<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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the Transition period from to
Commission File No. 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
incorporation or organization) Identification Number)
Edens and Winnetka Road, 60093
Northfield, Illinois (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number including area code: 847-446-7500
Securities registered pursuant to Section 12 (b) of the Act:
<TABLE>
<CAPTION>
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
<S> <C>
Common Stock, $1 par value New York Stock Exchange
Chicago Stock Exchange
5 1/2% Convertible Preferred Stock, no par value New York Stock Exchange
Chicago Stock Exchange
</TABLE>
Securities registered pursuant to Section 12 (g) of the Act:
None
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [ ].
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Aggregate market value at February 28, 1999, of voting stock held by
nonaffiliates of the registrant: $161,889,000*
Number of shares outstanding of each of the issuer's classes of common
stock as of February 28, 1999:
<TABLE>
<CAPTION>
Class Outstanding at February 28, 1999
----- --------------------------------
<S> <C>
Common Stock, $1 par value 9,678,176
</TABLE>
Documents Incorporated by Reference
<TABLE>
<CAPTION>
Part of Form 10-K Document Incorporated
----------------- ---------------------
<S> <C>
Part I, Item 1 1998 Annual Report to Stockholders
Part II, Items 5-8 1998 Annual Report to Stockholders
Part III, Items 10-12 Proxy Statement dated March 30, 1999
</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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 has three reportable segments:
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 derives its revenue from the sale of phthalic anhydride, polyols and
polyurethane foam systems used in plastics, building materials and
refrigeration industries. Specialty products sells chemicals used in food,
flavoring and pharmaceutical applications.
In mid 1998, the company purchased the remaining 50 percent ownership of
its Colombian joint venture. As a result, Stepan Colombiana de Quimicos
(Stepan Colombia) became a wholly owned subsidiary.
Effective June 30, 1998, the company acquired selected specialty surfactant
product lines from E.I. DuPont De Nemours Company. The acquired business
consists of phosphate esters, specialty ethoxylates and other specialty
quaternaries and polymers sold to the plastic and fiber industries. The
product lines supplement the company's existing surfactants and polymers
businesses and will be produced in current company manufacturing plants.
On November 11, 1998, the company's wholly owned subsidiary, Stepan Canada,
Inc., acquired the Canadian anionic and cationic surfactant business from
Boehme Filatex Canada, Inc. The acquired product lines are sold primarily into
the personal care and the institutional cleaning product markets.
MARKETING AND COMPETITION
Principal markets for surfactants are manufacturers of detergents,
shampoos, lotions, toothpastes and cosmetics. Surfactants are also sold to the
producers of emulsifiers and lubricating products. The company also is a
principal provider of polymers used in construction, refrigeration,
automotive, boating and other consumer product industries. Specialty products
are used primarily by food and pharmaceutical manufacturers.
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.
1
<PAGE>
MAJOR CUSTOMER AND BACKLOG
The company does not have any one single customer whose business represents
more than 10 percent 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.
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 1999, the company has commitments from suppliers to
cover its forecasted requirements and is not substantially dependent upon any
one supplier.
RESEARCH AND DEVELOPMENT
The company maintains an active research and development program to assist
in the discovery and commercialization of new knowledge with the intent that
such effort will be useful in developing a new product or in bringing about a
significant improvement to an existing product or process. Total expenses for
research and development during 1998, 1997 and 1996 were $12,219,000,
$12,404,000, and $12,469,000, respectively. During 1998 and 1997, the research
and development staff consisted of 188 and 182 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 $7,136,000 during 1998. Such capital expenditures in 1999
should approximate $4.0 to $5.0 million. These expenditures represented
approximately 16 percent of the company's capital expenditures in 1998 and are
expected to be approximately 14 percent of such expenditures in 1999. 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, 1998 and 1997, the company employed worldwide 1,372 and
1,292 persons, respectively.
FOREIGN OPERATIONS
See Note 13, Segment Reporting, on page 35 of the company's 1998 Annual
Report to Stockholders.
2
<PAGE>
SEGMENTS
The company has three reportable segments: surfactants, polymers and
specialty products. Their contribution to sales for the three years ended
December 31, 1998, were:
<TABLE>
<CAPTION>
Specialty
Surfactants Polymers Products
----------- -------- ---------
<S> <C> <C> <C>
1998....................................... 78% 18% 4%
1997....................................... 79% 18% 3%
1996....................................... 77% 19% 4%
</TABLE>
See Note 13, Segment Reporting, on page 35 of the company's 1998 Annual
Report to Stockholders.
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 eight acre site. In addition, the
company leases 49,000 square feet of office space in a nearby office complex.
Stepan Canada maintains a leased sales office in Mississagua, Canada.
Stepan Mexico maintains a leased sales office in Mexico City, Mexico.
Surfactants are produced at four plants in the United States and five
wholly owned subsidiaries: one in France, Canada, Mexico, Colombia and
Germany. The principal plant is located on a 626 acre site at Millsdale
(Joliet), Illinois. A second plant is located on a 44 acre tract in
Fieldsboro, New Jersey. West Coast operations are conducted on an eight acre
site in Anaheim, California. A fourth plant is located on a 175 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.
Stepan Germany is located on a five acre site in Cologne, Germany. Stepan
Colombia is located on a five acre site in Manizales, Colombia. 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
On October 22, 1998, the company received a general notice letter
indicating that the company might be a potentially responsible party at the
Casmalia Disposal Site in Santa Barbara County, California. Following request
for information, the company was apprised that it is considered to be a de
minimis party at this site and that the United States Environmental Protection
Agency (USEPA) has allocated the company an amount of $269,955 to settle this
liability with regard to this site. Because of the way in which the numbers at
this site were arrived at by the USEPA, the company has joined a de minimis
settling parties group to see if this amount can be reduced. Discussions with
the EPA are continuing.
On December 28, 1998, the company received notification that it may be a
potentially responsible party at the Four County Landfill in DeLonge, Indiana
as a result of the company's Maywood, New Jersey operations utilizing Chem Met
Inc. as a waste hauler. The allegation is that Chem Met reportedly
transshipped wastes from the company's Maywood, New Jersey facility to the
site. While the company denies liability at this site, the company has entered
into an Agreed Order for Remedial Design/Remedial Action for Operable Unit 1
and has paid the amount of $400 in settlement of its obligations thereunder.
As reported previously, the company was notified pursuant to Section 107A
of the Comprehensive Environmental Response Compensation and Liability Act
(CERCLA) as amended that it may be potentially
3
<PAGE>
responsible for the response costs that have been incurred with respect to a
landfill site known as the Ewan Property Superfund Site located in Shawong
Township, Burlington County, New Jersey. The company's alleged liability at
this site arises out of the alleged illegal disposal of waste at this site by
Lightman Drum Company in the early 1970s. The company and other PRPs have
agreed to a non-binding allocation process and have been funding remediation
activities at this site. The company is however, contesting its liability at
this site as more fully described below in U.S. v. Jerome Lightman (92CV4710)
(JVS).
As reported previously, the company was named a third-party defendant in an
action entitled U.S. v. Jerome Lightman (92CV4710) (JVS) which case originally
involved only the Government's claim for past costs at the landfill site at
D'Imperio located in Hamilton Township, New Jersey. This site is another one
at which Lightman Drum Company allegedly illegally disposed of waste. Cross-
claims were filed by each potentially responsible party against other
potentially responsible parties and the suit as to these cross-claims has been
expanded to include the Ewan Shawong Township site as well. As an
accommodation, the company has agreed previously to make payment, without
admitting its liability, to the Government for the Government's past costs
with regard to this site. The Consent Order with the Government has been
lodged and the company has filed objections to it, because the company
believes it has defenses to the past costs. Payment of past costs removed the
Government from the lawsuit but the cross-claims filed by each potentially
responsible party against the other party are left. As to these cross-claims,
the company has filed a motion for summary judgment and motion to strike other
third-party defendants' expert witnesses. It is anticipated that a ruling from
the Federal District Court in Trenton, New Jersey will appear in May or June
of 1999. If the company's motions are granted, the company believes that its
liability at both the Ewan and D'Imperio sites will cease.
As to other following sites:
- --ABC Barrel & Drum Co. -- Detroit, Michigan
- --Batavia Landfill -- Batavia, New York
- --Bofors Nobel Site -- Muskegon, Michigan
- --Chemsol, Inc. -- Piscataway, New Jersey
- --Chem-Trol Pollution Services, Inc. -- Hamburg, New York
- --Delilah Road Site -- Atlantic County, New Jersey
- --Gallup's Quarry -- Plainfield, Connecticut
- --Iron Horse Park/Shaffer Landfill -- Billerica, Massachusetts
- --Nyanza Chemical Waste Dump -- Ashland, Massachusetts
- --Memphis Container aka Tri-State Drums -- Memphis, Shelby County, Tennessee
- --Twin Cities -- Arvada, Colorado
- --and Virginia RR Washout,
all of which have been previously reported, there has been no further activity
or inquiry since the first notice.
As reported previously in November 1992, the company received notification
from Olin Corporation that Olin Corporation had incurred costs in cleaning up
a plant site formerly owned by the company in Wilmington, Massachusetts. The
company entered into a settlement agreement with Olin which resolved its
liability with regard to the company's liability for environmental matters at
this site, if any. Subsequent thereto, Olin Corporation sued three prior
owners of this site who in turn, bought the company and is a third-party
defendant in an action entitled Olin Corporation v. Fisions plc, et al., Civil
Action No. 93-11166-MLW. The company subsequently filed a motion for
contribution protection and was granted that protection with regard to all
matters with the exception of Resource, Conservation and Recovery Act claims
brought by the third party against the company. That motion is still pending
in the Federal District Court in Boston. Discovery continues in the case and
the company cannot estimate what its liability, if any, will be for this
third-party RCRA claim, if any, but believes it is protected from liability
under the laws of contribution of the Commonwealth of Massachusetts.
The company's site in Maywood, New Jersey and property formerly owned by
the company adjacent to its current site, were listed on the National
Priorities List in September 1993 pursuant to the provisions of the
4
<PAGE>
Comprehensive Environmental Response Compensation and Liabilities Act because
of certain alleged chemical contaminations. Pursuant to an Administrative
Order on Consent entered into between the United States Environmental
Protection Agency (USEPA) and the company for property formerly owned by the
company, and the issuance of an order by the USEPA to the company for property
currently owned by the company, the company has completed a Remedial
Investigation Feasibility study in 1994. The company has been awaiting the
issuance of a Record of Decision from the USEPA which would relate to both the
currently owned and formerly owned company property and would recommend the
type of remediation required on each property. It is now estimated that a
Record of Decision will be issued by the USEPA in the third quarter of 1999.
As to radiological contamination on the company's property and other
properties in Maywood, Rochelle Park and Lodi, New Jersey, the company entered
into a Memorandum of Understanding with the United States of America
represented by the Department of Energy (Agreement) in 1985. Pursuant to this
Agreement, the Department of Energy took title to radiological contaminated
materials and was to remediate, at its expense, all radiological contamination
on the company's property and other properties in the Maywood, Rochelle Park
and Lodi areas. The properties were remediated by the Department of Energy
under the Formerly Utilized Sites Remedial Action Program, a federal program
under which the U.S. Government undertook to remediate properties which were
used to process radiological material for the U.S. Government. In 1997,
responsibility for this clean-up was transferred to the United States Army
Corps of Engineers (USACE). On January 29, 1999, the company received a copy
of the USACE Report to Congress dated January 1998 in which the USACE
expressed their intention to evaluate with the USEPA whether the company or
other parties might be responsible for cost recovery or contributions for work
performed by the USACE and to turn over such evaluations at some time in the
future, to the Department of Justice for the Department of Justice to
determine whether or not cost recovery or contribution claims are appropriate
against the company or other parties who may be potentially responsible for
radiological contamination from commercial operations or for chemically
contaminating the radiological contamination.
As no claim for contribution or cost recovery has been made by the
Department of Justice, the company cannot make any estimate as to its
liability, if any. However, given the fact that the company has the Agreement
with the United States of America covering radiological remediation, it is the
company's belief that its liability, if any, has been resolved with regard to
the United States of America as to the radiological contamination, including
radiological contamination which is co-mingled with other chemicals.
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, 1998.
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 15, 1999, the company announced that F. Quinn Stepan,
Jr., has been elected President and Chief Operating Officer. He was previously
Vice President and General Manager--Surfactants as of January 1, 1997, Vice
President--Global Laundry and Cleaning Products as of May 1996 and Director--
Business Management as of May 1992. Mr. F. Quinn Stepan, Sr., who has served
the company as Chairman and Chief Executive Officer since 1984 and as
President since 1973, will remain Chairman and Chief Executive Officer.
Effective February 16, 1999, John V. Venegoni was appointed Corporate Vice
President and General Manager--Surfactants. Since May 1992 until May 1996, he
served as a Senior Business Manager--Consumer Products. From May 1996, until
present, he was Director--Global Personal Care.
5
<PAGE>
Charles W. Given retired in 1998. He held a number of positions in the
company, most recently as 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, 1999,
and certain other information are as follows:
<TABLE>
<CAPTION>
Year First
Name Age Title Elected Officer
---- --- ----- ---------------
<S> <C> <C> <C>
F. Quinn
Stepan...... 61 Chairman and Chief Executive Officer 1967
James A.
Hartlage.... 61 Senior Vice President--Technology and Operations 1980
Ronald L.
Siemon...... 61 Vice President and General Manager--Polymers 1992
Jeffrey W. 55 Vice President, General Counsel, Regulatory Affairs 1983
Bartlett.... and Corporate Secretary
Walter J.
Klein....... 52 Vice President--Finance 1985
Mickey
Mirghanbari. 61 Vice President--Manufacturing and Engineering 1992
Earl H.
Wagener..... 58 Vice President--Research and Development 1995
F. Quinn
Stepan, Jr.. 38 President and Chief Operating Officer 1997
John V.
Venegoni.... 40 Vice President and General Manager--Surfactants 1999
</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 37 of the company's
1998 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 31 of the company's 1998 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, 1999, there were 1,522 holders of common stock of the
company.
(c) See page 37 of the company's 1998 Annual Report to Stockholders for
dividend information which is incorporated by reference herein. Also see Note
4 on page 29 of the company's 1998 Annual Report to Stockholders which sets
forth the restrictive covenants covering dividends.
Item 6. Selected Financial Data
See page 37 of the company's 1998 Annual Report to Stockholders for a five
year summary of selected financial information which is incorporated by
reference herein.
6
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations and Quantitative and Qualitative Disclosures about
Market Risk
See pages 14 through 20 of the company's 1998 Annual Report to Stockholders
which is incorporated by reference herein.
Some information contained in the Management's Discussion and Analysis is
forward looking and involves risks and uncertainties. The results achieved
this year are not necessarily an indication of future prospects for the
company. Actual results in future years may differ materially. Potential risks
and uncertainties include, among others, fluctuations in the volume and timing
of product orders, changes in demand for the company's products, changes in
technology, continued competitive pressures in the marketplace, availability
of raw materials, foreign currency fluctuations and general economic
conditions.
Item 8. Financial Statements and Supplementary Data
See pages 21 through 36 of the company's 1998 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 37 of the company's 1998 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
Mr. Paul Stepan is a general partner of a partnership having an interest in
certain real estate which is unrelated to the business of the company. The
partnership of which Mr. Paul Stepan is a general partner, filed in bankruptcy
for Chapter 11 protection in February, 1998. Mr. Paul Stepan advised that a
refinancing package and successful discharge from Chapter 11 occurred.
For additional information about the company's Directors, see pages 3
through 5 of the company's Proxy Statement dated March 30, 1999, 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 7 and 8 of the company's Proxy Statement dated March 30, 1999,
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 30,
1999, for the Annual Meeting of Stockholders which are incorporated by
reference herein.
7
<PAGE>
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
None
(c) Exhibits
See Exhibit Index filed herewith.
8
<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 29, 1999
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, Chief Executive March 29, 1999
____________________________________ Officer and Director
F. Quinn Stepan
</TABLE>
<TABLE>
<S> <C> <C>
F. Quinn Stepan, Jr. President, Chief Operating March 29, 1999
____________________________________ Officer and Interim
F. Quinn Stepan, Jr. Director
Walter J. Klein Vice President--Finance, March 29, 1999
____________________________________ Principal Financial and
Walter J. Klein Accounting Officer
James A. Hartlage Senior Vice President-- March 29, 1999
____________________________________ Technology and Operations
James A. Hartlage and Director
Thomas F. Grojean Director March 29, 1999
____________________________________
Thomas F. Grojean
Paul H. Stepan Director March 29, 1999
____________________________________
Paul H. Stepan
Robert D. Cadieux Director March 29, 1999
____________________________________
Robert D. Cadieux
Robert G. Potter Director March 29, 1999
____________________________________
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 29, 1999
9
<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, 1998, has been filed as an exhibit to this Annual Report on Form
10-K. Pages 21 through 36 of such Annual Report to Stockholders contain the
Consolidated Balance Sheets as of December 31, 1998 and 1997, the Consolidated
Statements of Income, Stockholders' Equity and Cash Flows and Notes to
Consolidated Financial Statements for the three years ended December 31, 1998,
1997 and 1996, 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 11 and 12
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.
10
<PAGE>
STEPAN COMPANY
SUPPLEMENTAL SCHEDULE TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
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>
1998 1997 1996
------ ------ ------
(In Thousands)
<S> <C> <C> <C>
Balance, Beginning of Year.............................. $2,121 $2,074 $1,744
Provision charged to income........................... 339 548 442
Accounts written off, net of recoveries............... (197) (501) (112)
------ ------ ------
Balance, End of Year.................................... $2,263 $2,121 $2,074
====== ====== ======
</TABLE>
11
<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, 1999. 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, 1999
12
<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 February 15,
1999.
(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)
(4)o Copy of Revolving Credit and Term Loan Agreement dated January 9,
1998, with The First National Bank of Chicago. (Note 11)
(4)p Copy of Term Loan Agreement dated October 1, 1998, with The
Northwestern Mutual Life Insurance Company and Connecticut General
Life Insurance Company.
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
(10)e Copy of Leveraged Employee Stock Ownership Plan. (Note 3)
(10)f Copy of the company's 1992 Stock Option Plan. (Note 5)
(13) Copy of the company's 1998 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, 1998.
(23) Consent of Independent Public Accountants.
(24) Power of Attorney.
(27) Financial Data Schedule.
</TABLE>
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.
11. Filed with the company's Annual report on Form 10-K for the year ended
December 31, 1997, and incorporated herein by reference.
</TABLE>
<PAGE>
AMENDED MAY 5, 1998
-------------------
AMENDED FEBRUARY 15, 1999
-------------------------
AMENDED AND RESTATED BY-LAWS
STEPAN COMPANY
A DELAWARE CORPORATION
----------------------
ARTICLE I
OFFICES
The registered office of the Corporation in the State of Delaware shall be
in the City of Wilmington, County of New Castle, and the name of the resident
agent in charge thereof shall be The Corporation Trust Company. The Corporation
may have such other offices, either within or without the State of Delaware, as
the business of the Corporation may require from time to time.
ARTICLE II
STOCKHOLDERS
SECTION 1. Annual Meeting. The annual meeting of the stockholders for
each year shall be held on such date and at such time as the Board of Directors
shall determine from time to time. At such meeting the stockholders entitled to
vote shall elect Directors, and transact such other business as may properly be
brought before the meeting. If the election of Directors shall not be held on
the day designated herein for any annual meeting, or at any adjournment thereof,
the Board of Directors shall cause the election to be held at a special meeting
of the stockholders as soon thereafter as conveniently may be.
SECTION 2. Special Meetings. Special meetings of the stockholders may be
called by the Chairman of the Board of Directors, by the Board of Directors, or
by the holders of shares of capital stock representing not less than one-third
of the voting power of all the outstanding shares of capital stock of the
Corporation.
SECTION 3. Place of Meeting. Meetings of the stockholders for the
election of Directors and for all other purposes shall be held at the
Corporation's Administrative Building in Northfield, Illinois or at such other
place within or without the State of Illinois, as the Board of Directors shall
designate.
SECTION 4. Advance Notification of Proposals at Stockholders' Meetings.
If a stockholder desires to submit a proposal for consideration at an annual or
special stockholders' meeting, or to
<PAGE>
nominate persons for election as directors at any stockholders' meeting duly
called for the election of directors,
written notice of such stockholder's intent to make such a proposal or
nomination must be given and received by the Secretary of the Corporation at the
principal executive offices of the Corporation either by personal delivery or by
United States mail not later than (i) with respect to an annual meeting of
stockholders, 90 days prior to the anniversary date of the immediately preceding
annual meeting, and (ii) with respect to a special meeting of stockholders, the
close of business on the tenth day following the date on which notice of such
meeting is first given to stockholders. Each notice shall describe the proposal
or nomination in sufficient detail for the proposal or nomination to be
summarized on the agenda for the meeting and shall set forth (i) the name and
address, as it appears on the books of the Corporation, of the stockholder who
intends to make the proposal or nomination; (ii) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
present such proposal or nomination; and (iii) the class and number of shares of
the Corporation which are beneficially owned by the stockholder. In addition, in
the case of a stockholder proposal, the notice shall set forth the reasons for
conducting such proposed business at the meeting and any material interest of
the stockholder in such business. In the case of a nomination of any person for
election as a director, the notice shall set forth: (i) the name and address of
any person to be nominated; (ii) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (iii) such other information
regarding such nominee proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission; and (iv) the consent of each nominee to
serve as a director of the Corporation if so elected. The presiding officer of
the annual or special meeting shall, if the facts warrant, refuse to acknowledge
a proposal or nomination not made in compliance with the foregoing procedure,
and any such proposal or nomination not properly brought before the meeting
shall not be transacted. Nothing contained in this Section shall be deemed to
decrease any time period set forth in the Securities Exchange Act of 1934, as
amended, or any rule or regulation of the Securities and Exchange Commission
thereunder.
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<PAGE>
SECTION 5. Notice of Stockholders' Meetings. Written or printed notice
stating the place, day and hour of the meeting, and, in case of a special
meeting, the purpose or purposes for which the meeting is called, shall be given
not less than ten (10) nor more than sixty (60) days before the date of the
meeting, or, in case of a merger or consolidation, not less than twenty (20) nor
more than sixty (60) days before the date of the meeting, either personally or
by mail, by or at the direction of the Chairman of the Board, the President, the
Secretary, or the persons calling the meeting, to each stockholder of record
entitled to vote at such meeting. If mailed, such notice shall be deemed to be
given when deposited in the United States mail and addressed to the stockholder
at his address as it appears on the records of the Corporation, with postage
thereon prepaid.
SECTION 6. Closing of Transfer Books and Fixing Record Date. The Board of
Directors or the Executive Committee shall have power to close the stock
transfer books of the Corporation for a period which shall not be more than
sixty (60) nor less than ten (10) days preceding the date of any meeting of
stockholders, or the date for payment of any dividend, or the date for the
allotment of rights, or the date when any change or conversion or exchange of
capital stock shall go into effect, or a date in connection with obtaining the
consent of stockholders for any purpose, or a date for the purpose of any other
lawful action. In lieu of closing the stock transfer books as aforesaid, the
Board of Directors or Executive Committee may fix in advance a date, which shall
not be more than sixty (60) nor less than ten (10) days preceding the date of
any meeting of stockholders, or the date for the payment of any dividend, or the
date for the allotment of rights, or the date when any change or conversion or
exchange of capital stock shall go into effect, or a date in connection with
obtaining the consent of stockholders for any purpose, or a date for the purpose
of any other lawful action, as a record date for the determination of
stockholders entitled to notice of, and to vote at, any such meeting and any
adjournment thereof, or entitled to receive payment of any such dividend, or to
any such allotment of rights, or to exercise the rights in respect of any such
change, conversion or exchange of capital stock, or to give such consent, or to
take such lawful action, and in such case such stockholders, and only such
stockholders, as shall be stockholders of record on the date so fixed shall be
entitled to such notice of, and to vote at, such meeting and any adjournment
thereof, or to receive payment of such dividend, or to receive such allotment of
rights, or to exercise such rights, or to give
3
<PAGE>
such consent, or to take such lawful action, as the case may be, notwithstanding
any transfer of any stock on the books of the Corporation after any such record
date fixed as aforesaid.
SECTION 7. Voting Lists. The office or agent having charge of the stock
ledgers of the Corporation shall prepare and make, at least ten (10) days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at said meeting of stockholders, arranged by class and series of capital
stock in alphabetical order within each series or class, and showing the address
of each stockholder and the number of shares of such series or class registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder for any purpose germane to the meeting during ordinary business
hours, for a period of at least ten (10) days prior to the meeting of
stockholders, either at a place within the city, town or village where the
meeting of stockholders is to be held, and which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where said meeting
is to be held, and the list shall also be produced and kept at the time and
place of the meeting of stockholders during the whole time thereof, and may be
inspected by any stockholder who is present thereat. The original or duplicate
share ledger or transfer book shall be the only evidence as to who are the
stockholders entitled to examine such list or share ledgers or transfer books or
to vote at any meeting of stockholders.
SECTION 8. Quorum and Voting. Holders of shares representing a majority
of the voting power of the outstanding shares of capital stock of the
Corporation entitled to vote at said meeting represented in person or by proxy,
shall constitute a quorum at any meeting of stockholders, except as otherwise
provided by law, the Certificate of Incorporation, or these by-laws. If a quorum
is present, (1) in all matters other than the election of directors, the
affirmative vote of holders of shares having a majority of the voting power of
the shares of capital stock present in person or represented by proxy at the
meeting and entitled to vote on the subject matter shall be the act of the
stockholders, unless the vote of a greater number is required by statute or by
the Certificate of Incorporation, and (2) directors shall be elected by a
plurality of the voting power of the shares of capital stock present in person
or represented by proxy at the meeting and entitled to vote on the election of
directors. If shares representing less than a majority of the voting power of
the outstanding shares of capital stock of the Corporation are represented at a
meeting of stockholders, shares with a majority
4
<PAGE>
of the voting power of the shares so represented may adjourn the meeting from
time to time without further notice.
SECTION 9. Voting of Shares. At each meeting of the stockholders, each
holder of capital stock, which shall, at the time, possess voting powers, shall
be entitled to vote, in person or by proxy, and shall have the number of votes
provided by the Certificate of Incorporation, any applicable Certificate of
Designation or as otherwise required by law for each such share of capital stock
registered in his name on the date the stock transfer books were closed
preceding such meeting for the purpose of determining stockholders entitled to
vote at said meeting, or on the record date fixed for the purpose of determining
stockholders entitled to vote at such meeting or, in the event that the stock
transfer books shall not be so closed or a record date so fixed, on the date
next preceding the date notice of such meeting was given; provided, however,
that, except where the stock transfer books shall have been so closed, or a
record date shall have been so fixed, no share of stock shall be voted on at any
election for Directors, which shall have been transferred on the books of the
Corporation within twenty days next preceding such election of Directors, and no
proxy shall be voted or acted upon after three years from its date unless such
proxy provides for a longer period. The vote for Directors and, upon the demand
of any stockholder entitled to vote, the vote upon any question before any
stockholders' meeting, shall be by ballot.
SECTION 10. Voting of Shares of Certain Holders. Shares standing in the
name of another corporation, domestic or foreign, may be voted by such officer,
agent, or proxy as the by-laws of such corporation may prescribe, or, in the
absence of such provision, as the Board of Directors of such corporation may
determine.
Shares standing in the name of a deceased person may be voted by his
administrator or executor, either in person or by proxy. Shares standing in the
name of a guardian, conservator, or trustee may be voted by such fiduciary,
either in person or by proxy .
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
5
<PAGE>
ARTICLE III
DIRECTORS
SECTION 1. General Powers. The property, business and affairs of the
Corporation shall be managed by its Board of Directors.
SECTION 2. Number and Tenure. The number of Directors shall be seven but
the number of Directors may, from time to time, be altered by amendment of these
by-laws. The Directors shall serve staggered three year terms. The Directors
shall be classified in respect to the time for which they shall severally hold
office, into three classes, each class to consist of one-third (1/3) in number
of the Directors as near as may be. At each annual election, the successors to
the class of Directors whose term expires in that year shall be elected for the
term of three years. The Directors shall be elected by the stockholders at the
stockholders' annual meeting, except as provided in Section 5 of this Article
III, and each Director elected shall hold office until his successor is duly
elected and qualified.
SECTION 3. Place of Meetings; Records. The Directors may hold their
meeting and have one or more offices and keep the books of the Corporation
(except the original or duplicate stock ledger) outside the State of Delaware at
such place or places as they may from time to time determine.
SECTION 4. General Powers. In addition to the powers and duties by these
by-laws expressly conferred upon them, the Board of Directors may exercise all
such powers of the Corporation and do all such lawful acts and things as are not
by statute, or by the Certificate of Incorporation, or by these by-laws directed
or required to be exercised or done by the stockholders.
SECTION 5. Vacancies. Except as otherwise provided by law, a vacancy in
the office of any Director, because of death, resignation, or otherwise, and
newly created directorships resulting from any increase in the authorized number
of Directors, may be filled by the vote of a majority of the remaining
Directors, though less than a quorum, and the Directors so chosen shall hold
office until the next annual meeting of the stockholders and until their
successors shall be duly elected and qualified.
SECTION 6. Regular Meetings. A regular annual meeting of the Board of
Directors shall be held as close in time after the annual meeting of
stockholders as is convenient. In addition, the Board of Directors
6
<PAGE>
shall hold at least three other regular meetings in each year. Notice of all
regular meetings shall be given as provided in Section 8 of this Article and
such meetings shall be held at such place, either within or without the State of
Delaware, as may be designated in such notice. All regular meetings shall be
called by or at the request of the Chairman or the President.
SECTION 7. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the Chairman, the President, or any two
Directors. The person or persons authorized to call special meetings of the
Board of Directors may fix any place, either within or without the State of
Delaware, as the place for holding any special meeting of the Board of Directors
called by them.
SECTION 8. Notice. Notice of any regular meeting shall be given at least
three days previously thereto and notice of any special meeting shall be given
at least ten days previously thereto. Such notice shall be in writing and shall
be given personally or mailed or telegraphed or telexed to each Director at his
business address or at such other address as he shall specify to the Secretary.
If mailed, such notice shall be deemed to be given when deposited in the United
States mail in a sealed envelope so addressed, with postage thereon prepaid. If
notice be given by telegram, such notice shall be deemed to be given when the
telegram is delivered to the telegraph company. If notice be given by telex,
such notice shall be deemed to be given when transmitted. Any Director may waive
notice of any meeting. The attendance of a Director at any meeting shall
constitute a waiver of notice of such meeting, except where a Director attends a
meeting for the express purpose of objecting, at the beginning of the meeting to
the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
SECTION 9. Quorum. A majority of the Board of Directors shall constitute
a quorum for the transaction of business at any meeting of the Board of
Directors (provided, however, that if the Board of Directors shall have fewer
than three (3) members, a quorum shall consist of two (2) of such members),
provided that, if less than a quorum of the Directors are present at said
meeting, a majority of the Directors present may adjourn the meeting from time
to time without further notice.
7
<PAGE>
SECTION 10. Manner of Acting. Except where otherwise provided in these
by-laws, the act of the majority of the Directors present at a meeting at which
a quorum is present shall be the act of the Board of Directors.
SECTION 11. Compensation. Directors regularly in the employ of the
Corporation shall not receive compensation for their services as Directors or as
members of any committee of the Board of Directors on which they serve.
Directors not regularly in the employ of the Corporation shall be paid
reasonable compensation for services as directors and as members of any
committee of the Board of Directors on which such Directors serve, which shall
be fixed by resolution of the Board of Directors. Directors shall be reimbursed
for reasonable expenses incurred in attending meetings of the Board of Directors
and meetings of committees appointed by the Board of Directors. Nothing herein
contained shall be construed to preclude any Director from serving the
Corporation in any other capacity and receiving compensation therefor.
ARTICLE IV
COMMITTEES
SECTION 1. Executive Committee. (a) The Board of Directors of the
Corporation at any regular or special meeting called for such purpose may (in
its discretion), by resolution adopted by a majority of the whole Board,
designate three (3) or more Directors, two of whom shall be the Chairman of the
Board and the President of the Corporation, to constitute an Executive
Committee. Vacancies in the Executive Committee may be filled by the Board of
Directors. Each member of the Executive Committee shall hold office until his
successor shall have been duly elected, or until his death, or until he shall
resign or shall have been removed from the Executive Committee by the Board, or
shall cease to be a Director. Any member of the Executive Committee may be
removed by resolution adopted by a majority of the whole Board of Directors
whenever in its judgment the best interests of the Corporation would be served
thereby. The compensation, if any, of members of the Executive Committee shall
be established by resolution of the Board of Directors.
