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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: February 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission file number: 1-8803
MATERIAL SCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2673173
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 EAST PRATT BOULEVARD
ELK GROVE VILLAGE, ILLINOIS 60007
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 847-439-8270
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.02 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[_]
The aggregate market value of the voting stock of the registrant held by
shareowners (not including any voting stock owned by directors or officers of
the registrant (such exclusion shall not be deemed an admission that any such
person is an affiliate of the registrant)) of the registrant was approximately
$214,539,500 at May 23, 1997 (based on the closing sale price on the New York
Stock Exchange on such date, as reported by The Wall Street Journal Midwest
Edition).
At May 23, 1997, the registrant had outstanding an aggregate of 15,324,250
shares of its Common Stock.
Document Incorporated by Reference
Portions of the following document are incorporated herein by reference
into the indicated part of this Form 10-K:
Part of Form 10-K
Document into which incorporated
-------- -----------------------
Registrant's proxy statement for the Annual Part III
Meeting of Shareowners to be held on
July 17, 1997.
2
PART I
ITEM 1. BUSINESS
- ------------------
Introduction
- ------------
Material Sciences Corporation (unless otherwise indicated by the context,
including its subsidiaries, "MSC" or the "Company") develops, manufactures, and
markets continuously processed, coated, and laminated materials. These materials
are divided into four product groups: laminates and composites; specialty films;
coil coating; and electrogalvanizing. The Company's materials are used in motor
vehicles, building products, appliances, office equipment, furniture, lighting
products, packaging, and a wide range of other products. MSC develops
proprietary value-added materials and processes to meet specific customer and
market requirements and believes it has achieved product or technological
leadership in each of its four product groups.
Customers generally benefit from the energy savings and environmental
advantages of MSC's manufacturing processes and products. In the laminates and
composites product group and the specialty films product group, the Company is
primarily a manufacturer and marketer of its own proprietary products. In the
coil coating product group and electrogalvanizing product group, MSC generally
acts as a "toll coater" by processing its customers' metal for a fee, without
taking ownership of the metal.
Headquartered near Chicago, the Company, through its MSC Laminates and
Composites Inc. ("MSCLC"), MSC Specialty Films, Inc. ("MSCSF"), MSC Pre Finish
Metals Inc. ("PFM"), and MSC Walbridge Coatings Inc. ("MSCWC"), subsidiaries,
operates seven manufacturing plants. MSCLC operates one facility in Elk Grove
Village, Illinois. MSCSF operates a thin film sputter-deposition metallizing,
coating, and laminating facility in San Diego, California. PFM operates two
facilities in Elk Grove Village, Illinois, one facility in Morrisville,
Pennsylvania, and one facility in Middletown, Ohio. MSCWC, a subsidiary of PFM,
operates a facility in Walbridge, Ohio, on behalf of Walbridge Coatings, an
Illinois Partnership (the "Partnership"), formed among MSCWC, Inland Steel
Industries, Inc. ("Inland"), and Bethlehem Steel Corporation ("Bethlehem" or
"BSC").
Additional information concerning certain transactions and events is
included in Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7.
MSC, a Delaware corporation, was founded in 1971 and has been a publicly
traded company since 1984. The principal executive offices of the Company are
located at 2200 East Pratt Boulevard, Elk Grove Village, Illinois 60007, and its
telephone number at that address is (847) 439-8270.
3
Laminates and Composites
- ------------------------
Laminates and composites combine layers of steel or other metals with
layers of polymers or other materials to achieve specific properties, such as
noise and vibration reduction, thermal insulation, or high reflectivity in
lighting among others. These products consist of functionally engineered
materials that are designed to meet specific customer requirements. Products in
this group largely result from the Company's research and development efforts
and the proprietary equipment and processes designed and implemented by its
engineering and manufacturing organizations. The Company supplies its laminates
and composites to a variety of markets both in the United States and
internationally. The majority of these products are used in the automotive,
lighting, and appliance industries. The major products in this product group are
Polycore Composites(R), disc brake noise dampers, and Specular+(R).
Polycore Composites are multilayer composites consisting of various metals,
adhesives, and other components, typically consisting of metal outer skins
surrounding a thin viscoelastic core material. Polycore Composites are
engineered to meet a variety of needs. The Company believes it is a leader in
developing and manufacturing continuously processed coated materials that reduce
noise and create thermal barriers. The automotive industry is the largest market
for metal composites, which are being used to replace solid sheet metal parts,
including oil pans, valve covers, front engine covers, and heat shields.
Polycore Composites are also being evaluated for use in dash panels, floor pans,
and other internal components in order to help reduce road noise. Polycore
Composites are also found in a number of other products, including lawn mower
engines, air conditioners, computer disk drive covers, and appliances, and
numerous other uses are under evaluation.
The disc brake noise damper market developed as manufacturers moved to
asbestos-free brake linings. The increased brake noise these linings produce can
be virtually eliminated by the composite materials pioneered by the Company. The
Company believes it has over a 50% share of the domestic disc brake noise
dampers original equipment market. The Company also believes it is a significant
supplier to the emerging domestic aftermarket, which it estimates will grow to
be at least three times as large as the domestic original equipment market. Disc
brake noise damper sales for the 1997 fiscal year set another record as a result
of increased sales to General Motors Corporation ("General Motors"), Ford Motor
Company, and Chrysler Corporation, and due to further penetration into the disc
brake aftermarket.
Specular+, a laminate of silver-sputtered coated film and sheet metal, was
developed by the Company for the growing high-reflective fluorescent lighting
market. Because pure silver offers unsurpassed reflectivity and precise light
control, Specular+ produces virtually the same amount of light with only half
the bulbs of a typical white painted fixture. The result is a significant
reduction in the electricity cost for lighting.
The market for laminate and composite materials is competitive, both
domestically and internationally. There are competitors in each product market
served by the Company, some of which have greater resources than the Company.
The Company believes, however, that its
4
technology, product development capability, technical support, and customer
service place it in a strong competitive position in this market.
Specialty Films
- ---------------
The Company uses sputter-deposition technology to metallize wide rolls of
flexible substrates, generally consisting of thin polymeric films. In the
sputter-deposition process, a target material is disintegrated, in a vacuum
chamber by ion bombardment, into its component atoms or molecules, which are
then deposited onto the surface of the base material to be coated. Such base
material (commonly called the substrate or flexible web) can be polymeric film,
foil, fabric, or paper.
Sputter-deposition permits the use of a wide range of target materials,
singly or in combination (including metals, metal alloys, and metal oxides),
some of which cannot be applied in any other way. This flexibility allows
formation of composites of metals, dielectrics, and semiconductors. Sputter-
coated, flexible polymeric substrates may be designed to have specific
properties, including energy reflectance, transmission, absorption, and
electrical conductance. After the sputtering process, these materials are often
further enhanced with other coatings, adhesives, and films, resulting in a
multilayer laminate.
The Company's specialty films sales consist principally of solar control
and safety window films for use in the automotive aftermarket and building
applications. The Company sells these products through Solar Gard International,
Inc. ("SGI") and four independent distributors. The Company believes there are
significant growth opportunities in the building market, since there is
currently low market penetration, and industrial, commercial, and residential
building owners are becoming more familiar with the benefits of solar control
and safety window films. Solar control window films can lower energy bills year-
round by reducing heat penetration in the summer and retaining residual warmth
in the winter. They also reject ultraviolet light, thereby eliminating the
damage it causes. In commercial environments, window film generally improves
productivity by reducing glare and heat generation. Safety films offer security
by making glass shatter-resistant.
This product group includes the silver-sputtered, coated film used in
Specular+, although intercompany sales of such film are excluded from this
product group's sales. The Company also has developed other products for the
high-reflective fluorescent lighting market. In addition, the Company
participates in the microwaveable food packaging market with its Insceptor(R)
film products that offer precise control of heating, browning, and crisping of
food during the cooking process. The Company has established agreements with
rigid and flexible packaging companies to supply certain customers in the
domestic market. This product group also includes security seals, which are used
in tamper-evident packaging and anti-counterfeit measures. In addition, the
Company manufactures sputtered films for photoreceptor belts used in paper
copiers and digital imaging films used in printing plates.
On May 12, 1997, a subsidiary of the Company signed a letter of intent to
purchase designated assets of a specialty films distribution business in
Australia.
5
During the first quarter of fiscal 1997, the Company purchased certain
assets of a distributor of solar control and safety window film products with
operations primarily in the Western United States and throughout the world. In
September 1995, MSC acquired all of the outstanding capital stock of SGI.
Headquartered in Largo, Florida, SGI was the largest independent distributor of
professionally installed solar control window film products in the world prior
to the acquisition. It was also MSC's largest distributor, with a relationship
going back to 1980. SGI had eight wholly owned distribution centers across the
United States, one center in each of Canada and England, and a joint venture
operation in Singapore at the time of acquisition. SGI currently distributes
products in over sixty countries.
MSC believes that there are four major domestic companies producing
competitive specialty film materials in addition to the Company. Some of these
competitors have greater resources than the Company, including patented
technology. The Company competes on the basis of a number of factors, including
product performance and quality, completeness of product offering, new product
development capabilities, service, and price. The Company believes that it is
competitive in these areas.
Coil Coating
- ------------
The Company believes that coil coating is the most environmentally safe and
energy-efficient method available for applying paint and other coatings to
metal. This continuous, highly automated, high-speed process applies coatings to
wide coils of metal. In the process, sheet metal is unwound from a coil,
cleaned, chemically treated, coated, oven-cured, and rewound into coils for
shipment to manufacturers that fabricate the coated metal into finished products
that are sold into a variety of industrial and commercial markets. The coatings
are designed to produce both protective and decorative finishes. Through
techniques such as printing, embossing, and striping, special finishing effects
can also be created. The finished product (i.e. prepainted or coil coated metal)
is a versatile material capable of being drawn, formed, bent, bolted, riveted,
chemically bonded, and welded. The Company generally acts as a "toll coater" by
processing coils for steel mills, or their customers, without taking ownership
of the metal. The Company charges by weight or surface area processed.
The Company's coil coated products are used by manufacturers in building
products, heating and air conditioning, fuel tanks, lighting, truck trailer,
above-ground swimming pools, and other products. The Company's strategy in its
coil coating business has been to produce high-volume, competitive coated
products at low cost, as well as to identify, develop, and produce specialty
niche products meeting specific customer requirements. The Company also offers
proprietary products such as Weldrite(R), a weldable coating; Enduratex(R), an
embossed plastisol coated material capable of being stained to simulate the look
of wood; and ER6, a patented high temperature non-stick coating designed for
bakeware and cookware products.
Coil coating technology reduces the environmental impact of painting and
reduces manufacturers' energy needs. In coil coating processes, over 95% of the
coating material is applied, in contrast with the significant waste from
"overspray" typical in post-fabrication painting. The energy required to cure
coil coated metal is substantially less than that required by
6
other coating methods. These savings are achieved because of high-speed material
processing and because 90% to 95% of the coatings' volatile organic compounds
are recycled back into the curing ovens and used as fuel.
Manufacturers that use prepainted materials can eliminate or significantly
reduce on-site post paint lines and the associated compliance with complex
environmental and other regulations. Prepainted materials facilitate the
adoption of just-in-time and continuous process manufacturing techniques which
can result in improvements to work in process inventory, plant utilization, and
productivity. Since prepainted metal is cleaned, treated, and painted while
flat, the result is a more uniform and higher quality finished part than can be
achieved by even the best post-fabrication painting operation. There are no
hidden areas where paint is difficult to reach and where corrosion can begin
after the product has been marketed. As a result, companies using prepainted
material generally benefit from lower manufacturing costs and improved product
quality. Use of prepainted metal may, however, require product design or
fabrication changes and more stringent handling procedures during manufacturing.
The coil coating process competes with other methods of producing coated
sheet metal, principally post-fabrication finishing methods such as spraying,
dipping, and brushing. The Company believes that coil coating accounts for
approximately 10% of all the sheet metal now being coated. The Company expects
that, although there can be no assurance in this regard, the market penetration
of coil coated metal will increase as a result of more stringent environmental
regulation and the energy efficiency, quality, and cost advantages provided by
prepainted metal as compared to post-fabrication painting, particularly in high-
volume manufacturing operations. The Company estimates that there are
approximately 85 companies operating coil coating lines in North America. The
Company believes it is one of the largest coil coaters, with approximately 15%
of the total tons processed in the United States in calendar 1996. Competition
in the coil coating industry is heavily influenced by geography, due to the high
costs involved in transporting sheet metal coils. Within geographic areas, coil
coaters compete on the basis of quality, price, customer service, technical
support, and product development capability.
Electrogalvanizing
- ------------------
Electrogalvanized ("EG") steel is the primary corrosion resistant steel
product used in automobile and light truck bodies. Significant domestic demand
for EG steel started in 1985 and is estimated to have been 3.9 million tons in
calendar 1996. The Company believes that demand will continue to grow as
automobile manufacturers respond to consumer demands for longer warranty
protection against rust and, to a lesser extent, due to increased applications
for EG steel in the appliance and other non-automotive industries.
MSC participates in the electrogalvanizing market through its 50% financial
interest in and role as operator of the Partnership. The term of the Partnership
ends on June 30, 1998. Through the Partnership, MSC electrogalvanizes zinc and
zinc-alloy coatings and applies organic coatings onto sheet metal. There is
growing demand by the automotive industry for a full complement of products such
as zinc-nickel, zinc-nickel with a thin organic coating, and other organic
coated zinc-nickel products such as fuel tanks that offer additional protection
against corrosion. As a
7
result, a shift from pure zinc to differentiated materials has commenced. These
newer materials are particularly in demand by Japanese automakers in the United
States - currently among the end-use customers for the Partnership's services.
The Partnership's facility is the only facility in North America capable of
meeting, in a single pass through its line, the demand for this full complement
of products.
Sales to the Partnership represented 21%, 23%, and 22% of MSC's net sales
in fiscal 1997, 1996, and 1995, respectively. MSC's net sales for
electrogalvanizing consists of various fees charged to the Partnership for
operating the facility. Such fees are the predominant financial return to MSC
from its participation in the Partnership. There are both fixed fees (for
selling, general and administrative expenses and a portion of the financing,
taxes, and insurance) and variable fees based on production volumes (for the
balance of the financing, operating expenses, and profit). The Company pays the
actual costs of operating the facility, so the overall profitability of its
participation in the Partnership depends on its skill and efficiency. The
operating expense portion of the variable fee is based on standard costs, which
may be adjusted to reflect matters beyond the Company's control, upon agreement
of the partners or informal arbitration. The fees charged to Bethlehem and
Inland by the Partnership for services fund the standard operating costs of the
Partnership (including the Company's per ton profit allowance) and, at a defined
contractual production volume, all of the Partnership's financing costs. At
lesser levels of production, the Company is obligated to fund a portion (not to
exceed 50%) of the Partnership's financing costs.
Bethlehem and Inland are two of the major suppliers of sheet steel to the
United States automobile industry. The orders for the Partnership's toll coating
services are primarily and independently generated by Bethlehem and Inland for
their respective customers, although the Partnership may also accept orders from
outside parties to the extent of available capacity and production schedules.
Through fiscal 1997, third party sales have not been significant. The sales and
marketing responsibilities of the Partnership are currently split between
Bethlehem and Inland at 76% and 24%, respectively. In addition to Bethlehem's
historic production at the facility, BSC transferred its in-house
electrogalvanizing production from its Burns Harbor facility to the Partnership
in fiscal 1996. During fiscal 1997, Inland utilized only 9% of available line
time; Bethlehem and other customers utilized the balance of Inland's available
line time. Inland is reviewing its future involvement in the Partnership, and
therefore, there is no assurance that Inland will utilize its full 24% of
available line time on a long-term basis. The Company believes that any short-
term disruption in volume that might be caused by a continued reduction in
Inland's line time requirements could be replaced by additional volume from
Bethlehem and other customers.
