UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                             ______________________

                                   FORM 10-Q10-Q/A
                                 Amendment No. 1

(MARK ONE)
(X)[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934
      FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,MARCH 31, 2002

( )[_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES EXCHANGE ACT OF 1934
      FOR THE TRANSITION PERIOD FROM ______________ TO __________

                                     1-4462
                           -------------------------------------------------------------
                             Commission File Number

                                 STEPAN COMPANY
- --------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

              Delaware                                       36 1823834
- -------------------------------------------          ---------------------------------------------------------------                ----------------------------
  (State or other jurisdiction of                        (I.R.S. Employer
   incorporation or organization)                     Identification Number)

               Edens and Winnetka Road, Northfield, Illinois 60093
- --------------------------------------------------------------------------------
                    (Address of principal executive offices)

Registrant's telephone number                            (847) 446-7500
                                                ------------------------------------------------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                                                             Yes  X       No _______
                                                                 ---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

              Class                             Outstanding at October 31,April 30, 2002
- ------------------------------             -------------------------------------------------------------------------        ------------------------------------
    Common Stock, $1 par value                           8,878,852 Shares8,859,003



                                Explanatory Note

This amendment to Form 10-Q is being filed to give effect to the restatement of
Stepan Company's condensed consolidated financial statements for the quarters
ended March 31, 2002 and 2001, and the year ended December 31, 2001, as
discussed in Note 3 to the Condensed Consolidated Financial Statements.



Part I                       FINANCIAL INFORMATION

- --------------------------------------------------------------------------------
Item 1  -  Financial Statements

STEPAN COMPANY
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                    September 30,
STEPAN COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2002 and December 31, 2001 (Dollars in thousands) Unaudited
ASSETS 2002 2001 - ------ 2002 As Restated* ----As Restated* ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 2,9042,735 $ 4,224 Receivables, net 116,390109,383 103,190 Inventories (Note 3) 64,3234) 54,797 59,330 Deferred income taxes 8,2038,696 8,810 Other current assets 6,3407,300 5,233 ----------- ----------- Total current assets 198,160182,911 180,787 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT: Cost 692,217670,978 666,117 Less: Accumulatedaccumulated depreciation (485,209)(464,333) (454,684) ----------- ----------------------- ------------ Property, plant and equipment, net 207,008206,645 211,433 ----------- ----------- LONG TERM INVESTMENTS 6,2567,090 7,674 ----------- ----------- GOODWILL, NET (Note 8) 6,2339) 6,058 6,100 ----------- ----------- OTHER INTANGIBLE ASSETS, NET (Note 8) 12,2459) 12,910 13,293 ----------- ----------- OTHER NON-CURRENT ASSETS 20,39320,949 19,468 ----------- ----------- Total assets $ 450,295436,563 $ 438,755 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Current maturities of long-term debt (Note 10) $ 9,2019,840 $ 10,745 Accounts payable 59,43355,186 62,410 Accrued liabilities 38,52232,511 35,004 ----------- ----------- Total current liabilities 107,15697,537 108,159 ----------- ----------- DEFERRED INCOME TAXES 30,57027,827 28,603 ----------- ----------- LONG-TERM DEBT, less current maturities (Note 10) 108,237117,180 109,588 ----------- ----------- DEFERRED COMPENSATION (Note 2) 16,98117,557 16,653 ----------- ----------- OTHER NON-CURRENT LIABILITIES 20,73921,239 21,401 ----------- ----------- STOCKHOLDERS' EQUITY: 5-1/2% convertible preferred stock, cumulative, voting without par value; authorized 2,000,000 shares; issued 583,012583,252 shares in 2002 and 14,5752001 14,581 583,252 shares in 200114,581 Common stock, $1 par value; authorized 30,000,000 shares; issued 9,740,3289,690,559 shares in 2002 and 9,604,003 shares in 2001 9,7409,691 9,604 Additional paid-in capital 18,97118,010 16,531 Accumulated other comprehensive loss (Note 6) (16,404)7) (16,992) (15,870) Retained earnings (approximately $37,948$50,346 unrestricted in 2002 and $48,987 in 2001) 156,906146,656 144,658 Less: Treasury stock shares of 861,476844,790 in 2002 and 782,232 shares (17,176) (15,153) in 2001, at cost (16,723) (15,153) ----------- ----------- Stockholders' equity 166,612155,223 154,351 ----------- ----------- Total liabilities and stockholders' equity $ 450,295436,563 $ 438,755 =========== ===========
* See Note 23 for explanation of restatement. The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements. STEPAN COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the Three and Nine Months Ended September 30,March 31, 2002 and 2001 Unaudited
Three Months Ended Nine Months Ended (In thousands, except per share amounts) September 30 September 30 ------------------------------Three Months Ended March 31 ----------------------------- 2002 2001 2002 2001 ---- ---- As Restated* As Restated* ----------- ----------------------- ------------ NET SALES $ 193,344181,156 $ 173,829 $ 563,295 $ 533,453176,857 Cost of Sales 162,279 147,346 468,028 451,368 ------------ ------------152,187 150,956 ------------ ------------ Gross Profit 31,065 26,483 95,267 82,085 ------------ ------------28,969 25,901 ------------ ------------ Operating Expenses: Marketing 7,427 6,498 20,304 18,7446,131 6,241 Administrative 7,985 2,079 26,555 16,0159,403 6,115 Research, development and technical services 6,407 5,517 18,379 16,9415,986 5,631 ------------ ------------ ------------ ------------ 21,819 14,094 65,238 51,700 ------------ ------------21,520 17,987 ------------ ------------ Operating Income 9,246 12,389 30,029 30,3857,449 7,914 Other Income (Expense): Interest, net (1,743) (1,713) (5,240) (5,375)(1,791) (1,905) Income from equity joint venture 790 529 2,444 1,149488 127 ------------ ------------ ------------ ------------ (953) (1,184) (2,796) (4,226) ------------ ------------(1,303) (1,778) ------------ ------------ Income Before Income Taxes 8,293 11,205 27,233 26,1596,146 6,136 Provision for Income Taxes 2,618 4,359 9,531 10,176 ------------ ------------2,336 2,426 ------------ ------------ NET INCOME $ 5,6753,810 $ 6,846 $ 17,702 $ 15,983 ============ ============3,710 ============ ============ Net Income Per Common Share (Note 5)6): Basic $ 0.620.41 $ 0.75 $ 1.93 $ 1.74 ============ ============0.40 ============ ============ Diluted $ 0.580.39 $ 0.70 $ 1.81 $ 1.64 ============ ============0.38 ============ ============ Shares usedUsed to computeCompute Net Income Per Common Share (Note 5)6): Basic 8,871 8,848 8,855 8,842 ============ ============8,835 8,829 ============ ============ Diluted 9,830 9,720 9,791 9,736 ============ ============9,740 9,742 ============ ============ Dividends per Common Share $ 0.1825 $ 0.1750 $ 0.5475 $ 0.5250 ============ ============ ============ ============
* See Note 23 for explanation of restatement. The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements. STEPAN COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the NineThree Months Ended September 30,March 31, 2002 and 2001 Unaudited
(In thousands) 2002 2001 2002 As Restated* ----As Restated* ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 17,7023,810 $ 15,9833,710 Depreciation and amortization 30,655 29,75810,251 10,099 Deferred revenue (615) (355)(115) (126) Deferred income taxes 2,751 (933)(699) (988) Environmental and legal liabilities (270) 744(113) 156 Other non-cash items (524) (1,833)605 1,677 Changes in working capital: Receivables, net (13,200) (1,505)(6,193) (10,069) Inventories (4,993) 9594,533 7,157 Accounts payable and accrued liabilities 541 (1,947)(9,717) (11,506) Other current assets (1,107) (442) ----------- -----------(2,067) (908) ------------ ------------ Net Cash Provided byBy (Used For) Operating Activities 30,940 40,429 ----------- -----------295 (798) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant and equipment (24,634) (24,375) Business acquisitions 0 (24,623)(6,490) (5,184) Other non-current assets 2,812 71 ----------- -----------257 763 ------------ ------------ Net Cash Used forFor Investing Activities (21,822) (48,927) ----------- -----------(6,233) (4,421) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Revolving debt and notes payable to banks, net (35,200) 24,000(3,200) 7,300 Other debt borrowings 41,142 1,1529,997 1,241 Other debt repayments (8,837) (9,109)(110) - Purchase of treasury stock, net (2,023) (4,271)(1,570) (810) Dividends paid (5,454) (5,245)(1,812) (1,746) Stock option exercises 2,570 2,986 ----------- -----------1,566 762 Other - (1) ------------ ------------ Net Cash Provided by/Used forBy Financing Activities (7,802) 9,513 ----------- -----------4,871 6,746 ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,636) (1,333) ----------- -----------(422) (1,161) ------------ ------------ NET DECREASEINCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,320) (318)(1,489) 366 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,224 3,536 ----------- ----------------------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,9042,735 $ 3,218 =========== ===========3,902 ============ ============ CASH PAID DURING THE PERIOD FOR: Interest $ 4,653800 $ 4,829726 ============ ============ Income taxes $ 5,765(345) $ 5,944(52) ============ ============
* See Note 23 for explanation of restatement. The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements. STEPAN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30,March 31, 2002 Unaudited 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The condensed consolidated financial statements included herein have been prepared by the Stepan Company (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate and make the information presented not misleading. In the opinion of management all normal recurring adjustments necessary to present fairly the condensed consolidated financial position of the Company as of September 30,March 31, 2002, and the condensed consolidated results of operations for the three and nine months then ended and cash flows for the ninethree months then ended have been included. 2. DEFERRED COMPENSATION The Company maintains deferred compensation plans. These plans allow management to defer receipt of their bonuses and directors to defer receipt of director fees until retirement or departure from the Company. The plans allow the participant to choose to invest in either Stepan common stock or a limited variety of mutual funds. These assets are owned by the Company and subject to the claims of general creditors of the Company. These plans are accounted for under the requirements of the consensus reached by the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") in issue No. 97-14, "Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested". A description of the Company's deferred compensation accounting policy follows: The deferred compensation liability to the participants who elect deferral is recorded after the underlying compensation is earned, and recorded as expense. The purchase of Stepan common shares for the plans is recorded as a regular treasury stock purchase. The purchase of mutual funds is recorded as long term investments. Fluctuations in the value of these assets are recorded as adjustments to the deferred compensation liability and compensation costs included in administrative expense. The dividends, interest and capital gains from the mutual fund assets are recorded as investment income and included in "Other Income" as interest expense, net of investment income. Unrealized gains and losses resulting from market fluctuations of the mutual funds are recorded as other comprehensive income or expense in stockholders' equity. 3. RESTATEMENT Subsequent to the issuance of its financial statements for the three-month period ended March 31, 2002, management of the Company determined that the accounting treatment that had previously been afforded to the deferred compensation arrangements entered into with its managers and directors was not in accordance with the requirements of the consensus reached by the Emerging Issues Task ForceEITF of the Financial Accounting Standards BoardFASB in issue No. 97-14, Accounting"Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested.Invested". This consensus requires that assets and liabilities of the deferred compensation plan be presented separately on the balance sheet; that fluctuations in asset values should result in compensation expense or income; and that, based on the categories of assets underlying the plan, investment income and expense should be recorded in the income statement and unrealized market appreciation should be reported as a component of other comprehensive income and included in stockholders' equity. Historically, the Company had recorded the assets and liabilities related to the plans on a net basis when the awards were made and did not recognize changes in asset value in income. As a result, the condensed consolidated financial statements for the quarters ended March 31, 2002 and 2001, and the year ended December 31, 2001, have been restated from the amounts previously reported to give effect to the correction of this accounting error. A summary of the significant effects of the restatement is as follows: As of March 31, 2002:
