<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-4462
----------------
STEPAN COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 36-1823834
- -------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
Edens and Winnetka Road, Northfield, 60093
Illinois
- -------------------------------------- --------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number including area code: 847-446-7500
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
REGISTERED
----------- --------------
Common Stock, $1 par value New York Stock Exchange
Chicago Stock Exchange
5 1/2% Convertible Preferred Stock, no New York Stock Exchange
par value Chicago Stock Exchange
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, 1997, OF VOTING STOCK HELD BY
NONAFFILIATES OF THE REGISTRANT: $136,578,000.*
NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK
AS OF FEBRUARY 28, 1997:
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT FEBRUARY 28, 1997
----- --------------------------------
<S> <C>
Common Stock, $1 par value 9,861,000 shares
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
PART OF FORM 10-K DOCUMENT INCORPORATED
----------------- ---------------------
<S> <C>
Part I, Item 1 1996 Annual Report to Stockholders
Part II, Items 5-8 1996 Annual Report to Stockholders
Part III, Items 10-12 Proxy Statement dated March 28, 1997
</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>
PART I
ITEM 1. BUSINESS
Stepan Company and its subsidiaries (the "company") produce specialty 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, toothpastes, cosmetics and
other personal care products. Commercial and industrial applications include
emulsifiers for agricultural insecticides and herbicides, 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 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 manufactures selected
surfactants and markets 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., manufactures
selected surfactants for sale in the Philippines and Asia/Pacific markets
commencing in 1996.
In April 1996, the company acquired a sulfonation plant from Shell Group in
Cologne, Germany. This plant, organized as a German subsidiary, will allow the
company to serve European customers with a wide range of sulfate and sulfonate
products used in household, personal care, individual, institutional and
agricultural markets.
MARKETING AND COMPETITION
Principal markets for all products are manufacturers of cleaning or washing
compounds (including detergents, shampoos, toothpastes and household
cleaners), paints, cosmetics, food and beverages, agricultural insecticides
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 sales of commodity chemicals
having identical performance characteristics. The company is a leading
merchant producer 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 has also faced
periodic competition from foreign imports of phthalic anhydride. In specialty
products, the 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 the "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.
1
<PAGE>
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 1997, the company has commitments from suppliers to
cover its forecasted requirements and is not substantially dependent upon any
one supplier.
RESEARCH AND ENVIRONMENT
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 1996, 1995 and 1994 were $12,469,000,
$12,425,000 and $12,281,000, respectively. During 1996 and 1995, the research
and development staff consisted of 179 and 175 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 $6,015,000 during 1996. Such capital expenditures in 1997
should approximate $4.0 million. These expenditures represented approximately
13% of the company's capital expenditures in 1996 and are expected to be 11%
of such expenditures in 1997. 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, 1996 and 1995, the company employed worldwide 1,270 and
1,267 persons, respectively.
FOREIGN OPERATIONS
See Note 13, Geographic Data, on page 31 of the company's 1996 Annual Report
to Stockholders.
PRODUCT GROUPS
The manufacture of specialty 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, 1996, were:
<TABLE>
<CAPTION>
SPECIALTY
SURFACTANTS POLYMERS PRODUCTS
----------- -------- ---------
<S> <C> <C> <C>
1996....................................... 75% 19% 6%
1995....................................... 72% 22% 6%
1994....................................... 74% 18% 8%
</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.
2
<PAGE>
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 four wholly
owned subsidiaries: one in France, Canada, Mexico and Germany. 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 newly acquired Stepan Germany is
located on a five acre site in Cologne, Germany. 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
A reference is made to the Company's Report Form 10-Q for the quarter ended
September 30, 1993 and the Company's Report Form 10-Q for the quarter ended
September 30, 1996 and Report Form 10-K for the year ended December 31, 1995
relating to the Biddle Sawyer site located in Keyport New Jersey (Biddle
Sawyer Corporation v. American Cyanamid Company, U.S. District Court of New
Jersey CA-93-1063). On February 24, 1997, the Company entered into a
settlement agreement with Biddle Sawyer for an undisclosed sum but which sum
the Company does not believe is material. The settlement includes cross
dismissals with prejudice by Biddle Sawyer against the Company and other
defendants and the Company against Biddle Sawyer as well as other defendants.
Reference is made to the Company's Report Form 10-K for the year ended
December 31, 1992 and Report Form 10-Q for the quarter ended September 30,
1995 and September 30, 1996 and Report form 10-K for the year ended December
31, 1995 and Report Form 10-Q for the quarter ended June 30, 1996 relating to
the insurance recovery case brought by the company against various insurers to
recover the cost for remediation at various sites (Stepan v. Admiral et.al.).
The Company has now reached an agreement for settlement of its claim against
all insurers in this action with the exception of one insurer. The case
against this one insurer is scheduled to go to trial December, 1997 with a
back-up trial date in July, 1997. At the present time, the Company anticipates
that it will be going to trial on this action in July, 1997 unless it reaches
a settlement agreement with the last remaining defendant. In addition to
which, as the Company noticed previously, the Company is pursuing its action
in New Jersey against the remaining insurer in this case for sites that were
excluded in the Illinois action but for which the Company believes that proper
venue and jurisdiction lies in New Jersey.
Reference is made to the Company's Report Form 10-Q for the quarter ended
September 30, 1993, September 30, 1994, September 30, 1995, September 30, 1996
and Report Form 10-K for the year ended December 31, 1995 regarding the
D'Imperio site and particularly U.S. v. Jerome Lightman (92CV4710)(JBS). As
reported previously, this case is proceeding to trial, most likely in the
third quarter of 1997. The Company cannot at this time predict the outcome of
this case but believes it has defenses to all of the Government's and other
PRPs' allegations.
Reference is made to the Company's Report Form 10-K for the years ended
December 31, 1991, 1992, 1994, and 1995 and Report Form 10-Q for the quarters
ended September 30, 1993, September 30, 1995 and September 30, 1996 regarding
the Company's Maywood site. The Company has submitted a plan to perform
remedial investigation of a pile of leather scraps appearing at this site.
Other than this, no remediation has occurred at this site and the Company
anticipates that the Record of Decision will be issued in the third or fourth
quarter of 1997. The Company estimates that the cost for this leather scrap
remediation will be non-material.
3
<PAGE>
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, 1996.
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 February 20, 1997, F. Quinn Stepan, Jr., was appointed Vice
President and General Manager--Surfactants. He was previously Vice President--
Global Laundry and Cleaning Products as of May, 1996 and Director--Business
Management as of May, 1992. Charles W. Given, formerly Vice President and
General Manager--Surfactants since April, 1992, was appointed Vice President--
Corporate Development.
Effective May 22, 1995, Jeffrey W. Bartlett, formerly Vice President,
General Counsel and Corporate Secretary, was appointed Vice President, General
Counsel, Regulatory Affairs and Corporate Secretary. Effective January 1,
1995, James A. Hartlage, who was formerly the Senior Vice President--
Technology, was appointed Senior Vice President--Technology and Operations. In
addition, during 1995 he assumed Administrative responsibilities. Effective
January 1, 1995, Earl H. Wagener, formerly Vice President--Product
Development, was appointed Vice President--Research and Development. 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, 1997,
and certain other information are as follows:
<TABLE>
<CAPTION>
YEAR FIRST
NAME AGE TITLE ELECTED OFFICER
---- --- ----- ---------------
<C> <C> <S> <C>
F. Quinn Stepan...... 59 Chairman, President and Chief
Executive Officer 1967
James A. Hartlage.... 59 Senior Vice President--Technology
and Operations 1980
Charles W. Given..... 60 Vice President--Corporate
Development 1992
Ronald L. Siemon..... 59 Vice President and General
Manager--Polymers 1992
Jeffrey W. Bartlett.. 53 Vice President, General Counsel,
Regulatory Affairs
and Corporate Secretary 1983
Walter J. Klein...... 50 Vice President--Finance 1985
Mickey Mirghanbari... 59 Vice President--Manufacturing and
Engineering 1992
Earl H. Wagener...... 56 Vice President--Research and
Development 1995
F. Quinn Stepan, Jr.. 36 Vice President and General
Manager--Surfactants 1997
</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 New York
Stock Exchange and the Chicago Stock Exchange. See page 33 of the company's
1996 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 New York Stock Exchange and the Chicago Stock Exchange. See Note 7 on
page 28 of the company's 1996 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, 1997, there were 1,658 holders of common stock of the
company.