Bethlehem and Inland have rights to purchase all the facility's production
for the 12-year life of the Partnership. The Company's potential alternatives
upon expiration of the Partnership term in June 1998, include, among other
things, extension of the Partnership, purchase of the facility, or sale of the
facility. The partners are actively discussing the various alternatives.
Competition in the production and sale of EG steel for the automotive
industry comes from other steel companies that, either directly or through joint
ventures, produce EG steel on eight manufacturing lines in the United States,
including Inland's other facility. Limited quantities of EG
8
steel also are imported from foreign steel suppliers. The Company believes the
Partnership's line is well positioned to serve the current and expected end-
users of EG steel. The Company is unable to determine the effect, if any, on the
market resulting from the existence of excess capacity, the entrance of
additional capacity, improved galvanizing technology, or the substitution of
other materials.
International
- -------------
The Company believes that significant opportunities exist internationally,
particularly for the Company's disc brake noise damper products, Polycore
Composites, Specular+, and solar control and safety window film. As a percent of
net sales, direct export sales represented 11%, 8%, and 8% in fiscal 1997, 1996,
and 1995, respectively.
The Company has certain distribution agreements and licensing and royalty
agreements with agents and companies in Europe, Latin America, and the Far East
that cover disc brake noise dampers, Polycore Composites, and lighting products.
These agreements provide the Company with opportunities for market expansion in
those geographic areas.
Approximately 39% of the specialty films' products are sold to export
markets directly or through domestic distributors. The Company believes that
export shipments will continue to grow with the expansion of its distribution
network through strategic acquisitions and as emerging markets increasingly
realize the energy saving and ultraviolet light blocking benefits this product
provides.
The Company is pursuing a variety of other business relationships,
including direct sales, distribution agreements, licensing, and other forms of
partnering to increase its international sales and expand its international
presence.
Marketing and Sales
- -------------------
The Company markets its laminates and composites and coil coating products,
services, and technologies primarily through its in-house sales organization and
also through independent distributors, agents, and licensees. The Company
focuses its sales efforts on manufacturers, but also sells to steel mills and
their intermediaries, metal service centers, and metal brokers. Bethlehem and
Inland are the primary marketing partners for EG steel. The Company sells its
specialty films' products primarily through its internal distribution network,
as well as domestic and international distributors. All of the Company's selling
activities are supported by technical service departments that aid the customer
in the choice of available materials and their use in the customer's
manufacturing process.
The Company estimates that customers in the transportation industry were
the end-users for approximately 52%, 53%, and 52% of MSC's net sales in fiscal
1997, 1996, and 1995, respectively. The Company's direct sales to General Motors
were in excess of 5% during each of the last three fiscal years. In addition,
the Company believes that it has significant indirect sales to General Motors in
its coil coating and electrogalvanizing product groups. Due to concentration in
9
the automobile industry, the Company believes that sales to other individual
automobile companies, including indirect sales, are significant.
On June 30, 1993, the Company acquired the assets of a coil paint facility
owned by AK Steel Corporation ("AKS"), in Middletown, Ohio. The Company also
entered into a tolling agreement in which MSC agrees to provide AKS with coil
coating and other ancillary services from the facility of up to approximately
75% of the facility's capacity for 10 years. The balance of capacity is being
marketed by the Company's sales force and shifting production from other MSC
plants that, at times, reach their capacity. AKS represented 5%, 8%, and 10% of
MSC's net sales in fiscal 1997, 1996, and 1995, respectively.
The Company's backlog of orders as of February 28, 1997, was approximately
$48.5 million, all of which is expected to be filled during the remainder of the
current fiscal year. The Company's backlog was approximately $49.9 million as of
February 29, 1996.
MSC is generally not dependent on any one source for raw materials or
purchased components essential to its business, and it is believed that such raw
materials and components will be available in adequate quantities to meet
anticipated production schedules.
MSC believes that its business, in the aggregate, is not seasonal. Certain
of its products, however, sell more heavily in some seasons than in others.
Environmental Matters
- ---------------------
The Company is subject to federal, state, and local environmental laws. As
a result of these laws, the Company has incurred, and will continue to incur in
the future, significant capital expenditures and operating costs and charges.
The Company is involved in two Superfund sites located in Gary and Kingsbury,
Indiana. Although the ultimate cost of the Company's share of necessary cleanup
expenses is not yet known, the Company believes that it is adequately reserved
for environmental matters given the information currently available. See Note 6
of the Notes to the Consolidated Financial Statements entitled "Environmental
and Legal Matters," which is included in Item 8. The Company cannot predict the
impact of new or changed laws or regulations.
The Company believes it operates its facilities and conducts its business,
in all material respects, in accordance with all environmental laws presently
applicable to its facilities. The Company spent approximately $2.1 million in
fiscal 1997, and has budgeted approximately $3.1 million during fiscal 1998, for
maintenance or installation of environmental controls at the Elk Grove Village,
Illinois; Walbridge, Ohio; Morrisville, Pennsylvania; Middletown, Ohio; and San
Diego, California facilities. See Item 3 "Legal Proceedings" below.
Research and Development
- ------------------------
Management estimates that it spent approximately $6.7 million in fiscal
1997, $6.7 million in fiscal 1996, and $5.4 million in fiscal 1995 for product
and process development activities.
10
While it considers its various patents, licenses, and trademarks to be
important, it does not believe that the loss of any individual patent, license,
or trademark would have a material adverse effect upon its business.
Employees
- ---------
At February 28, 1997, the Company had 988 full-time employees. Of these,
approximately 673 were engaged in manufacturing, 156 in marketing and sales, 109
in administrative and clerical positions, and 50 in process and product
development.
The employees at the San Diego, California; Walbridge, Ohio; and SGI
facilities are not represented by a union. Hourly manufacturing employees at Elk
Grove Village, Illinois; Morrisville, Pennsylvania; and Middletown, Ohio, are
covered by separate union contracts expiring in February 2002, November 2000,
and October 1997, respectively. The Company believes that its relations with its
employees are good.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of May 23, 1997, are as follows:
Position and
Name Age Year First Elected
---- --- ------------------
G. Robert Evans 65 Chairman of the Board, MSC since January
1997; previously Chairman and Chief Executive
Officer, MSC since July 1991; previously
Chairman, President, and Chief Executive
Officer, MSC since February 1991.
Gerald G. Nadig 52 President and Chief Executive Officer, MSC
since January 1997; previously President and
Chief Operating Officer, MSC since July 1991;
previously President and Chief Operating
Officer, PFM since 1990; previously Executive
Vice President, PFM since 1989.
Thomas E. Moore 51 Executive Vice President and Chief Operating
Officer, MSC since May 1997; previously
Executive Vice President and General Manager,
MSCWC since 1993; previously General Manager,
MSCWC since 1984.
James J. Waclawik, Sr. 38 Vice President, Chief Financial Officer, and
Secretary, MSC since October 1996; previously
Vice President and Controller, MSC since July
1991; previously Vice President and
Controller, PFM since 1989; previously
Controller, PFM since 1988.
Frank D. Graziano 64 Senior Vice President, Technology, MSC since
July 1991; previously Senior Vice President,
Research and Development, PFM since 1990;
previously Senior Vice President, Marketing,
Research and Development, PFM since 1988.
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Position and
Name Age Year First Elected
---- --- ------------------
Anton F. Vitzthum 62 Senior Vice President, Manufacturing, MSC
since March 1994; previously Senior Vice
President, Operations, PFM since 1990;
previously Vice President, Manufacturing, PFM
since 1984.
Frank J. Lazowski, Jr. 57 Vice President, Human Resources, MSC since
July 1991; previously Vice President, Human
Resources, PFM since 1988.
Robert J. Mataya 54 Vice President, Business Planning and
Development, MSC since July 1991; previously
Vice President, Business Planning and
Development, PFM since 1990; previously Vice
President, Marketing, PFM since 1986.
David J. DeNeve 29 Controller, MSC since October 1996;
previously Accounting and Tax Manager, MSC
since November 1995; previously Financial
Analyst, MSC since June 1994.
David A. Fletcher 43 President and Chief Operating Officer, MSCSF
since September 1993; previously Vice
President, Research and Development, MSCSF
since 1989.
Ronald L. Millar 46 Group Vice President and General Manager,
MSCLC since November 1995; previously Vice
President, PFM since 1991.
Kelly M. Nammari 49 Group Vice President and General Manager, PFM
since November 1995; previously Vice
President of Eastern Operations, PFM since
1993; previously Vice President and General
Manager, PFM Morrisville since 1991.
Edward A. Williams 38 Group Vice President and General Manager,
MSCWC since May 1997; previously Plant
Manager, MSCWC since 1993.
13
Prior to joining the Company in 1994, Mr. DeNeve was on the audit staff of
Arthur Andersen LLP. Mr. Williams was Director of Pin Mill Products, National
Steel Midwest Division, prior to joining the Company and was Superintendent,
Armco Steel Company from 1989 until 1993.
Mr. Evans serves as a director of Consolidated Freightways, Inc., Fiberboard
Corporation, and Swift Energy Company.
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ITEM 2. PROPERTIES
- ------- ----------
The Company owns or leases facilities with an aggregate of approximately
1,288,000 square feet of space. The Company considers all of such facilities to
be in good operating condition. In addition to the principal physical properties
used by the Company in its manufacturing operations as summarized in the table
below, the Company leases numerous sales and administrative offices pursuant to
short-term leases.
Approximate
Area in Lease Expiration
Location Square Feet (or Ownership)
- --------------------- ----------- ----------------
Elk Grove Village, Illinois 58,000 Owner
Plant No. 1
Elk Grove Village, Illinois 205,000 Owner
Plant No. 2
Elk Grove Village, Illinois 233,000 Owner
Plant No. 3
Morrisville, Pennsylvania 121,000 Owner
Middletown, Ohio 170,000 Owner
San Diego, California 65,000 February 2002
Walbridge, Ohio 311,000 June 2003(1)
(1) The lease is renewable, at the Company's option, for additional periods
totaling 25 years. Since April 1, 1986, this facility has been subleased to the
Partnership and the sublease is scheduled to expire on June 30, 1998 (see
"Electrogalvanizing").
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
See Note 6 of the Notes to Consolidated Financial Statements entitled
"Environmental and Legal Matters," included in Item 8.
15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY OWNERS
- -----------------------------------------------------------
There were no matters submitted to the Company's security owners during the
fourth quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
- ------- RELATED SHAREOWNER MATTERS
---------------------------------------------
The Company's common stock, $.02 par value, is listed on the New York Stock
Exchange under the symbol "MSC." The table below sets forth, by fiscal quarter,
the high and low sales prices of the Company's common stock during its past two
fiscal years.
Fiscal Fiscal
Year Quarter High Low
------ ------- ---- ---
1997 1st 16 7/8 14 1/2
2nd 17 1/4 15
3rd 18 15 1/8
4th 21 15 1/2
Fiscal Fiscal
Year Quarter High Low
------ ------- ---- ---
1996 1st 19 3/4 15 1/2
2nd 22 3/8 16 3/4
3rd 19 3/8 12 1/8
4th 15 12 5/8
There were 1,147 owners of record of the Company's common stock at the
close of business on May 23, 1997. MSC has not paid cash dividends other than a
nominal amount in lieu of fractional shares in connection with stock dividends.
Management currently anticipates that all earnings will be retained for
development of the Company's business. If business circumstances should change,
the Board of Directors may declare and instruct the Company to pay cash
dividends.
16
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
Fiscal Year
(Dollars and number of shares in -----------------------------------------------------------------
thousands, except per share data) 1997 1996 1995 1994 1993
(restated)(5)
- -------------------------------------------------------------------------------------------------------------------
Operating Results
Net Sales $278,017 $236,150 $227,658 $187,701 $156,230
Gross Profit 74,208 55,596 62,171 45,752 38,828
Selling, General and Administrative Expenses 47,340 37,549 35,679 27,409 24,992
Income from Operations 26,868 13,847 26,492 18,343 13,836
Net Income(1)(2) 16,236 8,497 16,740 11,802 7,617
Per Share Information:(3)
Net Sales $ 17.82 $ 15.30 $ 14.94 $ 12.47 $ 11.67
Net Income 1.04 0.55 1.10 0.78 0.56
Cash Dividends - - - - -
Shareowners' Equity 8.55 7.66 6.92 5.74 5.48
Market Price:
High $ 21.00 $ 22.38 $ 17.75 $ 17.63 $ 12.00
Low $ 14.50 $ 12.13 $ 13.75 $ 10.63 $ 7.88
Close $ 16.38 $ 14.38 $ 15.88 $ 17.63 $ 11.00
P/E (High) 20.2x 40.7x 16.1x 22.6x 21.4x
P/E (Low) 13.9x 22.1x 12.5x 13.6x 14.1x
- -------------------------------------------------------------------------------------------------------------------
Financial Position
Total Assets $254,089 $200,026 $172,357 $151,592 $128,711
Working Capital 31,154 23,716 22,706 29,026 37,749
Net Property, Plant and Equipment 154,386 110,882 92,913 72,048 52,151
Long-Term Debt, Less Current Portion 54,761 16,815 6,933 8,853 10,696
Shareowners' Equity 133,373 118,226 105,404 86,464 73,318
Total Capital Invested 191,884 138,055 114,240 97,087 85,689
- -------------------------------------------------------------------------------------------------------------------
Key Ratios
Gross Profit as a % of Net Sales 26.7% 23.5% 27.3% 24.4% 24.9%
SG&A Expenses as a % of Net Sales 17.0% 15.9% 15.7% 14.6% 16.0%
Income from Operations as a % of Net Sales 9.7% 5.9% 11.6% 9.8% 8.9%
Net Income as a % of Net Sales 5.8% 3.6% 7.3% 6.3% 4.9%
Research and Development as a % of Net Sales 2.4% 2.8% 2.4% 2.1% 2.0%
Effective Income Tax Rate 38.5% 38.2% 38.5% 38.0% 37.0%
Current Ratio 1.7 1.6 1.6 1.9 2.5
Long-Term Debt to Shareowners' Equity 41.1% 14.2% 6.6% 10.2% 14.6%
Total Debt as a % of Total Capital Invested 30.5% 14.4% 7.7% 10.9% 14.4%
Return on Average Shareowners' Equity 12.9% 7.6% 17.4% 14.8% 13.2%
Return on Average Total Capital Invested 9.8% 6.7% 15.8% 12.9% 10.6%
- -------------------------------------------------------------------------------------------------------------------
Other Statistics
Net Cash Provided by Operating Activities $ 21,641 $ 19,542 $ 25,020 $ 18,589 $ 12,827
Capital Expenditures, Net 55,599 27,467 29,374 14,894 11,444
Operating Free Cash Flow(4) (33,958) (7,925) (4,354) 3,695 1,383
EBITDA 40,916 24,731 35,363 25,472 19,954
Depreciation and Amortization 14,323 11,098 8,747 7,385 6,455
Sales per Employee 281 268 246 227 231
Weighted Average Number of Common and
Common Equivalent Shares Outstanding(3) 15,605 15,437 15,241 15,057 13,383
Shareowners of Record 999 1,012 1,110 796 891
Number of Employees 988 882 925 826 675
- -------------------------------------------------------------------------------------------------------------------
(1) In 1996, the Company recorded a pretax special charge against income of
$4,200 for the restructuring of its four product groups.
(2) In 1993, MSC recorded the cumulative effect of adopting SFAS No. 106 and
No. 109, which reduced net income by $1,283, net of income taxes, or $0.17
per share.
(3) The above data has been restated to reflect two separate one-half share
per share dividends to shareowners of record on March 16, 1992 and
June 30, 1994.
(4) This figure represents net cash provided by operating activities less
capital expenditures, net.