As of December 31, 2001: (In(Dollars in thousands) As Previously Reported Adjustments As Restated -------- ----------- ----------- Assets Deferred income taxes $ 10,570 $ (1,874) $ 8,696 Long term investments - 7,090 7,090 Liabilities Deferred income taxes $ 7,67434,734 $ 7,674(6,907) $ 27,827 Deferred compensation - current and long-term - 18,519 18,519 Stockholders' Equity Additional paid-in capital $ 18,375 $ (365) $ 18,010 Accumulated other comprehensive loss (15,971) (1,021) (16,992) Retained earnings 144,796 1,860 146,656 Treasury stock (9,853) (6,870) (16,723)
As of December 31, 2001:
(Dollars in thousands) As Previously Reported Adjustments As Restated -------- ----------- ----------- Assets Deferred income taxes $ 10,684 $ (1,874) $ 8,810 Long term investments - 7,674 7,674 Liabilities Deferred income taxes $ 35,040 $ (6,437) $ 28,603 Deferred compensation - current &and long-term - 17,615 17,615 Stockholders' Equity Additional paid-in capital $ 16,893 $ (362) $ 16,531 Accumulated other comprehensive loss (14,800) (1,070) (15,870) Retained earnings 142,110 2,548 144,658 Treasury stock (8,659) (6,494) (15,153)
For the three months ended March 31, 2002 and nine month periods ended September 30,March 31, 2001:
Three Months Ended NineThree Months Ended September 30, 2001 September 30,March 31, 2002 March 31, 2001 ---------------------------------------- ------------------------------------------ (Dollars in thousands, except As As per share amounts) Previously As Previously As Reported Adjustments Restated Reported Adjustments Restated -------- ----------- -------- -------- ----------- -------- Net income $ 4,4814,577 $ 2,365(767) $ 6,8463,810 $ 14,2823,628 $ 1,70182 $ 15,9833,710 Earnings per share: Basic $ 0.460.47 $ 0.29(0.06) $ 0.750.41 $ 1.480.37 $ 0.260.03 $ 1.740.40 Diluted $ 0.44 $ 0.26 $ 0.70 $ 1.41 $ 0.23 $ 1.640.45 (0.06) 0.39 0.36 0.02 0.38 Shares used to compute net income per common share: Basic 9,2609,250 (415) 8,835 9,241 (412) 8,848 9,2558,829 Diluted 10,153 (413) 8,842 Diluted 10,1329,740 10,154 (412) 9,720 10,149 (413) 9,7369,742 Other comprehensive income (loss) $ (274)(1,171) $ (580)49 $ (854)(1,122) $ (1,280)(1,511) $ (723)(406) $ (2,003)(1,917)
Certain other amounts in 4. INVENTORIES
Inventories include the restated 2001 financial statements have been reclassified to conform to the 2002 presentation. The Annual Report on Form 10-K covering the 2001, 2000 and 1999 financial statements, as well as SEC Form 10-Q for the first two quarters of 2002 will be amended and refiled with the SEC upon completion of an audit of the annual financial statements. The Company's loan agreements require audited financial statements and pending completion of the reaudit, the lenders have provided a 120 day waiver of compliance with this debt covenant. After filing SEC Form 10-Q for the three and six month periods ended June 30, 2002, the Company determined that it had not recorded approximately $3,429,000 of deferred tax assets related to the deferred compensation plan. This adjustment is reflected in the balance sheet restatement effect, noted above, in this footnote. 3. INVENTORIES Inventories consist of following amounts:
(In(Dollars in thousands) September 30,March 31, 2002 December 31, 2001 -------------------------------- ----------------- Inventories valued primarily on LIFO basis - Finished products $ 41,13134,207 $ 33,932 Raw materials 23,19220,590 25,398 --------------- --------------------------- ----------- Total inventories $ 64,32354,797 $ 59,330 =============== =========================== ===========
If the first-in, first-out (FIFO) inventory valuation method had been used for all inventories, inventory balances would have been approximately $6.7$6.5 million and $7.5 million higher than reported at September 30,March 31, 2002, and December 31, 2001, respectively. 4.5. 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")(CERCLA) and the Superfund amendments of 1986.1986 ("Superfund"). The Company and others have been named as potentially responsible parties at affected geographic sites. TheAs discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company believes that it has made adequate provisions for the costs it may incur with respect to these sites. The Company has estimated a range of possible environmental and legal losses from $7.2 million to $34.3 million at September 30,March 31, 2002. At September 30,March 31, 2002, and December 31, 2001, the Company's best estimates of reserves for such losses were $17.1reserve was $17.2 million and $17.0 million, respectively, for legal and environmental matters.matters compared to $17.0 million at December 31, 2001. For certain sites, estimates cannot be made of the total costs of compliance, or the Company's share of such costs; accordingly, the Company is unable to predict the effect thereof on future results of operations. In the event of one or more adverse determinations in any annual or interim period, the impact on results of operations for those periods could be material. However, based upon the Company's present belief as to its relative involvement at these sites, other viable entities' responsibilities for cleanup, and the extended period over which any costs would be incurred, the Company believes that these matters will not have a material effect on the Company's financial position. Following are summaries of the environmental proceedings related to the Company's Maywood, New Jersey, and Ewan and D'Imperio environmental sites: Maywood, New Jersey, Site:Site The Company's site in Maywood, New Jersey and property formerly owned by the Company adjacent to its current site, were listed on the National Priorities List in September 1993 pursuant to the provisions of the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) because of certain alleged chemical contamination. Pursuant to an Administrative Order on Consent entered into between the United States Environmental Protection Agency (USEPA) and the Company for property formerly owned by the Company, and the issuance of an order by USEPA to the Company for property currently owned by the Company, the Company completed a Remedial Investigation Feasibility Study (RI/FS) in 1994. The Company submitted the Draft Final FS for Soil and Source Areas (Operable Unit 1) in September 2002. In addition, the Company has also submitted additional information regarding the remediation, most recently in October 2002. Discussions between USEPA and the Company are continuing. The Company is awaiting the issuance of a Record of Decision (ROD) from USEPA relating to the currently owned and formerly owned Company property and the proposed remediation. The final ROD will be issued sometime after the public comment period. In 1985, the Company entered into a Cooperative Agreement with the United States of America represented by the Department of Energy (Agreement). Pursuant to this Agreement, the Department of Energy (DOE) took title to radiological contaminated materials and was to remediate, at its expense, all radiological waste on the Company's property in Maywood, New Jersey. The Maywood property (and portions of the surrounding area) were remediated by the DOE under the Formerly Utilized Sites Remedial Action Program, a federal program under which the U.S. Government undertook to remediate properties which were used to process radiological material for the U.S. Government. In 1997, responsibility for this clean-up was transferred to the United States Army Corps of Engineers (USACE). On January 29, 1999, the Company received a copy of a USACE Report to Congress dated January 1998 in which the USACE expressed their intention to evaluate, with the USEPA, whether the Company and/or other parties might be responsible for cost recovery or contribution claims related to the Maywood site. Subsequent to the issuance of that report, the USACE advised the Company that it had requested legal advice from the Department of Justice as to the impact of the Agreement. By letter dated July 28, 2000, the Department of Justice advised the Company that the USACE and USEPA had referred to the Justice Department claims against the Company for response costs incurred or to be incurred by the USACE, USEPA and the DOE in connection with the Maywood site and the Justice Department stated that the United States is entitled to recovery of its response costs from the company under CERCLA. The letter referred to both radiological and non-radiological hazardous waste at the Maywood site and stated that the United States has incurred unreimbursed response costs to date of $138 million. Costs associated with radiological waste at the Maywood site, which the Company believes represent all but a small portion of the amount referred to in the Justice Department letter, could be expected to aggregate substantially in excess of that amount. In the letter, the Justice Department invited the Company to discuss settlement of the matter in order to avoid the need for litigation. The Company believes that its liability, if any, for such costs has been resolved by the aforesaid Agreement. Despite the fact that the Company continues to believe that it has no liability to the United States for such costs, discussions with the Justice Department are currently ongoing to attempt to resolve this matter. The Company believes it has adequate reserves for claims associated with the Maywood site. However, depending on the results of the ongoing discussions regarding the Maywood site, the final cost of the remediation could differ from the current estimates. Ewan and D'Imperio Sites: The Company has been named as a potentially responsible party (PRP) in the case USEPA v. Jerome Lightman (92 CV 4710 D. N. J.) which involves the Ewan and D'Imperio Superfund Sites located in New Jersey. Trial on the issue of the Company's liability at these sites was completed in March 2000. The Company is awaiting a decision from the court. If the Company is found liable at either site, a second trial as to the Company's allocated share of clean-up costs at these sites will likely be held in 2003. The Company believes it has adequate defenses to the issue of liability. In the event of an unfavorable outcome related to the issue of liability, the Company believes it has adequate reserves. Lightman Drum Site: The Company received a Section 104(e) Request for Information from USEPA dated March 21, 2000, regarding the Lightman Drum Company Site located in Winslow Township, New Jersey. The Company responded to this request on May 18, 2000. In addition, the Company received a Notice of Potential Liability and Request to Perform RI/FS dated June 30, 2000, from USEPA. The Company has decided that it will participate in the performance of the RI/FS. However, based on the current information known regarding this site, the Company is unable to predict what its liability, if any, will be for this site. Liquid Dynamics Site: The Company received a General Notice of Potential Liability letter from the USEPA dated October 18, 2002, regarding the Liquid Dynamics Site located in Chicago, Illinois. The Company submitted a response to USEPA on November 5, 2002, stating that it is interested in negotiating a resolution of its potential responsibility at this site. Based on the fact that the Company believes it is a de minimis PRP at this site, the Company believes that a resolution of its liability at this site will not have a material impact on the financial condition of the Company. Wilmington Site: As reported previously in the Company's Quarterly Report Form 10-Q for the quarter ended September 30, 1994 and various subsequent reports, the Company received a Request for Information from the Commonwealth of Massachusetts Department of Environmental Protection relating to the Company's formerly-owned site at 51 Eames Street, Wilmington, Massachusetts. The Company received a copy of another Request for Information regarding this site dated October 18, 2002. The Company's response to this request is due on November 29, 2002. The Company is currently investigating this matter and therefore, cannot predict what its liability, if any, will be for this site. 5. EARNINGS PER SHARE Below is the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2002 and 2001.