4
<PAGE>
(c) See page 33 of the company's 1996 Annual Report to Stockholders for
dividend information which is incorporated by reference herein. Also see Note
4 on page 26 of the company's 1996 Annual Report to Stockholders which sets
forth the restrictive covenants covering dividends.
ITEM 6. SELECTED FINANCIAL DATA
See page 32 of the company's 1996 Annual Report to Stockholders for a five
year summary of selected financial information which is incorporated by
reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
See pages 14 through 18 of the company's 1996 Annual Report to Stockholders
which is incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages 19 through 31 of the company's 1996 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 33 of the company's 1996 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 28,
1997, 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 pages 6 and 7 of the company's Proxy Statement dated March 28, 1997, for
the Annual Meeting of the Stockholders which are 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 28, 1997,
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 June 6, 1996, regarding settlement of a
lawsuit.
(c) Exhibits
See Exhibit Index filed herewith.
5
<PAGE>
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,
Regulatory Affairs
and Corporate
Secretary
March 25, 1997
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 25, 1997
____________________________________ Executive Officer and Director
F. Quinn Stepan
Thomas F. Grojean Director March 25, 1997
____________________________________
Thomas F. Grojean
James A. Hartlage Senior Vice President--Technology March 25, 1997
____________________________________ and Operations and Director
James A. Hartlage
Walter J. Klein Vice President--Finance, March 25, 1997
____________________________________ Principal Financial and
Walter J. Klein Accounting Officer
Paul H. Stepan Director March 25, 1997
____________________________________
Paul H. Stepan
Robert D. Cadieux Director March 25, 1997
____________________________________
Robert D. Cadieux
Robert G. Potter Director March 25, 1997
____________________________________
Robert G. Potter
</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 25, 1997
6
<PAGE>
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, 1996, has been filed as an exhibit to this Annual Report on Form
10-K. Pages 19 through 31 of such Annual Report to Stockholders contain the
Consolidated Balance Sheets as of December 31, 1996 and 1995, the Consolidated
Statements of Income, Stockholders' Equity and Cash Flows and Notes to
Consolidated Financial Statements for the three years ended December 31, 1996,
1995 and 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 8 and 9
of this Form 10-K.
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.
7
<PAGE>
STEPAN COMPANY
SUPPLEMENTAL SCHEDULE TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1996
AS REQUIRED TO COMPLY WITH REGULATION S-X
SCHEDULE II--ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Below is an analysis of the allowance for doubtful accounts for the three
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, Beginning of Year........................ $1,744 $1,585 $1,739
Provision charged to income..................... 442 349 291
Accounts written off, net of recoveries......... (112) (190) (445)
------ ------ ------
Balance, End of Year.............................. $2,074 $1,744 $1,585
====== ====== ======
</TABLE>
8
<PAGE>
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 11, 1997. 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 11, 1997
9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
(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)h Copy of Loan Agreement dated June 15, 1995, with Aid Association for
Lutherans, the Northwestern Mutual Life Insurance Company and The
Mutual Life Insurance Company of New York. (Note 10)
(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). (Note 9)
(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 1996 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, 1996.
(23) Consent of Independent Public Accountants.
(24) Power of Attorney.
(27) Financial Data Schedule.
</TABLE>
<PAGE>
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.
9. Filed with the company's Annual Report on Form 10-K for the year
ended December 31, 1994, and incorporated herein by reference.
10. Filed with the company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, and incorporated herein by reference.
</TABLE>
<PAGE>
EXHIBIT (11)
STEPAN COMPANY
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
COMPUTATION OF PER SHARE EARNINGS
Net Income..................................................... $19,067 $16,119
Deduct dividends on preferred stock............................ 1,068 1,069
------- -------
Income applicable to common stock.............................. $17,999 $15,050
======= =======
Weighted average number of shares outstanding.................. 10,002 9,984
Per share earnings*............................................ $ 1.800 $ 1.507
======= =======
COMPUTATION OF PER SHARE PRIMARY EARNINGS
Income applicable to common stock.............................. $17,999 $15,050
======= =======
Weighted average number of shares outstanding.................. 10,002 9,984
Add net shares issuable from assumed exercise of options (under
treasury stock method)........................................ 242 166
------- -------
Shares applicable to primary earnings.......................... 10,244 10,150
======= =======
Per share primary earnings*.................................... $ 1.757 $ 1.483
======= =======
Dilutive effect................................................ 2.4% 1.6%
======= =======
COMPUTATION OF PER SHARE FULLY DILUTED EARNINGS
Net income..................................................... $19,067 $16,119
======= =======
Weighted average number of shares outstanding.................. 10,002 9,984
Add net shares issuable from assumed exercise of options (under
treasury stock method)........................................ 265 166
Add weighted average shares issuable from assumed conversion of
convertible preferred stock................................... 887 888
------- -------
Shares applicable to fully diluted earnings.................... 11,154 11,038
======= =======
Per share fully diluted earnings*.............................. $ 1.709 $ 1.460
======= =======
Dilutive effect................................................ 5.1% 3.1%
======= =======
</TABLE>
- --------
* Rounded
This calculation is submitted in accordance with Regulation S-K, item
601(b)(11).
<PAGE>
Stepan Company Management's Discussion and Analysis
Results of Operations
1996 Compared with 1995
Sales for 1996 rose two percent to a record $536.6 million. The increase was the
result of a nine percent growth in sales volume. Sales by product group were:
Percent
(Dollars in Thousands) 1996 1995 Change
-------------------------------------------------------
Surfactants $ 402,268 $ 380,179 + 6
Polymers 103,444 115,833 - 11
Specialty Products 30,923 32,206 - 4
-------------------------------------------------------
Total $ 536,535 $ 528,218 + 2
=======================================================
Surfactants are a principal ingredient in consumer and industrial cleaning
products such as detergents, shampoos, lotions, toothpastes and cosmetics. Other
applications include lubricating ingredients and emulsifiers for spreading of
insecticides and herbicides. Surfactants net sales, representing 75 percent of
the company business, were the source of sales growth in 1996. The sales
increase was due mainly to a 10 percent increase in sales volume. The volume
gain stemmed largely from a growing domestic demand for high active products.
The domestic market accounted for 84 percent of the total surfactant volume.
Foreign operations also contributed to the sales growth, particularly with $6.5
million of first-time sales reported by the newly acquired German subsidiary
(See Note 2 of Notes to the Consolidated Financial Statements). Canada, France
and Mexico all reported higher sales on modest volume gains.
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. Despite a seven percent increase
in sales volume, polymers net sales, accounting for 19 percent of the company
business, decreased sharply due to a 35 percent drop in sales of phthalic
anhydride (PA). Lower selling prices driven by a steep decline in raw material
costs led to the decrease in PA sales. A five percent decrease in sales volume
also contributed. PA business represented 48 percent of polymer volume in 1996.
Partially offsetting the PA results were higher polyurethane polyols and
polyurethane systems sales on stronger sales volume. Polyurethane polyols,
representing 46 percent of polymer volume, recorded a 13 percent volume gain
primarily on the strength of the laminate board industry.
Specialty products include flavors, lubricant additives, oil field
chemicals and emulsifiers and solubilizers used in the food and pharmaceutical
industry. Specialty products revenue declined moderately on a much reduced sales
volume. Prior year sales included some lower margin products which have since
been discontinued. This contributed to an improved average selling price between
years.
