<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO __________
1-4462
-------------------------------
Commission File Number
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, Northfield, Illinois 60093
(Address of principal executive offices)
Registrant's telephone number (847) 446-7500
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1999
---------------------------- -------------------------------------
Common Stock, $1 par value 9,626,105 shares
<PAGE>
Part I FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1999 and December 31, 1998
Unaudited
<TABLE>
(Dollars in Thousands) 3/31/99 12/31/98
-------- ---------
ASSETS
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,783 $ 983
Receivables, net 93,941 81,890
Inventories (Note 2) 47,245 52,496
Deferred income taxes 10,572 10,572
Other current assets 3,530 3,817
-------- ---------
Total current assets 159,071 149,758
-------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Cost 574,413 568,601
Less: Accumulated depreciation 361,842 353,505
-------- ---------
212,571 215,096
-------- ---------
OTHER ASSETS 38,629 39,507
-------- ---------
Total assets $410,271 $ 404,361
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 6,613 $ 6,807
Accounts payable 51,959 43,977
Accrued liabilities 34,451 37,160
-------- ---------
Total current liabilities 93,023 87,944
-------- ---------
DEFERRED INCOME TAXES 40,723 39,920
-------- ---------
LONG-TERM DEBT, less current maturities 107,150 107,708
-------- ---------
OTHER NON-CURRENT LIABILITIES 19,506 20,805
-------- ---------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock, cumulative, voting without par value;
authorized 2,000,000 shares; issued 783,887 shares in 1999 and 784,417
shares in 1998 19,597 19,611
Common stock, $1 par value; authorized 15,000,000 shares;
issued 10,048,491 shares in 1999 and 9,997,736 shares in 1998 (Note 7) 10,048 9,998
Additional paid-in capital 11,702 10,962
Accumulated other comprehensive loss (9,978) (9,050)
Retained earnings (approximately $46,507 unrestricted in 1999 and $44,346 in 1998) 131,944 127,478
-------- ---------
163,313 158,999
Less: Treasury stock, at cost 13,444 11,015
-------- ---------
Stockholders' equity 149,869 147,984
-------- ---------
Total liabilities and stockholders' equity $410,271 $ 404,361
======== =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated balance sheets.
<PAGE>
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1999 and 1998
Unaudited
<TABLE>
<CAPTION>
(In Thousands, except per share amounts) Three Months
Ended March 31
1999 1998
--------------- -------------
<S> <C> <C>
NET SALES $163,961 $150,388
Cost of Sales 135,042 122,559
-------- --------
Gross Profit 28,919 27,829
-------- --------
Operating Expenses:
Marketing 5,682 5,953
Administrative 5,520 5,174
Research, Development and Technical Services 5,492 5,304
-------- --------
16,694 16,431
-------- --------
Operating Income 12,225 11,398
Other Income (Expense):
Interest, Net (2,110) (1,907)
Income from Equity Joint Ventures 33 47
-------- --------
(2,077) (1,860)
-------- --------
Income Before Income Taxes 10,148 9,538
Provision for Income Taxes 4,006 3,816
-------- --------
NET INCOME $ 6,142 $ 5,722
======== ========
Net Income Per Common Share
Basic $ 0.61 $ 0.56
======== ========
Diluted $ 0.57 $ 0.52
======== ========
Dividends per Common Share $ 0.1500 $ 0.1375
======== ========
Average Common Shares Outstanding 9,681 9,846
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1999 and 1998
Unaudited
<TABLE>
<CAPTION>
(Dollars In Thousands) 3/31/99 3/31/98
-------- --------
<S> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 6,142 $ 5,722
Depreciation and amortization 10,211 9,318
Deferred revenue recognition (1,112) (1,081)
Deferred income taxes 836 (406)
Environmental and legal liabilities (186) (548)
Other non-cash items 438 87
Changes in Working Capital:
Receivables, net (12,051) (5,535)
Inventories 5,251 2,401
Accounts payable and accrued liabilities 5,273 (1,213)
Other 287 796
-------- --------
Net Cash Provided by Operating Activities 15,089 9,541
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (7,886) (6,401)
Other non-current assets 82 125
-------- --------
Net Cash Used for Investing Activities (7,804) (6,276)
-------- --------
CASH FLOWS FROM FINANCING AND OTHER RELATED ACTIVITIES
Revolving debt and notes payable to banks, net (400) (1,610)
Other debt repayments (352) (57)
