-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FhpTkaISSTqu6SUxHVpPM4tE+Ks2gOS+XNU9b7MoMST3a5qOUALRkwyw9eWwjs6l fDWQO04S6ppzWNox2Ivuew== 0000950131-96-002493.txt : 19960529 0000950131-96-002493.hdr.sgml : 19960529 ACCESSION NUMBER: 0000950131-96-002493 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960229 FILED AS OF DATE: 19960528 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATERIAL SCIENCES CORP CENTRAL INDEX KEY: 0000755003 STANDARD INDUSTRIAL CLASSIFICATION: COATING, ENGRAVING & ALLIED SERVICES [3470] IRS NUMBER: 952673173 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08803 FILM NUMBER: 96572795 BUSINESS ADDRESS: STREET 1: 2300 E PRATT BLVD CITY: ELK GROVE VILLAGE STATE: IL ZIP: 60007 BUSINESS PHONE: 7084398270 10-K 1 FORM 10-K 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 [FEE REQUIRED] For the fiscal year ended: February 29, 1996 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________ to _________ Commission file number: 1-8803 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.) 2300 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: Name of each exchange Title of each class 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 $250,197,000 at April 26, 1996 (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 April 26, 1996, the registrant had outstanding an aggregate of 15,396,750 shares of its Common Stock. Documents Incorporated by Reference Portions of the following documents 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 1996 annual Parts I, II, IV report to shareowners Registrant's proxy Part III statement for the Annual Meeting of Shareowners to be held on June 20, 1996 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 (the new name for metallizing and coating); 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 Pre Finish Metals Inc., f/k/a Pre Finish Metals Incorporated ("PFM"), MSC Specialty Films Inc., f/k/a/ Deposition Technologies, Inc. ("MSCSF"), MSC Laminates and Composites Inc. ("MSCLC"), and MSC Walbridge Coatings Inc., f/k/a Pre Finish Metal (EG) Incorporated ("MSCWC") subsidiaries, operates seven manufacturing plants. 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"). MSCSF operates a thin film sputter-deposition metallizing, coating, and laminating facility in San Diego, California. MSCLC operates one facility in Elk Grove Village, Illinois, in conjunction with PFM. Additional information concerning certain transactions and events is incorporated herein by reference to Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1996 annual report, which is incorporated herein by reference. 1 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 2300 East Pratt Boulevard, Elk Grove Village, Illinois 60007, and its telephone number at that address is (847) 439-8270. 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. 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 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 1996 fiscal year set another record as a result of increased sales to General Motors Corporation ("General Motors"), Ford Motor 2 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 cost of electricity 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 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 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 3 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 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 September 1995, MSC acquired all of the outstanding capital stock of Solar-Gard International, Inc. ("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 and subsequent to the acquisition, SGI has expanded in California (two distribution centers) and Florida (Latin American export center). SGI currently distributes products in over sixty countries. During the first quarter of fiscal 1997, the Company entered into an agreement to purchase 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. The Company anticipates this transaction will be completed during the first quarter of fiscal 1997. 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. 4 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 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 5 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 14% of the total tons processed in the United States in calendar 1995. 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 3.4 million tons in calendar 1995. 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 result, a shift from 6 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 23%, 22% and 24% of MSC's net sales in fiscal 1996, 1995 and 1994, 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, 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 U.S. 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. Historically, third party sales have not been significant. The sales and marketing responsibilities of the Partnership are currently split between Bethlehem and Inland at 77% and 23%, 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 1996, Inland utilized only 10% 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 23% 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. 7 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. Competition in the production and sale of electrogalvanized steel for the automotive industry comes from other steel companies that, either directly or through joint ventures, produce electrogalvanized steel on eight manufacturing lines in the United States, including Inland's other facility. Limited quantities of electrogalvanized 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 electrogalvanized 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 8%, 8% and 7% in fiscal 1996, 1995 and 1994, 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 38% 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 acquisition of SGI 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. 