(Dollars in thousands, except per share amounts) Three Months Ended Nine Months Ended September 30 September 30 ------------------------- --------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Computation of Basic Earnings per Share Net income $ 5,675 $ 6,846 $ 17,702 $ 15,983 Deduct dividends on preferred stock (199) (200) (601) (602) -------- -------- -------- -------- Income applicable to common stock $ 5,476 $ 6,646 $ 17,101 $ 15,381 ======== ======== ======== ======== Weighted-average number of common shares outstanding 8,871 8,848 8,855 8,842 Basic earnings per share $ 0.62 $ 0.75 $ 1.93 $ 1.74 ======== ======== ======== ======== Computation of Diluted Earnings per Share ----------------------------------------- Net income $ 5,675 $ 6,846 $ 17,702 $ 15,983 Weighted-average number of common shares outstanding 8,871 8,848 8,855 8,842 Add net shares issuable from assumed exercise of options (under treasury stock method) 293 206 270 228 Add weighted-average shares issuable from assumed conversion of convertible preferred stock 666 666 666 666 -------- -------- -------- -------- Shares applicable to diluted earnings 9,830 9,720 9,791 9,736 ======== ======== ======== ======== Diluted earnings per share $ 0.58 $ 0.70 $ 1.81 $ 1.64 ======== ======== ======== ========
6. COMPREHENSIVE INCOME Comprehensive income includes net income and all other non-owner changes in equity that are not reported in net income. Below is the Company's comprehensive income for the three and nine months ended September 30, 2002 and 2001.
(In thousands) Three Months Ended Nine Months Ended September 30 September 30 ------------------------ ----------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Net income $ 5,675 $ 6,846 $ 17,702 $ 15,983 Other comprehensive income (loss): Foreign currency translation adjustments 298 (274) 283 (1,280) Unrealized loss on securities (557) (580) (817) (723) -------- -------- -------- -------- Comprehensive income $ 5,416 $ 5,992 $ 17,168 $ 13,980 ======== ======== ======== ========
At September 30, 2002, the total accumulated other comprehensive loss of $16,404,000 was comprised of $13,533,000 of foreign currency translation adjustments, $1,887,000 of unrealized losses on securities and $984,000 of minimum pension liability adjustments. At December 31, 2001, the total accumulated other comprehensive loss of $15,870,000 included $13,816,000 of foreign currency translation adjustments, $1,070,000 of unrealized losses on securities and $984,000 of minimum pension liability adjustments. 7. SEGMENT REPORTING The Company has three reportable segments: surfactants, polymers and specialty products. Financial results of the Company's operating segments for the three and nine months ended September 30, 2002 and 2001, are summarized below:
(In thousands) Three Months Ended Nine Months Ended September 30 September 30 ------------------------------------------------ ------------------------------------------------ 2002 2001 2002 2001 ---------------------- ---------------------- ---------------------- ---------------------- Operating Operating Operating Operating Net Sales Income Net Sales Income Net Sales Income Net Sales Income --------- ------ --------- ------ --------- ------ --------- ------ Surfactants $152,103 $ 9,403 $134,379 $ 7,938 $449,799 $36,382 $415,165 $28,289 Polymers 33,952 5,931 31,906 3,915 94,002 14,325 98,643 13,607 Specialty Products 7,289 2,342 7,544 3,190 19,494 6,662 19,645 6,373 Segment Totals $193,344 $17,676 $173,829 $15,043 $563,295 $57,369 $533,453 $48,269
Below are reconciliations of segment operating income to consolidated income before income taxes:
(In thousands) Three Months Ended Nine Months Ended September 30 September 30 ----------------------- -------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Operating income segment totals $ 17,676 $ 15,043 $ 57,369 $ 48,269 Unallocated corporate expenses (a) (8,430) (2,654) (27,340) (17,884) Interest expense (1,743) (1,713) (5,240) (5,375) Income from equity joint venture 790 529 2,444 1,149 -------- -------- -------- -------- Consolidated income before income taxes $ 8,293 $ 11,205 $ 27,233 $ 26,159 ======== ======== ======== ========
(a) Includes corporate administrative and corporate manufacturing expenses, which are not included in segment operating income and not used to evaluate segment performance. 8. GOODWILL AND OTHER INTANGIBLE ASSETS On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which is effective for fiscal years beginning after December 15, 2001. This standard establishes new accounting and reporting requirements for goodwill and intangible assets including no amortization of goodwill, separate identification of certain identifiable intangible assets, and an annual assessment for impairment of all goodwill and intangible assets. The following is a reconciliation of the Company's reported net income, basic earnings per share and diluted earnings per share to the amounts that would have been reported had the new accounting rules been in effect at January 1, 2001:
Three Months Ended Nine Months Ended (In thousands, except per share data) September 30 September 30 ------------------------ ------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Reported net income $ 5,675 $ 6,846 $ 17,702 $ 15,983 Add back: Goodwill amortization 0 97 0 323 --------- --------- ---------- ---------- Adjusted net income $ 5,675 $ 6,943 $ 17,702 $ 16,306 ========= ========= ========== ========== Basic earnings per share: Reported basic earnings per share $ 0.62 $ 0.75 $ 1.93 $ 1.74 Add back: Goodwill amortization 0.00 0.01 0.00 0.04 --------- --------- ---------- ---------- Adjusted basic earnings per share $ 0.62 $ 0.76 $ 1.93 $ 1.78 ========= ========= ========== ========== Diluted earnings per share: Reported diluted earnings per share $ 0.58 $ 0.70 $ 1.81 $ 1.64 Add back: Goodwill amortization 0.00 0.01 0.00 0.03 --------- --------- ---------- ---------- Adjusted diluted earnings per share $ 0.58 $ 0.71 $ 1.81 $ 1.67 ========= ========= ========== ==========
The Company's net carrying values of goodwill were $6,233,000 and $6,100,000 as of September 30, 2002 and December 31, 2001, respectively. The entire amount of goodwill relates to the surfactants' reporting unit. SFAS No. 142 required the Company to complete a transition goodwill impairment test by comparing the fair value of the reporting unit with its net carrying value, including goodwill. The Company has completed this test and the results of that test indicated that goodwill was not impaired at January 1, 2002. The following table reflects the components of all other intangible assets, which have finite lives, as of September 30, 2002 and December 31, 2001.
(In thousands) Gross Carrying Amount Accumulated Amortization -------------------------------- ------------------------------- Sept. 30, 2002 Dec. 31, 2001 Sept. 30, 2002 Dec. 31, 2001 -------------- ------------- -------------- ------------- Other Intangible Assets: Patents $ 2,000 $ 2,000 $ 567 $ 466 Trademarks, customer lists, know-how 17,095 17,095 6,283 5,386 Non-compete Agreements 1,000 1,000 1,000 950 ------------ ------------ ------------ ----------- Total $ 20,095 $ 20,095 $ 7,850 $ 6,802 ============ ============ ============ ===========
Aggregate amortization expenses for the three and nine months ended September 30, 2002, were $333,000 and $1,048,000, respectively. Aggregated amortization expenses for the three and nine months ended September 30, 2001, were $400,000 and $1,205,000, respectively. Amortization expense is recorded based on useful lives ranging from 5 to 15 years. Estimated amortization expense for identifiable intangibles assets, other than goodwill, for each of the succeeding fiscal years are as follows: (In thousands) For year ended 12/31/03 $1,330 For year ended 12/31/04 $1,330 For year ended 12/31/05 $1,330 For year ended 12/31/06 $1,330 For year ended 12/31/07 $1,086 9. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," effective for fiscal years beginning after December 15, 2001. It requires the use of the purchase method of accounting for all transactions initiated after June 30, 2001. The Company applied the provisions of SFAS No. 141 to the September 2001 acquisition of Manro Performance Chemicals Limited. No acquisitions took place during the first nine months of 2002. In April 2001, the Emerging Issues Task Force (EITF) issued EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." EITF Issue No. 00-25 provides guidance regarding the reporting of consideration given by a vendor to a reseller of the vendor's products. This Issue requires certain considerations from vendor to a reseller of the vendor's products be considered: (a) as a reduction of the selling prices of the vendor's products and, therefore, be recorded as a reduction of revenue when recognized in the vendor's income statement, or (b) as a cost incurred by the vendor for assets or services received from the reseller and, therefore, be recorded as a cost or an expense when recognized in the vendor's income statement. EITF Issue No. 00-25 was effective for the Company beginning January 1, 2002. The Company's accounting policies were already consistent with the guidance provided in this EITF. Therefore, adoption of this standard did not have an impact on the Company's financial position or results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002, supersedes previous guidance for financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. Based on the information currently available, adoption of this standard is not expected to have an impact on the Company's financial position or results of operations. In August 2001, SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets," was issued. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 144 was effective January 1, 2002. Adoption of this standard did not have an impact on the Company's financial position or results of operations. In June 2002, The Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Based on the information currently available, adoption of this standard is not expected to have an impact on the Company's financial position or results of operations. 10. NEW LOAN AGREEMENT During September 2002, the Company completed a new $30 million private placement loan with its existing insurance company lenders. The proceeds of the loan were used to repay existing bank debt that had been classified as long-term. The new loan is unsecured and will bear interest at 6.86 percent through the stated maturity date of September 1, 2015. 11. RECLASSIFICATIONS Certain amounts in the restated 2001 financial statements have been reclassified to conform to the 2002 presentation. Item 2 - Management's Discussion and Analysis of Financial Conditions and Results of Operations The following is management's discussion and analysis of certain significant factors, which have affected the Company's financial condition and results of operations during the interim period included in the accompanying condensed consolidated financial statements. As discussed in Note 2 to the unaudited, condensed, consolidated financial statements, the Company has restated its financial statements for the three and nine month periods ended September 30, 2001 and for the year ended December 31, 2001. The accompanying Management's Discussion and Analysis gives effect to the restatement. CRITICAL ACCOUNTING POLICIES Estimates We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America. Preparing our financial statements in accordance with generally accepted accounting principles requires us 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. Critical areas where estimates are required are noted below: Environmental Liabilities: It is the Company's accounting policy to record environmental liabilities 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, 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. Reserves for Doubtful Accounts: Accounts receivable are reported net of reserves for doubtful accounts. The Company determines the reserve requirement based upon the estimated collectibility of specific delinquent accounts, the Company's historical loss experience and the level of non-delinquent accounts receivable. Reserves for Obsolete and Slow Moving Inventories: The Company provides reserves for obsolete and slow moving inventory items. The reserve requirement is estimated based upon a review of specific inventory items that are identified as slow moving and consideration of potential salvage value and disposal costs. Because the foregoing liabilities and reserves are recorded based on estimates, actual amounts could differ from these estimates. Initial Adoption of an Accounting Policy As discussed in Note 2 to the condensed Consolidated Financial Statements, the Company adopted the requirements of the consensus reached by the Emerging Issues Task Force of the Financial Accounting Standards Board in issue No. 97-14, "Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested". A description of the Company's deferred compensation accounting policy follows: The Company maintains deferred compensation plans. These plans allow management to defer receipt of their bonuses and directors to defer receipt of director fees until retirement or departure from the Company. The plans allow the participant to choose to invest in either Stepan common stock or a narrow variety of mutual funds. These assets are owned by the Company and subject to the claims of general creditors of the Company. The liability to the participants is recorded after the underlying compensation is earned, recorded as expense and a deferral election is made resulting in the deferred compensation liability. The purchase of Stepan common shares for the plans is recorded as a regular treasury stock purchase. The purchase of mutual funds is recorded as long term investments. Fluctuations in the value of these assets are recorded as compensation income or expense in administrative expense. The dividends, interest and capital gains from the mutual fund assets are recorded as investment income and reported under Other Income as interest expense, net of investment income. Unrealized market fluctuations of the mutual funds are recorded as other comprehensive income or expense in