Gross profit in 1996 was $96.2 million, or 17.9 percent of net sales, a one
percent drop from $97.2 million, or 18.4 percent of net sales in 1995.
Surfactant business was the main contributor to the decline. Despite the sales
and volume growth, surfactants gross profit decreased 10 percent from $72.2
million to $65.0 million in 1996. Both domestic and foreign operations posted
lower gross profit. Domestic gross profit decreased primarily as a result of
competitive pressure on pricing and higher maintenance expenses. Maintenance
expenses are projected to be lower in 1997 and the company feels that the
domestic profit margins should improve. Mexican gross profit was down 32 percent
principally as a result of a larger volume of lower margin products. Canadian
gross profit was also down as a result of lower profit margins. France posted
higher gross profit on higher sales volume, while Germany, the newly acquired
subsidiary, reported start-up losses. In 1997, the company plans an expansion of
the German product line to improve operating results. For 1996, the impact of
the German operation was $1.6 million after tax loss which reduced earnings by
approximately $.16 per share. Offsetting the surfactants results, polymers gross
profit increased 29 percent to a record $24.9 million in 1996 from $19.3 million
reported in the prior year. Higher margins and sales volumes for polyurethane
polyols and systems, partially offset by lower margins and volumes for PA,
accounted for the improvement. Specialty products gross profit improved by $.6
million to $6.3 million as a result of the improved product mix between years.
14
<PAGE>
Stepan Company Management's Discussion and Analysis
Average raw material costs decreased eight percent during 1996, due
primarily to lower polymer raw material costs. Manufacturing labor costs
increased at a modest rate reflecting the recent low levels of inflation. The
company employed 1,270 people, which was relatively unchanged from 1995.
Depreciation expense increased to $30.5 million in 1996 from $28.8 million in
1995 as a result of bringing into service significant capacity expansion
projects, as well as continuing capital spending for plant improvements.
Operating income was $40.4 million in 1996, a 24 percent increase over
1995. Operating expenses, consisting of marketing, administrative and research
expenses, fell 14 percent from a year ago. Administrative expenses decreased 40
percent as a result of lower legal and environmental costs which in the prior
year included significant charges for potential future remediation costs for the
company's Maywood, New Jersey, plant and adjacent property. See Note 12 of the
Notes to the Consolidated Financial Statements. Current year's expense also
benefited from $4.2 million of insurance recoveries. Marketing expenses rose
five percent primarily due to higher payroll related expenses as well as
increased advertising and promotional expenses. Research and development
expenses increased seven percent due primarily to higher payroll expenses.
Excluding 1996 insurance recoveries, operating expenses are expected to increase
modestly in 1997.
Pretax income benefited from an eight percent decrease in interest expense.
An increased amount of interest capitalized for long term construction projects
accounted for most of the decline. Start-up losses reported by the Philippine
joint venture negatively affected pre-tax earnings. The company expects
improvement and profitability from the joint venture in 1997.
The effective tax rate was 40.9 percent in 1996 compared to 35.5 percent in
1995. The higher effective tax rate for the year was precipitated by a higher
effective Mexican tax rate, as the prior year included loss carryforward
benefits. The inability to tax benefit losses in Germany and the Philippines
also contributed to a higher effective tax rate. See Note 6 of the Notes to the
Consolidated Financial Statements for a reconciliation of the statutory to the
effective tax rate.
Net income for 1996 rose to a record of $19.1 million, or $1.80 per share,
up 19 percent from $16.1 million, or $1.51 per share reported for 1995. The
company believes improvement in surfactant earnings should lead the way to
another record year in 1997.
1995 Compared with 1994
Sales for 1995 grew 19 percent to a record $528.2 million. The increase was the
result of a 12 percent increase in sales volume. Sales by product group were:
<TABLE>
<CAPTION>
Percent
(Dollars in Thousands) 1995 1994 Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Surfactants $ 380,179 $ 329,186 + 15
Polymers 115,833 78,778 + 47
Specialty Products 32,206 35,984 - 10
- -------------------------------------------------------------------------------
Total $ 528,218 $ 443,948 + 19
===============================================================================
</TABLE>
Domestic surfactant volume, which contributed 85 percent of total
surfactant sales volume, grew 17 percent over 1994. Higher average selling
prices resulting from raw material cost increases also contributed to higher
sales. Foreign subsidiaries' sales, representing 15 percent of surfactant sales
volume, rose by four percent. European sales were up 29 percent due primarily to
a 15 percent gain in volume coupled with a stronger French franc. Partially
offsetting the European result was the reported lower Mexican sales on the
significantly devalued Mexican peso that has lost 22 percent against the U.S.
dollar since the beginning of 1995. However, Mexican sales volume declined only
two percent. Canadian sales reported an eight percent increase reflecting mainly
higher selling prices to pass through raw material cost increases.
Polymer sales increased due to higher selling prices reflecting a pass
through of higher raw material costs and a 12 percent increase in volume.
Phthalic anhydride, which represented 54 percent of polymer volume, experienced
a 64 percent increase in sales due primarily to a 53 percent increase in average
selling prices and a seven percent volume gain. The sharp rise in selling prices
was driven by higher raw material costs and stronger market demand. Polyurethane
polyols, which represented 41 percent of total polymer volume, experienced a 23
percent increase in volume due to strong domestic demand and significant gains
in the export business. Polyurethane systems sales held steady as efforts
continue to commercialize new generation products with more favorable
environmental characteristics.
15
<PAGE>
Stepan Company Management's Discussion and Analysis
Specialty products revenues declined 10 percent on reduced volume. Sales of
certain lower margin lubricant additives were discontinued in the current year.
This has led to an improved average selling price between years.
Gross profit in 1995 was $97.2 million, or 18.4 percent of net sales, a 20
percent growth from $81.3 million, or 18.3 percent of net sales in 1994.
Surfactants gross profit was $72.2 million for 1995, an increase of 17 percent
from 1994. Domestic surfactants were up $10.7 million, or 24 percent, as a
result of the higher domestic sales volume. Gross profit of foreign operations
was flat as Europe's modest gain being entirely offset by slight declines
reported by Canada and Mexico. Continued competitive pricing pressure which
affected the foreign subsidiaries' ability to fully pass through raw material
cost increases was the main cause of the lackluster foreign results. Polymers
gross profit jumped $6.3 million to $19.3 million in 1995 representing a 48
percent increase from 1994. Phthalic anhydride accounted for all of the
increased polymer gross profit showing significantly increased gross profit
margins as a result of the higher selling prices mentioned earlier. Polyurethane
polyols gross profit decreased 30 percent despite higher volume due to the
inability to fully pass on raw material cost increases. Polyurethane systems
gross profit declined 40 percent as a result of the unfavorable product mix and
reduced volumes. Specialty products gross profit dropped $1.0 million to $5.6
million in 1995, a 16 percent decrease from 1994. The decline was due mainly to
the cessation of certain low margin lubricant additives products.
Average raw material costs increased 11 percent during 1995, reflecting
primarily higher polymer raw material costs. Manufacturing labor costs increased
at a modest rate reflecting the recent low levels of inflation. The company
employed 1,267 people which was relatively unchanged from 1994, but down 35
people from 1993 due to the voluntary early retirement program offered in 1994.
Depreciation expense increased to $28.8 million in 1995 from $27.0 million in
1994 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 was $32.6 million in 1995, a nine percent increase from
1994. Operating expenses, consisting of marketing, administrative and research
expenses, rose 25 percent reflecting higher administrative expenses in 1995.
Administrative expenses climbed 61 percent due to a $9.4 million increase in
legal and environmental expenses which was precipitated by a draft Remedial
Investigation Feasibility Study enumerating possible future costs for
remediation of the company's Maywood, New Jersey plant and adjacent property.