8 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 electrogalvanized steel. The Company sells its specialty films' products primarily through SGI and to other 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 53%, 52% and 52% of MSC's net sales in fiscal 1996, 1995 and 1994, 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 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 8%, 10% and 8% of MSC's net sales in fiscal 1996, 1995 and 1994, respectively. The Company's backlog of orders as of February 29, 1996, was approximately $49.9 million, all of which is expected to be filled during the remainder of the current fiscal year. The Company's backlog was approximately $43.6 million as of February 28, 1995. MSC is generally not dependant 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. 9 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," on pages 28 and 29 of the annual report, which is incorporated by reference herein. 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 $0.7 million in fiscal 1996, and has budgeted approximately $1.1 million during fiscal 1997, 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 1996, $5.4 million in fiscal 1995 and $4.0 million in fiscal 1994 for product and process development activities. 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 29, 1996, the Company had 882 full-time employees. Of these, approximately 611 were engaged in manufacturing, 116 in marketing and sales, 103 in administrative and clerical positions, and 52 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; 10 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. [THIS SPACE INTENTIONALLY LEFT BLANK.] ----------------------------------- 11 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company as of April 26, 1996 are as follows: Position and Name Age Year First Elected ---- --- ------------------ G. Robert Evans...............64 Chairman and Chief Executive Officer, MSC since July 1991; previously Chairman, President, and Chief Executive Officer, MSC since February 1991. Gerald G. Nadig...............51 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. William H. Vrba...............64 Senior Vice President, Chief Financial Officer, and Secretary, MSC since July 1991. Frank D. Graziano.............63 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. Anton F. Vitzthum.............61 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. .......56 Vice President, Human Resources, MSC since July 1991; previously Vice President, Human Resources PFM since 1988. Robert J. Mataya..............53 Vice President, Business Planning and Development, MSC since July 1991; previously 12 Vice President, Business Planning and Development, PFM since 1990; previously Vice President, Marketing, PFM since 1986. James J. Waclawik, Sr. .......37 Vice President and Controller, MSC since July 1991; previously Vice President and Controller, PFM since 1989; previously Controller PFM since 1988. David A. Fletcher.............42 President and Chief Operating Officer,MSCSF since September 1993; previously Vice President, Research and Development, MSCSF since 1989. During the past five years, Messrs. Evans, Nadig, Vrba, Graziano, Vitzthum, Lazowski, Mataya, Waclawik, and Fletcher have been employed in management capacities by the Company. Mr. Evans serves as a director of Consolidated Freightways, Inc., Fiberboard Corporation, and Swift Energy Company. [THIS SPACE INTENTIONALLY LEFT BLANK.] ----------------------------------- 13 ITEM 2. PROPERTIES - ------- ---------- The Company owns or leases facilities with an aggregate of approximately 1,126,000 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 Plant No. 1 58,000 Owner Elk Grove Village, Illinois Plant No. 2 205,000 Owner Elk Grove Village, Illinois Plant No. 3 152,000 Owner 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," on pages 28 and 29 of the annual report, which is incorporated by reference herein. In May 1996, the lawsuit with a former distributor of solar control and safety window film referenced in Note 6 was settled and the lawsuit was dismissed. 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 1996. 14 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. Sales prices for the first quarter of fiscal 1995 have been retroactively adjusted to give effect to the one-half share per share dividend declared and paid in the second quarter of fiscal 1995. 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 Fiscal Fiscal Year Quarter High Low ------- ------- ------ ------ 1995 1st 17 3/4 14 3/8 2nd 17 1/2 14 7/8 3rd 17 1/4 14 1/8 4th 17 1/8 13 3/4 There were 1,143 owners of record of the Company's Common Stock at the close of business on April 26, 1996. 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. 15 ITEM 6. SELECTED FINANCIAL DATA - ------ ----------------------- Reference is made to the information found under the caption "Selected Financial Data" on pages 34 and 35 of the annual report, which is incorporated by reference herein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF - ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Reference is made to the information found under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 20 through 23 of the annual report, which is incorporated by reference herein. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------ ------------------------------------------- (a) The Consolidated Statements of Income for the years ended February 29, 1996, February 28, 1995 and February 28, 1994, Consolidated Balance Sheets as of February 29, 1996 and February 28, 1995, Consolidated Statements of Cash Flows for the years ended February 29, 1996, February 28, 1995 and February 28, 1994, Notes to Consolidated Financial Statements and the Report of Independent Public Accountants, set forth on pages 24 through 33 and page 19 of the annual report, are incorporated by reference herein. (b) The unaudited selected quarterly financial data which is referred to in Item 8(a) above and is set forth in Note 14 of the Notes to Consolidated Financial Statements under the caption "Summary of Quarterly Data (Unaudited)" on page 33 of the annual report is incorporated by reference herein. 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 4 of the Company's proxy statement for the 1996 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. 