 31, 1993. During
1994, expenditures related to legal and environmental matters approximated $4.3
million compared to $4.5 million expended in 1993. During 1994, the company
recovered $3.1 million from insurers primarily for reimbursement of previously
incurred environmental defense costs. The recoveries are recorded as a reduction
to the current year's legal and environmental expense. It is anticipated that
the company will receive continued insurance reimbursement of ongoing
environmental legal defense costs. While it is difficult to forecast the
expenditures for 1995, the company believes that the $6.9 million reserve
balance at December 31, 1994 is more likely to be paid out over many years. See
also Note 12 of the Notes to Consolidated Financial Statements. At certain of
the sites, estimates cannot be made of the total costs of compliance or the
company's share of such costs; accordingly, the company is unable to predict the
effect thereof on future results of operations. In the event of one or more
adverse determinations in any annual or interim period, the impact on results of
operations for those periods could be material. However, based upon the
company's present belief as to its relative involvement at these sites, other
viable entities' responsibilities for cleanup and the extended period over which
any costs would be incurred, the company believes that these matters will not
have a material effect on the company's financial position. Certain of these
matters are discussed in Item 3, Legal Proceedings in the 1994 Form 10-K Annual
Report and in other filings of the company with the Securities and Exchange
Commission, which filings are available upon request from the company.
In addition, reference should be made to the Ten Year Summary on pages 30
and 31.
18
<PAGE> 6
REPORT OF MANAGEMENT
MANAGEMENT REPORT ON FINANCIAL STATEMENTS
The financial statements of Stepan Company and subsidiaries were prepared
by and are the responsibility of management. The statements have been prepared
in conformity with generally accepted accounting principles appropriate in the
circumstances and include some amounts that are based on management's best
estimates and judgments. The Board of Directors, through its Audit Committee,
assumes an oversight role with respect to the preparation of the financial
statements.
In meeting its responsibility for the reliability of the financial
statements, the company depends on its system of internal accounting control.
The system is designed to provide reasonable assurance that assets are
safeguarded and that transactions are executed as authorized and are properly
recorded. The system is augmented by written policies and procedures and an
internal audit department.
The Audit Committee of the Board of Directors, composed solely of directors
who are not officers or employees of the company, meets regularly with
management, with the company's internal auditors and with its independent
certified public accountants to discuss its evaluation of internal accounting
controls and the quality of financial reporting. The independent auditors and
the internal auditors have free access to the Audit Committee, without
management's presence.
F. Quinn Stepan
Chairman of the Board and Chief Executive Officer
Walter J. Klein
Vice President-Finance
February 10, 1995
<PAGE> 7
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS OF STEPAN COMPANY:
We have audited the accompanying consolidated balance sheets of Stepan
Company (a Delaware corporation) and subsidiaries as of December 31, 1994 and
1993, and the related consolidated statements of income, cash flows and
stockholders' equity, for each of the three years in the period ended December
31, 1994. These consolidated financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Stepan
Company and subsidiaries as of December 31, 1994 and 1993, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 5 to the consolidated financial statements,
effective January 1, 1992, Stepan Company changed its methods of accounting for
investment tax credits and for income taxes.
Arthur Andersen LLP
Chicago, Illinois,
February 10, 1995
19
<PAGE> 8
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 2,452 $ 1,515
Receivables, less allowances of $1,585 in 1994 and $1,739 in 1993 70,385 57,250
Inventories (Note 2) 45,464 48,918
Deferred income taxes (Note 5) 8,218 7,498
Other current assets 2,852 3,979
----------------------------------------------------------------------------------------------
Total current assets 129,371 119,160
----------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Land 4,576 4,533
Buildings and improvements 52,558 50,143
Machinery and equipment 343,629 313,010
Construction in progress 16,891 11,142
----------------------------------------------------------------------------------------------
417,654 378,828
Less accumulated depreciation 233,997 208,558
----------------------------------------------------------------------------------------------
Property, plant and equipment, net 183,657 170,270
----------------------------------------------------------------------------------------------
Other Assets 11,920 11,058
----------------------------------------------------------------------------------------------
Total assets $324,948 $300,488
==============================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt (Note 3) $ 8,043 $ 7,447
Accounts payable 37,904 34,832
Accrued liabilities (Note 9) 34,509 28,312
----------------------------------------------------------------------------------------------
Total current liabilities 80,456 70,591
----------------------------------------------------------------------------------------------
Deferred Income Taxes (Note 5) 32,976 36,020
----------------------------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 3) 89,795 89,660
----------------------------------------------------------------------------------------------
Deferred Revenue (Note 10) 10,419 --
----------------------------------------------------------------------------------------------
Stockholders' Equity (Note 6):
5 1/2 percent convertible preferred stock, cumulative, voting,
without par value; authorized 2,000,000 shares; issued
799,196 shares in 1994 and 799,684 shares in 1993 19,980 19,992
Common stock, $1 par value; authorized 15,000,000 shares; issued
10,028,544 shares in 1994 and 10,226,048 shares in 1993 (a) 10,029 5,113
Additional paid-in capital 3,983 3,781
Cumulative translation adjustments (3,491) (2,058)
Retained earnings 82,445 82,475
----------------------------------------------------------------------------------------------
112,946 109,303
Less: Treasury stock, at cost 1,644 4,863
Deferred ESOP compensation (Note 7) -- 223
----------------------------------------------------------------------------------------------
Stockholders' equity 111,302 104,217
----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $324,948 $300,488
==============================================================================================
</TABLE>
(a) Restated for the two-for-one common stock split effective December 15, 1994.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated balance sheets.