See Note 12 of the Notes to the Consolidated Financial Statements. The 1994
expenses benefited from $3.1 million of insurance recoveries related to
previously incurred legal and environmental costs. Marketing expenses rose 10
percent primarily due to higher salaries as well as increased marketing effort
in the Pacific Rim. Research and development expenses increased six percent due
largely to increased salary expenses.
The effective tax rate was 35.5 percent in 1995 compared to 38.5 percent in
1994 resulting in a modest two percent increase in the income tax provision. The
decrease in the effective tax rate was attributable to the higher research and
development tax credit benefits at the state level as well as tax credit
carryforward benefits realized in Mexico. See Note 6 of the Notes to the
Consolidated Financial Statements for a reconciliation of the statutory to the
effective tax rate.
Net income for 1995 rose to a record $16.1 million, or $1.51 per share,
compared to $13.8 million, or $1.29 per share in 1994.
Fourth Quarter 1996 Compared with 1995
For the quarter ended December 31, 1996, the company reported net income of
$4.1 million, or $.38 per share, compared to $5.1 million, or $.49 per share in
the fourth quarter of 1995. Net sales for the quarter increased three percent to
$130.1 million from $126.8 million recorded in 1995. Gross profit was $23.1
million, down five percent in the fourth quarter compared to the same quarter of
1995. Surfactants earnings were down due to weakening profit margins and start-
up losses of the German acquisition. Polymers reported higher quarterly gross
profit due to increased sales volume and improved margins. Specialty products
gross profit was essentially unchanged. Operating expenses declined four percent
in the fourth quarter compared to the same quarter of 1995, due largely to lower
legal and environmental expenses partially offset by higher research and
development and marketing expenses.
16
<PAGE>
Stepan Company Management's Discussion and Analysis
Liquidity and Financial Condition
For the year ended December 31, 1996, net cash from operations totaled $65.8
million, an increase of $30.8 million over 1995. The current year increase was a
product of higher earnings, customer prepayments and insurance recoveries as
well as reduced working capital requirements compared to the prior year.
For the current year, net income and customer prepayments were up by $2.9
million and $7.4 million, respectively. Inventories decreased by $4.1 million
during 1996 compared to an $8.9 million increase in 1995. The current year
accounts receivable increase of $5.2 million compared to the 1995 increase of
$9.4 million.
Capital expenditures totaled $44.9 million for 1996, up as planned from the
$39.2 million recorded in 1995. Looking ahead, capital spending for 1997 is
expected to approximate that of 1996.
Since December 31, 1995, total company debt has decreased by $6.4 million
to finish the year at $109.5 million. Since December 31, 1995, the ratio of
long-term debt to long-term debt plus shareholders' equity (long-term debt
ratio) has decreased from 47.1 percent to 43.8 percent.
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. At December 31, 1996, the company had
$12.2 million outstanding under this revolving credit line. The company also
meets 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 and
acquisitions.
The company anticipates that cash from operations and from committed credit
facilities will be sufficient to fund anticipated capital expenditures,
dividends, acquisition and joint venture investments and other planned financial
commitments 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 1996, the company
expenditures for capital projects related to the environment were $6.0 million
and should approximate $4.0 million for 1997. 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 facilities for waste treatment and
disposal and managing environmental compliance in ongoing operations at our
manufacturing locations were approximately $7.8 million for 1996 compared to
$7.0 million for 1995. 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 14 waste disposal sites where cleanup 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. After partial remediation payments at certain sites,
the company has estimated a range of possible environmental and legal losses
from $4.1 million to $26.5 million at December 31, 1996, compared to $4.3
million to $23.6 million at December 31, 1995. At December 31, 1996, the
company's reserve was $21.0 million for legal and environmental matters compared
to $8.7 million at December 31, 1995. In 1996, the company recorded $24.0
million of insurance recoveries which represented a combination of settlements
of litigation for all known environmental sites and a policy buyback from the
company's primary insurers. $4.2 million of the settlements was credited to
income for legal costs related to these recoveries. As a result, the company
increased its reserve for legal and environmental matters to a
17
<PAGE>
Stepan Company Management's Discussion and Analysis
more conservative position. During 1996, expenditures related to legal and
environmental matters approximated $8.2 million compared to $7.8 million
expended in 1995. While it is difficult to forecast the timing of the
expenditures, the company believes that $4.5 million of the $21.0 million
reserve is likely to be paid out in 1997. The balance of the reserve would
probably 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 1996
Form 10-K Annual Report and in other filings of the company with the Securities
and Exchange Commission, which are available upon request from the company.
In addition, reference should be made to the Five Year Summary on page 32.
18
<PAGE>
Stepan Company 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.
/s/ F. Quinn Stepan
F. Quinn Stepan
Chairman of the Board and Chief Executive Officer
/s/ Walter J. KLein
Walter J. Klein
Vice President--Finance
February 11, 1997
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, 1996 and 1995, and
the related consolidated statements of income, cash flows and stockholders'
equity, for each of the three years in the period ended December 31, 1996. 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 also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit 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, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Chicago, Illinois,
February 11, 1997
19
<PAGE>
Stepan Company Consolidated Financial Statements
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 4,778 $ 3,148
Receivables, less allowances of $2,074 in
1996 and $1,744 in 1995 85,017 79,814
Inventories (Note 3) 50,242 54,363
Deferred income taxes (Note 6) 10,703 9,444
Other current assets 2,958 3,385
- -------------------------------------------------------------------------------
Total current assets 153,698 150,154
- -------------------------------------------------------------------------------
Property, Plant and Equipment:
Land 6,416 4,611
Buildings and improvements 55,795 53,701
Machinery and equipment 427,141 379,363
Construction in progress 8,530 16,429
- -------------------------------------------------------------------------------
497,882 454,104
Less accumulated depreciation 290,723 261,634
- -------------------------------------------------------------------------------
Property, plant and equipment, net 207,159 192,470
- -------------------------------------------------------------------------------
Other Assets 20,155 19,903
- -------------------------------------------------------------------------------
Total assets $ 381,012 $ 362,527
===============================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt (Note 4) $ 6,973 $ 6,946
Accounts payable 43,417 42,530
Accrued liabilities (Note 10) 32,986 33,822
- -------------------------------------------------------------------------------
Total current liabilities 83,376 83,298
- -------------------------------------------------------------------------------
Deferred Income Taxes (Note 6) 35,954 36,469
- -------------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 4) 102,567 109,023
- -------------------------------------------------------------------------------
Other Non-current Liabilities (Note 11) 27,500 11,260
- -------------------------------------------------------------------------------
Stockholders' Equity (Note 7):
5 1/2 percent convertible preferred stock,
cumulative, voting, without par value; authorized
2,000,000 shares; issued 796,972 shares in 1996 and
797,172 shares in 1995 19,924 19,929
Common stock, $1 par value; authorized 15,000,000
shares; issued 10,131,706 shares in 1996 and
10,086,653 shares in 1995 10,132 10,087
Additional paid-in capital 5,066 4,568
Cumulative translation adjustments (4,820) (3,691)
Retained earnings 106,513 93,292
- -------------------------------------------------------------------------------
136,815 124,185
Less: Treasury stock, at cost 5,200 1,708
- -------------------------------------------------------------------------------
Stockholders' equity 131,615 122,477
- -------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 381,012 $ 362,527
===============================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated balance sheets.