16 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 7 through 14 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 set forth on pages 5 and 6 of the proxy statement, all of which is incorporated by reference herein, except that the table on page 5 is hereby amended to reflect that as of April 26, 1996 (i) the number of shares beneficially owned by A.F. Vitzthum is 91,550 shares for a total of 113,475 and (ii) the number of shares beneficially owned by all officers and directors as a group is 699,648 shares for a total of 1,183,423, which represents 7.7% of the Common Stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ---------------------------------------------- There were no relationships or related transactions requiring disclosure in fiscal 1996. [THIS SPACE INTENTIONALLY LEFT BLANK.] ----------------------------------- 17 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. Incorporated herein by reference to pages 24 through 33 and page 19 of the Company's annual report. (i) Consolidated Statements of Income for the years ended February 28 or 29, 1996, 1995 and 1994 (ii) Consolidated Balance Sheets - February 29, 1996 and February 28, 1995 (iii) Consolidated Statements of Cash Flows for the years ended February 28 or 29, 1996, 1995 and 1994 (iv) Notes to Consolidated Financial Statements (v) Report of Independent Public Accountants II Supplemental Schedules ---------------------- (i) Report of Independent Public Accountants with respect to Supplemental Schedules 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. 18 (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) 19 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 A Junior Participating Preferred Stock.(4) 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 Rights Agreement dated as of April 21, 1994 by and between Material Sciences Corporation and Mellon Securities Trust Company.(9) 4(c) First Amendment to Credit Agreement dated as of September 5, 1995, by and between Material Sciences Corporation and Bank of America Illinois. 4(d) 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. 20 Exhibit Number Description of Exhibit - ------- ---------------------- 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.(7) 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. 10(k) Deferred Compensation Plan of Material Sciences Corporation and Certain Participating Subsidiaries.(6) 21 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) 22 Exhibit Number Description of Exhibit - ------- ---------------------- 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) 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) Rights Agreement dated as of June 17, 1986, between Material Sciences Corporation and Continental Illinois National Bank and Trust Company of Chicago.(6) 10(x) Form of Indemnification Agreement between Material Sciences Corporation and each of its officers and directors.(7) 10(y) Supplemental Retirement Agreement dated as of December 28, 1992 between Material Sciences Corporation and William H. Vrba.(8) 10(aa) Letter Agreement dated as of May 8, 1991 between Material Sciences Corporation and William H. Vrba. (8) 23 Exhibit Number Description of Exhibit - ------- ---------------------- 11 Computation of net income per share. 13 Annual Report to Shareowners. (Except as specifically incorporated herein by reference, this document shall not be deemed "filed" as a part of this Form 10-K Annual Report.) 21 Subsidiaries of the Registrant. 23 Consent of Arthur Andersen LLP. 27 Financial Data Schedule.(10) _______________ (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). 24 (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 10-K Annual Report for the Fiscal Year Ended February 28, 1994 (File No. 1-8803). (10) Appears only in the electronic filing of this report with the Securities and Exchange Commission. (d) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the fourth quarter. [THIS SPACE INTENTIONALLY LEFT BLANK.] ----------------------------------- 25 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/ G. Robert Evans ----------------------------------------- G. Robert Evans Chairman and Chief Executive Officer Date: May 28, 1996 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 28, 1996. Signature Title --------- ----- /s/ G. Robert Evans Chairman and Chief Executive - -------------------------- Officer, and Director (Principal G. Robert Evans Executive Officer) /s/ William H. Vrba Senior Vice President, Chief - -------------------------- Financial Officer, and Secretary William H. Vrba (Principal Financial Officer) /s/ James J. Waclawik, Sr. Vice President and Controller - -------------------------- (Principal Accounting Officer) James J. Waclawik, Sr. /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/ E. F. Heizer, Jr. Director - -------------------------- E. F. Heizer, Jr. /s/ J. Frank Leach Director - -------------------------- J. Frank Leach /s/ Gerald G. Nadig Director - -------------------------- Gerald G. Nadig /s/ Irwin P. Pochter Director - -------------------------- Irwin P. Pochter 26 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. Incorporated herein by reference to pages 24 through 33 and page 19 of the Company's annual report. (i) Consolidated Statements of Income for the years ended February 28 or 29, 1996, 1995 and 1994 (ii) Consolidated Balance Sheets -February 29, 1996 and February 28, 1995 (iii) Consolidated Statements of Cash Flows for the years ended February 28 or 29, 1996, 1995 and 1994 (iv) Notes to Consolidated Financial Statements (v) Report of Independent Public Accountants II Supplemental Schedules (i) Report of Independent Public Accountants with respect to Supplemental Schedules 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. 28 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) - -------------------------------------------------------------------------------
29
============================================================= 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 A Junior Participating Preferred Stock.(4) - ------------------------------------------------------------- 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 Rights Agreement dated as of April 21, 1994 by and between Material Sciences Corporation and Mellon Securities Trust Company.(9) - ------------------------------------------------------------- 4(c) First Amendment to Credit Agreement dated as of September 25, 1995 by and between Material Sciences Corporation and Bank of America Illinois - ------------------------------------------------------------- 4(d) 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. - -------------------------------------------------------------