(5) See Note 2 of the Notes to Consolidated Financial Statements which is
included in Item 8.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands)
------------------------------------------------------------
For the fiscal years ended February 28 or 29,
Net Sales Summary 1997 1996 1995
- ------------------------ ---- ---- ----
Product Group: Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- -------
Laminates and Composites $ 66,483 24% $ 56,790 24% $ 57,722 25%
Specialty Films 36,999 13% 23,662 10% 19,134 8%
Coil Coating 115,857 42% 100,652 43% 101,206 45%
Electrogalvanizing 58,678 21% 55,046 23% 49,596 22%
-------- ---- -------- ---- -------- ----
$278,017 100% $236,150 100% $227,658 100%
======== ==== ======== ==== ======== ====
For the fiscal years ended February 28 or 29,
Results of Operations 1997 1996 (restated) 1995
- -------------------------------------------- ----- --------------- ----
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 73.3 76.5 72.7
------ ------ ------
Gross Profit 26.7% 23.5% 27.3%
Selling, General and Administrative Expenses 17.0 15.9 15.7
Special Charge -- 1.7 --
------ ------ ------
Income from Operations 9.7% 5.9% 11.6%
Total Other (Income) and Expense, Net 0.2 0.1 (0.3)
------ ------ ------
Income Before Income Taxes 9.5% 5.8% 11.9%
Income Taxes 3.7 2.2 4.6
------ ------ ------
Net Income 5.8% 3.6% 7.3%
====== ====== ======
Material Sciences Corporation ("MSC" or "Company") operates in one business
segment comprised of the following four product groups: laminates and
composites, specialty films, coil coating, and electrogalvanizing.
The preceding tables provide a summary of net sales and the percent of net sales
of MSC's product groups, and a summary of MSC's results of operations as a
percent of net sales.
Accounting Irregularities and Restatement of Financial Statements
As described in Note 2 of the Notes to Consolidated Financial Statements, on
April 7, 1997, the Company announced that it had discovered accounting
irregularities at one of its operating units. An independent investigation has
confirmed that the controller of that operating unit acted alone and altered and
falsified that unit's financial reports beginning in fiscal 1995. Since
learning of the accounting irregularities, the Company has taken actions
intended to prevent a recurrence of this situation.
The Company's financial statements for fiscal 1996 and the quarterly financial
information for fiscal 1997 and 1996 have been restated to reflect the
correction of the accounting irregularities. The pretax effect of this incident
on results of operations for fiscal 1995 was $1,847 and was not deemed material.
18
The amount related to this period is reflected in the first quarter of fiscal
1996. After restatement, the pretax effect of the total understatement of cost
of sales related to the accounting irregularities amounted to $2,557 during the
first three quarters of fiscal 1997 and $5,638 in fiscal 1996.
The Information in the Discussion Which Follows is Presented After Restatement
of the Financial Statements
Fiscal 1997 Compared with Fiscal 1996
Net Sales
Net sales in fiscal 1997 grew 17.7% over fiscal 1996 as all four product groups
contributed to the increase. Sales of laminates and composites increased by
17.1%; specialty films 56.4%; coil coating 15.1%; and electrogalvanizing 6.6%.
Specialty films sales include nine months of activity from the May 31, 1996
acquisition of certain assets of a former West Coast distributor and our first
full year of sales from the September 7, 1995 acquisition of Solar Gard
International, Inc. ("SGI").
Laminates and Composites
Fiscal 1997 net sales of laminates and composites grew 17.1% to $66,483 from
$56,790 in fiscal 1996. Sales of Polycore Composites(R) increased due to a
higher demand to reduce noise by computer disk drive and automotive
manufacturers. Disc brake noise damper material sales were up from fiscal 1996,
as a result of increased demand in the replacement market, as well as an
increase in original equipment manufacturer ("OEM") sales. Specular+(R) sales
were flat compared to the prior fiscal year, as a result of a general market
softness and lower utility rebates offered for high-reflective lighting
fixtures. In addition, MSC completed the construction of a new, high-speed coil
coating line located in Elk Grove Village, Illinois, which was commissioned
during the first quarter of fiscal 1998. Going forward, this new coil coating
line will increase production capacity for laminates and composites products, as
we will be able to transfer coil coating products from our existing lines in Elk
Grove Village to our new coil coating line.
Specialty Films
Specialty films net sales increased 56.4% to $36,999 in fiscal 1997 from $23,662
in fiscal 1996. Included in fiscal 1997 are sales for nine months from the
acquisition of certain assets of a former West Coast distributor during the
first quarter of fiscal 1997, and sales from the SGI acquisition for the full
year of fiscal 1997, as compared to six months in fiscal 1996. The
acquisitions, due to a higher average selling price and an increase in volume,
were primarily responsible for strong gains in solar control and safety window
film, both domestically and internationally. In addition, sales of several new
products contributed to the growth.
Coil Coating
Coil coating net sales of $115,857 increased 15.1% from $100,652 in the previous
fiscal year. The major contributor to the growth was the increase in shipments
to the building, appliance, and transportation markets. The Company
successfully completed the final phase of its Middletown, Ohio expansion program
in the second quarter of fiscal 1997. In addition, our new, high-speed coil
coating line will both increase production capacity, as well as improve our
ability to compete
19
as a low cost producer in current and new markets. Our coil coating business is
well positioned for long-term growth.
Electrogalvanizing
MSC participates in the electrogalvanizing market through Walbridge Coatings
(the "Partnership"), a partnership among subsidiaries of MSC, Bethlehem Steel
Corporation ("Bethlehem" or "BSC"), and Inland Steel Industries, Inc.
("Inland"). MSC's net sales for electrogalvanizing consist of various fees
charged to the Partnership for operating the facility. Bethlehem and Inland are
primarily responsible for the sales and marketing activities of the Partnership.
The Company's primary financial benefits from the Partnership are the revenues
billed to Walbridge Coatings for operating the facility. These revenues
represent 21%, 23%, and 22% of the Company's net sales in fiscal 1997, 1996, and
1995, respectively. The profitability for operating the facility is comparable
to the Company's overall operating results. Under the equity method of
accounting, the Company includes its portion of the Partnership Net Loss in
Equity in Results of Partnership shown in the Consolidated Statements of Income.
The amounts do not directly correlate to the Company's 50% ownership interest
due to contractual allocation requirements of the Partnership agreement. The
Company's potential alternatives upon expiration of the Partnership include,
among other things, extension of the Partnership, purchase of the facility, or
sale of the facility. The partners are actively discussing the various
alternatives. The Company believes its investment in the Partnership is
realizable.
MSC's electrogalvanizing sales increased 6.6% to $58,678 in fiscal 1997 from
$55,046 in fiscal 1996, while electrogalvanizing volume increased 5.3% to
477,888 tons in fiscal 1997 from 453,710 tons in the prior fiscal year. The
increase in sales and volume resulted from the shortened annual maintenance
shutdown, improved yields and efficiencies, and higher line utilization.
The sales and marketing responsibilities of the Partnership are split between
Bethlehem and Inland at approximately 76% and 24%, respectively. During fiscal
1997, Inland utilized only 9% of available production line time rather than its
24% share. Bethlehem and other customers utilized this additional available
line time. In fiscal 1998, we expect more production line time will be utilized
by customers other than Bethlehem and Inland. Inland is reviewing its future
involvement in the Partnership, and therefore, there is no assurance that Inland
will utilize its 24% share of available line time on a long-term basis. The
Company believes that any short-term disruption in volume that might be caused
by a reduction in Inland's line time requirements could be replaced by
additional volume from Bethlehem and other customers.
Gross Profit
MSC's gross profit percentage increased to 26.7% in fiscal 1997 from 23.5% in
fiscal 1996. This increase was primarily due to incremental gross profit margin
related to the SGI acquisition, higher line utilization, and improved labor and
overhead spending for volumes produced. This increase was offset, in part, by
changes in the product mix, a more competitive pricing environment, and lower
productivity at our Middletown, Ohio operation, due to scheduled shutdowns and a
large number of new business qualification trials. During the second quarter of
20
fiscal 1996, the Company reached an agreement with its insurers regarding a
casualty and business interruption loss incurred in the fourth quarter of fiscal
1995. MSC recognized approximately $.7 million in operating income during the
second quarter of fiscal 1996 for this matter.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased to 17.0% of
sales in fiscal 1997 from 15.9% in fiscal 1996, excluding the impact of a $4.2
million pretax special charge recorded in the third quarter of fiscal 1996. The
increase in SG&A was largely due to additional ongoing expenses related to the
expansion of the distribution network within specialty films. SG&A was also
affected by the Company's continued strategic plan for growth utilizing
effective product marketing and international marketing efforts.
Total Other (Income) and Expense, Net and Income Taxes
Total other (income) and expense, net was $.5 million of expense in fiscal 1997
and $.1 million of expense in fiscal 1996. Interest expense increased during
the year due to higher levels of debt related to our increase in capital
expenditures, the acquisition of certain assets of the West Coast distributor of
solar control window film, and the Company's stock repurchase program. MSC
capitalized $1.8 million of interest expense in fiscal 1997 related to the
construction of a new coil coating line in Elk Grove Village, Illinois, and the
completion of the facility upgrade of our Middletown, Ohio facility. In fiscal
1998, we anticipate interest expense will increase significantly from fiscal
1997, resulting from less capitalized interest, higher debt levels, and fixed
interest rates higher than actual fiscal 1997 variable interest rates. Equity
in results of partnership declined due to higher utilization by the partners
replacing third party sales in fiscal 1997. MSC's effective tax rate for fiscal
1997 was approximately 38.5% compared with 38.2% in the prior year.
21
Fiscal 1996 Compared with Fiscal 1995
Net Sales
Net sales in fiscal 1996 grew 3.7% over fiscal 1995. Sales of laminates and
composites and coil coating declined 1.6% and .5%, respectively. Specialty
films and electrogalvanizing grew 23.7% and 11.0%, respectively. Included in
the above amounts are specialty films sales from the September 7, 1995
acquisition of SGI.
Laminates and Composites
Fiscal 1996 net sales of laminates and composites declined 1.6% to $56,790 from
$57,722 in fiscal 1995. Sales of Polycore Composites decreased due to lower
sales to Chrysler. Partially offsetting the shortfall in Polycore Composites
was significant growth in non-automotive uses including computer disk drive
covers. Sales of disc brake noise damper materials increased significantly from
the previous fiscal year, as a result of increased aftermarket demand, as well
as a steady increase in OEM sales during the year. In the high-reflective
lighting fixture market, Specular+ sales decreased from fiscal 1995 due to
increased competitive pressure and a decline in OEM requirements.
Specialty Films
Specialty films net sales increased 23.7% to $23,662 in fiscal 1996 from $19,134
in fiscal 1995 due to a higher average selling price and an increase in volume
from the acquisition of SGI, increased domestic and international demand for
solar control and safety window film, offset by lost sales from a West Coast
distributor terminated in fiscal 1995. Increased productivity and quality
improvements also contributed to the increase in sales over the prior fiscal
year, as MSC was better able to meet seasonal demand.
On September 7, 1995, a subsidiary of MSC acquired all of the outstanding
capital stock of SGI. Headquartered in Largo, Florida, SGI was the largest
independent distributor of professionally installed solar control window film
products in the world. It was also MSC's largest distributor, with a
relationship going back to 1980. SGI had eight wholly owned distribution centers
across the United States, one center each in Canada and England, and a joint
venture operation in Singapore.
Coil Coating
Coil coating net sales of $100,652 in fiscal 1996 were flat with fiscal 1995.
Coil coating sales were affected by lingering effects of customer inventory
adjustments related to a scheduled 52 day shutdown of MSC's Middletown, Ohio
facility occurring in the fourth quarter of fiscal 1995. In addition, price
competition in the industry was partially offset by an increase in the sales of
clutch plate materials that were sold as a package. Package sales include both
coating and metal components. Sales declines were experienced in the truck
trailer, swimming pool, and the heating and air conditioning areas. During the
fourth quarter of fiscal 1996, pricing stabilized and backlog increased from the
previous quarter.
22
Electrogalvanizing
MSC's electrogalvanizing sales increased 11.0% to $55,046 in fiscal 1996 from
$49,596 in fiscal 1995, while electrogalvanizing volume increased 6.2% to
453,710 tons in fiscal 1996 from 427,133 tons in the prior fiscal year. The
increase in sales and volume over the previous fiscal year resulted from
increased sales efforts, pricing, and improved yields.
The sales and marketing responsibilities of the Partnership are split between
Bethlehem and Inland at approximately 76% and 24%, respectively. During fiscal
1996, Inland utilized only 10% of available production line time rather than its
full 24% share. Bethlehem and other customers utilized this additional
available line time. In addition to Bethlehem's historic production, BSC
transferred its in-house electrogalvanizing production from its Burns Harbor
facility to Walbridge Coatings.
Gross Profit
MSC's gross profit percentage decreased from 27.3% in fiscal 1995 to 23.5% in
fiscal 1996. This percentage decline was due to higher labor and overhead
spending in relation to production volume, product mix, and competitive pricing
pressure, offset, in part, by improved manufacturing efficiencies. Significant
capital expenditures have resulted in increased yields and line speeds, as well
as reductions in set-up time and unscheduled downtime. The Company reached
agreement with its insurers regarding a casualty and business interruption loss
incurred in the fourth quarter of fiscal 1995. MSC recognized approximately $.7
million in operating income during the second quarter of fiscal 1996 for this
matter.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased to 15.9% of
sales in fiscal 1996 from 15.7% in fiscal 1995, excluding the impact of a $4.2
million pretax special charge recorded in the third quarter of fiscal 1996. The
increase in SG&A primarily was due to increased expenditures related to the SGI
acquisition, continued strategic high-growth product marketing, research and
development, and international marketing efforts, as well as some non-recurring
increases in other administrative expenses. The special charge included costs
related to severance and other related expenses, and litigation expenses.
Total Other (Income) and Expense, Net and Income Taxes
Total other (income) and expense, net was $.1 million of expense in fiscal 1996
and $.7 million of income in fiscal 1995. Interest income declined due to lower
amounts of cash investments. Equity in results of partnership declined due to
higher utilization by the partners replacing third party sales. MSC's effective
tax rate for fiscal 1996 was approximately 38.2% compared with 38.5% in the
prior year. In fiscal 1996, MSC benefited from the creation of a foreign sales
corporation and research and development ("R&D") tax credits for its increasing
investment in R&D.
23
Liquidity and Capital Resources
MSC generated $21.6 million of cash from operating activities in fiscal 1997
compared with $19.5 million in the prior fiscal year. The increase was due
mainly to the increase in net income and higher depreciation and amortization
offset, in part, by higher accounts receivable and inventory levels at fiscal
year end compared with the prior year. Earnings before interest, taxes,
depreciation and amortization ("EBITDA") also increased to $40.9 million in
fiscal 1997 from $24.7 million in fiscal 1996.
In fiscal 1997, MSC invested $55.6 million in capital improvement projects
compared with $27.5 million last year. The increase was largely due to the
construction of the Company's new high-speed coil coating line in Elk Grove
Village, Illinois, and the completion of the facility upgrade of our Middletown,
Ohio location during fiscal 1997. In addition, MSC purchased certain assets of a
West Coast distributor of solar control and safety window film for approximately
$4.0 million payable in cash and subordinated convertible notes in the first
quarter of fiscal 1997.
During the third quarter of fiscal 1996, MSC acquired all of the outstanding
capital stock of SGI. Consideration for the purchase, including transaction
costs and net of cash acquired, was $8.0 million in subordinated convertible
notes and $.2 million in cash.
On May 12, 1997, a subsidiary of the Company signed a letter of intent to
purchase designated assets of a specialty films distribution business in
Australia. The Company hopes to finalize the purchase by July 14, 1997. It is
expected that incremental debt will not be incurred to purchase the facility.
Financing and start-up costs related to our $55.6 million capital spending
initiatives in fiscal 1997 will result in first quarter earnings for fiscal 1998
that are below the restated $0.26 per share in the first quarter last year. One-
time expenses associated with our investigation related to the accounting
irregularities discovered in the first quarter of fiscal 1998 will also
negatively affect first quarter earnings. The Company is pursuing recovery of
these expenses under its insurance policies.
The Company plans to decrease its capital expenditures to approximately $25.0
million in fiscal 1998, which includes investing in powder coating and
completing the construction of a new coating and laminating line in the first
quarter of fiscal 1998 in San Diego, California.