Purchases of treasury stock, net (2,429) (452)
Dividends paid (1,676) (1,583)
Other non-cash items 372 175
-------- --------
Net Cash Used for Financing and Other Related Activities (4,485) (3,527)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,800 (262)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 983 5,507
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,783 $ 5,245
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 735 $ 887
Income taxes $ 1,728 $ 896
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and December 31, 1998
Unaudited
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
The condensed consolidated financial statements included herein have been
prepared by the company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
management believes that the disclosures are adequate and make the
information presented not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the company's latest Annual
Report to Stockholders and the Annual Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1998. In the
opinion of management all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial
position of Stepan Company as of March 31, 1999, and the consolidated
results of operations and cash flows for the three months then ended, have
been included.
2. INVENTORIES
-----------
Inventories include the following amounts:
<TABLE>
<CAPTION>
(Dollars in Thousands) 3/31/99 12/31/98
-------- ---------
<S> <C> <C>
Inventories valued primarily on LIFO basis -
Finished products $ 29,755 $ 33,444
Raw materials 17,490 19,052
-------- ---------
Total inventories $ 47,245 $ 52,496
======== =========
</TABLE>
If the first-in, first-out (FIFO) inventory valuation method had been used
for all inventories, inventory balances would have been approximately
$9,600,000 and $10,000,000 higher than reported at March 31, 1999, and
December 31, 1998, respectively.
3. 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
<PAGE>
potentially responsible parties at affected geographic sites. As discussed
in Management's Discussion and Analysis of Financial Condition and Results
of Operations included in this filing, the company believes that it has
made adequate provisions for the costs it may incur with respect to these
sites.
The company has estimated a range of possible environmental and legal
losses from $4.2 million to $26.4 million at March 31, 1999. At March 31,
1999, the company's reserve was $17.4 million for legal and environmental
matters compared to $17.6 million at December 31, 1998.
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.
4. EARNINGS PER SHARE
------------------
Below is the computation of basic and diluted earnings per share for the
three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
(In Thousands, except per share amounts) Three Months
Ended March 31
1999 1998
-------------- ------------
<S> <C> <C>
Computation of Basic Earnings per Share
- ----------------------------------------
Net income $ 6,142 $ 5,722
Deduct dividends on preferred stock 224 224
------- -------
Income applicable to common stock $ 5,918 $ 5,498
======= =======
Weighted-average number of shares outstanding 9,681 9,846
Basic earnings per share $ 0.61 $ 0.56
======= =======
Computation of Diluted Earnings per Share
- -----------------------------------------
Net income $ 6,142 $ 5,722
======= =======
Weighted-average number of shares outstanding 9,681 9,846
Add net shares issuable from assumed exercise of options
(under treasury stock method) 336 391
Add weighted-average shares issuable from assumed conversion of
convertible preferred stock 743 746
------- -------
Shares applicable to diluted earnings 10,760 10,983
======= =======
Diluted earnings per share $ 0.57 $ 0.52
======= =======
</TABLE>
<PAGE>
5. 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 income be reported in a financial statement that is displayed
with the same prominence as other financial statements (although for
interim financial reporting footnote disclosure of comprehensive income is
acceptable). Comprehensive income includes net income and all other
nonowner changes in equity that are not reported in net income. The foreign
currency translation losses totaled $928,000 and $599,000 for the quarters
ended March 31, 1999 and 1998, respectively. Therefore, total comprehensive
income was $5,214,000 for the quarter ended March 31, 1999, compared to
$5,123,000 for the same quarter of 1998.