30 ============================================================= Sequentially Exhibit Numbered Number Description of Exhibit Page* - ------ ---------------------- ---- - ------------------------------------------------------------- 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(7). - ------------------------------------------------------------- 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. - ------------------------------------------------------------- 10(k) Deferred Compensation Plan of Material Sciences Corporation and Certain Participating Subsidiaries.(6) - ------------------------------------------------------------- 31 ============================================================= Sequentially Exhibit Numbered Number Description of Exhibit Page* - ------ ---------------------- ---- - ------------------------------------------------------------- 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) - ------------------------------------------------------------- 32
============================================================= 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) Rights Agreement dated as of June 17, 1986, between Material Sciences Corporation and Continental Illinois National Bank and Trust Company of Chicago.(6) - ------------------------------------------------------------- 10(x) Form of Indemnification Agreement between the Company and each of its officers and directors.(7) - ------------------------------------------------------------- 10(y) Supplemental Retirement Agreement dated as of December 28, 1992 between Material Sciences Corporation and William H. Vrba.(8) - ------------------------------------------------------------- 10(aa) Letter Agreement dated as of May 8, 1991 between Material Sciences Corporation and William H. Vrba.(8) - ------------------------------------------------------------- 11 Computation of net income per share. - ------------------------------------------------------------- 13 Annual Report to Shareowners. (Except as specifically incorporated herein by reference, this document shall not be deemed "filed" as a part of this Form 10-K Annual Report.) - ------------------------------------------------------------- 21 Subsidiaries of the Registrant. - ------------------------------------------------------------- 23 Consent of Arthur Andersen LLP. - -------------------------------------------------------------
33
============================================================= Sequentially Exhibit Numbered Number Description of Exhibit Page* - ------ ---------------------- ---- - ------------------------------------------------------------- 27 Financial Data Schedule.(10) =============================================================
- -------------------- (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 10-K Annual Report for the Fiscal Year Ended February 28, 1994 (File No. 1-8803). (10) Appears only in the electronic filing of this report with the Securities and Exchange Commission. 34 MATERIAL SCIENCES CORPORATION Supplemental Schedules REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO SUPPLEMENTAL SCHEDULES TO THE FINANCIAL STATEMENTS To Material Sciences Corporation: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in the Material Sciences Corporation 1996 Annual Report to Shareowners incorporated by reference in this Form 10-K, and have issued our report thereon dated April 17, 1996. 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 17, 1996 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 expenses accounts Acquisition reserve year ---------- ---------- --------- ----------------- ---------- ---------- 1994 - --------------------- Receivable Allowances $ 2,541 $ 5,461 $ - $ - $ 4,500 $ 3,502 Deferred Tax Asset Valuation Allowance 1,620 - - - 1,620 ---------- ---------- --------- ----------------- ---------- ---------- Total $ 4,161 $ 5,461 $ - $ - $ 4,500 $ 5,122 ========== ========== ========= ================= ========== ========== 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 ========== ========== ========= ================= ========== ==========
The activity in the Receivable Allowances account includes the Company's bad debt, claim and scrap allowances. EX-4.C 2 FIRST AMENDMENT TO CREDIT AGREEMENT EXHIBIT 4(c) FIRST AMENDMENT TO CREDIT AGREEMENT DATED AS OF SEPTEMBER 5, 1995 BY AND BETWEEN MATERIAL SCIENCES CORPORATION AND BANK OF AMERICA ILLINOIS. FIRST AMENDMENT TO CREDIT AGREEMENT THIS AMENDMENT, dated as of September 5, 1996, is entered into between MATERIAL SCIENCES CORPORATION, a Delaware corporation (the "Borrower"), and BANK OF AMERICA ILLINOIS, an Illinois banking corporation (the "Lender"). W I T N E S S E T H: WHEREAS, the Borrower and the Lender have entered into a Credit Agreement dated as of September 1, 1994 (the "Agreement"; the terms defined in the Agreement and not otherwise defined herein shall be used herein as defined in the Agreement); and WHEREAS, the Borrower and the Lender wish to amend the Borrower's covenant in the Agreement concerning mergers and acquisitions; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I AMENDMENT TO THE AGREEMENT SECTION 1.1 Consolidation, Merger, etc.. Section 7.2.8 of the Agreement is hereby amended as of the date hereof to read in its entirety as follows: "SECTION 7.2.8 Consolidation, Merger, etc.. The Borrower will not, and will not permit any of its Subsidiaries to, liquidate or dissolve, consolidate with, or merge into or with, any other corporation, or purchase or otherwise acquire all or substantially all of the assets of any Person (or of any division thereof) unless after giving effect thereto no Default shall have occurred and be continuing and unless, in the case of the merger of a Person into the Borrower or any of its Subsidiaries or the purchase or other acquisition of all or substantially all of the assets of any Person (or of any division thereof), the board of directors or