20
<PAGE>
Stepan Company Consolidated Financial Statements
Consolidated Statements of Income
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(Dollars in Thousands, except per share amounts) 1996 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $ 536,635 $ 528,218 $ 443,948
- ------------------------------------------------------------------------------------------------
Cost of Sales 440,420 431,051 362,643
- ------------------------------------------------------------------------------------------------
Gross Profit 96,215 97,167 81,305
- ------------------------------------------------------------------------------------------------
Operating Expenses:
Marketing 19,577 18,673 16,972
Administrative 16,549 27,412 17,082
Research, development and technical services (Note 1) 19,703 18,462 17,398
- ------------------------------------------------------------------------------------------------
55,829 64,547 51,452
- ------------------------------------------------------------------------------------------------
Operating Income 40,386 32,620 29,853
Other Income (Expenses):
Interest, net (Note 4) (7,243) (7,865) (7,136)
Income (loss) from equity joint ventures (Note 1) (882) 236 (205)
- ------------------------------------------------------------------------------------------------
(8,125) (7,629) (7,341)
- ------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 32,261 24,991 22,512
Provision for Income Taxes (Note 6) 13,194 8,872 8,667
- ------------------------------------------------------------------------------------------------
Net Income $ 19,067 $ 16,119 $ 13,845
================================================================================================
Net Income Per Common Share:
Primary $ 1.80 $ 1.51 $ 1.29
Fully Diluted $ 1.71 $ 1.46 $ 1.26
================================================================================================
Average Common Shares Outstanding (Note 1) 10,002 9,984 9,924
================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
1996 Sales Dollar Distribution
(Dollars in Thousands)
- -----------------------------------
[PIE CHART APPEARS HERE] Material Depreciation and
$318,125 Amortization
59.3% $32,138
6.0%
Other Expenses Income Taxes
$74,358 $13,194
13.8% 2.5%
Payroll and Fringes Net Income
$79,753 $19,067
14.8% 3.6%
Combined Sales
(Thousands of Dollars)
- -------------------------------------
[BAR GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Surfactants 317,522 324,809 329,186 380,179 402,268
Polymers 87,060 79,071 78,778 115,833 103,444
Specialty Products 31,182 34,945 35,984 32,206 30,923
------- ------- ------- ------- -------
Consolidated Total 435,764 438,825 443,948 528,218 536,635
======= ======= ======= ======= =======
</TABLE>
. Surfactants
. Polymers
. Specialty Products
(Consolidated Totals in bold)
21
<PAGE>
Stepan Company Consolidated Financial Statements
Capital Expenditures
(Thousands of Dollars)
[CHART APPEARS HERE]
91 33,728
92 34,440
93 25,435
94 42,884
95 39,247
96 44,923
Compound Annual Growth
Five Years + 6%
Equity Per Share
(Dollars)
[CHART APPEARS HERE]
91 8.35
92 9.22
93 9.65
94 10.27
95 11.25
96 12.24
Compound Annual Growth
Five Years + 8%
Consolidated Statements of Cash Flows
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Cash Flows from Operating Activities
Net income $ 19,067 $ 16,119 $ 13,845
Depreciation and amortization 32,138 30,384 28,935
Deferred revenue recognition (2,896) (2,760) --
Customer prepayments 7,375 -- 12,883
Deferred income taxes (1,710) 2,359 410
Non-current environmental and legal liabilities 12,925 3,601 --
Other non-cash items 548 (605) 627
Changes in Working Capital:
Receivables, net (5,203) (9,429) (13,135)
Inventories 4,121 (8,899) 3,454
Accounts payable and accrued liabilities (1,113) 4,310 4,106
Other 535 (74) (96)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 65,787 35,006 51,029
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Expenditures for property, plant and equipment (44,923) (39,247) (42,884)
Investment in subsidiaries or joint ventures (3,859) (7,500) (2,314)
Other non-current assets 268 (14) (711)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (48,514) (46,761) (45,909)
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing and Other
Related Activities
Revolving debt and notes payable to banks, net (800) (9,711) 13,313
Other debt borrowings 3,734 40,000 --
Other debt repayments (9,190) (12,053) (11,455)
Purchases of treasury stock, net (3,492) (64) (327)
Dividends paid (5,846) (5,540) (5,294)
Other non-cash items (49) (181) (420)
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used for) Financing
and Other Related Activities (15,643) 12,451 (4,183)
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 1,630 696 937
Cash and Cash Equivalents at Beginning of Year 3,148 2,452 1,515
- -------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 4,778 $ 3,148 $ 2,452
===============================================================================================================================
Supplemental Cash Flow Information
Cash payments of income taxes, net of refunds $ 12,417 $ 9,804 $ 8,554
Cash payments of interest $ 10,838 $ 7,761 $ 8,536
===============================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
22
<PAGE>
<TABLE>
<CAPTION>
Stepan Company Consolidated Financial Statements
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1996, 1995 and 1994
Convertible Additional Cumulative Deferred
Preferred Common Paid-in Treasury Translation ESOP Retained
(Dollars in Thousands) Stock Stock Capital Stock Adjustments Compensation Earings
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $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 -- -- -- -- -- 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 7) -- 5,014 -- -- -- -- (5,014)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 19,980 10,029 3,983 (1,644) (3,491) -- 82,445
Sale of 55,800 shares under stock option plan -- 56 484 -- -- -- --
Purchase of 536 shares of common treasury stock,
net of sales -- -- 52 (64) -- -- --
Conversion of preferred stock to common stock (51) 2 49 -- -- -- --
Net income -- -- -- -- -- -- 16,119
Cash dividends paid
Preferred stock ($1.375 per share) -- -- -- -- -- -- (801)
Common stock (44.75c per share) -- -- -- -- -- -- (4,471)
Translation adjustments -- -- -- -- (200) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 19,929 10,087 4,568 (1,708) (3,691) -- 93,292
Sale of 44,826 shares under stock option plan -- 45 419 -- -- -- --
Purchase of 184,587 shares of common
treasury stock, net of sales -- -- 74 (3,492) -- -- --
Conversion of preferred stock to common stock (5) -- 5 -- -- -- --
Net income -- -- -- -- -- -- 19,067
Cash dividends paid
Preferred stock ($1.375 per share) -- -- -- -- -- -- (1,068)
Common stock (47.75c per share) -- -- -- -- -- -- (4,778)
Translation adjustments -- -- -- -- (1,129) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 $19,924 $10,132 $ 5,066 $(5,200) $ (4,820) $ -- $ 106,513
===================================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
23
<PAGE>
Stepan Company Notes to Consolidated Financial Statements
For the years ended December 31, 1996, 1995 and 1994
1. Summary of Significant Accounting Policies
- -------------------------------------------------------------------------------
Nature of Operations
The company's operations consist predominantly of the production and sale of
specialty 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,
toothpastes and household cleaners), paints, cosmetics, food and beverages,
agricultural insecticides and herbicides, plastics, furniture, automotive
equipment, insulation and refrigeration.
The company grants credit to its customers who are widely distributed
across the Americas, Europe, Asia and the Pacific. 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 subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Investments in 50 percent
owned joint ventures in the Philippines and Colombia are accounted for on the
equity method and are included in the "Other Assets" caption on the Consolidated
Balance Sheet. 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.
Cash and Cash Equivalents
The company considers all highly liquid investments with original maturities of
six 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, 1996 and 1995 amounted to 89 percent and 88 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 ($20,509,000, $16,791,000 and $16,468,000 in 1996, 1995 and 1994,
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. Expenditures that mitigate or prevent
environmental contamination and that benefit 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 $12,469,000, $12,425,000 and $12,281,000 in 1996, 1995 and
1994, respectively. The balance
24
<PAGE>
Stepan Company Notes to Consolidated Financial Statements
For the years ended December 31, 1996, 1995 and 1994
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
The provision for income taxes includes federal, foreign, state and local income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities.
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.
Translation of Foreign Currencies
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.
Derivative Financial Instruments
The company's utilization of derivative financial instruments currently consists
of the use of forward exchange contracts to hedge firm foreign currency
commitments. The unrealized gains and losses are deferred and included in the
measurement of the related foreign currency transaction. Gains and losses on
unhedged foreign currency transactions are included in income.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that operating assets and associated goodwill be written down to fair
value whenever an impairment review indicates that the carrying value cannot be
recovered on an undiscounted cash flow basis. After any such noncash write-down,
results of operations would be favorably affected by reduced depreciation,
depletion and amortization charges. During 1996, the company adopted this
statement and determined that no impairment loss needs to be recognized for
applicable assets of continuing operations.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," encourages but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. The company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. Refer to Note 8.