6. 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 the periods beginning after
December 15, 1997. Stepan Company has three reportable segments:
surfactants, polymers and specialty products. Financial results of Stepan
Company's operating segments for the quarters ended March 31, 1999 and 1998
are summarized below:
<TABLE>
<CAPTION>
(Dollars in Thousands) Specialty
Surfactants Polymers Products Segment Totals
------------- ----------- ------------ -----------------
For the quarter ended March 31, 1999
- ------------------------------------
<S> <C> <C> <C> <C>
Net Sales $131,749 $27,762 $4,450 $163,961
Operating income 13,605 4,856 626 19,087
For the quarter ended March 31, 1998
- ---------------------------------------------
Net Sales $119,200 $26,041 $5,147 $150,388
Operating income 12,663 3,628 1,238 17,529
</TABLE>
Below are reconciliations of segment operating income to consolidated
income before income taxes:
<TABLE>
<CAPTION>
(Dollars in Thousands) Three Months Ended March 31
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
Operating income segment totals $19,087 $17,529
Unallocated corporate expenses (a) (6,862) (6,131)
Interest expense (2,110) (1,907)
Income from equity in joint ventures 33 47
------- -------
Consolidated income before income taxes $10,148 $ 9,538
======= =======
</TABLE>
(a) Includes corporate administrative and corporate manufacturing expenses
which are not included in segment operating income and not used to evaluate
segment performance.
<PAGE>
There have been no changes in the basis of segmentation or the measurement
of segment profit or loss and no material change in segment assets from
those disclosed in the annual report for the year ended December 31, 1998.
7. SUBSEQUENT EVENT
----------------
On May 11, 1999, shareholders approved an amendment to the company's
Certificate of Incorporation which increases the number of authorized
shares of Common Stock, par value $1 per share, from 15,000,000 shares to
30,000,000 shares.
8. SOFTWARE DEVELOPMENT COSTS
--------------------------
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use". SOP 98-1
provides guidance on accounting for costs related to obtaining or
developing internal-use software. The company adopted SOP 98-1 in 1999.
The adoption does not have a material impact on the company's operating
results or financial position.
<PAGE>
STEPAN COMPANY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following is management's discussion and analysis of certain significant
factors which have affected the company's financial condition and results of
operations during the interim period included in the accompanying condensed
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the three months ended March 31, 1999, net cash from operations totaled
$15.1 million, up by $5.5 million compared to the same quarter in 1998. Net
income was up by $0.4 million while depreciation and amortization and other non-
cash income add-backs were up by $2.8 million. Working capital was a seasonal
cash use of $1.2 million during the current year quarter compared to a $3.6
million use for the same period a year ago.
Capital expenditures totaled $7.9 million for the first quarter of 1999,
compared to $6.4 million in 1998. Despite higher current quarter spending,
total year capital expenditures are expected to be lower for 1999 compared to
1998.
Since December 31, 1998, consolidated debt decreased by $0.8 million, to $113.8
million. As of March 31, 1999, the ratio of long-term debt to long-term debt
plus shareholders' equity was 41.7 percent, down from 42.1 percent at year end.
The company maintains contractual relationships with its domestic banks which
provide for revolving credit which may be drawn upon as needed for general
corporate purposes. This credit facility was amended on March 12, 1999, to
increase the total amount of the commitment from $45 million to $60 million.
Other terms of the agreement remained unchanged.
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.
There have been no material changes in the company's market risks since December
31, 1998.