stockholders' equity. LIQUIDITY AND CAPITAL RESOURCES Net cash from operating activities for the first nine months of 2002 totaled $30.9 million, a decrease of $9.5 million compared to $40.4 million for the same period in 2001. A $1.7 million increase in net income during the period was offset by increased working capital. For the first three quarters of 2002, seasonal working capital growth required $18.8 million compared to $2.9 million for the same period last year. For the prior year period, seasonal working capital requirements were lower after the events of September 11, 2001. Working capital changes for the current year period include: accounts receivable up by $13.2 million, inventories up by $5.0 million, prepaid expenses up by $1.1 million and accounts payable and accrued liabilities up by $0.5 million. Capital expenditures totaled $24.6 million for the first three quarters of 2002, compared to $24.4 million for the same period in 2001. The pace of capital spending is expected to increase during the fourth quarter of 2002 and total year expenditures for property, plant and equipment are expected to be somewhat higher from year to year. Total company debt decreased by $2.9 million during the first nine months of 2002, from $120.3 million to $117.4 million. As of September 30, 2002, the ratio of long-term debt to long-term debt plus stockholders' equity was 39.4 percent, compared to 41.5 percent at December 31, 2001. The Company's announced change in accounting for deferred compensation plans will require financial restatement and independent audit for 1999, 2000, and 2001 and the first quarter of 2002. While the company is presently not in compliance with domestic loan agreements, because they require audited financial statements, the company's banks and insurance company lenders have waived those particular debt covenants until November 22, 2002, pending completion of the audit process. During September 2002, the Company completed a new $30 million private placement loan with its existing insurance company lenders. The proceeds of the loan were used to repay existing bank debt that had been classified as long-term. The new loan is unsecured and will bear interest at 6.86 percent through the stated maturity date of September 1, 2015. The Company maintains contractual relationships with its domestic banks that provide for revolving credit of up to $60 million, which may be drawn upon as needed for general corporate purposes through May 2, 2007 under a revolving credit agreement. The company also meets short-term liquidity requirements through uncommitted domestic bank lines of credit. The Company's foreign subsidiaries maintain committed and uncommitted bank lines of credit in their respective countries to meet working capital requirements as well as to fund capital expenditure programs and acquisitions. During March 2002, the company's Stepan Europe subsidiary completed a (euro)13.4 million bank term loan as long-term financing for a portion of the Manro acquisition. This loan will mature in 7 years and bears interest at rates set quarterly, based on 90-day EURIBOR plus the contractual spread. The U.S. parent company does not guaranty this loan. The Company anticipates that cash from operations and from committed credit facilities will be sufficient to fund anticipated capital expenditures, dividends and other planned financial commitments for the foreseeable future. Any substantial acquisitions would require additional funding. There have been no material changes in the Company's market risks since December 31, 2001. RESULTS OF OPERATIONS Three Months Ended September 30, 2002 and 2001 Net income for the third quarter ended September 30, 2002, decreased to $5.7 million, or $0.58 per share (diluted), from $6.8 million, or $0.70 per share (diluted), in 2001. Net sales increased 11 percent to $193.3 million in the third quarter of 2002 from $173.8 million a year ago. Net sales by segment were: (Dollars in thousands) Three Months Ended September 30 ---------------------------------------- 2002 2001 % Change ---- ---- -------- Net Sales: Surfactants $ 152,103 $ 134,379 +13 Polymers 33,952 31,906 +6 Specialty Products 7,289 7,544 -3 ------------ ------------ Total $ 193,344 $ 173,829 +11 ============ ============ Surfactants net sales increased from $134.4 million in the third quarter of 2001 to $152.1 million in the third quarter of 2002. Foreign operations accounted for most of the improvement, reporting a $13.0 million, or 38 percent, increase between quarters. Approximately $12.1 million of the increased net sales were attributable to the fourth quarter 2001 acquisition of Stepan UK. European operations, excluding Stepan UK, reported higher net sales based on improved sales volume and a stronger euro. Latin American operations posted weaker net sales due to decreased sales volume and lower average selling prices. Net sales for domestic surfactant U.S. operations, which accounted for 69 percent of total surfactant revenues, increased $4.7 million, or five percent, from $99.9 million in the third quarter of 2001 to $104.6 million in the third quarter of 2002. A seven percent growth of sales volume more than offset a three percent decline in average selling prices. Higher demand for personal care products led to the increase in sales volume. Surfactants gross profit increased 15 percent to $20.3 million in the third quarter of 2002 from $17.6 million in the third quarter of 2001. Domestic operations reported a $0.7 million, or five percent, increase in gross profit. The increase was based on improved sales volume, which offset a two percent decline in average margins. Raw material costs declined after several years of increases allowing a partial recovery in margins. However, this was offset by a weaker sales mix of higher value added products used in industrial applications, which have been harder hit by the slow economy. Foreign operations' gross profit increased $2.0 million, or 51 percent, between quarters. Stepan Europe contributed $2.6 million to the improvement, of which $2.2 million was attributable to the previously noted Stepan UK acquisition. Latin American operations reported higher gross profit due to higher average margins and Canadian operations showed an improvement based on increased sales volume and higher average margins. Polymers net sales increased $2.1 million, or six percent, to $34.0 million in the third quarter of 2002 from $31.9 million in the third quarter of 2001. The increase was based on an 18 percent growth in sales volume, which offset a ten percent decline in average selling prices. Global polyurethane polyols net sales increased $2.7 million, or 14 percent, between quarters. Domestic operations reported a $1.4 million improvement based on an eight percent rise in sales volume. European net sales rose $1.5 million between quarters due primarily to improved sales volume. Phthalic anhydride (PA) net sales increased three percent to $8.3 million in the third quarter 2002 from $8.1 million in the third quarter of 2001. A 31 percent gain in sales volume led to the improvement and more than offset a 22 percent drop in average selling prices. Lower raw material costs, which were passed on to customers, and a change from selling a finished product to toll processing of consigned raw materials, led to the average selling price decline. Polyurethane systems reported a $0.8 million, or 17 percent, decline in net sales. An 18 percent drop in sales volume, due primarily to lost business, led to the decline. Polymers third quarter gross profit increased $2.6 million, or 48 percent, from $5.4 million in the third quarter of 2001 to $8.0 million in the third quarter of 2002. Global polyurethane polyols' gross profit increased $1.4 million, or 33 percent, from quarter to quarter. Domestic operations gross profit rose $1.3 million, or 29 percent, based on higher sales volume and improved average margins. Polyurethane systems gross profit declined $0.4 million, or 32 percent, between quarters. Lower sales volume and average margins led to the decrease. Higher unit overhead costs resulting from lower production volumes led to the decrease in average margins. PA gross profit rose $1.4 million between quarters due to improved sales volume and higher average margins. Specialty products reported $7.3 million in net sales for the third quarter of 2002 compared to $7.5 million a year ago. The decline was due to lower average selling prices. Gross profit declined $0.7 million, or 20 percent, to $2.8 million in the third quarter of 2002 from $3.5 million in the third quarter of 2001. Lower sales volume of higher margin products led to the decline. Operating expenses for the third quarter of 2002 increased 55 percent from $14.1 million in 2001 to $21.8 million in 2002. Administrative expenses increased $5.9 million from quarter to quarter. The $2.7 million increase in deferred compensation expense coupled with $1.4 million in reduced insurance recoveries contributed to the higher domestic expense. The inclusion of $0.7 million of expense related to Stepan UK, which was first consolidated in the fourth quarter of 2001, also contributed to the increase. Marketing expense rose $0.9 million, or 14 percent, between quarters. The addition of Stepan UK marketing expenses coupled with higher payroll costs accounted for most of the increase. Research and development expense increased 16 percent, mostly due to higher payroll costs. Net interest expense increased two percent between quarters. Interest expense declined two percent due to lower overall borrowing rates and decreased debt levels. The decline in interest expense was more than offset by lower investment income from mutual funds. Income from the Philippines equity joint venture increased to $0.8 million in the third quarter of 2002 from $0.5 million in the third quarter of 2001. The rise was due to royalty income and higher equity income based on improved sales volume. The effective tax rate was 31.6 percent for the third quarter ended September 30, 2002 compared to 38.9 percent for the third quarter ended September 30, 2001. The lower effective tax rate was primarily attributable to a revised estimated annual effective rate of 35 percent. The lower annual rate is due to favorable rates on European earnings and a higher U.S. tax benefit realized on export sales. A decrease in the overall state apportionment factor also contributed to the lower effective tax rate. Nine Months Ended September 30, 2002 and 2001 Net income for the first nine months ended September 30, 2002, was $17.7 million, or $1.81 per share (diluted), up $1.7 million, or 11 percent, from $16.0 million, or $1.64 per share (diluted), for the same period in 2001. Net sales increased six percent to $563.3 million from $533.5 million reported last year. Net sales by segment were: (Dollars in thousands) Nine Months Ended September 30 ------------------------------------------ 2002 2001 % Change ---- ---- -------- Net Sales: Surfactants $ 449,799 $ 415,165 +8 Polymers 94,002 98,643 -5 Specialty Products 19,494 19,645 -1 ------------ ------------ Total $ 563,295 $ 533,453 +6 ============ ============ Surfactants net sales increased $34.6 million, or eight percent, to $449.8 million in 2002 from $415.2 million in 2001. Net sales for foreign operations rose $34.2 million, or 33 percent, from $103.3 million in 2001 to $137.5 million in 2002. A 47 percent increase in sales volume led to the net sales growth. Approximately $31.2 million of the increase was due to the fourth quarter 2001 acquisition of Stepan UK. European operations, excluding Stepan UK, and Canadian operations reported higher net sales by $2.4 million and $1.6 million, respectively, based on improved sales volume. Domestic U.S. operations, which accounted for 69 percent of total surfactant revenues, reported net sales that were relatively unchanged from year to year. Surfactants gross profit increased $10.9 million, or 19 percent, to $67.6 million in the first nine months of 2002 from $56.7 million for the same period of 2001. Domestic operations reported a $5.4 million, or 12 percent, increase in gross profit due to a partial recovery in margins as raw material costs declined after several years of increases. Gross profit for foreign operations rose $5.5 million, or 45 percent, to $17.8 million in 2002 from $12.3 million in 2001. European operations contributed $5.7 million to the improvement, of which $5.1 million related to the previously noted Stepan UK acquisition. Latin America operations reported increased gross profit due to higher average margins. Polymers net sales decreased $4.6 million, or five percent, to $94.0 million in 2002 from $98.6 million in 2001. PA net sales increased 13 percent to $28.3 million in 2002 from $25.1 million in 2001. A 35 percent gain in sales volume more than offset a 17 percent drop in average selling prices. Lower raw material costs, coupled with the move to a consignment arrangement with a major customer (i.e. the customer provides the Company with the raw material to produce the customer's finished product), led to the average price decline. Global polyurethane polyols net sales decreased seven percent to $54.2 million in 2002 from $58.1 million for the same period a year ago. Domestic operations accounted for most of the net sales decrease contributing $5.2 million to the drop, based on declined sales volume and lower average selling prices. Urethane systems net sales fell 26 percent to $11.5 million for the first nine months of 2002 from $15.5 million in 2001. A 25 percent drop in sales volume, which led to the decrease, was due primarily to lost business. Polymers gross profit was $20.0 million for the nine months of 2002, which was $1.7 million, or nine percent, higher than a year ago. PA's gross profit increased $2.0 million, or 79 percent, to $4.5 million in 2002 from $2.5 million in 2001. A 35 percent improvement in sales volume, coupled with a 31 percent increase in average margins, led to the rise. Global polyurethane polyols gross profit increased $1.1 million, or eight percent, to $15.2 million in 2002 from $14.1 million in 2001. Domestic polyurethane polyols gross profit increased $0.6 million, or four percent, from $14.4 million in 2001 to $15.0 