the functional equivalent of the Person being merged or whose assets are being purchased or otherwise acquired has approved the terms of the merger or the purchase or other acquisition. Notwithstanding the foregoing, any immaterial Subsidiary may be liquidated, any wholly-owned Subsidiary of the Borrower may be merged into the Borrower or another wholly-owned Subsidiary of the Borrower and a wholly-owned Subsidiary of the Borrower may be created, provided that in the case of the creation of a wholly-owned Subsidiary of the Borrower, such Subsidiary shall deliver to the Lender a guaranty in form reasonably satisfactory to the Lender and such related documents, including certified resolutions, incumbency certificates and opinions of counsel, as the Lender may reasonably request." ARTICLE II REPRESENTATIONS AND WARRANTIES In order to induce the Lender to enter into this Amendment, the Borrower represents and warrants unto the Lender as set forth in this Article II. SECTION 2.1 Due Authorization, Non-Contravention, etc.. The execution, delivery and performance by the Borrower of this Amendment are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not (a) contravene the Borrower's Organic Documents; (b) contravene any material contractual restriction, law or governmental regulation or court decree or order binding on or affecting the Borrower; or (c) result in, or require the creation or imposition of, any Lien on any of the Borrower's properties. SECTION 2.2 Validity, etc. This Amendment constitutes the legal, valid and binding obligation of the Borrower enforceable in accordance with its terms subject to applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally and to equitable principles of general applicability. ARTICLE III MISCELLANEOUS PROVISIONS SECTION 3.1 Payment of Costs and Expenses. Notwithstanding the provisions of Section 9.3(a) of the Agreement, the Lender and the Borrower shall pay all of their own expenses (including all reasonable fees and out-of-pocket expenses of counsel) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment. SECTION 3.2 Headings. The various headings of this Amendment are inserted for convenience only and shall not affect the meaning or interpretation of this Amendment or any provisions hereof. SECTION 3.3 Governing Law. THIS AMENDMENT SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS. SECTION 3.4 Successors and Assigns. This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. SECTION 3.5 Confirmation of the Agreement. Except as amended hereby, the Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. SECTION 3.6 References to the Agreement. Each reference in the Agreement to "this Agreement," "hereunder," "hereof," or words of like import, and each reference to the Agreement in any and all instruments or documents provided for in the Agreement or delivered or to be delivered thereunder or in connection therewith, shall, except where the context otherwise requires, be deemed a reference to the Agreement as amended hereby. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized as of the day and year first above written. MATERIAL SCIENCES CORPORATION By: /s/ William H. Vrba ---------------------------------- Title: Sr. Vice President, Chief Financial Officer and Secretary BANK OF AMERICA ILLINOIS By: /s/ Arthur N. Traver ----------------------------------- Title: Vice President EX-4.D 3 MONEY MARKET DEMAND NOTE EXHIBIT 4(d) 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. MONEY MARKET DEMAND NOTE (FIXED AND FLOATING RATE-CORPORATION) ON DEMAND, for value received MATERIAL SCIENCE CORPORATION, a Delaware corporation (the "Borrower"), promises to pay to the order of The Northern Trust Company, an Illinois banking corporation (the "Lender"), the aggregate unpaid principal balance of each advance (an "Advance" and collectively the "Advances") made by the Lender to the Borrower hereunder. The total principal amount of Advances outstanding at any one time hereunder shall not exceed twenty-five million UNITED STATES DOLLARS ($25,000,000.00). The unpaid principal balance of each Advance shall bear interest from the date thereof until its interim maturity date, which may be from one to ninety days from the date of the Advance, as reflected in column three on the annexed schedule (the "Interim Maturity Date"), the occurrence of a demand for payment hereof, or an "Automatic Demand" (as defined below), whichever is earliest, at the fixed or floating rate (as the parties may agree) set forth in column four of the annexed schedule. The principal amount of each Advance shall mature and be payable on its Interim Maturity Date unless the Lender makes demand for payment hereof or an Automatic Demand occurs, as provided below. Interest on each Advance shall be payable on its Interim Maturity Date or upon payment of such Advance in full (whether pursuant to demand, the occurrence of an Automatic Demand, or otherwise), whichever is earlier. Any Advance which is not paid in full on its Interim Maturity Date or on or before the maturity of this Note (whether by demand, the occurrence of an Automatic Demand, or otherwise) shall thereafter bear interest until paid at a rate equal to two percent (2%) in addition to the "Prime Rate" (as defined below). The Borrower hereby authorizes the Lender to charge any account of the Borrower maintained with the Lender for any amounts due or payable hereunder; unless the Borrower instructs otherwise, all Advances made to the Borrower under this Note shall be credited to an account(s) of the Borrower with the Lender. THE LENDER AT ITS OPTION MAY MAKE ADVANCES HEREUNDER UPON TELEPHONIC INSTRUCTIONS AND IN SO DOING SHALL BE FULLY ENTITLED TO RELY SOLELY UPON INSTRUCTIONS, INCLUDING INSTRUCTIONS TO MAKE TRANSFERS TO THIRD PARTIES REASONABLY BELIEVED BY THE LENDER TO HAVE BEEN GIVEN BY AN AUTHORIZED PERSON, WITHOUT INDEPENDENT INQUIRY OF ANY TYPE. For purposes hereof, "Prime Rate" means that per annum rate of interest announced from time to time by the Lender called its prime rate which may not at any time be the lowest rate charged by the Lender. Changes in the interest rate on any Advance resulting from a change in the Prime Rate shall take effect on the date set forth in