20
<PAGE> 9
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
(Dollars in Thousands, except per share amounts) 1994 1993 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $443,948 $438,825 $435,764
-----------------------------------------------------------------------------------------------
Cost and Expenses:
Cost of sales 362,848 358,790 353,950
Marketing 16,972 16,738 16,061
Administrative 17,082 18,378 20,110
Research, development and technical services (Note 1) 17,398 17,669 15,134
Interest, net (Note 3) 7,136 7,626 6,644
Environmental and restructuring charges (Note 11) -- -- 6,500
-----------------------------------------------------------------------------------------------
421,436 419,201 418,399
Income Before Provision for Income Taxes and Cumulative
Effect of Accounting Changes 22,512 19,624 17,365
Provision for Income Taxes (Note 5) 8,667 8,848 6,942
-----------------------------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Changes 13,845 10,776 10,423
Cumulative Effect of Accounting Changes (Notes 1 and 5) -- -- 5,406
-----------------------------------------------------------------------------------------------
Net Income $ 13,845 $ 10,776 $ 15,829
===============================================================================================
Primary Earnings Per Share:
Income before cumulative effect of accounting changes 1.29 .98 .95
Cumulative effect of accounting changes (Notes 1 and 5) -- -- .51
-----------------------------------------------------------------------------------------------
Net Income per Common Share $ 1.29 $ .98 $ 1.46
===============================================================================================
Fully Diluted Earnings Per Share:
Income before cumulative effect of accounting changes 1.26 .96 .93
Cumulative effect of accounting changes (Notes 1 and 5) -- -- .49
-----------------------------------------------------------------------------------------------
Net Income per Common Share $ 1.26 $ .96 $ 1.42
===============================================================================================
Average Common Shares Outstanding (Note 1) 9,924 9,894 10,572
===============================================================================================
</TABLE>
All share and per share data have been restated for the two-for-one common stock
split effective December 15, 1994.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
(COMBINED SALES chart appears here)
(1994 SALES DOLLAR DISTRIBUTION chart appears here)
21
<PAGE> 10
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Cash Flow from Operating Activities
Net income $ 13,845 $ 10,776 $ 15,829
Depreciation and amortization 28,935 27,679 23,914
Cumulative effect of accounting changes (Notes 1 and 5) -- -- (5,406)
Provision for environmental and restructuring charges
(Note 11) -- -- 6,500
Deferred income taxes 410 2,735 2,409
Prepaid pension cost (Note 8) (190) (567) (645)
Other non-cash items 817 830 271
Deferred revenue (Note 10) 12,883 -- --
Changes in Working Capital:
Receivables, net (13,135) (220) (2,985)
Inventories 3,454 (1,140) (3,823)
Accounts payable and accrued liabilities 4,106 (4,788) 3,000
Other (96) 1 (250)
-----------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 51,029 35,306 38,814
-----------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Expenditures for property, plant and equipment (42,884) (25,435) (34,440)
Investment in joint ventures (Note 1) (2,314) (1,422) --
Other non-current assets (711) (963) (1,960)
-----------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (45,909) (27,820) (36,400)
-----------------------------------------------------------------------------------------------
Cash Flows from Financing and Other Related Activities
Revolving debt and notes payable to banks, net 13,313 (20,631) 11,129
Other debt borrowings -- 30,000 --
Other debt repayments (11,455) (12,633) (6,556)
Purchases of treasury stock, net (327) (244) (2,034)
Dividends paid (5,294) (5,105) (4,172)
Other non-cash items (420) (273) (141)
-----------------------------------------------------------------------------------------------
Net Cash Used for Financing and Other Related
Activities (4,183) (8,886) (1,774)
-----------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 937 (1,400) 640
Cash and Cash Equivalents at Beginning of Year 1,515 2,915 2,275
-----------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 2,452 $ 1,515 $ 2,915
===============================================================================================
Supplemental Cash Flow Information
Cash payments of income taxes, net of refunds $ 8,554 $ 6,327 $ 6,568
Cash payments of interest $ 8,536 $ 8,002 $ 8,289
===============================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
(CAPITAL SPENDING chart appears here)
(EQUITY PER SHARE chart appears here)
22
<PAGE> 11
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1994, 1993 and 1992
<TABLE>
<CAPTION>
Convertible Additional Cumulative Deferred
Preferred Common Paid-in Treasury Translation ESOP Retained
(Dollars in Thousands) Stock Stock Capital Stock Adjustments Compensation Earnings
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1992 $ -- $ 5,551 $ 3,565 $ (2,585) $ 385 $ (667) $84,617
Sale of 160,132 shares under stock option
plan -- 80 949 -- -- -- --
Purchase of 104,846 shares of common
treasury stock, net of sales -- -- 49 (2,034) -- -- --
Issuance of preferred stock in exchange and
retirement of 1,059,602 shares of common
stock (Note 6) 20,000 (530 ) (875) -- -- -- (19,470 )
Compensation expense (Note 7) -- -- -- -- -- 222 --
Net income -- -- -- -- -- -- 15,829
Cash dividends paid
Preferred stock (31.0c per share) -- -- -- -- -- -- (244 )
Common stock (37.0c per share) -- -- -- -- -- -- (3,928 )
Translation adjustments -- -- -- -- (1,408) -- --
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 20,000 5,101 3,688 (4,619) (1,023) (445) 76,804
Sale of 23,800 shares under stock option
plan -- 12 132 -- -- -- --
Purchase of 44 shares of common and 8,700
shares of preferred treasury stock, net of
sales -- -- 93 (244) -- -- --
Issuance cost of preferred stock -- -- (140) -- -- -- --
Conversion of preferred stock to common
stock (8) -- 8 -- -- -- --
Compensation expense (Note 7) -- -- -- -- -- 222 --
Net income -- -- -- -- -- -- 10,776
Cash dividends paid
Preferred stock ($1.375 per share) -- -- -- -- -- -- (1,097 )
Common stock (40.5c per share) -- -- -- -- -- -- (4,008 )
Translation adjustments -- -- -- -- (1,035) -- --
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 19,992 5,113 3,781 (4,863) (2,058) (223) 82,475
Sale of 51,940 shares under stock option
plan -- 27 290 -- -- -- --
Purchase of 4,222 shares of common and
11,508 shares of preferred treasury stock,
net of sales -- -- 21 (327) -- -- --
Retirement of 250,000 shares of common
treasury stock -- (125 ) (121) 3,546 -- -- (3,300 )
Conversion of preferred stock to common
stock (12) -- 12 -- -- -- --
Compensation expense (Note 7) -- -- -- -- -- 223 --
Net income -- -- -- -- -- -- 13,845
Cash dividends paid
Preferred stock ($1.375 per share) -- -- -- -- -- -- (1,076 )
Common stock (42.5c per share) -- -- -- -- -- -- (4,218 )
Preferred stock dividends declared -- -- -- -- -- -- (267 )
Translation adjustments -- -- -- -- (1,433) -- --
Two-for-one common stock split (Note 6) -- 5,014 -- -- -- -- (5,014 )
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ 19,980 $10,029 $ 3,983 $ (1,644) $ (3,491) $ -- $82,445
=============================================================================================================================
</TABLE>
All share and per share data have been restated for the two-for-one common stock
split effective December 15, 1994.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
23
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1994, 1993 and 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The company's operations consist predominantly of the production and sale
of basic and intermediate chemicals which are sold to other manufacturers for
use in a variety of end products. Principal markets for all products are
manufacturers of cleaning and washing compounds (including detergents, shampoos,
toothpaste and household cleaners), paints, cosmetics, beverages, agricultural
pesticides and herbicides, plastics, furniture, automotive equipment, insulation
and refrigeration.