Per Share Data
Primary earnings per share amounts are computed based on the weighted average
number of common shares outstanding: 10,002,000 in 1996, 9,984,000 in 1995 and
9,924,000 in 1994. 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 stockholders. 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 11,154,000 in 1996, 11,038,000 in 1995 and
10,972,000 in 1994.
Reclassifications
Certain amounts in the 1995 and 1994 financial statements have been reclassified
to conform with the 1996 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
25
<PAGE>
Stepan Company Notes to Consolidated Financial Statements
For the years ended December 31, 1996, 1995 and 1994
2. Acquisition
- --------------------------------------------------------------------------------
In April 1996, the company acquired a sulfonation plant from Shell Group in
Cologne, Germany. This plant, organized as a German subsidiary, will allow the
company to serve European customers with a wide range of sulfate and sulfonate
products used in household, personal care, individual, institutional and
agricultural markets. The purchase consisted of land, sulfonation equipment, and
intangible assets. The acquisition was accounted for as a purchase, and the
results of the subsidiary have been included in the accompanying consolidated
financial statements since the date of acquisition. Had the results of this
subsidiary been included commencing with operations in 1996, the reported
results would not have been materially affected.
3. Inventories
- --------------------------------------------------------------------------------
The composition of inventories was as follows:
December 31
----------------------
(Dollars in Thousands) 1996 1995
- --------------------------------------------------------------------
Finished products $ 30,689 $ 32,204
Raw materials 19,553 22,159
- --------------------------------------------------------------------
Total inventories $ 50,242 $ 54,363
====================================================================
If the first-in, first-out (FIFO) inventory valuation method had been used,
inventories would have been approximately $12,800,000 and $12,100,000 higher
than reported at December 31, 1996 and 1995, respectively.
4. Debt
- --------------------------------------------------------------------------------
Debt was composed of the following:
December 31
----------------------
(Dollars in Thousands) Maturity Dates 1996 1995
- --------------------------------------------------------------------
Unsecured promissory notes
7.22% 1999-2008 $ 30,000 $ 30,000
7.77% 2000-2010 30,000 30,000
7.69% 2001-2005 10,000 10,000
9.70% 1997-2006 10,000 10,000
9.52% 1997-1999 6,429 10,714
9.70% 1997-1999 2,667 4,000
10.54% 1997 2,379 5,951
Unsecured bank debt 1998-2001 12,200 13,000
Debt of foreign subsidiaries
payable in foreign currency 1997-2003 5,865 2,304
- --------------------------------------------------------------------
Total debt 109,540 115,969
Less current maturities 6,973 6,946
- --------------------------------------------------------------------
Long-term debt $102,567 $109,023
====================================================================
Unsecured bank debt at December 31, 1996, consists of borrowings under a
committed $45,000,000 revolving credit agreement which bears interest at varying
rates which averaged 6.06 percent during the year. 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, 1996 and 1995.
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
$46,689,000 and $37,904,000 at December 31, 1996 and 1995, respectively. The
company is in compliance with all loan agreements.
Debt at December 31, 1996, matures as follows: $6,973,000 in 1997;
$8,338,000 in 1998; $11,505,000 in 1999; $11,342,000 in 2000; $11,175,000 in
2001 and $60,207,000 after 2001.
Net interest expense for the years ended December 31 was composed of the
following:
(Dollars in Thousands) 1996 1995 1994
- -----------------------------------------------------------------
Interest expense $ 9,165 $ 9,043 $ 8,428
Interest income (671) (629) (295)
- -----------------------------------------------------------------
8,494 8,414 8,133
Capitalized interest (1,251) (549) (997)
- -----------------------------------------------------------------
Interest, net $ 7,243 $ 7,865 $ 7,136
=================================================================
26
<PAGE>
Stepan Company Notes to Consolidated Financial Statements
For the years ended December 31, 1996, 1995 and 1994
5. Leased Properties
- --------------------------------------------------------------------------------
The company leases certain property and equipment (primarily transportation
equipment, buildings and computer equipment) under operating leases. Total
rental expense was $3,474,000, $3,398,000 and $2,994,000 in 1996, 1995 and 1994,
respectively.
Minimum future rental payments under operating leases with terms in excess
of one year as of December 31, 1996, are:
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Amount
- --------------------------------------------------------------------------------
<S> <C> <C>
1997 $ 2,228
1998 1,920
1999 1,310
2000 943
2001 583
Subsequent to 2001 1,199
- --------------------------------------------------------------------------------
Total minimum future rental payments $ 8,183
================================================================================
</TABLE>
6. Income Taxes
- --------------------------------------------------------------------------------
The provision for taxes on income and the related income before taxes are as
follows:
<TABLE>
<CAPTION>
Taxes on Income
(Dollars in Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal
Current $ 9,785 $ 3,698 $ 6,732
Deferred 54 2,003 (1,524)
State
Current 1,863 899 2,020
Deferred (345) 278 (646)
Foreign
Current 2,700 1,973 2,299
Deferred (863) 21 (214)
- --------------------------------------------------------------------------------
Total $13,194 $ 8,872 $ 8,667
================================================================================
Income before Taxes
(Dollars in Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
Domestic $28,420 $18,044 $15,429
Foreign 3,841 6,947 7,083
- --------------------------------------------------------------------------------
Total $32,261 $24,991 $22,512
================================================================================
</TABLE>
No federal income taxes have been provided on $22,427,000 of undistributed
earnings of the company's foreign subsidiaries. In general, the company
reinvests earnings of foreign subsidiaries in their operations indefinitely.
However, the company will repatriate earnings from a subsidiary where excess
cash has accumulated and it is advantageous for tax or foreign exchange
reasons. Based on the current United States and foreign income tax rates, it is
anticipated that no additional United States tax would be incurred on any
earnings that are expected to be repatriated. 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 earnings reinvested
indefinitely.
The variations between the effective and statutory federal income tax rates are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Amount % Amount % Amount %
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision at statutory tax rate $ 11,292 35.0 $ 8,747 35.0 $ 7,879 35.0
State taxes on income less applicable federal tax benefit 987 3.1 765 3.1 893 4.0
Other items 915 2.8 (640) (2.6) (105) (.5)
- -------------------------------------------------------------------------------------------------------------
Total income tax provision $ 13,194 40.9 $ 8,872 35.5 $ 8,667 38.5
=============================================================================================================
</TABLE>
27
<PAGE>
Stepan Company Notes to Consolidated Financial Statements
For the years ended December 31, 1996, 1995 and 1994
The net deferred tax liability at December 31 is comprised of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Current deferred income taxes
Gross assets $ 14,970 $ 9,982
Gross liabilities (4,267) (538)
- --------------------------------------------------------------------------------
Total current deferred tax assets 10,703 9,444
Non-current deferred income taxes
Gross assets 6,989 4,313
Valuation allowance (854) (409)
Gross liabilities (42,089) (40,373)
- --------------------------------------------------------------------------------
Total non-current deferred tax liabilities (35,954) (36,469)
- --------------------------------------------------------------------------------
Net deferred tax liability $(25,251) $(27,025)
================================================================================
</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) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Tax over book depreciation $(36,691) $(33,947)
Safe Harbor leases (3,452) (3,914)
SFAS No. 87 pension accounting (2,716) (2,628)
State income tax accrual 1,377 1,305
Deferred revenue 5,813 3,912
Book reserves deductible in other periods 9,240 8,149
Deferred management compensation 1,412 1,028
Valuation allowance (854) (409)
Other, net 620 (521)
- --------------------------------------------------------------------------------
Net deferred tax liability $(25,251) $(27,025)
================================================================================
</TABLE>
7. 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.
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 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 million at December 31, 1996 and 1995. 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.