each announcement. Interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 360 days, including the date an Advance is made and excluding the date an Advance or any portion thereof is paid or prepaid. Payments of both principal and interest hereon, whether at scheduled maturity, upon demand for payment hereof, upon the occurrence of an Automatic Demand, or otherwise, shall be due and payable on the date specified or demanded for such payment at the principal office of the Lender at 50 South LaSalle Street, Chicago, Illinois 60675 in lawful money of the United States of America and in immediately available funds. The Borrower shall have the right to prepay without penalty or premium any Advances bearing interest at a rate based on the Prime Rate. If the Borrower prepays any Advance bearing a fixed interest rate (i.e. any rate other than one based on Prime Rate) in whole or in part, or if the maturity of any such fixed rate Advance is accelerated upon demand for payment hereof or the occurrence of an Automatic Demand, the Borrower shall also pay the Lender for all losses (including but not limited to interest rate margin and any other losses of anticipated profits) or expenses incurred by reason of the liquidation or re-employment of deposits acquired by the Lender to make the Advance or maintain principal outstanding at a fixed rate. Upon the Lender's demand in writing specifying such losses and expenses, the Borrower shall promptly pay them, the Lender's specification shall be deemed correct in the absence of manifest error. Each Advance shall be conclusively deemed to have been funded by or on behalf of the Lender by the purchase of a deposit corresponding in amount to such Advance and in maturity to such Advance's Interim Maturity. The Lender shall, and is hereby authorized by the Borrower to, endorse on the schedule annexed to this Note notations with respect to each Advance specifying the date and principal amount thereof, the Interim Maturity Date, the applicable interest rate and the date and amount of each payment of principal and interest made by the Borrower with respect to each such Advance; provided, however, the failure of the Lender to make any such notation shall not limit or otherwise affect the right of the Lender to repayment of all Advances (including interest thereon) made by the Lender to the Borrower. The Lender's endorsements as well as its records relating to Advances shall be rebuttable presumptive evidence of the outstanding principal and interest on the Advances, and, in the event of inconsistency, shall prevail over any records of the Borrower and any written confirmations of Advances given by the Borrower. The Borrower hereby represents and warrants to the Lender that: (i) the Borrower and each "subsidiary" (as defined below) is a corporation existing and in good standing under the laws of its state of incorporation; (ii) the Borrower and each subsidiary are duly qualified, in good standing and authorized to do business in each jurisdiction deemed necessary by the Borrower; (iii) the borrowings hereunder, the execution and delivery of this Note and the performance by the Borrower of its obligations hereunder are within the Borrower's corporate powers, have been authorized by all necessary corporate action, have received all necessary governmental approval (if any is required) and do not and will not contravene or conflict with any provision of law or of the charter or by-laws of the Borrower or of any agreement binding upon the Borrower; and (iv) there has been no material adverse change in the business, properties, assets, operations or prospects of the Borrower since the date of the latest financial statements provided on behalf of the Borrower to the Lenders. "Subsidiary" means any corporation, partnership, joint venture, trust or other legal entity of which the Borrower owns directly or indirectly 50% or more of the outstanding voting stock or interest, or of which the Borrower has effective control, by contract or otherwise. The Borrower shall be deemed to have remade the foregoing representations and warranties each time it requests an Advance hereunder, except that (iv) shall be deemed to refer to the then most recent financial statements furnished to the Lender. This Note (principal, interest and other amounts) shall be immediately and automatically due and payable without action or further action of any kind on the part of the Lender, and the Lender shall have and may exercise any and all rights and remedies available at, law or in equity, if the Lender demands payment hereof or if any one or more of the following "Automatic Demands" occurs: (a) The Borrower shall fail to make any payment of principal, interest, or other amounts payable hereunder when and as due or demanded; or (b) Any default, event of default, or similar event shall occur or continue under any instrument, document, note agreement, or guaranty delivered to the Lender in connection with this Note or any such instrument, document, note, agreement, or guaranty shall not be, or shall cease to be, enforceable in accordance with its terms; or (c) There shall occur any default or event of default, or any event which might become such with notice or the passage of time or both, or any similar event, or any event which requires the prepayment of borrowed money or the acceleration of the maturity thereof, under the terms of any evidence of indebtedness or other agreement issued or assumed or entered into by the Borrower or any subsidiary or under the terms of any indenture, agreement or instrument under which any such evidence of indebtedness or other agreement is issued, assumed, secured or guaranteed, and such event shall continue beyond any applicable period of grace; or (d) The Borrower or any subsidiary shall fail to preserve and maintain its existence, rights, franchises, licenses and privileges, or shall liquidate, dissolve or merger, or consolidate with or into any other entity, or sell, lease, transfer or otherwise dispose of all or a substantial part of its assets; (e) Any representation, warranty, schedule, certificate, financial statement, report, notice or other writing furnished by or on behalf of the Borrower to the Lender