MSC's long-term debt, less current portion, increased to $54.8 million in fiscal
1997 from $16.8 million in fiscal 1996, due mainly to an increase in capital
expenditures, the acquisition of certain assets of a West Coast distributor, and
the Company's stock repurchase program. As of February 28, 1997, the Company
purchased 228,100 shares of treasury stock, at an average purchase price of
$18.14 per share. The Company was in compliance with all financial covenants for
the period ending February 28, 1997. Due to the accounting irregularities (see
Note 2 of the Notes to Consolidated Financial Statements which is included in
Item 8), the Company obtained required waivers from lenders regarding this
matter.
24
The Company currently maintains a $25.0 million committed line of credit. This
agreement expires August 31, 1999, or earlier at the Company's option. There was
$15.0 million outstanding under this line at February 28, 1997. The Company has
outstanding letters of credit totaling $4.9 million against this line leaving an
available line of credit of $5.1 million at February 28, 1997. The Company also
maintains two uncommitted lines of credit totaling $50.0 million. There was no
outstanding balance under these uncommitted lines of credit at February 28,
1997.
On February 15, 1997, the Company authorized the issuance and sale of $50.0
million Senior Notes ("Notes"). As of February 28, 1997, $30.0 million of the
Notes were issued and funded. Subsequent to fiscal year end, the remaining $20.0
million was issued and funded. The interest rate on the Notes is 7.05% and the
Notes mature on May 31, 2007.
In fiscal 1998, the Company believes that its cash flow from operations,
together with available financing and cash on hand will be sufficient to fund
its working capital needs, capital expenditure program, and debt amortization.
MSC continues to participate in the implementation of settlements with the
government for clean-up of various Superfund sites. The Company has been named
as a potentially responsible party ("PRP") for the surface, soil, and ground
water contamination at these sites. Although the ultimate cost of the Company's
share of various necessary clean-up expenses is not yet known, the Company
believes it is adequately reserved for known environmental matters, given the
information currently available. The PRPs and the United States Environmental
Protection Agency ("USEPA") are discussing modifications regarding the scope of
the work required under the decree for the Kingsbury site. The remedial costs at
this site could change depending on the USEPA's position. The Company and other
PRPs that are parties to the decree for the Kingsbury site are engaged in
litigation with several non-settling PRPs including two large volume PRPs and
the United States Army, to compel such non-settling PRPs to contribute to the
clean-up effort at this site. The Company believes its range of exposure for all
known sites, based on allocations of liability among PRPs and the most recent
estimate of remedial work, is $4.2 million to $5.0 million at February 28, 1997.
The timing of the Company's cash payments for environmental matters is not
known, and no assurance can be given that the Company's environmental
obligations will not increase (see Note 6 of the Notes to Consolidated Financial
Statements which is included in Item 8).
On April 9, 1997, a plaintiff claiming to represent a class of Material Sciences
Corporation shareowners, who suffered injury as a result of the accounting
irregularities announced on April 7, 1997, filed a complaint in the United
States District Court for the Northern District of Illinois. The class
purportedly includes shareowners who purchased MSC shares between April 18, 1996
and April 7, 1997. The plaintiff claims that the Company and certain of its
officers violated the federal securities laws and were aware of, or recklessly
disregarded, material misstatements that were made in the Company's publicly
filed financial reports. The amount of the claims is uncertain. The Company
believes that the claims are without merit and intends to vigorously defend the
lawsuit. However, there
25
can be no assurance with respect to the outcome of the litigation. No amounts
have been provided in the accompanying financial statements for these claims.
In addition, the Securities and Exchange Commission ("SEC") has requested the
voluntary cooperation of the Company in a request for documents related to the
accounting irregularities. Such a request should not be construed as an
indication by the SEC or its staff that any violations of law have occurred. The
Company is cooperating with the SEC in this matter.
During the first quarter of fiscal 1997, the Company entered into a settlement
agreement regarding a lawsuit with a former distributor of solar control and
safety window film. The amount of the settlement was within the range of
previously established reserves.
The Company has a capital lease obligation, which was $5.3 million as of
February 28, 1997, relating to a facility that the Company subleases to the
Partnership. In addition, throughout the term of the Partnership, the Company is
contingently responsible for 50% of the Partnership's financing requirements,
including the Company's share (approximately $1.9 million) of $3.8 million in
Partnership financing loans from third parties at February 28, 1997.
On March 3, 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings Per Share" which is effective for fiscal years ending after
December 15, 1997. The adoption of this Statement is not expected to have a
material impact on the Company.
Certain statements in this Form 10-K and in future filings of the Company with
the SEC and in the Company's written and oral statements made by or with the
approval of an authorized officer of the Company contain, or will contain,
various "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including assumptions concerning MSC's operations, future results, and
prospects, and the Company intends that such forward-looking statements be
subject to the safe harbors created thereby. These forward-looking statements
are based on MSC's current expectations and are subject to risk and
uncertainties which could cause actual results or events to differ materially
from those set forth or implied. Examples of forward-looking statements include,
but are not limited to, statements regarding the Company's future financial
position and results of operations and cash flows (including future capital
expenditures and anticipated debt levels and strategies for growth), plans, and
objectives. Uncertainties and factors which could cause actual results or events
to differ materially from those set forth or implied include, but are not
limited to, (i) successful development and market introduction of anticipated
new products and technologies; (ii) competitive factors and competitors'
responses to MSC's initiatives; (iii) changes in the current and future business
environment; (iv) adverse changes in government laws and regulations applicable
to the Company; (v) continuation of the favorable environment to make
acquisitions, including regulatory requirements and market values of candidates;
(vi) the stability of governments and business conditions inside and outside the
United States which may affect successful penetration of the Company's products;
(vii) the health of the automobile and durable goods industries; (viii)
environmental risks associated with the manufacturing operations of the Company;
(ix) the loss of one or more significant customers of the Company; (x) risks
associated
26
with the termination of the Partnership in June 1998; and (xi) increases in
the price of raw and other material inputs used by the Company that cannot
be passed on to its customers. The Company does not undertake any
obligation to update or revise any forward-looking statement made by it or
on its behalf, whether as the result of new information, future events, or
otherwise.
Inflation
The Company believes that inflation has not had a significant impact on
fiscal 1997, 1996, and 1995 results of operations in any of its product
groups.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
(a) The Consolidated Statements of Income for the years ended February 28,
1997, February 29, 1996, and February 28, 1995, Consolidated Balance Sheets
as of February 28, 1997 and February 29, 1996, Consolidated Statements of
Cash Flows for the years ended February 28, 1997, February 29, 1996, and
February 28, 1995, Notes to Consolidated Financial Statements and the
Report of Independent Public Accountants are included on the following
pages.
27
Consolidated Statements of Income
Material Sciences Corporation and Subsidiaries
For the years ended February 28 or 29,
----------------------------------------
(In thousands, except per share data) 1997 1996 (restated) 1995
- ----------------------------------------------------- ----------------------------------------
Net Sales $278,017 $236,150 $227,658
Cost of Sales 203,809 180,554 165,487
-------- -------- --------
Gross Profit $ 74,208 $ 55,596 $ 62,171
Selling, General and Administrative Expenses 47,340 37,549 35,679
Special Charge -- 4,200 --
-------- -------- --------
Income from Operations $ 26,868 $ 13,847 $ 26,492
-------- -------- --------
Other (Income) and Expense:
Interest Income $ (227) $ (343) $ (667)
Interest Expense 420 217 64
Equity in Results of Partnership 1,272 931 485
Other, Net (997) (717) (609)
-------- -------- --------
Total Other (Income) and Expense, Net $ 468 $ 88 $ (727)
-------- -------- --------
Income Before Income Taxes $ 26,400 $ 13,759 $ 27,219
Income Taxes 10,164 5,262 10,479
-------- -------- --------
Net Income $ 16,236 $ 8,497 $ 16,740
======== ======== ========
Net Income Per Common and Common Equivalent Share $ 1.04 $ 0.55 $ 1.10
======== ======== ========
Weighted Average Number of Common
and Common Equivalent Shares Outstanding 15,605 15,437 15,241
======== ======== ========
The accompanying notes are an integral part of these statements.
28
Consolidated Balance Sheets
Material Sciences Corporation and Subsidiaries
February 28 or 29,
----------------------------
(In thousands, except share data) 1997 1996 (restated)
- ------------------------------------------------------------- ----------------------------
Assets
Current Assets:
Cash and Cash Equivalents $ 2,116 $ 3,379
Receivables:
Trade, Less Reserves of $2,271 in 1997 and $4,407 in 1996 35,944 25,836
Current Portion of Partnership Note 767 781
Income Taxes 1,249 2,156
Prepaid Expenses 2,791 3,069
Inventories:
Raw Materials 11,941 10,829
Finished Goods 19,011 17,573
Prepaid Taxes 1,186 3,074
-------- --------
Total Current Assets $ 75,005 $ 66,697
-------- --------
Property, Plant and Equipment:
Land and Building $ 34,580 $ 30,891
Machinery and Equipment 138,459 116,240
Leasehold Improvements 1,289 1,376
Capital Leases 17,233 17,233
Construction in Progress 50,779 19,713
-------- --------
$242,340 $185,453
Accumulated Depreciation and Amortization (87,954) (74,571)
-------- --------
Net Property, Plant and Equipment $154,386 $110,882
-------- --------
Other Assets:
Investment in Partnership $ 10,759 $ 10,727
Partnership Note Receivable, Less Current Portion 374 1,123
Intangible Assets, Net 12,837 9,556
Other 728 1,041
-------- --------
Total Other Assets $ 24,698 $ 22,447
-------- --------
Total Assets $254,089 $200,026
======== ========
29
Consolidated Balance Sheets
Material Sciences Corporation and Subsidiaries
February 28 or 29,
--------------------------------
(In thousands, except share data) 1997 1996 (restated)
- --------------------------------------------------------------- --------------------------------
Liabilities
Current Liabilities:
Current Portion of Long-Term Debt $ 3,750 $ 3,014
Accounts Payable 24,092 25,343
Accrued Payroll Related Expenses 9,838 8,036
Accrued Expenses 6,171 6,588
-------- --------
Total Current Liabilities $ 43,851 $ 42,981
-------- --------
Long-Term Liabilities:
Deferred Income Taxes $ 11,392 $ 11,451
Long-Term Debt, Less Current Portion 54,761 16,815
Accrued Superfund Liability 4,071 4,177
Other 6,641 6,376
-------- --------
Total Long-Term Liabilities $ 76,865 $ 38,819
-------- --------
- ---------------------------
Shareowners' Equity
Preferred Stock, $1.00 Par Value; 10,000,000 Shares Authorized;
1,000,000 Designated Series B Junior Participating Preferred;
None Issued $ - $ -
Common Stock, $.02 Par Value; 20,000,000 Shares Authorized;
16,256,132 Shares Issued and 15,339,384 Shares Outstanding at
February 28, 1997, and 16,046,398 Shares Issued and 15,357,750
Shares Outstanding at February 29, 1996 325 321
Additional Paid-In Capital 50,142 47,097
Treasury Stock at Cost, 916,748 Shares at February 28, 1997
and 688,648 Shares at February 29, 1996 (7,518) (3,380)
Retained Earnings 90,424 74,188
-------- --------
Total Shareowners' Equity $133,373 $118,226
-------- --------
Total Liabilities and Shareowners' Equity $254,089 $200,026
======== ========
The accompanying notes are an integral part of these statements.
30
Consolidated Statements of Cash Flows
Material Sciences Corporation and Subsidiaries
(In thousands) For the years ended February 28 or 29,
--------------------------------------
Cash Flows From: 1997 1996 (restated) 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net Income $ 16,236 $ 8,497 $ 16,740
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 14,323 11,098 8,747
Provision for Deferred Income Taxes 1,789 1,406 986
Compensatory Effect of Stock Plans 1,255 1,188 647
Other, Net 471 918 464
-------- -------- --------
Operating Cash Flow Prior to Changes in Assets and Liabilities $ 34,074 $ 23,107 $ 27,584
-------- -------- --------
Changes in Assets and Liabilities:
Receivables $ (8,794) $ (6,488) $ (1,597)
Income Taxes Receivable 907 163 (2,319)
Prepaid Expenses (794) (659) (1,101)
Inventories (2,550) 1,766 (4,187)
Accounts Payable (1,251) 2,581 3,860
Accrued Expenses 892 (1,395) 1,866
Other, Net (843) 467 914
-------- -------- --------
Cash Flow from Changes in Assets and Liabilities $(12,433) $ (3,565) $ (2,564)
-------- -------- --------
Net Cash Provided by Operating Activities $ 21,641 $ 19,542 $ 25,020
-------- -------- --------
- ------------------------------------------------------------------------
Investing Activities:
Capital Expenditures, Net $(55,599) $(27,467) $(29,374)
Acquisitions, Net of Cash Acquired (2,489) (213) -
Investment in Partnership (1,304) (741) (1,939)
Distribution from Partnership 749 748 749
Other Long-Term Assets 313 390 205
-------- -------- --------
Net Cash Used in Investing Activities $(58,330) $(27,283) $(30,359)
-------- -------- --------
- ------------------------------------------------------------------------
Financing Activities:
Net Proceeds Under Lines of Credit $ 10,200 $ 4,800 $ -
Proceeds from Senior Notes 30,000 - -
Payments to Settle Debt (3,018) (1,969) (1,787)
Purchase of Treasury Stock (4,138) - -
Sale of Common Stock 2,382 2,473 1,012
-------- -------- --------
Net Cash Provided by (Used in) Financing Activities $ 35,426 $ 5,304 $ (775)
-------- -------- --------
Net Decrease in Cash $ (1,263) $ (2,437) $ (6,114)
Cash and Cash Equivalents at Beginning of Year 3,379 5,816 11,930
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 2,116 $ 3,379 $ 5,816
======== ======== ========
Supplemental Cash Flow Disclosures:
Interest Paid $ 2,845 $ 1,377 $ 981
Income Taxes Paid 7,606 3,842 11,195
Subordinated Convertible Notes Issued for Acquisitions $ 1,500 $ 7,981 $ -
Cash Portion of Acquisitions and Related Costs 2,489 213 -
-------- -------- --------
Total Consideration Paid for Acquisitions $ 3,989 $ 8,194 $ -
======== ======== ========
The Changes in Assets and Liabilities above for the years ended February 28,
1997 and February 29, 1996, are net of assets and liabilities acquired.
The accompanying notes are an integral part of these statements.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Material Sciences Corporation and Subsidiaries
For the three years ended February 28, 1997
Note 1: Summary of Significant Accounting Policies
The significant accounting policies of Material Sciences Corporation and its
wholly owned subsidiaries ("MSC" or "Company"), as summarized below, conform
with generally accepted accounting principles that, in management's opinion,
reflect practices appropriate to the business in which it operates. Certain
prior year amounts have been reclassified to conform with the fiscal 1997
presentation.
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the comments on financial statements. Actual results could differ from those
estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts for MSC
after all intercompany transactions have been eliminated. The Company maintains
a financial interest of 50% in Walbridge Coatings ("Partnership"). Under terms
of the Partnership agreement, significant actions require unanimous consent of
all partners and, therefore, the Company does not have a controlling interest.
Accordingly, the Company accounts for the Partnership under the equity method.
Inventories
Inventories are stated at the lower of cost or market, using either the specific
identification, average cost, or first-in, first-out (FIFO) method of cost
valuation. Due to the continuous nature of the Company's operations, work in
process inventories are not material.
Property, Plant and Equipment
Property, Plant and Equipment are recorded at cost. Improvements and
replacements are capitalized, while expenditures for maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the straight-
line method over the assets' estimated useful lives.
Facilities and equipment leased through capital leases are recorded in Property,
Plant and Equipment, with their corresponding obligations recorded in Current
and Long-Term Liabilities. The amount capitalized is the lower of the present
value of minimum lease payments or the fair value of the leased property.
Amortization of capital lease assets is recorded on a straight-line basis, over
the lease term.
