Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
Stepan Company and its subsidiaries (the "Company") produce basic and intermediate chemicals which are sold to other manufacturers and then made into a variety of end products. The Company sells three groups of products: surfactants, polymers and specialty products. Surfactants refer to chemical agents which affect the interaction between two surfaces; they can provide actions such as detergency (i.e., the ability of water to remove soil from another surface), wetting and foaming, dispersing, emulsification (aiding two dissimilar liquids to mix), demulsification and viscosity modifications. Surfactants are the basic cleaning agent in detergents for washing clothes, dishes, carpets, fine fabrics, floors and walls. Surfactants are also used for the same purpose in shampoos and conditioners, toothpaste, cosmetics and other personal care products. Commercial and industrial applications include emulsifiers for agricultural pesticides, emulsion polymers such as floor polishes and latex foams and coatings, wetting and foaming agents for wallboard manufacturing and surfactants for enhanced oil recovery. Polymers refer to intermediate chemicals including phthalic anhydride, polyols and urethane foam systems used in plastics, building materials and refrigeration industries. Specialty products consist of flavor and pharmaceutical intermediates, fine chemicals, esters, synthetic lubricants and other specialty products.
In February 1990, Stepan Company sold its paper chemical business which reported moderate losses since its purchase in 1985.
In the first quarter of 1990, Stepan Company capitalized $1.6 million of loans to Stepan Mexico, increasing Stepan Company's ownership from 40% to 98%. Stepan Mexico S.A. de C.V. is a manufacturer of surfactant chemicals.
In 1991, Stepan Company purchased the ACCOSOFT(R) line of fabric softeners from Karlshamns U.S.A., Inc. The Company also purchased from ICI Americas, Inc. the U.S. portion of the sulfonate and sulfonate blend line used in agricultural products and industrial coatings.
In 1993, Stepan Company entered into a 50 percent joint venture with Coldequim, S.A. called Stepan Colombiana de Quimicos, Ltda in Colombia, South America. Under the agreement, Stepan Colombiana will manufacture selected surfactants and market the Company's complete line of surfactants in the Andean Pact countries of Colombia, Venezuela, Peru, Bolivia and Ecuador.
In 1994, Stepan Company entered into a 50 percent joint venture with United Coconut Chemicals, Inc. and United Coconut Planters International in the Philippines. The venture, called Stepan Philippines, Inc., will manufacture selected surfactants for sale in the Philippines and Asia/Pacific markets commencing in 1996.
MARKETING AND COMPETITION
Principal markets for all products are manufacturers of cleaning or washing compounds (including detergents, shampoos, toothpaste and household cleaners), paints, cosmetics, beverages, agricultural pesticides and herbicides, plastics, furniture, building materials and automotive and refrigeration equipment. Sales of the Company tend not to be seasonal.
The Company does not sell directly to the retail market, but sells to a wide range of manufacturers in many industries and has many competitors. The principal methods of competition are product performance, price and adaptability to the specific needs of individual customers. These factors allow the Company to compete on a basis other than solely price, reducing the severity of competition as experienced in the sale of commodity chemicals having identical performance characteristics. The Company is one of the largest merchant producers of surfactants in the United States. In the case of surfactants, much of the Company's competition comes from the internal divisions of larger companies, as well as several large national and regional producers. In the manufacture of polymers, the Company competes with the chemical divisions of several large companies, as well as with other small specialty chemical manufacturers. In recent years, the Company also faces some competition from foreign imports of phthalic anhydride. In specialty products, the
Company competes with several large firms plus numerous small companies. The Company does not expect any significant changes in the competitive environment in the foreseeable future.
MAJOR CUSTOMER AND BACKLOG
The Company does not have any one single customer whose business represents more than 10% of the Company's consolidated revenue. Most of the Company's business is essentially on a "spot delivery basis" and does not involve a significant backlog. The Company does have some contract arrangements with certain customers, but purchases are generally contingent on purchaser requirements.
