SEC Filing | Stepan Company

- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-4462 ---------------- STEPAN COMPANY (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) Delaware 36-1823834 - -------------------------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) Edens and Winnetka Road, Northfield, 60093 Illinois - -------------------------------------- -------------------------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number including area code: 847-446-7500 Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ----------- -------------- Common Stock, $1 par value New York Stock Exchange (Effective March 14, 1996) American Stock Exchange (Cancelled March 13, 1996) Chicago Stock Exchange 5 1/2% Convertible Preferred Stock, no New York Stock Exchange (Effective par value March 14, 1996) Chicago Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None ----------- (Title of Class) INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS, AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO AGGREGATE MARKET VALUE AT FEBRUARY 29, 1996, OF VOTING STOCK HELD BY NONAFFILIATES OF THE REGISTRANT: $141,542,000.* NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK AS OF FEBRUARY 29, 1996:

DOCUMENTS INCORPORATED BY REFERENCE

*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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS Stepan Company and its subsidiaries (the "company") produce specialty and intermediate chemicals which are sold to other manufacturers and then made into a variety of end products. The company sells three groups of products: surfactants, polymers and specialty products. Surfactants refer to chemical agents which affect the interaction between two surfaces; they can provide actions such as detergency (i.e., the ability of water to remove soil from another surface), wetting and foaming, dispersing, emulsification (aiding two dissimilar liquids to mix), demulsification and viscosity modifications. Surfactants are the basic cleaning agent in detergents for washing clothes, dishes, carpets, fine fabrics, floors and walls. Surfactants are also used for the same purpose in shampoos and conditioners, toothpastes, cosmetics and other personal care products. Commercial and industrial applications include emulsifiers for agricultural insecticides and herbicides, emulsion polymers such as floor polishes and latex foams and coatings, wetting and foaming agents for wallboard manufacturing and surfactants for enhanced oil recovery. Polymers refer to intermediate chemicals including phthalic anhydride, polyols and urethane foam systems used in plastics, building materials and refrigeration industries. Specialty products consist of flavor and pharmaceutical intermediates, fine chemicals, esters, synthetic lubricants and other specialty products. In 1991, Stepan Company purchased the ACCOSOFT(R) line of fabric softeners from Karlshamns U.S.A., Inc. The company also purchased from ICI Americas, Inc. the U.S. portion of the sulfonate and sulfonate blend line used in agricultural products and industrial coatings. In 1993, Stepan Company entered into a 50 percent joint venture with Coldequim, S.A. called Stepan Colombiana de Quimicos, Ltda in Colombia, South America. Under the agreement, Stepan Colombiana manufactures selected surfactants and markets the company's complete line of surfactants in the Andean Pact countries of Colombia, Venezuela, Peru, Bolivia and Ecuador. In 1994, Stepan Company entered into a 50 percent joint venture with United Coconut Chemicals, Inc. and United Coconut Planters International in the Philippines. The venture, called Stepan Philippines, Inc., will manufacture selected surfactants for sale in the Philippines and Asia/Pacific markets commencing in 1996. In January 1996, Stepan Company agreed in principle to acquire a sulfonation plant and sulfonated products business from Shell Group in Cologne, Germany. This plant will allow 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. MARKETING AND COMPETITION Principal markets for all products are manufacturers of cleaning or washing compounds (including detergents, shampoos, toothpastes and household cleaners), paints, cosmetics, food and beverages, agricultural insecticides and herbicides, plastics, furniture, building materials and automotive and refrigeration equipment. Sales of the company tend not to be seasonal. The company does not sell directly to the retail market, but sells to a wide range of manufacturers in many industries and has many competitors. The principal methods of competition are product performance, price and adaptability to the specific needs of individual customers. These factors allow the company to compete on a basis other than solely price, reducing the severity of competition as experienced in the sales of commodity chemicals having identical performance characteristics. The company is one of the largest merchant producers of surfactants in the United States. In the case of surfactants, much of the company's competition comes from the internal divisions of larger companies, as well as several large national and regional producers. In the manufacture of polymers, the company competes with the chemical divisions of several large companies, as well as with other small specialty chemical manufacturers. In recent years, the company has also faced periodic competition from foreign imports of phthalic anhydride. In specialty products, the company competes with several large firms plus numerous small companies. The company does not expect any significant changes in the competitive environment in the foreseeable future. MAJOR CUSTOMER AND BACKLOG The company does not have any one single customer whose business represents more than 10% of the company's consolidated revenue. Most of the company's business is essentially on the "spot delivery basis" and does not involve a significant backlog. The company does have some contract arrangements with certain customers, but purchases are generally contingent on purchaser requirements. 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 1996, 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 1995, 1994 and 1993 were $12,425,000, $12,281,000 and $12,613,000, respectively. During 1995 and 1994, the research and development staff consisted of 175 and 170 employees, respectively. The balance of expenses reflected on the Consolidated Statements of Income relates to technical services which include routine product testing, quality control and sales support service. ENVIRONMENTAL COMPLIANCE Compliance with applicable federal, state and local regulations regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, resulted in capital expenditures by the company of approximately $6,840,000 during 1995. Such capital expenditures in 1996 should approximate $5.4 million. These expenditures represented approximately 17% of the company's capital expenditures in 1995 and are expected to be 10% of such expenditures in 1996. 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, 1995 and 1994, the company employed worldwide 1,267 and 1,265 persons, respectively. FOREIGN OPERATIONS See Note 12, Geographic Data, on page 29 of the company's 1995 Annual Report to Stockholders. PRODUCT GROUPS The manufacture of specialty and intermediate chemicals constitutes the company's only industry segment. The company's three groups of products and their contribution to sales for the three years ended December 31, 1995, were:

2 ITEM 2. PROPERTIES The company's corporate headquarters and central research laboratories are located in Northfield, Illinois. The Northfield facilities contain approximately 70,000 square feet on an 8 acre site. In addition, the company leases 49,000 square feet of office space in a nearby office complex. The Canadian sales office is located in Mississagua, Canada and is approximately 2,300 square feet of leased space. Stepan Mexico maintains a leased sales office in Mexico City, Mexico. Surfactants are produced at four plants in the United States and three wholly owned subsidiaries: one in France, Canada and Mexico. The principal plant is located on a 626 acre site at Millsdale (Joliet), Illinois. A second plant is located on a 39 acre tract in Fieldsboro, New Jersey. West Coast operations are conducted on an 8 acre site in Anaheim, California. A fourth plant is located on a 162 acre site in Winder, Georgia. The plant, laboratory and office of Stepan Europe are located on a 20 acre site near Grenoble, France. Stepan Canada, Inc. is located on a 70 acre leased, with an option to purchase, site in Longford Mills, Ontario, Canada. Stepan Mexico is located on a 13 acre site in Matamoros, Mexico. The phthalic anhydride, polyurethane systems and polyurethane polyols plants are also located at Millsdale. Specialty products are mainly produced at a plant located on a 19 acre site in Maywood, New Jersey. The company owns all of the foregoing facilities except the leased office space and Canadian plant site mentioned above. The company believes these properties are adequate for its operations. ITEM 3. LEGAL PROCEEDINGS Reference is made to the company's report Form 10-K for the years ended 1991, 1992 and 1994 and reports Form 10-Q for the quarters ended September 30, 1993, and September 30, 1995, regarding the company's 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. Reference is made to the company's report Form 10-Q for the quarters ended September 30, 1993, September 30, 1994, and September 30, 1995, regarding the Ewan and D'Imperio cases and particularly U.S. v. Jerome Lightman (92 cv 4710 (JBS)). 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. Reference is made to the company's report Form 10-K for the year ended 1992 and report Form 10-Q for the quarter ended September 30, 1995, relating to the 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. Reference is made to the company's report Form 10-Q for the quarter ended September 30, 1993, relating to the Biddle Sawyer site located in Keyport, New Jersey. (Biddle Sawyer Corporation v. American Cyanamid Company in the United States District Court of New Jersey CA-93-1063). As reported previously, the company was named as a defendant in this action to recover remediation costs incurred at the site. Trial on the issues will commence the last quarter of 1996 or the first quarter of 1997. The company cannot predict what the outcome of the trial will be, but the company believes that it has defenses to all of the plaintiff's allegations. Reference is made to the company's report Form 10-Q for the quarter ended March 31, 1995, relating to an action entitled General Electric Company v. Buzby Brothers Materials Corporation et al. (CA 87-4263 JHR). As reported previously, the company believed that it settled its liability at this site. The court recently approved the settlement. However, the company must cooperate in depositions by the non-settling parties. 3 Reference is made to the company's report 10-Q for the quarter ended March 31, 1995, referencing an action entitled Millmaster Onyx Group Inc. v. Stepan Company (CA No. 93-510-LON). Trial is still scheduled to commence on June 4, 1996. The company cannot predict what the outcome of the trial will be, but the company believes that it has defenses to all of the plaintiff's allegations. On March 15, 1996, the company was notified by the Occupational Safety and Health Administration (OSHA) following an audit of the company's Maywood, New Jersey facility that the OSHA would be issuing a preliminary fine of approximately $206,000 for alleged violations at the Maywood site. The company has 15 days in which to appeal the preliminary findings, and the company plans to do so. At this time the company cannot anticipate what change, if any, to the preliminary fine will be made following the appeal. 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, 1995. 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 May 22, 1995, Jeffrey W. Bartlett, formerly Vice President, General Counsel and Corporate Secretary, was appointed Vice President, Regulatory Affairs, General Counsel and Corporate Secretary. Effective January 1, 1995, James A. Hartlage, who was formerly the Senior Vice President-- Technology as of February, 1992, 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. Effective April 28, 1992, Charles W. Given, formerly Vice President-- Marketing, was appointed Vice President and General Manager--Surfactants. Ronald L. Siemon, formerly Vice President--Polyurethanes, was appointed Vice President and General Manager--Polymers. Effective January 1, 1992, Walter J. Klein, formerly the Vice President and Corporate Controller, was appointed Vice President--Finance. Mickey Mirghanbari, who previously served in the capacity of Vice President for Plant Operations, assumed the position of Vice President--Manufacturing and Engineering. All other executive officers have remained in their current capacity for over five years. The Executive Officers of the company, their ages as of February 29, 1996, and certain other information are as follows:

4 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 (effective March 14, 1996) and the Chicago Stock Exchange. See page 30 of the company's 1995 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 (effective March 14, 1996) and the Chicago Stock Exchange. See Note 6 on page 27 of the company's 1995 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. In addition to these funding requirements, on November 6, 1995, the Board of Directors approved an additional open market repurchase of up to 300,000 shares of common stock. (b) On February 29, 1996, there were 1,759 holders of record of common stock of the company. (c) See page 30 of the company's 1995 Annual Report to Stockholders for dividend information which is incorporated by reference herein. Also see Note 3 on page 25 of the company's 1995 Annual Report to Stockholders which sets forth the restrictive covenants covering dividends. ITEM 6. SELECTED FINANCIAL DATA See pages 30 and 31 of the company's 1995 Annual Report to Stockholders' for a ten year summary of selected financial information which is incorporated by reference herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS See pages 14 through 18 of the company's 1995 Annual Report to Stockholders which is incorporated by reference herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See pages 19 through 29 of the company's 1995 Annual Report to Stockholders for the company's consolidated financial statements, notes to the consolidated financial statements and auditors' report which are incorporated by reference herein. See page 31 of the company's 1995 Annual Report to Stockholders for selected quarterly financial data which is incorporated by reference herein. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Directors See pages 3 through 5 of the company's Proxy Statement dated April 5, 1996, for the Annual Meeting of Stockholders which are incorporated by reference herein. 5 (b) Executive Officers See Executive Officers of the Registrant in Part I above. ITEM 11. EXECUTIVE COMPENSATION See page 7 of the company's Proxy Statement dated April 5, 1996, for the Annual Meeting of the Stockholders which is incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See Pages 1 through 6 of the company's Proxy Statement dated April 5, 1996, for the Annual Meeting of Stockholders which are incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) & (d) Financial Statements and Schedules See the Index to the Consolidated Financial Statements and Supplemental Schedule filed herewith. (b) Reports on Form 8-K A report on Form 8-K was filed on April 12, 1995, regarding quarterly earnings. A report on Form 8-K was filed on October 24, 1995, regarding quarterly earnings. (c) Exhibits See Exhibit Index filed herewith. 6 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, Regulatory Affairs, General Counsel and Corporate Secretary March 25, 1996 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. F. Quinn Stepan Chairman, President, Chief March 25, 1996 ____________________________________ Executive Officer and Director F. Quinn Stepan Thomas F. Grojean Director March 25, 1996 ____________________________________ Thomas F. Grojean James A. Hartlage Senior Vice President--Technology March 25, 1996 ____________________________________ and Operations and Director James A. Hartlage Walter J. Klein Vice President--Finance, March 25, 1996 ____________________________________ Principal Financial and Walter J. Klein Accounting Officer Paul H. Stepan Director March 25, 1996 ____________________________________ Paul H. Stepan Robert D. Cadieux Director March 25, 1996 ____________________________________ Robert D. Cadieux Robert G. Potter Director March 25, 1996 ____________________________________ Robert G. Potter

JEFFREY W. BARTLETT, PURSUANT TO POWERS OF ATTORNEY EXECUTED BY EACH OF THE DIRECTORS AND OFFICERS LISTED ABOVE, DOES HEREBY EXECUTE THIS REPORT ON BEHALF OF EACH OF SUCH DIRECTORS AND OFFICERS IN THE CAPACITY IN WHICH THE NAME OF EACH APPEARS ABOVE. JEFFREY W. BARTLETT March 25, 1996 7 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, 1995, has been filed as an exhibit to this Annual Report on Form 10-K. Pages 19 through 29 of such Annual Report to Stockholders contain the Consolidated Balance Sheets as of December 31, 1995 and 1994, the Consolidated Statements of Income, Stockholders' Equity and Cash Flows and Notes to Consolidated Financial Statements for the three years ended December 31, 1995, and the Auditors' Report covering the aforementioned financial statements. These consolidated financial statements and the Auditors' Report thereon are incorporated herein by reference. Supplemental Schedule II--Allowance for Doubtful Accounts--to Consolidated Financial Statements, which is required to comply with regulation S-X, and the Auditors' report on such Supplemental Schedule are included on pages 9 and 10 of this 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. 8 STEPAN COMPANY SUPPLEMENTAL SCHEDULE TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1995 AS REQUIRED TO COMPLY WITH REGULATIONS 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, 1995:
1995 1994 1993 ------ ------ ------ (IN THOUSANDS) Balance, Beginning of Year........................ $1,585 $1,739 $1,444 Provision charged to income..................... 349 291 621 Accounts written off, net of recoveries......... (190) (445) (326) ------ ------ ------ Balance, End of Year.............................. $1,744 $1,585 $1,739 ====== ====== ======
9 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 9, 1996. 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 9, 1996 10 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- (3)a Copy of the Certificate of Incorporation, and the Certificates of Amendment of Certificate of Incorporation dated May 6, 1968, April 20, 1972, April 16, 1973, December 2, 1983. Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1983, and incorporated herein by reference. (3)b Copy of the Bylaws of the company as amended through May 6, 1987. (Note 1) (3)c Copy of Certificate of Amendment, dated April 28, 1993, to Article IV of Certificate of Incorporation. (Note 7) (3)d Copy of Certificate of Amendment, dated May 5, 1987, to Article X of Certificate of Incorporation. (Note 1) (4)h Copy of Loan Agreement dated June 15, 1995, with Aid Association for Lutherans, the Northwestern Mutual Life Insurance Company and The Mutual Life Insurance Company of New York. (Note 9) (4)i Copy of Revolving Credit and Term Loan Agreement dated February 20, 1990, with The First National Bank of Chicago and the amendment dated March 21, 1990. (Note 3) (4)m Copy of Second Amendment dated September 20, 1991, amending Revolving Credit and Term Loan Agreement dated February 20, 1990 (see (4)i above). (Note 4) (4)m(1) Copy of Third Amendment dated December 29, 1992, amending Revolving Credit and Term Loan Agreement dated February 20, 1990 (see (4)i and (4)m above). (Note 8) (4)m(2) Copy of Fourth Amendment dated May 31, 1994, amending revolving credit and Term Loan Agreement dated February 20, 1990 (see (4)i, (4)m and (4)m(1) above). (4)n(1) Copy of Certificate of Designation, Preferences and Rights of the 5 1/2% Convertible Preferred Stock, without Par Value and the Amended Certificate dated August 12, 1992 and April 28, 1993. (Note 7) (4)n(2) Copy of Issuer Tender Offer Statement on Schedule 13E-4 dated August 13, 1992. (Note 6) (4)n(3) Copy of Amendment No. 1 to Schedule 13E-4 (see also (4)n(2) above) dated September 23, 1992. (Note 6) (4)n(4) Copy of the company's Form 8-A dated August 13, 1992. (Note 6) In accordance with 601 (b)(4)(iii) of Regulation S-K, certain debt instruments are omitted, where the amount of securities authorized under such instruments does not exceed 10% of the total consolidated assets of the Registrant. Copies of such instruments will be furnished to the Commission upon request. (10)a Description of the 1965 Directors Deferred Compensation Plan. (Note 2) (10)b Copy of the 1969 Management Incentive Compensation Plan as amended and restated as of January 1, 1992. (Note 5) (10)d Copy of the 1982 Stock Option Plan. (Note 2) (10)e Copy of Leveraged Employee Stock Ownership Plan. (Note 3) (10)f Copy of the company's 1992 Stock Option Plan. (Note 5) (11) Statement re computation of per share earnings. (13) Copy of the company's 1995 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, 1995. (23) Consent of Independent Public Accountants. (24) Power of Attorney. (27) Financial Data Schedule.
- -------- NOTES TO EXHIBIT INDEX
NOTE NO. -------- 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference.

Exhibit (11) STEPAN COMPANY STATEMENT RE COMPUTATION OF PER SHARE EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 ------- ------- Computation of Per Share Earnings - --------------------------------- Net Income $16,119 $13,845 Deduct dividends on preferred stock 1,069 1,076 ------- ------- Income applicable to common stock $15,050 $12,769 ======= ======= Weighted average number of shares outstanding 9,984 9,924 Per share earnings* $ 1.507 $ 1.287 ======= ======= Computation of Per Share Primary Earnings - ----------------------------------------- Income applicable to common stock $15,050 $12,769 ======= ======= Weighted average number of shares outstanding 9,984 9,924 Add net shares issuable from assumed exercise of options (under treasury stock method) 166 142 ------- ------- Shares applicable to primary earnings 10,150 10,066 ======= ======= Per share primary earnings* $ 1.483 $ 1.269 ======= ======= Dilutive effect 1.6% 1.4% ======= ======= Computation of Per Share Fully Diluted Earnings - ----------------------------------------------- Net income $16,119 $13,845 ======= ======= Weighted average number of shares outstanding 9,984 9,924 Add net shares issuable from assumed exercise of options (under treasury stock method) 166 154 Add weighted average shares issuable from assumed conversion of convertible preferred stock 888 894 ------- ------- Shares applicable to fully diluted earnings 11,038 10,972 ======= ======= Per share fully diluted earnings* $ 1.460 $ 1.262 ======= ======= Dilutive effect 3.1% 1.9% ======= =======
* Rounded This calculation is submitted in accordance with Regulation S-K, item 601(b)(11).

Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations 1995 Compared with 1994 Sales for 1995 grew 19 percent to a record $528.2 million. The increase was the result of a 12 percent increase in sales volume. Sales by product group were:
Percent (Dollars in Thousands) 1995 1994 Change - ---------------------------------------------------- Surfactants $380,179 $329,186 + 15 Polymers 115,833 78,778 + 47 Specialty products 32,206 35,984 - 10 - ---------------------------------------------------- Total $528,218 $443,948 + 19 ====================================================
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. Domestic volume which contributes 85 percent of total surfactant sales volume grew 17 percent over 1994. Recent capacity expansions have kept pace with demand growth and ongoing capacity expansions should meet projected requirements. Higher average selling prices resulting from raw material cost increases also contributed to higher sales from the broad commercial customer base. Sales of foreign subsidiaries representing 15 percent of surfactant sales volume rose by four percent. European sales were up 29 percent due primarily to a 15 percent gain in volume coupled with a stronger French franc. Partially offsetting the European result was the reported lower Mexican sales on the significantly devalued Mexican peso that has lost 22 percent against the U.S. dollar since the beginning of 1995. However, Mexican sales volume only declined two percent. Canadian sales reported an eight percent increase reflecting mainly higher selling prices to pass through raw material cost increases. The polymer product group includes phthalic anhydride, polyurethane systems and polyurethane polyols. Phthalic anhydride is used in polyester resins, alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. Polyurethane systems provide thermal insulation and are sold to the construction, industrial and appliance markets. Polyurethane polyols are used in the manufacture of laminate board for the construction industry. Polymer sales increased due to higher selling prices reflecting a pass through of higher raw material costs and a 12 percent increase in volume. Phthalic anhydride, which represents 54 percent of polymer volume, experienced a 64 percent increase in sales due primarily to a 53 percent increase in average selling prices and a seven percent volume gain. The sharp rise in selling prices was driven by higher raw material costs and stronger market demand. Demand should remain steady in 1996 although selling prices are expected to decline significantly as a result of lower raw material costs. Polyurethane polyols, which represent 41 percent of total polymer volume, experienced a 23 percent increase in volume due to strong domestic demand and significant gains in the export business. Polyurethane systems sales held steady as efforts continue to commercialize new generation products with more favorable environmental characteristics. Specialty products include flavors, lubricant additives, oil field chemicals and emulsifiers and solubilizers used in the food and pharmaceutical industry. Specialty products revenues declined 10 percent on reduced volume. Sales of certain lower margin lubricant additives were discontinued in the current year. This has led to an improved average selling price between years. Gross profit in 1995 was $97.4 million, or 18.4 percent of net sales, a 20 percent growth from $81.1 million, or 18.3 percent of net sales in 1994. Surfactants gross profit was $72.5 million for 1995, an increase of 18 percent from 1994. Domestic surfactants were up $11.2 million, or 25 percent, as a result of the higher domestic sales volume. Gross profit of foreign operations was flat with Europe's modest gain being entirely offset by slight declines reported by Canada and Mexico. Continued competitive pricing pressure which affected the foreign subsidiaries' ability to fully pass through raw material cost increases was the main cause of the lackluster foreign results. Polymers gross profit jumped $6.3 million to $19.3 million in 1995 representing a 48 percent increase from 1994. Phthalic anhydride accounted for all of the increased polymer gross profit showing significantly increased gross profit margins as a result of the higher selling prices mentioned earlier. Polyurethane polyols gross profit decreased 30 percent despite higher volume due to the inability to fully pass on raw material cost increases. Polyurethane 14 systems gross profit declined 40 percent as a result of the unfavorable product mix and reduced volumes. Specialty products gross profit dropped $1.0 million to $5.6 million in 1995, a 16 percent decrease from 1994. The decline was due mainly to the cessation of certain low margin lubricant additives products. Average raw material costs increased 11 percent during 1995, primarily reflecting higher polymer raw material costs. Manufacturing labor costs increased at a modest rate reflecting the recent low levels of inflation which are expected to continue in the near term. The company currently employs 1,267 people which is relatively unchanged from a year ago, but down 35 people from 1993 due to the voluntary early retirement program offered in 1994. Depreciation expense increased to $28.8 million in 1995 from $27.0 million in 1994 as a result of bringing into service significant capacity expansion projects in recent years, as well as continuing capital spending for plant improvements. Operating income, pre-tax income before net interest expense, was $32.9 million in 1995, an 11 percent increase from 1994. Operating expenses, consisting of marketing, administrative and research expenses, rose 25 percent reflecting higher administrative expenses in 1995. Administrative expenses climbed 61 percent due to a $9.4 million increase in legal and environmental expenses which was precipitated by a draft Remedial Investigation Feasibility Study enumerating possible future costs for remediation of the company's Maywood, New Jersey plant and adjacent property. See Note 11 of the Notes to the Consolidated Financial Statements. Prior year's expenses benefited from $3.1 million of insurance recoveries related to previously incurred legal and environmental costs. Marketing expenses rose 10 percent primarily due to higher salaries as well as increased marketing effort in the Pacific Rim. Research and development expenses increased six percent due largely to increased salary expenses. Operating expenses related to legal and environmental are expected to decline significantly in 1996. Other cost saving initiatives and current low inflationary levels are expected to keep 1996 operating expense increases to a modest level. The effective tax rate was 35.5 percent in 1995 compared to 38.5 percent in 1994 resulting in a modest two percent increase in the income tax provision. The decrease in the effective tax rate was attributable to the higher research and development tax credit benefits at the state level as well as tax credit carryforward benefits realized in Mexico. See Note 5 of the Notes to the Consolidated Financial Statements for a reconciliation of the statutory to the effective tax rate. Net income for 1995 rose to a record $16.1 million, or $1.51 per share, compared to $13.8 million, or $1.29 per share in 1994. Surfactant and Polymer earnings are expected to show continued improvement in 1996. Operating expenses should decline due to lower legal and environmental expenses. Those factors should lead to further earnings growth in 1996. 1994 Compared with 1993 Sales for 1994 grew one percent to a record $444 million despite a one percent decline in sales volume. Sales by product group were:
Percent (Dollars in Thousands) 1994 1993 Change - ---------------------------------------------------- Surfactants $329,186 $324,809 + 1 Polymers 78,778 79,071 -- Specialty products 35,984 34,945 + 3 - ---------------------------------------------------- Total $443,948 $438,825 + 1 ====================================================
Surfactant sales rose one percent despite a four percent decline in sales volume. The moderate growth in sales was primarily contributed by foreign subsidiaries, as domestic sales were essentially flat between years. Domestic volume, representing 83 percent of total surfactant sales volume, was down seven percent from 1993 as a result of product reformulation by large national customers. Partially offsetting this was a significant volume growth in the broad commercial customer base. Sales of foreign subsidiaries, representing 17 percent of surfactant sales volume, grew six percent as a result of a strong volume gain. Mexico contributed a 46 percent year-to-year volume increase, followed by a 13 percent and a six percent increase from Canada and Europe, respectively. The weakened Canadian dollar has negatively affected the subsidiary's reported sales growth. The continued competitive pressure on prices in Europe has erased the revenue growth fueled by stronger sales volume and the strengthening French franc. 15 Management's Discussion and Analysis of Financial Condition and Results of Operations Polymer sales were essentially unchanged from 1993, although sales volume rose eight percent. Phthalic anhydride, which represents 57 percent of polymer volume, reported a 16 percent increase in sales due to a 13 percent increase in volume and higher selling prices. Higher selling prices were driven by improved market conditions and higher raw material costs. The increase in phthalic anhydride volume was the result of strong domestic demand, lower levels of competing foreign imports and high production levels attributable to refurbishments made to our manufacturing facility. Polyurethane polyols, which represent 38 percent of total polymer volume, posted 15 percent sales growth due entirely to improved volume. Polyurethane systems sales fell 44 percent as volume dropped 45 percent due to delays in the roll-out of new products with more favorable environmental characteristics. Specialty products revenues grew three percent with most of the improvement coming from higher volume. Gross profit in 1994 was $81.1 million, or 18.3 percent of net sales, an increase from $80.0 million, or 18.2 percent of net sales in 1993. Surfactant gross profit was $61.3 million for 1994, a decrease of three percent from 1993. Domestic surfactants were down $3.5 million, or seven percent, as a result of the reduced sales to larger national customers. Foreign operations were up $1.9 million as Mexico and Canada continued to post stronger sales over prior years. Negatively impacting the result was Stepan Europe which continued to face increasingly competitive price pressure in a recovering European economy. Polymer gross profit rose $3.4 million to $13.1 million for 1994 representing a 35 percent increase from 1993. Phthalic anhydride contributed most of the increased polymer gross profit, as a result of significantly improved margins and volume. Insurance recoveries of $1.1 million related to 1993 production outages also contributed to the improved margin. Despite the significant sales drop in polyurethane systems, gross profit only declined 26 percent due primarily to the development of lower cost formulations. While polyurethane polyols posted higher sales and volume, increased manufacturing expenses, raw material costs and export freight costs more than offset the volume gains. Specialty products gross profit fell $.7 million to $6.7 million for 1994 representing a nine percent decline from 1993. Despite the increased sales, the decline in gross profit was largely attributable to reduced royalty income compared to a year earlier. Average raw material costs climbed six percent during 1994. Labor costs increased at a modest rate reflecting the recent low levels of inflation. Depreciation expense increased to $27.0 million in 1994 from $25.7 million in 1993 as a result of bringing into service capacity expansion projects in recent years, as well as continuing capital spending for plant improvements. Operating income, pre-tax income before net interest expense, was $29.6 million in 1994, an 8.4 percent increase from 1993. Operating expenses declined three percent reflecting lower administrative expenses in 1994. Administrative expenses decreased $1.3 million, or seven percent due primarily to $3.1 million of insurance recoveries relating to legal costs previously incurred in defending environmental cases against the company. See Note 11 of the Notes to Consolidated Financial Statements. Net of these favorable recoveries, provision for legal and environmental costs was $.7 million in 1994 compared