The company grants credit to its customers who are widely distributed
throughout North America and Europe. There is no material concentration of
credit risk.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Stepan
Company and its wholly-owned foreign subsidiary companies. All significant
intercompany balances and transactions have been eliminated in consolidation.
The equity method of accounting is used for certain 50 percent owned foreign
joint venture investments. The company's share of the net earnings of the
investments is included in consolidated net income. Differences between the cost
of equity investments and the amount of underlying equity in net assets of the
investees are amortized systematically to income. The financial results of the
joint ventures are not material to the consolidated financial statements.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments with original
maturities of three months or less from the date of purchase to be cash
equivalents.
INVENTORIES
Inventories are valued at cost, which is not in excess of market value, and
include material, labor and plant overhead costs. The last-in, first-out (LIFO)
method is used to determine the cost of most company inventories. The first-in,
first-out (FIFO) method is used for all other inventories. Inventories priced at
LIFO as of December 31, 1994 and 1993 amounted to 87 percent and 89 percent of
total inventories, respectively.
PROPERTY, PLANT AND EQUIPMENT
Depreciation of physical properties is provided on a straight-line basis
over the estimated useful lives of various assets. Lives used for calculating
depreciation are 30 years for buildings, 15 years for building improvements and
from three to 15 years for machinery and equipment. Major renewals and
betterments are capitalized in the property accounts, while maintenance and
repairs ($16,468,000, $16,505,000 and $15,335,000 in 1994, 1993 and 1992,
respectively), which do not renew or extend the life of the respective assets,
are charged to operations currently. The cost of property retired or sold and
the related accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in income.
Interest charges on borrowings applicable to major construction projects
are capitalized and subsequently amortized over the lives of the related assets.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the cost or range of
possible costs can be reasonably estimated. When no amount within the range is a
better estimate than any other amount, at least the minimum is accrued.
Some of the factors on which the company bases its estimates include information
provided by feasibility studies, potentially responsible party negotiations and
the development of remedial action plans. Liabilities are recorded at gross
amounts of probable future cash outlays and are not discounted to reflect the
time value of money. While the company has insurance policies that may cover
some of its liabilities, it does not record those claims until such time as they
become probable. Expenditures that mitigate or prevent environmental
contamination that has yet to occur and that otherwise may result from future
operations are capitalized. Capitalized expenditures are depreciated generally
utilizing a ten-year life.
INTANGIBLE ASSETS
Included in other assets are intangible assets consisting of patents,
agreements not to compete, trademarks, customer lists and goodwill, all of which
were acquired as part of business acquisitions. These assets are presented net
of amortization provided on a straight-line basis over their estimated useful
lives ranging from two to ten years.
RESEARCH AND DEVELOPMENT COSTS
The company's research and development costs are expensed as incurred.
These expenses are aimed at discovery and commercialization of new knowledge
with the intent that such effort will be useful in developing a new product or
in bringing about a significant improvement to an existing product or process.
Total expenses were $12,281,000, $12,613,000 and $11,320,000 in 1994, 1993 and
1992, respectively. The balance of expenses reflected on the Consolidated
Statements of Income relates to technical services which include routine product
testing, quality control and sales support service.
INCOME TAXES
As discussed in Note 5, in 1992 the company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
24
<PAGE> 13
TRANSLATION OF FOREIGN CURRENCIES
In general, assets and liabilities of consolidated foreign subsidiaries are
translated into U.S. dollars at exchange rates in effect at year end, while
revenues and expenses are translated at average exchange rates prevailing during
the year. The resulting translation adjustments are included in stockholders'
equity. Gains or losses on foreign currency transactions and the related tax
effects are reflected in net income.
PER SHARE DATA
Primary earnings per share amounts are computed based on the weighted
average number of common shares outstanding, 9,924,000 in 1994, 9,894,000 in
1993 and 10,572,000 in 1992. Common share equivalents resulting from dilutive
stock options have been excluded as the dilutive effect was not material. Net
income used in computing primary earnings per share has been reduced by
dividends paid to preferred shareholders. Fully diluted earnings per share
amounts are based on an increased number of common shares that would be
outstanding assuming the exercise of certain outstanding stock options and the
conversion of the convertible preferred stock, when such conversion would have
the effect of reducing earnings per share. The number of shares used in the
computations of fully diluted earnings per share were 10,972,000 in 1994,
10,100,000 in 1993 and 11,154,000 in 1992, respectively. All share and per share
data have been retroactively adjusted for the two-for-one common stock split of
December 15, 1994.
RECLASSIFICATIONS
Certain amounts in the 1993 financial statements have been reclassified to
conform with the 1994 presentation.
2. INVENTORIES
The composition of inventories was as follows:
<TABLE>
<CAPTION>
December 31
---------------------
(Dollars in Thousands) 1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C>
Finished products $ 27,632 $ 27,269
Raw materials 17,832 21,649
----------------------------------------------------------------------------------------------
Total inventories $ 45,464 $ 48,918
==============================================================================================
</TABLE>
If the first-in, first-out (FIFO) inventory valuation method had been used,
inventories would have been approximately $13,200,000 and $9,700,000 higher than
reported at December 31, 1994 and 1993, respectively.