ENERGY SOURCES
Substantially all of the Company's manufacturing plants operate on electricity and interruptable gas purchased from local utilities. During peak heating demand periods, gas service to all plants may be temporarily interrupted for varying periods ranging from a few days to several months. The plants operate on fuel oil during these gas interruption periods. The Company has not experienced any plant shutdowns or adverse effects upon its business in recent years that were caused by a lack of available energy sources.
RAW MATERIALS
The most important raw materials used by the Company are of a petroleum or vegetable nature. For 1995, the Company has commitments from suppliers to cover its forecasted requirements and is not substantially dependent upon any one supplier.
RESEARCH AND DEVELOPMENT
The Company maintains an active research and development program to assist in the discovery and commercialization of new knowledge with the intent that such effort will be useful in developing a new product or in bringing about a significant improvement to an existing product or process. Total expenses for research and development during 1994, 1993 and 1992 were $12,281,000, $12,613,000 and $11,320,000, respectively. During 1994 and 1993, the research and development staff consisted of 170 and 162 employees, respectively. The balance of expenses reflected on the Consolidated Statements of Income relates to technical services which include routine product testing, quality control and sales support service.
ENVIRONMENTAL COMPLIANCE
Compliance with applicable federal, state and local regulations regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, resulted in capital expenditures by the Company of approximately $4,960,000 during 1994. Such capital expenditures in 1995 should approximate $8,850,000. These expenditures represented approximately 11% of the Company's capital expenditures in 1994 and are expected to be 21% of such expenditures in 1995. These expenditures, when incurred, are depreciated and charged on a straight-line basis to pre-tax earnings over their respective useful lives which are typically 10 years. Compliance with such regulations is not expected to have a material adverse effect on the Company's earnings and competitive position in the foreseeable future.
EMPLOYMENT
At December 31, 1994 and 1993, the Company employed worldwide 1,265 and 1,302 persons, respectively.
FOREIGN OPERATIONS
See Note 13, Geographic Data, on page 29 of the Company's 1994 Annual Report to Stockholders.
PRODUCT GROUPS
The manufacture of basic and intermediate chemicals constitutes the Company's only industry segment. The Company's three groups of products and their contribution to sales for the three years ended December 31, 1994, were:
ITEM 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.

ITEM 3. LEGAL PROCEEDINGS
As previously reported in the Company's Form 10-K/A for the year ended December 31, 1992, the Company was named as a potentially responsible party ("PRP") for its Maywood, New Jersey Property and property adjacent thereto ("sites"). The Company now believes that the Feasibility Study, which sets forth alternative recommendations as to remediation at the sites, and the Company's Maywood, New Jersey site, will be published for public comment in the second calendar quarter of 1995. Following the public comment period, the United States Environmental Protection Agency ("USEPA") will publish the Record of Decision, which will set the remediation program to be followed at the sites, and the Company's Maywood, New Jersey property. While it is probable that the Company will incur some clean-up costs, until publication of the Record of Decision, the Company cannot estimate what its future liability, if any, would be.
In addition, the Company received from Region II of the USEPA, a demand for payment of past oversight costs incurred by the government at the sites and the Company's Maywood, New Jersey property. The demand is for approximately one million seventy-six thousand dollars ($1,076,000.) The Company believes that part of this amount is the responsibility of other PRPs at the sites, and is in the process of meeting with the USEPA to resolve this issue.
As reported previously in the Company's Form 10-K/A for the year ended December 31, 1992, the Company was named as a PRP at the D'Imperio site located in Hamilton Township, New Jersey, as well as being named as a party defendant in United States of America v. Jerome Lightman, et. al. (92 CV 4710 [JBS]), a cost recovery action. The offer to settle, as previously reported, was not accepted because of the
inability of the PRPs at this site to resolve other outstanding issues. Consequently, the Company and the other twenty PRPs are engaged in litigation regarding each party's share of costs at this site.
As reported previously in the Company's Form 10-K/A for the year ended December 31, 1992, the Company and its wholly-owned Mexican subsidiary were named as party defendants in an action brought in Brownsville, Texas entitled Alvear et. al. v. Leonard Electronics Products Co. et. al. Discovery has continued to proceed in this case, and based on current time schedules, the case is scheduled for trial commencing August 15, 1995. The Company cannot estimate what its liability, if any, will be with regard to this case.