with $2.2 million recorded in 1993. Marketing expenses increased a modest one percent which was essentially offset by a decrease in research and product development expenses. Excluding the insurance recoveries, operating expenses for 1994 increased $1.8 million, or a moderate three percent. Continued insurance reimbursement of ongoing environmental legal defense costs is expected to minimize the company's share of future defense costs. Other cost containment efforts, including a voluntary early retirement program offered in 1994, are expected to keep 1995 operating expense increases to a modest level. Net income in 1994 benefited from a substantially lower tax rate than 1993. The effective tax rate was 38.5 percent in 1994 compared to 45.1 percent in 1993. The 1993 tax rate was unusually high because of a U.S. tax rate hike and the resulting upward restatement of deferred tax liabilities. A recognition in the current year of tax benefits on loss carryforwards of foreign subsidiaries also contributed to the lower tax provision. See Note 5 of the Notes to the Consolidated Financial Statements for a reconciliation of the statutory to the effective tax rate. Net income for 1994 rose 28 percent to $13.8 million, or $1.29 per share, compared to $10.8 million, or $.98 per share in 1993. As a result of the two- for-one common 16 stock split on December 15, 1994, earnings per share for 1993 and prior have been restated. Fourth Quarter 1995 Compared with 1994 For the quarter ended December 31, 1995, the company reported net income of $5.1 million, or $.49 per share, compared to $3.6 million, or $.34 per share in the fourth quarter of 1994. Net sales for the quarter increased 12 percent to $126.8 million from $113.6 million recorded in 1994. Gross profit was $24.3 million, up 20 percent in the fourth quarter compared to the same quarter of 1994. Surfactants made the largest contribution as a result of considerably higher sales volume. Polymers recorded higher quarterly gross profit due to improved phthalic anhydride margins. Specialty products posted lower gross profit due to lower sales volume. Total operating expenses were 13 percent higher in the fourth quarter compared with the same quarter of 1994. The lower 1994 expenses benefited from insurance recoveries of $1.1 million related to previously incurred legal and environmental costs. Liquidity and Financial Condition For 1995, net cash from operations totaled $35.0 million, a decrease of $16.0 million compared to $51.0 million for 1994. During 1994, cash from operations included $12.9 million in customer prepayments under long-term contracts. Increased working capital requirements stemming from sales growth were responsible for substantially all of the remaining difference in operating cash flows from year to year. Capital expenditures totaled $39.2 million for 1995, down from $42.9 million for 1994. The company also invested $7.5 million in capital contributions for a joint venture operation in the Philippines. Cash requirements for investing activities are expected to increase during 1996 driven mainly by higher planned capital spending as well as continued effort in global expansion. Since December 31, 1994, total company debt has increased by $18.1 million to close the year at $116.0 million. At December 31, 1995, the ratio of long-term debt to long-term debt plus shareholders' equity stood at 47.1 percent compared to 44.7 percent one year earlier. For 1996, the company plans to derive cash from earnings and from committed credit lines in proportions close to the present capital structure. As a result, we expect the ratio of long-term debt to long-term debt plus shareholders' equity to remain relatively steady from year to year. During June 1995, the company entered into unsecured long-term loan agreements totaling $40 million with maturities of 10 to 15 years. The proceeds of the new loans were used to reduce domestic bank debt. The terms and conditions of the new loan agreements are essentially the same as those of previously existing agreements. The company maintains contractual relationships with its domestic banks which provide for $45 million of revolving credit which may be drawn upon as needed for general corporate purposes. The company also meets short-term liquidity requirements through uncommitted bank lines of credit and bankers' acceptances. The company's foreign subsidiaries maintain committed and uncommitted bank lines of credit in their respective countries to meet working capital requirements as well as to fund capital expenditure programs. The company anticipates that cash from operations and from committed credit facilities will be sufficient to meet anticipated capital expenditure programs, dividend requirements and other planned financial commitments in 1996 and for the foreseeable future. Environmental and Legal Matters The company is subject to extensive federal, state and local environmental laws and regulations. Although the company's environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent environmental regulation could require the company to make additional unforeseen environmental expenditures. The company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations. During 1995, the company expenditures for capital projects related to the environment were $6.8 million and should approximate $5.4 million for 1996. These projects are capitalized and typically depreciated over ten years. Capital spending on such projects is likely to continue at these levels in future years. Recurring costs associated with the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing operations at our manufacturing 17 Management's Discussion and Analysis of Financial Condition and Results of Operations locations were approximately $7.0 million for 1995 compared to $7.1 million for 1994. 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 17 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. The company has estimated a range of possible environmental and legal losses from $4.3 million to $23.6 million at December 31, 1995, compared to $5.5 million to $21.6 million at December 31, 1994. At December 31, 1995, the company's reserve was $8.7 million for legal and environmental matters compared to $6.9 million at December 31, 1994. During 1995, expenditures related to legal and environmental matters approximated $7.8 million compared to $4.3 million expended in 1994. During 1994, the company recovered $3.1 million from insurers for reimbursement of previously incurred environmental defense costs which reduced that year's legal and environmental expense. The company continues to pursue potential recoveries of legal and environmental costs from insurers and other third parties. The potential benefit of such recoveries has not been recorded. While it is difficult to forecast the expenditures for 1996, the company believes that the $8.7 million reserve balance at December 31, 1995, is more likely to be paid out over many years. See also Note 11 of the Notes to Consolidated Financial Statements. At certain of the sites, estimates cannot be made of the total costs of compliance or the company's share of such costs; accordingly, the company is unable to predict the effect thereof on future results of operations. In the event of one or more adverse determinations in any annual or interim period, the impact on results of operations for those periods could be material. However, based upon the company's present belief as to its relative involvement at these sites, other viable entities' responsibilities for cleanup and the extended period over which any costs would be incurred, the company believes that these matters will not have a material effect on the company's financial position. Certain of these matters are discussed in Item 3, Legal Proceedings in the 1995 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. Accounting Standard In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121-Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS No. 121"). This standard must be adopted no later than the 1996 reporting year, but can be adopted early. SFAS No. 121 requires that operating assets and associated goodwill be written down to fair value whenever an impairment review indicates that the carrying value cannot be recovered on an undiscounted cash flow basis. After any such noncash write-down, results of operations would be favorably affected by reduced depreciation, depletion and amortization charges. The company believes this standard will have no impact on the results of operations upon adoption in the first quarter of 1996. In addition, reference should be made to the Ten Year Summary on pages 30 and 31. 18 Report of Management Management Report on Financial Statements The financial statements of Stepan Company and subsidiaries were prepared by and are the responsibility of management. The statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and include some amounts that are based on management's best estimates and judgments. The Board of Directors, through its Audit Committee, assumes an oversight role with respect to the preparation of the financial statements. In meeting its responsibility for the reliability of the financial statements, the company depends on its system of internal accounting control. The system is designed to provide reasonable assurance that assets are safeguarded and that transactions are executed as authorized and are properly recorded. The system is augmented by written policies and procedures and an internal audit department. The Audit Committee of the Board of Directors, composed solely of directors who are not officers or employees of the company, meets regularly with management, with the company's internal auditors and with its independent certified public accountants to discuss its evaluation of internal accounting controls and the quality of financial reporting. The independent auditors and the internal auditors have free access to the Audit Committee, without management's presence. /s/ F. Quinn Stepan F. Quinn Stepan Chairman of the Board and Chief Executive Officer /s/ Walter J. Klein Walter J. Klein Vice President-Finance February 9, 1996 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, 1995 and 1994, and the related consolidated statements of income, cash flows and stockholders' equity, for each of the three years in the period ended December 31, 1995. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stepan Company and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Chicago, Illinois, February 9, 1996 19 Consolidated Balance Sheets December 31, 1995 and 1994
(Dollars in Thousands) 1995 1994 - --------------------------------------------------------------------------------------------------------- Assets Current Assets: Cash and cash equivalents $ 3,148 $ 2,452 Receivables, less allowances of $1,744 in 1995 and $1,585 in 1994 79,814 70,385 Inventories (Note 2) 54,363 45,464 Deferred income taxes (Note 5) 9,444 8,218 Other current assets 3,385 2,852 - --------------------------------------------------------------------------------------------------------- Total current assets 150,154 129,371 - --------------------------------------------------------------------------------------------------------- Property, Plant and Equipment: Land 4,611 4,576 Buildings and improvements 53,701 52,558 Machinery and equipment 379,363 343,629 Construction in progress 16,429 16,891 - --------------------------------------------------------------------------------------------------------- 454,104 417,654 Less accumulated depreciation 261,634 233,997 - --------------------------------------------------------------------------------------------------------- Property, plant and equipment, net 192,470 183,657 - --------------------------------------------------------------------------------------------------------- Other Assets 19,903 11,920 - --------------------------------------------------------------------------------------------------------- Total assets $362,527 $324,948 ========================================================================================================= Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term debt (Note 3) $ 6,946 $ 8,043 Accounts payable 42,530 37,904 Accrued liabilities (Note 9) 37,423 34,509 - --------------------------------------------------------------------------------------------------------- Total current liabilities 86,899 80,456 - --------------------------------------------------------------------------------------------------------- Deferred Income Taxes (Note 5) 36,469 32,976 - --------------------------------------------------------------------------------------------------------- Long-term Debt, less current maturities (Note 3) 109,023 89,795 - --------------------------------------------------------------------------------------------------------- Deferred Revenue (Note 10) 7,659 10,419 - --------------------------------------------------------------------------------------------------------- Stockholders' Equity (Note 6): 5-1/2 percent convertible preferred stock, cumulative, voting, without par value; authorized 2,000,000 shares; issued 797,172 shares in 1995 and 799,196 shares in 1994 19,929 19,980 Common stock, $1 par value; authorized 15,000,000 shares; issued 10,086,653 shares in 1995 and 10,028,544 shares in 1994 10,087 10,029 Additional paid-in capital 4,568 3,983 Cumulative translation adjustments (3,691) (3,491) Retained earnings 93,292 82,445 - --------------------------------------------------------------------------------------------------------- 124,185 112,946 Less: Treasury stock, at cost 1,708 1,644 - --------------------------------------------------------------------------------------------------------- Stockholders' equity 122,477 111,302 - --------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $362,527 $324,948 =========================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated balance sheets. 20 Consolidated Statements of Income For the years ended December 31, 1995, 1994 and 1993