3. DEBT
Debt was composed of the following:
<TABLE>
<CAPTION>
December 31
Maturity ---------------------
(Dollars in Thousands) Dates 1994 1993
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unsecured promissory notes
7.22% 1999-2008 $ 30,000 $ 30,000
9.52% 1995-2001 15,000 15,000
10.54% 1995-1997 10,712 17,856
9.70% 1997-2006 10,000 10,000
9.70% 1995-2000 6,000 8,000
9.40% 1995 955 2,860
Unsecured bank debt, interest at 6.92% at December 31,
1994 1998-2001 21,800 7,000
ESOP loan guarantee (Note 7) -- -- 300
Loans of foreign subsidiaries payable in foreign
currency 1995-2003 3,371 5,091
Note payable to joint venture interest in Colombia,
South America -- -- 1,000
-----------------------------------------------------------------------------------------------
Total debt 97,838 97,107
Less current maturities 8,043 7,447
-----------------------------------------------------------------------------------------------
Long-term debt $ 89,795 $ 89,660
===============================================================================================
</TABLE>
Unsecured bank debt at December 31, 1994, consists of borrowings under a
committed $45,000,000 revolving credit agreement which bears interest at varying
rates. Borrowings under this agreement at May 31, 1998, if any, would convert to
a term loan payable over three years. The company must pay a commitment fee of
.25 percent per annum on the unused portion of the commitment. Periodically, the
company also availed itself of other borrowings under notes payable to banks of
which there were no outstanding balances at December 31, 1994 and 1993.
The various loan agreements contain provisions which, among others, require
maintenance of certain financial ratios, and place limitations on additional
debt, investments and payment of dividends. Unrestricted retained earnings were
$36,336,000 and $32,789,000 at December 31, 1994 and 1993, respectively. The
company is in compliance with all loan agreements.
Debt at December 31, 1994 matures as follows: $8,043,000 in 1995;
$7,027,000 in 1996; $8,190,000 in 1997; $9,746,000 in 1998; $14,614,000 in 1999
and $50,218,000 after 1999.
Net interest expense for the years ended December 31, was composed of the
following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense $ 8,428 $ 8,552 $ 8,326
Interest income (295) (331) (150)
-----------------------------------------------------------------------------------------------
8,133 8,221 8,176
Capitalized interest (997) (595) (1,532)
-----------------------------------------------------------------------------------------------
Interest, net $ 7,136 $ 7,626 $ 6,644
===============================================================================================
</TABLE>
25
<PAGE> 14
4. LEASED PROPERTIES
The company leases certain property and equipment (primarily transportation
equipment, buildings and computer equipment) under operating leases. Total
rental expense was $2,994,000, $2,932,000 and $3,343,000 in 1994, 1993 and 1992,
respectively.
Minimum future rental payments under operating leases with terms in excess
of one year as of December 31, 1994 are:
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Amount
---------------------------------------------------------------------------------------------
<S> <C> <C>
1995 $ 2,518
1996 1,843
1997 1,073
1998 773
1999 432
Subsequent to 1999 1,522
---------------------------------------------------------------------------------------------
Total minimum future rental payments $ 8,161
=============================================================================================
</TABLE>
5. INCOME TAXES
In 1992, the company adopted SFAS No. 109, "Accounting for Income Taxes,"
which requires the use of the liability method of accounting for income taxes.
As a result of adopting SFAS No. 109, the company recognized a cumulative
benefit of $4,254,000 ($.40 per primary share and $.38 per fully diluted share),
as of January 1, 1992. The benefit was included under the caption "Cumulative
Effect of Accounting Changes" in the Consolidated Statements of Income. Prior
year financial statements were not restated to reflect the new accounting
method. The effect of this new standard on income tax expense (exclusive of the
cumulative benefit) for the year ended December 31, 1992, and for each of the
quarters in the period then ended, was not material.
In 1992, the company also changed its method of accounting for investment
tax credits from the deferred method to the flow-through method. This change
resulted in the recognition of a cumulative benefit of $1,152,000 ($.11 per
primary share and per fully diluted share) as of January 1, 1992, for credits
earned but not recognized under the deferred method used prior to this date. The
benefit was included under the caption "Cumulative Effect of Accounting Changes"
in the Consolidated Statements of Income. The effect of this change on net
income (exclusive of the cumulative benefit) for the year ended December 31,
1992 and for each of the quarters in the period then ended, was not material.
The provision for taxes on income and the related income before taxes, are
as follows:
TAXES ON INCOME
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $ 6,732 $ 3,818 $ 2,462
Deferred (1,524) 1,365 1,023
State
Current 2,020 1,076 692
Deferred (646) 239 359
Foreign
Current 2,299 1,426 1,643
Deferred (214) 924 763
-----------------------------------------------------------------------------------------------
Total $ 8,667 $ 8,848 $ 6,942
===============================================================================================
</TABLE>
INCOME BEFORE TAXES AND ACCOUNTING CHANGES
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ 15,429 $ 14,493 $ 9,781
Foreign 7,083 5,131 7,584
-----------------------------------------------------------------------------------------------
Total $ 22,512 $ 19,624 $ 17,365
===============================================================================================
</TABLE>
No federal income taxes have been provided on approximately $20,234,000 of
undistributed earnings of the company's foreign subsidiaries. These earnings are
expected to be reinvested indefinitely. Such earnings would become taxable upon
the sale or liquidation of the foreign subsidiaries or upon the remittance of
dividends. Because of the probable availability of foreign tax credits, it is
not practicable to estimate the amount, if any, of the deferred tax liability on
such earnings.