million in 2002 based on higher average margins, partially offset by lower sales volume. Lower raw material costs led to the average margin improvement. European gross profit increased $0.8 million based on higher average margins and improved sales volume, while Brazil's gross profit dropped $0.2 million due to lower sales volume. Polyurethane systems gross profit decreased $1.4 million, or 39 percent, from year to year. Lower sales volume and average margins led to the decrease. Higher unit overhead costs resulting from decreased production volumes led to the decline in average margins. Specialty products net sales decreased $0.1 million, or one percent, from $19.6 million in 2001 to $19.5 million in 2002. The decrease was primarily due to lower sales volume. Gross profit increased $0.6 million, or nine percent, between years due to increased sales volume of higher margin products. Operating expenses increased $13.5 million, or 26 percent, to $65.2 million in the first nine months of 2002 from $51.7 million for the same period a year ago. Administrative expenses rose $10.5 million, or 66 percent, between years. The rise reflected $3.4 million increase in costs associated with the implementation of an enterprise resource planning system and $3.2 million increased deferred compensation expenses. The increase also reflected $1.6 million in expenses for Stepan UK, which was first consolidated in the fourth quarter of 2001. Marketing expenses increased $1.6 million, or eight percent, between years. Research and development expenses increased $1.4 million, or eight percent, between years. Interest expense decreased three percent from year to year due to lower overall borrowing rates. Income from the Philippines equity joint venture increased to $2.4 million in 2002 from $1.1 million a year ago. The rise was due to royalty income and to increased equity income generated by higher sales volume. The effective tax rate was 35.0 percent for the first nine months ended September 30, 2002 compared to 38.9 percent for the first nine months ended September 30, 2001. The lower effective tax rate was primarily attributable to a decrease in the effective tax rate on European earnings and a higher U.S. tax benefit realized on export sales. A decrease in the overall state apportionment factor also contributed to the lower effective tax rate. ENVIRONMENTAL AND LEGAL MATTERS The Company is subject to extensive federal, state and local environmental laws and regulations. Although the Company's environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent environmental regulation could require the Company to make additional unforeseen environmental expenditures. The Company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations. During the first nine months of 2002, Company expenditures for capital projects related to the environment were $0.8 million and should approximate $1.2 million for the full year 2002. These projects are capitalized and typically depreciated over 10 years. Recurring costs associated with the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing operations at our manufacturing locations were $5.6 million for the first nine months of 2002. The Company has been named by the government as a potentially responsible party at 18 waste disposal sites where cleanup costs have been or may be incurred under the federal Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it may incur with respect to these sites. The Company has estimated a range of possible environmental and legal losses from $7.2 million to $34.3 million at September 30, 2002. At September 30, 2002 and December 31, 2001, the Company's reserves were $17.1 million and $17.0 million for legal and environmental matters. During the first nine months of 2002, expenditures related to legal and environmental matters approximated $2.2 million. For certain sites, estimates cannot be made of the total costs of compliance or the Company's share of such costs; accordingly, the Company is unable to predict the effect thereof on future results of operations. In the event of one or more adverse determinations in any annual or interim period, the impact on results of operations for those periods could be material. However, based upon the Company's present belief as to its relative involvement at these sites, other viable entities' responsibilities for cleanup and the extended period over which any costs would be incurred, the Company believes that these matters will not have a material effect on the Company's financial position. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," effective for fiscal years beginning after December 15, 2001. It requires the use of the purchase method of accounting for all transactions initiated after June 30, 2001. The Company applied the provisions of SFAS No. 141 to the September 2001 acquisition of Manro Performance Chemicals Limited. No acquisitions took place during the first nine months of 2002. In April 2001, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." EITF Issue No. 00-25 provides guidance regarding the reporting of consideration given by a vendor to a reseller of the vendor's products. This Issue requires certain considerations from vendor to a reseller of the vendor's products be considered: (a) as a reduction of the selling prices of the vendor's products and, therefore, be recorded as a reduction of revenue when recognized in the vendor's income statement, or (b) as a cost incurred by the vendor for assets or services received from the reseller and, therefore, be recorded as a cost or an expense when recognized in the vendor's income statement. EITF Issue No. 00-25 was effective for the Company beginning January 1, 2002. The Company's accounting policies were already consistent with the guidance provided in this EITF. Therefore, adoption of this standard did not have an impact on the Company's financial position or results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143, which is effective for fiscal year beginning after June 15, 2002, supersedes previous guidance for financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement applies to legal obliations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. Based on the information currently available, adoption of this standard is not expected to have an impact on the Company's financial position or results of operations. In August 2001, SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets," was issued. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 144 was effective January 1, 2002. Adoption of this standard did not have an impact on the Company's financial position or results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002, supersedes previous guidance for financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. Based on the information currently available, adoption of this standard is not expected to have an impact on the Company's financial position or results of operations. In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Based on the information currently available, adoption of this standard is not expected to have an impact on the Company's financial position or results of operations. OTHER Except for the historical information contained herein, the matters discussed in this document are forward looking statements that involve risks and uncertainties. The results achieved this quarter are not necessarily an indication of future prospects for the Company. Actual results in future quarters may differ materially. Potential risks and uncertainties include, among others, fluctuations in the volume and timing of product orders, changes in demand for the Company's products, changes in technology, continued competitive pressures in the marketplace, outcome of environmental contingencies, availability of raw materials, foreign currency fluctuations and the general economic conditions. Item 3 - Quantitative and Qualitative Disclosures about Market Risk For information regarding our exposure to market risk, see the caption entitled "Liquidity and Capital Resources" in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," which is incorporated herein by reference. Item 4 - Controls and Procedures a. Evaluation of Disclosure Controls and Procedures Based on their evaluation of our disclosure controls and procedures conducted within 90 days of the date of filing this report on Form 10-Q, our Chief Executive Officer and our acting Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934) are effective. b. Changes in Internal Controls There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. Part II OTHER INFORMATION - -------------------------------------------------------------------------------- Item 1 - Legal Proceedings The Company's site in Maywood, New Jersey and property formerly owned by the Company adjacent to its current site, were listed on the National Priorities List in September 1993 pursuant to the provisions of the Comprehensive Environmental Response Compensation and Liability Act (CERCLA)CERCLA because of certain alleged chemical contamination. Pursuant to an Administrative Order on Consent entered into between the United States Environmental Protection Agency (USEPA) and the Company for property formerly owned by the Company, and the issuance of an order by USEPA to the Company for property currently owned by the Company, the Company completed a Remedial Investigation Feasibility Study (RI/FS) in 1994. The Company submitted the Draft Final FS for Soil and Source Areas (Operable Unit 1) in September 2002. In addition, the Company has also submitted additional information regarding the remediation, most recently in October 2002. Discussions between USEPA and the Company are continuing. The Company is awaiting the issuance of a Record of Decision (ROD) from USEPA relating to the currently owned and formerly owned Company property and the proposed remediation. The final ROD will be issued sometime after the public comment period. In 1985, the Company entered into a Cooperative Agreement with the United States of America represented by the Department of Energy (Agreement). Pursuant to this Agreement, the Department of Energy (DOE) took title to radiological contaminated materials and was to remediate, at its expense, all radiological waste on the Company's property in Maywood, New Jersey. The Maywood property (and portions of the surrounding area) were remediated by the DOE under the Formerly Utilized Sites Remedial Action Program, a federal program under which the U.S. Government undertook to remediate properties which were used to process radiological material for the U.S. Government. In 1997, responsibility for this clean-up was transferred to the United States Army Corps of Engineers (USACE). On January 29, 1999, the Company received a copy of a USACE Report to Congress dated January 1998 in which the USACE expressed their intention to evaluate, with the USEPA, whether the Company and/or other parties might be responsible for cost recovery or contribution claims related to the Maywood site. Subsequent to the issuance of that report, the USACE advised the Company that it had requested legal advice from the Department of Justice as to the impact of the Agreement. By letter dated July 28, 2000, the Department of Justice advised the Company that the USACE and USEPA had referred to the Justice Department claims against the Company for response costs incurred or to be incurred by the USACE, USEPA and the DOE in connection with the Maywood site and the Justice Department stated that the United States is entitled to recovery of its response costs from the Company under CERCLA. The letter referred to both radiological and non-radiological hazardous waste at the Maywood site and stated that the United States has incurred unreimbursed response costs to date of $138 million. Costs associated with radiological waste at the Maywood site, which the Company believes represent all but a small portion of the amount referred to in the Justice Department letter, could be expected to aggregate substantially in excess of that amount. In the letter, the Justice Department invited the Company to discuss settlement of the matter in order to avoid the need for litigation. The Company believes that its liability, if any, for such costs has been resolved by the aforesaid Agreement. Despite the fact that the Company continues to believe that it has no liability to the United States for such costs, discussions with the Justice Department are currently ongoing to attempt to resolve this matter. The Company believes it has adequate reserves for claims associated with the Maywood site. However, depending on the results of the ongoing discussions regarding the Maywood site, the final cost of the remediation could differ from the current estimates. Ewan and D'Imperio Site The Company has been named as a potentially responsible party (PRP) in the case USEPA v. Jerome Lightman (92 CV 4710 D. N. J.) which involves the Ewan and D'Imperio Superfund Sites located in New Jersey. Trial on the issue of the Company's liability at these sites was completed in March 2000. The Company is awaiting a decision from the court. If the Company is found liable at either site, a second trial as to the Company's allocated share of clean-up costs at these sites will likely be held in 2003. The Company believes it has adequate defenses to the issue of liability. In the event of an unfavorable outcome related to the issue of liability, the Company believes it has adequate reserves. Lightman Drum Site The Company received a Section 104(e) Request for Information from USEPA dated March 21, 2000, regarding the Lightman Drum Company Site located in Winslow Township, New Jersey. The Company responded to this request on May 18, 2000. In addition, the Company received a Notice of Potential Liability and Request to Perform RI/FS dated June 30, 2000, from USEPA. The Company has decided that it will participate in the performance of the RI/FS. However, based on the current information known regarding this site, the Company is unable to predict what its liability, if any, will be for this site. 6. EARNINGS PER SHARE Below is the computation of basic and diluted earnings per share for the three months ended March 31, 2002 and 2001.