(b) The Executive Committee shall have and may exercise all of the
authority of the Board of Directors in the management of the
8
<PAGE>
Corporation, provided such committee shall not have the authority of the Board
of Directors in reference to amending the Certificate of Incorporation, adopting
a plan of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the property and assets of the
Corporation, recommending to the stockholders a dissolution of the Corporation
or a revocation thereof or amending the by-laws of the Corporation. The
Executive Committee shall have the power to authorize the seal of the
Corporation to be affixed to all papers which may require it. The Secretary of
the Corporation shall act as Secretary to the Executive Committee and keep full
and complete minutes of its meetings. Minutes of all meetings of the Executive
Committee shall be transmitted to the Directors of the Corporation as soon as
possible after such meetings but in no event later than the meeting of the Board
following the meeting of the Executive Committee. The minute books of the
Executive Committee shall at all times be open to the inspection of any
Director.
(c) The Executive Committee shall meet at the call of the President, or of
any two members of the Executive Committee. A majority of the members of the
Executive Committee shall constitute a quorum for the transaction of business
(provided, however, that if the Executive Committee shall have fewer than three
(3) members, a quorum shall consist of two (2) of such members) and the act of a
majority of those present shall constitute the act of the Committee.
SECTION 2. Audit Committee. (a) The Board of Directors of the Corporation
at any regular or special meeting shall, by resolution adopted by a majority of
the whole Board, designate three or more independent directors to constitute an
Audit Committee and appoint one of the directors so designated as the chairman
of the Audit Committee. Membership on the Audit Committee shall be restricted to
those Directors who are independent of the management of the Corporation and are
free from any relationship that, in the opinion of the Corporation's Board of
Directors, would interfere with the exercise of the independent judgment as a
member of the committee. Vacancies in the committee may be filled by the Board
of Directors. Each member of the committee shall hold office until his successor
shall have been duly elected, or until his death, or until he shall resign or
shall have been removed from the Audit Committee by the Board, or shall cease to
be a Director. Any member of the Audit Committee may be removed from the
committee by resolution adopted by a majority of the whole Board of Directors
whenever in
9
<PAGE>
its judgment (1) such person is no longer an independent Director or free from
any relationship with the Corporation or any of its officers prohibited by this
section, or (2) the best interests of the Corporation would be served thereby.
The compensation, if any, of members of the committee shall be established by
resolution of the Board of Directors.
(b) The Audit Committee shall be responsible for recommending to the Board
of Directors the appointment or discharge of independent auditors; reviewing
with management and the independent auditors the terms of engagement of
independent auditors, including the fees, scope and timing of the audit and any
other services rendered by such independent auditors; reviewing with independent
auditors and management the Corporation's policies and procedures with respect
to internal auditing, accounting and financial controls, and dissemination of
financial information; reviewing with management, the independent auditors and
the internal auditors, the Corporation's financial statements, audit results and
reports and the recommendations made by the auditors with respect to changes in
accounting procedures and internal controls; reviewing the results of studies of
the Corporation's system of internal accounting controls; and performing any
other duties or functions deemed appropriate by the Board of Directors. The
committee shall have such powers and rights as may be necessary or desirable to
fulfill these responsibilities including, the power and right to consult with
legal counsel and to rely upon the opinion of such legal counsel. The Audit
Committee is authorized to communicate directly with the Corporation's financial
officers and employees, internal auditors and independent auditors on such
matters as it deems desirable and to have the internal auditors and independent
auditors perform such additional procedures as it deems appropriate. The Audit
Committee shall periodically report to the Board of Directors on its activities.
(c) Minutes of all meetings of the Audit Committee shall be submitted to
the Board of Directors of the Corporation. The minute book of the committee
shall at all times be open to the inspection of any Director.
10
<PAGE>
(d) The Audit Committee shall meet at the call of its chairman or any two
members of the committee. A majority of the members of the Audit Committee shall
constitute a quorum for the transaction of business (provided, however, that if
the Audit Committee shall have fewer than three (3) members, a quorum shall
consist of two (2) of such members) and the act of a majority of those present
shall constitute the act of the committee.
SECTION 3. Compensation and Development Committee. (a) The Board of
Directors of the Corporation at any regular or special meeting shall, by
resolution adopted by a majority of the whole Board, designate three or more
Directors to constitute a Compensation and Development Committee and appoint one
of the Directors so designated as the chairman of the Compensation and
Development Committee. Membership on the Compensation and Development Committee
shall be restricted to disinterested persons which for this purpose shall mean
any Director, who, during the time he is a member of the Compensation and
Development Committee is not eligible, and has not at any time within one year
prior thereto been eligible, for selection to participate in any of the
compensation plans administered by the Compensation and Development Committee.
Vacancies in the committee may be filled at any meeting of the Board of
Directors. Each member of the committee shall hold office until his successor
shall have been duly elected, or until his death or resignation, or until he
shall have been removed from the committee by the Board of Directors, or until
he shall cease to be a Director or a disinterested person. Any member of the
Compensation and Development Committee may be removed by resolution adopted by a
majority of the whole Board of Directors whenever in its judgment the best
interests of the Corporation would be served thereby. The Compensation and
Development Committee shall meet at the call of its chairman or any two members
of the committee. A majority of the members of the Compensation and Development
Committee shall constitute a quorum (provided, however, that if the Compensation
and Development Committee shall have fewer than three (3) members, a quorum
shall consist of two (2) of such members) and an act of the majority of those
present shall constitute the act of the Compensation and Development Committee.
The compensation, if any, of members of the committee shall be established by
resolution of the Board of Directors.
(b) The Compensation and Development Committee shall administer the
Corporation's stock option and incentive compensation plans and all other plans
which by their terms provide for administration by the Compensation and
Development Committee. The Compensation and Development Committee shall have the
power and authority vested in it by any plan of the Corporation which the
committee administers. The Compensation and Development Committee shall from
time to time recommend to the Board of Directors the compensation of the
officers of the Corporation. The Compensation and Development Committee shall
also make recommendations to the Board of Directors with regard to the
11
<PAGE>
compensation of members of the Board of Directors and its committees except the
Compensation and Development Committee.
SECTION 4. Nominating Committee. (a) The Board of Directors of the
Corporation at any regular or special meeting may, by resolution adopted by a
majority of the whole Board, designate three or more directors to constitute a
Nominating Committee and appoint one of the Directors so designated as the
chairman of the Nominating Committee. The majority of the members of the
Nominating Committee shall be persons who are not, during the time they are
members of the Nominating Committee, either officers or employees of the
Corporation. Vacancies in the committee may be filled by the Board of Directors.
Each member of the committee shall hold office until his successor shall have
been duly elected, or until his death or resignation, or until he shall have
been removed from the committee by the Board of Directors, or until he shall
cease to be a Director. Any member of the Nominating Committee may be removed by
resolution of the whole Board of Directors whenever in its judgment the best
interests of the Corporation would be served thereby. The Nominating Committee
shall meet at the call of its chairman or any two members of the committee. A
majority of the members of the Nominating Committee shall constitute a quorum
(provided, however, that if the Nominating Committee shall have fewer than three
(3) members, a quorum shall consist of two (2) of such members) and an act of
the majority of those present shall constitute the act of the Nominating
Committee. The compensation, if any, of members of the committee shall be
established by resolution of the Board of Directors.
(b) Before the annual meeting of the stockholders of the Corporation, and
before any special meeting of stockholders at which Directors are to be elected,
the Nominating Committee shall recommend to the Board of Directors the names of
individuals for submission to the stockholders in the Corporation's proxy
material as the Board's nominees for election as Directors of the Corporation
for which the Board is soliciting proxies. From time to time, the Nominating
Committee shall make recommendations to the Board of nominees to fill vacancies
on the Board of Directors as they occur. The Nominating Committee shall also,
from time to time, consider and make recommendations to the Board with regard to
increases or decreases in the size of the Board.
(c) Nothing in this by-law is intended to prevent any individual Director
from making a recommendation of a person to be a Director of the Corporation
either to the Nominating Committee or to the Board.
SECTION 5. Additional Committees. The Board of Directors may, by
resolution adopted by a majority of the whole Board, from time to time create
and appoint such committees in addition to the Executive, Audit, Compensation
and Development, and Nominating Committees as it deems desirable. Each
additional committee shall bear such designation,
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shall have such powers, and shall perform such duties, not inconsistent with
these by-laws or with law, as may be assigned to it by the Board of Directors;
provided that no such additional committee may exercise the powers of the Board
of Directors in the management of the business and affairs of the Corporation
except such as shall be expressly delegated to it. The Board of Directors shall
have the power to change the members of any such additional committee at any
time, to fill vacancies, and to discharge any such additional committee at any
time. The compensation, if any, of members of any such committee shall be
established by resolution of the Board of Directors. A majority of the members
of any such committee shall constitute a quorum for the transaction of business
(provided, however, that if such committee shall have fewer than three (3)
members, a quorum shall consist of two (2) of such members) and the act of a
majority of those present shall constitute the act of such committee.
ARTICLE V
OFFICERS
SECTION 1. Number. The officers of the Corporation shall be a Chairman of
the Board, President, one or more Vice-Presidents (the number thereof to be
determined by the Board of Directors), a Treasurer, a Secretary, a Controller,
and such Assistant Treasurers, Assistant Secretaries, and other officers as
shall be elected or appointed by the Board of Directors. More than one office
may be held by the same individual.
SECTION 2. Election and Term of office. The officers of the Corporation
shall be elected annually by the Board of Directors at the first meeting of the
Board of Directors held after each annual meeting of stockholders. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as conveniently may be. Each officer shall hold office
until his successor shall have been duly elected and shall have qualified or
until his death or until he shall resign or shall have been removed in the
manner hereinafter provided.
SECTION 3. Removal. Any officer or agent elected or appointed by the
Board of Directors may be removed by the Board of Directors whenever in its
judgment the best interests of the Corporation would be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the person
so
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removed. Election or appointment of an officer or agent shall not of itself
create contract rights.
SECTION 4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise, may be filled by the Board
of Directors for the unexpired portion of the term, and new offices may be
created and filled by the Board of Directors.
SECTION 5. Chairman of the Board. The Chairman of the Board of Directors
shall be the chief executive officer of the corporation. He shall, subject to
the provisions of these by-laws and to the direction of the Board of Directors,
have general supervision and control over the business affairs and properties of
the corporation and of the activities of its several officers. He may delegate
to any officer, agent or employee of the corporation such of his duties and
authority as in his judgment is in the best interests of the corporation or is
necessary for the conduct of its affairs. The Chairman of the Board shall
preside at all meetings of the stockholders and of the Board of Directors, and
shall see that all orders and resolutions adopted by such bodies are carried
into effect.
SECTION 6. President. The President shall be the chief operating officer
of the corporation and, subject to the direction of the Board of Directors and
of the Chairman of the Board of Directors, shall have general charge of all
operating divisions and subsidiaries of the corporation and of such related
staff functions as the Chairman of the Board shall designate from time to time.
In the absence or disability of the Chairman of the Board, the President shall
preside at all meetings of the stockholders and of the Board of Directors.
SECTION 7. The Chairman of the Board of Directors and the President shall
each be empowered to sign, with the Secretary or any other proper officer of the
corporation thereunto authorized by the Board of Directors, certificates for
shares of stock of the corporation and they each shall have general power to
execute deeds, mortgages, bonds, contracts and other instruments, except in
cases where the signing and execution thereof shall be expressly delegated by
the Board of Directors or by these by-laws to some other officer or agent of the
Corporation.
SECTION 8. The Vice Presidents. The Vice Presidents shall have such
duties and powers as shall be designated from time to time by the Board of
Directors or by the Chairman of the Board of
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Directors. They may be given additional title designations descriptive of their
general duties. In the absence of the President, or in the event of his
inability or his refusal to act, the Board of Directors shall assign to any Vice
President the duty of acting for the President, and such Vice President shall
have all the powers of the President and be subject to all the restrictions upon
the President. Any Vice President may sign, with the Secretary or an Assistant
Secretary, certificates for shares of the Corporation.
SECTION 9. The Treasurer. The Treasurer, together with such other
officers of the Corporation as may be designated by the Board of Directors,
shall deposit all moneys and other valuable effects of the Corporation in the
name and to the credit of the Corporation in such depositories as may be
designated by the Board of Directors, and shall disburse funds of the
Corporation, taking proper vouchers for such disbursements. In general, the
Treasurer shall perform the duties usually incident to the office of treasurer,
and such other duties as may from time to time be assigned to him by the Board
of Directors, the Chairman of the Board, the President, or by such Vice
President as shall be designated as the chief financial officer of the
Corporation.
SECTION 10. The Secretary. The Secretary shall: (a) keep the minutes of
all meetings of the stockholders, the Board of Directors, and the Executive
Committee in one or more books provided for that purpose, and shall perform like
duties for other committees of the Board when requested by such committees; (b)
see that all notices are duly given in accordance with the provisions of these
by-laws or as required by law; (c) be custodian of the corporate records and of
the seal of the Corporation and see that the seal of the Corporation is affixed
to all certificates for shares prior to the issue thereof and to all documents,
the execution of which on behalf of the Corporation under its seal is duly
authorized in accordance with the provisions of these by-laws; (d) keep a
register of the post office address of each stockholder; (e) sign with the
Chairman of the Board of Directors, the President, or a Vice President,
certificates for shares of the Corporation, the issue of which shall have been
authorized by resolution of the Board of Directors; (f) have general charge of
the stock transfer books of the Corporation; and (g) in general, perform all
duties incident to the office of secretary and such other duties as from time to
time may be assigned to him by the Board of Directors, the Chairman of the
Board, or by the President.
SECTION 11. The Controller. The Controller shall maintain adequate
records of all assets, liabilities and other financial transactions of the
Corporation and, in general, shall perform all duties incident to the office of
Controller and such other duties as from time to time may
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be assigned to him by the Board of Directors, the Chairman of the Board, the
President, or the Vice President-Finance.
SECTION 12. Assistant Treasurers and Assistant Secretaries. The Assistant
Secretaries as thereunto authorized by the Board of Directors may sign with the
Chairman of the Board of Directors, the President or a Vice President
certificates for shares of the Corporation, the issue of which shall have been
authorized by a resolution of the Board of Directors. The Assistant Treasurers
and Assistant Secretaries, in general, shall perform such duties as shall be
assigned to them by the Vice President-Finance, the Treasurer, or the Secretary,
respectively.
SECTION 13. Salaries. The salaries of the officers shall be fixed from
time to time by the Board of Directors.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. Contracts. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances. However, each of the Chairman
of the Board, President, and any Senior Vice President of the Corporation, and
any of them, are specifically empowered to execute the following documents or
instruments in the ordinary course of business by and on behalf of the
Corporation.
(a) Powers of attorney appointing persons, firms or corporations as
attorney-in-fact of the Corporation, which powers of attorney may be necessary
or appropriate in connection with the import or export of goods by or for the
Corporation.
(b) Deeds or other instruments or conveyance conveying real property or
interests therein to or from the Corporation if such real property or interests
therein have a value or purchase price not in excess of $500,000.
(c) Leases pursuant to which the Corporation leases, as lessor or lessee,
property (real, personal or mixed) if such leases call for the payment by or to
the Corporation of rental in the amount of not more than $100,000 per year.
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(d) Any and all other written agreements, documents or instruments deemed
necessary or appropriate to the conduct of the business of the Corporation in
the ordinary course, and within the ordinary or customary duties of the Vice
President executing the same.
SECTION 2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors. Such authority may be
general or confined to specific instances. However, each of the Chairman of the
Board, the President, the Vice President-Finance, and the Treasurer of the
Corporation, and any of them, is authorized to borrow funds in the ordinary
course of business and to execute the necessary related documents or instruments
by and on behalf of the Corporation:
(a) up to the maximum amount provided in any agreement previously approved
by the Board of Directors;
(b) or up to a maximum of $500,000 on open account, under a line of
credit, or under an agreement not previously authorized by the Board of
Directors.
SECTION 3. Checks, Drafts, etc. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation, shall be signed by such officer or officers, agent or
agents of the Corporation and in such manner as shall from time to time be
determined by resolution of the Board of Directors.
SECTION 4. Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board of Directors may
select.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. Certificates representing shares of stock of the Corporation
shall be in such form as may be determined from time to time by the Board of
Directors or by the Executive Committee. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by, or in the name of
the Corporation by, the Chairman of the Board of Directors, the President, or a
17
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Vice-President and the Secretary or an Assistant Secretary of the Corporation,
certifying the number of shares owned by him in the Corporation. If the
Corporation shall be authorized to issue more than one class of stock or more
than one series of any class, designations, preferences and relative,
participating, optional and other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions on such
preferences and rights shall be set forth in full or summarized on the face or
back of the certificate which the Corporation shall issue to represent such
class or series of stock; provided, however, that, to the full extent allowed by
law, in lieu of the foregoing requirements, there may be set forth on the face
or back of the certificate which the Corporation shall issue to represent such
class or series of stock, a statement that the Corporation will furnish without
charge to each stockholder who so requests the designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and rights. If such certificate is countersigned (1) by a transfer
agent other than the Corporation or its employee or (2) by a registrar other
than the Corporation or its employee, any other signature on the certificate may
be a facsimile. In case any person who has signed or whose facsimile signature
has been placed upon any such certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if he were such officer, transfer
agent or registrar at the date of issue. All certificates for shares in the
Corporation of the same class and series shall be consecutively numbered. The
name of the person owning the shares of stock represented thereby with the
number of shares and date of issue shall be entered on the books of the
Corporation. All certificates surrendered to the Corporation for transfer shall
be cancelled and no new certificate shall be issued until the former certificate
for a like number of shares shall have been surrendered and cancelled, except
that in the case of a lost, destroyed or mutilated certificate, a new one may be
issued therefore upon such terms and indemnity to the Corporation as the Board
of Directors may prescribe.
SECTION 2. Transfers of shares of stock of the Corporation shall be made
on the books of the Corporation only by the person named in the certificates
evidencing such shares of stock or his successor or assignee, or by such
person's attorney lawfully constituted in writing, and upon surrender of such
certificates
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and delivery to the Corporation of proper evidence of succession, assignment or
other authority, to transfer.
SECTION 3. The Corporation shall be entitled to treat the holder of record
of any share or shares of stock as the holder in fact thereof and, accordingly,
shall not be bound to recognize any equitable or other claim to, or interest in,
such share or shares on the part of any other person, whether or not the
Corporation shall have express or other notice thereof, save as expressly
provided by the laws of the State of Delaware.
SECTION 4. The Board of Directors or the Executive Committee may from time
to time appoint a Transfer Agent and Registrar in one or more cities, may
require all certificates evidencing shares of stock of the Corporation to bear
the signatures of a Transfer Agent or Registrar, and may provide that such
certificates shall be transferable in more than one city.
SECTION 5. The Board of Directors may authorize the Transfer Agent and
Registrars of the Corporation to issue and register, respectively, new
certificates in place of any certificates alleged to have been lost, stolen or
destroyed, and in its discretion and as a condition precedent to the issuance
thereof, may prescribe such terms and conditions as it deems expedient, and may
require such indemnities as it deems necessary to protect the Corporation and
said Transfer Agents and Registrars.
ARTICLE VIII
FISCAL YEAR
The fiscal year of the Corporation shall begin on the first day of January
and end on the thirty-first day of December in each year.
ARTICLE IX
DIVIDENDS
Dividends on the capital stock of the Corporation may be declared by the
Board of Directors at any meeting, regular or special, pursuant to law and to
the provisions of the Corporation's certificate of incorporation.
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ARTICLE X
INDEMNIFICATION OF OFFICERS AND DIRECTORS
SECTION 1. The Corporation shall indemnify, in accordance with and to the
full extent now or hereafter permitted by law, any person who was a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(including, without limitation, an action by or in the right of the
Corporation), by reason of his acting as a director or officer of the
Corporation (and the Corporation, in the discretion of the Board of Directors,
may so indemnify a person by reason of the fact that he is or was an employee of
the Corporation or is and was serving at the request of the Corporation in any
other capacity for or on behalf of the Corporation) against any liability or
expense actually and reasonably incurred by such person in respect thereof. Such
indemnification is not exclusive of any other right to indemnification provided
by law or otherwise. The right to indemnification conferred by this Section
shall be deemed to be a contract between the Corporation and each person
referred to herein.
SECTION 2. The indemnification provided by this Article shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any by-law, agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, officer, employee or agent and shall insure to
the benefit of the heirs, executors and administrators of such person.
SECTION 3. The Corporation may purchase and maintain insurance on behalf
of any person who is or was a Director, officer, employee or agent of the
corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not he would be entitled to indemnity against such liability under
the provisions of this Article.
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SECTION 4. No amendment to or repeal of these provisions shall apply to or
have any effect on the liability or alleged liability of any person for or with
respect to any acts or omissions of such person occurring prior to such
amendment.
ARTICLE XI
WAIVER OF NOTICE
Whenever any notice whatever is required to be given under the provisions
of these by-laws or under the provisions of the Certificate of Incorporation or
under the provisions of law, waiver thereof in writing, signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice.
ARTICLE XII
CORPORATE SEAL
The corporate seal shall have inscribed thereon the name of the
Corporation, the year of its organization and the words "Corporate Seal,
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced otherwise.
ARTICLE XIII
SEVERABILITY OF PROVISIONS
If any provision of these by-laws, or the application thereof to any person
or circumstances, is held invalid, the remainder of these by-laws, and the
application of such provision to other persons or circumstances, shall not be
affected thereby.
ARTICLE XIV
AMENDMENTS
These by-laws may be altered, amended or repealed and new by-laws may be
adopted by the Board of Directors.
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================================================================================
STEPAN COMPANY
_____________________________________________
$30,000,000 6.59% Promissory Notes,
Due October 1, 2013
_____________________________________________
LOAN AGREEMENT
Dated as of October 1, 1998
================================================================================
<PAGE>
TABLE OF CONTENTS
(not part of Agreement)
-----------------------
SECTION HEADING PAGE
LOAN AGREEMENT
Section 1. The Notes and Commitment................................... 1
Section 2. Representations and Warranties............................. 2
Section 3. Acquisition for Investment................................. 8
Section 4. Conditions of Closing...................................... 8
Section 5. Use of Proceeds............................................ 11
Section 6. Method and Place of Payment of Principal,
Premium and Interest.................................... 11
Section 7. Statements, Reports and Certificates to Be Delivered
by the Company.......................................... 12
Section 8. Registered Notes........................................... 15
Section 9. Payments of Certain Expenses by the Company................ 15
Section 10. Survival of Covenants; Successors and Assigns.............. 16
Section 11. No Oral Change............................................. 16
Section 12. Communications and Notices................................. 16
Section 13. Law Governing.............................................. 17
Section 14. Headings................................................... 17
Signature Page............................................................... 18
PROMISSORY NOTES - EXHIBIT A................................................. 1
Section 1. The Notes.................................................. 1
Section 2. Exchanges.................................................. 1
Section 3. Payments to Registered Holder.............................. 2
Section 4. Prepayment of Notes........................................ 2
(A) Required Prepayments....................................... 2
(B) Optional Prepayments without Premium....................... 2
(C) Optional Prepayment with Premium........................... 2
(D) Prepayment on Failure of Holders to Consent to
Change of Control....................................... 4
Section 5. Partial Prepayments to be Pro Rata where More than
One Note Outstanding.................................... 4
Section 6. Notice of Prepayment and Other Notices..................... 5
(A) Prepayment Notice.......................................... 5
(B) Mailing of Notices......................................... 5
Section 7. Notes Due and Interest Ceases on Prepayment Date;
Evidence of Partial Prepayment; New Notes............... 5
Section 8. Affirmative Covenants...................................... 6
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<PAGE>
(A) Maintenance of Office or Agency............................ 6
(B) Payment of Principal, Premium and Interest................. 6
(C) Maintenance of Corporate Existence......................... 6
(D) Properties................................................. 7
(E) Insurance.................................................. 7
(F) Payment of Taxes, Assessments, Etc......................... 7
(G) Payment of Indebtedness.................................... 8
(H) Keeping of Books........................................... 8
(I) Compliance with Law........................................ 8
(J) Notice of Default.......................................... 8
(K) Notice of Change of Control................................ 9
(L) Year 2000 Compliance....................................... 9
Section 9. Negative Covenants......................................... 9
(A) Limitations on Funded Indebtedness......................... 9
(B) Limitations on Restricted Subsidiaries..................... 10
(C) Limitations on Liens....................................... 11
(D) Limitations on Guaranties.................................. 14
(E) Limitation on Investments.................................. 14
(F) Limitation on Dividends.................................... 15
(G) Limitations on Dispositions of Stock or
Indebtedness of Restricted Subsidiaries................. 16
(H) Maintenance of Consolidated Current Assets................. 16
(I) Limitations on Mergers, Consolidations and
Sales of Assets......................................... 16
(J) Limitations on Sale-and-Leasebacks......................... 17
(K) Limitation on Rentals...................................... 17
(L) Transactions with Affiliates............................... 18
(M) Compliance with ERISA...................................... 18
Section 10. Consents, Waivers and Modifications........................ 19
Section 11. Definitions................................................ 19
Section 12. Events of Default and Remedies............................. 26
Section 13. No Waiver.................................................. 29
Section 14. Loss, Theft, Destruction or Mutilation of Note............. 29
Section 15. Governing Law.............................................. 29
Section 16. Successors and Assigns..................................... 29
Section 17. Headings................................................... 29
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<PAGE>
Description of Properties,
Subsidiaries, Pending Litigation, etc.
(Exhibit B to Loan Agreement)
Legal Proceedings
(Exhibit C to Loan Agreement)
<PAGE>
STEPAN COMPANY
Edens at Winnetka Avenue
Northfield, Illinois 60093
LOAN AGREEMENT
Dated as of October 1, 1998
To the Institution Listed
on Schedule I Attached Hereto
Which is a Signatory to This
Agreement
Ladies and Gentlemen:
The undersigned, Stepan Company, a Delaware corporation (herein called the
"Company"), agrees with you as follows:
Section 1. The Notes and Commitment.
(A) Authorization and Description of Notes. The Company proposes to
authorize borrowings in the aggregate principal amount of $30,000,000, such
borrowings to be evidenced by the 6.59% Promissory Notes of the Company (the
"Notes"), to be dated as of the date of issue, to bear interest from such date
at the rate of 6.59% per annum payable semi-annually on the first day of each
April and October in each year (commencing on the first of such dates after the
date hereof), to be expressed to mature on October 1, 2013 and to have the other
terms and provisions and to be substantially in the form attached to this
agreement as Exhibit A. The term "Notes" as used in this agreement shall include
each promissory note delivered under this agreement and the other agreements
referred to in paragraph (C) of this section 1, and each promissory note
delivered in substitution or exchange for any such promissory note, and, where
applicable, shall include the singular number as well as the plural. The term
"Note" shall mean one of the Notes. Each term defined in Exhibit A shall have
such defined meaning for the purpose of this agreement unless this agreement
otherwise requires.
(B) The Loans and Closing Date. Subject to the terms and conditions of
this agreement and on the basis of the representations and warranties
hereinafter set forth, the Company hereby agrees to borrow from you, and you
hereby agree to lend to the Company, on October 1, 1998, or such other date as
shall be mutually agreed upon (the "Closing Date"), the aggregate principal
amounts to be evidenced by Notes as set forth opposite your name on Schedule I.
The loans will be made at the offices of Chapman and Cutler, 111 W. Monroe
Street, Chicago, Illinois 60603, at 11:00 A.M. Chicago time on the Closing Date
in Federal or other funds current and immediately available at The First
National Bank of Chicago (ABA No. 071000013), One First National Plaza, Chicago,
Illinois 60670, against delivery of Notes in the aggregate principal amount of
the loans then scheduled to be made by you.
<PAGE>
Stepan Company Loan Agreement
The Notes to be delivered to you on the Closing Date will be in the form of
one Note in the aggregate principal amount of the loan specified to be made by
you on the Closing Date, registered in your name or in the name of such nominee
all as you may specify at any time prior to the date fixed for delivery.
(C) Other Agreements. Simultaneously with the execution and delivery of
this agreement, the Company is entering into substantially identical agreements
with the other lenders listed on Schedule I under which such other lenders agree
to lend to the Company the principal amounts set opposite such lenders' names in
Schedule I and your obligations and the obligations of the Company hereunder are
subject to the execution and delivery of substantially identical agreements by
the other lenders. The obligations of each lender shall be several and not joint
and no lender shall be liable or responsible for the acts of any other.
Section 2. Representations and Warranties.
The Company represents and warrants that:
(A) Financial Statements. The consolidated balance sheets of the
Company and its subsidiaries for the last five fiscal years of the Company
ending December 31, 1997, and the consolidated statements of income and
changes in financial position or cash flows of the Company and its
subsidiaries for such fiscal years, including in each case the related
schedules and notes, all accompanied by the opinion of Arthur Andersen &
Co., independent certified public accountants, and the consolidated balance
sheet of the Company and its subsidiaries for the fiscal quarter of the
Company ending June 30, 1998, and the consolidated statements of income and
cash flows of the Company and its subsidiaries for such three month period,
copies of all of which balance sheets and statements have heretofore been
delivered to you, were prepared in accordance with good accounting practice
consistently applied throughout the periods involved, are correct and
complete and fairly present the financial position and results of
operations of the Company and its subsidiaries for each such fiscal year
and, subject to year end audit, for such quarterly fiscal period. There has
been no change in the financial condition of the Company and its
subsidiaries as shown on its latest audited consolidated balance sheet,
other than changes in the ordinary course of business which have not, in
the aggregate, been materially adverse.
(B) Business. You have heretofore been furnished with copies of (x)
the annual report as filed with the Securities and Exchange Commission on
Form 10-K for year ended December 31, 1997 (the "10-K") which generally
sets forth the business conducted and proposed to be conducted by the
Company and its subsidiaries and (y) the quarterly report as filed with the
Securities and Exchange Commission on Form 10-Q for the quarterly fiscal
period ended June 30, 1998 (the "10-Q").
(C) Properties and Subsidiaries. Exhibit B to this agreement
correctly sets forth (1) a brief description of the properties (including
material leaseholds) of the Company, (2) the jurisdiction or jurisdictions
in which the Company is incorporated or owns property or conducts its
business, and a statement as to whether the Company is
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<PAGE>
Stepan Company Loan Agreement
qualified or licensed as a foreign corporation in each jurisdiction, other
than the jurisdiction of its incorporation, in which it owns property or
conducts business, (3) a list of the subsidiaries of the Company showing in
each case the number of shares of stock of each class outstanding and the
shares of each class as of the date hereof owned by the Company, and (4) a
list of the subsidiaries of the Company which the Company hereby designates
as restricted subsidiaries pursuant to paragraph (U) of section 11 of the
Notes.
(D) No Material Adverse Changes. Since December 31, 1997 neither the
business or operations of the Company or any of its subsidiaries nor the
properties or assets of the Company and its subsidiaries, taken as a whole,
have been materially and adversely affected in any way as the result of any
act or event, including, without limitation: fire, explosion, flood,
drought, storm, earthquake, accident or act of God; strike, lockout,
combination of workmen or other disturbance; riot, atomic explosion,
activity of armed forces or of the public enemy; or embargo,
nationalization, condemnation, requisition or taking of property or
cancellation or modification of contracts by any domestic or foreign
government.
(E) No Pending Material Litigation or Proceedings. Except as
disclosed in Exhibit C attached to this agreement, there are no actions,
suits or proceedings pending or, to the best knowledge and belief of the
Company, threatened against or affecting the Company, at law or in equity
or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic
or foreign, which may result in any material adverse change in the
business, properties or assets or in the condition, financial or otherwise,
of the Company. The Company is not (1) in default with respect to any
order, writ, injunction or decree of any court or (2) in default in any
material respect under any order, regulation (including but not limited to
any environmental regulation), permit, license or demand of any federal,
state, municipal or other governmental agency, the consequences of which
would materially and adversely affect the business, properties or assets or
the condition, financial or otherwise, of the Company.
(F) Valid Organization and Good Standing of the Company. The Company
is a duly and validly organized and existing corporation in good standing
under the laws of its jurisdiction of incorporation and is duly licensed or
qualified and in good standing as a foreign corporation in all other
jurisdictions where the ownership or leasing of property or the nature of
business transacted makes such qualification necessary, and is entitled to
own its properties and assets, and to carry on its business, all as, and in
the places where, such properties and assets are now owned or operated or
such business is now conducted or presently proposed to be conducted. The
Company does not own any real property located outside of its jurisdiction
of incorporation or jurisdictions in which it is duly qualified to do
business as a foreign corporation and is not doing business outside of such
jurisdictions of a character which would require such qualification. The
Company has made payment of all franchise and similar taxes in its
jurisdiction of incorporation, and in all of the respective jurisdictions
in which it is qualified as a foreign corporation, insofar as such taxes
are due and payable at the date of this agreement, except for any such
taxes the validity of which is
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Stepan Company Loan Agreement
being contested in good faith and for which proper reserves have been set
aside on the books of the Company.