The variations between the effective and statutory federal income tax rates
are summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
1994 1993 1992
(Dollars in Thousands) Amount % Amount % Amount %
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision at statutory tax
rate $ 7,879 35.0 $ 6,731 34.3 $ 5,903 34.0
State taxes on income less applicable
federal tax benefit 893 4.0 864 4.4 694 4.0
Deferred tax adjustment for tax rate
change -- -- 558 2.8 -- --
Research and development credit (244) (1.1) (55) (.3) -- --
Valuation allowance 11 -- 319 1.6 390 2.2
Other items 128 .6 431 2.3 (45) (.2)
--------------------------------------------------------------------------------------------------
Total income tax provision $ 8,667 38.5 $ 8,848 45.1 $ 6,942 40.0
==================================================================================================
</TABLE>
26
<PAGE> 15
Pursuant to SFAS No. 109, deferred taxes are determined based on the
estimated future tax effects of differences between the financial statement and
tax bases of assets and liabilities given the provisions of the enacted tax
laws. The net deferred tax liability at December 31 is comprised of the
following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C>
Current deferred income taxes
Gross assets $ 8,413 $ 7,740
Gross liabilities (195) (242)
----------------------------------------------------------------------------------------------
Total current deferred tax assets 8,218 7,498
Non-current deferred income taxes
Gross assets 5,684 2,066
Valuation allowance (741) (730)
Gross liabilities (37,919) (37,356)
----------------------------------------------------------------------------------------------
Total non-current deferred tax liabilities (32,976) (36,020)
----------------------------------------------------------------------------------------------
Net deferred tax liability $(24,758) $(28,522)
==============================================================================================
</TABLE>
At December 31, the tax effect of significant temporary differences
representing deferred tax assets and liabilities is as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C>
Tax over book depreciation $(30,748) $(29,608)
Safe Harbor leases (4,228) (4,547)
SFAS No. 87 pension accounting (2,346) (2,282)
State income tax accrual 1,188 1,437
Deferred revenue 4,837 --
Book reserves deductible in other periods 6,941 7,204
Valuation allowance (741) (730)
Other, net 339 4
----------------------------------------------------------------------------------------------
Net deferred tax liability $(24,758) $(28,522)
==============================================================================================
</TABLE>
6. STOCKHOLDERS' EQUITY
On November 11, 1994, the Board of Directors declared a two-for-one stock
split on the company's common stock in the form of a 100 percent stock dividend,
payable December 15, 1994, to shareholders of record on December 1, 1994. As a
result of the split, 5,014,272 additional shares were issued, and retained
earnings were reduced by $5,014,272. All share and per share data appearing in
the consolidated financial statements and notes thereto have been retroactively
adjusted for the stock split.
On April 28, 1993, the shareholders approved an increase in the authorized
shares of the 5 1/2% convertible preferred stock ("preferred stock") from
200,000 to 2,000,000 and approved an eight-for-one stock split to shareholders
of record on April 30, 1993. All share and per share data appearing in the
consolidated financial statements and notes thereto have been retroactively
adjusted for the stock split and the increased authorized shares.
In 1992, the company acquired 1,059,602 shares of its common stock in
exchange for 800,000 shares of its then newly issued preferred stock at an
exchange ratio of one share of preferred stock for each 1.3245 shares of common
stock. In connection with the exchange transaction, the company recorded
$20,000,000 of preferred stock based on the market value of the 1,059,602 shares
of common stock acquired. Simultaneously, the company retired these common
shares by reducing common stock in the amount of $529,801 (par value) and
retained earnings by $19,470,199. Additional paid-in capital was reduced by
$875,000, representing the costs related to the issuance of the preferred stock.
The preferred stock is convertible at the option of the holder at any time
(unless previously redeemed) into shares of common stock at a conversion rate of
1.14175 shares of common stock for each share of preferred stock. Dividends on
preferred stock accrue at a rate of $1.375 per share per annum which are
cumulative from the date of original issue. The company may not declare and pay
any dividend or make any distribution of assets (other than dividends or other
distribution payable in shares of common stock) on, or redeem, purchase or
otherwise acquire, shares of common stock, unless all accumulated and unpaid
preferred dividends have been paid or are contemporaneously declared and paid.
The preferred stock is subject to optional redemption by the company, in whole
or in part, at any time on or after September 1, 1997, at a redemption price of
$25.69 per share reduced annually by $.14 per share to a minimum of $25 per
share on or after September 1, 2002, plus accrued and unpaid dividends thereon
to the date fixed for redemption. The aggregate liquidation preference is
approximately $20.0 million at December 31, 1994 and 1993. Preferred stock is
entitled to 1.14175 votes per share on all matters submitted to stockholders
for action, and votes together with the common stock as a single class, except
as otherwise provided by law or the Certificate of Incorporation of the
company. There is no mandatory redemption or sinking fund obligation with
respect to the preferred stock.
In 1992, the shareholders approved the Stepan Company 1992 Stock Option
Plan ("1992 Plan"). The 1992 Plan replaces the 1982 Plan and extends
participation to directors who are not employees of the company. The 1992 Plan
authorizes the award of up to 1,600,000 shares of the company's common stock for
stock options ("options") and stock appreciation rights ("SAR"). SARs entitle
the employee to receive an amount equal to the difference between the fair
market value of a share of stock at the time the SAR is exercised and the
exercise price specified at the time the SAR is granted. Options are granted at
the market price on the date of grant and become exercisable on various dates
over a ten-year period. The purchase price per share of options currently
outstanding ranges from $8.12500 to $18.21875 with option expiration dates
ranging from April 28, 1996 to May 1, 2004. The options become exercisable as
follows: 662,304 currently exercisable and 464,400 on May 2, 1996.
27
<PAGE> 16
A summary of option transactions during the two years ended December 31,
1994, follows:
<TABLE>
<CAPTION>
Shares Options Outstanding
Available --------------------------------------------------
(Dollars in Thousands, except per for Aggregate
share amounts) Grant Shares Price per Share Option Price
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1993 1,351,696 742,444 $3.84375 -- 18.21875 $ 9,240
Exercised -- (23,800) 3.84375 -- 12.09375 (144)
Cancelled -- (4,400) 18.21875 (80)
----------------------------------------------------------------------------------------------------
Balance, December 31, 1993 1,351,696 714,244 3.84375 -- 18.21875 9,016
Granted (464,400) 464,400 14.00000 6,502
Exercised -- (51,940) 3.84375 -- 12.09375 (318)
----------------------------------------------------------------------------------------------------
Balance, December 31, 1994 887,296 1,126,704 $8.12500 -- 18.21875 $ 15,200
====================================================================================================
Became exercisable in 1994 243,904 $18.21875 $ 4,444
====================================================================================================
Became exercisable in 1993 70,000 $12.56250 $ 879
====================================================================================================
</TABLE>
At December 31, 1994, treasury stock consists of 20,208 shares of preferred
stock and 84,280 shares of common stock. At December 31, 1993, treasury stock
consisted of 8,700 shares of preferred stock and 330,058 shares of common stock.