As reported previously in the Company's Form 10-K/A for the year ended December 31, 1992, the Company was named as a PRP at the American Chemical Services Site located in Griffith, Indiana, and was named as a party defendant in an action entitled In the Matter of American Chemical Services Superfund Site. In December 1994, the Company settled its alleged obligations under this case on a de minimis basis. The settlement was fully reserved for and did not have a material impact upon the financial condition of the Company.
As reported previously in the Company's Form 10-K/A for the year ended December 31, 1992, the Company was named as a third party defendant in an action entitled General Electric Company v. Buzby Brothers Materials Corporation et. al. (No. 87-4263 [JHR]). Subject to court approval, the Company settled its alleged liability in this action under a court-sealed settlement in January 1995. The settlement was fully reserved for and did not have a material impact upon the financial condition of the Company.
As previously reported in the Company's Form 10-K/A for the year ended December 31, 1992, the Company was a named PRP at the Ewan site, Shamong Township, New Jersey. The USEPA has combined operable unit 1 and operable unit 2 (drum removal and liquid/soil removal) into one operating unit. The contractor hired by the PRP group has commenced remediation at this site.
As previously reported in the Company's 1992 Forms 10-K and 10-K/A and the Company's Form 10-Qs for the quarters ended March 31 1994, June 30, 1994 and September 30, 1994, the Company was named as a PRP at other sites located primarily in the Eastern part of the United States of America. While named as a PRP at these sites, the Company has contested its involvement at these sites. To date, the Company has received no further communication regarding these sites, or the Company's involvement at these sites.
ITEM 4.

ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
No matters were submitted to stockholders during the fourth quarter of the fiscal year ended December 31, 1994.
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers are elected annually by the Board of Directors at the first meeting following the Annual Meeting of Stockholders to serve until the next annual meeting of the Board and until their respective successors are duly elected and qualified.
Effective January 1, 1995, James A. Hartlage, who was formerly Senior Vice President--Technology as of February, 1992, was appointed Senior Vice President--Technology and Operations. Earl H. Wagener, formerly Vice President--Product Development, was appointed Vice President--Research and Development.
As of October 29, 1992, pursuant to Section 3(b) Rule 3b-7 of the Securities Exchange Act of 1934, Mark S. Barg is deemed an executive officer of the Company. Mark Barg has served in the capacity of Vice President--Logistics for the last five years. Effective April 28, 1992, Charles W. Given, formerly Vice President--Marketing, was appointed Vice President and General Manager--Surfactants. Ronald L. Siemon, formerly Vice President--Polyurethanes, was appointed Vice President and General Manager--Polymers.
Effective January 1, 1992, Walter J. Klein, formerly the Vice President and Corporate Controller, was appointed Vice President--Finance. Charles P. Riley, Jr., who previously held the position of Vice President--Manufacturing and Engineering, assumed the position of Vice President--Administration and Regulatory Affairs. Mickey Mirghanbari, who previously served in the capacity of Vice President for Plant
Operations, assumed the position of Vice President--Manufacturing and Engineering. All other executive officers have remained in their current capacity for over five years.
The Executive Officers of the Company, their ages as of February 28, 1995, and certain other information are as follows:
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
(a) The Company's common stock is listed and traded on both the American Stock Exchange and the Chicago Stock Exchange. See page 30 of the Company's 1994 Annual Report to Stockholders for market price information which is incorporated by reference herein.
The Company's 5 1/2 percent convertible preferred stock is listed and traded on the Chicago Stock Exchange. See Note 6 on page 27 of the Company's 1994 Annual Report to Stockholders for the description of the preferred stockholders' rights which is incorporated by reference herein.
From time to time the Company purchases shares of its common stock in the open market and in block transactions from dealers for the purpose of funding option grants under its stock option plans and deferred compensation plans for directors and officers.
(b) On February 28, 1995, there were 1,784 holders of common stock of the Company.