(G) Title to Real and Personal Property. The Company has good and
marketable fee title to all the real property, and good and marketable
title to all other material property and assets, reflected in the
consolidated balance sheet as of December 31, 1997, referred to in
paragraph (A) above, or purported to have been acquired by the Company
subsequent to such date, except property and assets sold or otherwise
disposed of subsequent to such date in the ordinary course of business and
except for title defects permitted by paragraph (C) of section 9 of the
Notes. The real property and other material property and assets of the
Company are free from any liens, security interests or other encumbrances
securing indebtedness which arose through borrowings and from any other
liens, security interests or other encumbrances which are substantial in
amount, or which affect or impair the operations of the Company, or which
have arisen other than in the ordinary course of the business of the
Company, except as may be permitted by paragraph (C) of section 9 of the
Notes. No financing statement under the Uniform Commercial Code which names
the Company or any of its subsidiaries as debtor has been filed in any
jurisdiction, and neither the Company nor any of such subsidiaries has
signed any financing statement or any security agreement authorizing any
secured party thereunder to file any such financing statement, except as
may be permitted by paragraph (C) of section 9 of the Notes.
(H) Patents and Other Rights. The Company possesses all patents,
patent rights or licenses, trademark rights, trade names, trade name rights
and copyrights which are required to conduct its business as now conducted
without known conflict with the rights of others.
(I) No Leases or Title Retention Agreements Affecting Balance Sheet
Values; Status of any Other Leases. None of the assets or property the
value of which is reflected in the consolidated balance sheet as of
December 31, 1997, referred to in paragraph (A) above, is held by the
Company as lessee under any lease or as conditional vendee under any
conditional sale contract or other title retention agreement, other than
capitalized leases included on such consolidated balance sheet and
leasehold improvements on leased property in an aggregate amount (net after
subtracting the reserve for amortization with respect to such leasehold
improvements) not exceeding $200,000. The Company enjoys peaceful and
undisturbed possession of the premises occupied under all of the leases
under which it is operating, none of which contains any unusual or
burdensome provisions that will materially affect or impair the operations
of the Company. All of such leases are valid, subsisting and in full force
and effect.
(J) No Adverse Contracts or Restrictions. The Company is not a party
to, or bound by, any contract or agreement or instrument, or subject to any
charter or other corporate restriction, materially and adversely affecting
its business, property, assets, operations or condition, financial or
otherwise.
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Stepan Company Loan Agreement
(K) Transaction Is Legal and Authorized; No Legal Restrictions on
Performance. The issuance of the Notes and compliance by the Company with
all of the provisions of this agreement and the Notes --
(i) are within the corporate powers of the Company; and
(ii) will, on or prior to the Closing Date, have been duly
authorized by proper corporate action on the part of the Company (no
action by the stockholders of the Company being required by law, by
the corporate charter or by-laws of the Company or otherwise), and the
agreement and the Notes will, upon execution and delivery by the
Company on the Closing Date, constitute the legal, valid and binding
obligations, contracts and agreements of the Company enforceable in
accordance with their respective terms.
Neither the execution and delivery of this agreement, the consummation
of the transactions contemplated hereby, the fulfillment of its terms, nor
compliance with its terms and conditions and with the terms and provisions
of the Notes, will conflict with or result in a breach of any of the terms,
conditions or provisions of any corporate restriction or of any indenture,
mortgage, deed of trust, pledge, bank loan, credit agreement, corporate
charter, by-laws or other agreement or instrument to which the Company is
now a party or by which it or its properties may be bound or affected, or
any judgment, order, writ, injunction, decree or demand of any court or any
federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, or
constitute a default under any of the foregoing, or result in the creation
or imposition of any lien, charge or encumbrance of any nature whatsoever
upon any of the property or assets of the Company under the terms or
provisions of any of the foregoing. The Company is not in default in the
performance, observance or fulfillment of any of the obligations, covenants
and conditions contained in any indenture or other agreement creating,
evidencing or securing indebtedness of the Company or pursuant to which any
such indebtedness is or may be issued, or contained in any other agreement
or instrument to which the Company is a party or by which the Company or
its properties may be bound or affected.
(L) Compliance with Statutes and Regulations. The Company and its
subsidiaries have complied with all applicable statutes and regulations of
the United States of America and of all foreign countries having
jurisdiction, and of any state, province, municipality, agency or other
governmental unit of any thereof, in respect of the conduct of their
respective businesses and ownership of their respective properties
(including, without limitation, applicable statutes, regulations, orders
and restrictions relating to equal employment opportunities and
environmental standards or controls). No governmental consents, approvals
or authorizations are required to be obtained and no registrations or
declarations are required to be filed in connection with the execution and
delivery of this agreement and the Notes.
(M) Tax Status. All domestic and foreign tax returns and reports of
the Company and its subsidiaries relating to taxes based on or measured by
income or
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Stepan Company Loan Agreement
revenues, and all other tax returns and reports of the Company and its
subsidiaries, required to be filed have been duly filed. The Company and
its subsidiaries have paid or adequately provided for the payment of (i)
all taxes shown as due on the returns and reports filed by any of them or
pursuant to any assessment received by any of them (and the Company knows
of no proposed assessment of additional taxes or any basis therefor) and
(ii) all other taxes, assessments, fees and governmental charges upon the
Company and its subsidiaries and upon their respective properties, assets,
income and franchises, except for such taxes, assessments, fees and
charges, if any, which are being contested in good faith and as to which
adequate reserves have been provided. The United States income tax
liabilities of the Company and its subsidiaries have been finally
determined by the Internal Revenue Service and satisfied for all fiscal
years up to and including the fiscal year ended December 31, 1994. The
Internal Revenue Service has reviewed all of the Federal tax returns of the
Company and its subsidiaries for the fiscal years up to and including the
fiscal year ending December 31, 1994. All agreed-to adjustments and
interest thereon have been paid.
No waiver of the applicable statute of limitations has been given and
is in effect with respect to any United States tax return required to be
filed by the Company or any of its subsidiaries.
(N) Absence of Foreign or Enemy Status, Investment Company Act and
Public Utility Holding Company Act. Neither the issuance of the Notes nor
the use of the proceeds of the loans evidenced thereby as contemplated
herein will result in a violation of any of the foreign assets control
regulations of the United States Treasury Department (31 C.F.R., Subtitle
B, Chapter V, as amended), or any ruling issued thereunder or any enabling
legislation or Presidential Executive Order in connection therewith. The
Company is not an "investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of
1940, as amended, and neither the Company, nor any of its subsidiaries, is
a "holding company" or a "subsidiary company" of a "holding company" or an
"affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company," as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended.
(O) Federal Reserve Board Regulations. Neither the Company nor any
of its subsidiaries owns any "margin stock" as such term is defined in
Regulation U of the Board of Governors of the Federal Reserve System (12
CFR Part 221), as amended, except margin stock owned or which may be
acquired by the Company or its subsidiaries which does not and would not in
the aggregate constitute a substantial part of the consolidated assets of
the Company and its subsidiaries within the meaning of Section 221.2 of the
aforesaid Regulation U, and the Company will not use, or permit any of its
subsidiaries to use, any part of the proceeds from the loan to be made
under this agreement, (1) directly or indirectly, to purchase or carry any
such stock (except for shares of the Company acquired by the Company in
connection with its stock option plans, deferred management compensation
plans or other publicly announced stock purchase plans) or to reduce or
retire any indebtedness originally incurred to purchase any such stock
(except as noted above) within the meaning of such Regulation, (2) so as to
involve the Company or any of its
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Stepan Company Loan Agreement
subsidiaries in a violation of Regulation T, U or X of such Board (12 CFR
Parts 220, 221 and 224), or (3) for any other purpose not permitted by
Section 7 of the Securities Exchange Act of 1934, as amended, or any of the
rules and regulations respecting the extension of credit promulgated
thereunder.
(P) Exempt Status of Transaction under Securities Act and
Representations of Company Relating Thereto. The Company has not, either
directly or through any agent, offered all or any part of the loan to be
made by you under this agreement or any of the Notes to, or solicited any
offers to make all or any part of such loan or to acquire any of the Notes
from, or otherwise approached or negotiated or communicated in respect of
all or any part of such loan or any of the Notes with, any person other
than you and not more than one other institutional investor each of whom
was offered a portion of the Notes at a private sale for investment.
Neither the Company nor any agent on its behalf will offer to obtain all or
any part of such loan from, or offer any of the Notes to, or solicit any
offers to make all or any part of such loan or acquire any of the Notes
from, or otherwise approach, negotiate or communicate in respect of any
part of such loan or any of the Notes with, any person or persons so as
thereby to bring the obtaining of such loan by the Company and the delivery
of the Notes within the registration provisions of the Securities Act of
1933, as amended.
(Q) Disclosure. Neither this agreement, the 10-K, the 10-Q nor the
financial statements referred to in paragraph (A) of this section 2, nor
any certificate or statement furnished to you on behalf of the Company in
connection with the transactions contemplated hereby, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained therein in light of the
circumstances under which they were made not misleading. There is no fact
which materially adversely affects, or in the future may (so far as the
Company can now foresee) materially adversely affect, the business
prospects or financial condition of the Company or any of its properties or
assets which has not been set forth herein or in a certificate or statement
in writing furnished to you by the Company.
(R) Employee Retirement Income Security Act of 1974. The
consummation of the transactions herein provided for and compliance by the
Company with the provisions of this agreement and the Notes issued
hereunder will not involve any prohibited transaction within the meaning of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
or Section 4975 of the Internal Revenue Code. No "employee pension benefit
plans", as defined in ERISA ("Plans"), maintained by the Company, nor any
trusts created thereunder, have incurred any "accumulated funding
deficiency" as defined in Section 302 of ERISA nor does the present value
of all benefits vested under all Plans exceed, as of January 1, 1998, the
last annual valuation date, the value of the assets of the Plans allocable
to such vested benefits by an amount in excess of $100,000.
(S) Compliance with Environmental Laws. The Company complies with
all applicable Federal, state and local laws, statutes, rules, regulations
and ordinances relating to public health, safety or the environment
including, without limitation, relating to releases, discharges, emissions
or disposals to air, water, land or ground water, to the
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Stepan Company Loan Agreement
withdrawal or use of ground water, to the use, handling or disposal of
polychlorinated biphenyls (PCB's), asbestos or urea formaldehyde, to the
treatment, storage, disposal or management of hazardous substances
(including, without limitation, petroleum, its derivatives, by-products or
other hydrocarbons), to exposure to toxic, hazardous or other controlled,
prohibited or regulated substances, to the transportation, storage,
disposal, management or release of gases or liquid substances, the failure
to comply with which could have a materially adverse effect on the Company,
its subsidiaries, their business and properties, taken as a whole. The
Company does not know of any liability of the Company or any subsidiary
under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended by the Superfund Amendments and Reauthorization Act
of 1986 (42 U.S.C. Section 9601 et seq.) which could have a material
adverse effect on the Company and its subsidiaries on a consolidated basis,
except as disclosed in Exhibit C attached to this agreement.
Section 3. Acquisition for Investment.
The Company makes this agreement with you in reliance upon your
representation to the Company, which by your acceptance of this agreement you
confirm, that you are acquiring the Notes which are the subject matter of this
agreement for your own account for the purpose of investment and not with a view
to the distribution of such Notes, but subject nevertheless to any requirement
of law that the disposition of your property shall at all times be and remain
within your control. You further represent that (i) you are acquiring the Notes
for your own account and with your general corporate assets and not with the
assets of any separate account in which any employee benefit plan has any
interest, and (ii) as used in this section, the terms "separate account" and
"employee benefit plan" shall have the respective meanings assigned to them in
ERISA.
Section 4. Conditions of Closing.
Your obligation to make the loans provided for in section 1 above shall be
subject to the performance by the Company prior to or on the Closing Date of all
of its agreements theretofore to be performed under this agreement, to the
accuracy of its representations and warranties contained in this agreement and
to the satisfaction, prior to or concurrently with the making of such loans on
the Closing Date, of the following further conditions:
(A) Opinion of Special Counsel. You shall have received on the
Closing Date from Chapman and Cutler, who are acting as special counsel for
you in connection with this transaction, an opinion, dated the Closing
Date, in form and substance satisfactory to you, to the effect that:
(1) the Company is a corporation, validly existing and in good
standing under the laws of the State of Delaware and has the corporate
power and the corporate authority to execute and deliver this
Agreement and to issue the Notes;
(2) this agreement has been duly authorized by all necessary
corporate action on the part of the Company, has been duly executed
and delivered by the Company and constitutes the legal, valid and
binding contract of the Company
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Stepan Company Loan Agreement
enforceable in accordance with its terms, subject to bankruptcy,
insolvency, fraudulent conveyance and similar laws affecting
creditors' rights generally, and general principles of equity
(regardless of whether application of such principles is considered in
a proceeding in equity or at law);
(3) the Notes have been duly authorized by all necessary
corporate action on the part of the Company, and the Notes being
delivered on the date hereof have been duly executed and delivered by
the Company and constitute the legal, valid and binding obligations of
the Company enforceable in accordance with their terms, subject to
bankruptcy, insolvency, fraudulent conveyance and similar laws
affecting creditors' rights generally, and general principles of
equity (regardless of whether application of such principles is
considered in a proceeding in equity or at law);
(4) it is not necessary, in connection with the obtaining of
such loans from you and the execution and delivery of the Notes to you
under the circumstances contemplated by this agreement, to register
such Notes under the Securities Act of 1933, as amended, or to qualify
an indenture in respect of such Notes under the Trust Indenture Act of
1939, as amended;
(5) the legal opinion referred to in paragraph (B) of this
section 4 is satisfactory in form and scope to such special counsel
and, in their opinion, you are justified in relying thereon; and
(6) such other matters incident to the transactions contemplated
by this agreement as you may request.
(B) Opinion of Counsel to Company. You shall have received on the
Closing Date from Jeffrey W. Bartlett, Esq., General Counsel for the
Company, an opinion, dated the Closing Date, in form and substance
satisfactory to you, as to all matters specified in clauses (2) to (4),
inclusive, of paragraph (A) of this section 4, and to the effect that:
(1) the Company is a corporation duly organized, existing and in
good standing under the laws of the State of Delaware, with full power
and authority to carry on the business and to own the properties
described in Exhibit C, to enter into this agreement, to borrow money
as contemplated by it, to issue the Notes and to carry out the
provisions of this agreement and the Notes;
(2) the Company is duly qualified as a foreign corporation to do
business and is in good standing in each of the jurisdictions in which
it is required to be qualified to do business as a foreign corporation
as stated in Exhibit C;
(3) there is no charter, by-law or preferred or common stock
provision, nor any statute, rule or regulation binding on the Company,
nor (to the best knowledge and belief of such counsel) any indenture,
contract or other agreement to which the Company is a party or by
which the Company or its properties is or may
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Stepan Company Loan Agreement
be bound, which would be contravened by the execution and delivery of
this agreement or of the Notes or by the performance of any term,
provision, condition, agreement, covenant or obligation of the Company
contained herein or therein;
(4) neither the borrowing pursuant hereto nor the use by the
Company of all or any portion of the proceeds of the loan in
accordance with section 5 hereof will violate Section 7 of the
Securities Exchange Act of 1934, as amended, or applicable regulations
thereunder including, without limitation, Regulations T and X of the
Board of Governors of the Federal Reserve System (12 CFR. Chapter II);
(5) except as set forth in the 10-K or in Exhibit C attached
hereto, there are no actions, suits or proceedings pending or, to the
best knowledge and belief of such counsel, threatened against or
affecting the Company, at law or in equity or before or by any
federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or
foreign, an adverse determination with respect to which may result in
any material adverse change in the business, properties, assets or
condition, financial or otherwise, of the Company;
(6) no order, permission, consent or approval of any federal or
state commission, board or regulatory body is required as a condition
to the lawful execution and delivery of this agreement or of such
Notes; and
(7) such other matters incident to the transactions contemplated
by this agreement as you may request.
(C) Certificate as to Representations and Warranties. The
representations and warranties of the Company contained in section 2 shall
be true on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of the Closing Date;
and the Company shall have delivered to you on the Closing Date a
certificate, dated the Closing Date, signed by the President, a Vice
President or the Treasurer of the Company to such effect.
(D) Related Transactions. Concurrently with the consummation of the
loans and the issuance of the Notes on the Closing Date, the Company shall
consummate all of the loans and the issue of the Notes in the aggregate
principal amount scheduled for such Closing Date pursuant to this agreement
and the other agreements referred to in paragraph (C) of section 1 hereof.
(E) Legality of Investment. The making of the loans provided for in
section 1 on the Closing Date and the acquisition of the Notes evidencing
the same shall qualify as a legal investment for you under all laws
applicable to investments by you (without resort to any so-called basket
provisions of such laws) and you shall have received such certificates, or
such other evidence as you may reasonably request, to establish compliance
with this condition.
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Stepan Company Loan Agreement
(F) No Material Change in Management or Business. There shall not
have been since December 31, 1997 any material change in the management,
control or nature of the business of the Company and, to the best knowledge
and belief of the Company, no such change shall be pending and the Company
shall have delivered to you on the Closing Date a certificate, dated such
Closing Date, signed by the President, a Vice President or the Treasurer of
the Company to such effect.
(G) Compliance with Certain Provisions and Related Certificate. The
Company shall not have taken or suffered to be taken any action which it
would have been prohibited from taking or suffering to be taken, and shall
not have omitted or permitted the omission of any action which it would
have been required to take or cause to be taken, if promissory notes in the
form of Exhibit A had at all times since the date of this agreement been
binding and effective instruments; and the Company shall have delivered to
you on the Closing Date a certificate, dated such Closing Date, signed by
the President, a Vice President or the Treasurer of the Company, to such
effect.
(H) Private Placement Number. On or prior to the Closing Date,
special counsel to the Purchasers shall have duly made the appropriate
filings with Standard & Poor's CUSIP Service Bureau, as agent for the
National Association of Insurance Commissioners, in order to obtain a
private placement number for the Notes.
(I) Special Counsel Fees. Concurrently with the delivery of the Notes
to you on the Closing Date, the fees, charges and disbursements of Chapman
and Cutler, your special counsel, shall have been paid by the Company to
the extent reflected in a statement of such counsel rendered to the Company
at least one day prior to the Closing Date.
(J) Proceedings and Documents. All proceedings to be taken in
connection with the transactions contemplated by this agreement and all
documents incident to such transactions shall be satisfactory in form and
substance to you and your special counsel; and you shall have received all
documents which you and your special counsel may reasonably have requested
in connection with such transactions, including copies of records of all
corporate proceedings in connection with such transactions, and compliance
with the conditions set forth in this section 4, satisfactory in form and
substance to you and your special counsel.
Section 5. Use of Proceeds.
The Company will use the proceeds derived by it from the $30,000,000
aggregate principal amount of the loans obtained by the Company under this
agreement and the agreements similar hereto to repay outstanding Indebtedness of
the Company, to fund capital expenditures and for other corporate purposes.
Section 6. Method and Place of Payment of Principal, Premium and
Interest.
Notwithstanding anything to the contrary in this agreement or the Notes, in
the case of any Note owned by you or your nominee or owned by any other
institutional holder who has given
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Stepan Company Loan Agreement
written notice to the Company requesting that the provisions of this section
shall apply, the Company will promptly and punctually pay when due the principal
thereof and premium, if any, and interest thereon, without any presentment
thereof directly to you or such nominee or subsequent holder at your address set
forth in Schedule I or at such other address as you or such subsequent holder
may from time to time designate in writing to the Company or, if a bank account
is designated for you on Schedule I hereto or in any written notice to the
Company from you or any such subsequent holder, the Company will make such
payments in immediately available funds to such bank account before 12:00 Noon,
New York time, marked for attention as indicated, or in such other manner or to
such other account of yours or such holders in any bank in the United States as
you or any such subsequent holder may from time to time direct in writing. The
holder of any Notes to which this paragraph applies agrees that in the event it
shall sell or transfer any such Notes (i) it will, prior to the delivery of such
Notes (unless it has already done so), make a notation thereon of all principal,
if any, prepaid on such Notes and will also note thereon the date to which
interest has been paid on such Notes, and (ii) it will promptly notify the
Company of the name and address of the transferee of any Notes so transferred.
With respect to Notes to which this paragraph applies, the Company shall be
entitled to presume conclusively that the original or such subsequent
institutional holder as shall have requested the provisions hereof to apply to
its Notes remains the holder of such Notes until (y) the Company shall have
received notice of transfer of such Notes, and of the name and address of the
transferee, or (z) such Notes shall have been presented to the Company as
evidence of the transfer. Payments made in accordance with this Section 6 shall
relieve the Company from all liability to make such payments.
Section 7. Statements, Reports and Certificates to Be Delivered by the
Company.
From the date of this agreement to the date on which you first acquire any
Note under this agreement, and thereafter the Company will deliver to you, so
long as you are the holder of any Note, and to each other institutional holder
of then outstanding Notes (in duplicate if so requested) the following:
(A) Quarterly Financial Statements. As soon as reasonably possible,
and in any event within 60 days after the close of each of the first three
fiscal quarters of the Company, (1) the balance sheet of the Company as of
the end of such quarter, setting forth in comparative form the
corresponding figures for the corresponding quarter of the preceding fiscal
year, and (2) the statements of income, stockholders' equity and cash flows
of the Company for such quarter and for the portion of the fiscal year
ended with such quarter, setting forth in comparative form the
corresponding figures for the corresponding periods of the preceding fiscal
year, all in reasonable detail (and prepared on a consolidated basis under
the circumstances set forth in the first grammatical paragraph following
paragraph (G) of this section 7) and certified as complete and correct by a
principal financial officer of the Company, subject to year-end audit.
(B) Annual Reports and Financial Statements. As soon as reasonably
possible, and in any event within 90 days after the close of each fiscal
year of the Company, (1) the balance sheet of the Company as of the end of
such fiscal year, setting forth in comparative form the corresponding
figures as of the end of the preceding fiscal year, and (2) the statements
of income, stockholders' equity and cash flows of the Company for such
fiscal
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Stepan Company Loan Agreement
year, setting forth in comparative form the corresponding figures for the
preceding fiscal year. Such balance sheet and statements shall be prepared
in reasonable detail and in accordance with good accounting practice and
shall be prepared on a consolidated basis under the circumstances set forth
in the first grammatical paragraph following paragraph (G) of this section
7; and such balance sheets and statements shall be accompanied by an
opinion of independent public accountants of recognized national standing
selected by the Company, which opinion shall state that such financial
statements were prepared in accordance with generally accepted accounting
principles. In addition, such accountants will furnish to you a letter
stating that in making their examination of such financial statements
nothing came to their attention which caused them to believe that there was
any default by the Company in the performance or observance of any
covenant, condition or agreement of the Company contained in sections 8 or
9 of the Notes insofar as such covenants, conditions or agreements pertain
to accounting matters, provided that if in the course of their regular
auditing procedure such accountants become aware of any other type of
default, they shall disclose the same but such accountants shall have no
responsibility for ascertaining the existence of any such default. The
Company agrees to supply you promptly with a copy of any letter,
certificate or other writing supplied by its independent public accountants
to any other person pertaining to whether such accountants have cause to
believe that there has been any default by the Company under any other
agreement or evidence of indebtedness.
(C) Certificate as to Certain Financial Information. Within 90 days
after the close of each fiscal year of the Company, and in any event not
later than the time of delivery of the statements furnished pursuant to
paragraph (B) of this section 7, a certificate signed by the principal
financial officer of the Company setting forth (i) the aggregate amount, as
of the end of such fiscal year, permitted to be used for dividends or
distributions on any shares of the capital stock of the Company, or for the
redemption, purchase, retirement or other acquisition of any shares of the
capital stock of the Company, pursuant to the provisions of paragraph (F)
of section 9 of the Notes; (ii) a statement of the rentals paid during such
year by the Company and any restricted subsidiaries showing (A) all rentals
so paid and (B) all rentals so paid under leases of the type described in
paragraph (K) of section 9 of the Notes; (iii) an analysis of changes in
consolidated current assets, consolidated net current assets and
consolidated tangible net worth of the Company and any restricted
subsidiaries from the corresponding figures as of the end of the preceding
fiscal year; (iv) a statement of the amount of additional unsecured funded
indebtedness which the Company is permitted to incur as of the end of such
fiscal year pursuant to the provisions of paragraph (A) of section 9 of the
Notes; and (v) a statement evidencing that the Company is in compliance
with clause (3) of said paragraph (A); (vi) a statement setting forth the
aggregate fair market value of all properties or assets sold, leased,
transferred or disposed of by the Company and its restricted subsidiaries,
other than in the ordinary course of business, during the same fiscal year
of the Company, and an itemization describing each such property or asset
having a fair market value equal to or greater than $250,000; and (vii) a
listing of all insurance maintained by the Company and its subsidiaries in
compliance with the provisions of paragraph (E) of section 8 of the Notes;
together with a brief description, including (where applicable) all
necessary computations, of the manner in which the foregoing were
determined.
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Stepan Company Loan Agreement
(D) Compliance Certificate. Within 90 days after the close of each
fiscal year of the Company, and in any event not later than the time of
delivery of the statements furnished pursuant to paragraph (B) of this
section 7, a certificate, signed by the President or a Vice President and
the Treasurer or an Assistant Treasurer of the Company, stating that a
review of the activities of the Company and any subsidiaries during such
fiscal year has been made under their supervision with a view to
determining whether during such fiscal year the Company and such
subsidiaries had kept, observed, performed and fulfilled all of their
respective obligations under this agreement and the Notes, and either (1)
stating that to their best knowledge and belief the Company and such
subsidiaries have during such fiscal year kept, observed, performed and
fulfilled each and every covenant and condition of this agreement and the
Notes, or (2) if the Company and such subsidiaries shall not so have kept,
observed, performed and fulfilled said covenants and conditions, specifying
all such defaults and the nature and status thereof.
(E) Special Reports of Accountants. Promptly upon receipt thereof, a
copy of all financial statements which are accompanied by an opinion of the
Company's independent public accountants and prepared in connection with
any special audit of the Company's books or the books of any subsidiary by
such accountants.
(F) Other Reports and Statements. Promptly upon the mailing to its
stockholders of each annual report, proxy statement or other report or
communication, a copy of each such report, proxy statement or
communication; and promptly upon any filing by the Company with the
Securities and Exchange Commission or any governmental agency or agencies
substituted therefor, or with any national securities exchange, of any
annual or periodic or special report or registration statement, a copy of
such report or statement.
(G) Additional Information. Such other data and information as from
time to time may be reasonably requested by you or any such institutional
holder.
If, and so long as, the Company has (i) one or more restricted
subsidiaries, the financial statements referred to in paragraphs (A) and (B) of
this section 7 shall be on a consolidated basis prepared in accordance with good
accounting practice, or (ii) one or more unrestricted subsidiaries, the Company
shall deliver to you or any such institutional holder, promptly after receipt
thereof, copies of balance sheets and income and surplus statements of each such
subsidiary which are not included in the financial statements furnished pursuant
to paragraph (B) of this section 7, in the form delivered to the Company for the
fiscal year of each such subsidiary.
For the purpose of the preceding paragraph the Company's French subsidiary,
Stepan Europe S.A., shall be included in the consolidated financial statements
as though it were a restricted subsidiary but the Company shall also furnish
separate financial statements for said French subsidiary.
The Company will furnish, at such address as may be designated by you or
any such institutional holder, and within the applicable time specified in this
section 7, one additional copy
-14-
<PAGE>
Stepan Company Loan Agreement
of each of the financial statements, certificates, statements and reports which
the Company is required to furnish pursuant to this section 7.
In the event that any indebtedness of the Company is declared due and
payable before its expressed maturity, or any holder of such indebtedness shall
have the right to declare such indebtedness due and payable before its expressed
maturity, because of the occurrence of any default or event of default under
such indebtedness, the Company will, immediately give you, so long as you hold
any of the Notes, or any such institutional holder written notice of such
declaration or right of declaration.
You, so long as you shall hold any of the Notes, or any such institutional
holder or such person or persons as you or such holder may designate, may visit
and inspect any of the properties of the Company or its subsidiaries (except for
the Company's Natural Products facilities located at its Maywood, New Jersey,
plant), examine (either by your or such holder's employees or by independent
accountants employed by you or such holder) the books of account of the Company
and the books of account of its subsidiaries and discuss the affairs, finances
and accounts of the Company and its subsidiaries with its and their officers, or
with its and their independent accountants, all at such reasonable times after
notice to the Company and as often as you or such holder may desire. During any
period in which an event of default, or any event which, with the passage of
time or giving of notice, or both would become an event of default, has occurred
and is continuing, the Company shall pay or reimburse you or any such holder for
expenses which you or any such holder may incur in connection with any such
visitation or inspection.
Section 8. Registered Notes.
The Company shall cause to be kept at its principal office a register for
the registration and transfer of the Notes, and the Company will register or
transfer or cause to be registered or transferred, as hereinafter provided and
under such reasonable regulations as it may prescribe, any Note issued pursuant
to this agreement.
At any time and from time to time the registered holder of any Note which
has been duly registered as hereinabove provided may transfer such Note upon
surrender thereof at the principal office of the Company accompanied by a
written instrument of transfer duly executed by such registered holder or its
attorney authorized in writing.
The person in whose name any Note shall be registered shall be deemed and
treated as the owner and holder thereof for all purposes of this agreement and
the Company shall not be affected by any notice or knowledge to the contrary.
Payment of or on account of the principal, premium, if any, and interest on any
such Note shall be made to or upon the written order of such registered holder.
Section 9. Payments of Certain Expenses by the Company.
Whether or not the loan herein contemplated shall be consummated, the
Company will pay all of your reasonable expenses arising in connection with the
transactions herein contemplated or in connection with any modification,
alteration or amendment of this agreement or the Notes,
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<PAGE>
Stepan Company Loan Agreement
including, but not limited to, your out-of-pocket expenses, printing expenses,
expenses in connection with the shipment to you or your agent of the Notes
delivered to you hereunder, expenses in connection with the shipment from and to
you or your agent upon any exchange of notes pursuant to section 2 of the Notes
and the reasonable charges and disbursements of your special counsel for all
services required of them incident to the transactions herein contemplated. The
Company will also pay, and save you and all other holders of the Notes harmless
from, any and all liabilities with respect to, or resulting from any delay in
paying, (i) stamp or other taxes (including issuance taxes but excluding
transfer taxes and interest and penalties on such transfer taxes) which may be
determined to be payable in connection with the execution and delivery of this
agreement or the Notes or in connection with any modification, alteration or
amendment of this agreement or the Notes, (ii) any interest and penalties
resulting from non-payment or delay in payment of such expenses, charges,
disbursements, liabilities or taxes, and (iii) any income taxes in respect of
any reimbursement by the Company for any of such taxes, levies, interest or
penalties paid by you. The obligations of the Company under this section 9 shall
survive the payment of the Notes.
Section 10. Survival of Covenants; Successors and Assigns.
All covenants, agreements, representations and warranties made by the
Company in this agreement and in certificates or other documents delivered
pursuant to it shall survive the making by you of the loan contemplated by this
agreement and the execution and delivery of Notes to you, and shall continue in
full force and effect until all the Notes are paid in full and thereafter to the
extent provided by section 9 hereof. All such covenants, agreements,
representations and warranties shall be binding upon any successors and assigns
of the Company.
Section 11. No Oral Change.
This agreement may not be changed orally, but only by an agreement in
writing and signed by the party against whom enforcement of any waiver, change,
modification or discharge is sought.
The Company may not assign any of its rights hereunder without your written
consent, and you shall not be required to lend hereunder except to the Company
as presently existing.
Section 12. Communications and Notices.
Except as otherwise expressly provided in this agreement, all
communications and notices provided for in this agreement or under the Notes
shall be in writing and, if to the Company, mailed or delivered to it at its
office at Edens and Winnetka Avenue, Northfield, Illinois 60093, attention of
the Secretary, or at any other office that the Company may hereafter designate
by notice to you or, if to you, mailed or delivered to the address shown on
Schedule I to this agreement, or to such other address and for such attention as
you may from time to time designate to the Company in writing.
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<PAGE>
Stepan Company Loan Agreement
Section 13. Law Governing.
This agreement shall be construed in accordance with and governed by the
laws of the State of Illinois.
Section 14. Headings.
The headings of the sections and paragraphs of this agreement are inserted
for convenience only and shall not be deemed to constitute a part of this
agreement.
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<PAGE>
Stepan Company Loan Agreement
If you agree with the foregoing, please sign the enclosed copy of this
letter in the space provided below and return it to the Company, and this letter
shall upon execution become a binding agreement between you and the Company in
accordance with its terms.
Very truly yours,
STEPAN COMPANY
By /s/ Walter J. Klein
-------------------------------------
Its V.P. Finance
The foregoing is hereby
accepted as of the date
first above written.
CONNECTICUT GENERAL LIFE INSURANCE
COMPANY
By: CIGNA Investments, Inc. (authorized agent)
By______________________________
Its
-18-
<PAGE>
Stepan Company Loan Agreement
If you agree with the foregoing, please sign the enclosed copy of this
letter in the space provided below and return it to the Company, and this letter
shall upon execution become a binding agreement between you and the Company in
accordance with its terms.