7. DEFERRED ESOP COMPENSATION
In 1985, the company established an Employee Stock Ownership Plan ("ESOP").
Under the Plan, the company makes contributions to a trust for the benefit of
eligible employees. The amount of the contribution is discretionary except that
it must be sufficient to enable the trust to meet its current obligations.
The trust originally borrowed $2,000,000 to purchase 438,356 common shares
for the Plan. The company has guaranteed the loan and is obligated to contribute
sufficient cash to the Plan to repay the loan. The loan bears interest at 85
percent of the prime rate which was 6.0 percent at December 31, 1993. The
remaining balance of the loan was reported as current maturities of long-term
debt in the consolidated balance sheet of the company at December 31, 1993 (Note
3), and a related amount of deferred compensation was reported as a reduction of
stockholders' equity. Compensation expense is recognized in equal annual amounts
through 1994. As of December 31, 1994, the company had made the last
contribution and the loan was repaid. The company currently has no plan for
further ESOP contributions.
8. PENSION PLANS
The company has non-contributory defined benefit plans covering
substantially all employees. The benefits under these plans are based primarily
on years of service and compensation levels. The company funds the annual
provision deductible for income tax purposes. The plans' assets consist
principally of marketable equity securities and government and corporate debt
securities. The plans' assets at December 31, 1994, include $6,300,000 of the
company's common stock.
Net 1994, 1993 and 1992 periodic pension cost for the plans consists of the
following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 1,639 $ 1,251 $ 1,095
Interest cost on projected benefit obligation 2,454 2,228 1,997
Actual return on plan assets 1,190 (3,222) (3,372)
Net amortization and deferral (5,449) (824) (365)
-----------------------------------------------------------------------------------------------
Net prepaid pension cost $ (166) $ (567) $ (645)
===============================================================================================
</TABLE>
The reconciliation of the funded status of the plans to the amount reported
in the company's consolidated balance sheet is as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C>
Vested benefit obligation $(18,583) $(24,388)
----------------------------------------------------------------------------------------------
Accumulated benefit obligation (21,127) (27,190)
----------------------------------------------------------------------------------------------
Projected benefit obligation (27,129) (32,818)
Plan assets at fair value 38,830 46,471
----------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 11,701 13,653
Unrecognized net gain (3,616) (3,855)
Unamortized net transitional assets (3,402) (4,755)
Unamortized prior service cost 1,058 508
----------------------------------------------------------------------------------------------
Prepaid pension asset $ 5,741 $ 5,551
==============================================================================================
</TABLE>
The prepaid pension asset is included in the "Other Assets" caption on the
Consolidated Balance Sheets.
The projected benefit obligations were determined using a discount rate of
8.5 and 7.0 percent for 1994 and 1993, respectively. The projected benefit
obligations were determined under assumed compensation increases ranging from
5.0 percent to 7.0 percent for different employee groups for 1994 and 1993. The
assumed long-term rate of return on plan assets was 8.5 percent for 1994 and
1993. The plans' net transitional assets are being amortized over a period of 15
years. The prior service costs are being amortized over an average of 12 years.
In 1994, the company offered a one-time early retirement program to certain
employees with whom the company settled its pension obligation by acquiring an
annuity contract for vested benefits as of December 31, 1994. The gain of
$24,000 associated with this settlement is included
28
<PAGE> 17
in consolidated net income for 1994. In connection with the early retirement
program, the company provides 50 percent of the cost of health insurance to
electing retirees up to normal retirement age. The company has accrued the
present value of the health insurance for these retirees under this one-time
early retirement program.
9. ACCRUED LIABILITIES
Accrued liabilities consisted of:
<TABLE>
<CAPTION>
December 31
---------------------
(Dollars in Thousands) 1994 1993
----------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued payroll and benefits $ 10,514 $ 9,583
Provision for uninsured risks 8,741 8,786
Other accrued liabilities 15,254 9,943
----------------------------------------------------------------------------------------------
Total accrued liabilities $ 34,509 $ 28,312
==============================================================================================
</TABLE>
10. DEFERRED REVENUE
During 1994, the company received prepayments on certain multi-year
commitments for future shipments of products. As the commitments are fulfilled,
a proportionate share of the deferred revenue is taken into income. Related
deferred revenue at December 31, 1994 is $12.8 million of which $2.4 million is
included in the "Accrued liabilities" caption of the Consolidated Balance
Sheets.
11. ENVIRONMENTAL AND RESTRUCTURING CHARGES
In 1992, the company recorded a provision for environmental expenditures of
$5.0 million and a write-down of certain assets of $1.0 million and the related
restructuring reserve of $.5 million. The purpose of the environmental provision
was to bring the company's reserve for existing claims to a more conservative
level of probability. These future expenditures are indicative of the company's
commitment to improve and maintain the environment in which it operates.
Environmental accruals are included in the "Accrued liabilities" caption of the
company's consolidated balance sheets. In connection with a realignment of its
operation in late 1992, the company conducted a review of its operating
subsidiaries and determined that certain assets should be written down, which
resulted in non-recurring charges of $1.5 million. These charges included a $1.0
million write-down of certain non-performing assets of its subsidiary located in
Matamoros, Mexico, and an accrual of $.5 million for related restructuring
costs. This wholly owned subsidiary continues to serve the surfactant market
throughout Mexico.
12. CONTINGENCIES
There are a variety of legal proceedings pending or threatened against the
company. Some of these proceedings may result in fines, penalties, judgments or
costs being assessed against the company at some future time. The company's
operations are subject to extensive local, state and federal regulations,
including the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("Superfund") and the Superfund amendments of 1986. The
company, and others, have been named as potentially responsible parties at
affected geographic sites. As discussed in Management's Discussion and Analysis
of Financial Condition and Results of Operations, the company believes that it
has made adequate provisions for the costs it may incur with respect to these
sites. The company has estimated a range of possible environmental and legal
losses from $5.5 million to $21.6 million at December 31, 1994, compared to $4.4
million to $22.8 million at December 31, 1993. At December 31, 1994, the
company's reserve was $6.9 million for legal and environmental matters compared
to $7.2 million at December 31, 1993. The company made payments of $4.3 million
in 1994 and $4.5 million in 1993 related to legal costs, settlements and costs
related to remedial design studies at various sites. While the company has
insurance policies that may cover some of its environmental costs, it does not
record those claims until such time as they become probable. During 1994, the
company received $3.1 million from insurers related to legal costs previously
incurred by the company. The recoveries reduced administrative expense in the
Consolidated Statements of Income. There were no insurance recoveries recorded
in 1993 or 1992.