(Dollars in Thousands, except per share amounts) 1995 1994 1993 - --------------------------------------------------------------------------------------- Net Sales $528,218 $443,948 $438,825 - --------------------------------------------------------------------------------------- Cost and Expenses: Cost of sales 430,815 362,848 358,790 Marketing 18,673 16,972 16,738 Administrative 27,412 17,082 18,378 Research, development and technical services (Note 1) 18,462 17,398 17,669 Interest, net (Note 3) 7,865 7,136 7,626 - --------------------------------------------------------------------------------------- 503,227 421,436 419,201 - --------------------------------------------------------------------------------------- Income Before Provision for Income Taxes 24,991 22,512 19,624 Provision for Income Taxes (Note 5) 8,872 8,667 8,848 - --------------------------------------------------------------------------------------- Net Income $ 16,119 $ 13,845 $ 10,776 ======================================================================================= Net Income Per Common Share: Primary $1.51 $1.29 $ .98 ======================================================================================= Fully Diluted $1.46 $1.26 $ .96 ======================================================================================= Average Common Shares Outstanding (Note 1) 9,984 9,924 9,894 =======================================================================================
All 1993 share and per share data have been restated for the two-for-one common stock split effective December 15, 1994. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. Combined Sales (Thousands of Dollars) [GRAPH APPEARS HERE] 1991 1992 1993 1994 1995 ------- ------- ------- ------- ------- Surfactants.......... 293,347 317,522 324,809 329,186 380,179 Polymers............. 89,848 87,060 79,071 78,778 115,833 Specialty Products... 30,874 31,182 34,945 35,984 32,206 ------- ------- ------- ------- ------- Consolidated Total... 414,069 435,764 438,825 443,948 528,218 ======= ======= ======= ======= ======= . Surfactants . Polymers . Specialty Products (Consolidated Totals in bold) 1995 Sales Dollar Distribution (Dollars in Thousands) [PIE CHART APPEARS HERE] . Material $317,641 60.1% . Other Expenses $78,704 14.9% . Payroll and Fringes $76,498 14.5% . Depreciation and Amortization $30,384 5.7% . Income Taxes $8,872 1.7% . Net Income $16,119 3.1% 21 Consolidated Statements of Cash Flows For the years ended December 31, 1995, 1994 and 1993
(Dollars in Thousands) 1995 1994 1993 - ------------------------------------------------------------------- Net Cash Flow from Operating Activities Net income $ 16,119 $ 13,845 $ 10,776 Depreciation and amortization 30,384 28,935 27,679 Deferred revenues (Note 10) (2,760) 12,883 -- Deferred income taxes 2,359 410 2,735 Other non-cash items (605) 627 263 Changes in Working Capital: Receivables, net (9,429) (13,135) (220) Inventories (8,899) 3,454 (1,140) Accounts payable and accrued liabilities 7,911 4,106 (4,788) Other (74) (96) 1 - ------------------------------------------------------------------- Net Cash Provided by Operating Activities 35,006 51,029 35,306 - ------------------------------------------------------------------- Cash Flows from Investing Activities Expenditures for property, plant and equipment................... (39,247) (42,884) (25,435) Investment in joint ventures (Note 1) (7,500) (2,314) (1,422) Other non-current assets (14) (711) (963) - ------------------------------------------------------------------- Net Cash Used for Investing Activities (46,761) (45,909) (27,820) - ------------------------------------------------------------------- Cash Flows from Financing and Other Related Activities Revolving debt and notes payable to banks, net................... (9,711) 13,313 (20,631) Other debt borrowings 40,000 - 30,000 Other debt repayments (12,053) (11,455) (12,633) Purchases of treasury stock, net (64) (327) (244) Dividends paid (5,540) (5,294) (5,105) Other non-cash items (181) (420) (273) - ------------------------------------------------------------------- Net Cash Provided by (Used for) Financing and Other Related Activities 12,451 (4,183) (8,886) - ------------------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents 696 937 (1,400) Cash and Cash Equivalents at Beginning of Year 2,452 1,515 2,915 - ------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 3,148 $ 2,452 $ 1,515 =================================================================== Supplemental Cash Flow Information Cash payments of income taxes, net of refunds $ 9,804 $ 8,554 $ 6,327 Cash payments of interest $ 7,761 $ 8,536 $ 8,002 ===================================================================
Capital Expenditures (Thousands of Dollars) [CHART APPEARS HERE] 90...... 38,375 91...... 33,728 92...... 34,440 93...... 25,435 94...... 42,884 95...... 39,247 Compound Annual Growth Five Years 0% Equity Per Share (Dollars) [CHART APPEARS HERE] 90...... 7.57 91...... 8.35 92...... 9.22 93...... 9.65 94...... 10.27 95...... 11.25 Compound Annual Growth Five Years + 8% The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 22 Consolidated Statements of Stockholders' Equity For the years ended December 31, 1995, 1994 and 1993
Convertible Additional Cumulative Deferred Preferred Common Paid-in Treasury Translation ESOP Com- Retained (Dollars in Thousands) Stock Stock Capital Stock Adjustments pensation Earnings - ----------------------------------------------------------------------------------------------------------------- Balance, January 1, 1993 $20,000 $ 5,101 $3,688 $(4,619) $(1,023) $ (445) $76,804 Sale of 23,800 shares under stock option plan -- 12 132 -- -- -- -- Purchase of 44 shares of common and 8,700 shares of preferred treasury stock, net of sales -- -- 93 (244) -- -- -- Issuance cost of preferred stock -- -- (140) -- -- -- -- Conversion of preferred stock to common stock (8) -- 8 -- -- -- -- Compensation expense (Note 7) -- -- -- -- -- 222 -- Net income -- -- -- -- -- -- 10,776 Cash dividends paid Preferred stock ($1.375 per share) -- -- -- -- -- -- (1,097) Common stock (40.5c per share) -- -- -- -- -- -- (4,008) Translation adjustments -- -- -- -- (1,035) -- -- - ----------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 19,992 5,113 3,781 (4,863) (2,058) (223) 82,475 Sale of 51,940 shares under stock option plan -- 27 290 -- -- -- -- Purchase of 4,222 shares of common and 11,508 shares of preferred treasury stock, net of sales -- -- 21 (327) -- -- -- Retirement of 250,000 shares of common treasury stock -- (125) (121) 3,546 -- -- (3,300) Conversion of preferred stock to common stock (12) -- 12 -- -- -- -- Compensation expense (Note 7) -- -- -- -- -- 223 -- Net income -- -- -- -- -- -- 13,845 Cash dividends paid Preferred stock ($1.375 per share) -- -- -- -- -- -- (1,076) Common stock (42.5c per share) -- -- -- -- -- -- (4,218) Preferred stock dividends declared -- -- -- -- -- -- (267) Translation adjustments -- -- -- -- (1,433) -- -- Two-for-one common stock split (Note 6) -- 5,014 -- -- -- -- (5,014) - ----------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 19,980 10,029 3,983 (1,644) (3,491) -- 82,445 Sale of 55,800 shares under stock option plan -- 56 484 -- -- -- -- Purchase of 536 shares of common treasury stock, net of sales -- -- 52 (64) -- -- -- Conversion of preferred stock to common stock (51) 2 49 -- -- -- -- Net income -- -- -- -- -- -- 16,119 Cash dividends paid Preferred stock ($1.375 per share) -- -- -- -- -- -- (801) Common stock (44.75c per share) -- -- -- -- -- -- (4,471) Translation adjustments -- -- -- -- (200) -- -- - ----------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 $19,929 $10,087 $4,568 $(1,708) $(3,691) $ -- $93,292 =================================================================================================================
All 1993 share and per share data have been restated for the two-for-one common stock split effective December 15, 1994. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 23 Notes to Consolidated Financial Statements For the years ended December 31, 1995, 1994 and 1993 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 throughout North America and Europe. There is no material concentration of credit risk. Principles of Consolidation The consolidated financial statements include the accounts of Stepan Company and its wholly-owned foreign subsidiary companies. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in 50 percent owned joint ventures in the Philippines and Colombia are accounted for on the equity method and are included in the "Other Assets" caption on the Consolidated Balance Sheet. The company's share of the net earnings of the investments is included in consolidated net income. Differences between the cost of equity investments and the amount of underlying equity in net assets of the investees are amortized systematically to income. Cash and Cash Equivalents The company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. Inventories Inventories are valued at cost, which is not in excess of market value, and include material, labor and plant overhead costs. The last-in, first-out (LIFO) method is used to determine the cost of most company inventories. The first-in, first-out (FIFO) method is used for all other inventories. Inventories priced at LIFO as of December 31, 1995 and 1994 amounted to 88 percent and 87 percent of total inventories, respectively. Property, Plant and Equipment Depreciation of physical properties is provided on a straight-line basis over the estimated useful lives of various assets. Lives used for calculating depreciation are 30 years for buildings, 15 years for building improvements and from three to 15 years for machinery and equipment. Major renewals and betterments are capitalized in the property accounts, while maintenance and repairs ($16,791,000, $16,468,000 and $16,505,000 in 1995, 1994 and 1993, 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. While the company has insurance policies that may cover some of its liabilities, it does not record those claims until such time as they become probable. Expenditures that mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations are capitalized. Capitalized expenditures are depreciated generally utilizing a ten-year life. Intangible Assets Included in other assets are intangible assets consisting of patents, agreements not to compete, trademarks, customer lists and goodwill, all of which were acquired as part of business acquisitions. These assets are presented net of amortization provided on a straight-line basis over their estimated useful lives ranging from two to ten years. Research and Development Costs The company's research and development costs are expensed as incurred. These expenses are aimed at discovery and commercialization of new knowledge with the intent that such effort will be useful in developing a new product or in bringing about a significant improvement to an existing product or process. Total expenses were $12,425,000, $12,281,000 and $12,613,000 in 1995, 1994 and 1993, 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. 24 Translation of Foreign Currencies Assets and liabilities of consolidated foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at year end, while revenues and expenses are translated at average exchange rates prevailing during the year. The resulting translation adjustments are included in stockholders' equity. Gains or losses on foreign currency transactions and the related tax effects are reflected in net income. Per Share Data Primary earnings per share amounts are computed based on the weighted average number of common shares outstanding, 9,984,000 in 1995, 9,924,000 in 1994 and 9,894,000 in 1993. Common share equivalents resulting from dilutive stock options have been excluded as the dilutive effect was not material. Net income used in computing primary earnings per share has been reduced by dividends paid to preferred shareholders. Fully diluted earnings per share amounts are based on an increased number of common shares that would be outstanding assuming the exercise of certain outstanding stock options and the conversion of the convertible preferred stock, when such conversion would have the effect of reducing earnings per share. The number of shares used in the computations of fully diluted earnings per share were 11,038,000 in 1995, 10,972,000 in 1994 and 10,100,000 in 1993. The 1993 share data has been retroactively adjusted for the two-for-one common stock split of December 15, 1994. Reclassifications Certain amounts in the 1994 and 1993 financial statements have been reclassified to conform with the 1995 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. Inventories The composition of inventories was as follows:
December 31 ---------------- (Dollars in Thousands) 1995 1994 - ------------------------------------------------------------------ Finished products $32,204 $27,632 Raw materials 22,159 17,832 - ------------------------------------------------------------------ Total inventories $54,363 $45,464 ==================================================================
If the first-in, first-out (FIFO) inventory valuation method had been used, inventories would have been approximately $12,100,000 and $13,200,000 higher than reported at December 31, 1995 and 1994, respectively. 3. Debt Debt was composed of the following:
December 31 ------------------ (Dollars in Thousands) Maturity Dates 1995 1994 - ------------------------------------------------------------------- Unsecured promissory notes 7.22% 1999--2008 $ 30,000 $30,000 7.77% 2000--2010 30,000 - 9.52% 1996--2000 10,714 15,000 7.69% 2000--2005 10,000 - 9.70% 1997--2006 10,000 10,000 10.54% 1996--1997 5,951 10,712 9.70% 1996--1999 4,000 6,000 9.40% - - 955 Unsecured bank debt 1998--2001 13,000 21,800 Debt of foreign subsidiaries payable in foreign currency 1996--2003 2,304 3,371 - ------------------------------------------------------------------- Total debt 115,969 97,838 Less current maturities 6,946 8,043 - ------------------------------------------------------------------- Long-term debt $109,023 $89,795 ===================================================================
Unsecured bank debt at December 31, 1995, consists of borrowings under a committed $45,000,000 revolving credit agreement which bears interest at varying rates which averaged 6.69 percent during the year. Borrowings under this agreement at May 31, 1998, if any, would convert to a term loan payable over three years. The company must pay a commitment fee of .25 percent per annum on the unused portion of the commitment. Periodically, the company also availed itself of other borrowings under notes payable to banks of which there were no outstanding balances at December 31, 1995 and 1994. 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 $37,904,000 and $36,336,000 at December 31, 1995 and 1994, respectively. The company is in compliance with all loan agreements. Debt at December 31, 1995, matures as follows: $6,946,000 in 1996; $6,729,000 in 1997; $8,056,000 in 1998; $11,501,000 in 1999; $13,225,000 in 2000 and $69,512,000 after 2000. Net interest expense for the years ended December 31 was composed of the following:
(Dollars in Thousands) 1995 1994 1993 - -------------------------------------------------- Interest expense $9,043 $8,428 $8,552 Interest income (629) (295) (331) - -------------------------------------------------- 8,414 8,133 8,221 Capitalized interest (549) (997) (595) - -------------------------------------------------- Interest, net $7,865 $7,136 $7,626 ==================================================
4. Leased Properties The company leases certain property and equipment (primarily transportation equipment, buildings and computer equipment) under operating leases. Total rental expense was $3,398,000, $2,994,000 and $2,932,000 in 1995, 1994 and 1993, respectively. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the years ended December 31, 1995, 1994 and 1993 Minimum future rental payments under operating leases with terms in excess of one year as of December 31, 1995, are:
(Dollars in Thousands) Year Amount - ------------------------------------------------------------------- 1996 $2,163 1997 1,395 1998 1,233 1999 886 2000 600 Subsequent to 2000 1,898 - ------------------------------------------------------------------- Total minimum future rental payments $8,175 ===================================================================
5. INCOME TAXES The provision for taxes on income and the related income before taxes are as follows:
TAXES ON INCOME (Dollars in Thousands) 1995 1994 1993 - ---------------------------------------------------- Federal Current $ 3,698 $ 6,732 $ 3,818 Deferred 2,003 (1,524) 1,365 State Current 899 2,020 1,076 Deferred 278 (646) 239 Foreign Current 1,973 2,299 1,426 Deferred 21 (214) 924 - ---------------------------------------------------- Total $ 8,872 $ 8,667 $ 8,848 ==================================================== INCOME BEFORE TAXES (Dollars in Thousands) 1995 1994 1993 - ---------------------------------------------------- Domestic $18,044 $15,429 $14,493 Foreign 6,947 7,083 5,131 - ---------------------------------------------------- Total $24,991 $22,512 $19,624 ====================================================
No federal income taxes have been provided on approximately $20,939,000 of undistributed earnings of the company's foreign subsidiaries. These earnings are expected to be reinvested indefinitely. Such earnings would become taxable upon the sale or liquidation of the foreign subsidiaries or upon the remittance of dividends. Because of the probable availability of foreign tax credits, it is not practicable to estimate the amount, if any, of the deferred tax liability on such earnings. Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of the enacted tax laws. The net deferred tax liability at December 31 is comprised of the following:
(Dollars in Thousands) 1995 1994 - ----------------------------------------------------------------- Current deferred income taxes Gross assets $ 9,982 $ 8,413 Gross liabilities (538) (195) - ----------------------------------------------------------------- Total current deferred tax assets 9,444 8,218 Non-current deferred income taxes Gross assets 4,313 5,684 Valuation allowance (409) (741) Gross liabilities (40,373) (37,919) - ----------------------------------------------------------------- Total non-current deferred tax liabilities (36,469) (32,976) - ----------------------------------------------------------------- Net deferred tax liability $(27,025) $(24,758) =================================================================
At December 31, the tax effect of significant temporary differences representing deferred tax assets and liabilities is as follows:
(Dollars in Thousands) 1995 1994 - ----------------------------------------------------------------- Tax over book depreciation $(33,947) $(30,748) Safe Harbor leases (3,914) (4,228) SFAS No. 87 pension accounting (2,628) (2,346) State income tax accrual 1,305 1,188 Deferred revenue 3,912 4,837 Book reserves deductible in other periods 8,149 6,941 Valuation allowance (409) (741) Other, net 507 339 - ----------------------------------------------------------------- Net deferred tax liability $(27,025) $(24,758) =================================================================
The variations between the effective and statutory federal income tax rates are summarized as follows:
1995 1994 1993 - ---------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Amount % Amount % Amount % - ---------------------------------------------------------------------------------------------------------- Income tax provision at statutory tax rate $8,747 35.0 $7,879 35.0 $6,731 34.3 State taxes on income less applicable federal tax benefit 765 3.1 893 4.0 864 4.4 Deferred tax adjustment for tax rate change - - - - 558 2.8 Research and development credit (138) (0.6) (244) (1.1) (55) (.3) Other items (502) (2.0) 139 .6 750 3.9 - ---------------------------------------------------------------------------------------------------------- Total income tax provision $8,872 35.5 $8,667 38.5 $8,848 45.1 ==========================================================================================================
26 6. STOCKHOLDERS' EQUITY On November 11, 1994, the Board of Directors declared a two-for-one stock split on the company's common stock in the form of a 100 percent stock dividend, payable December 15, 1994, to shareholders of record on December 1, 1994. As a result of the split, 5,014,272 additional shares were issued, and retained earnings were reduced by $5,014,272. All share and per share data appearing in the consolidated financial statements and notes thereto have been retroactively adjusted for the stock split. On April 28, 1993, the shareholders approved an increase in the authorized shares of the 5-1/2% convertible preferred stock ("preferred stock") from 200,000 to 2,000,000 and approved an eight-for-one stock split to shareholders of record on April 30, 1993. All share and per share data appearing in the consolidated financial statements and notes thereto have been retroactively adjusted for the stock split and the increased authorized shares. The preferred stock is convertible at the option of the holder at any time (unless previously redeemed) into shares of common stock at a conversion rate of 1.14175 shares of common stock for each share of preferred stock. Dividends on preferred stock accrue at a rate of $1.375 per share per annum which are cumulative from the date of original issue. The company may not declare and pay any dividend or make any distribution of assets (other than dividends or other distribution payable in shares of common stock) on, or redeem, purchase or otherwise acquire, shares of common stock, unless all accumulated and unpaid preferred dividends have been paid or are contemporaneously declared and paid. The preferred stock is subject to optional redemption by the company, in whole or in part, at any time on or after September 1, 1997, at a redemption price of $25.69 per share reduced annually by $.14 per share to a minimum of $25 per share on or after September 1, 2002, plus accrued and unpaid dividends thereon to the date fixed for redemption. The aggregate liquidation preference is approximately $20.0 million at December 31, 1995 and 1994. Preferred stock is entitled to 1.14175 votes per share on all matters submitted to stockholders for action, and votes together with the common stock as a single class, except as otherwise provided by law or the Certificate of Incorporation of the company. There is no mandatory redemption or sinking fund obligation with respect to the preferred stock. In 1992, the shareholders approved the Stepan Company 1992 Stock Option Plan ("1992 Plan"). The 1992 Plan replaces the 1982 Plan and extends participation to directors who are not employees of the company. The 1992 Plan authorizes the award of up to 1,600,000 shares of the company's common stock for stock options ("options") and stock appreciation rights ("SAR"). SARs entitle the employee to receive an amount equal to the difference between the fair market value of a share of stock at the time the SAR is exercised and the exercise price specified at the time the SAR is granted. Options are granted at the market price on the date of grant and become exercisable on various dates over a ten-year period. The purchase price per share of options currently outstanding ranges from $8.12500 to $19.62500 with option expiration dates ranging from April 28, 1996 to April 30, 2005. The options become exercisable as follows: 589,416 currently exercisable and 8,000 on April 29, 1996, 446,400 on May 2, 1996, and 994 on May 1, 1997. A summary of option transactions during the three years ended December 31, 1995, follows:
Options Outstanding Shares --------------------------------------------- Available Aggregate (Dollars in Thousands, except per share amounts) for Grant Shares Price per Share Option Price - ------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1993 1,351,696 742,444 $ 3.84375-18.21875 $ 9,240 Exercised - (23,800) 3.84375-12.09375 (144) Cancelled - (4,400) 18.21875 (80) - ------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1993 1,351,696 714,244 3.84375-18.21875 9,016 Granted (464,400) 464,400 14.00000 6,502 Exercised - (51,940) 3.84375-12.09375 (318) - ------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994 887,296 1,126,704 8.12500-18.21875 15,200 Granted (994) 994 19.62500 20 Exercised - (55,800) 8.12500-14.68750 (541) Cancelled 27,088 (27,088) 14.00000-18.21875 (451) - ------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 913,390 1,044,810 $ 8.12500-19.62500 $14,228 ============================================================================================================= Became exercisable in 1995 - - - ============================================================================================================= Became exercisable in 1994 243,904 $ 18.21875 $ 4,444 ============================================================================================================= Became exercisable in 1993 70,000 $ 12.56250 $ 879 =============================================================================================================
At December 31, 1995, treasury stock consists of 20,208 shares of preferred stock and 84,816 shares of common stock. At December 31, 1994, treasury stock consisted of 20,208 shares of preferred stock and 84,280 shares of common stock. 27 Notes to Consolidated Financial Statements For the years ended December 31, 1995, 1994 and 1993 7. Deferred ESOP Compensation In 1985, the company established an Employee Stock Ownership Plan ("ESOP"). Under the Plan, the company can make discretionary contributions to a trust for the benefit of eligible employees. The trust originally borrowed $2,000,000 to purchase 438,356 common shares for the Plan. The company guaranteed the loan and contributed sufficient cash to the Plan to repay the loan. Compensation expense was recognized in equal annual amounts through 1994. As of December 31, 1994, the company had made the last contribution and the loan was repaid. The company currently has no plan for further ESOP contributions. 8. Pension Plans The company has non-contributory defined benefit plans covering substantially all employees. The benefits under these plans are based primarily on years of service and compensation levels. The company funds the annual provision deductible for income tax purposes. The plans' assets consist principally of marketable equity securities and government and corporate debt securities. The plans' assets at December 31, 1995, include $6,983,000 of the company's common stock. Net 1995, 1994 and 1993 periodic pension cost for the plans consists of the following:
(Dollars in Thousands) 1995 1994 1993 - ------------------------------------------------------------ Service cost $ 1,244 $ 1,639 $ 1,251 Interest cost on projected benefit obligation 2,383 2,454 2,228 Actual return on plan assets (8,653) 1,190 (3,222) Net amortization and deferral 4,611 (5,449) (824) - ------------------------------------------------------------ Net prepaid pension cost $ (415) $ (166) $ (567) ============================================================
The reconciliation of the funded status of the plans to the amount reported in the company's consolidated balance sheet is as follows:
(Dollars in Thousands) 1995 1994 - -------------------------------------------------------------- Vested benefit obligation $(24,909) $(18,583) - -------------------------------------------------------------- Accumulated benefit obligation (28,030) (21,127) - -------------------------------------------------------------- Projected benefit obligation (35,329) (27,129) Plan assets at fair value 46,455 38,830 - -------------------------------------------------------------- Plan assets in excess of projected benefit obligation 11,126 11,701 Unrecognized net gain (3,173) (3,616) Unamortized net transitional assets (2,835) (3,402) Unamortized prior service cost 1,244 1,058 - -------------------------------------------------------------- Prepaid pension asset $ 6,362 $ 5,741 ==============================================================
The prepaid pension asset is included in the "Other Assets" caption on the Consolidated Balance Sheets. The projected benefit obligations were determined using a discount rate of 7.5 and 8.5 percent for 1995 and 1994, respectively. The projected benefit obligations were determined under assumed compensation increases ranging from five percent to seven percent for different employee groups for 1995 and 1994. The assumed long-term rate of return on plan assets was 8.5 percent for 1995 and 1994. 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. 9. Accrued Liabilities Accrued liabilities consisted of:
December 31 ---------------- (Dollars in Thousands) 1995 1994 - ----------------------------------------------------- Accrued payroll and benefits $12,121 $10,514 Accrued uninsured risks 10,472 8,741 Other accrued liabilities 14,830 15,254 - ----------------------------------------------------- Total accrued liabilities $37,423 $34,509 =====================================================
10. Deferred Revenue During 1994, the company received prepayments on certain multi-year commitments for future shipments of products. As the commitments are fulfilled, a proportionate share of the deferred revenue is recognized into income. Related deferred revenue at December 31, 1995 and 1994 is $10,059,000 and $12,819,000, respectively, of which the amount recognizable within one year is included in the "Accrued Liabilities" caption of the Consolidated Balance Sheets. 11. 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 28 Condition and Results of Operations, the company believes that it has made adequate provisions for the costs it may incur with respect to these sites. The company has estimated a range of possible environmental and legal losses from $4.3 million to $23.6 million at December 31, 1995, compared to $5.5 million to $21.6 million at December 31, 1994. At December 31, 1995, the company's reserve is $8.7 million for legal and environmental matters compared to $6.9 million at December 31, 1994. The 1995 provision included an additional $5.0 million charge for costs that may be incurred for the remediation of the company's Maywood, New Jersey plant and adjacent property based on a draft Remedial Investigation Feasibility Study prepared for that site. The company made payments of $7.8 million in 1995 and $4.3 million in 1994 related to legal costs, settlements and costs related to remedial design studies at various sites. While the company has insurance policies that may cover some of its environmental costs, it does not record those claims until such time as they become probable. During 1994, the company received $3.1 million from insurers related to legal costs previously incurred by the company. The recoveries reduced administrative expense in the Consolidated Statements of Income. At certain of the sites, estimates cannot be made of the total costs of compliance, or the company's share of such costs; accordingly, the company is unable to predict the effect thereof on future results of operations. In the event of one or more adverse determinations in any annual or interim period, the impact on results of operations for those periods could be material. However, based upon the company's present belief as to its relative involvement at these sites, other viable entities' responsibilities for cleanup and the extended period over which any costs would be incurred, the company believes that these matters will not have a material effect on the company's financial position. Certain of these matters are discussed in Item 3, Legal Proceedings, in the 1995 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. 12. Geographic Data
(Dollars in Thousands) 1995 1994 1993 - ----------------------------------------------------------- United States Net Sales-Unaffiliated $452,013 $377,986 $376,325 Interarea Transfers 13,052 10,701 7,620 ------------------------------ Total $465,065 $388,687 $383,945 Operating Income 26,174 22,504 22,122 Identifiable Assets 315,393 279,919 256,398 - ----------------------------------------------------------- Other Net Sales-Unaffiliated $ 76,205 $ 65,962 $ 62,500 Interarea Transfers 19,971 16,426 15,484 ------------------------------ Total $ 96,176 $ 82,388 $ 77,984 Operating Income 6,682 7,144 5,128 Identifiable Assets 47,134 45,029 44,090 - ----------------------------------------------------------- Eliminations Net Sales $(33,023) $(27,127) $(23,104) - ----------------------------------------------------------- Consolidated Net Sales $528,218 $443,948 $438,825 Operating Income 32,856 29,648 27,250 Identifiable Assets 362,527 324,948 300,488 ===========================================================
Interarea transfers consist principally of surfactant intermediates and finished products. They are generally transferred at cost plus an appropriate mark-up for profit. Operating income is calculated as income before net interest expense and provision for income taxes. Marketing and services in the United States, Canada and Mexico are managed as a single enterprise. However, in compliance with Statement of Financial Accounting Standards 14, "Financial Reporting for Segments of a Business Enterprise," the United States is reported as a separate geographic area. Other includes subsidiaries in Canada, Mexico and Europe. Prior years' information has been reclassified to conform with current year's presentation. 29 TEN YEAR SUMMARY (In Thousands, except per share and employee data)
FOR THE YEAR 1995 1994 1993 - ------------------------------------------------------------------------- Net Sales $528,218 $443,948 $438,825 - ------------------------------------------------------------------------- Income from Operations(f) 24,991 22,512 19,624 Percent of net sales 4.7% 5.1% 4.5% - ------------------------------------------------------------------------- Gain on Sale of Assets - - - Environmental and Restructuring Charges - - - Pre-tax Income 24,991 22,512 19,624 Percent of net sales 4.7% 5.1% 4.5% - ------------------------------------------------------------------------- Provision for Income Taxes 8,872 8,667 8,848 - ------------------------------------------------------------------------- Net Income 16,119 13,845 10,776 Per share (a) (b) 1.51 1.29 .98 Percent of net sales 3.1% 3.1% 2.5% Percent to stockholders' equity (c) 14.5% 13.3% 10.8% - ------------------------------------------------------------------------- Cash Dividends Paid 5,540 5,294 5,105 Per common share (a) .4475 .4250 .4050 - ------------------------------------------------------------------------- Depreciation and Amortization 30,384 28,935 27,679 Capital Expenditures 39,247 42,884 25,435 Average Common Shares Outstanding (a) 9,984 9,924 9,894 - ------------------------------------------------------------------------- AS OF YEAR END - ------------------------------------------------------------------------- Working Capital $ 63,255 $ 48,915 $ 48,569 Current Ratio 1.7 1.6 1.7 - ------------------------------------------------------------------------- Property, Plant and Equipment, net 192,470 183,657 170,270 Total Assets 362,527 324,948 300,488 Long-term Debt, less current maturities 109,023 89,795 89,660 - ------------------------------------------------------------------------- Stockholders' Equity 122,477 111,302 104,217 Per share (a) (d) 11.25 10.27 9.65 Number of Employees 1,267 1,265 1,302 =========================================================================
(a) Adjusted for two-for-one common stock splits in 1988 and 1994. (b) Based on average number of common shares outstanding during the year. (c) Based on equity at beginning of year. (d) Based on common shares and the assumed conversion of the convertible preferred shares outstanding at year end. (e) Change in method of accounting for pensions increased net income in 1986 by $467 or $.04 per share. (f) Pre-tax income before applicable gain on sale of assets, environmental and restructuring charges, and cumulative effect of accounting changes. (g) Reflected cumulative effect of accounting changes for income taxes and investment tax credits of $5.4 million, or $.51 per primary share and $.49 per fully diluted share.