Very truly yours,
STEPAN COMPANY
By____________________________________
Its
The foregoing is hereby
accepted as of the date
first above written.
CONNECTICUT GENERAL LIFE INSURANCE
COMPANY
By: CIGNA Investments, Inc. (authorized agent)
By /s/ Thomas P. Shea
-------------------------------
Its Vice President
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<PAGE>
Schedule I
(to Loan Agreement)
NAME AND ADDRESS PRINCIPAL AMOUNT OF
OF LENDER NOTES TO BE PURCHASED
THE NORTHWESTERN MUTUAL LIFE $20,000,000
INSURANCE COMPANY
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Attention: Securities Department
Telecopier Number: (414) 299-7124
Payments
All payments on or in respect of the Notes to be by bank wire transfer of
Federal or other immediately available funds (identifying each payment as
"Stepan Company, 6.59% Promissory Notes due October 1, 2013, PPN 858586 E*7,
principal, premium or interest") to:
Bankers Trust Company (ABA #0210-01033)
16 Wall Street
Insurance Unit, 4th Floor
New York, New York 10005
for credit to: The Northwestern Mutual Life Insurance Company
Account Number 00-000-027
Notices
All notices and communications to be addressed as first provided above, except
notices with respect to payments and written confirmation of each such payment
to be addressed, Attention: Investment Operations, Fax Number: (414) 299-5714.
Name of Nominee in which Notes are to be issued: None
Taxpayer I.D. Number: 39-0509570
<PAGE>
NAME AND ADDRESS PRINCIPAL AMOUNT OF
OF LENDER NOTES TO BE PURCHASED
CONNECTICUT GENERAL LIFE INSURANCE COMPANY $5,000,000
c/o CIGNA Investments, Inc. $5,000,000
900 Cottage Grove Road
Hartford, Connecticut 06152-2307
Attention: Private Securities Division - S-307
Fax: 860-726-7203
Payments
All payments on or in respect of the Notes to be by Federal Funds Wire Transfer
to:
Chase NYC/CTR/
BNF=CIGNA Private Placements/AC=9009001802
ABA #021000021
OBI=[Stepan Company; Promissory Notes; 6.59%; due 2013; PPN 858586 E*7; due
date and application (as among principal, premium and interest of the
payment being made); contact name and phone.]
Address for Notices Related to Payments:
CIG & Co.
c/o CIGNA Investments, Inc.
Attention: Securities Processing S-309
900 Cottage Grove Road
Hartford, Connecticut 06152-2309
CIG & Co.
c/o CIGNA Investments, Inc.
Attention: Private Securities - S-307
Operations Group
900 Cottage Grove Road
Hartford, Connecticut 06152-2307
Fax: 860-726-7203
-2-
<PAGE>
with a copy to:
Chase Manhattan Bank, N.A.
Private Placement Servicing
P. O. Box 1508
Bowling Green Station
New York, New York 10081
Attention: CIGNA Private Placements
Fax: 212-552-3107/1005
Address for All Other Notices:
CIG & Co.
c/o CIGNA Investments, Inc.
Attention: Private Securities Division - S-307
900 Cottage Grove Road
Hartford, Connecticut 06152-2307
Fax: 860-726-7203
Name of Nominee in which Notes are to be issued: CIG & CO.
Taxpayer I.D. Number for CIG & CO.: 13-3574027
-3-
<PAGE>
EXHIBIT A
(to Loan Agreement)
No. R-
PPN: 858586 E* 7
STEPAN COMPANY
6.59% Promissory Notes Due October 1, 2013
$______________ ______________, ______
STEPAN COMPANY, a corporation duly organized and existing under the laws of
the State of Delaware (hereinafter called the "Company"), for value received,
hereby promises to pay to
or registered assigns, on October 1, 2013
the principal amount of
to the extent not theretofore prepaid pursuant to the terms of this Note, in
such coin or currency of the United States of America as at the time of payment
shall be legal tender for the payment of public and private debts, at the
principal office of the Company in Northfield, Illinois, and to pay interest
(computed on the basis of a 360-day year of twelve 30-day months) on the unpaid
principal amount hereof from the date hereof, in like coin or currency, at such
office, semi-annually on the first day of April and October in each year, at the
rate of 6.59% per annum until the unpaid principal amount hereof shall have
become due and payable and at the default rate thereafter and, so far as may be
lawful, to pay interest on any overdue installment of interest at the default
rate at such principal office in like coin or currency.
Section 1. The Notes. This Note is one of a number of promissory notes
(hereinafter called the "Notes"), evidenced by the $30,000,000 aggregate
principal amount of 6.59% Promissory Notes Due October 1, 2013 issued or to be
issued pursuant to separate and several loan agreements, each dated as of
October 1, 1998 entered into by the Company with the lenders therein referred
to.
Section 2. Exchanges. The holder of this Note, or of any note or Notes
substituted therefor pursuant to the provisions of this section 2, may at its
option, in person or by duly authorized attorney, surrender the same for
exchange at the principal office of the Company in Northfield, Illinois
accompanied by a written instrument of transfer duly executed by the registered
holder hereof and, within a reasonable time thereafter and without expenses
(other than transfer taxes, if any), receive in exchange therefor one or more
duly executed printed Note or Notes in the principal amount of $100,000 or any
integral multiple of $10,000 in excess thereof, dated as of the date to which
interest has been paid on the Note or Notes so surrendered or, if no interest
has yet been so paid, then dated the date hereof, and payable to such person or
persons as may be
<PAGE>
designated by such holder, for the same aggregate principal amount as the then
unpaid principal amount of the Note or Notes so surrendered. The Company
covenants and agrees to take and cause to be taken all action necessary to
effect such exchanges.
Section 3. Payments to Registered Holder. The person in whose name this
Note is registered shall be deemed to be and treated as the owner and holder
hereof for all purposes and payment of or on account of the principal, premium,
if any or interest hereon shall be made to or upon the written order of the
registered holder.
Section 4. Prepayment of Notes.
(A) Required Prepayments. In addition to paying the entire outstanding
principal amount and the interest due on the Notes on the maturity date thereof,
on October 1 in each year, commencing October 1, 2003 and ending October 1, 2012
(herein called "fixed payment dates"), both inclusive, the Company will prepay
and apply and there shall become due and payable the sum of $2,727,272 on the
principal indebtedness evidenced by the Notes. No premium shall be payable in
connection with any required prepayment made pursuant to this paragraph 4(A).
Any payment of less than all of the Notes pursuant to the provisions of
paragraphs (B), (C) or (D) of this section 4 shall not relieve the Company of
the obligation to make the required payments or prepayments on the Notes in
accordance with the terms of this paragraph 4(A); provided, however, that if and
to the extent that any prepayment of Notes pursuant to the provisions of
paragraph 4(D) below does not result in the prepayment of all of the Notes then
outstanding, the remaining prepayments required to be made pursuant to this
paragraph 4(A) shall, in each case, be reduced in the same proportion that the
principal amount of Notes outstanding immediately prior to such prepayment
pursuant to paragraph 4(D) is reduced by such prepayment.
(B) Optional Prepayments without Premium. Upon compliance with section 6,
the Company shall have the privilege (which shall be non cumulative) of
prepaying outstanding Notes on any fixed payment date in units of $100,000 or an
integral multiple of $10,000 in excess thereof, by payments of the principal
amount of the Notes to be prepaid and accrued interest thereon to the date of
such payment and without premium; provided however that the principal amount of
Notes prepaid pursuant to this subparagraph 4(B) on any one fixed payment date
shall not exceed the principal amount of the Notes required to be prepaid
pursuant to paragraph 4(A) on such fixed payment date and (ii) the aggregate
amount of all Notes prepaid pursuant to this subparagraph 4(B) shall not exceed
an amount equal to $10,000,000.
(C) Optional Prepayment with Premium. In addition to the prepayments
required by paragraph 4(A) and the rights of prepayment set forth in 4(B) the
Company shall have the privilege at any time and from time to time of prepaying
the outstanding Notes either in whole or in part (but if in part then in units
of $1,000,000 or an integral multiple of $10,000 in excess thereof) by payment
of the principal amount of the Notes or the portion thereof to be prepaid and
accrued interest thereon to the date of such prepayment together with the make
whole premium amount.
For purposes of this paragraph 4(C) and section 12 below:
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<PAGE>
The term "make whole premium amount" shall mean, to the extent that the
adjusted treasury reinvestment yield at such time is lower than 6.59% per annum,
the excess of (a) the present value of the remaining scheduled principal and
interest payments and prepayments to become due on that portion of the Notes to
be prepaid, taking into account the required application of such prepayment to
the scheduled payments and prepayments on the Notes, all determined by
discounting such payments and prepayments at a rate that is equal to the
adjusted treasury reinvestment yield, over (b) the aggregate principal amount of
the Notes plus accrued interest to be paid or prepaid. To the extent that the
adjusted treasury reinvestment yield at the time of such prepayment or payment
is equal to or higher than 6.59% per annum, the make whole premium amount is
zero.
The term "adjusted treasury reinvestment yield" shall mean, as of the date
of any determination thereof, the sum of (i) the then applicable treasury
reinvestment yield, plus (ii) 50 basis points.
The term "treasury reinvestment yield" shall be (a) the yield reported on
the third business day preceding the date of prepayment or payment on page "PX-
1" of the Bloomberg Financial Markets Service Screen (or, if not available, any
other nationally recognized trading screen reporting on-line intraday trading in
United States government securities) at 10:00 A.M. (New York time) for United
States government securities having a maturity corresponding to the remaining
weighted average life to maturity of the principal of the Notes as of the date
of such prepayment or payment, as the case may be, rounded to the nearest month,
or (b) in the event that no such nationally recognized trading screen reporting
on-line trading in United States government securities is available, "treasury
reinvestment yield" shall mean the arithmetic mean of the yields published in
the weekly statistical release designated H.15(519) of the Federal Reserve
System under the caption "U.S. Government Securities-Treasury Constant
Maturities" (the "statistical release") or if the statistical release is not
published, the arithmetic mean of such reasonably comparable index as may be
designated by the holders of at least 51% in aggregate principal amount of the
outstanding Notes, for the maturity corresponding to the remaining weighted
average life to maturity of the Notes as of the date of such prepayment or
payment, as the case may be, rounded to the nearest month. If no maturity
exactly corresponds to such rounded weighted average life to maturity, the
yields for the two most closely corresponding published maturities shall be
calculated pursuant to the immediately preceding sentence and the treasury
reinvestment yield shall be interpolated from such yields on a straight-line
basis, rounding in each of such relevant periods to the nearest month. For
purposes of calculating the treasury reinvestment yield, the most recent
statistical release published prior to the third business day preceding the date
of prepayment or payment shall be used.
The term "weighted average life to maturity" shall mean as at the time of
the determination thereof the number of years obtained by dividing the then
remaining dollar-years of the Notes by the aggregate amount of all remaining
scheduled principal and interest payments (including the payments at final
maturity) to be made on the Notes. The term "remaining dollar-years" of the
Notes means the product obtained by (1) multiplying (A) the amount of each of
the remaining scheduled principal and interest payments (including the payments
at final maturity), by (B) the number of years (calculated at the nearest one-
A-3
<PAGE>
twelfth) which will elapse between the date of determination of the
weighted average life to maturity of the Notes and the date of required
payment is due and (2) totaling all the products obtained in (1).
(D) Prepayment on Failure of Holders to Consent to Change of Control. In
the event that the Company shall request the holders of the Notes in writing to
consent to a change of control and the holder or holders of any Notes shall,
within 30 days following the receipt of such a request, have refused in writing
to consent to such a change of control, then the Company may, at any time within
5 days after the earlier of (x) the receipt of a response to such request from
the holder or holders of 100% of the outstanding Notes, or (y) the expiration of
such 30 day period, and upon not less than three business days prior written
notice, prepay all (but not less than all) Notes held by each holder which has
refused to consent to such change of control by prepayment of the principal
amount thereof and accrued interest thereon to the date of such prepayment. Any
holder which has failed to respond to such request prior to the expiration of
such 30 day period shall, for purposes hereof, be deemed to have consented to
such change of control. Any request by the Company made pursuant to this
paragraph 4(D) shall set forth (i) a summary of the transaction or transactions
causing the change of control, (ii) the name and address of the "person"
described in clause (i) or (ii) of the definition of the term "change of
control" set forth below, (iii) such financial or other information as would be
reasonably necessary for each holder to make an informed decision with respect
to such request, and (iv) a statement as to whether, at the time of such change
of control and after giving effect thereto, either any event of default or any
event which, with the passage of time or giving of notice, or both, would become
an event of default, shall have occurred and be continuing. In the event that
the Company shall receive a response to its request from any holder of a Note,
it will promptly advise, in writing, all other holders of Notes of such response
and the source and content thereof.
For purposes of this paragraph 4(D) and paragraphs 8(K) and 12(H) below,
the term "change of control" shall mean and shall be deemed to have occurred,
(i) upon the acquisition by any "person" (as that term is used in Sections 13(d)
and 14(d)(2) of the Securities Exchange Act of 1934, as amended) of beneficial
ownership, direct or indirect, of more than 50% of the outstanding voting stock
of the Company, or (ii) upon the acquisition of the Company, or all or
substantially all of its assets by, or the combination of the Company, or all or
substantially all of its assets with, another "person" (as defined above),
unless the acquiring or surviving "person" shall be a corporation more than 50%
of the outstanding voting stock of which is owned, immediately after such
acquisition or combination, by the owners of the voting stock of the Company
immediately prior to such acquisition or combination. The term "acquisition"
shall mean the earlier to occur of (x) the actual possession of the subject
voting stock or assets, and (y) the consummation of any transaction or series of
related transactions which, with the passage of time, will give such person the
actual possession thereof. The term "voting stock" shall mean securities of any
class or classes, the holders of which are ordinarily, in the absence of
contingencies, entitled to elect a majority of the corporate directors (or
persons performing similar functions).
Section 5. Partial Prepayments to be Pro Rata where More than One Note
Outstanding. In the event of any prepayment of less than all of the outstanding
Notes pursuant to the provisions of paragraphs 4(A), 4(B) or 4(C), at a time
when more than one Note is outstanding, the principal amount of the Notes so to
be prepaid shall be allocated among the respective Notes and holders
A-4
<PAGE>
thereof so that the principal amount to be prepaid to each holder pursuant to
any section hereof shall bear the same ratio to the aggregate principal amount
then to be prepaid pursuant to such section as the principal amount of Notes
then held by such holder bears to the aggregate principal amount of all Notes
then outstanding, except that if upon any allocation on such basis the amounts
so to be prepaid to any such holder pursuant to any section hereof would not be
an exact multiple of $1,000, then additional or lesser amounts not exceeding
$1,000 may be allocated by the Company to such holder, or if the amount so to be
prepaid to any such holder pursuant to such section would be less than $1,000,
then no amount need be allocated to such holder, in each such case so long as
allocations of prepayments among the respective Notes and holders thereof shall
be appropriate to maintain, from time to time, through successive partial
prepayments as nearly as practicable the ratio above provided. Prepayments of
Notes pursuant to the provisions of paragraph 4(D) shall be allocated as therein
provided.
Section 6. Notice of Prepayment and Other Notices.
(A) Prepayment Notice. If the Company shall elect to prepay this Note or
any portion hereof pursuant to paragraph 4(B) or 4(C), the Company shall give
notice of such prepayment in writing not less than 30 nor more than 60 days
prior to the date fixed for such prepayment, specifying (i) the prepayment date,
(ii) the principal amount to be prepaid on this Note and on all the other
outstanding Notes, (iii) an estimate of the make whole premium amount, if any,
applicable to the prepayment of this Note, and (iv) accrued interest applicable
to such prepayment. A computation of the amount, if any, of any make whole
premium amount payable in connection with a prepayment of this Note shall be
furnished to the holder hereof as soon as practicable after determination of
such premium and, in all events, not less than three business days prior to the
date of such prepayment.
(B) Mailing of Notices. Such notice of prepayment, and all other notices
to be given to any holder of this Note, shall be sent by prepaid overnight
courier to the payee herein named, irrespective of whether the payee is the
holder of this Note; provided, however, that if any subsequent holder of this
Note shall have presented it to the Company for inspection at the office of the
Company maintained as provided in paragraph (A) of section 8, and shall have
delivered to the Company at such office a written notice of the acquisition by
such holder of this Note and designated in writing an address to which notices
in respect of this Note shall be mailed, such notices shall be sent to such
holder at such designated address instead of to the payee herein named. All
notices to be given to any holder of this Note shall be deemed to have been
given only upon actual receipt thereof by such holder. In the case of a properly
addressed notice, the Company shall not be required to determine the authority
of any person signing or initialing a confirmation of receipt.
Section 7. Notes Due and Interest Ceases on Prepayment Date; Evidence of
Partial Prepayment; New Notes. Upon notice of prepayment being given as in this
Note provided, the Company shall be obligated to prepay, at the principal office
of the Company in Northfield, Illinois, on the date specified in such notice,
this Note or such portion hereof to be prepaid as is specified in such notice at
the principal amount thereof, plus accrued interest thereon to the date so
specified and the applicable make whole premium amount, if any. If this Note is
designated for prepayment in whole or in part as hereinbefore provided, then
this Note or such portion hereof as
A-5
<PAGE>
is designated for prepayment, as the case may be, shall cease to bear interest
on and after the date fixed for such prepayment provided such prepayment is duly
made. Upon the due prepayment in part of this Note, the holder hereof shall
surrender it to the Company, which shall thereupon issue and deliver, without
charge to such holder, a new Note for the unpaid balance of this Note; provided,
however, that instead of surrendering this Note as aforesaid, the holder of this
Note may, at its option, present this Note to the Company for notation hereon of
the payment of the portion of the principal of this Note so prepaid and this
Note shall thereupon be returned to or on the order of the holder hereof. To the
extent that any of the Notes are fully prepaid they shall be cancelled and may
not be redelivered. Any new Note made and delivered in accordance with the
provisions of this section 7 shall be dated as of the date to which interest has
been paid on the indebtedness to be evidenced by such new Note, or if no
interest has yet been so paid, then dated the date hereof.
Section 8. Affirmative Covenants. The Company covenants and agrees that so
long as this Note shall be outstanding:
(A) Maintenance of Office or Agency. The Company will maintain an
office in Northfield, Illinois or at such other place hereafter designated
in writing by the Company by notice to the holder of this Note, where
notices, presentations and demands to or upon the Company in respect of
this Note may be given or made.
(B) Payment of Principal, Premium and Interest. The Company will
punctually pay or cause to be paid the principal and interest, and premium,
if any, to become due in respect of all the Notes according to the terms
thereof.
(C) Maintenance of Corporate Existence. The Company will at all times
do or cause to be done all things necessary to maintain, preserve and renew
its corporate existence and the corporate existence of each of its
subsidiaries and its and their rights, patents and franchises, and comply
with and cause each subsidiary to comply with, all related laws applicable
to the Company or its subsidiaries in such manner as counsel shall advise;
provided, however, that nothing contained in this paragraph (C) shall (1)
require the Company or any subsidiary to comply with any law so long as the
validity or applicability thereof shall be contested in good faith, (2)
require the Company or any subsidiary to maintain, preserve or renew any
right or franchise not necessary or desirable in the conduct of the
business of the Company or of such subsidiary, as the case may be, (3)
prevent the termination of the corporate existence of any subsidiary if in
the opinion of the Board of Directors of the Company such termination is in
the best interest of the Company and not disadvantageous to the holders of
the Notes, or (4) prevent any transaction by a subsidiary permitted by the
provisions of clause (4) or (5) of paragraph (B) of section 9, or any
transaction by the Company permitted by the provisions of paragraph (I) of
section 9.
(D) Properties. The Company will, in so far as it is not prevented by
causes beyond its control, at all times maintain, preserve, protect and
keep, or cause to be maintained, preserved, protected and kept, its
property and the property of its subsidiaries in good repair, working order
and condition and, from time to time, will, in so far as it is
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not prevented by causes beyond its control, make or cause to be made all
repairs, renewals, replacements, extensions, additions, betterments and
improvements to its property and the property of its subsidiaries as are
needful and proper, so that the business carried on in connection therewith
may be conducted properly and efficiently at all times; provided, however,
that nothing in this paragraph (D) shall prevent the Company or any
subsidiary from selling, abandoning or otherwise disposing of any property
if such property is no longer of use in the business of the Company or the
subsidiary owning the same, and if, in the opinion of the Company, such
sale, abandonment or other disposition is in the best interest of the
Company or such subsidiary and not disadvantageous to the holders of the
Notes.
(E) Insurance. The Company will provide or cause to be provided for
itself and its subsidiaries such insurance against loss or damage of the
kinds customarily insured against by corporations similarly situated, with
reputable insurers, in such amounts and by such methods as shall be
adequate, and will at all times maintain or cause to be maintained in full
force and effect, with reputable insurers and in such amounts and by such
methods as shall be adequate, public liability insurance against loss or
damage to it or its subsidiaries for bodily injury or death in or about any
premises occupied by it or its subsidiaries, and liability insurance
against loss or damage to it or its subsidiaries for bodily injury or death
or injury to property occurring by reason of the operation by it or its
subsidiaries of any motor vehicle.
(F) Payment of Taxes, Assessments, Etc. The Company will duly pay and
discharge, and cause each of its subsidiaries to duly pay and discharge, as
the same become due and payable, all taxes, assessments and governmental
and other charges and claims levied or imposed, or which if unpaid might
become a lien or charge, upon the franchises, assets, earnings or business
of the Company or such subsidiary, as the case may be, as well as all
lawful claims for labor, materials and supplies which, if unpaid, might
become a lien or charge upon such properties or any part thereof; provided,
however, that nothing contained in this paragraph (F) shall require the
Company or any such subsidiary to pay any such tax, assessment, charge or
claim so long as the Company or such subsidiary in good faith shall contest
the validity thereof and shall set aside on its books adequate reserves
with respect thereto.
(G) Payment of Indebtedness. The Company will, and will cause each of
its subsidiaries to, pay punctually and discharge when due, or renew or
extend (except as otherwise prohibited by this Note), any indebtedness
heretofore or hereafter incurred by it or any of them, as the case may be,
and discharge, perform and observe the covenants, provisions and conditions
to be performed, discharged and observed on the part of the Company or such
subsidiary, as the case may be, in connection therewith, or in connection
with any agreement or other instrument relating thereto, or in connection
with any mortgage, pledge, security interest or other lien existing at any
time upon any of the property or assets of the Company or such subsidiary,
as the case may be; provided, however, that nothing contained in this
paragraph (G) shall require the Company or any such subsidiary to pay or
discharge or renew or extend any such indebtedness or to discharge, perform
or observe any such covenants, provisions and conditions so long as
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the Company or such subsidiary in good faith shall contest any claim which
may be asserted against it in respect of any such indebtedness or of any
such covenants, provisions and conditions and shall set aside on its books
adequate reserves with respect thereto.
(H) Keeping of Books. The Company will, and will cause each
subsidiary to, (1) at all times keep proper books of record and account in
which full, true and correct entries will be made of its transactions in
accordance with good accounting practice; and (2) set aside on its books
from its earnings, for the fiscal year ending December 31, 1998, and each
fiscal year thereafter, reserves for depreciation, obsolescence and/or
amortization of its properties during such year and all other proper
reserves which, in accordance with good accounting practice, should be set
aside from such earnings in connection with its business.
(I) Compliance with Law. The Company will, and will cause each of its
subsidiaries to, use its best efforts to comply with all applicable
statutes, regulations, orders and restrictions of the United States of
America, foreign countries, states, provinces, municipalities and agencies
and instrumentalities of the foregoing, in respect of the conduct of its
respective business and the ownership of its respective property
(including, without limitation, applicable statutes, regulations, orders
and restrictions relating to equal employment opportunities and
environmental standards and controls), except such as are being contested
in good faith or with respect to which compliance shall have been waived or
extended by the applicable governmental authority.
(J) Notice of Default. If any one or more of the events of default
specified in section 12 shall occur, or if the holder of any Note shall
demand payment or take any other action permitted upon the occurrence of
any such event of default, the Company will at once give notice to all
holders of the Notes, specifying the nature of the event of default or of
such demand or other action, as the case may be. In the event any
indebtedness of the Company (other than the Notes) is declared due and
payable before its expressed maturity because of the occurrence of an event
of default thereunder, or under any instrument or agreement pursuant to
which such indebtedness is issued or securing such indebtedness, the
Company will at once give notice in writing of such happening to all
holders of the Notes.
(K) Notice of Change of Control. The Company will, within two
business days of becoming aware of a change of control (as defined in
paragraph 4(D)), give notice thereof to all holders of the Notes.
(L) Year 2000 Compliance. The Company will, and will cause each
restricted subsidiary to, comply with all applicable disclosure
requirements and rules, regulations and orders promulgated by the
Securities and Exchange Commission (the "SEC") relating to the Year 2000
Problem. The "Year 2000 Problem" means any significant risk that computer
hardware or software used in the Company's or its restricted subsidiaries'
businesses or operations may be unable to recognize and perform properly
date-sensitive functions involving dates or time periods occurring after
December 31, 1999, including the making of accurate leap year calculations.
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Section 9. Negative Covenants. The Company covenants and agrees that so
long as this Note shall be outstanding:
(A) Limitations on Funded Indebtedness. The Company will not create,
incur, issue, assume or become or be liable, contingently or otherwise, in
respect of any funded indebtedness other than
(1) funded indebtedness outstanding on September 15, 1998 and
reflected on Schedule B to the loan agreements and funded indebtedness
represented by the Notes;
(2) secured funded indebtedness incurred or assumed subsequent
to September 15, 1998 solely for the purpose of financing the
acquisition of property and secured only as permitted under clauses
(2), (3) and (4) of paragraph (C) of this section 9, but only in an
amount not exceeding the maximum amount of additional unsecured funded
indebtedness which the Company could then incur under clause (3) of
this paragraph (A), provided that for purposes of this Note, secured
funded indebtedness shall not include indebtedness for money borrowed
by the Company against or secured by the cash surrender value of life
insurance maintained by the Company on officers or directors of the
Company, which indebtedness shall constitute unsecured funded
indebtedness for all purposes of this Note;
(3) unsecured funded indebtedness incurred or assumed subsequent
to September 15, 1998 if, and to the extent that, immediately after
giving effect thereto and the application of the proceeds thereof,
consolidated funded indebtedness does not exceed an amount equal to
55% of consolidated capitalization, it being understood that the test
of this clause (3) is one of incurrence only;
(4) indebtedness taking the form of a guaranty of indebtedness
of any other person permitted by clause (3) of paragraph (D) of this
section 9, but only if, and to the extent that, immediately after
giving effect thereto, the limitations set forth in clause (3) of this
paragraph (A) shall be satisfied, all such guaranties being treated as
funded indebtedness for the purpose of clause (3) of this paragraph
(A); and
(5) funded indebtedness of the Company incurred solely for the
purpose of extending, renewing or refunding any funded indebtedness of
the Company then outstanding and permitted by this paragraph (A), but
only if, and to the extent that, immediately after giving effect
thereto, the limitations set forth in clause (3) of this paragraph (A)
shall be satisfied.
(B) Limitations on Restricted Subsidiaries. The Company will not
cause, suffer or permit any restricted subsidiary to
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(1) create, incur, issue, assume or become or be liable,
contingently or otherwise, in respect of any indebtedness except (a)
indebtedness to the Company or to a wholly-owned restricted
subsidiary, (b) unsecured accounts payable and other unsecured
obligations (other than as a result of borrowing) incurred in the
ordinary course of business of such subsidiary, and (c) indebtedness
in addition to that described in subclauses (a) and (b) above;
provided that the aggregate principal amount of all such indebtedness
permitted by this subclause (c) shall not at any time exceed 10% of
consolidated capitalization of the Company and its restricted
subsidiaries; and provided further that the sum, without duplication,
of (x) the aggregate unpaid principal amount of all such indebtedness
permitted by this subclause (c), (y) the aggregate unpaid principal
amount of all indebtedness of the Company secured pursuant to the
provisions of clauses (2), (3) and (4) of paragraph (C) of this
section 9, and (z) the aggregate amount of liabilities of the Company
and its restricted subsidiaries secured by liens permitted pursuant to
the provisions of clause (11) of paragraph (C) of this section (9),
shall not at any time exceed 20% of consolidated capitalization of the
Company and its restricted subsidiaries; or
(2) issue or sell any shares of its capital stock or securities
convertible into such capital stock except (a) issuance or sale of
directors' qualifying shares, (b) issuance or sale to the Company or
to any wholly-owned restricted subsidiary, and (c) issuance or sale of
additional shares of stock of any such subsidiary to any holders
thereof entitled to receive or purchase such additional shares through
the declaration of a stock dividend or through the exercise of
preemptive rights; or
(3) sell, assign, transfer or otherwise dispose of any shares of
capital stock of any class of any other restricted subsidiary, or any
other security of, or any indebtedness owing to it by, any other
restricted subsidiary (except in each case to the Company or to a
wholly-owned restricted subsidiary) unless such sale, assignment,
transfer or other disposition shall meet all the conditions set forth
in paragraph (G) of this section 9 which would be applicable to a
similar disposition made by the Company; or
(4) consolidate with or merge into any other corporation or
permit any other corporation to merge into it, except a merger into or
consolidation with (a) the Company, (b) any wholly-owned restricted
subsidiary or (c) any other corporation if, immediately thereafter,
(x) the surviving corporation shall be a restricted subsidiary, (y)
the Company shall be in full compliance with all the terms and
provisions of the Notes, and (z) the surviving corporation would be
permitted to incur at least $1.00 of additional unsecured funded
indebtedness pursuant to the provisions of section 9(A)(3) hereof; or
(5) sell, lease, transfer or otherwise dispose of all or any
substantial part of its property and assets except (a) to the Company
or any wholly-owned restricted subsidiary or (b) in the case of a sale
to any other person, in compliance with all applicable requirements of
paragraphs (G) and (I) of this section 9; or
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(6) make any investments or commitments to make investments
except as expressly permitted by paragraph (E) of this section 9.
Any corporation which becomes a restricted subsidiary after the date hereof
shall for all purposes of this paragraph (B) be deemed to have created,
assumed or incurred, at the time it becomes a restricted subsidiary, all
indebtedness of such corporation existing immediately after it becomes a
restricted subsidiary.