At certain of the sites, estimates cannot be made of the total costs of
compliance, or the company's share of such costs; accordingly, the company is
unable to predict the effect thereof on future results of operations. In the
event of one or more adverse determinations in any annual or interim period, the
impact on results of operations for those periods could be material. However,
based upon the company's present belief as to its relative involvement at these
sites, other viable entities' responsibilities for cleanup and the extended
period over which any costs would be incurred, the company believes that these
matters will not have a material effect on the company's financial position.
Certain of these matters are discussed in Item 3, Legal Proceedings, in the
1994 Form 10-K Annual Report and in other filings of the company with the
Securities and Exchange Commission, which filings are available upon request
from the company.
13. GEOGRAPHIC DATA
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales
United States $372,261 $368,461 $365,666
Other 71,687 70,364 70,098
-----------------------------------------------------------------------------------------------
$443,948 $438,825 $435,764
===============================================================================================
Operating Income
United States $ 22,504 $ 22,122 $ 21,998
Other 7,144 5,128 8,511
-----------------------------------------------------------------------------------------------
$ 29,648 $ 27,250 $ 30,509
===============================================================================================
Identifiable Assets
United States $279,919 $256,398 $255,696
Other 45,029 44,090 41,384
-----------------------------------------------------------------------------------------------
$324,948 $300,488 $297,080
===============================================================================================
</TABLE>
Operating income is calculated as income before net interest expense,
environmental and restructuring charges, provision for income taxes and
cumulative effect of accounting changes. Other includes subsidiaries in Canada,
Europe and Mexico.
29
<PAGE> 18
TEN YEAR SUMMARY
(In Thousands, except per share and employee data)
<TABLE>
<CAPTION>
For the Year 1994 1993 1992
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $443,948 $438,825 $435,764
--------------------------------------------------------------------------------------------------
Income from Operations 22,512 19,624 23,865(g)
Percent of net sales 5.1% 4.5% 5.5%
--------------------------------------------------------------------------------------------------
Gain on Sale of Assets -- -- --
Environmental and Restructuring Charges -- -- 6,500
Pre-tax Income 22,512 19,624 17,365
Percent of net sales 5.1% 4.5% 4.0%
--------------------------------------------------------------------------------------------------
Provision for Income Taxes 8,667 8,848 6,942
--------------------------------------------------------------------------------------------------
Net Income 13,845 10,776 15,829(h)
Per share (a) (b) 1.29 .98 1.46
Percent of net sales 3.1% 2.5% 3.6%
Percent to stockholders' equity (c) 13.3% 10.8% 17.4%
--------------------------------------------------------------------------------------------------
Cash Dividends Paid 5,294 5,105 4,172
Per common share (a) .4250 .4050 .3700
--------------------------------------------------------------------------------------------------
Depreciation and Amortization 28,935 27,679 23,914
Capital Expenditures 42,884 25,435 34,440
Average Common Shares Outstanding (a) 9,924 9,894 10,572
--------------------------------------------------------------------------------------------------
As of Year End
--------------------------------------------------------------------------------------------------
Working Capital $ 48,915 $ 48,569 $ 44,265
Current Ratio 1.6 1.7 1.6
--------------------------------------------------------------------------------------------------
Property, Plant and Equipment (net) 183,657 170,270 167,930
Total Assets 324,948 300,488 297,080
Long-term Debt 89,795 89,660 90,505
--------------------------------------------------------------------------------------------------
Stockholders' Equity 111,302 104,217 99,506
Per share (a) (d) 10.27 9.65 9.22
Number of Employees 1,265 1,302 1,317
==================================================================================================
</TABLE>
(a) Adjusted for two-for-one common stock splits in 1988 and 1994.
(b) Based on average number of common shares outstanding during the year.
(c) Based on equity at beginning of year.
(d) Based on common shares and the assumed conversion of the convertible
preferred shares outstanding at year end.
(e) Change in method of accounting for pensions increased net income in 1986 by
$467 or $.04 per share.
(f) Pre-tax income before gain on sale of assets.
(g) Pre-tax income before environmental and restructuring charges and cumulative
effect of accounting changes.
(h) Reflected cumulative effect of accounting changes for income taxes and
investment tax credits of $5.4 million, or $.51 per primary share and $.49
per fully diluted share.