The Company capitalizes interest costs as a part of the cost of constructing
major facilities and equipment.
32
Intangible Assets
Intangible assets consist principally of the excess of cost over the fair market
value of net assets acquired ("goodwill") and non-compete agreements. These
assets are being amortized on a straight-line basis over periods of 4 to 20
years. Accumulated amortization of intangible assets was $1,659 and $713 at
February 28, 1997 and February 29, 1996, respectively. The Company periodically
reviews whether subsequent events and circumstances have occurred that indicate
the remaining estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable. If events and
circumstances indicate that goodwill related to a particular business should be
reviewed for possible impairment, the Company uses projections to assess whether
future operating income on a non-discounted basis (before goodwill amortization)
of the unit is likely to exceed the goodwill amortization over the remaining
life of the goodwill, to determine whether a writedown of goodwill to
recoverable value is appropriate. This policy is consistent with Statement of
Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. "
Fair Market Value of Financial Instruments
The Company believes that the carrying amounts of all financial instruments
approximate fair market value.
Revenue Recognition
The Company generally recognizes revenue upon shipment.
Research and Development
The Company expenses all research and development costs in the period incurred.
Research and development expenses were $6,682 in fiscal 1997, $6,653 in fiscal
1996, and $5,404 in fiscal 1995.
Net Income Per Share
Net income per common and common equivalent share is computed using the weighted
average number of common and common equivalent shares outstanding during the
periods. Common equivalent shares are determined by the treasury stock method.
Concentrations of Credit Risks
Certain financial instruments potentially subject the Company to concentrations
of credit risk. These financial instruments consist primarily of temporary cash
investments and trade receivables.
The Company places its temporary cash investments with high credit, quality
financial institutions and in investment grade securities with maturities less
than 90 days. Approximately 43% of the Company's receivables are concentrated
with customers in the motor vehicle industry.
Stock Dividend
On June 16, 1994, the Board of Directors of the Company declared a stock
dividend of one-half share per share of the Company's common stock, which was
paid on July 28, 1994, to shareowners of record at the close of business on June
30, 1994. All share and per share data has been restated to retroactively
reflect this stock dividend.
33
Note 2: Accounting Irregularities and Restatement of Financial Statements
On April 7, 1997, the Company announced that it had discovered accounting
irregularities at one of its operating units. An independent investigation has
confirmed that the controller of that operating unit acted alone and altered and
falsified that unit's financial reports beginning in fiscal 1995. After
restatement, the pretax effect of the total understatement of cost of sales
related to the accounting irregularities amounted to $2,557 during the first
three quarters of fiscal 1997 and $5,638 in fiscal 1996. Since learning of the
accounting irregularities, the Company has taken actions intended to prevent a
recurrence of this situation.
The Company's fiscal 1996 financial statements and the quarterly financial
information for fiscal 1997 and 1996 have been restated to reflect the
correction of the accounting irregularities. In addition, see Note 16 for
restated interim financial information for fiscal 1997 and fiscal 1996. The
pretax effect of this incident on results of operations for fiscal 1995 was
$1,847 and was not deemed material. The amount related to this period is
reflected in the first quarter of fiscal 1996. The effect of the restatement of
fiscal 1996 results of operations is as follows:
For the year ended February 29, 1996
------------------------------------
Previously
Reported Restated
---------- --------
Net Sales $236,150 $236,150
Gross Profit 61,234 55,596
Income from Operations 19,485 13,847
Net Income 11,979 8,497
Net Income Per Share $ 0.78 $ 0.55
The effect of the restatement on the February 29, 1996 Consolidated Balance
Sheet resulted in corresponding decreases of $4,245 in Inventories and $3,482 in
Retained Earnings and increases of $2,156 in Income Taxes Receivable and $1,393
in Accounts Payable compared to February 29, 1996 amounts previously reported.
Note 3: Special Charge
During the third quarter of fiscal 1996, the Company provided $4,200 primarily
for the restructuring of its four product groups. The special charge included
projected costs related to severance and other related costs, and litigation
expenses. Cash related components represented approximately $3,900 with the
remainder related to a writedown to net realizable value for purchased computer
software as a result of the four product group structure. The remaining reserve
of $2,317 at February 29, 1996, was paid during fiscal 1997.
Note 4: Acquisitions
On May 31, 1996, the Company purchased certain assets of a distributor of solar
control and safety window film in the Western United States and throughout the
world. Consideration for the purchase, including transaction costs, was $1,500
in subordinated convertible notes and $2,489 in cash. Net tangible assets of
$1,027 and goodwill and a non-compete agreement totaling $2,962 were recorded in
the Consolidated Balance Sheets. The acquisition has been accounted for under
the purchase method
34
of accounting and is included in the Consolidated Financial
Statements of the Company since the date of acquisition.
On September 7, 1995, the Company purchased all of the outstanding capital stock
of Solar Gard International, Inc. ("SGI"). Consideration for the purchase,
including transaction costs and net of cash acquired, was $7,981 in subordinated
convertible notes and $213 in cash. As a result of the SGI acquisition, net
tangible assets of $1,249 and goodwill and a non-compete agreement totaling
$6,945 were recorded in the Consolidated Balance Sheets. The acquisition has
been accounted for under the purchase method of accounting and is included in
the Consolidated Financial Statements of the Company since the date of
acquisition.
Note 5: Partnership
On August 31, 1984, the Company entered into a Partnership ("Walbridge
Coatings") with subsidiaries of Bethlehem Steel Corporation ("Bethlehem") and
Inland Steel Industries, Inc. ("Inland") to pursue the production and further
development of electroplated steel.
The Company acted as general contractor to expand and modify its Walbridge, Ohio
facility and install electroplating equipment. The facility was transferred to
the Partnership in April 1986. The line is capable of electroplating, coil
coating, or performing both processes continuously to sheet metal. Bethlehem
and Inland have rights to purchase all the facility's production for the 12-year
life of the Partnership. The Company's potential alternatives upon expiration
of the Partnership term in June 1998 include, among other things, extension of
the Partnership, purchase of the facility, or sale of the facility. The
partners are actively discussing the various alternatives. The Company believes
its investment in the Partnership is realizable.
Summarized financial information for the Partnership is presented below.
Summarized Financial Information For the years ended
of Walbridge Coatings February 28 or 29,
Earnings Information 1997 1996 1995
- -------------------------------- -------- -------- --------
Net Revenues $67,761 $64,941 $60,887
Gross Profit 947 2,286 3,729
Income (Loss) from Operations (1,567) (153) 1,333
Net Loss (2,618) (1,852) (950)
February 28 or 29,
Balance Sheet Information 1997 1996 1995
- -------------------------------- -------- -------- --------
Current Assets $ 9,726 $ 9,375 $10,005
Total Assets 31,726 36,458 42,824
Current Liabilities 7,883 7,653 8,590
Total Liabilities 10,351 15,059 21,433
Partners' Capital 21,375 21,399 21,391
35
The Company's primary financial benefits from the Partnership are the revenues
billed to Walbridge Coatings for operating the facility. MSC's
electrogalvanizing revenues billed to Walbridge Coatings exclude financing and
other items which are included in Walbridge Coatings' revenues billed to
Bethlehem and Inland. The profitability for operating the facility is
comparable to the Company's overall operating results. Under the equity method
of accounting, the Company includes its portion of the Partnership Net Loss
summarized above in Equity in Results of Partnership shown in the Consolidated
Statements of Income. The amounts do not directly correlate to the Company's
50% ownership interest due to contractual allocation requirements of the
Partnership agreement.
As of February 28, 1997, the Company holds a $1,122 note receivable from the
Partnership requiring semi-annual interest and level principal repayments over
the life of the Partnership. Trade receivables include amounts due from the
Partnership of $2,256 at February 28, 1997, and $1,752 at February 29, 1996.
The Company has guaranteed 50% of the third party debt of the Partnership. At
February 28, 1997, the Partnership debt totaled $3,750. This debt is scheduled
to be retired ratably throughout the Partnership's life by revenues paid to the
Partnership by Bethlehem, Inland, and, if production does not reach a defined
contractual volume, the Company.
Note 6: Environmental and Legal Matters
The Company is a party to various legal proceedings connected with the clean-up
of environmental problems. These proceedings are pending against numerous other
parties, in addition to the Company. The most significant proceedings relate to
the Company's involvement in Superfund sites in Kingsbury, Indiana and Gary,
Indiana. The Company has been named as a potentially responsible party ("PRP")
for the surface, soil, and ground water contamination at these sites. The
activities related to MSC's involvement were alleged to have occurred prior to
1984.
At the Kingsbury site, the United States District Court for the Northern
District of Indiana has entered a Consent Decree between the government and PRPs
accounting for approximately 75% of the waste volume sent to the site, including
the Company, regarding the scope of the remediation work to be performed at the
site. The estimated range of the Company's liability is $2,900 to $3,400 for
this site. Certain maintenance and long-term monitoring expenditures included
in the estimated range have been discounted approximately $1,000 at a 5%
discount rate. The expenditures related to the discounted portion of the
liability are expected to be paid ratably over 30 years. MSC maintains a letter
of credit for approximately $3,200 to secure its obligation to pay its currently
estimated share of the clean-up expenses at the site.
The United States District Court for the Northern District of Indiana has also
entered a Consent Decree with respect to the scope of the remediation work at
the Gary site. The estimated range of the Company's liability is $1,100 to
$1,300 for this site. This work has commenced and the Company maintains a
letter of credit for approximately $1,200 to secure its obligation to pay its
currently estimated share of the clean-up expenses at the Gary site.
The ultimate cost of remediation work at the Kingsbury and Gary sites and the
Company's final share thereof, net of contributions from the other PRPs, has not
yet been determined. Based on the
36
allocations of liability among PRPs who are parties to the decrees entered in
these proceedings and the most recent estimates of remedial costs prepared by
the engineering consulting firms retained to supervise the remedial work, the
Company estimates that its share of remedial costs and reimbursable past costs
of the government will fall within the amount reserved by the Company for such
costs as of February 28, 1997. The PRPs and the United States Environmental
Protection Agency ("USEPA") are discussing modifications regarding the scope of
the work required under the decree for the Kingsbury site. The remedial costs at
this site could change depending on the USEPA's position. The Company and other
PRPs that are parties to the decree for the Kingsbury site are engaged in
litigation with several non-settling PRPs, including two large volume PRPs and
the United States Army, to compel such non-settling PRPs to contribute to the
clean-up effort at this site.
The Company is involved in other environmental matters that, on an individual
basis, are not material. MSC believes that the estimated range of exposure on
all environmental matters is between $4,200 and $5,000. The Company's
environmental reserves total approximately $4,800 at February 28, 1997.
The Company currently believes that the ultimate outcome of these proceedings,
net of contributions from other PRPs, will not have a material effect on the
financial condition or the results of operations of the Company given existing
reserves recorded at February 28, 1997. However, no assurance can be given that
such information, including estimates of remedial expenses, will not change.
During the first quarter of fiscal 1997, the Company entered into a settlement
agreement regarding a lawsuit with a former distributor of solar control and
safety window film. The amount of the settlement was within the range of
previously established reserves.
On April 9, 1997, a plaintiff claiming to represent a class of Material Sciences
Corporation shareowners, who suffered injury as a result of the accounting
irregularities announced on April 7, 1997, filed a complaint in the United
States District Court for the Northern District of Illinois. The class
purportedly includes shareowners who purchased MSC shares between April 18, 1996
and April 7, 1997. The plaintiff claims that the Company and certain of its
officers violated the federal securities laws and were aware of, or recklessly
disregarded, material misstatements that were made in the Company's publicly
filed financial reports. The amount of the claims is uncertain. The Company
believes that the claims are without merit and intends to vigorously defend the
lawsuit. However, there can be no assurance with respect to the outcome of the
litigation. No amounts have been provided in the accompanying financial
statements for these claims.
In addition, the Securities and Exchange Commission ("SEC") has requested the
voluntary cooperation of the Company in a request for documents related to the
accounting irregularities. Such a request should not be construed as an
indication by the SEC or its staff that any violations of law have occurred. The
Company is cooperating with the SEC in this matter.
37
Note 7: Indebtedness
Long-term debt, inclusive of capital leases, consists of the obligations
presented in the chart below. Projected maturities of long-term debt, assuming
no conversion or redemption, also are presented in the chart below.
February 28 or 29,
--------------------------
Long-Term Debt Obligations 1997 1996
- ----------------------------------------- ----------------- -------
Borrowings Under Lines of Credit $15,000 $ 4,800
Senior Notes 30,000 -
Subordinated Convertible Notes 8,151 7,981
Obligations Under Capital Leases (Note 8) 5,298 6,932
Other 62 116
------- -------
$58,511 $19,829
Less Current Portion 3,750 3,014
------- -------
Long-Term Debt $54,761 $16,815
======= =======
Projected Maturities of Long-Term Debt February 28, 1997
- -------------------------------------- -----------------
1998 $ 3,750
1999 5,513
2000 16,974
2001 1,974
2002 300
2003 and thereafter 30,000
-------
Total $58,511
=======
The Company maintains a $25,000 committed line of credit. At the option of the
Company, interest is at the bank's reference rate (8.25% at February 28, 1997),
or at LIBOR plus 1/2%, which generally is lower than the bank's reference rate.
This agreement expires on August 31, 1999, or earlier at the Company's option.
There was $15,000 outstanding under this line of credit at February 28, 1997.
The Company has four irrevocable letters of credit totaling $4,881 against this
line, leaving an available line of credit of $5,119 at February 28, 1997. MSC
pays a commitment fee of 1/4% per annum on the daily average of the unused
amount during the period, and is required to maintain $500 in compensating
balances. The agreement requires the Company to adhere to certain covenants,
some of which are adjusted quarterly. The most significant of these covenants
include restrictions relating to its current ratio (1.2:1.0), liabilities to net
worth (1.5:1.0), tangible net worth ($107,431), and interest coverage (2.0x).
The Company was in compliance with all financial covenants for the period ending
February 28, 1997. Due to the accounting irregularities discussed in Note 2,
the Company obtained a waiver from the lender regarding this matter.
The Company also maintains two uncommitted lines of credit totaling $50,000.
The interest rate is based on a market rate to be agreed upon by the parties at
the time of the borrowing. There is no commitment fee for these uncommitted
lines of credit. There was no outstanding balance under these uncommitted lines
of credit at February 28, 1997.
38
On February 15, 1997, the Company authorized the issuance and sale of $50,000
Senior Notes ("Notes"). As of February 28, 1997, $30,000 of the Notes were
issued and funded. Subsequent to fiscal year end, the remaining $20,000 was
issued and funded. The interest rate on the Notes is 7.05% and the Notes mature
on May 31, 2007. Interest payments are due semi-annually on May 31 and November
30 of each year, commencing May 31, 1997. The agreement requires the Company to
adhere to certain covenants. The most significant of these covenants includes
restrictions related to its consolidated net worth ($105,000), consolidated
senior debt ratio (55%), and total indebtedness ratio (60%). The Company was in
compliance with all financial covenants for the period ending February 28, 1997.
Due to the accounting irregularities discussed in Note 2, the Company obtained a
waiver from the lenders regarding this matter.
In addition, the Company has subordinated convertible notes ("Subordinated
Notes") as of February 28, 1997, which were issued in consideration for the
purchase of SGI and certain assets of a West Coast distributor. The Subordinated
Notes bear interest at a rate of 7%. The Subordinated Notes for SGI and the
West Coast distributor are convertible into shares of the Company's common stock
at a conversion price of $24.27 and $20.80 per share, respectively. The
Subordinated Notes mature in five equal installments and became due annually
beginning on September 8, 1996, for SGI, and June 1, 1997, for the West Coast
distributor. A maximum of 346,140 shares of common stock have been reserved for
the conversion option contained in the Subordinated Notes. As of February 28,
1997, a portion of these Subordinated Notes ($1,434) was issued to certain
individuals who are currently employed with the Company.
Note 8: Leases
The Company leases one manufacturing facility under a capital lease that
includes a renewal option. Another manufacturing facility, 13 distribution
centers, and other equipment are leased under non-cancelable operating leases.