(In thousands, except per share amounts) Three Months Ended March 31 ---------------------- 2002 2001 ---- ---- Computation of Basic Earnings per Share --------------------------------------- Net income $ 3,810 $ 3,710 Deduct dividends on preferred stock 200 201 ------- ------- Income applicable to common stock $ 3,610 $ 3,509 ======= ======= Weighted-average number of shares outstanding 8,835 8,829 Basic earnings per share $ 0.41 $ 0.40 ======= ======= Computation of Diluted Earnings per Share ----------------------------------------- Net income $ 3,810 $ 3,710 Weighted-average number of shares outstanding 8,835 8,829 Add net shares issuable from assumed exercise of options (under treasury stock method) 239 247 Add weighted-average shares issuable from assumed conversion of convertible preferred stock 666 666 ------- ------- Shares applicable to diluted earnings 9,740 9,742 ======= ======= Diluted earnings per share $ 0.39 $ 0.38 ======= =======
7. COMPREHENSIVE INCOME Comprehensive income includes net income and all other non-owner changes in equity that are not reported in net income. Below is the Company's comprehensive income for the three months ended March 31, 2002 and 2001.
(Dollars in thousands) Three Months Ended March 31 ------------------------------ 2002 2001 ---- ---- Net income $ 3,810 $ 3,710 Other comprehensive loss: Foreign currency translation adjustments (1,171) (1,511) Unrealized gain (loss) on securities 49 (406) --------- --------- Comprehensive income $ 2,688 $ 1,793 ========= =========
At March 31, 2002, the total accumulated other comprehensive loss of $16,992,000 was comprised of $14,987,000 of foreign currency translation adjustments, $1,021,000 of unrealized losses on securities and $984,000 of minimum pension liability adjustments. At December 31, 2001, the total accumulated other comprehensive loss of $15,870,000 included $13,816,000 of foreign currency translation adjustments, $1,070,000 of unrealized losses on securities and $984,000 of minimum pension liability adjustments. 8. SEGMENT REPORTING The Company has three reportable segments: surfactants, polymers and specialty products. There is no intersegment revenue and all intercompany transactions are eliminated from segments' revenue. Financial results of the Company's operating segments for the quarters ended March 31, 2002 and 2001, are summarized below:
(Dollars in thousands) Specialty Segment Surfactants Polymers Products Totals ----------- -------- -------- -------- For the quarter ended March 31, 2002 ------------------------------------ Net Sales $146,816 $28,867 $5,473 $181,156 Operating income 12,289 4,153 1,112 17,554 For the quarter ended March 31, 2001 ------------------------------------ Net Sales $140,378 $30,833 $5,646 $176,857 Operating income 9,916 3,922 980 14,818
Below are reconciliations of segment operating income to consolidated income before income taxes:
(Dollars in thousands) Three Months Ended March 31 -------------------------------- 2002 2001 ---- ---- Operating income segment totals $ 17,554 $ 14,818 Unallocated corporate expenses /(a)/ (10,105) (6,904) Interest expense (1,791) (1,905) Equity in earnings of joint venture 488 127 --------- --------- Consolidated income before income taxes $ 6,146 $ 6,136 ========= =========
(a) Includes corporate administrative and corporate manufacturing expenses, which are not included in segment operating income and not used to evaluate segment performance. 9. GOODWILL AND OTHER INTANGIBLE ASSETS On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. In part, SFAS No. 142 requires that acquired goodwill cease being amortized. The following is a reconciliation of the Company's reported first quarters 2002 and 2001 net income, basic earnings per share and diluted earnings per share to the amounts that would have been reported had the new accounting rules been in effect at January 1, 2001:
Three Months Ended March 31 --------------------------------- (In thousands, except per share data) 2002 2001 ---- ---- Reported net income $ 3,810 $ 3,710 Goodwill amortization - 111 --------- -------- Adjusted net income $ 3,810 $ 3,821 ========= ======== Basic earnings per share: Reported basic earnings per share $ 0.41 $ 0.40 Goodwill amortization - 0.01 --------- -------- Adjusted basic earnings per share $ 0.41 $ 0.41 ========= ======== Diluted earnings per share: Reported diluted earnings per share $ 0.39 $ 0.38 Goodwill amortization - 0.01 --------- -------- Adjusted diluted earnings per share $ 0.39 $ 0.39 ========= ========
The Company's net carrying values of goodwill were $6,058,000 and $6,100,000 as of March 31, 2002 and December 31, 2001, respectively. The entire amount of goodwill relates to the surfactants' reporting unit. SFAS No. 142 required the Company to complete a transition goodwill impairment test by comparing the fair value of the reporting unit with its net carrying value, including goodwill. The Company completed this test in the second quarter of 2002 and the results of that test indicated that goodwill was not impaired at January 1, 2002. SFAS No. 142 also requires that previously recognized intangible assets, other than goodwill, be evaluated to determine if they have finite or indefinite useful lives. Intangible assets determined to have finite lives are amortized over those lives and intangible assets that have indefinite useful lives are not amortized. In accordance with criteria established in SFAS No. 142, the Company evaluated its intangible assets and determined that all such assets had finite lives and that the previously assigned useful lives remained appropriate for future amortization. The following table reflects the components of intangible assets as of March 31, 2002 and December 31, 2001.
(In thousands) Gross Carrying Amount Accumulated Amortization ---------------------------------- ----------------------------- March 31, December 31, March 31, December 31, 2002 2001 2002 2001 ---- ---- ---- ---- Amortized Intangible Assets: Patents $ 2,000 $ 2,000 $ 500 $ 466 Trademarks, customer lists, know-how 17,095 17,095 5,685 5,386 Non-compete Agreements 1,000 1,000 1,000 950 ---------- ---------- ---------- ---------- Total $ 20,095 $ 20,095 $ 7,185 $ 6,802 ========== ========== ========== ==========
Aggregate amortization expenses for the quarters ended March 31, 2002 and March 31, 2001, were $383,000 and $402,000, respectively. Estimated amortization expense for identifiable intangibles assets, other than goodwill, for each of the succeeding fiscal years are as follows: (In thousands) For year ending 12/31/03 $1,330 For year ending 12/31/04 $1,330 For year ending 12/31/05 $1,330 For year ending 12/31/06 $1,330 For year ending 12/31/07 $1,086 10. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, "Business Combinations," effective for fiscal years beginning after December 15, 2001. It requires the use of the purchase method of accounting for all transactions initiated after June 30, 2001. The Company applied the provisions of SFAS No. 141 to the September 2001 acquisition of Manro Performance Chemicals Limited. No acquisitions took place during the first three months of 2002. In April 2001, the EITF released Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." Issue No. 00-25 provides guidance regarding the reporting of consideration given by a vendor to a reseller of the vendor's products. This issue requires certain considerations from vendor to a reseller of the vendor's products be viewed: (a) as a reduction of the selling prices of the vendor's products and, therefore, be recorded as a reduction of revenue when recognized in the vendor's income statement, or (b) as a cost incurred by the vendor for assets or services received from the reseller and, therefore, be recorded as a cost or an expense when recognized in the vendor's income statement. Issue No. 00-25 is effective for fiscal years beginning after December 15, 2001. The Company's accounting policies are currently consistent with the guidance provided in this issue. Therefore, the adoption of Issue No.00-25 did not have an impact on the Company's financial position or results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002, supersedes previous guidance for financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. The Company is evaluating the effect of this standard on its financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 was effective January 1, 2002. Adoption of this standard did not have an impact on the Company's financial position or results of operations. 11. NEW CREDIT AND BANK TERM LOANS During March 2002, the Company's Stepan Europe subsidiary completed an $11.7 million (denominated in euros) bank term loan as long-term financing for a portion of the Manro acquisition. This loan will mature in seven years and bears interest at rates set quarterly, based on 90-day EURIBOR plus 1.825 percent . The U.S. parent company does not guaranty this loan. In May 2002, the Company replaced its existing U.S. bank revolver with a new loan agreement. The new revolver will provide up to $60 million of committed funding for general corporate purposes and may be drawn upon as needed through May 2, 2007. This arrangement provides for borrowings at various interest rates based, at the Company's option, on LIBOR plus a margin or at the bank's prime rate. 12. RECLASSIFICATIONS Certain amounts in the 2001 financial statements have been reclassified to conform to the 2002 presentation. Item 2 - Management's Discussion and Analysis of Financial Conditions and Results of Operations As discussed in Note 3 to the unaudited condensed consolidated financial statements, the Company has restated its financial statements for the three months periods ended March 31, 2002 and March 31, 2001, and for the year ended December 31, 2001. The accompanying Management's Discussion and Analysis gives effect to the restatement. The following is management's discussion and analysis of certain significant factors, which have affected the Company's financial condition and results of operations during the interim period included in the accompanying condensed consolidated financial statements. CRITICAL ACCOUNTING POLICIES Estimates We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America. Preparing our financial statements in accordance with generally accepted accounting principles requires us 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. Critical areas where estimates are required are noted below: Environmental Liabilities: It is the Company's accounting policy to record environmental liabilities 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, 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. Reserves for Doubtful Accounts: Accounts receivable are reported net of reserves for doubtful accounts. The Company determines the reserve requirement based upon the estimated collectibility of specific delinquent accounts, the Company's historical loss experience and the level of non-delinquent accounts receivable. Reserves for Obsolete and Slow Moving Inventories: The Company provides reserves for obsolete and slow moving inventory items. The reserve requirement is estimated based upon a review of specific inventory items that are identified as slow moving and consideration of potential salvage value and disposal costs. Because the foregoing liabilities and reserves are recorded based on estimates, actual amounts could differ from these estimates. Revenue Recognition Revenue is recognized upon shipment of goods to customers. The Company records shipping and handling billed to a customer in a sales transaction as revenue. Costs incurred for shipping and handling are recorded in cost of sales. Volume discounts due customers are recognized as earned and reported as reductions of revenue in the statement of income. Deferred Compensation The Company maintains deferred compensation plans. These plans allow management to defer receipt of their bonuses and directors to defer receipt of director fees until retirement or departure from the Company. The plans allow the participant to choose to invest in either Stepan common stock or a limited variety of mutual funds. These assets are owned by the Company and subject to the claims of general creditors of the Company. Beginning in 2002, these plans are accounted for under the requirements of the consensus reached by the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") in issue No. 97-14, "Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested". As described in Note 3, prior period financial statements have been restated to correctly present the accounting for the Company's deferred compensation plans in accordance with EITF No. 97-14. A description of