(C) Limitations on Liens. The Company will not itself, and will
not permit or suffer any restricted subsidiary to, create or incur or
suffer to be created or incurred or to exist any mortgage, lien, security
interest, charge or encumbrance of any kind on, or pledge of, any property
or assets of any kind, real or personal, tangible or intangible, of the
Company or any such subsidiary, whether owned on the date of original issue
of the Notes or thereafter acquired, or acquire or agree to acquire any
property or assets of any kind under a conditional sale agreement or other
title retention agreement or file or permit the filing of any financing
statement under the Uniform Commercial Code or other similar notice under
any other similar statute without equally and ratably securing the Notes
with all other obligations secured thereby and which security shall be
created and conveyed by documentation satisfactory in scope, form and
substance to the holders of at least 66-2/3% in aggregate principal amount
of the outstanding Notes and which security shall continue in full force
and effect until either (x) the same is released by the holders of at least
66-2/3% in aggregate principal amount of outstanding Notes, (y) all other
obligations secured thereby are discharged, or (z) the security is released
by the holders of all such other obligations, and in any case the Notes
shall have the benefit, to the full extent that the holders may be entitled
thereto under applicable law, of an equitable lien on such property or
assets equally and ratably securing the Notes; provided, however, that the
provisions of this paragraph (C) shall not prevent or restrict the
creation, incurring or existence of any of the following:
(1) any mortgage, lien, security interest, charge or encumbrance
on, or pledge of, any property or assets of any such subsidiary to
secure indebtedness owing by it to the Company or a wholly-owned
restricted subsidiary;
(2) purchase money mortgages or other liens on real property
(including leaseholds) and fixtures thereon, acquired by the Company
or any such subsidiary, to secure the purchase price of such property
(or to secure indebtedness incurred solely for the purpose of
financing the acquisition of any such property to be subject to such
mortgage or other lien) and created contemporaneously with such
acquisition or within 180 days thereafter, or mortgages or other liens
existing on any such property at the time of acquisition of such
property by the Company or by such subsidiary, whether or not assumed,
or any mortgage or lien on real property of such subsidiary existing
at the time of acquisition of such subsidiary, provided that at the
time of the acquisition of the property by the Company or a restricted
subsidiary, or at the time of the acquisition of the restricted
subsidiary by the Company, as the case may be, (a) the principal
amount of the indebtedness secured by each such mortgage or lien, plus
the principal amount of all other indebtedness secured by mortgages or
liens on the same property, shall not exceed 75% (100%
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in the case of capitalized leases) of the cost (which shall be deemed
to include the amount of all indebtedness secured by mortgages or
other liens, including existing liens, on such property) of such
property to the Company or any such subsidiary, or 75% (100% in the
case of capitalized leases) of the fair value thereof (without
deduction of the indebtedness secured by mortgages or liens on such
property) at the time of the acquisition thereof by the Company or
such subsidiary, whichever is the lesser, and (b) every mortgage or
lien shall apply only to the property originally subject thereto and
fixed improvements constructed thereon;
(3) refundings or extensions of the mortgages or liens permitted
in the foregoing clause (2) for amounts not exceeding the principal
amounts of the indebtedness so refunded or extended at the time of the
refunding or extension thereof, and applying only to the same property
theretofore subject to the same and fixed improvements constructed
thereon;
(4) the owning or acquiring or agreeing to acquire machinery or
equipment useful for the business of the Company or any such
subsidiary subject to or upon chattel mortgages or conditional sale
agreements or other title retention agreements, provided that the
principal amounts of the indebtedness secured by such chattel
mortgages, plus the aggregate amounts payable under such conditional
sale agreements and other title retention agreements, shall not exceed
the limitations set forth in clause (2) of paragraph (A) of this
section 9;
(5) deposits, liens or pledges to enable the Company or any such
subsidiary to exercise any privilege or license, or to secure payments
of workmen's compensation, unemployment insurance, old age pensions or
other social security, or to secure the performance of bids, tenders,
contracts (other than for the payment of money) or leases to which the
Company or any such subsidiary is a party, or to secure public or
statutory obligations of the Company or any such subsidiary, or to
secure surety, stay or appeal bonds to which the Company or any such
subsidiary is a party, but, as to all of the foregoing, only if the
same shall arise and continue in the ordinary course of business; or
other similar deposits or pledges made and continued in the ordinary
course of business;
(6) mechanic's, workmen's, repairmen's or carriers' liens, but
only if arising, and only so long as continuing, in the ordinary
course of business; or other similar liens arising and continuing in
the ordinary course of business; or deposits or pledges in the
ordinary course of business to obtain the release of any such liens;
(7) liens arising out of judgments or awards against the Company
or any such subsidiary with respect to which the Company or such
subsidiary shall in good faith be prosecuting an appeal or proceedings
for review; or liens incurred by the Company or any such subsidiary
for the purpose of obtaining a stay or discharge in the course of any
legal proceeding to which the Company or such subsidiary is a party;
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(8) liens for taxes not yet subject to penalties for non-
payment or contested as permitted by paragraph (F) of section 8, or
minor survey exceptions, or minor encumbrances, easements or
reservations of, or rights of others for, rights of way, sewers,
electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real
properties, which encumbrances, easements, reservations, rights and
restrictions do not in the aggregate materially detract from the value
of said properties or materially impair their use in the operation of
the business of the Company or of such subsidiary owning the same;
(9) liens: (i) in favor of the United States of America or any
department or agency thereof or in favor of a prime contractor under a
United States Government contract, and (ii) resulting from the
acceptance of progress or partial payments under United States
Government contracts or subcontracts thereunder;
(10) any arrangement permitted by paragraph (J) of this section
9;
(11) inchoate liens arising under the Employee Retirement Income
Security Act of 1974, as amended, to secure contingent liabilities
under said Act;
(12) security interest evidenced by a UCC-1 financing statement
to secure an obligation not exceeding $1,000,000 in favor of
Millmaster/Onyx Chemical Company as vendor of certain chemical
inventories located in Northfield, Illinois; or
(13) liens on accounts receivable and ancillary rights sold (or
in which participating interests are sold) in compliance with all
applicable requirements of paragraph (I) of this section 9
provided however that:
(x) the aggregate unpaid principal amount of all indebtedness of
the Company and its restricted subsidiaries secured by the mortgages
or liens permitted by clauses (2), (3) and (4) of this paragraph (C)
shall not at any time exceed an amount equal to 10% of consolidated
capitalization; and
(y) the sum, without duplication, of
(i) the aggregate unpaid principal amount of all
indebtedness of the Company secured by the mortgages or liens
permitted by clauses (2), (3) and (4) of this paragraph (C);
(ii) the aggregate unpaid principal amount of all
indebtedness of restricted subsidiaries permitted by subclause
(c) of clause (1) of paragraph (B) of this section 9; and
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(iii) the aggregate amount of liabilities of the Company and
its restricted subsidiaries secured by liens permitted pursuant
to the provisions of clause (11) of this paragraph (C)
shall not at any time exceed an amount equal to 20% of consolidated
capitalization.
For purposes of this Note, the Company or a restricted subsidiary
shall be deemed to be the owner of any property which it has acquired or
holds subject to a conditional sale agreement, capitalized lease or other
arrangement pursuant to which the property has been retained by or vested
in some other person for security purposes and such retention or vesting
shall constitute a lien hereunder.
(D) Limitations on Guaranties. The Company will not itself, and will
not permit any restricted subsidiary to, guarantee any dividend, or
guarantee any obligation or indebtedness, of any other person other than
(1) guarantees by the Company of obligations or indebtedness of a
restricted subsidiary which such subsidiary shall be authorized to incur
pursuant to the provisions of this Note, (2) guaranties incurred in the
ordinary course of business of the Company or of a restricted subsidiary,
and (3) guarantees by the Company of indebtedness of persons other than
restricted subsidiaries to the extent permitted by clause (4) of paragraph
(A) of this section 9.
(E) Limitation on Investments. The Company will not itself, and
will not permit any restricted subsidiary to, make any investment, or any
commitment to make any investment, if, immediately after giving effect to
any such proposed investment, (1) the aggregate amount of all investments,
including investments made prior to the date of original issue of the Notes
(all such investments to be taken at the cost thereof at the time of making
such investment without allowance for any subsequent write-offs or
appreciation or depreciation thereof, but less any amount repaid or
recovered on account of capital or principal), shall exceed 30% of the
consolidated tangible net worth of the Company and its restricted
subsidiaries, or (2) consolidated funded indebtedness shall exceed 55% of
consolidated capitalization.
(F) Limitation on Dividends. The Company will not declare or pay, or
set apart any funds for the payment of, any dividends (other than dividends
payable in common stock of the Company) on any shares of capital stock of
any class of the Company, or apply any of its funds, property or assets to,
or set apart any funds, property or assets for, the purchase, redemption or
other retirement of, or make any other distribution, by reduction of
capital or otherwise, in respect of, any shares of capital stock of any
class of the Company, unless, immediately after giving effect to such
action (a) the Company would be permitted to incur at least $1.00 of
additional unsecured funded indebtedness pursuant to the provisions of
section 9(A)(3) hereof, and (b) the sum of
(1) the amounts declared and paid or payable as, or set apart
for, dividends (other than dividends paid or payable in common stock
of the Company) on, or distributions (taken at cost to the Company or
fair value at time of
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distribution, whichever is higher) in respect of, all shares of
capital stock of all classes of the Company subsequent to December 31,
1994, and
(2) the excess, if any, of the amounts applied to, or set apart
for, the purchase, redemption or retirement of all shares of capital
stock of all classes of the Company subsequent to December 31, 1994,
over the sum of (i) such amounts as shall have been received as the
net cash proceeds of sales of shares of capital stock of all classes
of the Company subsequent to December 31, 1994, plus (ii) the
aggregate principal amount of all indebtedness of the Company and its
subsidiaries converted into or exchanged for shares of capital stock
of the Company subsequent to December 31, 1994,
would not be in excess of (x) $30,000,000 plus (or minus in the case of a
deficit) (y) the consolidated net income of the Company and its restricted
subsidiaries accrued subsequent to December 31, 1994. The foregoing
provisions of this paragraph (F) to the contrary notwithstanding (i) the
Company may pay any dividend within 90 days of the date of its declaration
if, on the date of declaration, such dividend could properly have been paid
within the limitations of this paragraph (F), and (ii) the Company may pay
regular dividends on or make payments or purchases required to be made at
the time when made by the terms of any sinking fund, purchase fund or
mandatory redemption requirement in respect of any outstanding shares of
preferred stock of the Company originally issued for cash but all amounts
so paid or applied pursuant to clauses (i) and (ii) above shall be included
in any subsequent computation of restricted payments under this paragraph
(F). The Company will not declare any dividend payable more than 90 days
after the date of declaration thereof. The Company will not declare any
dividend if an event of default under section 12 shall have occurred and be
continuing.
(G) Limitations on Dispositions of Stock or Indebtedness of
Restricted Subsidiaries. The Company will not sell, assign, transfer or
otherwise dispose of (except to a wholly-owned restricted subsidiary) any
shares of capital stock of any class of any restricted subsidiary, or any
other security of, or any indebtedness owing to it by, any such subsidiary,
unless (1) all of the capital stock and other securities and the entire
indebtedness of such subsidiary at the time owned by the Company and by all
its other restricted subsidiaries shall be sold, assigned, transferred or
otherwise disposed of, at the same time, for cash, (2) such subsidiary
shall not, at the time of such sale, assignment, transfer or other
disposition, own either (a) any shares of capital stock of any class or any
other security or any indebtedness of any other restricted subsidiary of
the Company which is not being simultaneously disposed of as permitted by
this paragraph (G) or (b) any indebtedness of the Company, and (3) such
sale, assignment or transfer is permitted by paragraph (I) of this section
9.
(H) Maintenance of Consolidated Current Assets. The Company will
not permit the consolidated current assets of the Company and its
restricted subsidiaries to be at any time less than 140% of consolidated
current indebtedness.
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(I) Limitations on Mergers, Consolidations and Sales of Assets. The
Company will not (1) consolidate with or merge into any other corporation,
or permit any other corporation to merge into the Company, unless (a) the
surviving or continuing corporation shall be the Company, and (b) no event
of default under section 12 shall exist at the time of, or result from,
such merger or consolidation, and (c) after giving effect to such
consolidation or merger the Company would be permitted to incur at least
$1.00 of additional funded indebtedness under the provisions of paragraph
(A)(3) of this section 9; or (2) sell, lease, transfer or otherwise dispose
of all or any substantial part of its property and assets.
For the purposes of this paragraph (I) and clause (5) of paragraph (B)
of this section 9, a sale, lease, transfer or disposition of properties or
assets of the Company or a restricted subsidiary shall be deemed to be of a
"substantial part" thereof only if the fair market value of such properties
or assets, when added to the fair market value of all other properties or
assets sold, leased, transferred or disposed of by the Company and its
restricted subsidiaries, other than (x) in the ordinary course of business,
or (y) in an approved transaction, during the 365 day period ending on the
date of such sale, lease, transfer or disposition exceeds 15% of the
consolidated assets of the Company and its restricted subsidiaries
determined as of the end of the Company's immediately preceding fiscal
year.
As used herein, the term "approved transaction" shall mean any sale,
lease, transfer or disposition of properties or assets to the extent that
the Company shall, within 5 business days of such sale, lease, transfer or
disposition, certify in writing to each holder of outstanding Notes that
such transaction shall constitute an "approved transaction" for all
purposes hereof.
The company will, on a date not later than the 365th day after the
occurrence of any approved transaction, apply the net after tax proceeds of
each approved transaction to either
(i) the purchase, acquisition or construction of capital assets
which are useful and to be used in the surfactant, polymer, or
specialty chemical business of the Company or a restricted subsidiary,
or
(ii) the prepayment of unsecured funded indebtedness of the
Company, including the concurrent prepayment of Notes pursuant to the
provisions of paragraph 4(C) hereof pro rata with all other unsecured
funded indebtedness then being prepaid;
provided, however, that to the extent that, at any time, the fair market
value of all properties or assets which were the subject of approved
transactions (the net after tax proceeds of which have not theretofore been
applied as contemplated in clause (i) or clause (ii) above) exceeds 10% of
the consolidated assets of the Company and its restricted subsidiaries,
determined as of the end of the fiscal year of the Company immediately
preceding any determination hereunder, the Company will, on a date not
later than the 30th day after such
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determination, apply the net after tax proceeds of such excess approved
transactions in the manner contemplated in clause (i) or clause (ii) above.
(J) Limitations on Sale-and-Leasebacks. The Company will not itself,
and will not permit any restricted subsidiary to, enter into any
arrangement, directly or indirectly, with any person whereby the Company or
such subsidiary shall sell or transfer any manufacturing plant or equipment
owned or acquired by the Company or such subsidiary and then or thereafter
rent or lease, as lessee, such property or any part thereof, or other
property which the Company or such subsidiary, as the case may be, intends
to use for substantially the same purpose or purposes as the property being
sold or transferred, unless (1) the lease covering such property or other
property shall be for a term of not less than three years, and (2) the
Company could then incur unsecured funded indebtedness under clause (3) of
paragraph (A) of this section 9 in an amount not less than the capitalized
value of the rentals payable by the Company or such subsidiary, as the case
may be, under such lease determined in accordance with good accounting
practice.
(K) Limitation on Rentals. The Company will not itself, and will
not permit any restricted subsidiary to, enter into, as lessee, or be a
party to, any lease of property if, immediately after giving effect to such
lease, the aggregate amount of rentals (excluding up to $2,500,000 of tank
car rentals incurred during such fiscal year and any rentals payable under
capitalized leases or under leases between the Company and any wholly-owned
restricted subsidiary or between wholly-owned restricted subsidiaries) for
any fiscal year of the Company payable by the Company and its restricted
subsidiaries with respect to all such leases shall exceed 5% of
consolidated tangible net worth of the Company and its restricted
subsidiaries. For the purposes of this paragraph (K), the term "rentals,"
with respect to any lease and for any period, shall mean the aggregate
amount payable by the lessee under such lease for such period to the
lessor.
(L) Transactions with Affiliates. Notwithstanding any other
provision hereof, the Company will not, and will not permit any restricted
subsidiary to, directly or indirectly, enter into any transaction with any
affiliate of the Company (other than a wholly-owned restricted subsidiary)
unless such transaction is in the ordinary course of, and pursuant to the
reasonable requirements of, the Company's or such restricted subsidiary's
business and is determined by the Board of Directors of the Company to be
at least as favorable to the Company or such restricted subsidiary as
generally obtainable at the time from persons other than affiliates of the
Company in a similar transaction.
(M) Compliance with ERISA.
(1) The Company will not, and will not permit any restricted
subsidiary to, permit the aggregate value of all vested benefits under
all its employee benefit plans which are employee pension benefit
plans to exceed on any valuation date the then current value of the
assets of such employee benefit plans allocable to such vested
benefits unless the Company could issue additional unsecured funded
indebtedness pursuant to section 9(A)(3) in an amount at least equal
to the amount by which such vested benefits exceed the current value
of the assets of such plans
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allocable to such vested benefits. All actuarial assumptions and
methods used to make each determination required by the preceding
sentence shall be reasonable in the aggregate, and shall comply with
all requirements of law. All such employee benefit plans shall have
annual or more frequent valuation dates.
If, on any valuation date, after giving effect to any increase in
vested benefits, the value of vested benefits under all employee
pension benefit plans maintained by the Company and its restricted
subsidiaries exceeds the value of plan assets, the amount of any
deficit resulting from an increase in vested benefits subsequent to
the immediately preceding valuation date shall be amortized and made
up during the twelve-month period following the valuation date as of
which such deficit was determined, or on such other basis as is agreed
to by the Company and the holder or holders of 51% in aggregate
principal amount of all outstanding Notes and the holder or holders of
the Notes agree that their approval of any such other basis proposed
by the Company shall not be unreasonably withheld. In addition, the
Company will make annual contributions in the aggregate sufficient to
comply with the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") standards as to the funding of employee pension
benefit plans. The Company will make an evaluation at least once a
year and also after the occurrence of an event resulting in an
extension of pension benefits to additional employees or negotiation
of labor contracts increasing pension benefits or any other event
which the Company should reasonably expect to increase vested
benefits.
(2) The Company will not, and will not permit any subsidiary to,
(a) terminate any of its employee benefit plans so as to result in any
material liability to the Pension Benefit Guaranty Corporation
established pursuant to ERISA, (b) allow or suffer to exist any
material prohibited transaction involving any of such employee benefit
plans, (c) incur or suffer to exist any material accumulated funding
deficiency, whether or not waived, involving any of such employee
benefit plans, or (d) allow or suffer to exist any occurrence of any
reportable event, or any other event or condition, which presents a
material risk of termination of such employee benefit plans by such
Pension Benefit Guaranty Corporation so as to result in a material
liability to the Pension Benefit Guaranty Corporation.
(3) As used in this paragraph (M), the terms "vested benefits,"
"employee pension benefit plans," "accumulated funding deficiency" and
"reportable event" shall have the respective meanings assigned to them
in ERISA, and the term "prohibited transaction" shall have the meaning
assigned to it in Internal Revenue Code Section 4975 and ERISA.
Section 10. Consents, Waivers and Modifications. Any term, covenant,
agreement or condition of this Note may be amended, or compliance therewith may
be waived (either generally or in a particular instance and either retroactively
or prospectively), if the Company shall have obtained the agreement or consent
in writing of the holders of at least 51% in aggregate principal amount of all
outstanding Notes; provided, however, that without the agreement or consent in
writing of the holders of all outstanding Notes no such amendment or waiver
shall (i) change the
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amount or maturity of any principal of the Notes or any installment or fixed
prepayment thereof or change the rate or extend the time of payment of interest
on the Notes or reduce the amount of principal thereof or premium with respect
thereto or modify any of the provisions of the Notes with respect to the payment
or prepayment thereof, (ii) give to any Note any preference over any other Note,
(iii) reduce the percentage of holders of Notes required to approve any such
amendment or effectuate any such waiver or (iv) change the definition of "change
of control" set forth in paragraph 4(D). Any such amendment or waiver shall
apply equally to all holders of the Notes and shall be binding upon them, upon
each future holder of any Note and upon the Company, whether or not such Note
shall have been marked to indicate such amendment or waiver. No such amendment
or waiver shall extend to or affect any obligation not expressly amended or
waived or impair any right consequent thereon.
Section 11. Definitions. For the purposes of this Note, the following
terms shall have the following respective meanings, and any accounting terms not
defined in this Note shall have the respective meanings given to them in
accordance with good accounting practice:
(A) The term "affiliate" of any corporation shall mean any person
which, directly or indirectly, controls or is controlled by or is under
common control with such corporation. For the purposes of this definition,
"control" (including the correlative meanings of "controlling," "controlled
by" and "under common control with") shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of such person, whether through the ownership of voting
securities, by contract or otherwise.
(B) The term "assets" of any corporation shall mean, at any date, the
gross book value as shown by the books of such corporation in accordance
with good accounting practice of all its property, whether real, personal
or mixed (exclusive of franchises, licenses, permits, patents, patent
applications, copyrights, trademarks, trade names, good will, experimental
or organizational expense, leasehold improvements not recoverable at the
expiration of a lease, unamortized debt discount and expense, deferred
charges and other intangibles and treasury stock), less the sum (without
duplication) of (1) all reserves for depreciation, depletion, obsolescence
and amortization of its properties (other than properties excluded as
hereinabove provided) as shown by the books of such corporation and all
other proper reserves which in accordance with good accounting practice
should be set aside in connection with the business conducted by such
corporation, other than reserves for contingencies not allocated to any
particular purpose; and (2) the amount of any write-up subsequent to
December 31, 1986 in the book value of any asset owned by such corporation
on such date resulting from the revaluation thereof subsequent to such
date, or any write-up in excess of the cost of any asset acquired by such
corporation subsequent to such date.
(C) The term "capitalized lease" shall mean any lease which, in
accordance with good accounting practice, is of such a nature that payment
obligations of the lessee thereunder shall have been or should be
capitalized and shown as liabilities (other than current indebtedness) upon
the balance sheet of such lessee.
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(D) The term "consolidated," when used in respect of the assets,
current assets, current indebtedness and funded indebtedness of the Company
and its restricted subsidiaries shall mean the aggregate of the assets,
current assets, current indebtedness, funded indebtedness, respectively, of
the Company and its restricted subsidiaries, after eliminating all
intercompany items and all other items which should be eliminated in
accordance with good accounting practice; provided, however, in determining
consolidated assets, there shall not be included therein any amount on
account of the excess of (i) the cost of acquisition of shares of any
subsidiary over the book value of the assets of such subsidiary
attributable to such shares on the books of such subsidiary at the date of
acquisition of such shares, or (ii) the book value of the assets of such
subsidiary attributable to such shares at the date of such acquisition over
the cost of acquisition of such shares.
(E) The term "consolidated capitalization" shall mean the sum of (i)
consolidated funded indebtedness, plus (ii) consolidated tangible net
worth.
(F) The term "consolidated balance sheet" shall mean a balance sheet
consolidating the accounts of the Company and its restricted subsidiaries
prepared, subject to any applicable provisions hereof, in accordance with
good accounting practice and after eliminating all intercompany items and
all other items which should be eliminated in accordance with good
accounting practice.
(G) The term "consolidated net current assets" shall mean the amount
by which consolidated current assets exceeds consolidated current
indebtedness.
(H) The term "consolidated net income" shall mean the aggregate of the
net income of the Company and its restricted subsidiaries, after
eliminating all intercompany items and portions of income properly
attributable to minority interest in the stock of such subsidiaries, all
computed in accordance with good accounting practice.
(I) The term "consolidated tangible net worth" shall mean the
aggregate of the tangible net worth of the Company and its restricted
subsidiaries, consolidated in accordance with good accounting practice.
(J) The term "corporation" shall include corporations, joint stock
companies and business trusts.
(K) The term "current assets", to the extent permitted by and in all
cases as determined in accordance with, good accounting practice, shall
include (1) cash on hand or in transit or on deposit in any bank or trust
company which has not suspended business; (2) readily marketable securities
issued by the United States of America and other readily marketable
securities maturing within one year from the date of issuance, taken in
total at not more than cost or current market value, whichever is lower;
(3) customers' accounts and bills and notes receivable; (4) inventories of
raw materials and supplies, of work or materials in process and of finished
products, taken in total at not more than cost or current market value,
whichever is less; and (5) such other assets including prepaid expenses but
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not deferred charges as, in accordance with good accounting practice, would
be included in "current assets"; all after deduction of adequate reserves
in each case where a reserve is proper under good accounting practice;
provided, however, that in computing current assets there shall be excluded
any assets which are pledged or deposited as security for or for the
purpose of paying any obligation which is not included in current
indebtedness.
(L) The term "current indebtedness" shall mean all indebtedness other
than funded indebtedness, and, without limitation, shall include (1) all
indebtedness maturing on demand or within one year after the date as of
which such determination is made, (2) final maturities and prepayments of
indebtedness and sinking fund payments (including, with respect to the
Notes, not only (a) fixed prepayments, but also (b) other prepayments on
and after the date of notice of prepayment thereof pursuant to section 6)
required to be made in respect of any indebtedness within one year after
said date, and (3) all other items (including taxes accrued as estimated)
which in accordance with good accounting practice would be included as
current liabilities.
(M) The term "default rate" shall mean the greater of (1) 8.59% per
annum, or (2) the prime rate of interest as announced from time to time by
The First National Bank of Chicago (or if not so announced by said bank
then the prime rate as reported from time to time in the money rate section
of The Wall Street Journal).
(N) The term "events of default" shall have the meaning specified in
section 12.
(O) The term "funded indebtedness" shall mean all indebtedness
(including capitalized payment obligations under capitalized leases) which
by its terms matures more than one year from the date as of which any
calculation of funded indebtedness is made. Funded indebtedness shall also
include the amount by which vested benefits under employee pension benefit
plans exceeds the value of assets of such plans allocable to such vested
benefit, if any.
(P) The term "good accounting practice" shall mean, as to a particular
corporation, such accounting practices as, in the opinion of the
independent accountants regularly retained by such corporation, conforms at
the time to generally accepted accounting principles.
(Q) The term "indebtedness" of any corporation shall mean and include
(1) all items which, in accordance with good accounting practice, would be
included on the liability side of a balance sheet of such corporation as of
the date as of which indebtedness is to be determined, including all
capitalized payment obligations created or arising under any capitalized
lease, but excluding capital stock, capital, paid-in and earned surplus,
surplus reserves which in effect are appropriations of surplus or offsets
to asset values (other than all reserves in respect of obligations, the
amount, applicability or validity of which is at such date being contested
in good faith by such corporation) and deferred credits, (2) indebtedness
secured by any mortgage, pledge, security interest or lien existing on
property owned subject to such mortgage, pledge, security interest or lien
whether or not the indebtedness secured thereby shall have been assumed,
(3) all proper accruals for
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federal and other taxes based on or measured by income or profits, and (4)
except for guaranties referred to in clauses (1) and (2) of paragraph (D)
of section 9, all indebtedness guaranteed, directly or indirectly, in any
manner by such corporation, or in effect guaranteed or supported, directly
or indirectly, by such corporation through an agreement, contingent or
otherwise, (a) to purchase the indebtedness, (b) to purchase, sell,
transport or lease (as lessee or lessor) property or to purchase or sell
services at prices or in amounts designed to enable the debtor to make
payment of the indebtedness or to assure the owner of the indebtedness
against loss, or (c) to supply funds to or in any other manner invest in
the debtor; provided, however, that such term shall not mean and include
any indebtedness in respect of which moneys sufficient to pay and discharge
the same in full (either on the expressed date of maturity thereof or on
such earlier date as such indebtedness may be duly called for redemption
and payment) shall be deposited with a depositary, agency or trustee in
trust for the payment thereof, but only if, in the case of indebtedness to
be redeemed prior to the maturity thereof, any notice of redemption
required by the terms thereof shall have been duly given or provision
satisfactory to the depositary, agent or trustee, as the case may be, shall
have been made for the giving of such notice.
(R) The term "investment" shall include any investment, in cash or by
the delivery of other property (except against receipt of the fair value
thereof in cash or in the ordinary course of business), whether by
acquisition of stock, securities or other indebtedness, or by loan,
advance, capital contribution, transfer of property or otherwise; provided,
however, that (1) the acquisition of stock, securities or other
indebtedness of, or a loan, advance capital contribution or transfer of
property to, a restricted subsidiary (or a corporation which by reason of
such transaction will become a restricted subsidiary) by the Company or one
of its restricted subsidiaries, or (2) the purchase, acquisition or
ownership by the Company or a restricted subsidiary of (a) readily
marketable securities issued by states or municipalities within the United
States of America or agencies or subdivisions thereof rated "A" or better
by any recognized rating agency, (b) direct obligations of, or obligations
unconditionally guaranteed by, the United States of America or any agency
thereof, (c) commercial paper maturing within not more than 270 days from
the date of issuance thereof which is issued by any corporation organized
and doing business under the laws of the United States of America or any
state thereof and which is rated "Prime 1" by Moody's Investors Service,
Inc. or "A-1" by Standard and Poor's Corporation (or comparably rated by
such organizations or any successors thereto if the rating system is
changed or there are such successors), (d) certificates of deposit issued
by any commercial bank organized and doing business under the laws of the
United States of America or any state thereof and having (x) capital,
surplus and undivided profits aggregating more than $50,000,000, and (y)
outstanding commercial paper which, at the time of acquisition of such
certificates of deposit by the Company or any restricted subsidiary is
rated "Prime 1" by Moody's Investors Service, Inc. or "A-1" by Standard and
Poor's Corporation (or comparably rated by such organizations or any
successors thereto if the rating system is changed or there are any
successors), and (e) trade accounts payable to the Company or a restricted
subsidiary within six months from the date such liability arose, shall not
be deemed an "investment."
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(S) The term "net income" of any corporation for any fiscal period
shall mean the net income (or the net deficit, if expenses and charges
exceed revenues and other proper income credits) of such corporation for
such period, determined in the following manner:
(1) The gross revenues and other proper income credits of such
corporation shall be computed for such period in accordance with good
accounting practice; provided that in any event there shall not be
included in such gross revenues and income credits any write up in the
book value of any asset resulting from the revaluation thereof;
(2) From the amount of such gross revenues and other proper
income credits for such period determined as provided in the preceding
clause (1), there shall be deducted an amount equal to the aggregate
of all expenses and other proper income charges for such period,
determined in accordance with good accounting practice but in any
event deducting (without in any respect limiting the generality of the
foregoing) the following items: (a) all interest charges; (b)
amortization of debt discount and expense and any other amortization
of deferred charges properly subject to amortization; (c) provision
for all taxes whether in respect of property, income, excess profits
or otherwise; (d) provisions for all contingency and other reserves
whether general or special; and (e) provision for depreciation,
depletion, obsolescence and amortization of the properties of such
corporation (including depreciation and amortization of leasehold
improvements) in amounts not less than the aggregate amount actually
deducted on its books and not less than the aggregate amount claimed
(but adjusted for any disallowance) or to be claimed by such
corporation for federal income tax purposes for such period; provided,
however, that in lieu of accelerated depreciation permitted under the
Internal Revenue Code of 1986, as amended, the corporation may at its
option provide for depreciation and amortization in amounts based on
the normal rates customarily employed by the corporation for identical
or similar types of property in the preparation of its audited
financial statements, and in such event the corporation shall
establish and shall maintain in accordance with good accounting
practice an appropriate reserve in respect of any tax savings as a
result of charging for tax purposes such accelerated depreciation or
accelerated amortization;
provided that, in determining the amount to be included in clauses (1) and
(2) above, (i) any federal tax adjustments for any period prior to January
1, 1995 shall not be a proper charge or credit to income for any period
subsequent to that date, and any federal tax adjustment for any period
subsequent to December 31, 1994 shall be included as a proper charge or
credit to income for the year in which actually received or paid, except to
the extent, if any, to which the amount of such latter adjustment is
charged to a proper reserve for federal taxes set up out of income for any
period subsequent to December 31, 1994; (ii) any adjustments for any period
prior to January 1, 1995 resulting from any renegotiation or price
redetermination in respect of any Government prime contract, or any
subcontract under any Government prime contract, shall not be included as a
proper charge or credit to income for any period subsequent to that date,
and any such renegotiation or price redetermination adjustment for any
period subsequent to December 31, 1994 shall be
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included as a proper charge or credit to income for the year in which
actually received or paid, except to the extent, if any, to which the
amount of such adjustment is charged to a proper reserve for renegotiation
or price redetermination set up out of income for any period subsequent to
December 31, 1994; (iii) any earnings of, and dividends payable to, such
corporation in currencies which at the time are blocked against conversion
into United States currency shall not be included as a proper charge or
credit to income for any period subsequent to December 31, 1994; (iv) any
undistributed earnings of, and dividends payable by, unconsolidated
subsidiaries or any other person (other than a restricted subsidiary) shall
not be included as a proper charge or credit to income for any period
subsequent to December 31, 1994; (v) any gains on the sale or other
disposition of capital assets and taxes on such excluded gains shall not be
included as a proper charge or credit to income for any period subsequent
to December 31, 1994; (vi) net earnings and losses of any corporation
(other than a subsidiary) substantially all the assets of which have been
acquired in any manner, realized by such other corporation prior to the
date of acquisition shall not be included as a proper charge or credit to
income for any period subsequent to December 31, 1994; (vii) net earnings
or losses of any corporation (other than a restricted subsidiary) with
which the Company or a restricted subsidiary shall have consolidated or
which shall have merged into or with the Company or a restricted subsidiary
prior to the date of such consolidation or merger shall not be included as
a proper charge or credit to income for any period subsequent to December
31, 1994; and (viii) any portion of the net earnings of any restricted
subsidiary which for any reason is unavailable for the payment of dividends
to the Company or any other restricted subsidiary shall not be included as
a proper credit to income for any period subsequent to December 31, 1994.
The term "capital assets" of any corporation as used herein shall include
all fixed assets, both tangible (such as land, buildings, machinery and
equipment) and intangible (such as patents, copyrights, trademarks, trade
names, formulae and good will), and securities.
(T) The term "person" shall include any individual, a corporation, a
partnership or a government, foreign or domestic, or any agency or
political subdivision thereof.
(U) The term "restricted subsidiary" shall mean any subsidiary of the
Company which (i) is organized under the laws of any state of the United
States of America or under the laws of Canada or any province thereof, (ii)
has substantially all of its assets located within, and operates
substantially within, the United States of America or Canada, (iii) at
least 50% of the outstanding voting stock having ordinary voting power to
elect a majority of the Board of Directors of such corporation
(irrespective of whether or not at the time stock of any other class or
classes shall have or might have voting power by reason of the happening of
any contingency) is at the time directly or indirectly owned by the
Company, by one or more of its wholly-owned restricted subsidiaries or by
the Company and one or more of its wholly-owned restricted subsidiaries,
and (iv) which the Company designates as a restricted subsidiary, by notice
to the holders of the Notes in the manner in section 6 provided, at the
date on which the Notes shall be originally issued or subsequent to the
acquisition of any such subsidiary by the Company; provided, however, that
the Company may not designate any subsidiary as a restricted subsidiary
unless at the time of such designation, and after giving effect thereto,
(a) the Company could become liable for at least $1.00 of additional
unsecured funded indebtedness pursuant to clause (3) of
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paragraph (A) of section 9, and (b) no default or event which the passage
of time or giving of notice, or both, would constitute an event of default
would exist; and provided further that the Company may not subsequently
change the designation of any such subsidiary from restricted subsidiary to
unrestricted subsidiary.