QUARTERLY STOCK DATA (UNAUDITED) Dividends Paid Stock Price Range Per Common Share --------------------------------------------------------------- 1995 1994 1995 1994 --------------------------------------------------------------- Quarter High Low High Low - ------------------------------------------------------------------------------- First $19-1/2 $14-3/4 $16 $13-5/16 11.00c 10.50c Second 20-7/8 17 14-5/16 13 11.00c 10.50c Third 17-3/4 15-5/8 17-5/8 12-3/8 11.00c 10.50c Fourth 17-1/2 15 17-11/16 14-1/2 11.75c 11.00c ----------------- Year 20-7/8 14-3/4 17-11/16 12-3/8 44.75c 42.50c ====================================================================================================
30
1992 1991 1990 1989 1988 1987 1986 - --------------------------------------------------------------------------- $435,764 $414,069 $389,612 $346,350 $333,033 $288,935 $259,787 - --------------------------------------------------------------------------- 23,865 18,866 21,420 11,701 20,554 19,230 14,037 5.5% 4.6% 5.5% 3.4% 6.2% 6.7% 5.4% - --------------------------------------------------------------------------- - - 874 - - - - 6,500 - - - - - - 17,365 18,866 22,294 11,701 20,554 19,230 14,037 4.0% 4.6% 5.7% 3.4% 6.2% 6.7% 5.4% - --------------------------------------------------------------------------- 6,942 6,319 7,803 3,861 7,126 8,271 6,524 - --------------------------------------------------------------------------- 15,829(g) 12,547 14,491 7,840 13,428 10,959 7,513(e) 1.46 1.15 1.32 .71 1.19 .91 .63(e) 3.6% 3.0% 3.7% 2.3% 4.0% 3.8% 2.9% 17.4% 15.2% 20.5% 11.7% 22.4% 19.9% 15.2% - --------------------------------------------------------------------------- 4,172 3,603 3,190 2,919 2,658 2,386 2,145 .3700 .3300 .2900 .2650 .2375 .2075 .1850 - --------------------------------------------------------------------------- 23,914 21,108 19,391 17,061 15,393 13,815 11,630 34,440 33,728 38,375 34,090 20,442 25,705 14,322 10,572 10,916 10,992 11,034 11,216 11,954 11,888 - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- $44,265 $ 41,972 $ 38,943 $ 36,952 $ 28,498 $ 26,637 $ 23,386 1.6 1.7 1.7 1.8 1.6 1.7 1.6 - --------------------------------------------------------------------------- 167,930 157,063 143,342 122,509 104,697 98,994 85,607 297,080 271,442 246,992 215,351 185,601 172,726 152,794 90,505 89,759 77,326 68,568 45,369 44,399 34,868 - --------------------------------------------------------------------------- 99,506 90,866 82,698 70,741 66,790 59,936 55,029 9.22 8.35 7.57 6.45 6.06 5.32 4.76 1,317 1,317 1,311 1,152 1,028 1,002 948 ===========================================================================

QUARTERLY FINANCIAL DATA (UNAUDITED) (Dollars in Thousands, except per share data) 1995 ----------------------------------------------------- Quarter First Second Third Fourth Year - --------------------------------------------------------------------------------------------- Net Sales $134,786 $136,258 $130,410 $126,764 $528,218 - --------------------------------------------------------------------------------------------- Gross Profit 26,655 25,807 20,647 24,294 97,403 - --------------------------------------------------------------------------------------------- Interest, net (1,864) (2,128) (2,046) (1,827) (7,865) - --------------------------------------------------------------------------------------------- Pre-tax Income (Loss) 9,936 8,506 (879) 7,428 24,991 - --------------------------------------------------------------------------------------------- Net Income (Loss) 6,109 5,418 (550) 5,142 16,119 - --------------------------------------------------------------------------------------------- Net Income (Loss) per Share .59 .52 (.08) .49 1.51 ============================================================================================= 1994 ----------------------------------------------------- Quarter First Second Third Fourth Year - --------------------------------------------------------------------------------------------- Net Sales $107,279 $112,305 $110,761 $113,603 $443,948 - --------------------------------------------------------------------------------------------- Gross Profit 19,143 20,657 20,983 20,317 81,100 - --------------------------------------------------------------------------------------------- Interest, net (1,918) (1,803) (1,639) (1,776) (7,136) - --------------------------------------------------------------------------------------------- Pre-tax Income 3,427 6,912 6,939 5,234 22,512 - --------------------------------------------------------------------------------------------- Net Income 2,022 4,078 4,112 3,633 13,845 - --------------------------------------------------------------------------------------------- Net Income per Share .18 .38 .39 .34 1.29 =============================================================================================
31

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

Exhibit (23) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated February 9, 1996, included or incorporated by reference in Stepan Company's Annual Report in this Form 10-K for the year ended December 31, 1995, into the company's previously filed Registration Statements on Form S-8, File Nos. 2-64668, 2-40183, 2-80336 and 33-57189. ARTHUR ANDERSEN LLP Chicago, Illinois, March 25, 1996

Exhibit (24) POWER OF ATTORNEY ----------------- The undersigned hereby appoints F. Quinn Stepan, Walter J. Klein and Jeffrey W. Bartlett, and each of them individually, the true and lawful attorney or attorneys of the undersigned, with substitution and resubstitution, to execute in his name, place and stead in his capacity as an officer or director or both of Stepan Company, a Delaware corporation, the Annual Report of Form 10-K under the Securities Exchange Act of 1934, and any amendments or supplements thereto, and all instruments necessary or incidental in connection therewith, and to file or cause to be filed such Annual Report and related documents with the Securities and Exchange Commission. Each of said attorneys shall have full power and authority to do and perform, in the name and on behalf of the undersigned, every act whatsoever necessary or desirable to be done in the premises, as fully as all intents and purposes of the undersigned could do in person. The undersigned hereby ratifies and approves the actions of said attorneys and each of them. IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney on this 25th day of March 1996. /s/ F. Quinn Stepan ____________________________________ F. Quinn Stepan /s/ Thomas F. Grojean ____________________________________ Thomas F. Grojean /s/ James A. Hartlage ____________________________________ James A. Hartlage /s/ Walter J. Klein ____________________________________ Walter J. Klein /s/ Paul H. Stepan ____________________________________ Paul H. Stepan /s/ Robert D. Cadieux ____________________________________ Robert D. Cadieux /s/ Robert G. Potter ____________________________________ Robert G. Potter

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1995 AND CONSOLIDATED STATEMENT OF INCOME FOR THE TWELVE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1995 DEC-31-1995 3,148 0 81,558 1,744 54,363 150,154 454,104 261,634 362,527 86,899 109,023 10,087 0 19,929 92,461 362,527 528,218 528,218 430,815 503,227 0 0 7,865 24,991 8,872 16,119 0 0 0 16,119 1.51 1.46