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended March 31, 1999 and 1998
- ------------------------------------------
Net income for the first quarter ended March 31, 1999, increased to $6.1
million, or $0.57 per share diluted, from $5.7 million or $0.52 per share
diluted a year ago. Net sales increased nine percent to $164.0 million in 1999
in comparison with $150.4 million for the same period in 1998. Net sales by
segments were:
<TABLE>
<CAPTION>
(Dollars in Thousands) Three Months
Ended March 31
--------------------------------------------------
1999 1998 % Change
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales:
Surfactants $131,749 $119,200 +11%
Polymers 27,762 26,041 +7%
Specialty Products 4,450 5,147 -14%
-------- --------
Total $163,961 $150,388 +9%
======== ========
</TABLE>
Domestic operations, which accounted for about 78 percent of total surfactant
revenues, reported net sales that were $6.6 million, or seven percent, greater
than those of a year ago. A two percent increase in sales volume, driven by
higher demand for the company's personal care products, contributed to the
improvement. A shift in mix from the larger national customers to the broader-
based commercial customers and distributors also favorably affected net sales.
Foreign operations reported a $6.0 million, or 26 percent, increase in net
sales. Sales volume rose 20 percent due to increases in Canada and Europe. The
fourth quarter 1998 acquisition of Boehme Filatex Canada, Inc.'s anionic and
cationic surfactant business led to Canada's improvement. Approximately 25
percent of the foreign operations' volume gain resulted from the consolidation
of Stepan Colombia, which did not occur until the second quarter of 1998. There
was no significant exchange rate fluctuation impact on net sales.
Surfactants gross profit rose three percent from $21.1 million in the first
quarter of 1998 to $21.7 million in 1999. Domestic surfactants were the main
contributing factor to the improvement. Better margins, due primarily to sales
mix, and higher sales volumes led to the domestic increase. Despite increased
sales volumes, gross profit for foreign surfactants operations fell $0.2
million, or six percent.
Polymers net sales increased $1.7 million, or seven percent, to $27.8 million in
1999 from $26.0 million a year ago. Sales volume rose 13 percent and accounted
for the improvement. Polyurethane polyols' 16 percent sales volume growth led
to a $1.2 million, or 10 percent, increase in revenue. Foreign and export
operations sales of polyurethane polyols, driven by higher volumes, also
increased $1.1 million from year to year. Polyurethane systems' net sales
increased $1.2 million, or 33 percent, due to a 37 percent rise in sales
volumes. Despite a two percent volume increase, phthalic anhydride (PA) net
sales fell $1.8 million, or 18 percent, between years. Lower average selling
prices led to the decline. The drop in the average selling prices was primarily
due to decreased raw materials costs coupled with price reductions reflecting
oversupply of PA in the marketplace.
<PAGE>
Polymers gross profit increased 24 percent to $6.3 million in the first quarter
of 1999 from $5.1 million in the first quarter of 1998. Polyurethane polyols
recorded the largest increase of 47 percent from $3.1 million a year ago to $4.5
million in 1999. This improvement was based on higher sales volumes and
margins. Polyurethane systems reported a 16 percent increase in gross profit
based entirely on increased volumes. The improvement in volumes was somewhat
dampened by a decline in margins due to sales mix. Gross profit for PA fell 33
percent to $1.1 million in 1999 from $1.6 million in 1998. The reason for the
decrease was a decline in margins which more than offset the impact of higher
sales volumes. Reducing prices in response to an oversupply of PA in the
marketplace caused the drop in margin.
Specialty products recorded a 14 percent decrease in net sales from $5.1 million
in 1998 to $4.5 million in 1999. Gross profit declined 46 percent from $1.6
million in 1998 to $0.9 million in 1999. Sales of higher margin products were
particularly weak during the first quarter of 1999.
Operating expenses rose approximately two percent from $16.4 million in 1998 to
$16.7 million in the first quarter of 1999. Administrative and research and
development expenses were up seven and four percent, respectively. Marketing
expenses fell five percent. Overall, operating expenses were 10 percent of net
sales for the first quarter of 1999 compared to 11 percent of net sales for the
first quarter of 1998.
Interest expense grew by 11 percent due to higher average debt levels.