The Walbridge, Ohio facility lease contains certain covenants with which the
Company is in compliance. The Company subleases its interest in this facility
to the Partnership. The sublease contains substantially the same terms and
conditions as the lease, with the monthly payment paid directly to the lessor by
the Partnership. The Company has assigned all of its rights under the sublease
to the lessor. The Company also has agreed to purchase the mortgage loan on the
facility in the event of default by the lessor. The lease is renewable, at the
Company's option, for additional periods totaling 25 years.
39
Some leases also contain escalation provisions based upon specified inflation
indices. The table below presents future minimum lease payments and sublease
income.
Minimum Lease Capital Sublease Operating
Payments Lease Income Leases
- -------------------------------- ------- -------- ---------
1998 $2,294 $2,294 $2,167
1999 1,359 955 1,609
2000 692 - 1,357
2001 692 - 951
2002 692 - 577
2003 and thereafter 970 - 2,731
------ ------ ------
Total Minimum Lease Payments $6,699 $3,249 $9,392
====== ======
Amount Representing Interest 1,401
------
Present Value of Minimum Lease
Payments $5,298
======
Amortization of leased property was $997 in fiscal 1997, $988 in fiscal 1996,
and $980 in fiscal 1995.
Total rental expense under operating leases was $2,686 in fiscal 1997, $2,689 in
fiscal 1996, and $2,511 in fiscal 1995.
Note 9: Retirement Plans
The Company has non-contributory defined benefit and defined contribution
pension plans that cover a majority of its employees. The Company funds amounts
required to meet ERISA funding requirements for the defined benefit plans. The
Company makes an annual contribution for the defined contribution plans after
the end of each calendar year for the amount earned by participating employees
during that preceding calendar year. In addition to the benefits previously
described, some Company officers participate in a non-contributory supplemental
pension plan.
Certain of the Company's defined benefit plans have been frozen. During fiscal
1996, the Material Sciences Corporation Pension Plan for Salaried Employees was
terminated, and all assets were distributed to the plan participants. These
plans were replaced with defined contribution plans. The discount rate used for
the terminated and frozen plans is 8.0% in 1997, 8.0% in 1996, and 7.5% to 8.0%
in 1995. For plans that have not been terminated or frozen, the discount rate
was 8.0% in all years presented. The following tables detail the defined
benefit and non-contributory supplemental pension plans.
40
Components of Net Periodic For the years ended February 28 or 29,
Pension Cost 1997 1996 1995
- ------------ ---- ---- ----
Service Cost Benefits Earned
During the Period $385 $384 $353
Interest Cost on Projected
Benefit Obligation 504 442 737
Actual Return on Assets (230) (426) (612)
Net Amortization
and Deferral 51 271 41
---- ---- ----
Net Periodic Pension Cost $710 $671 $519
==== ==== ====
Assumptions Used in Determining For the years ended February 28 or 29,
the Plans' Funded Status 1997 1996 1995
- ------------------------ ---- ---- ----
Expected Long-Term 8.0% 8.0% 8.0%
Rate of Return on Assets
Rate of Increase in
Compensation Levels 6.0% 6.0% 6.0%
41
February 28 or 29,
--------------------------------------
Plans Whose Plans Whose
Assets Exceed Accumulated
Accumulated Benefits Exceed
Benefits Assets
Pension Plans' ------------------ ------------------
Funded Status 1997 1996 1997 1996
- -------------- -------- -------- -------- --------
Plan Assets
at Fair Value $3,268 $2,882 $ -- $ --
------ ------ ------ ------
Accumulated
Benefit Obligation
Vested $2,755 $2,504 $2,836 $2,363
Unvested 189 162 38 79
------ ------ ------ ------
Accumulated Benefit
Obligation $2,944 $2,666 $2,874 $2,442
Additional Benefits
Based on Projected Salary
and Service Levels 177 127 1,230 1,111
------ ------ ------ ------
Projected Benefit
Obligation $3,121 $2,793 $4,104 $3,553
------ ------ ------ ------
Projected Benefit
Obligation in Excess of
(Less Than) Plan Assets $ (147) $ (89) $4,104 $3,553
Unrecognized Gain (Loss) 317 258 (270) (64)
Prior Service Cost (369) (366) (214) (234)
Unrecognized Net
Obligation on March 1 11 12 (36) (40)
------ ------ ------ ------
Pension (Asset)
Liability Recognized in
the Consolidated
Balance Sheets $ (188) $ (185) $3,584 $3,215
====== ====== ====== ======
The Company sponsors a defined contribution plan for certain salaried and hourly
employees based upon a percentage of the employees' covered earnings as provided
for in the plan. The cost of this plan was $1,218 in fiscal 1997, $1,360 in
fiscal 1996, and $1,296 in fiscal 1995.
The Company provides its retired employees with certain post-retirement health
care benefits, which the Company may periodically amend or modify.
Substantially all employees may be eligible for these benefits if they reach
normal retirement age while employed by the Company. Payments for post-
retirement health care benefits were $149 in fiscal 1997, $59 in fiscal 1996,
and $95 in fiscal 1995.
42
The following table presents a reconciliation of the funded status of the plan
to the accrued benefit cost:
February 28 or 29,
Post-Retirement Plan ------------------
Funded Status 1997 1996
- ------------- ---- ----
Plan Assets at Fair Value $ 49 $ 24
------ ------
Retirees $1,030 $ 893
Other Fully Eligible Participants 278 322
Other Active Participants 588 601
------ ------
Accumulated Post-Retirement Benefit
Obligation $1,896 $1,816
------ ------
Projected Post-Retirement Benefit
Obligation $1,847 $1,792
Unrecognized Net Gain and Prior
Service Cost 1,334 1,414
------ ------
Accrued Post-Retirement Benefit Cost $3,181 $3,206
====== ======
For the years ended February 28 or 29,
Net Periodic Post- --------------------------------------
Retirement Benefit Cost 1997 1996 1995
- ----------------------- ---- ---- ----
Service Cost $ 66 $ 79 $ 73
Interest Cost on Accumulated Benefit
Obligation 136 132 104
Actual Return on Assets (2) (1) -
Net Amortization and Deferral (77) (71) (79)
----- ----- -----
Net Periodic Post-Retirement Benefit Cost $ 123 $ 139 $ 98
===== ===== =====
The discount rate used in determining the Accumulated Post-Retirement Benefit
Obligation was 8.0% in 1997, 1996, and 1995.
The Company continues to review its post-retirement benefits, incorporating
actual and anticipated benefit changes. In determining the present value of the
Accumulated Post-Retirement Benefit Obligation, of which only a minor amount has
been funded, and net cost, MSC used a 10% health care cost trend rate decreasing
until leveling off at 5% in Year 2010.
A 1% increase in the assumed health care cost trend rate would increase the
Accumulated Post-Retirement Benefit Obligation as of February 28, 1997, by
approximately $270 and the total of the service and interest cost components of
net post-retirement health care cost for the year then ended by approximately
$38.
43
Note 10: Interest Expense
The table presented below analyzes the components of interest expense.
For the years ended February 28 or 29,
--------------------------------------
Interest Expense 1997 1996 1995
- ---------------- ---- ---- ----
Interest Expense $ 2,216 $ 589 $ 124
Capitalized Interest (1,796) (372) (60)
------- ----- -----
Total $ 420 $ 217 $ 64
======= ===== =====
The table above excludes interest expense of $625, $792, and $869 for fiscal
years 1997, 1996, and 1995, respectively, relating to the Walbridge, Ohio
facility. This facility is subleased to the Partnership. The interest expense
and amortization relating to this lease is reduced by sublease income received
from the Partnership, and the net result is included in Other, Net.
Note 11: Income Taxes
Deferred income taxes are provided for differences arising between financial and
taxable income resulting primarily from the use of accelerated cost recovery
methods and certain transactions that are deferred for recognition until
economic occurrence of the event.
The components of the provision for income taxes and a reconciliation between
the statutory rate for federal income taxes and the effective tax rate are
summarized and presented below.
For the years ended February 28 and 29,
---------------------------------------
Tax Provision 1997 1996 (restated) 1995
- ------------- ---- --------------- ----
Current:
Federal $ 7,166 $3,291 $ 8,130
State 1,209 565 1,363
------- ------ -------
$ 8,375 $3,856 $ 9,493
------- ------ -------
Deferred:
Federal $ 1,546 $1,215 $ 852
State 243 191 134
------- ------ -------
$ 1,789 $1,406 $ 986
------- ------ -------
Total Provision $10,164 $5,262 $10,479
======= ====== =======
44
For the years ended February 28 or 29,
--------------------------------------
Tax Rate Reconciliation 1997 1996 (restated) 1995
- ----------------------- ---- --------------- ----
Federal Statutory Rate 35.0% 35.0% 35.0%
State and Local Taxes, Net of
Federal Tax Benefit 5.5 5.5 5.5
Research and Development
Tax Credits (0.3) (1.6) (0.7)
Foreign Sales Corp. Benefit (1.3) (0.7) -
Tax Exempt Interest Income - - (0.4)
Other, Net (0.4) - (0.9)
---- ---- ----
Effective Income Tax Rate 38.5% 38.2% 38.5%
==== ==== ====
Temporary differences that give rise to deferred tax (assets) and liabilities
are as follows:
February 28 or 29,
------------------
1997 1996
---- ----
Property and Equipment $15,654 $15,539
Reserves not Deductible Until Paid (2,695) (4,220)
Employee Benefit Liabilities (3,664) (4,013)
Deferred State Income Taxes, Net 1,386 1,140
Other (475) (69)
------- -------
Deferred Tax Liabilities, Net $10,206 $ 8,377
======= =======
Deferred Tax Liabilities, Net, have been recorded on the Company's Consolidated
Balance Sheets as follows:
February 28 or 29,
------------------
1997 1996
---- ----
Long-Term Liabilities -
Deferred Income Taxes $11,392 $11,451
Current Assets - Prepaid Taxes (1,186) (3,074)
------- -------
$10,206 $ 8,377
======= =======
Note 12: Significant Customers and Export Sales
The Partnership represented 21%, 23%, and 22% of the Company's net sales in
fiscal 1997, 1996, and 1995, respectively. Sales to AK Steel Corporation
amounted to 5%, 8%, and 10% of MSC's net sales in fiscal 1997, 1996, and 1995,
respectively. Export sales represented 11% of the Company's net sales in fiscal
1997, and 8% in both fiscal 1996 and 1995.
45
Note 13: Subsequent Event (Unaudited)
On May 12, 1997, a subsidiary of the Company signed a letter of intent to
purchase designated assets of a specialty films distribution business in
Australia. The Company hopes to finalize the purchase by July 14, 1997. It is
expected that incremental debt will not be incurred to purchase the facility.
Note 14: Equity Plans
The Company has four stock option plans: the Material Sciences Corporation 1985
Stock Option Plan for Key Employees ("1985 Plan"); the Material Sciences
Corporation 1991 Stock Option Plan for Directors ("1991 Directors Plan"); the
Material Sciences Corporation 1992 Omnibus Awards Plan for Key Employees ("1992
Plan"); and the Material Sciences Corporation Stock Option Plan for Non-Employee
Directors ("1996 Directors Plan"). The Company accounts for all plans under APB
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for stock options awarded under the plans been determined
consistent with SFAS No. 123, the Company's net income and net income per share
would have been reduced to the following pro forma amounts:
1997 1996(restated)
------- --------------
Net Income As Reported $16,236 $8,497
======= ======
Pro Forma $14,723 $7,781
======= ======
Net Income Per Share As Reported $1.04 $0.55
===== =====
Pro Forma $0.94 $0.50
===== =====
There are 1,687,500 shares authorized under the 1985 Plan to provide for the
options granted under the 1985 Plan, the 1991 Directors Plan, and the shares
purchased under the Material Sciences Corporation Employee Stock Purchase
Program. The options granted under the 1985 Plan consist of both non-qualified
and incentive stock options ("ISOs") which vest ratably on the first four
anniversary dates of grant, or earlier if the Company's stock reaches certain
trading levels. All of these options expire ten years after the date of grant.
The 1991 Directors Plan vests ratably over the first five anniversary dates of
grant and expire ten years after the date of grant.
There are 2,287,500 shares authorized under the 1992 Plan. Three grants provide
options for the Non-Qualified Stock Option Program, the 1993 Restricted
Stock/Incentive Stock Option Awards Program, and the 1995 Stock Option Program.
Each grant under the Non-Qualified Stock Option Program vests three years after
the date of grant and expires ten years after the date of grant. The 1993
Restricted Stock/Incentive Stock Option Awards Program consists of tandem grants
of restricted stock and ISOs to the extent allowed under the Internal Revenue
Code. A fifth of the restricted shares vest as trading levels of the Company's
stock reach predetermined levels. Once the vested restricted stock is held by
the optionee for a period of two years, the holder vests in an ISO for an equal
number of shares. All unvested ISOs vest nine years and eleven months after the
date of grant. All options expire ten years after the date of grant. All
unvested restricted shares vest at the end of a five to eight year period after
the date of grant, depending on the trading level of the Company's stock. The
1995 Stock
46
Option Program (non-qualified) consists of an initial grant on March 1, 1995,
and two additional grants of equal amounts per optionee on the first and second
anniversary dates of the initial grant. Each grant vests ratably over three
years on the anniversary date of grant. All options granted under the 1995 Stock
Option Program expire ten years after the date of grant.
There are 250,000 shares authorized under the 1996 Directors Plan. This plan
consists of grants which provide for fifty percent of each non-employee
director's annual retainer ("Retainer Option"), and an annual incentive stock
option ("Incentive Option"). The Retainer Options vest on the date of grant and
expire five years after the grant date. The Incentive Options vest one year from
the date of grant and expire five years after the date of grant.
The exercise price of all options equals the market price of the Company's stock
either on the date of grant or, in the case of the 1996 Directors Plan, on the
day prior to the grant.
A summary of transactions under the stock option plans is presented below.
Stock Option Activity
Weighted
Key Average Option Price
Directors Employees Exercise Price Per Share
- ------------------------------------------------------------------------------------------------------------------------------------
Outstanding at February 28, 1994 108,000 1,183,800 $10.43 $ 4.95 to $15.00
Granted - 47,550 $14.56 $14.67 to $17.33
Exercised (3,600) (37,000) $ 7.39 $ 4.95 to $10.05
Canceled - (7,500) $14.25 $14.25
------- ---------
Outstanding at February 28, 1995 104,400 1,186,850 $10.65 $ 4.95 to $17.33
Granted - 360,025 $16.42 $13.88 to $18.75
Exercised - (153,337) $10.05 $10.05
Canceled - (43,620) $15.65 $14.25 to $18.75
------- ---------
Outstanding at February 29, 1996 104,400 1,349,918 $11.99 $ 4.95 to $18.75
Granted 20,022 418,050 $14.86 $14.38 to $18.00
Exercised - (141,900) $ 9.80 $ 5.28 to $16.25
Canceled - (88,693) $15.14 $14.25 to $18.75
------- ---------
Outstanding at February 28, 1997 124,422 1,537,375 $12.77 $ 4.95 to $18.75
======= =========
The number of exercisable shares for the above mentioned years is presented below.
Exercisable at February 28, 1995 39,600 756,350 $ 9.13 $ 4.95 to $14.09
======= =========
Exercisable at February 29, 1996 61,200 648,013 $ 8.77 $ 4.95 to $14.09
======= =========
Exercisable at February 28, 1997 95,322 714,508 $10.32 $ 4.95 to $18.75
======= =========
The 1,661,797 outstanding shares as of February 28, 1997, have a remaining
contractual life of 8.5 years. The 438,072 options granted in fiscal 1997 have a
weighted average fair value price of $9.06 per share. The 1,454,318 outstanding
shares as of February 29, 1996, have a remaining contractual life of 8.0 years.
The 360,025 options granted in fiscal 1996 have a weighted average fair value
price of $10.59 per share.