(c) See page 30 of the Company's 1994 Annual Report to Stockholders for dividend information which is incorporated by reference herein. Also see Note 3 on page 25 of the Company's 1994 Annual Report to Stockholders which sets forth the restrictive covenants covering dividends.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
See pages 30 and 31 of the Company's 1994 Annual Report to Stockholders for a ten year summary of selected financial information which is incorporated by reference herein.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
See pages 14 through 18 of the Company's 1994 Annual Report to Stockholders which is incorporated by reference herein.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages 19 through 29 of the Company's 1994 Annual Report to Stockholders for the Company's consolidated financial statements, notes to the consolidated financial statements and auditors' report which are incorporated by reference herein.
See page 31 of the Company's 1994 Annual Report to Stockholders for selected quarterly financial data which is incorporated by reference herein.
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Directors
See pages 3 through 5 of the Company's Proxy Statement dated March 31, 1995, for the Annual Meeting of Stockholders which are incorporated by reference herein.
(b) Executive Officers
See Executive Officers of the Registrant in Part I above.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
See page 7 of the Company's Proxy Statement dated March 31, 1995, for the Annual Meeting of Stockholders which is incorporated by reference herein.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See pages 1 through 6 of the Company's Proxy Statement dated March 31, 1995, for the Annual Meeting of Stockholders which are incorporated by reference herein.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) & (d) Financial Statements and Schedules
See the Index to the Consolidated Financial Statements and Supplemental Schedule filed herewith.
(b) Reports on Form 8-K
A report on Form 8-K was filed on November 11, 1994, regarding actions by the Board of Directors to increase the quarterly dividend, to effect a two-for-one stock split on the Company's common stock and to approve modifications to the Company's Bylaws regarding stockholders' rights to call special meetings and the related written notification requirements.
(c) Exhibits
See Exhibit Index filed herewith.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
STEPAN COMPANY
By: JEFFREY W. BARTLETT Vice President, General Counsel and Corporate Secretary
March 24, 1995
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
JEFFREY W. BARTLETT, PURSUANT TO POWERS OF ATTORNEY EXECUTED BY EACH OF THE DIRECTORS AND OFFICERS LISTED ABOVE, DOES HEREBY EXECUTE THIS REPORT ON BEHALF OF EACH OF SUCH DIRECTORS AND OFFICERS IN THE CAPACITY IN WHICH THE NAME OF EACH APPEARS ABOVE.
JEFFREY W. BARTLETT March 24, 1995
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE
A copy of Stepan Company's Annual Report to Stockholders for the year ended December 31, 1994, has been filed as an exhibit to this Annual Report on Form 10-K. Pages 19 through 29 of such Annual Report to Stockholders contain the Consolidated Balance Sheets as of December 31, 1994 and 1993, the Consolidated Statements of Income, Stockholders' Equity and Cash Flows and Notes to Consolidated Financial Statements for the three years ended December 31, 1994, and the Auditors' Report covering the aforementioned financial statements. These consolidated financial statements and the Auditors' Report thereon are incorporated herein by reference.
Supplemental Schedule II -- Allowance for Doubtful Accounts -- to Consolidated Financial Statements, which is required to comply with Regulation S-X, and the Auditors' Report on such Supplemental Schedule are included on pages 9 and 10 of this 10-K.
The individual financial statements of the Registrant have been omitted because the Registrant is primarily an operating company and all subsidiaries included in the consolidated financial statements being filed, in the aggregate, do not have minority equity interests and/or indebtedness to any person other than the parent in amounts which together exceed 5% of the total consolidated assets at the date of the latest balance sheet filed.
Certain supplemental schedules are not submitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto.
STEPAN COMPANY
SUPPLEMENTAL SCHEDULE TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1994 AS REQUIRED TO COMPLY WITH REGULATION S-X
SCHEDULE II--ALLOWANCE FOR DOUBTFUL ACCOUNTS:
An analysis of the allowance for doubtful accounts for the three years ended December 31, 1994, is summarized as follows: (IN THOUSANDS)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SUPPLEMENTAL SCHEDULE
To Stepan Company:
We have audited in accordance with generally accepted auditing standards, the financial statements included in Stepan Company's Annual Report to Stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 10, 1995. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The supplemental schedule listed in the index of financial statements is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois, February 10, 1995
EXHIBIT INDEX
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NOTES TO EXHIBIT INDEX