ENVIRONMENTAL AND LEGAL MATTERS
- -------------------------------
The company is subject to extensive federal, state and local environmental laws
and regulations. Although the company's environmental policies and practices
are designed to ensure compliance with these laws and regulations, future
developments and increasingly stringent environmental regulation could require
the company to make additional unforeseen environmental expenditures. The
company will continue to invest in the equipment and facilities necessary to
comply with existing and future regulations. During the first quarter of 1999,
company expenditures for capital projects related to the environment were $1.5
million and should approximate $3.5 million to $5.0 million for the full year
1999. These projects are capitalized and typically depreciated over 10 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 $1.8 million for the first three
months of 1999. 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 these sites. The company has estimated a range of possible
environmental and legal losses from $4.2 million to $26.4 million at March 31,
1999. At March 31, 1999, the company's reserve was
<PAGE>
$17.4 million for legal and environmental matters compared to $17.6 million at
December 31, 1998. During the first three months of 1999, expenditures related
to legal and environmental matters approximated $0.4 million. 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.
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 the 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 3 major areas:
Information Technology ("IT") systems, non-"IT" systems and third-party
relationships. The project plan involves 3 phases: inventory and assessment,
remediation and testing, and implementation.
Implementation of approximately 80 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
requirement in June 1999 and implementation of the remaining systems is planned
for the third quarter.
The non-"IT" systems are comprised of manufacturing process control, telephone,
security, laboratory and other embedded chip systems. Implementation of
approximately 40 percent of these systems are complete and implementation of
critical and important items scheduled to be complete by June 1999. The
remaining non-"IT" systems are expected to be complete in 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 second 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
$1.8 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
<PAGE>
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 most reasonable
likely worst case scenarios. Contingency plans for these scenarios will be
developed as warranted throughout 1999.
OTHER
- -----
Except for the historical information contained herein, the matters discussed in
this document are forward looking statements that involve risks and
uncertainties. The results achieved this quarter are not necessarily an
indication of future prospects for the company. Actual results in future
quarters 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, outcome of environmental
contingencies, availability of raw materials, foreign currency fluctuations and
the general economic conditions.
<PAGE>
Part II OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Legal Proceedings
With regard to the Company's site at Maywood, New Jersey, and the report to
Congress issued by the United States Army Corps of Engineers in which report it
was indicated that the United States Army Corps of Engineers may seek
contribution recovery from certain parties, the United States Army Corps of
Engineers has requested legal advice from the Department of Justice as to the
interpretation of the Memorandum of Understanding which the Company entered into
with the United States of America, represented by the Department of Energy, in
1985, wherein the Department of Energy undertook the responsibility for
radiological clean-up, not only at the Company's site but at two adjacent sites
as well. There has been no report issued by the Department of Justice as of
this date.
As reported previously, the Company has been sued in Gilberg et al. v. Stepan et
---------------------------
al. and Accurso et al. v. Stepan et al. Civil Action 98-139 (Middlesex County,
- --- -------------------------------
New Jersey), now collectively known as Accurso et al. v. Stepan et al. This
-------------------------------
suit alleges a variety of alleged injuries from attention deficit disorder to
cancer, allegedly caused by or from exposure to radiological compounds and other
chemical compounds. The Company has been involved in mediation activities in an
attempt to resolve this issue but as of this date, has not been successful.
While such mediation efforts continue, the Court has ordered that 30
representative plaintiffs (Bell Weather plaintiffs mutually agreed to by both
defendants and plaintiffs) be chosen and that trial be conducted with regard to
each or all of the 30 representative plaintiffs. This process is underway. If
the mediation process does not resolve the case, trial with respect to such Bell
Weather plaintiffs has been scheduled to take place in mid-October of 1999.
Because of the fluidity of the situation and the fact that plaintiffs have
dropped cases as well as added cases, the Company's best estimate of the number
of plaintiffs in this action is now 548. In addition to which, 75 of 85
wrongful death actions and all but one potential claim by a worker against the
Company for negligence have been dismissed. The Company, at this date, still
cannot estimate what its liability, if any, will be.