(V) The term "subsidiary" shall mean, as to a particular parent
corporation, any corporation of which more than 50% of the outstanding
stock having ordinary voting power to elect a majority of the Board of
Directors of such corporation (irrespective of whether or not at the time
stock of any other class or classes of such corporation shall have or might
have voting power by reason of the happening of any contingency) is at the
time directly or indirectly owned by such parent corporation, by one or
more of its subsidiaries or by such parent corporation and one or more of
its subsidiaries.
(W) The term "tangible net worth" of any corporation shall mean the
sum of the amounts set forth on the balance sheet of such corporation,
prepared in accordance with good accounting practice and as of any date
selected by such corporation not more than 45 days prior to the taking of
any action for the purpose of which the determination is being made, which
appears as (1) the par or stated value of all outstanding stock, (2)
capital, paid-in and earned surplus and (3) deferred taxes and investment
tax credits, less the sum of (a) any surplus resulting from any write-up of
assets subsequent to December 31, 1994, (b) good will, including any
amounts (however designated on such balance sheet) representing the cost of
acquisitions of restricted subsidiaries in excess of underlying tangible
assets, unless an appraisal of such assets made by a reputable firm of
appraisers at the time of acquisition shall indicate sufficient value to
cover such excess, (c) any amounts by which investments in persons
appearing on the asset side of such balance sheet exceed the lesser of cost
or the proportionate share of such corporation in the book value of the
assets of such persons, provided that such book value shall be reduced by
any amounts representing restrictions on the payment of dividends by such
persons pursuant to any law, charter provision, mortgage or indenture or,
in lieu of the foregoing, any investment may be carried at its market value
if the securities representing such investment are publicly traded, (d)
patents, trademarks, copyrights, leasehold improvements not recoverable at
the expiration of a lease and deferred charges (including, but not limited
to, unamortized debt discount and expense, organization expenses,
experimental and development expenses, but excluding prepaid expenses), (e)
any amounts at which shares of capital stock of such corporation appear on
the asset side of such balance sheet, and (f) any amount of indebtedness
not included on the liability side of such balance sheet.
(X) The term "unrestricted subsidiary" shall mean any subsidiary
other than a restricted subsidiary.
(Y) The term "wholly-owned restricted subsidiary" shall mean any
restricted subsidiary all of whose outstanding stock of all classes (other
than directors' qualifying shares) at the time is owned directly or
indirectly by the Company, or by one or more of its wholly-owned restricted
subsidiaries or by the Company and one or more of its wholly-owned
restricted subsidiaries.
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Section 12. Events of Default and Remedies. When any event of default
(hereafter defined) described in paragraph (A) below has happened and is
continuing, the holder or holders of 25% or more of the principal amount of
Notes at the time outstanding may, and when any event of default described in
paragraph (B), (C), (F), (G) or (H) below has happened and is continuing, the
holder or holders of 51% or more of the principal amount of Notes at the time
outstanding may, by written notice to the Company, declare the entire principal
and all interest accrued on all Notes to be, and all such Notes shall thereupon
become, forthwith due and payable, without any presentment, demand, protest or
other notice of any kind, all of which are hereby expressly waived; provided,
however, when any event of default described in paragraph (A) below has happened
and is continuing with respect to any Note, the holder of such Note may, by
written notice to the Company, declare the entire principal and all interest
accrued on such Note to be, and such Note shall thereupon become, forthwith due
and payable, without any presentment, demand, protest or other notice of any
kind, all of which are hereby expressly waived. When any event of default
described in paragraph (D) or (E) below has occurred, then all outstanding Notes
shall immediately become due and payable without presentment, demand or notice
of any kind. If the event of default on which any such acceleration or
declaration is based is an event of default other than an event of default
described in paragraph (D) or (E) below, then in such event, in addition to the
amounts required to be paid by the Company in accordance with the foregoing
provisions of this section 12, the Company shall also pay, to the extent
permitted by law, an amount (as liquidated damages for the loss of the bargain
evidenced hereby and not as a penalty) equal to the make whole premium amount
described in section 4 above.
The provisions of this section 12 are subject to the condition that if the
principal of and accrued interest on all or any outstanding Notes have been
declared or become immediately due and payable by reason of the occurrence of
any event of default described in paragraphs (A) through (H), below, the holders
of 66-2/3% in aggregate principal amount of the Notes then outstanding may, by
written instrument filed with the Company, rescind and annul such acceleration
and the consequences thereof, provided that at the time such acceleration is
annulled and rescinded:
(a) no judgment or decree has been entered for the payment of any
monies due pursuant to the Notes;
(b) all arrears of interest upon all the Notes and all other sums
payable under the Notes (except any principal, interest or premium on the
Notes which has become due and payable solely by reason of such
acceleration under this section 12) shall have been duly paid; and
(c) each and every other event of default shall have been made good,
cured or waived pursuant to section 10 hereof;
and provided further, that no such rescission and annulment shall extend to or
affect any subsequent event of default or impair any right consequent thereto.
The events listed in paragraph (A) through (H) below are called "events of
default":
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(A) default shall be made by the Company (1) in the payment of
principal of, or premium, if any, on, any Note when and as the same shall
become due and payable, whether at maturity thereof, on a date fixed for
prepayment (in this Note or in any notice of prepayment), by acceleration
or otherwise, or (2) in the payment of interest on any Note when and as the
same shall become due and payable and such default in the payment of
interest shall continue for a period of 5 days; or
(B) default shall be made in the performance or observance of any
covenant, condition or agreement contained in section 9 and such default
shall continue for a period of 30 days; or
(C) default shall be made in the performance or observance of any
other of the covenants, conditions or agreements in this Note set forth or
in the Loan Agreement dated as of October 1, 1998 pursuant to which this
Note was initially issued and such default shall continue for a period of
30 days after the earlier of (1) the Company becoming aware of such
default, and (2) written notice to the Company from the holder of any Note
stating the specific default or defaults; or any representation or warranty
made by the Company herein or in said Loan Agreement, or furnished in
writing in connection with or pursuant to this Note or said Loan Agreement
shall be false in any material respect on the date as of which such
representation or warranty is made; or
(D) a decree or order by a court having jurisdiction in the premises
shall have been entered adjudging the Company or any restricted subsidiary
a bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, readjustment, arrangement, composition or similar relief
for the Company or any such subsidiary under the federal bankruptcy laws,
or any other similar applicable federal or state law, and such decree or
order shall have continued undischarged or unstayed for a period of 60
days; or a decree or order of a court having jurisdiction in the premises
for the appointment of a receiver or liquidator or trustee or assignee in
bankruptcy or insolvency of the Company or any restricted subsidiary or a
substantial part of its property, or for the winding up or liquidation of
its affairs, shall have been entered, and such decree or order shall have
remained in force undischarged and unstayed for a period of 60 days; or any
substantial part of the property of the Company or any restricted
subsidiary shall be sequestered or attached and shall not be returned to
the possession of the Company or such subsidiary or released from such
attachment within 60 days thereafter; or
(E) the Company or any restricted subsidiary shall institute
proceedings to be adjudged a voluntary bankrupt, or shall consent to the
filing of a bankruptcy proceeding against it, or shall file a petition or
answer or consent seeking reorganization, readjustment, arrangement,
composition or similar relief under the federal bankruptcy laws, or any
other similar applicable federal or state law, or shall consent to the
filing of any such petition, or shall consent to the appointment of a
receiver or liquidator or trustee or assignee in bankruptcy or insolvency
of it or of a substantial part of its property, or shall make an assignment
for the benefit of creditors, or shall admit in writing its inability to
pay its debts generally as they become due, or shall voluntarily suspend
transaction of its usual
A-27
<PAGE>
business, or corporate action shall be taken by the Company or any such
subsidiary in furtherance of any of the aforesaid purposes; or
(F) the Company or any restricted subsidiary fails to make any payment
due on any indebtedness having a principal amount greater than $2,500,000
or any event shall occur (other than the mere passage of time) or any
condition shall exist in respect of any indebtedness of the Company or any
restricted subsidiary, or under any agreement securing or relating to such
indebtedness and any such event or condition continues beyond any
applicable period of grace, if any, the effect of which is to cause (or
permit any holder of such indebtedness or other Security or a trustee to
cause) such indebtedness or other Security, or a portion thereof, to become
due prior to its stated maturity or prior to its regularly scheduled dates
of payment; or
(G) final judgment for the payment of money in excess of $250,000
shall be rendered against the Company or any restricted subsidiary and the
same shall remain undischarged for a period of 30 days during which
execution shall not be effectively stayed; or
(H) a change of control (as defined in paragraph 4(D)) shall occur and
continue for more than 40 days or a default shall occur in giving notice of
any change of control pursuant to the provisions of paragraph 8(K).
In case any one or more of the events of default specified above in this
section 12 shall have happened and be continuing, the holder of this Note may
proceed to protect and enforce its rights either by suit in equity and/or by
action at law, or by other appropriate proceedings, whether for the specific
performance (to the extent permitted by law) of any covenant or agreement
contained in this Note or in aid of the exercise of any power granted in this
Note, or, subject to the first paragraph of this section 12, may proceed to
enforce the payment of this Note or to enforce any other legal or equitable
right of the holder of this Note.
In case of a default in the payment of any principal of, premium, if any,
or interest on, any Note, the Company will pay to the holder thereof such
further amount as shall be sufficient to cover the cost and expense of
collection, including (without limitation) reasonable attorneys' fees.
Section 13. No Waiver. No course of dealing between the Company and the
holder hereof or any delay on the part of the holder hereof in exercising any
rights hereunder shall operate as a waiver of any rights of any holder hereof,
except to the extent expressly waived in writing by the holder hereof.
Section 14. Loss, Theft, Destruction or Mutilation of Note. Upon receipt
by the Company of evidence reasonably satisfactory to the Company of the loss,
theft, destruction or mutilation of this Note, and of indemnity or security
reasonably satisfactory to the Company (or, if this Note shall then be held by
an institutional investor, an indemnity agreement therefrom), and upon
reimbursement to the Company of all reasonable expenses incidental thereto, and
upon surrender and cancellation of this Note if mutilated, the Company will make
and deliver a new Note of like tenor in lieu of this Note. Any Note made and
delivered in accordance with the
A-28
<PAGE>
provisions of this section 14 shall be dated as of the date to which interest
has been paid on this Note or, if no interest has theretofore been paid on this
Note, then dated the date hereof.
Section 15. Governing Law. This Note shall be construed in accordance
with and governed by the laws of the State of Illinois.
Section 16. Successors and Assigns. All the covenants, stipulations,
promises and agreements in this Note contained by or on behalf of the Company
shall bind its successors and assigns, whether so expressed or not.
Section 17. Headings. The headings of the sections of this Note are
inserted for convenience only and shall not be deemed to constitute a part
hereof.
A-29
<PAGE>
IN WITNESS WHEREOF, STEPAN COMPANY has caused this Note to be signed in its
corporate name by a duly authorized officer and to be dated as of the day and
year first above written.
STEPAN COMPANY
By_______________________________
Its
A-30
<PAGE>
Exhibit B
(to Loan Agreement)
1. Qualification to do Business:
The Company was incorporated in Illinois on January 14, 1940. On March 31,
1959, the Company's state of incorporation was changed from Illinois to
Delaware. The Company is duly licensed or qualified and in good standing as a
foreign corporation to do business in the states of California, Georgia,
Illinois, Massachusetts, Pennsylvania, New York and New Jersey. Such states are
the only jurisdictions where the ownership or leasing of property or the nature
of business transacted makes such licensing or qualification necessary.
2. Brief Description of Properties Owned by the Company as of October 1,
1998:
(A) NORTHFIELD, ILLINOIS
The Company's administrative and research center is located on eight-acres
located in Northbrook, Illinois, 20 miles northwest of downtown Chicago.
(B) MILLSDALE (JOLIET), ILLINOIS
The Company's midwest manufacturing facilities are located at Millsdale,
Illinois, on 626 acres of land situated on the Illinois Deep Waterway and is
served by the main lines of the Santa Fe Railroad and the Illinois Central Gulf
Railroad. A high pressure, natural gas pipeline passes through the property
immediately adjacent to the Company's property.
This plant produces surfactants, phthalic anhydride and urethane foam
systems and is the Company's principal production facility.
The surfactant plant has ethoxylation, esterification, sulfation and
sulfonation facilities which, together with numerous reaction and mixing
vessels, produce a wide range of products for the surfactant and polymer
departments.
(C) FIELDSBORO, NEW JERSEY
This facility occupies approximately 39 acres of land with 700 feet of
water frontage on the Delaware River and is served by the Camden and Amboy
Railroad. This plant manufactures surfactants.
(D) ANAHEIM, CALIFORNIA
This plant produces surfactant products and occupies approximately eight
acres. The plant is served by the Atchison, Topeka and Santa Fe Railroad.
(E) WINDER, GEORGIA
This plant site occupies approximately 162 acres of land. This plant
manufactures surfactants. The plant is served by the CSX Railroad.
<PAGE>
(F) MAYWOOD, NEW JERSEY
The Company's specialty chemicals and flavor products are produced at this
plant which is 15 miles west of New York City. The plant, which compromises 19
acres, is served by the New York, Susquehanna and Western Railroad.
(G) VOREPPE, FRANCE
The Company owns a 20-acre specialty chemical plant site at this location.
(H) MATAMOROS, MEXICO
The Company owns a 13 acre specialty chemical plant at this location.
(I) MANIZALES, COLOMBIA
The Company owns a 5 acre specialty chemical plant at this location.
3. Subsidiaries as of October 1, 1998:
The following sets forth all subsidiaries of the Company as of October 1,
1998, the capital stock outstanding and the amount thereof owned by the Company
and whether such subsidiaries are consolidated for financial reporting purposes.
<TABLE>
<CAPTION>
SHARES
SHARES OWNED BY
OUTSTANDING COMPANY CONSOLIDATED
<S> <C> <C> <C>
Stepan Mexico, S.A. de C.V. 10,571,000 10,570,014 Yes
Stepan Canada Inc.
Common stock, no par value 1 1 Yes
Stepan Europe S.A.,
Common Stock, par value 100FF 5,400 5,400 Yes
Stepan Colombiana de Quimicos, Ltda.
Common Stock, par value 40COP 93,216,310 88,089,413 Yes
Stepan Quimica Ltda.
Common Stock, par value 1BRL 245,538 245,538 Yes
</TABLE>
4. Designation of Unrestricted Subsidiaries.
B-2
<PAGE>
The Company hereby designates, pursuant to paragraph (U) of Section 11 of
the Notes, for all purposes of the Notes and of the Loan Agreement dated as of
October 1, 1998, that no subsidiary shall be a restricted subsidiary.
5. Pending and Threatened Litigation Not Reflected in 10-K.
None.
6. Funded Indebtedness Outstanding on September 15, 1998.
<TABLE>
<CAPTION>
CURRENT FUNDED
LENDER - NOTE PRINCIPAL PORTION INDEBTEDNESS
<S> <C> <C> <C>
The Northwestern Mutual
Life Insurance Company
9.70% Notes due 8/20/02 $667,000 $667,000 $ 0
Aid Association for Lutherans
9.52% Notes due 4/1/01 476,189 476,189 0
The Mutual Life Insurance
Company of New York
9.52% Notes due 4/1/01 571,427 571,427 0
MONY Life Insurance
Company of America
9.52% Notes due 4/1/01 190,478 190,478 0
The Mutual Life Insurance
Company of New York (GIPEN
& Co.)
9.52% Notes due 4/1/01 190,478 190,478 0
The Northwestern Mutual Life
Insurance Company
9.70% Notes due 4/1/06 6,000,000 1,000,000 5,000,000
Aid Association for Lutherans
7.22% Notes due 4/1/08 5,000,000 500,000 4,500,000
The Mutual Life Insurance
Company of New York
7.22% Notes due 4/1/08 5,000,000 500,000 4,500,000
</TABLE>
B-3
<PAGE>
<TABLE>
<CAPTION>
CURRENT FUNDED
LENDER - NOTE PRINCIPAL PORTION INDEBTEDNESS
<S> <C> <C> <C>
The Northwestern Mutual
Life Insurance Company
7.22% Notes due 4/1/08 5,000,000 500,000 4,500,000
Aid Association for Lutherans
7.22% Notes due 8/1/08 5,000,000 500,000 4,500,000
The Mutual Life Insurance
Company of New York
7.22% Notes due 8/1/08 5,000,000 500,000 4,500,000
The Northwestern Mutual
Life Insurance Company
7.22% Notes due 8/1/08 5,000,000 500,000 4,500,000
Aid Association for Lutherans
7.69% Notes due 6/30/05 3,750,000 0 3,750,000
The Mutual Life Insurance
Company of New York
7.69% Notes due 6/30/05 2,500,000 0 2,500,000
The Northwestern Mutual Life
Insurance Company
7.69% Notes due 6/30/05 3,750,000 0 3,750,000
Aid Association for Lutherans
7.77% Notes due 6/30/10 11,250,000 0 11,250,000
The Mutual Life Insurance
Company of New York
7.77% Notes due 6/30/10 7,500,000 0 7,500,000
The Northwestern Mutual
Life Insurance Company
7.77% Notes due 6/30/10 11,250,000 0 11,250,000
Unsecured bank debt
Various maturities 28,300,000 0 28,300,000
---------- ------- ----------
</TABLE>
B-4
<PAGE>
<TABLE>
<CAPTION>
CURRENT FUNDED
LENDER - NOTE PRINCIPAL PORTION INDEBTEDNESS
<S> <C> <C> <C>
TOTALS $106,395,572 $6,095,572 $100,300,000
============ ========== ============
</TABLE>
B-5
<PAGE>
Exhibit C
(to Loan Agreement)
LEGAL PROCEEDINGS
[DESCRIPTIONS EXCERPTED FROM THE COMPANY'S SEC FILINGS AS INDICATED]
DECEMBER 31, 1992 AMENDED FORM 10-K
Maywood Site. The Company was named as a potentially responsible party ("PRP")
for the Company's Maywood, New Jersey property and the property adjacent thereto
("Sites"). The Company previously reported that it agreed to perform a Remedial
Investigation/Feasibility Study ("RI/FS") with respect to the Sites. The
Company has completed the Remedial Investigation portion of the study and will
file its report with the United States Environmental Protection Agency ("USEPA")
by March 28, 1993. As disclosed in the 1991 Form 10-K, the Company believed
that the cost of the RI/FS would be in the area of $3,000,000. The Company
expended and charged against the environmental reserve $2,349,000 during the
1991 and 1992. While it is probable that the Company will incur some site
cleanup costs, until the RI/FS is completed it is not possible to estimate what
the Company's future liability, if any, will be.
State of New York and Town of Tusten v. SCA Services Inc. The suit alleged that
SCA Services transported waste allegedly generated by the Company from a New
Jersey landfill to an unauthorized site in Cortese, New York, and that the
disposal of waste created a release of hazardous substances which necessitated
response costs and expenses. The Company has settled all of the alleged claims
against it by the United States Environmental Protection Agency, SCA Services,
Inc., Town of Tusten, and the State of New York. The settlement does contain a
provision to re-open the settlement under certain specific conditions. The
dollar amount of this settlement was $197,000 and was charged against the
reserve upon payment in 1993.
Fieldsboro, New Jersey Plant. The characterization study of the xylene
contamination most likely will not be completed until September 1993. The
Company cannot, at this time, estimate what its future potential liability, if
any, will be.
D'Imperio Site. The Company was named as a PRP with regard to the D'Imperio
site located in Hamilton Township, New Jersey. The Company and other PRPs
declined to enter into an agreement with the Environmental Protection Agency to
perform remedial activities at this site. In November 1992, the USEPA, by the
United States Justice Department in an action entitled United States of America
v. Jerome Lightman, et al. (92 CV 4710 (JBS), filed suit against the Company,
alleging that the Company was responsible, as a generator of waste, for the
clean-up costs at the D'Imperio site. The suit is requesting $5,000,000 from
approximately twenty companies as reimbursement for past costs incurred by the
USEPA at the D'Imperio site. As discussed further below, because of issues
relative to volumes, nexus, and credits at other sites, the Company, on December
31, 1992, could not estimate what its future liability might be.
Ewan Property Superfund Site located in Shamong Township, Burlington County, New
Jersey. The USEPA has made a demand to the group of PRPs to recover
approximately $2,000,000 in oversight cost which it has previously spent in
regard to this Site. This amount is over and above any sum which may be due to
remediate this site. The Company and approximately 20 other PRPs at this Site
are endeavoring to reach an allocation to apportion the USEPA's past costs among
themselves. The Company and other PRPs have agreed to a non-binding allocation
process. As
<PAGE>
of December 31, 1992, the PRP group was in an arbitration proceeding to
determine its liability vis a vis another hauler which went to this site and the
hauler for the Company's and the other 20 companies' waste. As to the Company's
involvement at the D'Imperio site (noted above) and Ewan site, one hauler,
Lightman Drum, is responsible for the company's involvement at these sites, as
well as the Enterprise Avenue site in Pennsylvania (settled and reported in the
Company's 1982 Form 10-K). However, given the nature of the issues over nexus,
waste types, volumes, and in the case of Ewan per se, the liability between
Lightman Drum customers and customers of other waste haulers which used Ewan,
two sets of mediation are taking place which impact the obligations of the
Company. The parties in the D'Imperio suit are only Lightman Drum customers.
Hence, the Company cannot estimate what its probable liability will be because
the mediation process is not yet concluded. It is the Company's position that
any liability at the D'Imperio site will reduce the Company's liability at the
Ewan site and its liability at both sites will be further reduced by credits for
payments at the Enterprise Avenue site (settled 1982).
Olin Corporation. The Company received notification in November, 1992 from Olin
Corporation that Olin Corporation has incurred costs in cleaning up a plant site
formerly owned by the Company in Wilmington, Massachusetts. Olin Company is
asserting a claim against Stepan Company for reimbursement of a part of this
claim. The claim against Stepan Company did not specify a dollar amount being
sought and consequently, the Company cannot estimate what its future potential
liability, if any, will be.
DECEMBER 31, 1993 FORM 10-K
Maywood Site. The Company filed its Remedial Investigation Study on February
11, 1994 and has until March 16, 1994 to file its draft Feasibility Study with
the USEPA Region II. The Company expended and charged against its environmental
reserve $3,476,000 during the last three years. While it is probable that the
Company will incur some site cleanup costs, until the Feasibility Study is
completed, it is not possible to estimate what the Company's future liability,
if any, would be.
Fieldsboro, New Jersey Site. The Company plans to expend approximately $220,000
to perform capping activities at this site. The Company is awaiting reapproval
from the New Jersey Environmental Protection department. In addition, the
Company may spend up to $70,000 per year to perform well monitoring activities.
D'Imperio Site/United States of America v. Jerome Lightman et. al. (92 CV 4710
[JBS]). The court ordered non-binding mediation in this matter which concluded
February 17, 1994. The Company did not agree with the mediators' results and
conclusions, which in the Company's opinion, were arbitrary and inconsistent. As
a result, the Company made a separate offer to pay for what the Company believes
to be its share of past costs, or $638,000. The twenty other PRPs have submitted
their own proposal to the government. The government has 45 days from February
17, 1994 to accept or reject the Company's offer. If no resolution is reached,
the matter will be tried. At this time, the Company cannot estimate what its
future potential liability might be at this site.
C-2
<PAGE>
Chemical Control Site, Elizabeth, New Jersey. The only manifest linking the
Company to this site clearly showed that the waste shipment in question was
rejected. The PRP group for Chemical Control has reviewed this evidence and has
determined that this shipment was, in fact, rejected. Thus, while the Company
technically remains a PRP at this site, the Company believes it has no exposure
at this site based upon the PRP group ruling.
D'Imperio et. al. v. Lightman Drum Company, et. al., New Jersey Superior Court,
Camden County (No. L-01791-91). This private suit alleges various defendants
improperly disposed of hazardous materials at property owned by D'Imperio
resulting in damage to D'Imperio's property, as well as tortious interference
with a real estate purchase contract. On February 19, 1994, the Court granted
the defendants' motions, including the Company's, for Summary Judgement. Unless
the plaintiff files an appeal within forty-five days from February 11, 1994,
this case is dismissed. The Company does not anticipate an appeal at this time.
MARCH 31, 1994 FORM 10-Q
Nor-Am Chemical Company and Olin Corporation (Wilmington, Massachusetts). On
March 31, 1994, the Commonwealth of Massachusetts, Department of Environmental
Affairs, sent to the Company and four other parties, a Notice of Responsibility
and Interim Deadline for the Company's former National Polychem site in
Wilmington, Massachusetts. This site has been the subject of previous reports.
The Company has responded that it believes its obligation has been settled in
view of its settlement with Olin Corporation. At this time, the Company cannot
estimate what its liability will be, if any, in view of the prior settlement
with Olin Corporation.
JUNE 30, 1994 FORM 10-Q
On June 22, 1994, the Commonwealth of Pennsylvania, Department of Environmental
Resources, sent to the Company a request for information regarding the Company's
Fieldsboro, New Jersey plant use of Reclamation Resource, Inc. and its landfill
located at Lenhart Road, Hartfield Township, Montgomery County, Pennsylvania.
The Company has responded that it has no knowledge of Reclamation Resource, Inc.
or the landfill and, to the Company's knowledge, no use of Reclamation Resource,
Inc. or the landfill and, to the Company's knowledge, no use of Reclamation
Resource, Inc. was ever made by the Company. Consequently, the Company cannot
determine what its liability, if any, will be.
SEPTEMBER 30, 1994 FORM 10-Q
Maywood Sites. Based on newspaper reports, the Company believes that during the
year, the United States Environmental Protection Agency ("EPA") and the United
States Department of Energy ("DOE") reached an agreement with regard to the
clean-up standards for mixed waste, (i.e. chemically and radiologically
contaminated waste.) Under the agreement, the DOE would clean-up to a standard
of 15 pico curries. The State of New Jersey has objected to this standard and
would like a clean-up standard of 5 pico curries. The impact of this split in
clean-up standards could have
C-3
<PAGE>
an impact on the costs which the Company may incur. The Company cannot now,
however, estimate what additional liability, if any, will be incurred. On
October 24, 1994, the Company received a Request for Information from the
Commonwealth of Massachusetts Department of Environmental Protection relating to
the Company's formerly-owned site at 51 Eames Street, Wilmington, Massachusetts,
and alleged releases at this site. The Company is in the process of gathering
information and cannot make a determination as to what liability, if any, it may
have.
Ewan, Shamong Township, and D'Imperio, Hamilton Township, sites in New Jersey.
Attempts to reach an allocation for costs at these sites among the various
parties by mediation have not been successful. As a consequence, the Company
believes that it will be involved in protracted litigation involving these
sites.
DECEMBER 31, 1994 FORM 10-K
Maywood Sites. The Company now believes that the Feasibility Study, which sets
forth alternative recommendations as to remediation at the sites, and the
Company's Maywood, New Jersey site, will be published for public comment in the
second calendar quarter of 1995. Following the public comment period, the United
States Environmental Protection Agency ("USEPA") will publish the Record of
Decision, which will set the remediation program to be followed at the sites,
and the Company's Maywood, New Jersey property. While it is probable that the
Company will incur some clean-up costs, until publication of the Record of
Decision, the Company cannot estimate what its future liability, if any, would
be.
In addition, the Company received from Region II of the USEPA, a demand for
payment of past oversight costs incurred by the government at the sites and the
Company's Maywood, New Jersey property. The demand is for approximately one
million seventy-six thousand dollars ($1,076,000.) The Company believes that
part of this amount is the responsibility of other PRPs at the sites, and is in
the process of meeting with the USEPA to resolve this issue.
D'Imperio Site/United States of America v. Jerome Lightman, et. al. (92 CV 4710
[JBS]). The offer to settle, as previously reported, was not accepted because of
the inability of the PRPs at this site to resolve other outstanding issues.
Consequently, the Company and the other twenty PRPs are engaged in litigation
regarding each party's share of costs at this site.
Ewan Site, Shamong Township, New Jersey. The USEPA has combined operable unit 1
and operable unit 2 (drum removal and liquid/soil removal) into one operating
unit. The contractor hired by the PRP group has commenced remediation at this
site.
MARCH 31, 1995 FORM 10-Q
Maywood Sites. Following a meeting with the EPA, the company paid four hundred
seventy-eight thousand four hundred thirty-one dollars and 54 cents
($478,431.54) for past costs attributable to the sites. The company will seek
reimbursement for these costs from the other potentially responsible parties
("PRPs") at the sites. As to the balance of the past costs, as these costs
relate to
C-4
<PAGE>
the Stepan Company property for which a Subsection 106 Administrative Order is
in place, it is the company's position that under current Third Circuit
decisional law, most notably United States v. Rohm and Haas Co., 37 ERC 1193
(3rd Cir. 1993), the USEPA is precluded from collecting these amounts. As of
this date, no further demand has been made.
Chemical Control Site. On March 10, 1995, the State of New Jersey sent to the
company, along with about 200 other PRPs, a demand for thirty-four million
dollars ($34,000,000) in past costs regarding the Chemical Control Site in
Elizabeth, New Jersey. The company has maintained throughout these proceedings
that it is not a PRP at this site. This position is based on the fact that the
only documentation linking the company to this site is a manifest which clearly
demonstrates that the company's shipment was rejected. The company has notified
the State of New Jersey of this fact. The company is currently investigating
this demand and cannot make a determination as to what liability, if any, it may
have.
John J. D'Andrea v. Jerome Lightman et. al (No. ATL-L-000810-95). On March 17,
1995, the company was served in an action in Atlantic County, New Jersey. The
company denies the allegations set forth in this action, and also believes it
has adequate defenses. Consequently, the company cannot determine what its
liability, if any, will be.
JUNE 30, 1995 FORM 10-Q
United States of America v. Jerome Lightman, et. al. (92 CV 4710 [JBS]). The
Company has been informed that the United State's Government's estimate of past
cost has now risen to approximately $9.1 million from approximately $7.4
million. The Company's liability, if any, for this amount will depend on what
the final determination of the Company's allocated share is, which is the
subject matter of this lawsuit.
Batavia Landfill located in Batavia, New York. On May 30, 1995, the Company
received notification that it might be a potentially responsible party at the
site. The Company has responded that it has no knowledge of this site or use of
the site by the Company. The Company, at this time, does not believe it has any
liability with regard to this site.
Chem-Trol Pollution Services Inc. Site. On June 13, 1995, the Company's wholly-
owned Canadian subsidiary received notification that Canada Development
Corporation, a Canadian entity from which the Company's Canadian subsidiary had
purchased assets, might be a potentially responsible party at the Chem-Trol
Pollution Services Inc. Site, located in Hamburg, New York. The alleged
activities at this site apparently occurred between 1971 and 1972 which pre-
dates the incorporation of the Company's Canadian subsidiary by approximately
twelve years. The Company does not believe at this time, that it or its wholly-
owned Canadian subsidiary has any liability with regard to this site.
C-5
<PAGE>
SEPTEMBER 30, 1995 FORM 10-Q
Maywood Sites. In August, 1995, the company has completed and presented to the
United States Environmental Protection Agency (USEPA) the Final Draft of the
Remedial Investigation Feasibility Study which contains alternatives for the
remediation of the company's site and theproperties known as the Sears and
Adjacent Properties. The company now anticipates that the remedial action plan
will be published by the USEPA for public comment in the second quarter of 1996.
Thereafter, a Record of Decision and designation of potentially responsible
parties (PRPs) to remediate the company's property and the Sears and Adjacent
Properties will be made. Although not currently a PRP to remediate, the company
believes that it will be named as a PRP, at least with regard to its property.
Ewan and D'Imperio and U.S. V. Jerome Lightman cases. The company anticipates
that a trial on the issues of nexus liability and divisibility of liability will
take place in the third quarter of 1996, pursuant to the terms of a Case
Management Order. As a result of the preceding items, the company has taken a
charge to more accurately reflect its best estimate of liability as of this
date.
Bofors Nobel Site in Muskegon, Michigan. On September 27, 1995, the company
received a 104(e) Request for Information from the United States Environmental
Protection Agency (USEPA). The company has reported that it has no knowledge of
use of this site by the company. Region V of the USEPA has since sent documents
to the company indicating that the company may be a potentially responsible
party. The company cannot, at this time, estimate what its liability, if any,
will be.
Insurance Recovery Case. On October 11, 1995, the Circuit Court of Cook County,
Illinois, Chancery Division, ruled that the company's primary insurance company,
The Hartford, has a duty to defend the company at environmental sites at which a
lawsuit has been filed.
DECEMBER 31, 1995 FORM 10-K
Maywood Site. No remediation action has occurred at this site, but the company
still anticipates that the Record of Decision will be issued in the calendar
year 1996.
Ewan and D'Imperio and U.S. v. Jerome Lightman (92 cv 4710 (JBS)) cases. The
government in this case has indicated a willingness to settle this case and
settlement discussions are underway. However, even if the case with the
government is settled, the case regarding issues of liability and allocation
between the company and other potentially responsible parties will continue and
is still scheduled for trial in the third or fourth quarter of 1996.