the Company's deferred compensation accounting policy follows: The deferred compensation liability to the participants who elect deferral is recorded after the underlying compensation is earned, and recorded as expense. The purchase of Stepan common shares for the plans is recorded as a regular treasury stock purchase. The purchase of mutual funds is recorded as long term investments. Fluctuations in the value of these assets are recorded as adjustments to the deferred compensation liability and compensation costs included in administrative expense. The dividends, interest and capital gains from the mutual fund assets are recorded as investment income and included in "Other Income" as interest expense, net of investment income. Unrealized gains and losses resulting from market fluctuations of the mutual funds are recorded as other comprehensive income or expense in stockholders' equity. LIQUIDITY AND CAPITAL RESOURCES Net cash from operating activities for the first three months of 2002 totaled $0.3 million, an increase of $1.1 million compared to last year's first quarter cash use of $0.8 million. For the current year quarter, working capital consumed $13.4 million compared to a use of $15.3 million for the same quarter in 2001, reflecting typical seasonality for both years. Working capital changes for the current year quarter include: accounts receivable up by $6.2 million, inventories down by $4.5 million, accounts payable and accrued liabilities down by $9.7 million and other current assets up by $2.1 million. Capital spending totaled $6.5 million for the first quarter of 2002 compared to $5.2 million for the same quarter in 2001. Consolidated debt increased by $6.7 million during the first three months of 2002, from $120.3 million to $127.0 million. As of March 31, 2002, the ratio of long-term debt to long-term debt plus shareholders' equity was 43.0 percent compared to 41.5 percent at December 31, 2001. The Company maintains contractual relationships with its domestic banks that provide for revolving credit of up to $60 million, which may be drawn upon as needed for general corporate purposes through May 2, 2007 under a new revolving credit agreement dated May 3, 2002. The Company also meets short-term liquidity requirements through uncommitted domestic bank lines of credit. On May 3, 2002 the Company signed a new 5-year revolving credit agreement with three U.S. banks, including Bank One, N.A, Harris Trust and Savings Bank and Bank of America, N.A. This new facility replaces the previous revolving credit agreement and provides committed, unsecured funding of up to $60 million for working capital, capital expenditures, acquisitions and other corporate purposes. The new agreement contains provisions substantially equivalent to the previous agreement, including limitations on additional debt, investments and payment of dividends. The Company's foreign subsidiaries maintain committed and uncommitted bank lines of credit in their respective countries to meet working capital requirements as well as to fund capital expenditure programs and acquisitions. During March 2002, the Company's Stepan Europe subsidiary completed an $11.7 million (denominated in euros) bank term loan as long-term financing for a portion of the Manro acquisition. This loan will mature in 7 years and bears interest at rates set quarterly, based on 90-day EURIBOR. The U.S. parent does not guaranty this loan. The Company anticipates that cash from operations and from committed credit facilities will be sufficient to fund anticipated capital expenditures, dividends and other planned financial commitments for the foreseeable future. Any substantial acquisitions would require additional funding. There have been no material changes in the Company's market risks since December 31, 2001. RESULTS OF OPERATIONS Three Months Ended March 31, 2002 and 2001 Net income for the quarter ended March 31, 2002, was $3.8 million, or $0.39 per diluted share, up three percent from $3.7 million, or $0.38 per diluted share, reported for the same quarter a year ago. Net sales increased two percent to $181.2 million in the first quarter of 2002 from $176.9 million reported for the first quarter of 2001. Net sales by segment were: (Dollars in thousands) Three Months Ended March 31 ---------------------------------------- 2002 2001 % Change ---- ---- -------- Net Sales: Surfactants $ 146,816 $140,378 +5 Polymers 28,867 30,833 -6 Specialty Products 5,473 5,646 -3 --------- -------- Total $ 181,156 $176,857 +2 ========= ======== Surfactants net sales increased five percent between years. Foreign operations accounted for the improvement, reporting a $9.4 million, or 29 percent, increase in net sales due to a 39 percent rise in sales volume. Approximately $7.9 million of the foreign operations' increase in revenue was attributable to the fourth quarter 2001 acquisition of Stepan UK. Net sales for Latin America operations increased $2.1 million between quarters due to improved sales volume and higher average selling prices. European operations, excluding Stepan UK, reported a decrease of $0.9 million in net sales, primarily due to a decline in average selling prices. Domestic operations, which accounted for 71 percent of total surfactant revenues, reported a $3.0 million, or three percent, decline in net sales from $107.7 million in the first quarter of 2001 to $104.7 million in the same period in 2002. The decrease was based on a three percent drop in sales volume. Volumes to laundry and cleaning, personal care and distribution customers were all down from quarter to quarter. Surfactants gross profit increased 13 percent to $21.6 million in 2002 from $19.2 million a year ago. Domestic operations reported a $1.7 million, or 12 percent, increase due to an improvement in average margins that more than offset the three percent decline in sales volume. The improvement in average margins was due to improved sales mix and lower cost of raw materials and utilities. Gross profit for foreign operations rose $0.7 million, or 17 percent, between years. The previously noted acquisition of Stepan UK contributed $1.2 million to the increase, and Latin America operations generated higher gross profit due to improved sales volume and higher average margins. Canadian and European operations, excluding Stepan U.K., reported declines in gross profit due to lower average margins. Weaker sales mix accounted for the decline. Polymers net sales for the first quarter of 2002 decreased $1.9 million, or six percent, from $30.8 million in 2001 to $28.9 million in 2002. Global polyurethane polyols net sales fell 10 percent to $15.6 million for the first quarter of 2002 from $17.2 million a year ago. A five percent drop in sales volume coupled with a four percent decrease in average selling prices led to the decline. Domestic operations accounted for most of the volume and price declines. Polyurethane systems net sales declined 35 percent to $3.4 million in the first quarter of 2002 from $5.3 million for the first quarter of 2001. A 31 percent drop in sales volume accounted for most of the decline. Phthalic anhydride (PA) net sales increased 18 percent from $8.3 million in 2001 to $9.9 million in 2002. A 24 percent rise in sales volume led to the improvement and more than offset a four percent drop in average selling prices. Lower raw material costs, which were passed on to customers, led to the average selling price decline. Polymers gross profit was $5.8 million, which was $0.3 million, or five percent, higher than the $5.5 million reported in the first quarter of 2001. PA's gross profit increased $0.6 million to $1.0 million in 2002 from $0.4 million in 2001. Higher average margins and increased sales volume led to the improvement. Global polyols gross profit rose $0.4 million, or eight percent, to $4.9 million in the first quarter of 2002 from $4.5 million for the same period a year ago. Domestic operations gross profit increased $0.2 million on higher average margins, which more than offset the effect of lower sales volume. European gross profit rose $0.2 million due to improved average margins and higher sales volume. Polyurethane systems gross profit declined $0.6 million, or 45 percent, from quarter to quarter. Lower sales volume and average margins led to the decrease. Higher unit overhead costs resulting from lower production volumes contributed to the decreased average margins. Specialty products net sales dropped $0.2 million, or three percent, from year to year. The decrease was primarily due to lower sales volume. Gross profit increased $0.4 million, or 30 percent, from $1.2 million in the first quarter of 2001 to $1.6 million in the same period of 2002. The rise was primarily due to higher sales volume into the pharmaceutical industry. Operating expenses increased $3.5 million, or 20 percent, from $18.0 million in the first quarter of 2001 to $21.5 million in the same period of 2002. Administrative expenses rose $3.3 million, or 54 percent, between quarters. The $1.4 million increase in deferred compensation expense coupled with $1.9 million of expense related to the implementation of an enterprise resource planning system contributed to the higher domestic expense. The increase also reflected $0.4 million of expense for Stepan U.K., which was first consolidated in the fourth quarter of 2001, and higher general legal expenses of $0.2 million. Salaries and related payroll costs fell $0.7 million from quarter to quarter. Research and development expenses increased six percent from $5.6 million in the first quarter of 2001 to $6.0 million in the first quarter of 2002. Higher payroll expenses caused the increase. Marketing expenses declined two percent between years. Interest expense decreased six percent from year to year due to lower overall borrowing rates, partially offset by higher average debt levels. Income from the Philippines equity joint venture increased to $0.5 million in 2002 from $0.1 million a year ago. Higher sales volume and a more favorable sales mix led to the improvement. ENVIRONMENTAL AND LEGAL MATTERS The Company is subject to extensive federal, state and local environmental laws and regulations. Although the Company's environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent environmental regulation could require the Company to make additional unforeseen environmental expenditures. The Company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations. During the first quarter of 2002, Company expenditures for capital projects related to the environment were $0.4 million and should approximate $1.3 million for the full year 2002. These projects are capitalized and typically depreciated over 10 years. Recurring costs associated with the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing operations at our manufacturing locations were $1.8 million for the first three months of 2002. While difficult to project, it is not anticipated that these recurring expenses will increase significantly in the future. The Company has been named by the government as a potentially responsible party at 16 waste disposal sites where cleanup costs have been or may be incurred under the federal Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it may incur with respect to these sites. The Company has estimated a range of possible environmental and legal losses from $7.2 million to $34.3 million at March 31, 2002. The Company's reserve at March 31, 2002 and December 31, 2001 were $17.2 and $17.0 million, respectively. During the first three months of 2002, expenditures related to legal and environmental matters approximated $0.6 million. For certain sites, estimates cannot be made of the total costs of compliance or the Company's share of such costs; accordingly, the Company is unable to predict the effect thereof on future results of operations. In the event of one or more adverse determinations in any annual or interim period, the impact on results of operations for those periods could be material. However, based upon the Company's present belief as to its relative involvement at these sites, other viable entities' responsibilities for cleanup and the extended period over which any costs would be incurred, the Company believes that these matters will not have a material effect on the Company's financial position. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 141, "Business Combinations," effective for fiscal years beginning after December 15, 2001. It requires the use of the purchase method of accounting for all transactions initiated after June 30, 2001. The Company applied the provisions of SFAS No. 141 to the September 2001 acquisition of Manro Performance Chemicals Limited. No acquisitions took place during the first three months of 2002. In April 2001, the EITF released Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." Issue No. 00-25 provides guidance regarding the reporting of consideration given by a vendor to a reseller of the vendor's products. This issue requires certain considerations from vendor to a reseller of the vendor's products be viewed: (a) as a reduction of the selling prices of the vendor's products and, therefore, be recorded as a reduction of revenue when recognized in the vendor's income statement, or (b) as a cost incurred by the vendor for assets or services received from the reseller and, therefore, be recorded as a cost or an expense when recognized in the vendor's income statement. Issue No. 00-25 is effective for fiscal years beginning after December 15, 2001. The Company's accounting policies were consistent with the guidance provided in this issue. Therefore, the adoption of Issue No.00-25 did not have an impact on the Company's financial position or results of operations. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002, supersedes previous guidance for financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. The Company is evaluating the effect of this standard on its financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 was effective January 1, 2002. Adoption of this standard did not have an impact on the Company's financial position or results of operations. OTHER Except for the historical information contained herein, the matters discussed in this document are forward looking statements that involve risks and uncertainties. The results achieved this quarter are not necessarily an indication of future prospects for the Company. Actual results in future quarters may differ materially. Potential risks and uncertainties include, among others, fluctuations in the volume and timing of product orders, changes in demand for the Company's products, changes in technology, continued competitive pressures in the marketplace, outcome of environmental contingencies, availability of raw materials, foreign currency fluctuations and the general economic conditions. Item 3 - Quantitative and Qualitative Disclosures about Market Risk For information regarding our exposure to market risk, see the caption entitled "Liquidity and Capital Resources" in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," which is incorporated herein by reference. Part II OTHER INFORMATION Item 1 - Legal Proceedings The Company's site in Maywood, New Jersey and property formerly owned by the Company adjacent to its current site, were listed on the National Priorities List in September 1993 pursuant to the provisions of the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) because of certain alleged chemical contamination. Pursuant to an Administrative Order on Consent entered into between the United States Environmental Protection Agency (USEPA) and the Company for property formerly owned by the Company, and the issuance of an order by USEPA to the Company for property currently owned by the Company, the Company completed a Remedial Investigation Feasibility Study (RI/FS) in 1994. The Company submitted the Draft Final FS for Soil and Source Areas (Operable Unit 1) in September 2002. In addition, the Company has also submitted additional information regarding the remediation, most recently in October 2002. Discussions between USEPA and the Company are continuing. The Company is awaiting the issuance of a Record of Decision (ROD) from USEPA relating to the currently owned and formerly owned Company property and the proposed remediation. The final ROD will be issued sometime after the public comment period. In 1985, the Company entered into a Cooperative Agreement with the United States of America represented by the Department of Energy (Agreement). Pursuant to this Agreement, the Department of Energy (DOE) took title to radiological contaminated materials and was to remediate, at its expense, all radiological waste on the Company's property in Maywood, New Jersey. The Maywood property (and portions of the surrounding area) were remediated by the DOE under the Formerly Utilized Sites Remedial Action Program, a federal program under which the U.S. Government undertook to remediate properties which were used to process radiological material for the U.S. Government. In 1997, responsibility for this clean-up was transferred to the United States Army Corps of Engineers (USACE). On January 29, 1999, the Company received a copy of a USACE Report to Congress dated January 1998 in which the USACE expressed their intention to evaluate, with the USEPA, whether the Company and/or other parties might be responsible for cost recovery or contribution claims related to the Maywood site. Subsequent to the issuance of that report, the USACE advised the Company that it had requested legal advice from the Department of Justice as to the impact of the Agreement. By letter dated July 28, 2000, the Department of Justice advised the Company that the USACE and USEPA had referred to the Justice Department claims against the Company for response costs incurred or to be incurred by the USACE, USEPA and the DOE in connection with the Maywood site and the Justice Department stated that the United States is entitled to recovery of its response costs from the Company under CERCLA. The letter referred to both radiological and non-radiological hazardous waste at the Maywood site and stated that the United States has incurred unreimbursed response costs to date of $138 million. Costs associated with radiological waste at the Maywood site, which the Company believes represent all but a small portion of the amount referred to in the Justice Department letter, could be expected to aggregate substantially in excess of that amount. In the letter, the Justice Department invited the Company to discuss settlement of the matter in order to avoid the need for litigation. The Company believes that its liability, if any, for such costs has been resolved by the aforesaid Agreement. Despite the fact that the Company continues to believe that it has no liability to the United States for such costs, discussions with the Justice Department are currently ongoing to attempt to resolve this matter. The Company believes it has adequate reserves for claims associated with the Maywood site. However, depending on the results of the ongoing discussions regarding the Maywood site, the final cost of the remediation could differ from the current estimates. The Company has been named as a potentially responsible party (PRP) in the case USEPA v. Jerome Lightman (92 CV 4710 D. N. J.) which involves the Ewan and D'Imperio Superfund Sites located in New Jersey. Trial on the issue of the Company's liability at these sites was completed in March 2000. The Company is awaiting a decision from the court. If the Company is found liable at either site, a second trial as to the Company's allocated share of clean-up costs at these sites will likely be held in 2003. The Company believes it has adequate defenses to the issue of liability. In the event of an unfavorable outcome related to the issue of liability, the Company believes it has adequate reserves. On a related matter, the Company has filed an appeal to the United States Third Circuit Court of Appeals objecting to the lodging of a partial consent decree in favor of the United States Government in this action. Under the partial consent decree, the government recovered past costs at the site from all PRPs including the Company. The Company paid its assessed share but by objecting to the partial consent decree, the Company is seeking to recover back the sums it paid. Regarding the D'Imperio Superfund Site, USEPA has indicated it will seek penalty claims against the Company based on the Company's alleged noncompliance with the modified Unilateral Administrative Order. The Company is currently negotiating with USEPA to settle its proposed penalty against the Company but does not believe that a settlement, if any, will have a material impact on the financial condition of the Company. In addition, the Company also received notice from the New Jersey Department of Environmental Protection (NJDEP) dated March 21, 2001, that NJDEP has indicated it will pursue cost recovery against the alleged responsible parties, including the Company. The NJDEP's claims include costs related to remediation of the D'Imperio Superfund Site in the amount of $434,406 and alleged natural resource damages in the amount of $529,584 (as of November 3, 2000). The NJDEP settled such claims against the alleged responsible parties, resulting in the Company paying its portion of $83,061 in July 2002. This payment is subject to reallocation after the allocation phase of the above-identified trial, if any. The payment did not have a material impact on the financial condition of the Company. The Company received a Section 104(e) Request for Information from USEPA dated March 21, 2000, regarding the Lightman Drum Company Site located in Winslow Township, New Jersey. The Company responded to this request on May 18, 2000. In addition, the Company received a Notice of Potential Liability and Request to Perform RI/FS dated June 30, 2000, from USEPA. The Company has decided that it will participate in the performance of the RI/FS. However, based on the current information known regarding this site, the Company is unable to predict what its liability, if any, will be for this site. Item 4 - Submission of Matters to a Vote of Security Holders (a) The Company received a General NoticeCompany's 2002 Annual Meeting of Potential Liability letter fromStockholders was held on April 30, 2002. (b) At the USEPA dated October 18,annual meeting of the Company's shareholders on April 30, 2002, regarding the Liquid Dynamics Site located in Chicago, Illinois. The Company submitted a response to USEPA on November 5, 2002, stating that it is interested in negotiating a resolutionshareholders elected Thomas F. Grojean, James A. Hartlage and F. Quinn Stepan, Jr. as Directors of its potential responsibility at this site. Based on the fact that the Company, believes it is a de minimis PRP at this site, the Company believes that a resolution of its liability at this site will not have a material impact on the financial condition of the Company. As reported previously in the Company's Quarterly Report Form 10-Qall for the quarter ended September 30, 1994 and various subsequent reports, the Company received a Request for Information from the Commonwealth of Massachusetts Department of Environmental Protection relating to the Company's formerly-owned site at 51 Eames Street, Wilmington, Massachusetts. The Company received a copy of another Request for Information regarding this site dated October 18, 2002. The Company's response to this request is due on November 29, 2002. The Company is currently investigating this matter and therefore, cannot predict what its liability, if any, will be for this site. three-year terms. For Withheld --------- -------- Thomas F. Grojean 8,429,839 89,612 James A. Hartlage 8,299,442 22,009 F. Quinn Stepan, Jr. 8,302,024 217,427 Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit 99.1--Certification(4)R - Revolving Credit Agreement dated as of May 3, 2002 Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 99.2--Note Purchase Agreement dated as of September 1, 2002 Exhibit 99.3--Revolving Credit Agreement dated as of May 3, 2002 (b) Reports on Form 8-K Form 8-K reporting the effects of a changeregarding "Changes in accounting for deferred compensation plan as a correction of an error with restatement of the Company's three prior year financial statementsRegistrant's Certifying Accountant" has been filed on August 1, 2002.April 30, 2002 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STEPAN COMPANY /s/ James E. Hurlbutt James E. Hurlbutt Vice President and& Corporate Controller Date: November 14,December 23, 2002 CERTIFICATIONS I, F. Quinn Stepan, certify that: 1. I have reviewed this quarterly report on Form 10-Q10-Q/A of Stepan Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.report. Date: November 14,December 23, 2002 /s/ F. Quinn Stepan -------------------------------------------------------------------------------- F. Quinn Stepan Chairman, and Chief Executive Officer CERTIFICATIONS I, James E. Hurlbutt, certify that: 1. I have reviewed this quarterly report on Form 10-Q10-QA of Stepan Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.report. Date: November 14,December 23, 2002 /s/ James E. Hurlbutt ------------------------------------------------------------------------------- James E. Hurlbutt Vice President & Corporate Controller