47
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for the option grants in fiscal 1997 and 1996, respectively:
risk-free interest rates of 6.05% and 7.16%; expected life of ten years; and
expected volatility of 38.56% and 38.76%.
Shares of restricted stock are awarded in the name of the employee, who has all
rights of a shareowner, subject to certain restrictions or forfeitures.
Restricted shares issued in 1994 and 1995 generally expire and vest over a five
to eight year period and are subject to accelerated vesting if the market value
of the Company's stock exceeds the levels specified in the plan. As an incentive
to participants to retain these shares upon vesting, the Company granted a
matching option at fair market value that vests two years after the vesting of
the restricted stock if that restricted stock is still owned by the participant.
The number of options and price per share are included in the stock option
activity table above. The market value of the restricted shares is amortized to
compensation expense over the period in which the shares vest based upon the
passage of time. In the event of accelerated vesting due to the achievement of
market value appreciation as defined by the plan, the recognition of the
unamortized expense would be accelerated.
A summary of transactions under the restricted stock plans is presented below.
Key
Restricted Stock Activity Employees
- ------------------------------- ----------
Unvested at February 28, 1994 223,950
Granted 47,550
Vested -
Canceled (1,500)
--------
Unvested at February 28, 1995 270,000
Granted -
Vested (49,110)
Canceled (14,070)
--------
Unvested at February 29, 1996 206,820
Granted -
Vested -
Canceled (12,840)
--------
Unvested at February 28, 1997 193,980
========
Compensation effects arising from restricted stock issuance is $471 in fiscal
1997, $1,188 in fiscal 1996, and $647 in fiscal 1995, and have been charged
against income and recorded as Additional Paid-In Capital.
The Employee Stock Purchase Plan permits eligible employees to purchase shares
of common stock at 85% of the lower fair market value of the stock as of two
measurement dates six months apart. During fiscal years 1997, 1996, and 1995,
80,674, 68,057, and 53,382 shares, respectively, were sold to employees under
this plan.
48
On June 20, 1996, the Company issued a dividend to shareowners of record on
July 2, 1996, of one right ("Right") for each outstanding share of the
Company's common stock. Each Right entitles the shareowners to buy 1/100th
of a share of Series B Junior Participating Preferred Stock at an initial
exercise price of $70.00. The Rights will be exercisable only if a person
or group acquires, or announces a tender offer, for 20 percent or more of
MSC's common stock. Upon an acquisition of 20 percent or more of MSC's
common stock by a person or group, the Rights (other than those held by
such person or group) "flip in" to the right to buy the number of shares of
MSC's common stock valued at two times the exercise price of the Rights.
Additionally, if MSC enters into a merger or other business combination
with a person or group owning 20 percent or more of MSC's outstanding
common stock, the Rights (other than those held by such person or group)
"flip over" into the right to buy that number of shares of common stock of
the acquiring company valued at two times the exercise price of the Rights.
MSC may exchange the Rights for its common stock on a one-for-one basis at
any time after a person or group has acquired 20 percent or more of its
outstanding common stock. MSC will be entitled to redeem the Rights at one
cent per Right (payable in common stock of the Company, cash or other
consideration, at MSC's option) at any time before public disclosure that a
20 percent position has been acquired. The Rights will expire on July 1,
2006, unless previously redeemed or exercised.
Note 15: Shareowners' Equity
The table presented below reconciles the Shareowners' Equity accounts.
Common Stock Additional Treasury Stock
-------------------------- Paid-In Retained -----------------------
Shares Amount Capital Earnings Shares Amount
-------------- ---------- ------- ---------- ---------- ---------
Balance at February 28, 1994 10,465,155 $210 $40,574 $49,060 (459,099) $(3,380)
Net Income - - - 16,740 - -
Sale of Common Stock 85,324 1 1,014 - - -
Compensatory Effect of Stock Plans 31,700 - 647 - - -
Tax Benefit from Exercise of Stock
Options - - 541 - - -
Impact of Stock Dividend 5,256,895 106 - (109) (229,549) -
---------- ---- ------- ------- -------- -------
Balance at February 28, 1995 15,839,074 $317 $42,776 $65,691 (688,648) $(3,380)
Net Income (restated) - - - 8,497 - -
Sale of Common Stock 221,394 4 2,469 - - -
Compensatory Effect of Stock Plans (14,070) - 1,188 - - -
Tax Benefit from Exercise of Stock
Options - - 664 - - -
---------- ---- ------- ------- -------- -------
Balance at February 29, 1996 (restated) 16,046,398 $321 $47,097 $74,188 (688,648) $(3,380)
Net Income - - - 16,236 - -
Sale of Common Stock 222,574 4 2,378 - - -
Purchase of Treasury Stock - - - - (228,100) (4,138)
Compensatory Effect of Stock Plans (12,840) - 471 - - -
Tax Benefit from Exercise of Stock
Options - - 196 - - -
---------- ---- ------- ------- -------- -------
Balance at February 28, 1997 16,256,132 $325 $50,142 $90,424 (916,748) $(7,518)
========== ==== ======= ======= ======== =======
49
Note 16: Selected Quarterly Results of Operations (Unaudited)
The table presented below is a summary of quarterly data for the years ended
February 28, 1997 and February 29, 1996.
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------
Previously Previously Previously
Reported Restated Reported Restated Reported Restated Reported
-------- -------- -------- -------- -------- -------- --------
Net Sales $68,884 $68,884 $70,420 $70,420 $69,658 $69,658 $69,055
Gross Profit 18,569 17,509 19,744 19,283 19,774 18,738 18,678
Net Income 4,621 3,969 4,532 4,248 4,880 4,243 3,776
Net Income
Per Share $ 0.30 $ 0.26 $ 0.29 $ 0.27 $ 0.31 $ 0.27 $ 0.24
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------------------------
Previously Previously Previously Previously
Reported Restated Reported Restated Reported Restated Reported Restated
-------- -------- -------- -------- -------- -------- -------- --------
Net Sales $60,406 $60,406 $58,650 $58,650 $58,020 $58,020 $59,074 $59,074
Gross Profit 16,537 13,761 15,583 14,697 14,554 12,930 14,560 14,208
Net Income
(Loss) 4,866 3,152 4,066 3,519 333 (670) 2,714 2,496
Net Income (Loss)
Per Share $ 0.32 $ 0.20 $ 0.26 $ 0.23 $ 0.02 $ (0.04) $ 0.18 $ 0.16
During the third quarter of fiscal 1996, the Company recorded a special charge
of $4,200 for the restructuring of its four product groups (see Note 3).
The unaudited quarterly information for the first three quarters of fiscal 1997
and all of fiscal 1996 has been restated due to the accounting irregularities
discovered at one of the Company's operating units (See Note 2).
50
Report of Independent Public Accountants
To the Shareowners and Board of Directors of Material Sciences Corporation:
We have audited the accompanying consolidated balance sheets of Material
Sciences Corporation (a Delaware Corporation) and subsidiaries as of February
28, 1997, and February 29, 1996, (as restated - see Note 2) and the related
consolidated statements of income and cash flows for each of the three fiscal
years in the period ended February 28, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Material Sciences Corporation
as of February 28, 1997, and February 29, 1996, and the results of its
operations and its cash flows for each of the three fiscal years in the period
ended February 28, 1997, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 29, 1997
51
(b) The unaudited selected quarterly financial data which is referred to in
Item 8(a) above and is set forth in Note 16 of the Notes to Consolidated
Financial Statements under the caption "Summary of Quarterly Data
(Unaudited)".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------ ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------- --------------------------------------------------
Reference is made to the information found under the caption "Election of
Directors" on pages 2 through 5 of the Company's proxy statement for the
1997 annual meeting of shareowners (the "proxy statement"), all of which is
incorporated by reference herein, for information on the directors of the
Company. Reference is made to Part I of this report for information on the
executive officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
------- ----------------------
Reference is made to the information under the captions "Compensation of
Executive Officers", "Compensation and Organization Committee Report", "MSC
Performance Graph", "Employment and Other Agreements", and "Employee and
Other Plans" on pages 8 through 16 of the proxy statement, all of which is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
------- HOLDERS AND MANAGEMENT
----------------------
Reference is made to the information under the captions "Security
Ownership of Management of the Company" and "Information with Respect to
Certain Shareowners" set forth on pages 6 and 7 of the proxy statement, all
of which is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
------- ----------------------------------------------
There were no relationships or related transactions requiring disclosure
in fiscal 1997.
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
- ------- REPORTS ON FORM 8-K
-------------------
(A) FINANCIAL STATEMENTS AND SCHEDULES OF THE COMPANY
I Financial Statements of the Company
-----------------------------------
(i) Consolidated Statements of Income for the years ended
February 28 or 29, 1997, 1996, and 1995
(ii) Consolidated Balance Sheets - February 28, 1997 and February
29, 1996
(iii) Consolidated Statements of Cash Flows for the years ended
February 28 or 29, 1997, 1996, and 1995
(iv) Notes to Consolidated Financial Statements
(v) Report of Independent Public Accountants
II Supplemental Schedule
---------------------
(i) Report of Independent Public Accountants with respect to
Supplemental Schedule to the Financial Statements
(ii) Schedule II - Reserve for Receivable Allowances and Deferred
Tax Asset Valuation Allowance
All other schedules have been omitted, since the required information is not
significant, is included in the financial statements or the notes thereto, or is
not applicable.
53
(c) EXHIBITS
Exhibit
Number Description of Exhibit
------ ----------------------
2(a) Parent Agreement dated as of October 15, 1984, by and among
Bethlehem Steel Corporation, Inland Steel Company, Pre Finish
Metals Incorporated and Material Sciences Corporation.(1)
2(b) Partnership Agreement dated as of August 30, 1984, by and among
EGL Steel Inc., Inland Steel Electrogalvanizing Corporation and
Pre Finish Metals (EG) Incorporated.(1)
2(c) Amendment No. 1 to the Partnership Agreement dated as of August
30, 1984.(2)
2(d) Amendment No. 2 to the Partnership Agreement dated as of August
30, 1984.(2)
2(e) Operating Agreement dated as of October 15, 1984, by and between
Pre Finish Metals (EG) Incorporated and Walbridge Coatings, An
Illinois Partnership.(1)
2(f) Coating Agreement dated as of October 15, 1984, by and between
Bethlehem Steel Corporation and Walbridge Coatings, An Illinois
Partnership.(1)
2(g) Coating Agreement dated as of October 15, 1984, by and between
Inland Steel Company and Walbridge Coatings, An Illinois
Partnership.(1)
2(h) Amendments to Definitive Agreements dated as of March 31, 1986,
among EGL Steel Inc., Inland Steel Electrogalvanizing
Corporation, Pre Finish Metals (EG) Incorporated, Bethlehem
Steel Corporation, Inland Steel Company, Pre Finish Metals
Incorporated and Material Sciences Corporation.(6)
2(i) Further Amendments to Definitive Agreements dated as of July 24,
1986, among EGL Steel Inc., Inland Steel Electrogalvanizing
Corporation, Pre Finish Metals (EG) Incorporated, Bethlehem
Steel Corporation, Inland Steel Company, Inland Steel
Industries, Inc., Pre Finish Metals Incorporated and Material
Sciences Corporation.(3)
54
Exhibit
Number Description of Exhibit
------ ----------------------
2(j) Further Amendments to Definitive Agreements dated as of April
23, 1992, among EGL Steel Inc., Inland Steel Electrogalvanizing
Corporation, Pre Finish Metals (EG) Incorporated, Bethlehem
Steel Corporation, Inland Steel Company, Inland Steel
Industries, Inc., Pre Finish Metals Incorporated and Material
Sciences Corporation.(7)
3(a) Registrant's Certificate of Incorporation, as amended.(1)
3(b) Amendment to Registrant's Certificate of Incorporation.(2)
3(c) Amendment to Registrant's Certificate of Incorporation.(4)
3(d) Certificate of Designation, Preferences and Rights of Series B
Junior Participating Preferred Stock.(9)
3(e) Registrant's By-laws, as amended.(6)
4(a) Credit Agreement dated as of September 1, 1994, between Material
Sciences Corporation and Bank of America Illinois.(5)
4(b) First Amendment to Credit Agreement dated as of September 5,
1995, by and between Material Sciences Corporation and Bank of
America Illinois.(10)
4(c) Money Market Demand Note (Fixed and Floating Rate Corporation)
dated December 20, 1995 executed by Material Sciences
Corporation in favor of The Northern Trust Company in the
aggregate principal amount of $25,000,000.(10)
4(d) Note Agreement, dated as of February 15, 1997, by and among the
Registrant and the purchasers described on Schedule I attached
thereto.
55
Exhibit
Number Description of Exhibit
------ ----------------------
4(e) Rights Agreement, dated as of June 20, 1996, between Material
Sciences Corporation and Chase Mellon Shareholder Services,
L.L.C. as Rights Agent.(9)
There are omitted certain instruments with respect to long-term
debt, the total amount of securities authorized under each of
which does not exceed 10% of the total assets of the registrant
and its subsidiaries on a consolidated basis. A copy of each
such instrument will be furnished to the Commission upon
request.
10(a) Material Sciences Corporation Stock Purchase Plan.(1)
10(b) Material Sciences Corporation Supplemental Pension Plan.(1)
10(c) Material Sciences Corporation Employee Stock Purchase Plan.(6)
10(d) Material Sciences Corporation 1985 Stock Option Plan for Key
Employees.(6)
10(e) Material Sciences Corporation 1985 Stock Option Plan for
Directors.(6)
10(f) Material Sciences Corporation 1992 Omnibus Stock Awards Plan
for Key Employees.(11)
10(g) Employment Agreement effective February 27, 1991, between
Material Sciences Corporation and G. Robert Evans.(6)
10(h) Material Sciences Corporation 1991 Stock Option Plan for
Directors.(6)
10(i) Material Sciences Corporation Directors Deferred Compensation
Plan.(6)
10(j) Material Sciences Corporation 1996 Stock Option Plan for
Non-Employee Directors.(12)
10(k) Deferred Compensation Plan of Material Sciences Corporation and
Certain Participating Subsidiaries.(6)
56
Exhibit
Number Description of Exhibit
------ ----------------------
10(l) Lease and Agreement dated as of December 1, 1980, between Line
6 Corp. and Pre Finish Metals Incorporated, relating to
Walbridge, Ohio facility.(1)
10(m) First Amendment to Lease and Agreement dated as of May 30, 1986,
between Corporate Property Associates and Corporate Property
Associates 2 and Pre Finish Metals Incorporated.(3)
10(n) Sublease dated as of May 30, 1986, between Pre Finish Metals
Incorporated and Walbridge Coatings, An Illinois Partnership.(3)
10(o) Lease Guaranty dated as of May 30, 1986, from Material Sciences
Corporation to Corporate Property Associates and Corporate
Property Associates 2.(3)
10(p) Note Purchase Agreement dated as of May 30, 1986, between
Material Sciences Corporation and Creditanstalt-Bankverein (New
York Branch).(3)
10(q) Agreement dated as of May 30, 1986, between Material Sciences
Corporation and Corporate Property Associates and Corporate
Property Associates 2.(3)
10(r) Term Loan Agreement dated as of July 23, 1986, among Walbridge
Coatings, An Illinois Partnership, Creditanstalt-Bankverein (New
York Branch) and The Toledo Trust Company, including the related
guaranties by Material Sciences Corporation and Pre Finish
Metals Incorporated.(3)
10(s) Amendment No. 1 to Term Loan Agreement dated as of March 31,
1987, among Walbridge Coatings, An Illinois Partnership,
Creditanstalt-Bankverein (New York Branch) and The Toledo Trust
Company.(3)
10(t) Amended and Restated Credit Facility Agreement dated as of July
23, 1986, between Walbridge Coatings, An Illinois Partnership,
and Creditanstalt-Bankverein, including the related guaranties
by Material Sciences Corporation and Pre Finish Metals
Incorporated.(3)
57
Exhibit
Number Description of Exhibit
------ ----------------------
10(u) Amendment and Consent Agreement dated as of April 23, 1992,
among Walbridge Coatings, An Illinois Partnership, Bethlehem
Steel Corporation, EGL Steel, Inc., Inland Steel Industries,
Inc., Inland Steel Company, Inland Steel Electrogalvanizing
Corporation, Material Sciences Corporation, Pre Finish Metals
Incorporated, Pre Finish Metals (EG) Incorporated, and
Creditanstalt-Bankverein, amending the Term Loan Agreement dated
as of July 23, 1986, as amended on March 31, 1987, and amending
the Amended and Restated Credit Facility Agreement dated as of
July 23, 1986, including the related guaranties by Material
Sciences Corporation and Pre Finish Metals Incorporated.(7)
10(v) Form of Standstill Agreement dated as of January 29, 1986, among
Material Sciences Corporation, Richard L. Burns and Joyce
Burns.(6)
10(w) Form of Indemnification Agreement between Material Sciences
Corporation and each of its officers and directors.(7)
10(x) Supplemental Retirement Agreement dated as of December 28, 1992
between Material Sciences Corporation and William H. Vrba.(8)
10(y) Letter Agreement dated as of May 8, 1991 between Material
Sciences Corporation and William H. Vrba.(8)
10(z) Severance Benefits Agreement, dated October 22, 1996 between
Material Sciences Corporation and James J. Waclawik, Sr.