At December 31, 1996, treasury stock consists of 20,208 shares of preferred
stock and 269,403 shares of common stock. At December 31, 1995, treasury stock
consisted of 20,208 shares of preferred stock and 84,816 shares of common stock.
28
<PAGE>
Stepan Company Notes to Consolidated Financial Statements
For the years ended December 31, 1996, 1995 and 1994
8. Stock Option Plans
- --------------------------------------------------------------------------------
The company has two fixed stock option plans - 1982 and 1992. The 1992 Plan
extends participation to directors who are not employees of the company. No
further grants may be made under the 1982 Plan. 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. An option may not be exercised within two years from the date of
grant and no option will be exercisable after ten years from the date granted.
The company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for the 1992
Plan been determined based on the fair value at the grant date for awards in
1996 and 1995 consistent with the provisions of SFAS No. 123, the company's net
income and earnings per share would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
(In Thousands, except per share data) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Earnings - as reported $19,067 $ 16,119
Net Earnings - pro forma 18,556 16,117
Primary Earnings per share - as reported $ 1.80 $ 1.51
Primary Earnings per share - pro forma 1.75 1.51
Fully Diluted Earnings per share - as reported 1.71 1.46
Fully Diluted Earnings per share - pro forma 1.66 1.46
- --------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: expected dividend yield of 3.0%;
expected volatility of 28%; and expected lives of 7.5 years and risk-free
interest rate of 6.89% (7.06% in 1995).
A summary of the status of the company's stock option plans at December 31,
1996, 1995 and 1994 and changes during the years then ended is presented as
follows:
<TABLE>
<CAPTION>
Weighted-
Average
1996 Exercise 1995 1994
Shares Price Shares Shares
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 1,044,810 $ 13.62 1,126,704 714,244
Options exercised (44,826) 10.34 (55,800) (51,940)
Options cancelled (5,112) 16.57 (27,088) --
Options granted 271,380 19.75 994 464,400
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 1,266,252 15.04 1,044,810 1,126,704
- ------------------------------------------------------------------------------------------------------------------------------------
Option price range at end of year $ 9.43750- $ 8.12500- $ 8.12500-
$ 19.75000 $ 19.62500 $ 18.21875
Option price range for exercised shares $ 8.12500- $ 8.12500- $ 3.84375-
$ 18.21875 $ 14.68750 $ 12.09375
- ------------------------------------------------------------------------------------------------------------------------------------
Options available for grant at end of year 647,122 913,390 887,296
Weighted-average fair value of options, granted during the year $ 6.35 $ 6.38 --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A summary of stock options outstanding at December 31, 1996, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Price at 12/31/96 Contractual Life Price at 12/31/96 Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 9.43750 - $ 9.65625 234,000 1.80 $ 9.55 234,000 $ 9.55
$12.09375 - $14.00000 537,600 6.72 13.72 537,600 13.72
$18.21875 - $19.75000 494,652 7.54 19.06 222,278 18.22
- ------------------------------------------------------------------------------------------------------------------------------------
1,266,252 6.13 $15.04 993,878 $13.74
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
Stepan Company Notes to Consolidated Financial Statements
For the years ended December 31, 1996, 1995 and 1994
9. 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, 1996, include $8,558,000 of the company's common
stock.
Net 1996, 1995 and 1994 periodic pension cost for the plans consists of the
following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 1,664 $ 1,244 $ 1,639
Interest cost on
projected benefit obligation 2,700 2,383 2,454
Actual return on plan assets (6,732) (8,653) 1,190
Net amortization and deferral 2,478 4,611 (5,449)
- -------------------------------------------------------------------------------
Net pension expense (income) $ 110 $ (415) $ (166)
===============================================================================
</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) 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C>
Vested benefit obligation $(27,013) $(24,909)
- -------------------------------------------------------------------------------
Accumulated benefit obligation (30,306) (28,030)
- -------------------------------------------------------------------------------
Projected benefit obligation (37,696) (35,329)
Plan assets at fair value 52,304) 46,455
- -------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 14,608 11,126
Unrecognized net gain (6,871) (3,173)
Unamortized net transitional assets (2,268) (2,835)
Unamortized prior service cost 1,140 1,244
- -------------------------------------------------------------------------------
Prepaid pension asset $ 6,609 $ 6,362
===============================================================================
</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
7.75 and 7.5 percent for 1996 and 1995, respectively. The projected benefit
obligations were determined under assumed compensation increases ranging from
five percent to seven percent for different employee groups for 1996 and 1995.
The assumed long-term rate of return on plan assets was 8.5 percent for 1996 and
1995. 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.
10. Accrued Liabilities
- --------------------------------------------------------------------------------
Accrued liabilities consisted of:
<TABLE>
<CAPTION>
December 31
---------------------
(Dollars in Thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Accrued payroll and benefits $ 11,236 $ 12,121
Accrued environmental and
legal matters (Note 12) 4,500 5,100
Other accrued liabilities 17,250 16,601
- --------------------------------------------------------------------------------
Total accrued liabilities $ 32,986 $ 33,822
================================================================================
</TABLE>
11. Other Non-current Liabilities
- --------------------------------------------------------------------------------
Other non-current liabilities were comprised of the following:
<TABLE>
<CAPTION>
December 31
---------------------
(Dollars in Thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred revenue $ 10,974 $ 7,659
Environmental and legal matters (Note 12) 16,526 3,601
- --------------------------------------------------------------------------------
Total other non-current liabilities $ 27,500 $ 11,260
================================================================================
</TABLE>
During 1996 and 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 recognized into income. Related
deferred revenue at December 31, 1996 and 1995 is $14,538,000 and $10,059,000,
respectively, of which the amount recognizable within one year is included in
the "Accrued Liabilities" caption of the Consolidated Balance Sheets.
30
<PAGE>
Stepan Company Notes to Consolidated Financial Statements
For the years ended December 31, 1996, 1995 and 1994
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.
After partial remediation payments at certain sites, the company has
estimated a range of possible environmental and legal losses from $4.1 million
to $26.5 million at December 31, 1996, compared to $4.3 million to $23.6 million
at December 31, 1995. At December 31, 1996, the company's reserve is $21.0
million for legal and environmental matters compared to $8.7 million at December
31, 1995. In 1996, the company recorded $24.0 million of insurance recoveries
which represented a combination of settlements of litigations for all known
environmental sites and a policy buyback from the company's primary insurers.
$4.2 million of the settlements was credited to income for legal costs related
to these recoveries. As a result, the company increased its reserve for legal
and environmental matters to a more conservative position. The company made
payments of $8.2 million in 1996 and $7.8 million in 1995 related to legal
costs, settlements and costs related to remedial design studies at various
sites.
The 1995 provision included an additional $5.0 million charge for costs
that may be incurred for the remediation of the company's Maywood, New Jersey
plant and adjacent property based on a draft Remedial Investigation Feasibility
Study prepared for that site. During 1994, the company received $3.1 million
from insurers related to previously incurred legal costs which reduced
administrative expense in the Consolidated Statements of Income.
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 1996
Form 10-K Annual Report and in other filings of the company with the Securities
and Exchange Commission, which are available upon request from the company.