As previously reported, the Company has been named as a third-party defendant in
an action entitled Olin Corporation v. Fissons plc et al. Civil Action No. 93-
--------------------------------------
11166-MLW, Federal District Court, Boston, Massachusetts. As of this date, the
Company has been dismissed from this case but the Court has given the defendants
leave to file a Motion for Reconsideration of the dismissal of the Company from
this case. Leave was given to the third-party defendants more than eight weeks
ago. To date, no Motion for Reconsideration has been filed.
<PAGE>
Item 4 - Submission of Matters to a Vote of Security Holders
(A) The company's 1999 Annual Meeting of Stockholders was held on May
11, 1999.
(B) At the annual meeting of the company's shareholders on May 11,
1999, shareholders elected Thomas F. Grojean, James A. Hartlage
and F. Quinn Stepan, Jr. as Directors of the company, all for
three-year terms. The vote in the election of Directors was as
follows:
<TABLE>
<CAPTION>
For Withheld
------------ -------------
<S> <C> <C>
Thomas F. Grojean 9,046,692 104,073
James A. Hartlage 9,052,180 98,585
F. Quinn Stepan, Jr. 9,051,500 99,265
</TABLE>
(C) A majority of the outstanding shares voted to amend the company's
Fourth Article of its Certificate of Incorporation to increase the
authorized number of shares of Common Stock from 15,000,000 to
30,000,000.
8,533,516 For
607,727 Against
9,522 Abstentions
(D) A majority of the outstanding shares voted to ratify the
appointment of Arthur Andersen LLP as independent auditors for the
company for 1999.
9,115,018 For
27,410 Against
8,337 Abstentions
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
(4)0(1) Copy of Certificate of Amendment, dated March 12, 1999,
amending Revolving Credit and Term Loan Agreement dated
January 9, 1998 (see 1998 Annual Report)
(27) Financial Data Schedule
(B) Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements 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
/s/ Walter J. Klein
Walter J. Klein
Vice President - Finance
Principal Financial and Accounting Officer
Date: May 14, 1999
<PAGE>
AMENDMENT NO. 1 TO REVOLVING CREDIT AGREEMENT
This Amendment No. 1 (the "Amendment") is dated as of March 12, 1999, among
Stepan Company (the "Company"), the undersigned Banks and The First National
Bank of Chicago, as agent for the Banks (the "Agent").
W I T N E S S E T H :
WHEREAS, the Company, the Banks and the Agent are parties to that certain
Credit Agreement dated as of January 9, 1998 (the "Agreement"); and
WHEREAS, the Company, the undersigned Banks and the Agent desire to amend
the Agreement in certain respects more fully described hereinafter;
NOW, THEREFORE, in consideration of the premises herein contained, and for
other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used herein and not otherwise defined
herein shall have the meanings attributed to such terms in the Agreement.
2. Amendment to the Agreement. The Commitment of The First National Bank of
Chicago and the Commitment of Harris Trust and Savings Bank are each hereby
increased from $22,500,000 to $30,000,000.
3. Representations and Warranties. In order to induce the Agent and the
undersigned Banks to enter into this Amendment, the Company represents and
warrants that:
(a) The representations and warranties set forth in Article V of the
Agreement, as hereby amended, are true, correct and complete on the date
hereof as if made on and as of the date hereof, and there exists no Default
or Unmatured Default on the date hereof.
(b) The execution and delivery by the Company of this Amendment have
been duly authorized by proper corporate proceedings of the Company and
this Amendment, and the Agreement, as amended by this Amendment, constitute
the legal, valid and binding obligations of the Company enforceable against
the Company in accordance with their terms, except as enforceability may be
limited by bankruptcy, insolvency or similar laws affecting the enforcement
of creditors' rights generally.
(c) Neither the execution and delivery by the Company of this Amendment,
nor the consummation of the transactions herein contemplated, nor
compliance with the provisions hereof will violate any law, rule,
regulation, order, writ, judgment, injunction, decree or award binding on
the Company or any Restricted Subsidiary or the Company's or any Restricted
Subsidiary's articles or certificate of incorporation, partnership
agreement, certificate of partnership, articles or certificate of
organization, by-laws, or operating or other management agreement, as the
case may be, or the provisions of any indenture, instrument or agreement to
which the Company or any Restricted Subsidiary is a party or is subject, or
by which it or its property, is bound, or conflict with or constitute a
default thereunder.