Insurance Recovery Case brought by the company against its insurers to recover
the cost of remediation at various sites. On February 23, 1996, the Chancery
Court Cook County, State of Illinois, ruled that the Hartford Insurance Company
is "foreclosed" from contesting coverage under the policies which it wrote over
a period of 14 years. The company has made a demand upon the Hartford which has
not responded. After issuance of a final judgement order, the Hartford may
appeal the decision and the company cannot at this time estimate what the
outcome of such appeal, if any, will be.
C-6
<PAGE>
JUNE 30, 1996 FORM 10-Q
Stepan vs. Admiral Insurance et.al. An action against the company's insurers to
recover the cost of remediation expenses at various sites. The company has
reached a settlement agreement with the sole remaining primary insurance company
defendant in this lawsuit. The terms of the settlement are confidential, but as
a result of this and earlier settlements, the company has now exhausted all of
its primary coverage. As a result, the company will call upon its excess
insurance companies to pay its defense and indemnity costs. Certain of the
excess insurance policies at issue in the action contain provisions regarding
the payment of defense costs which differ from those of the primary policies.
The trial in this matter is scheduled for August 12, 1996.
SEPTEMBER 30, 1996 FORM 10-Q
Stepan v. Admiral et.al. The company has reached an agreement for settlement of
its claim against three additional insurers in this action. In addition, on
August 13th, the date the case was scheduled to go to trial, the presiding judge
in the Chancery Court removed the case to the Law Division of Cook County. A
new trial judge was assigned. The company cannot at this time estimate the new
trial date for this action, if any. In addition, certain sites were excluded
from the case filed in the State of Illinois. The company has filed an action
in New Jersey against the remaining insurers in this case for sites that were
excluded in Illinois but for which the company believes proper venue and
jurisdiction lies in New Jersey.
D'Imperio and U.S. v. Jerome Lightman (92 CV 4710)(JBS)) cases. As reported
previously, the Government had indicated a willingness to settle this case and
settlement discussions were underway. In response to an offer made by the
Government, the company has rejected the offer and the government has withdrawn
its offer to settle. Other PRPs involved in this action may or may not wish to
settle with the Government and at this time, the company has no opinion as to
whether or not the other parties will settle. In any event, because of the
company's rejection of the Government's offer, this case is proceeding to trial.
The company cannot predict the outcome of this case but believes it has defenses
to all of the Government's allegations.
Maywood Site. No remediation has occurred at this site and the company
anticipates now that the Record of Decision will be issued sometime in 1997.
The company has undertaken to remove drums from adjacent property which drums
were accumulated in the process of the remedial investigation feasibility stage
pursuant to the terms and conditions of an Administrative Order on Consent.
DECEMBER 31, 1996 FORM 10-K
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
C-7
<PAGE>
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.
D'Imperio Site/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.
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.
MARCH 31, 1997 FORM 10-Q
Twins Inn. On April 30, 1997, the company received from the U.S. Environmental
Protection Agency, Region VIII, Denver, Colorado, a Notice of Request for
Information Pursuant to Section 104(e) of CERCLA for the Twins Inn Site in
Arvada, Jefferson County. The company has responded to this request for
information and based upon the information available to the company at this
time, the company does not believe it has any liability with regard to this
site. The company has no record of being at this site although it did do
business with the operator of the Twin Inns Site, but at a geographically
different site which is not part of the Twins Inn investigation.
JUNE 30, 1997 FORM 10-Q
On June 15, 1997 the company received a Section 107(e) letter from the United
States Environmental Protection Agency, Atlanta, Georgia, (USEPA) requesting
information about the company's use of a site entitled, Memphis Container Drum
Site (Tri-State Drums), located in Memphis, Shelby County, Tennessee, to dispose
of waste. The company has no record of using this particular site and so
informed the USEPA. At this time, the company can not estimate what its
liabilities of this site will be, if any.
Stepan v. Admiral. The company has settled with the last remaining defendant in
this case, and as such, this action has now been dismissed. The company's
insurance recovery action in New Jersey continues to be prosecuted.
DECEMBER 31, 1997 FORM 10-K
D'Imperio Superfund Site/United States v. Lightman et al. C.A. No. 92 CV4710
(JVS). On December 12, 1997, the Court enforced a proposed settlement of the
United States past cost claims and bound the company to payment of approximately
$639,000. The company has the right to
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<PAGE>
appeal this decision at a later date. For now, the company will make the payment
of approximately $639,000. The allocation action between the company and other
PRPs is continuing and discovery at the site is proceeding.
MARCH 31, 1998 FORM 10-Q
Stepan Company is aware of the fact that three plaintiffs' law firms located in
New Jersey have filed a complaint in the Superior Court of New Jersey, Middlesex
County, annexing approximately 270 separate case captions, collectively referred
to as Gilberg, et. al. V. Stepan, et al. and Accurso, et al. v. Stepan, et al.,
Civil Action No. 98-139 (KSH), alleging personal and property injury as well as
wrongful death, on behalf of certain citizens of Maywood, Rochelle Park and
Lodi, New Jersey. Stepan Company has accepted service in Gilberg, et al.
pursuant to a court request. The injuries and deaths are alleged to have been
the result of radiological and chemical contamination from the company's
Maywood, New Jersey site. The company has asserted in legal papers filed by it
that plaintiffs did not follow proper procedure under State Court rules and that
the multiple suits therefore were not properly filed. The complaint and annexed
captions, consistent with applicable federal law, have been removed to the
Federal District Court in Newark where the issue of jurisdiction will be
determined. The company believes it did not cause the alleged contamination.
In addition, the company believes it has other valid defenses. Moreover, as it
is uncertain as of this date how many, if any, lawsuits have been properly filed
or when the company will be served in any or all of the lawsuits, the company
cannot estimate what its liability, if any, will be.
JUNE 30, 1998 FORM 10-Q
Reference is made to the company's Report 10-Q for the quarter ending March 31,
1998, with regard to an action entitled Gilberg, et al.v. Stepan and Accurso, et
al. v. Stepan. The company attempted to remove all the cases which had been
filed in Middlesex County in New Jersey to the Federal District Court, Newark,
New Jersey. The Federal District Court remanded all but 15 cases to Middlesex
County. The company sought to appeal this decision to the Third Circuit Court
of Appeals by filing a Writ of Mandamus. On July 23, 1998, the Third Circuit
Court denied the company's petition. Consequently, at this time, there appear
to be 256 cases pending in Middlesex County, New Jersey, and 15 cases pending in
the Federal District Court, Newark, New Jersey.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1998 Compared with 1997
Net sales for 1998 rose five percent to a record $610.5 million. The increase
was primarily due to a seven percent growth in sales volume. Net sales by
product group were as follows (prior year data has been reclassified to conform
to 1998 presentation):
<TABLE>
<CAPTION>
Percent
(Dollars in Thousands) 1998 1997 Change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Surfactants $478,289 $457,109 +5
Polymers 112,625 105,754 +6
Specialty Products 19,537 19,086 +2
- ---------------------------------------------------------------------------------------------
Total $610,451 $581,949 +5
- ---------------------------------------------------------------------------------------------
</TABLE>
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, accounting for 78 percent of total revenues, increased
$21.2 million, or five percent, from year to year. Most of the increase ($16.9
million) was due to foreign operations which reported a 19 percent rise in net
sales on a 25 percent increase in sales volume. All foreign subsidiaries
recorded net sales and sales volume increases. Sales for the Colombian
subsidiary, consolidated for the first time in 1998, also contributed to the
foreign results. There was no material exchange rate impact on net sales.
Domestic operations, which constitute 78 percent of total surfactant net sales,
posted a $4.3 million, or one percent, increase on volume that remained flat.
Significantly lower export sales volumes to Asia and Central America offset
modest volume gains from U.S. customers.
The polymers product group includes phthalic anhydride (PA), polyurethane
systems and polyurethane polyols. PA is used in polyester 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. Polymers net sales, accounting for 18 percent of the
company's business, increased six percent on sales volume that was up 22
percent. Sales volume for polyurethane polyols increased 25 percent and was the
largest contributor to the polymer sales growth. Polyols accounted for 50
percent of polymers net sales. Polyurethane systems net sales increased six
percent on sales volume that improved 13 percent. PA net sales declined nine
percent from last year despite a 21 percent sales volume increase. A decrease in
average selling prices more than offset the impact of the increase in sales
volume. Oversupply in the marketplace together with lower raw material costs led
to the decline in selling prices. PA accounted for 33 percent of polymers' 1998
net sales.
Specialty products include flavors, emulsifiers and solubilizers used in
the food and pharmaceutical industry. Net sales for the year were $0.5 million,
or two percent, greater than a year ago. Higher selling prices contributed to
the modest increase.
Gross profit increased seven percent to $111.6 million in 1998 from $104.2
million in 1997. Surfactants gross profit rose three percent from $77.1 million
in 1997 to $79.7 million in 1998. The increase was driven by a four percent
increase in sales volume. Foreign surfactants operations reported a $1.6
million, or 13 percent, increase between years. Improved sales volumes for
Mexican and German operations coupled with the consolidation of Colombian
operations for the first time in 1998 led to the increase in foreign operations.
The increase was somewhat tempered by reduced margins. Domestic surfactants
posted a $1.0 million, or two percent, rise in gross profit due to increased
margins. Lower export sales dampened the domestic result. Polymers gross profit
increased 18 percent to $26.9 million in 1998 from $22.8 million in 1997. The
major factor for the increase was a 70 percent improvement in polyurethane
polyols earnings.
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<PAGE>
Better volumes and margins accounted for the growth. Polyurethane systems posted
a one percent increase in gross profit due to higher sales volume partially
offset by lower margins. A shift to a less profitable sales mix was responsible
for the decline in margins. PA gross profit dropped 26 percent from that
reported in 1997. A decline in margins more than offset the increase in volume.
Price reductions due to the competitiveness brought on by oversupply in the
marketplace led to the decrease in margin. Specialty products gross profit
increased by $0.7 million, or 16 percent, rising to $5.0 million in 1998 from
$4.3 million in 1997. The improvement was primarily due to increased margins.
Average raw material costs declined approximately three percent from 1997
to 1998. Manufacturing labor costs increased mainly due to higher fringe benefit
costs and normal annual pay raises. Total number of company employees increased
to 1,372 during 1998 from 1,292 in 1997. Most of the change occurred due to non-
manufacturing employee numbers and to employees added as a result of the
Colombian acquisition. Depreciation expense increased to $34.8 million in 1998
from $33.5 million in 1997.
Operating income was $45.4 million, a two percent increase over 1997.
Operating expenses, consisting of marketing, administrative and research
expenses, rose 11 percent from a year ago. Administrative expenses increased 15
percent as a result of unusually high consulting fees and severance costs. The
acquisition of Stepan Colombia also contributed to the increase. Marketing
expenses grew 15 percent due to increased payroll costs. The acquisition of
Colombia and the start-up of operations in Brazil also added to marketing
expenses. Research costs increased three percent due mainly to the growth of
payroll cost.
Pre-tax income rose 11 percent. Contributing to the increase was a $2.7
million improvement in joint venture equity income. Most of the improvement
resulted from $3.1 million of 1997 exchange loss from the devaluation of the
Philippine peso which did not recur in the same magnitude in 1998. The 1998
exchange loss was less than $0.1 million.
The effective tax rate was 39.5 percent in 1998 compared to 41.5 percent in
1997. The lower effective tax rate was primarily attributable to the tax benefit
realized on Philippine income during 1998 compared to the inability to secure a
tax benefit from Philippine losses in the prior year (see Note 6 of the Notes to
the Consolidated Financial Statements for a reconciliation of the statutory rate
to the effective tax rate).
Net income for 1998 rose to a record of $23.5 million, or $2.29 per share
($2.12 per share diluted), up 15 percent from $20.4 million, or $1.97 per share
($1.86 per share diluted), a year ago. The company expects another strong
performance in 1999. Surfactant earnings should benefit from recent acquisitions
of higher value-added products. Polymers earnings growth will be somewhat
constrained by an increasingly competitive pricing environment. Significant
efforts in the last year by the company's purchasing personnel should also lead
to reduced raw material and supply costs.
1997 Compared with 1996
Net sales for 1997 rose eight percent to $581.9 million. The increase was the
result of an 11 percent growth in sales volume. Net sales by product group
were as follows (prior year data has been reclassified to conform to 1998
presentation):
<TABLE>
<CAPTION>
Percent
(Dollars in Thousands) 1997 1996 Change
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Surfactants $457,109 $414,892 +10
Polymers 105,754 103,444 +2
Specialty Products 19,086 18,299 +4
- ---------------------------------------------------------------------------------------------
Total $581,949 $536,635 +8
- ---------------------------------------------------------------------------------------------
</TABLE>
Surfactants net sales, representing 79 percent of the company business,
were the primary source for overall sales growth. The surfactants sales increase
was due primarily to a 16 percent increase in domestic sales volume. The volume
gain was achieved mainly from the acquisition of Lonza, Inc.'s
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<PAGE>
West Coast surfactant business and from increased demand for the company's
laundry and cleaning and personal care products. The domestic market accounted
for 85 percent of total surfactant volume. Foreign net sales were flat between
years, despite a nine percent increase in sales volume. Weaker foreign currency
exchange rates, particularly for the French franc, negatively impacted results.
Polymers net sales, accounting for 18 percent of the company's business,
increased two percent over 1996, despite volume being down three percent. Higher
average selling prices, due largely to the passing on of raw material price
increases, and increased sales volume for the more expensive polyurethane system
products caused the rise in sales. Polyurethane systems posted significant net
sales and volume improvements of 18 percent and 16 percent, respectively,
compared to 1996. Offsetting these strong results, however, were decreased sales
of both PA and polyurethane polyols. PA sales volume dropped seven percent from
1996 levels due to decreased customer demand plus increased first half of year
internal requirements of PA in polyurethane polyols. Polyurethane polyols sales
volume fell four percent as a result of the mid-year loss of a large customer.
PA and polyurethane polyols accounted for 47 percent and 46 percent,
respectively, of 1997 polymer sales volume.
Specialty products revenue increased four percent on increased sales
volume.
Gross profit increased eight percent to $104.2 million, or 18 percent of
net sales, in 1997 from $96.2 million, or 18 percent of net sales, in 1996.
Surfactants 1997 gross profit of $77.1 million was 16 percent higher than 1996
profit of $66.4 million. Domestic earnings, driven by strong growth in sales
volumes, increased 22 percent and accounted for the improvement in total
surfactant profit. Foreign gross profit was down six percent to $12.6 million in
1997 from $13.4 million in 1996. Despite increased sales volume, European
operations surfactant profit dropped $1.4 million, or 18 percent, due primarily
to continued pressure on sales margins. Stepan Mexico earnings were also down
slightly while Canadian operations results improved on increased sales volumes.
Polymers gross profit fell eight percent to $22.8 million in 1997 from $24.9
million in 1996. Decreased sales volumes and margins led to the profit decline.
Within the polymer group, PA and polyurethane polyol earnings declined by 21
percent and 12 percent, respectively. In both instances, lower volumes and
margins caused the decrease. Price reductions necessitated by competitive
situations led to PA's drop in margin. Higher raw material costs, which could
only be partially passed along to customers, caused polyurethane polyols margin
decrease. Polyurethane systems profit, up 59 percent from 1996 due to better
margins and volumes, partially offset the results of the larger, two polymer
product lines. A shift to a more profitable sales mix generated polyurethane
systems margin improvement. Specialty products gross profit declined 12 percent
to $4.3 million in 1997 from $4.9 million in 1996. Lower margins more than
offset the increase in sales volume.
Average raw material costs remained constant from year to year.
Manufacturing labor costs increased due to higher fringe benefit costs and to
normal annual pay increases. Total number of company employees increased to
1,292 in 1997 from 1,270 in 1996. Most of the increase occurred in non-
manufacturing areas. Depreciation expense increased to $33.5 million in 1997
from $30.5 million in 1996 as a result of bringing into service significant
capacity expansion projects as well as continuing capital spending for plant
improvements.
Operating income was $44.4 million in 1997, a 10 percent increase over
1996. Operating expenses, consisting of marketing, administrative and research
expenses, rose seven percent from those reported in 1996. Administrative
expenses climbed 15 percent as a result of 1996 benefiting from $4.2 million of
insurance recoveries. Lower domestic 1997 travel and computer operations
expenses and lower overall foreign expenses partially offset the impact of the
16
<PAGE>
1996 insurance recoveries. Marketing expenses and research and development
expenses each grew four percent over 1996. These increases were primarily the
result of higher salaries and fringe benefits expenses.
Negatively impacting pre-tax earnings was $1.0 million of increased losses
of the company's equity joint ventures. Foreign exchange losses of $3.1 million
for the Philippine joint venture, due to the devaluation of the Philippine peso,
led to the increased loss.
The effective tax rate was 41.5 percent in 1997 compared to 40.9 percent in
1996. The higher effective tax rate for the year was precipitated by the
inability to apply a tax benefit to losses in the Philippines (see Note 6 of the
Notes to the Consolidated Financial Statements for a reconciliation of the
statutory rate to the effective tax rate).
Net income for 1997 rose to $20.4 million, or $1.97 per share($1.86 per
share diluted), up seven percent from $19.1 million, or $1.80 per share ($1.71
per share diluted), reported for 1996.
Fourth Quarter 1998 Compared with 1997
For the quarter ended December 31, 1998, the company reported net income of $5.6
million, or $0.55 per share ($0.51 per share diluted), compared to $3.5 million,
or $0.33 per share ($0.32 per share diluted) in the fourth quarter of 1997. Net
sales for the quarter grew six percent to $150.4 million from $142.1 million a
year ago. Gross profit increased 15 percent to $28.3 million compared with $24.5
million for the fourth quarter of 1997. Surfactants earnings were up eight
percent due to a strong performance by domestic operations and consolidation of
the Colombian subsidiary. Polymers reported a 45 percent increase in gross
profit mainly due to strong performance of polyurethane polyols based on
increased sales volume and improved margins. Specialty products gross profit was
essentially unchanged. Operating expenses were 11 percent higher than in the
fourth quarter of 1997, primarily due to the increase of administrative
expenses, in particular, unusually high severance costs and increased payroll
expense and consulting fees in 1998.
Liquidity and Financial Condition
For the year ended December 31, 1998, net cash from operations totaled $58.8
million, a decrease of $4.0 million from year to year. However, cash flows for
1997 included $9.8 million in insurance recoveries, reflected in the $4.0
million accounts receivable decrease for that period. Net income was up by $3.0
million in 1998 compared to the prior year, while customer prepayments credited
to deferred revenue totaled $0.8 million for 1998 compared to $3.3 million in
1997. Excluding the combined effects of both insurance recoveries and customer
prepayments, net cash from operations increased by $8.3 million during 1998.
During 1998, changes in working capital produced a $1.4 million cash source
compared to $4.9 million, including $9.8 million in insurance recoveries, for
1997.
Capital spending totaled $44.1 million during 1998, up by $8.5 million from
the 1997 total. Investing activities for the current year included the
acquisition of certain product lines and related intangible assets from DuPont
and the acquisition of 100 percent ownership (up from 50 percent) of Stepan
Colombia.
During 1998, consolidated debt increased by $13.7 million, to $114.5
million. As of December 31, 1998, the ratio of long-term debt to long-term debt
plus shareholders' equity was 42.1 percent, up from 40.8 percent as of December
31, 1997.
On October 1, 1998, the company borrowed $30 million from two U.S.
insurance companies, at 6.59 percent with a term of 15 years. The proceeds of
this borrowing were used primarily to reduce short-term domestic bank debt which
had totaled $25.8 million as of September 30, 1998. The terms of these new,
unsecured loan agreements are substantially the same as those in the company's
last private placement, which was completed in 1995.
17
<PAGE>
The company maintains contractual relationships with its domestic banks
which provide for $45 million of committed, revolving credit which may be drawn
upon as needed for general corporate purposes. The company entered into this new
agreement on January 9, 1998, and canceled the previous agreement at the same
time. The terms and conditions of the new agreement are substantially the same
as for the previous agreement. Interest rate spreads and commitment fees are
dependent on the company's capitalization structure, and are lower than under
the old agreement.
The company also meets short-term liquidity requirements through
uncommitted bank lines of credit. 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 and other planned financial commitments for the foreseeable future.
Any substantial acquisitions would require additional funding.
Market Risk Analysis
FOREIGN CURRENCY EXCHANGE RISK
Forward exchange contracts are used from time to time to manage currency
exposures for financial instruments denominated in currencies other than the
entity's functional currency. The counter-parties to any such contracts are
major financial institutions, therefore the credit risk of such contracts is
considered insignificant. Corporate policy prohibits the purchase or sale of
leveraged derivative financial instruments as well as the purchase or sale of
any derivative financial instrument for trading purposes.
Any unrealized gains or losses resulting from the use of hedge instruments
are deferred and included in the measurement of the related foreign currency
transaction. Gains or losses on unhedged foreign currency transactions are
included in income. As of December 31, 1998, the company had no outstanding
forward exchange contracts.
The company's 50 percent owned Philippine joint venture has U.S. dollar
denominated debt with the potential for future translation gains or losses. A 10
percent change in this exchange rate would not have a material effect on the
company's operating results of cash flow. A substantial majority of the revenues
of the Philippine joint venture is denominated in U.S. dollars.
INTEREST RATES
The company's debt was composed of fixed-rate and variable-rate borrowings
totaling $110.6 million and $3.9 million, respectively, as of December 31, 1998.
Over the course of 1999, it is projected that interest on variable-rate
borrowings will comprise about 12 percent of the company's total interest
expense. A 10 percent increase or decrease to short-term interest rates would be
immaterial to the company's operating results or cash flow.
The fair value of the company's fixed-rate debt, including current
maturities, was estimated to be $116.0 million as of December 31, 1998, and
exceeded the carrying value by approximately $5.4 million. Market risk was
estimated as the potential increase to the fair value which would result from a
hypothetical 10 percent decrease in the company's weighted average long-term
borrowing rates at December 31, 1998, or $3.5 million. Such a rate decrease
would be immaterial to future operating results or cash flow.
COMMODITY PRICE RISK
Certain raw materials are subject to price volatility caused by weather,
petroleum prices and other unpredictable factors. The commodity price risk is
not material to the company's consolidated financial position, results of
operations or cash flow.
Environmental and Legal Matters
The company is subject to extensive federal, state and local environmental laws
and regulations. Although the company's
18
<PAGE>
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
1998, the company's expenditures for capital projects related to the environment
were $7.1 million and should approximate $4.0 to $5.0 million for 1999. These
projects are capitalized and typically depreciated over 10 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 $6.9 million for
1998 compared to $7.5 million for 1997. 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 16 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 $26.4 million at December 31, 1998, compared to $4.2
million to $25.8 million at December 31, 1997. At December 31, 1998, the
company's reserve was $17.6 million for legal and environmental matters compared
to $20.6 million at December 31, 1997. During 1998, expenditures related to
legal and environmental matters approximated $3.6 million compared to $3.0
million expended in 1997. While it is difficult to forecast the timing of the
expenditures, the company believes that $3.0 million of the $17.6 million
reserve is likely to be paid out in 1999. The balance of the reserve would
probably be paid out over many years (see also Note 12 of the Notes to
Consolidated Financial Statements).
For certain 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 1998
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.
European Union
The European Council announced on December 31, 1998, irrevocably fixed
conversion rates between the National Currency Units (NCU) of the 11
participating countries and the euro. Through July 1, 2002, the official
"Transition Period", these National Currency Units will be considered to be sub-
units of the euro. During the Transition Period, cash transactions for these
11 currencies may be settled in either NCUs or euros, with no compulsion or
prohibition from either party. Stepan Company's U.S. and European banks are
euro-ready and transaction costs will not be affected.
The company expects that this conversion will result in generally higher
competition within the single-currency zone, as a result of greater cross-border
price transparency. This trend is expected to impact both the company's sales
and raw
19
<PAGE>
material purchases with the net effect expected to be immaterial to both
operating results and cash flows. The company will experience decreased currency
risk on certain sales and raw material purchases within the single-currency
zone.
The company's internal computer systems are capable of handling currency
conversions according to the rules announced by European Council. The company is
capable of invoicing its customers and receiving payments, as well as making
payments to suppliers, within the single-currency zone in either euro or the
applicable NCU.
Year 2000 Readiness Disclosure
The Year 2000 issue is a result of computer systems that utilize two digits,
rather than four, to represent a given year. Computer systems used by the
company and its business partners that have date-sensitive processing may
recognize a date using "00" as the year 1900 rather than year 2000. This could
result in a system failure or inaccurate calculation that may interrupt normal
business operations. The company has established a steering team to oversee all
efforts and is addressing Year 2000 compliance for three major areas:
Information Technology ("IT") systems, non-"IT" systems and third-party
relationships. The project plan involves three phases: inventory and assessment,
remediation and testing and implementation.
Implementation of approximately 70 percent of "IT" systems is fully
complete and the remainder of the systems is in the process of remediation and
testing. It is expected that 95 percent of the "IT" systems will be compliant
with Year 2000 requirements in June 1999 and implementation of the remaining
systems is planned for the third quarter of 1999.
The non-"IT" systems are comprised of manufacturing process control,
telephone, security, laboratory and other embedded chip systems. Identification
and assessment of these systems are essentially complete. Implementation is
expected to be complete the third quarter of 1999.
The company has initiated formal communications with suppliers and service
providers to determine the extent of their efforts in resolving Year 2000
issues. The assessment phase, which includes evaluation of responses and
meetings with significant suppliers, is in progress and will continue through
the first quarter of 1999. Contingency plans will be developed if responses
indicate the probability of non-compliance with Year 2000 requirements.
Costs for the Year 2000 project are currently estimated to be $2.9 million
with $1.5 million expended to date. Of the total estimated cost, $1.9 million
will be capitalized and the remaining will be expensed as incurred. These costs
are not material to the overall "IT" budget and no projects have been deferred
due to year 2000 efforts. The company's actual cost to achieve Year 2000
compliance could differ significantly from amounts disclosed above due to new
issues which have not yet been identified.
Although the company is in the process of implementing its Year 2000
project plan, there can be no assurance that all phases of the plan will be
completed prior to the Year 2000 or that if completed prior to the Year 2000
that disruption will not occur. In addition, there can be no assurance that the
company's customers, suppliers and service providers will successfully resolve
their own Year 2000 issues in a manner which would not cause material impact to
the company's operations and financial results. Recognizing these uncertainties,
the company is in the process of identifying the most reasonable likely worst
case scenarios. Contingency plans for these scenarios will be developed as
warranted throughout 1999.
20
<PAGE>
Report of Management
Management Report on Financial Statements
The financial statements of Stepan Company and subsidiaries were prepared by and
are the responsibility of management. The statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances and include some amounts that are based on management's best
estimates and judgments. The Board of Directors, through its Audit Committee,
assumes an oversight role with respect to the preparation of the financial
statements.
In meeting its responsibility for the reliability of the financial
statements, the company depends on its system of internal accounting control.
The system is designed to provide reasonable assurance that assets are
safeguarded and that transactions are executed as authorized and are properly
recorded. The system is augmented by written policies and procedures and an
internal audit department.
The Audit Committee of the Board of Directors, composed solely of directors
who are not officers or employees of the company, meets regularly with
management, with the company's internal auditors and with its independent
certified public accountants to discuss its evaluation of internal accounting
controls and the quality of financial reporting. The independent auditors and
the internal auditors have free access to the Audit Committee, without
management's presence.
F. Quinn Stepan
Chairman of the Board and Chief Executive Officer
Walter J. Klein
Vice President - Finance
February 11, 1999
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, 1998 and 1997, and
the related consolidated statements of income, cash flows and stockholders'
equity, for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Chicago, Illinois,
February 11, 1999
21
<PAGE>
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 983 $ 5,507
Receivables, less allowances of $2,263 in 1998 and $2,121 in 1997 81,890 81,018
Inventories (Note 3) 52,496 48,999
Deferred income taxes (Note 6) 10,572 6,636
Other current assets 3,817 4,322
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 149,758 146,482
- ---------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Land 6,553 6,108
Buildings and improvements 61,838 58,670
Machinery and equipment 491,899 459,945
Construction in progress 8,311 2,943
- ---------------------------------------------------------------------------------------------------------------------
568,601 527,666
Less: Accumulated depreciation 353,505 321,065
- ---------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 215,096 206,601
- ---------------------------------------------------------------------------------------------------------------------
Other Assets 39,507 21,853
- ---------------------------------------------------------------------------------------------------------------------
Total assets $404,361 $374,936
=====================================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt (Note 4) $ 6,807 $ 5,957
Accounts payable 43,977 42,894
Accrued liabilities (Note 10) 37,160 33,842
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 87,944 82,693
- ---------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes (Note 6) 39,920 32,258
- ---------------------------------------------------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 4) 107,708 94,898
- ---------------------------------------------------------------------------------------------------------------------
Other Non-current Liabilities (Note 11) 20,805 27,489
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Note 7):
5 1/2 percent convertible preferred stock, cumulative, voting, without par value;
authorized 2,000,000 shares; issued 784,417 in 1998 and 788,434
shares in 1997 19,611 19,711
Common stock, $1 par value; authorized 15,000,000 shares; issued
9,997,736 shares in 1998 and 10,341,952 shares in 1997 9,998 10,342
Additional paid-in capital 10,962 8,091
Accumulated other comprehensive loss (9,050) (7,337)
Retained earnings 127,478 120,854
- ---------------------------------------------------------------------------------------------------------------------
158,999 151,661
Less: Treasury stock, at cost 11,015 14,063
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity 147,984 137,598
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $404,361 $374,936
=====================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated balance sheets.