13. Geographic Data
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Thousands) 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
United States
Net Sales -- Unaffiliated $ 449,544 $ 452,013 $ 377,986
Interarea Transfers 15,338 13,052 10,701
-------------------------------------------
Total $ 464,882 $ 465,065 $ 388,687
Operating Income 37,034 25,938 22,709
Identifiable Assets 333,598 315,393 279,919
================================================================================
Other
Net Sales -- Unaffiliated $ 87,091 $ 76,205 $ 65,962
Interarea Transfers 20,025 19,971 16,426
-------------------------------------------
Total $ 107,116 $ 96,176 $ 82,388
Operating Income 3,352 6,682 7,144
Identifiable Assets 47,414 47,134 45,029
================================================================================
Eliminations
Net Sales $ (35,363) $ (33,023) $ (27,127)
================================================================================
Consolidated
Net Sales $ 536,635 $ 528,218 $ 443,948
Operating Income 40,386 32,620 29,853
Identifiable Assets 381,012 362,527 324,948
================================================================================
</TABLE>
Interarea transfers consist principally of surfactant intermediates and finished
products. They are generally transferred at cost plus an appropriate mark-up for
profit. Marketing and services in the United States, Canada and Mexico are
managed as a single enterprise. However, in compliance with Statement of
Financial Accounting Standards 14, "Financial Reporting for Segments of a
Business Enterprise," the United States is reported as a separate geographic
area. Other includes subsidiaries in Canada, Mexico and Europe. Prior years'
information has been reclassified to conform with current year's presentation.
31
<PAGE>
Stepan Company Consolidated Financial Statements
Five Year Summary
(In Thousands, except per share and employee data)
<TABLE>
<CAPTION>
For the Year 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 536,635 $ 528,218 $ 443,948 $ 438,825 $ 435,764
Operating Income* 40,386 32,620 29,853 27,335 24,009
Percent of net sales 7.5% 6.2% 6.7% 6.2% 5.5%
- -------------------------------------------------------------------------------------------------------------
Pre-tax Income 32,261 24,991 22,512 19,624 17,365
Percent of net sales 6.0% 4.7% 5.1% 4.5% 4.0%
- -------------------------------------------------------------------------------------------------------------
Provision for Income Taxes 13,194 8,872 8,667 8,848 6,942
- -------------------------------------------------------------------------------------------------------------
Net Income 19,067 16,119 13,845 10,776 15,829/(e)/
Per share/(a) (b)/ 1.80 1.51 1.29 .98 1.46
Percent of net sales 3.6% 3.1% 3.1% 2.5% 3.6%
Percent to stockholders' equity/(c)/ 15.6% 14.5% 13.3% 10.8% 17.4%
- -------------------------------------------------------------------------------------------------------------
Cash Dividends Paid 5,846 5,540 5,294 5,105 4,172
Per common share/(a)/ .4775 .4475 .4250 .4050 .3700
- -------------------------------------------------------------------------------------------------------------
Depreciation and Amortization 32,138 30,384 28,935 27,679 23,914
Capital Expenditures 44,923 39,247 42,884 25,435 34,440
Average Common Shares Outstanding/(a)/ 10,002 9,984 9,924 9,894 10,572
- -------------------------------------------------------------------------------------------------------------
As of Year End
- -------------------------------------------------------------------------------------------------------------
Working Capital* $ 70,322 $ 66,856 $ 48,915 $ 48,569 $ 44,265
Current Ratio* 1.8 1.8 1.6 1.7 1.6
- -------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, net 207,159 192,470 183,657 170,270 167,930
Total Assets 381,012 362,527 324,948 300,488 297,080
Long-term Debt, less current maturities 102,567 109,023 89,795 89,660 90,505
- -------------------------------------------------------------------------------------------------------------
Stockholders' Equity 131,615 122,477 111,302 104,217 99,506
Per share/(a) (d)/ 12.24 11.25 10.27 9.65 9.22
Number of Employees 1,270 1,267 1,265 1,302 1,317
=============================================================================================================
</TABLE>
/(a)/ Adjusted for two-for-one common stock split in 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)/ 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.
* Prior years' data has been restated to conform with the 1996 presentation.
32
<PAGE>
Stepan Company Consolidated Financial Statements
Quarterly Stock Data (Unaudited)
<TABLE>
<CAPTION>
Dividends Paid
Stock Price Range Per Common Share
--------------------------------------------------------------
1996 1995 1996 1995
--------------------------------------------------------------
Quarter High Low High Low
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First $ 19-3/4 $ 15-3/4 $ 19-1/2 $ 14-3/4 11.75c 11.00c
Second 20-1/2 18 20-7/8 17 11.75c 11.00c
Third 19 17 17-3/4 15-5/8 11.75c 11.00c
Fourth 20-1/2 16-7/8 17-1/2 15 12.50c 11.75c
----------------
Year 20-1/2 15-3/4 20-7/8 14-3/4 47.75c 44.75c
======================================================================================================
</TABLE>
Quarterly Financial Data (Unaudited)
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
1996
-----------------------------------------------------------------
Quarter First Second Third Fourth Year
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 130,643 $ 137,926 $ 137,922 $ 130,144 $ 536,635
- ---------------------------------------------------------------------------------------------------------
Gross Profit* 25,875 25,030 22,242 23,068 96,215
- ---------------------------------------------------------------------------------------------------------
Interest, net (1,987) (1,732) (1,643) (1,881) (7,243)
- ---------------------------------------------------------------------------------------------------------
Pre-tax Income 9,143 8,722 7,540 6,856 32,261
- ---------------------------------------------------------------------------------------------------------
Net Income 5,635 5,173 4,202 4,057 19,067
- ---------------------------------------------------------------------------------------------------------
Net Income per Share .54 .49 .39 .38 1.80
=========================================================================================================
1995
-----------------------------------------------------------------
Quarter First Second Third Fourth Year
- ---------------------------------------------------------------------------------------------------------
Net Sales $ 134,786 $ 136,258 $ 130,410 $ 126,764 $ 528,218
- ---------------------------------------------------------------------------------------------------------
Gross Profit* 26,606 25,662 20,668 24,231 97,167
- ---------------------------------------------------------------------------------------------------------
Interest, net (1,864) (2,128) (2,046) (1,827) (7,865)
- ---------------------------------------------------------------------------------------------------------
Pre-tax Income (Loss) 9,936 8,506 (879) 7,428 24,991
- ---------------------------------------------------------------------------------------------------------
Net Income (Loss) 6,109 5,418 (550) 5,142 16,119
- ---------------------------------------------------------------------------------------------------------
Net Income (Loss) per Share .59 .52 (.08) .49 1.51
=========================================================================================================
</TABLE>
* Restated to conform with the current year income statement presentation.
33
<PAGE>
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
Stepan Deutschland GmbH............................ Germany
</TABLE>
<PAGE>
EXHIBIT (23)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports dated February 11, 1997, included or incorporated by reference in
Stepan Company's Annual Report in this Form 10-K for the year ended December
31, 1996, 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 25, 1997
<PAGE>
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 25th day of March 1997.
/s/ F. Quinn Stepan
-------------------------------------
F. Quinn Stepan
/s/ Thomas F. Grojean
-------------------------------------
Thomas F. Grojean
/s/ James A. Hartlage
-------------------------------------
James A. Hartlage
/s/ Walter J. Klein
-------------------------------------
Walter J. Klein
/s/ Paul H. Stepan
-------------------------------------
Paul H. Stepan
/s/ Robert D. Cadieux
-------------------------------------
Robert D. Cadieux
/s/ Robert G. Potter
-------------------------------------
Robert G. Potter
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND CONSOLIDATED STATEMENT OF
INCOME FOR THE TWELVE MONTHS THEN ENDED
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,778
<SECURITIES> 0
<RECEIVABLES> 87,091
<ALLOWANCES> 2,074
<INVENTORY> 50,242
<CURRENT-ASSETS> 153,698
<PP&E> 497,882
<DEPRECIATION> 290,723
<TOTAL-ASSETS> 381,012
<CURRENT-LIABILITIES> 83,376
<BONDS> 102,567
<COMMON> 10,132
0
19,924
<OTHER-SE> 101,559
<TOTAL-LIABILITY-AND-EQUITY> 381,012
<SALES> 536,635
<TOTAL-REVENUES> 536,635
<CGS> 440,420
<TOTAL-COSTS> 496,249
<OTHER-EXPENSES> 882
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,243
<INCOME-PRETAX> 32,261
<INCOME-TAX> 13,194
<INCOME-CONTINUING> 19,067
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,067
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.71
</TABLE>