QUARTERLY STOCK DATA (UNAUDITED)
<TABLE>
<CAPTION>
Dividends Paid
Stock Price Range Per Common Share
----------------------------------------------------------------------------
1994 1993
Quarter High Low High Low 1994 1993
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
First $ 16 $ 13-5/16 $ 18-13/16 $ 15-3/8 10.5c 10.0c
Second 14-5/16 13 18-9/16 15-13/16 10.5c 10.0c
Third 17-5/8 12-3/8 16-13/16 14-1/2 10.5c 10.0c
Fourth 17-11/16 14-1/2 14-13/16 12-9/16 11.0c 10.5c
------------------
Year 17-11/16 12-3/8 18-13/16 12-9/16 42.5c 40.5c
==================================================================================================================================
</TABLE>
30
<PAGE> 19
<TABLE>
<CAPTION>
1991 1990 1989 1988 1987 1986 1985
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$414,069 $389,612 $346,350 $333,033 $288,935 $259,787 $235,919
-----------------------------------------------------------------------------
18,866 21,420(f) 11,701 20,554 19,230 14,037 9,231
4.6% 5.5% 3.4% 6.2% 6.7% 5.4% 3.9%
-----------------------------------------------------------------------------
-- 874 -- -- -- -- --
-- -- -- -- -- -- --
18,866 22,294 11,701 20,554 19,230 14,037 9,231
4.6% 5.7% 3.4% 6.2% 6.7% 5.4% 3.9%
-----------------------------------------------------------------------------
6,319 7,803 3,861 7,126 8,271 6,524 3,760
-----------------------------------------------------------------------------
12,547 14,491 7,840 13,428 10,959 7,513(e) 5,471
1.15 1.32 .71 1.19 .91 .63(e) .47
3.0% 3.7% 2.3% 4.0% 3.8% 2.9% 2.3%
15.2% 20.5% 11.7% 22.4% 19.9% 15.2% 11.5%
-----------------------------------------------------------------------------
3,603 3,190 2,919 2,658 2,386 2,145 2,000
.3300 .2900 .2650 .2375 .2075 .1850 .1725
-----------------------------------------------------------------------------
21,108 19,391 17,061 15,393 13,815 11,630 9,949
33,728 38,375 34,090 20,442 25,705 14,322 19,189
10,916 10,992 11,034 11,216 11,954 11,888 11,586
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
$ 41,972 $ 38,943 $ 36,952 $ 28,498 $ 26,637 $ 23,386 $ 20,602
1.7 1.7 1.8 1.6 1.7 1.6 1.6
-----------------------------------------------------------------------------
157,063 143,342 122,509 104,697 98,994 85,607 82,796
271,442 246,992 215,351 185,601 172,726 152,794 139,307
89,759 77,326 68,568 45,369 44,399 34,868 36,962
-----------------------------------------------------------------------------
90,866 82,698 70,741 66,790 59,936 55,029 49,575
8.35 7.57 6.45 6.06 5.32 4.76 4.28
1,317 1,311 1,152 1,028 1,002 948 894
=============================================================================
</TABLE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
1994 1993
-----------------------------------------------------------------------------------------------------------
Quarter First Second Third Fourth Year First Second Third Fourth Year
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $107,279 $112,305 $110,761 $113,603 $443,948 $114,620 $110,578 $111,111 $102,516 $438,825
---------------------------------------------------------------------------------------------------------------------------------
Gross Profit 19,143 20,657 20,983 20,317 81,100 22,868 20,662 21,149 15,356 80,035
---------------------------------------------------------------------------------------------------------------------------------
Interest, net (1,918) (1,803) (1,639) (1,776) (7,136) (1,887) (1,904) (1,869) (1,966) (7,626)
---------------------------------------------------------------------------------------------------------------------------------
Pre-tax Income
(Loss) 3,427 6,912 6,939 5,234 22,512 7,975 5,760 6,688 (799) 19,624
---------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) 2,022 4,078 4,112 3,633 13,845 4,687 3,368 3,170 (449) 10,776
---------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)
per Share (a) .18 .38 .39 .34 1.29 .44 .31 .29 (.08) .98
==================================================================================================================================
</TABLE>
(a) Restated for the two-for-one common stock split effective December 15, 1994.
31
<PAGE> 1
EXHIBIT (21)
STEPAN COMPANY
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
SUBSIDIARY ORGANIZED UNDER THE LAWS OF:
-------------------------------------------------- ----------------------------
<S> <C>
Stepan Europe S.A. ............................... France
Stepan Canada, Inc................................ Canada
Stepan Mexico, S.A. de C.V. ...................... Mexico
</TABLE>
<PAGE> 1
EXHIBIT (23)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports dated February 10, 1995, included or incorporated by reference in
Stepan Company's Annual Report in this Form 10-K for the year ended December 31,
1994, into the Company's previously filed Registration Statements on Form S-8,
File Nos. 2-64668, 2-40183, 2-80336 and 33-57189.
ARTHUR ANDERSEN LLP
Chicago, Illinois,
March 24, 1995
<PAGE> 1
EXHIBIT (24)
POWER OF ATTORNEY
The undersigned hereby appoints F. Quinn Stepan, Walter J. Klein and
Jeffrey W. Bartlett, and each of them individually, the true and lawful attorney
or attorneys of the undersigned, with substitution and resubstitution, to
execute in his name, place and stead in his capacity as an officer or director
or both of Stepan Company, a Delaware corporation, the Annual Report of Form
10-K under the Securities Exchange Act of 1934, and any amendments or
supplements thereto, and all instruments necessary or incidental in connection
therewith, and to file or cause to be filed such Annual Report and related
documents with the Securities and Exchange Commission. Each of said attorneys
shall have full power and authority to do and perform, in the name and on behalf
of the undersigned, every act whatsoever necessary or desirable to be done in
the premises, as fully as all intents and purposes of the undersigned could do
in person. The undersigned hereby ratifies and approves the actions of said
attorneys and each of them.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on
this 24th day of March, 1995.
F. QUINN STEPAN
--------------------------------------
F. Quinn Stepan
JAMES J. GAVIN, JR.
--------------------------------------
James J. Gavin, Jr.
THOMAS F. GROJEAN
--------------------------------------
Thomas F. Grojean
JAMES A. HARTLAGE
--------------------------------------
James A. Hartlage
WALTER J. KLEIN
--------------------------------------
Walter J. Klein
PAUL H. STEPAN
--------------------------------------
Paul H. Stepan
ROBERT D. CADIEUX
--------------------------------------
Robert D. Cadieux
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AS OF DECEMBER 31, 1994 AND CONSOLIDATED STATEMENT OF INCOME FOR
THE TWELVE MONTHS THEN ENDED AND IS QUALIFIFED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 2,452
<SECURITIES> 0
<RECEIVABLES> 71,970
<ALLOWANCES> 1,585
<INVENTORY> 45,464
<CURRENT-ASSETS> 129,371
<PP&E> 417,654
<DEPRECIATION> 233,997
<TOTAL-ASSETS> 324,948
<CURRENT-LIABILITIES> 80,456
<BONDS> 89,795
<COMMON> 10,029
0
19,980
<OTHER-SE> 81,293
<TOTAL-LIABILITY-AND-EQUITY> 324,948
<SALES> 443,948
<TOTAL-REVENUES> 443,948
<CGS> 362,848
<TOTAL-COSTS> 421,436
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,136
<INCOME-PRETAX> 22,512
<INCOME-TAX> 8,667
<INCOME-CONTINUING> 13,845
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,845
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.26
</TABLE>