22
<PAGE>
Consolidated Statements of Income
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(Dollars in Thousands, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales $610,451 $581,949 $536,635
- --------------------------------------------------------------------------------------------------------------
Cost of Sales 498,856 477,778 440,420
- --------------------------------------------------------------------------------------------------------------
Gross Profit 111,595 104,171 96,215
- --------------------------------------------------------------------------------------------------------------
Operating Expenses:
Marketing 23,365 20,394 19,577
Administrative 21,825 18,964 16,549
Research, development and technical services (Note 1) 20,982 20,443 19,703
- --------------------------------------------------------------------------------------------------------------
66,172 59,801 55,829
- --------------------------------------------------------------------------------------------------------------
Operating Income 45,423 44,370 40,386
Other Income (Expenses):
Interest, net (Note 4) (7,453) (7,595) (7,243)
Income (loss) from equity joint ventures (Note 1) 796 (1,901) (882)
- ---------------------------------------------------------------------------------------------------------------
(6,657) (9,496) (8,125)
- ---------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 38,766 34,874 32,261
Provision for Income Taxes (Note 6) 15,312 14,464 13,194
- --------------------------------------------------------------------------------------------------------------
Net Income $ 23,454 $ 20,410 $ 19,067
==============================================================================================================
Net Income Per Common Share:
Basic $ 2.29 $ 1.97 $ 1.80
==============================================================================================================
Diluted $ 2.12 $ 1.86 $ 1.71
==============================================================================================================
Average Common Shares Outstanding (Note 1) 9,843 9,831 10,002
==============================================================================================================
</TABLE>
Combined Sales
(Dollars in Thousands)
<TABLE>
<CAPTION>
Surfactants Polymers Specialty Products Consolidated Total
<S> <C> <C> <C> <C>
1994 336,224 78,778 28,946 443,948
1995 394,928 115,833 17,457 528,218
1996 414,892 103,444 18,299 536,635
1997 457,109 105,754 19,086 581,949
1998 478,289 112,625 19,537 610,451
</TABLE>
1998 Sales Dollar Distribution
(Dollars in Thousands)
<TABLE>
<S> <C> <C>
Material $367,109 60.1%
Other Expenses $ 76,984 12.6%
Payroll and Fringes $ 90,245 14.8%
Depreciation and Amortization $ 37,347 6.1%
Income Taxes $ 15,312 2.5%
Net Income $ 23,454 3.9%
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
23
<PAGE>
Consolidated Statements of Cash Flows
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Net Cash Flows from Operating Activities
<S> <C> <C> <C>
Net income $ 23,454 $ 20,410 $ 19,067
Depreciation and amortization 37,347 35,281 32,138
Deferred revenue recognition (4,327) (3,611) (2,896)
Customer prepayments 800 3,292 7,375
Deferred income taxes 4,244 1,114 (1,710)
Environmental and legal liabilities (3,035) (428) 12,925
Other non-cash items (998) 1,860 548
Changes in Working Capital:
Receivables, net 179 3,999 (5,203)
Inventories (2,840) 1,243 4,121
Accounts payable and accrued liabilities 2,731 1,069 (1,113)
Other 1,292 (1,364) 535
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 58,847 62,865 65,787
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Expenditures for property, plant and equipment (44,056) (35,589) (44,923)
Investment in acquisitions (21,195) (4,999) (3,859)
Other non-current assets 1,587 344 268
- -----------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (63,664) (40,244) (48,514)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing and Other
Related Activities
Revolving debt and notes payable to banks, net (10,310) 1,210 (800)
Other debt borrowings 30,000 - 3,734
Other debt repayments (6,151) (9,660) (9,190)
Purchases of treasury stock, net (8,402) (8,863) (3,492)
Dividends paid (6,432) (6,069) (5,846)
Stock option exercises 1,728 2,252 464
Other non-cash items (140) (762) (513)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used for) Financing and
Other Related Activities 293 (21,892) (15,643)
- ----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (4,524) 729 1,630
Cash and Cash Equivalents at Beginning of Year 5,507 4,778 3,148
- ----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 983 $ 5,507 $ 4,778
================================================================================================================
Supplemental Cash Flow Information
Cash payments of income taxes, net of refunds $ 9,295 $ 16,059 $ 12,417
Cash payments of interest $ 7,781 $ 8,306 $ 10,838
================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Capital Expenditures
(Dollars in Thousands)
<S> <C>
1993 25,435
1994 42,884
1995 39,247
1996 44,923
1997 35,589
1998 44,056
Compound Annual Growth
Five Years +12%
</TABLE>
<TABLE>
<CAPTION>
Equity Per Share
(Dollars)
<S> <C>
1993 9.65
1994 10.27
1995 11.25
1996 12.24
1997 13.01
1998 14.18
Compound Annual Growth
Five Years +8%
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
24
<PAGE>
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Convertible Additional Other
Preferred Common Paid-in Treasury Comprehensive Retained Comprehensive
(Dollars in Thousands) Stock Stock Capital Stock Income (Loss) Earnings Income
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 $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 $19,067
Other comprehensive income:
Foreign currency translation adjustments -- -- -- -- (1,129) -- (1,129)
-------
Comprehensive income -- -- -- -- -- -- $17,938
=======
Cash dividends paid -- -- -- -- -- -- --
Preferred stock ($1.375 per share) -- -- -- -- -- (1,068) --
Common stock (47.75c per share) -- -- -- -- -- (4,778) --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 19,924 10,132 5,066 (5,200) (4,820) 106,513 --
Sale of 200,500 shares
under stock option plan -- 200 2,052 -- -- -- --
Purchase of 246,901 shares of common
and 113,666 shares of preferred
treasury stock, net of sales -- -- 101 (8,863) -- -- --
Conversion of preferred stock
to common stock (213) 10 203 -- -- -- --
Net income -- -- -- -- -- 20,410 $20,410
Other comprehensive income:
Foreign currency translation adjustments -- -- -- -- (2,517) -- (2,517)
-------
Comprehensive income -- -- -- -- -- -- $17,893
=======
Cash dividends paid -- -- -- -- -- -- --
Preferred stock ($1.375 per share) -- -- -- -- -- (1,027) --
Common stock (51.25c per share) -- -- -- -- -- (5,042) --
Non-qualified stock option tax benefit -- -- 669 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 19,711 10,342 8,091 (14,063) (7,337) 120,854 --
Sale of 151,200 shares
under stock option plan -- 151 2,322 -- -- -- --
Purchase of 288,744 shares of common
treasury stock, net of sales -- -- 462 (8,402) -- -- --
Retirement of 500,000 shares of common
treasury stock -- (500) (552) 11,450 -- (10,398) --
Conversion of preferred stock
to common stock (100) 5 96 -- -- -- --
Net income -- -- -- -- -- 23,454 $23,454
Other comprehensive income:
Foreign currency translation adjustments -- -- -- -- (1,713) -- (1,713)
-------
Comprehensive income -- -- -- -- -- -- $21,741
=======
Cash dividends paid -- -- -- -- -- -- --
Preferred stock ($1.375 per share) -- -- -- -- -- (896) --
Common stock (56.25c per share) -- -- -- -- -- (5,536) --
Non-qualified stock option tax benefit -- -- 543 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $19,611 $ 9,998 $10,962 $(11,015) $(9,050) $127,478 --
====================================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
25
<PAGE>
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
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. The investment in the 50
percent owned joint venture in the Philippines is accounted for on the equity
method and is included in the "Other Assets" caption on the Consolidated Balance
Sheet. The company's share of the net earnings of the investment is included in
consolidated net income. Operations in Colombia were accounted for using the
equity method until May 8, 1998, when majority interest was obtained. See Note 2
for information on acquisitions.
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, 1998 and 1997, amounted to 86 percent and 91 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 ($18,335,000, $18,775,000 and $20,509,000 in 1998, 1997 and 1996,
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 10 year life.
See Note 12 for contingency information.
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
generally ranging from five to 15 years.
26
<PAGE>
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 $12,219,000, $12,404,000 and $12,469,000 in 1998, 1997 and
1996, respectively. The balance of expenses reflected on the Consolidated
Statements of Income relates to technical services which include routine product
testing, quality control and sales support service.
Income Taxes
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. The resulting translation
adjustments are included in stockholders' equity. Revenues and expenses are
translated at average exchange rates prevailing during the year. 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 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. The company has determined that no
impairment loss has needed 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. See Note 8 for stock
option plans information.
Per Share Data
In 1997, the company adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" (SFAS No. 128), effective December 15, 1997. Accordingly,
basic earnings per share amounts are computed based on the weighted-average
number of common shares outstanding. Net income used in computing basic earnings
per share has been reduced by dividends paid to preferred stockholders. Diluted
earnings per share amounts are based on the 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 adoption of
SFAS No. 128 had no effect on previously reported per share data. See Note 14
for the computation of earnings per share.
Comprehensive Income
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130),
which is effective for fiscal years beginning after December 15, 1997. SFAS No.
130, which the company adopted in 1998, requires that comprehensive
27
<PAGE>
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income includes net
income and all other nonowner changes in equity that are not reported in net
income. For the twelve months ended December 31, 1998, 1997 and 1996, the
company's comprehensive income included net income and foreign currency
translation gains and losses. The company has elected to disclose comprehensive
income in the Consolidated Statements of Stockholders' Equity.
Segment Reporting
In 1998, the company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No.
131), effective for periods beginning after December 15, 1997. The company is
required to report financial and descriptive information about its reportable
operating segments. Operating segments are components of the company that have
separate financial information that is regularly evaluated by the chief
operating decision maker to assess segment performance and allocate resources.
SFAS No. 131 requires the company to report a measure of segment profit or loss,
certain revenue and expense items and segment assets. Such data must be
reconciled to corresponding amounts in the company's general-purpose
consolidated financial statements. Enterprise-wide financial information about
the revenues derived from the company's products, about the countries in which
the company earns revenues and holds assets and about major customers must also
be disclosed. See Note 13 for segment reporting information.
Pension Plans
In 1998, the company adopted Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits",
effective for fiscal years beginning after December 15, 1997. The statement
revises disclosure requirements for pension and other postretirement benefit
plans. There is no change to the measurement or recognition of such plans. See
Note 9 for pension plans disclosure.
Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the 1998 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.
2. Acquisitions
- --------------------------------------------------------------------------------
On May 8, 1998, the company purchased an additional 34.5 percent of the
outstanding stock of Stepan Colombia raising its stake in the Colombia company
to 84.5 percent. On August 19, 1998, the remaining shares (15.5 percent) were
acquired. As a result, Stepan Colombia became a wholly-owned subsidiary. The
transaction was accounted for as a step acquisition purchase, and Stepan
Colombia's financial results have been reported on a consolidated basis from the
date that controlling interest was acquired. Prior to the May 1998 purchase
date, the investment was accounted for under the equity method. The reported
consolidated results of operations for 1996, 1997 and 1998 would not have been
materially affected had this transaction occurred at the beginning of 1996.
Effective June 30, 1998, the company acquired selected specialty surfactant
product lines from E.I. DuPont De Nemours Company. The acquired business
consists of phosphate esters, specialty ethoxylates and other specialty
quaternaries and polymers sold to the plastic and fiber industries. The product
lines supplement the company's existing surfactants and polymers businesses and
will be produced in current company manufacturing plants. The transaction was
recorded as a purchase of intangible assets, including patents, trademarks,
know-how and goodwill.
On November 11, 1998, the company's wholly owned subsidiary, Stepan Canada,
Inc., acquired the Canadian anionic and cationic surfactant business from Boehme
Filatex Canada, Inc.
28
<PAGE>
The acquired product lines are sold primarily into the personal care and the
institutional cleaning product markets. No manufacturing facilities were
included in this acquisition. The transaction was recorded as a purchase of
intangible assets, including goodwill, non-compete agreement, know-how, patents
and trademarks.
In April 1997, the company acquired the West Coast anionic surfactant business
from Lonza, Inc. The acquisition consisted of intangible assets, including
customer lists, goodwill, know-how and a non-compete covenant. No manufacturing
facilities were included in the agreement. The acquisition enables the company
to significantly strengthen its market share in the personal care market on the
West Coast.
In April 1996, the company acquired a sulfonation plant from Shell Group in
Cologne, Germany. This plant, organized as a German subsidiary, allows the
company to serve Northern 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:
<TABLE>
<CAPTION>
December 31
---------------------------------
(Dollars in Thousands) 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Finished products $33,444 $31,110
Raw materials 19,052 17,889
- -------------------------------------------------------------------------
Total inventories $52,496 $48,999
=========================================================================
</TABLE>
If the first-in, first-out (FIFO) inventory valuation method had been used,
inventories would have been approximately $10,000,000 and $11,900,000 higher
than reported at December 31, 1998 and 1997, respectively.
4. Debt
- --------------------------------------------------------------------------------
Debt was composed of the following:
<TABLE>
<CAPTION>
December 31
----------------------------
(Dollars in Thousands) Maturity Dates 1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Unsecured promissory notes
6.59% 2003-2013 $ 30,000 $ 0
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% 1999-2004 6,000 8,000
9.52% 1999 1,429 3,572
9.70% 1999 667 1,667
Unsecured bank debt 2003 3,100 10,800
Debt of foreign subsidiaries
payable in foreign currency 1999-2006 3,319 6,816
- ---------------------------------------------------------------------------------------------------
Total debt 114,515 100,855
Less current maturities 6,807 5,957
- ---------------------------------------------------------------------------------------------------
Long-term debt $107,708 $ 94,898
===================================================================================================
</TABLE>
Unsecured bank debt at December 31, 1998, consisted of borrowings under a
committed $45,000,000 revolving credit agreement with interest at varying rates
averaging 6.31 percent during the year. The agreement requires a commitment fee
to be paid on the unused portion of the commitment which averaged 0.14 percent
during the year. Periodically, the company also had other borrowings under notes
payable to banks under which there were no outstanding balances at December 31,
1998 and 1997.
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
$44,346,000 and $52,623,000 at December 31, 1998 and 1997, respectively. The
company is in compliance with all loan agreements.
29
<PAGE>
Debt at December 31, 1998, matures as follows: $6,807,000 in 1999; $7,434,000
in 2000; $9,099,000 in 2001; $9,069,000 in 2002; $14,893,000 in 2003 and
$67,213,000 after 2003.
Net interest expense for the years ended December 31 was composed of the
following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest expense $8,235 $8,205 $ 9,165
Interest income (364) (173) (671)
- -----------------------------------------------------------------------------------------------
7,871 8,032 8,494
Capitalized interest (418) (437) (1,251)
- -----------------------------------------------------------------------------------------------
Interest, net $7,453 $7,595 $ 7,243
===============================================================================================
</TABLE>
5. Leased Properties
- --------------------------------------------------------------------------------
The company leases certain property and equipment (primarily transportation
equipment, buildings and computer equipment) under operating leases. Total
rental expense was $3,918,000, $3,884,000 and $3,474,000 in 1998, 1997 and 1996,
respectively.
Minimum future rental payments under operating leases with terms in excess
of one year as of December 31, 1998, are:
<TABLE>
<CAPTION>
(Dollars in Thousands) Year Amount
- ----------------------------------------------------------------------
<S> <C> <C>
1999 $ 3,005
2000 2,355
2001 1,797
2002 1,031
2003 987
Subsequent to 2003 5,813
- ----------------------------------------------------------------------
Total minimum future rental payments $14,988
- ----------------------------------------------------------------------
</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) 1998 1997 1996
- -------------------------------------------------------------------------------------------
Federal
<S> <C> <C> <C>
Current $ 8,544 $11,321 $ 9,785
Deferred 3,285 (321) 54
State
Current 1,704 1,953 1,863
Deferred 718 502 (345)
Foreign
Current 1,047 1,451 2,700
Deferred 14 (442) (863)
- -------------------------------------------------------------------------------------------
Total $15,312 $14,464 $13,194
===========================================================================================
Income before Taxes
(Dollars in Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------
Domestic $35,766 $31,758 $28,420
Foreign 3,000 3,116 3,841
- -------------------------------------------------------------------------------------------
Total $38,766 $34,874 $32,261
===========================================================================================
</TABLE>
No federal income taxes have been provided on $26,483,000 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.
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>
1998 1997 1996
(Dollars in Thousands) Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision at statutory tax rate $13,568 35.0 $12,206 35.0 $11,292 35.0
State taxes on income
less applicable federal tax benefit 1,574 4.1 1,215 3.5 987 3.1
Effect of equity in foreign joint ventures (278) -0.7 665 1.9 308 1.0
Other items 448 1.1 378 1.1 607 1.8
- ------------------------------------------------------------------------------------------------------------------------
Total income tax provision $15,312 39.5 $14,464 41.5 $13,194 40.9
========================================================================================================================
</TABLE>
30
<PAGE>
The net deferred tax liability at December 31 is comprised of the
following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Current deferred income taxes
Gross assets $ 11,203 $ 7,469
Gross liabilities (631) (833)
- ------------------------------------------------------------------------------------------
Total current deferred tax assets 10,572 6,636
Non-current deferred income taxes
Gross assets 7,073 12,558
Gross liabilities (46,993) (44,816)
- ------------------------------------------------------------------------------------------
Total non-current deferred tax liabilities (39,920) (32,258)
- ------------------------------------------------------------------------------------------
Net deferred tax liability $(29,348) $(25,622)
==========================================================================================
</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) 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Tax over book depreciation $(43,884) $(40,705)
Safe Harbor leases (2,795) (2,971)
SFAS No. 87 pension accounting (3,043) (2,894)
State income tax accrual 2,062 1,444
Deferred revenue 4,505 5,942
Book reserves deductible in other periods 13,966 14,277
Other, net (159) (715)
- ------------------------------------------------------------------------------------------
Net deferred tax liability $(29,348) $(25,622)
==========================================================================================
</TABLE>
7. Stockholders' Equity
- --------------------------------------------------------------------------------
The company's 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), 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 $0.14 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. 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.
On December 8, 1998, 500,000 shares of common stock held in treasury were
retired in accordance with the Board of Directors' authorization. At December
31, 1998, treasury stock consists of 133,874 shares of preferred stock and
305,048 shares of common stock. At December 31, 1997, treasury stock consisted
of 133,874 shares of preferred stock and 516,304 shares of common stock.
8. Stock Option Plans
- --------------------------------------------------------------------------------
The company has two fixed stock option plans: the 1982 Plan and the 1992
Plan. 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 10 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 1998, 1997 and 1996 consistent with the provisions of SFAS No.
123, the company's net income and earnings
31
<PAGE>
per share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
(In Thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Earnings - as reported $23,454 $20,410 $19,067
Net Earnings - pro forma 22,575 19,716 18,556
Basic Earnings per share - as reported 2.29 1.97 1.80
Basic Earnings per share - pro forma 2.20 1.90 1.75
Diluted Earnings per share - as reported 2.12 1.86 1.71
Diluted Earnings per share - pro forma 2.05 1.80 1.66
- ------------------------------------------------------------------------------------------
</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 1998, 1997 and 1996: expected dividend yield of
2.5 percent in 1998, 2.7 percent in 1997 and 3.0 percent in 1996. Expected
volatility of 27 percent in 1998 and 28 percent in 1997 and 1996; expected lives
of 7.5 years; and risk-free interest rate of 5.75 percent in 1998, 6.24 percent
in 1997 and 6.89 percent in 1996.
A summary of the status of the company's stock option plans at December 31,
1998, 1997 and 1996, and changes during the years then ended is presented as
follows:
<TABLE>
<CAPTION>
Weighted-
Average
1998 Exercise 1997 1996
Shares Price Shares Shares
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 1,168,252 $16.06 1,266,252 1,044,810
Options exercised (151,200) 16.36 (200,500) (44,826)
Options canceled (3,229) 30.97 (4,000) (5,112)
Options granted 233,768 30.86 106,500 271,380
- ---------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 1,247,591 18.76 1,168,252 1,266,252
- ---------------------------------------------------------------------------------------------------------------
Option price range at end of year $ 9.438- $ 9.438- $ 9.438-
30.969 19.750 19.750
Option price range for exercised shares 9.438- 9.438- 8.125-
19.750 18.219 18.219
- ---------------------------------------------------------------------------------------------------------------
Options available for grant at end of year 315,583 546,122 647,122
- ---------------------------------------------------------------------------------------------------------------
Weighted-average fair value of options,
granted during the year $ 9.64 $ 6.18 $ 6.35
===============================================================================================================
</TABLE>
Summary of stock options outstanding at December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Price at 12/31/98 Life Price at 12/31/98 Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$9.438 89,800 1.33 $ 9.44 89,800 $ 9.44
$12.563 - $14.000 436,500 5.06 13.84 436,500 13.84
$18.219 - $30.969 721,291 7.23 22.90 385,752 19.13
- -------------------------------------------------------------------------------------------------------------
1,247,591 6.04 $18.76 912,052 $15.64
=============================================================================================================
</TABLE>
32
<PAGE>
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, 1998, 1997 and 1996, included $11,183,000,
$12,443,000 and $8,558,000, respectively, of the company's common stock.
Net 1998, 1997 and 1996 periodic pension cost for the plans consists of the
following:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 1,969 $ 1,754 $ 1,664
Interest cost on projected benefit obligation 3,262 3,029 2,700
Expected return on plan assets (4,658) (4,158) (3,851)
Amortization of unrecognized net transition
assets (567) (567) (567)
Amortization of unrecognized prior service cost 269 268 168
Amortization of unrecognized net gain (5) (4) (4)
- ----------------------------------------------------------------------------------------------
Net pension expense $ 270 $ 322 $ 110
==============================================================================================
</TABLE>
Changes in benefit obligations for the years ending December 31, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Benefit obligation at beginning of year $44,391 $37,696
Service cost 1,969 1,754
Interest cost 3,262 3,029
Plan amendments 23 --
Actuarial loss 5,064 3,198
Benefits paid (1,540) (1,286)
- ------------------------------------------------------------------
Benefit obligation at end of year $53,169 $44,391
==================================================================
</TABLE>
Changes in the fair value of plan assets during fiscal years 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Fair value of plan assets at beginning of year $64,786 $52,304
Actual return on plan assets 3,350 13,130
Employer contributions 587 638
Benefits paid (1,540) (1,286)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of the year $67,183 $64,786
================================================================================
</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) 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Plan assets in excess of projected benefit obligations $14,014 $ 20,395
Unrecognized net transition assets (1,134) (1,701)
Unrecognized prior service cost 1,748 1,994
Unrecognized net gain (7,386) (13,763)
- -----------------------------------------------------------------------------------------
Prepaid benefit cost $ 7,242 $ 6,925
=========================================================================================
</TABLE>
The prepaid pension asset is included in the "Other Assets" caption on the
Consolidated Balance Sheets. The weighted-average assumptions as of December 31,
1998, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 6.75% 7.25% 7.75%
Expected return on plan assets 8.50% 8.50% 8.50%
Rate of compensation increase 4.25%-6.25% 4.50%-6.50% 5.00%-7.00%
==========================================================================================
</TABLE>
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.
33
<PAGE>
10. Accrued Liabilities
- --------------------------------------------------------------------------------
Accrued liabilities consisted of:
<TABLE>
<CAPTION>
December 31
----------------------------------------------
(Dollars in Thousands) 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C>
Accrued payroll and benefits $14,236 $13,824
Accrued customer discounts 6,760 6,307
Deferred revenue - current 4,451 4,328
Other accrued liabilities 11,713 9,383
- -------------------------------------------------------------------------------------
Total accrued liabilities $37,160 $33,842
=====================================================================================
</TABLE>
11. Other Non-current Liabilities
- --------------------------------------------------------------------------------
Other non-current liabilities were comprised of the following:
<TABLE>
<CAPTION>
December 31
-------------------------
(Dollars in Thousands) 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Deferred revenue $ 6,242 $ 9,892
Environmental and legal matters (Note 12) 14,563 17,597
- ----------------------------------------------------------------------
Total other non-current liabilities $20,805 $27,489
======================================================================
</TABLE>
During 1998 and 1997, 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, 1998 and 1997 is $10,693,000
and $14,219,000, respectively, of which the amount recognizable within one year
is included in the "Accrued Liabilities" caption of the Consolidated Balance
Sheets.
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 $26.4 million at December 31, 1998, compared to $4.2 million to $25.8 million
at December 31, 1997. At December 31, 1998, the company's reserve was $17.6
million for legal and environmental matters compared to $20.6 million at
December 31, 1997. The company made payments of $3.6 million in 1998 and $3.0
million in 1997 related to legal costs, settlements and costs related to
remedial design studies at various sites.
For certain 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 1998
Form 10-K Annual Report and in other filings of the company with the Securities
and Exchange Commission, which filings are available upon request from the
company.
34
<PAGE>
13. Segment Reporting
- --------------------------------------------------------------------------------
Stepan Company has three reportable segments: surfactants, polymers and
specialty products. Each segment provides distinct products and requires
separate management due to unique markets, technologies and production
processes. Surfactants are used in a variety of consumer and industrial cleaning
compounds as well as in agricultural products, lubricating ingredients and other
specialized applications. Polymers derives its revenues from the sale of
phthalic anhydride, polyurethane polyols and polyurethane systems used in
plastics, building materials and refrigeration systems. Specialty products sells
chemicals used in food, flavoring and pharmaceutical applications.
The company evaluates the performance of its segments and allocates
resources based on operating income before interest income/expense, other
income/expense items and income tax provisions. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. There is no intersegment revenue and all
intercompany transactions are eliminated from segments' revenue.
Segment data for the three years ended December 31, 1998, 1997 and 1996, is as
follows:
<TABLE>
<CAPTION>
Specialty Segment
(Dollars in Thousands) Surfactants Polymers Products Totals
1998 ----------- -------- -------- -------
----
<S> <C> <C> <C> <C>
Net sales $478,289 $112,625 $19,537 $610,451
Operating income 42,757 21,051 3,511 67,319
Assets 315,549 48,795 17,478 381,822
Capital expenditures 37,091 3,632 1,652 42,375
Depreciation and amortization expenses 29,265 5,847 1,249 36,361
1997
----
Net sales $457,109 $105,754 $19,086 $581,949
Operating income 43,989 16,296 2,959 63,244
Assets 278,559 57,295 18,020 353,874
Capital expenditures 23,873 6,494 3,850 34,217
Depreciation and amortization expenses 27,507 5,819 983 34,309
1996
----
Net sales $414,892 $103,444 $18,299 $536,635
Operating income 37,672 19,765 3,494 60,931
Assets 280,854 52,012 15,743 348,609
Capital expenditures 35,967 6,376 1,757 44,100
Depreciation and amortization expenses 24,781 5,624 738 31,143
</TABLE>
35
<PAGE>
Below are reconciliations of segment data to the accompanying consolidated
financial statements:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
---- ----- ----
<S> <C> <C> <C>
Operating income - segment totals $ 67,319 $ 63,244 $ 60,931
Unallocated corporate expenses(a) (21,896) (18,874) (20,545)
Interest expenses (7,453) (7,595) (7,243)
Income/(Loss) from equity in joint ventures 796 (1,901) (882)
-------- -------- --------
Consolidated income before income taxes $ 38,766 $ 34,874 $ 32,261
======== ======== ========
Assets - segment totals $381,822 $353,874 $348,609
Unallocated corporate assets(b) 22,539 21,062 32,403
-------- -------- --------
Consolidated assets $404,361 $374,936 $381,012
======== ======== ========
Capital expenditures - segment totals $ 42,375 $ 34,217 $ 44,100
Unallocated corporate expenditures 1,681 1,372 823
-------- -------- --------
Consolidated capital expenditures $ 44,056 $ 35,589 $ 44,923
======== ======== ========
Depreciation and amortization expenses - segment totals $ 36,361 $ 34,309 $ 31,143
Unallocated corporate depreciation expenses 986 972 995
-------- -------- --------
Consolidated depreciation and
amortization expenses $ 37,347 $ 35,281 $ 32,138
======== ======== ========
</TABLE>
(a) Includes corporate administrative and corporate manufacturing expenses
which are not included in segment operating income and not used to evaluate
segment performance.
(b) Includes items such as deferred tax asset, prepaid pension asset, joint
venture investments and LIFO inventory reserve which are not allocated to
segments.
Company-wide geographic data for the years ended December 31, 1998, 1997 and
1996, is as follows (net sales attributed to countries based on selling
location):
<TABLE>
<CAPTION>
(Dollars in Thousands) 1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net sales
United States $506,075 $494,496 $449,544
All foreign countries 104,376 87,453 87,091
-------- -------- --------
Total $610,451 $581,949 $536,635
======== ======== ========
Long-lived assets
United States $200,587 $192,821 $189,671
All foreign countries 14,509 13,780 17,488
-------- -------- --------
Total $215,096 $206,601 $207,159
======== ======== ========
</TABLE>
14. Earnings Per Share
- --------------------------------------------------------------------------------
Below is the computation of basic and diluted earnings per share for the years
ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(In Thousands, except per share amounts) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computation of Basic Earnings per Share
Net income $23,454 $20,410 $19,067
Deduct dividends on preferred stock 896 1,027 1,068
- -----------------------------------------------------------------------------------------------------------------------------
Income applicable to common stock $22,558 $19,383 $17,999
Weighted-average number of shares outstanding 9,843 9,831 10,002
Basic earnings per share $ 2.29 $ 1.97 $ 1.80
=============================================================================================================================
Computation of Diluted Earnings per Share
Net income $23,454 $20,410 $19,067
Weighted-average number of shares outstanding 9,843 9,831 10,002
Add net shares from assumed exercise of options
(under treasury stock method) 456 275 242
Add weighted-average shares from assumed
conversion of convertible preferred stock 744 853 887
- -----------------------------------------------------------------------------------------------------------------------------
Shares applicable to diluted earnings 11,043 10,959 11,131
Diluted earnings per share $ 2.12 $ 1.86 $ 1.71
=============================================================================================================================
</TABLE>
36
<PAGE>
Five Year Summary
(In Thousands, except per share and employee data)
<TABLE>
<CAPTION>
For the Year 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $610,451 $581,949 $536,635 $528,218 $443,948
Operating Income 45,423 44,370 40,386 32,620 29,853
Percent of net sales 7.4% 7.6% 7.5% 6.2% 6.7%
- -------------------------------------------------------------------------------------------------------------------------
Pre-tax Income 38,766 34,874 32,261 24,991 22,512
Percent of net sales 6.4% 6.0% 6.0% 4.7% 5.1%
- -------------------------------------------------------------------------------------------------------------------------
Provision for Income Taxes 15,312 14,464 13,194 8,872 8,667
- -------------------------------------------------------------------------------------------------------------------------
Net Income 23,454 20,410 19,067 16,119 13,845
Per share (Diluted)/(a)(b)/ 2.12 1.86 1.71 1.46 1.26
Percent of net sales 3.8% 3.5% 3.6% 3.1% 3.1%
Percent to stockholders' equity/(c)/ 17.0% 15.5% 15.6% 14.5% 13.3%
- -------------------------------------------------------------------------------------------------------------------------
Cash Dividends Paid 6,432 6,069 5,846 5,540 5,294
Per common share/(a)/ .5625 .5125 .4775 .4475 .4250
- -------------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization 37,347 35,281 32,138 30,384 28,935
Capital Expenditures 44,056 35,589 44,923 39,247 42,884
Weighted-Average Common
Shares Outstanding/(a)/ 9,843 9,831 10,002 9,984 9,924
- -------------------------------------------------------------------------------------------------------------------------
As of Year End
- -------------------------------------------------------------------------------------------------------------------------
Working Capital $ 61,814 $ 63,789 $ 70,322 $ 66,856 $ 48,915
Current Ratio 1.7 1.8 1.8 1.8 1.6
- -------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, net 215,096 206,601 207,159 192,470 183,657
Total Assets 404,361 374,936 381,012 362,527 324,948
Long-term Debt, less current maturities 107,708 94,898 102,567 109,023 89,795
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity 147,984 137,598 131,615 122,477 111,302
Per share/(a)(d)/ 14.18 13.01 12.24 11.25 10.27
Number of Employees 1,372 1,292 1,270 1,267 1,265
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
/(a)/ Adjusted for two-for-one common stock split in 1994.
/(b)/ Based on weighted-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.
Quarterly Stock Data (Unaudited)
<TABLE>
<CAPTION>
Dividends Paid
Stock Price Range Per Common Share
--------------------------------------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First $30 1/2 $26 1/8 $20 3/8 $18 1/4 13.75c 12.50c
Second 32 1/4 29 5/8 24 5/8 18 13.75c 12.50c
Third 31 1/4 23 1/8 26 3/4 22 1/16 13.75c 12.50c
Fourth 29 24 5/8 32 3/8 26 15.00c 13.75c
------------------------
Year 32 1/4 23 1/8 32 3/8 18 56.25c 51.25c
======================================================================================================
</TABLE>
Quarterly Financial Data (Unaudited)
(Dollars in Thousands, except per share data)
<TABLE>
<CAPTION>
1998
--------------------------------------------------
Quarter First Second Third Fourth Year
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $150,388 $155,509 $154,134 $150,420 $610,451
- ---------------------------------------------------------------------------------------
Gross Profit 27,829 29,654 25,827 28,285 111,595
- ---------------------------------------------------------------------------------------
Interest, net (1,907) (1,769) (1,853) (1,924) (7,453)
- ---------------------------------------------------------------------------------------
Pre-tax Income 9,538 11,859 8,131 9,238 38,766
- ---------------------------------------------------------------------------------------
Net Income 5,722 7,110 5,032 5,590 23,454
- ---------------------------------------------------------------------------------------
Net Income per Share (Diluted) .52 .64 .45 .51 2.12
=======================================================================================
1997
----------------------------------------------------
Quarter First Second Third Fourth Year
- ---------------------------------------------------------------------------------------
Net Sales $139,670 $153,650 $146,502 $142,127 $581,949
- ---------------------------------------------------------------------------------------
Gross Profit 24,045 27,284 28,305 24,537 104,171
- ---------------------------------------------------------------------------------------
Interest, net (1,870) (1,900) (1,855) (1,970) (7,595)
- ---------------------------------------------------------------------------------------
Pre-tax Income 7,539 10,461 10,962 5,912 34,874
- ---------------------------------------------------------------------------------------
Net Income 4,477 6,323 6,143 3,467 20,410
- ---------------------------------------------------------------------------------------
Net Income per Share (Diluted) .41 .58 .56 .32 1.86
=======================================================================================
</TABLE>
37
<PAGE>
Exhibit (21)
STEPAN COMPANY
SUBSIDIARIES OF REGISTRANT
Subsidiary Organized under the Laws of:
---------- ----------------------------
Stepan Europe S.A. France
Stepan Canada, Inc. Canada
Stepan Mexico, S.A. de C.V. Mexico
Stepan Deutschland GmbH Germany
Stepan Colombiana de Quimicos Colombia
Stepan Quimica Ltda. Brazil
<PAGE>
Exhibit (23)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports dated February 11, 1999, included or incorporated by reference in
Stepan Company's Annual Report in this Form 10-K for the year ended December 31,
1998, 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 29, 1999
<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 29 day of March 1999
/s/ F. Quinn Stepan
------------------------------
F. Quinn Stepan
/s/ F. Quinn Stepan, Jr.
------------------------------
F. Quinn Stepan, Jr.
/s/ Walter J. Klein
------------------------------
Walter J. Klein
/s/ James A. Hartlage
------------------------------
James A. Hartlage
/s/ Thomas F. Grojean
------------------------------
Thomas F. Grojean
/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, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 983
<SECURITIES> 0
<RECEIVABLES> 84,153
<ALLOWANCES> 2,263
<INVENTORY> 52,496
<CURRENT-ASSETS> 149,758
<PP&E> 568,601
<DEPRECIATION> 353,505
<TOTAL-ASSETS> 404,361
<CURRENT-LIABILITIES> 87,944
<BONDS> 0
0
19,611
<COMMON> 9,998
<OTHER-SE> 118,375
<TOTAL-LIABILITY-AND-EQUITY> 404,361
<SALES> 610,451
<TOTAL-REVENUES> 610,451
<CGS> 498,856
<TOTAL-COSTS> 565,028
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,453
<INCOME-PRETAX> 38,766
<INCOME-TAX> 15,312
<INCOME-CONTINUING> 23,454
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,454
<EPS-PRIMARY> 2.29
<EPS-DILUTED> 2.12
</TABLE>