11 Computation of net income per share.
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.(13)
58
- --------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 2-93414), which was declared effective on
November 27, 1984.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-00828), which was filed on October 11,
1985.
(3) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 28, 1989 (File No. 1-8803).
(4) Incorporated by reference to the Registrant's Form 8-A dated June 17,
1986 (File No. 1-8803).
(5) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
for the Quarter Ended August 31, 1994 (File No. 1-8803).
(6) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 28, 1991 (File No. 1-8803).
(7) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 29, 1992 (File No. 1-8803).
(8) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 28, 1993 (File No. 1-8803).
(9) Incorporated by reference to the Registrant's Form 8-A filed on June 25,
1996 (File No. 1-8803).
(10) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 29, 1996 (File No. 1-8803).
(11) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-15679) which was filed on November 6,
1996.
(12) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-15677) which was filed on November 6,
1996.
(13) Appears only in the electronic filing of this report with the Securities
and Exchange Commission.
59
(d) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
--------------------------------------
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MATERIAL SCIENCES CORPORATION
By: /s/ Gerald G. Nadig
---------------------
Gerald G. Nadig
President and Chief Executive Officer
Date: May 23, 1997
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons in the capacities indicated on May 23,
1997.
Signature Title
--------- -----
/s/ Gerald G. Nadig President and Chief Executive Officer and Director
- --------------------------- (Principal Executive Officer)
Gerald G. Nadig
/s/ James J. Waclawik, Sr. Vice President, Chief Financial Officer, and
- --------------------------- Secretary
James J. Waclawik, Sr. (Principal Financial Officer)
/s/ David J. DeNeve Controller
- --------------------------- (Principal Accounting Officer)
David J. DeNeve
/s/ Jerome B. Cohen Director
- ---------------------------
Jerome B. Cohen
/s/ Roxanne J. Decyk Director
- ---------------------------
Roxanne J. Decyk
/s/ Eugene W. Emmerich Director
- ---------------------------
Eugene W. Emmerich
/s/ G. Robert Evans Chairman of the Board and Director
- ---------------------------
G. Robert Evans
/s/ E. F. Heizer, Jr. Director
- ---------------------------
E. F. Heizer, Jr.
/s/ J. Frank Leach Director
- ---------------------------
J. Frank Leach
/s/ Irwin P. Pochter Director
- ---------------------------
Irwin P. Pochter
61
EXHIBIT INDEX
MATERIAL SCIENCES CORPORATION
ANNUAL REPORT ON FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
- -------- --------------------------------------------
REPORTS ON FORM 8-K
-------------------
(a) FINANCIAL STATEMENTS AND SCHEDULES OF THE COMPANY
I Financial Statements of the Company
-----------------------------------
(i) Consolidated Statements of Income for the years ended
February 28 or 29, 1997, 1996, and 1995
(ii) Consolidated Balance Sheets -February 28, 1997 and
February 29, 1996
(iii) Consolidated Statements of Cash Flows for the years ended
February 28 or 29, 1997, 1996, and 1995
(iv) Notes to Consolidated Financial Statements
(v) Report of Independent Public Accountants
II Supplemental Schedule
---------------------
(i) Report of Independent Public Accountants with respect to
Supplemental Schedule to the Financial Statements
(ii) Schedule II - Reserve for Receivable Allowances and Deferred
Tax Asset Valuation Allowance
All other schedules have been omitted, since the required information is not
significant, is included in the financial statements or the notes thereto, or is
not applicable.
62
MATERIAL SCIENCES CORPORATION
ANNUAL REPORT ON FORM 10-K
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------- ---------------------- -----
2(a) Parent Agreement dated as of October
15, 1984, by and among Bethlehem
Steel Corporation, Inland Steel
Company, Pre Finish Metals
Incorporated and Material Sciences
Corporation.(1)
2(b) Partnership Agreement dated as of
August 30, 1984, by and among EGL
Steel Inc., Inland Steel
Electrogalvanizing Corporation and
Pre Finish Metals (EG)
Incorporated.(1)
2(c) Amendment No. 1 to the Partnership
Agreement dated as of August 30,
1984.(2)
2(d) Amendment No. 2 to the Partnership
Agreement dated as of August 30,
1984.(2)
2(e) Operating Agreement dated as of
October 15, 1984, by and between Pre
Finish Metals (EG) Incorporated and
Walbridge Coatings, An Illinois
Partnership.(1)
2(f) Coating Agreement dated as of
October 15, 1984, by and between
Bethlehem Steel Corporation and
Walbridge Coatings, An Illinois
Partnership.(1)
2(g) Coating Agreement dated as of
October 15, 1984, by and between
Inland Steel Company and Walbridge
Coatings, An Illinois Partnership.(1)
2(h) Amendments to Definitive Agreements
dated as of March 31, 1986, among
EGL Steel Inc., Inland Steel
Electrogalvanizing Corporation, Pre
Finish Metals (EG) Incorporated,
Bethlehem Steel Corporation, Inland
Steel Company, Pre Finish Metals
Incorporated and Material Sciences
Corporation.(6)
63
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------- ---------------------- -----
2(i) Further Amendments to Definitive
Agreements dated as of July 24,
1986, among EGL Steel Inc., Inland
Steel Electrogalvanizing
Corporation, Pre Finish Metals (EG)
Incorporated, Bethlehem Steel
Corporation, Inland Steel Company,
Inland Steel Industries, Inc., Pre
Finish Metals Incorporated and
Material Sciences Corporation.(3)
2(j) Further Amendments to Definitive
Agreements dated as of April 23,
1992, among EGL Steel Inc., Inland
Steel Electrogalvanizing
Corporation, Pre Finish Metals (EG)
Incorporated, Bethlehem Steel
Corporation, Inland Steel Company,
Inland Steel Industries, Inc., Pre
Finish Metals Incorporated and
Material Sciences Corporation.(7)
3(a) Registrant's Certificate of
Incorporation, as amended.(1)
3(b) Amendment to Registrant's
Certificate of Incorporation.(2)
3(c) Amendment to Registrant's
Certificate of Incorporation.(4)
3(d) Certificate of Designation,
Preferences and Rights of Series B
Junior Participating Preferred
Stock.(9)
3(e) Registrant's By-laws, as amended.(6)
4(a) Credit Agreement dated as of
September 1, 1994 between Material
Sciences Corporation and Bank of
America Illinois.(5)
4(b) First Amendment to Credit Agreement
dated as of September 25, 1995 by
and between Material Sciences
Corporation and Bank of America
Illinois.(10)
64
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
- ------ ---------------------- -----
4(c) Money Market Demand Note (Fixed and
Floating Rate Corporation) dated
December 20, 1995 executed by
Material Sciences Corporation in
favor of The Northern Trust Company
in the aggregate principal amount of
$25,000,000.(10)
4(d) Note Agreement, dated as of February
15, 1997, by and among the
Registrant and the purchasers
described on Schedule I attached
thereto.
4(e) Rights Agreement, dated as of June
20, 1996, between Material Sciences
Corporation and Chase Mellon
Shareholder Services, L.L.C. as
Rights Agent.(9)
There are omitted certain
instruments with respect to
long-term debt, the total amount of
securities authorized under each of
which does not exceed 10% of the
total assets of the registrant and
its subsidiaries on a consolidated
basis. A copy of each such
instrument will be furnished to the
Commission upon request.
10(a) Material Sciences Corporation Stock
Purchase Plan. (1)
10(b) Material Sciences Corporation
Supplemental Pension Plan.(1)
10(c) Material Sciences Corporation
Employee Stock Purchase Plan.(6)
10(d) Material Sciences Corporation 1985
Stock Option Plan for Key
Employees.(6)
10(e) Material Sciences Corporation 1985
Stock Option Plan for Directors.(6)
10(f) Material Sciences Corporation 1992
Omnibus Stock Awards Plan for Key
Employees. (11)
65
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------- ---------------------- -----
10(g) Employment Agreement effective
February 27, 1991, between Material
Sciences Corporation and
G. Robert Evans.(6)
10(h) Material Sciences Corporation 1991
Stock Option Plan for Directors.(6)
10(i) Material Sciences Corporation
Directors Deferred Compensation
Plan.(6)
10(j) Material Sciences Corporation 1996
Stock Option Plan for Non-Employee
Directors.(12)
10(k) Deferred Compensation Plan of
Material Sciences Corporation and
Certain Participating
Subsidiaries.(6)
10(l) Lease and Agreement dated as of
December 1, 1980, between Line 6
Corp. and Pre Finish Metals
Incorporated, relating to Walbridge,
Ohio facility.(1)
10(m) First Amendment to Lease and
Agreement dated as of May 30, 1986,
between Corporate Property
Associates and Corporate Property
Associates 2 and Pre Finish Metals
Incorporated.(3)
10(n) Sublease dated as of May 30, 1986,
between Pre Finish Metals
Incorporated and Walbridge Coatings,
An Illinois Partnership.(3)
10(o) Lease Guaranty dated as of May 30,
1986, from Material Sciences
Corporation to Corporate Property
Associates and Corporate Property
Associates 2.(3)
66
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------- ---------------------- ----
10(p) Note Purchase Agreement dated as of
May 30, 1986, between Material
Sciences Corporation and
Creditanstalt-Bankverein (New York
Branch).(3)
10(q) Agreement dated as of May 30, 1986,
between Material Sciences
Corporation and Corporate Property
Associates and Corporate Property
Associates 2.(3)
10(r) Term Loan Agreement dated as of July
23, 1986, among Walbridge Coatings,
An Illinois Partnership,
Creditanstalt-Bankverein (New York
Branch) and The Toledo Trust
Company, including the related
guaranties by Material Sciences
Corporation and Pre Finish Metals
Incorporated.(3)
10(s) Amendment No. 1 to Term Loan
Agreement dated as of March 31,
1987, among Walbridge Coatings, An
Illinois Partnership,
Creditanstalt-Bankverein (New York
Branch) and The Toledo Trust
Company.(3)
10(t) Amended and Restated Credit Facility
Agreement dated as of July 23, 1986,
between Walbridge Coatings, An
Illinois Partnership, and
Creditanstalt-Bankverein, including
the related guaranties by Material
Sciences Corporation and Pre Finish
Metals Incorporated.(3)
67
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------- ---------------------- ----
10(u) Amendment and Consent Agreement
dated as of April 23, 1992, among
Walbridge Coatings, An Illinois
Partnership, Bethlehem Steel
Corporation, EGL Steel, Inc., Inland
Steel Industries, Inc., Inland Steel
Company, Inland Steel
Electrogalvanizing Corporation,
Material Sciences Corporation, Pre
Finish Metals Incorporated, Pre
Finish Metals (EG) Incorporated, and
Creditanstalt-Bankverein, amending
the Term Loan Agreement dated as of
July 23, 1986, as amended on March
31, 1987, and amending the Amended
and Restated Credit Facility
Agreement dated as of July 23, 1986,
including the related guaranties by
Material Sciences Corporation and
Pre Finish Metals Incorporated.(7)
10(v) Form of Standstill Agreement dated
as of January 29, 1986, among
Material Sciences Corporation,
Richard L. Burns and Joyce Burns.(6)
10(w) Form of Indemnification Agreement
between Material Sciences
Corporation and each of its officers
and directors.(7)
10(x) Supplemental Retirement Agreement
dated as of December 28, 1992
between Material Sciences
Corporation and William H. Vrba.(8)
10(y) Letter Agreement dated as of May 8,
1991 between Material Sciences
Corporation and William H. Vrba.(8)
10(z) Severance Benefits Agreement, dated
October 22, 1996 between Material
Sciences Corporation and James J.
Waclawik, Sr.
11 Computation of net income per share.
21 Subsidiaries of the Registrant.
68
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------- ---------------------- -----
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.(13)
-------------------------------
(1) Incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 2-93414), which was declared effective on
November 27, 1984.
(2) Incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-00828), which was filed on October 11, 1985.
(3) Incorporated by reference to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended
February 28, 1989 (File No. 1-8803).
(4) Incorporated by reference to the Registrant's Form
8-A dated June 17, 1986 (File No. 1-8803).
(5) Incorporated by reference to the Registrant's Form
10-Q Quarterly Report for the Quarter Ended August
31, 1994 (File No. 1-8803).
(6) Incorporated by reference to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended
February 28, 1991 (File No. 1-8803).
(7) Incorporated by reference to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended
February 29, 1992 (File No. 1-8803).
(8) Incorporated by reference to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended
February 28, 1993 (File No. 1-8803).
(9) Incorporated by reference to the Registrant's Form
8-A filed on June 25, 1996 (File No. 1-8803).
(10) Incorporated by reference to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended
February 29, 1996 (File No. 1-8803).
(11) Incorporated by reference to the Registrant's
Registration Statement on Form S-8 (Registration
No. 333-15679) which was filed on November 6, 1996.
69
(12) Incorporated by reference to the Registrant's
Registration Statement on Form S-8 (Registration
No. 333-15677) which was filed on November 6, 1996.
(13) Appears only in the electronic filing of this
report with the Securities and Exchange Commission.
70
MATERIAL SCIENCES CORPORATION
Supplemental Schedule
71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
WITH RESPECT TO SUPPLEMENTAL SCHEDULE
TO THE FINANCIAL STATEMENTS
To the Shareowners and Board of Directors of Material Sciences Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in the Material Sciences Corporation
1997 Annual Report to Shareowners included in this Form 10-K, and have issued
our report thereon dated April 29, 1997. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The supplemental financial statement schedule is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. The supplemental financial statement schedule
has been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 29, 1997
72
SCHEDULE II
MATERIAL SCIENCES CORPORATION AND SUBSIDIARIES
RESERVE FOR RECEIVABLE ALLOWANCES AND DEFERRED TAX ASSET VALUATION ALLOWANCE
(in thousands)
Additions
---------------------------------------
Balance at Charged to Charged Reclassifications Deductions Balance at
beginning costs and to other and from end of
of year expense accounts Acquisition reserve year
------------ ---------- -------- ----------------- ---------- ----------
1995
- -----------------------
Receivable Allowances $3,502 $4,123 $ - $ - $3,997 $3,628
Deferred Tax Asset
Valuation Allowance 1,620 - - - 1,620 -
------ ------ ------ ------ ------ ------
Total $5,122 $4,123 $ - $ - $5,617 $3,628
====== ====== ====== ====== ====== ======
1996
- ------------------------
Receivable Allowances $3,628 $6,612 $ - $1,934 $7,767 $4,407
====== ====== ====== ====== ====== ======
1997
- ------------------------
Receivable Allowances $4,407 $4,132 $ - $ - $6,268 $2,271
====== ====== ====== ====== ====== ======
The activity in the Receivable Allowances account includes the Company's bad
debt, claim, and scrap allowance.
73