is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified; or (f) Any person or entity presently not in control of the Borrower shall obtain control directly or indirectly of the Borrower, whether by purchase or gift of stock or assets, by contract, or otherwise; or (g) Any reportable event shall occur under the Employee Retirement Income Security Act of 1974, as amended, in respect of any employee benefit plan maintained for employees of the Borrower or any subsidiary; or (h) Any suit, action or other proceeding (judicial or administrative) commenced against the Borrower or any subsidiary, or with respect to any assets of the Borrower or any subsidiary, shall threaten to have a material and adverse effect on the future operations of the Borrower or any subsidiary; or final judgment or settlement in excess of $100,000 in excess of insurance shall be entered in or agreed to in respect of, any such suit, action or proceeding; or (i) The Borrower shall fail to comply with any provision hereof, which failure does not otherwise constitute an Automatic Demand, and such failure shall continue for ten days after notice thereof to the Borrower by the Lender or any other holder of this Note; or (j) Any bankruptcy, insolvency, reorganization, arrangement, readjustment, liquidation, dissolution, or similar proceeding, domestic or foreign, is instituted by or against the Borrower or any subsidiary, or the Borrower or any subsidiary shall take any step toward, or to authorize, such a proceeding; or (k) The Borrower or any subsidiary shall become insolvent, generally shall fail or be unable to pay its debts as they mature, shall admit in writing its inability to pay its debts as they mature, shall make a general assignment for the benefit of its creditors, shall enter into any composition or similar agreement, or shall suspend the transaction of all or a substantial portion of its usual business. The Lender may, by written notice to the Borrower, at any time and from time to time, waive any Automatic - ----------------- * The Lender acknowledges that it does not have a security interest in any assets of the Borrower, its Subsidiaries, and the Lender hereby disclaims and releases any and all statutory or common law right of set off against the Borrower. Demand or "Unmatured Automatic Demand" (as defined below) which shall be for such period and subject to such conditions as shall be specified in any such notice. In the case of any such waiver, the Lender and the Borrower shall be restored to their former position and rights hereunder and under the Note, respectively, and any Automatic Demand or Unmatured Automatic Demand so waived shall be deemed to be cured and not continuing; but no such waiver shall extend to or impair any right consequent thereon or to any subsequent or other Automatic Demand or Unmatured Automatic Demand. "Unmatured Automatic Demand" means an event or condition which would become an Automatic Demand with notice or the passage of time or both. No failure to exercise, and no delay in exercising, on the part of the Lender of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies of the Leader herein provided are cumulative and not exclusive of any rights or remedies provided by law. All notices requests and demands to or upon the respective parties hereto shall be deemed to have been given or made when deposited in the mail, postage prepaid, addressed: (A) if to the Lender to 50 South LaSalle Street, Chicago, Illinois 60676 (Attention: Division Head, Mets III Division) (B) if to the Borrower to its address set forth below, or to such other address as may be hereafter designated in writing by the respective parties hereto. This Note and any document or instrument executed in connection herewith shall be governed by and construed in accordance with the internal law of the State of Illinois and shall be deemed to have been executed in the State of Illinois. Unless the context requires otherwise, wherever used herein the singular shall include the plural and vice versa. This Note shall bind the Borrower, its successors and assigns, and shall inure to the benefit of the Lender, its successors and assigns. The Borrower agrees to pay upon demand all expenses (including attorneys' fees, legal costs and expenses, and time charges of attorneys who may be employees of the Lender, in each case whether in or out of court, in original or appellate proceedings or in bankruptcy) incurred or paid by the Lender or any holder hereof in connection with the enforcement or preservation of its rights hereunder or under any document or instrument executed in connection herewith. The Borrower expressly and irrevocably waives presentment, protest, demand and notice of any kind in connection herewith. THE BORROWER HEREBY IRREVOCABLY AGREES THAT, SUBJECT TO THE LENDER'S SOLE AND ABSOLUTE ELECTION, ALL SUITS, ACTIONS OR OTHER PROCEEDINGS WITH RESPECT TO, ARISING OUT OF OR IN CONNECTION WITH THIS NOTE OR ANY DOCUMENT OR INSTRUMENT EXECUTED IN CONNECTION HEREWITH SHALL BE SUBJECT TO LITIGATION IN COURTS HAVING SITUS WITHIN CHICAGO, ILLINOIS. THE BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED IN CHICAGO, ILLINOIS, AND HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE TO REQUEST OR DEMAND TRIAL BY JURY, TO TRANSFER OR CHANGE THE VENUE OF ANY SUIT, ACTION OR OTHER PROCEEDING BROUGHT BY THE LENDER IN ACCORDANCE WITH THIS PARAGRAPH, OR TOCLAIM THAT ANY SUCH PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NO PROVISION OF THIS NOTE OR ANY RELATED DOCUMENT OR INSTRUMENT SHALL BE CONSTRUED TO REQUIRE THE LENDER TO EXTEND ANY CREDIT OR MAKE ANY LOAN TO THE BORROWER, THE BORROWER CLEARLY UNDERSTANDS AND AGREES THAT THIS NOTE IS A DEMAND OBLIGATION PAYMENT OF WHICH IN FULL (INCLUDING PRINCIPAL, INTEREST, AND ANY OTHER AMOUNTS) MAY BE DEMANDED BY THE LENDER AT ANY TIME IN ITS SOLE DISCRETION WITHOUT PRIOR ORAL OR WRITTEN NOTICE OF ANY KIND. DEMAND MAY BE MADE AT ANY TIME, WHETHER OR NOT AN "AUTOMATIC DEMAND" HAS OCCURRED, AND REGARDLESS OF WHETHER OR NOT AN ADVANCE(S) HAS BEEN OUTSTANDING THROUGH OR BEYOND ITS INTERIM MATURITY DATE. Material Sciences Corporation _______________________________________________________________________________ By: /s/ William