4. Fees and Legal Expenses.
-----------------------
(a) The Borrower agrees to pay an amendment fee of $15,000 to the Agent,
for the ratable account of each Bank based upon such Bank's percentage of
the Aggregate Commitment.
(b) The Borrower agrees to reimburse the Agent for reasonable legal fees
and expenses incurred by attorneys for the Agent (who may be employees of
the Agent) in connection with the preparation, negotiation and consummation
of this Amendment and the transactions contemplated herein.
5. Conditions Precedent This Amendment shall not become effective until and
unless the Borrower has furnished to the Agent (with sufficient copies for the
Banks):
(i) New Notes in the form of Exhibit "A" to the Credit Agreement payable
to
<PAGE>
the order of each of the Banks in the amount of their Commitment.
(ii) A certificate, executed by the Secretary or Assistant Secretary of
the Borrower, which shall confirm that the resolutions delivered to
the Agent in connection with the execution of the Credit Agreement
are true and correct and remain in full force and effect.
(iii)An incumbency certificate, executed by the Secretary or Assistant
Secretary of the Borrower, which shall identify by name and title
and bear the signature of the officers of the Borrower authorized
to sign this Amendment.
(iv) An opinion of counsel to the Borrower substantially in the form of
Exhibit "B" to the Credit Agreement.
6. Ratification. The Agreement, as amended hereby, shall remain in full
force and effect and is hereby ratified, approved and confirmed in all respects.
7. Reference to Agreement. From and after the effective date, each
reference in the Agreement to "this Agreement", "hereof", or "hereunder" or
words of like import, and all references to the Agreement in any and all
agreements, instruments, documents, notes, certificates and other writings of
every kind and nature shall be deemed to mean the Agreement, as amended by this
Amendment.
8. CHOICE OF LAW. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF ILLINOIS, BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
9. Miscellaneous.
--------------
(a) This Amendment may be executed in counterparts and by the different
parties hereto on separate counterparts each of which, when so executed and
delivered, shall be deemed an original, and all of which taken together
shall constitute one and the same agreement.
(b) This Amendment shall be effective as of the date first above
written; provided, that, (i) all of the conditions precedent set forth in
Section 5 have been satisfied, (ii) the Agent has received the fee referred
to in Section 4(a) of this Amendment and (iii) the Agent has received
executed counterparts of this Amendment from the Borrower, the Agent and
the Banks.
2
<PAGE>
IN WITNESS WHEREOF, the Company, the undersigned Banks and the Agent have
executed this Amendment as of the date first above written.
STEPAN COMPANY
By:_________________
Title:______________
THE FIRST NATIONAL BANK OF CHICAGO,
individually as a Bank and as Agent
By__________________
Title_______________
HARRIS TRUST AND SAVINGS BANK
By__________________
Title_______________
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND CONSOLIDATED STATEMENT OF
INCOME FOR THE THREE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,783
<SECURITIES> 0
<RECEIVABLES> 93,941
<ALLOWANCES> 0
<INVENTORY> 47,245
<CURRENT-ASSETS> 159,071
<PP&E> 574,413
<DEPRECIATION> 361,842
<TOTAL-ASSETS> 410,271
<CURRENT-LIABILITIES> 93,023
<BONDS> 0
0
19,597
<COMMON> 10,048
<OTHER-SE> 120,224
<TOTAL-LIABILITY-AND-EQUITY> 410,271
<SALES> 163,961
<TOTAL-REVENUES> 163,961
<CGS> 135,042
<TOTAL-COSTS> 151,736
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,110
<INCOME-PRETAX> 10,148
<INCOME-TAX> 4,006
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,142
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.57
</TABLE>