H. Vrba ___________________ Title: Senior Vice President and Chief Executive Officer Address for notices: 2300 East Pratt Boulevard Elk Grove Village, Illinois 60007 Attention: ____________________________________________________________________ _______________________________________________________________________________ EX-10.J 4 1996 STOCK OPTION PLAN Exhibit 10(j) Material Sciences Corporation 1996 Stock Option Plan for Non-Employee Directors EXHIBIT 10(j) MATERIAL SCIENCES CORPORATION 1996 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS 1. Purpose. The purpose of this 1996 Stock Option Plan for Non-Employee Directors (this "Plan") is to provide incentives to members of the Board of Directors (the "Board") of Material Sciences Corporation (the "Company") who are not officers or employees of the Company or its subsidiaries ("Non- Employee Directors"), through compensation and rewards paid in or based upon the ownership and performance of the common stock of the Company. 2. Limitations on Shares To Be Issued. The number of shares of the Company's common stock, par value $.02 per share, with respect to which options may be granted or awarded under this Plan and which may be issued upon the exercise thereof shall not exceed, in the aggregate, 250,000 shares; provided, that to the extent any awards hereunder expire unexercised or unpaid or are canceled, terminated or forfeited in any manner without the issuance of shares of common stock thereunder, such shares shall again be available under this Plan. Shares of common stock issued under this Plan may be authorized and unissued shares of common stock, treasury stock or a combination thereof. 3. Annual Retainer Option. On March 1 of each year, commencing March 1, 1996, each person who is a Non-Employee Director on such date shall automatically be granted an option entitling such director to purchase a number of shares of the Company's common stock (rounded up to the nearest whole number of shares) equal in value to (a) $30,000 divided by (b) the last reported sale price of the Company's common stock on the principal securities exchange on which shares of the Company's common stock are then listed on the date immediately preceding such March 1 (or, if such date is not a trading day on such exchange, the last trading day immediately preceding such date). The per share option price for each such option described in the immediately preceding sentence shall be the price described in clause (b) of the immediately preceding sentence. Any person who first becomes a Non-Employee Director after the Effective Date (as defined below), either because such person is first elected to the Board after the Effective Date or because such person was first elected to the Board while such person was an officer or employee of the Company or its subsidiaries and subsequently ceases to be an officer and employee of the Company and its subsidiaries (and consequently did not receive an option pursuant to the first sentence of this paragraph 3 on the respective March 1), shall, on the date such person first becomes a Non- Employee Director, automatically be granted an option entitling such person to purchase a number of shares of the Company's common stock (rounded up to the nearest whole number of shares) equal to (a) $7,500 multiplied by the number of fiscal quarters (rounded up to the nearest whole number of fiscal quarters) remaining in the fiscal year from and including the fiscal quarter in which such date of grant occurs divided by (b) the price described in clause (b) of the first sentence of this paragraph 3 for options granted on the March 1 immediately preceding such date of grant. The per share option price for each such option described in the immediately preceding sentence shall be the price described in clause (b) of the immediately preceding sentence. If any Non- Employee Director who receives an option pursuant to this paragraph 3 during the period commencing on March 1 of any year and ending on the day of the annual meeting of the Company's shareowners next following such March 1 is not elected as a Non-Employee Director at such annual meeting, the number of shares subject to such option shall be reduced to the lesser of (a) 25% of the number of shares originally subject to such option (rounded up to the nearest whole number of shares) and (b) the number of shares then subject to such option after giving effect to all exercises thereof. Each option granted under this paragraph 3 shall be exercisable at any time after the date of grant thereof. 1 4. Incentive Option. Each Non-Employee Director shall automatically receive as set forth below an option (an "Incentive Option") to purchase the number of shares (rounded up to the nearest whole number of shares) of common stock of the Company equal in value to (a) $40,000 divided by (b) the last reported sale price of the Company's common stock on the date immediately preceding the date of grant on the principal securities exchange on which shares of the Company's common stock are listed on such date (or, if such date is not a trading day on such exchange, the last trading day immediately preceding such date). The per share option price for each such Incentive Option shall be the price described in clause (b) of the immediately preceding sentence. With respect to each Non-Employee Director, the initial Incentive Option shall be granted to such director as follows: (i) in the case of any director who is a Non-Employee Director on the Effective Date, such option shall be granted automatically to such director upon the date on which the option granted to such director under the Company's 1991 Stock Option Plan for Directors becomes fully vested if such director is a Non-Employee Director on such date, (ii) in the case of any person first elected to the Board after the Effective Date who is not an officer or employee of the Company or its subsidiaries at the time of such election, such option shall be granted automatically to such person upon the date that such person is first elected to the Board (either by the shareowners of the Company or, in the case of the filling of a vacancy, by the Board) and (iii) in the case of a director who has not received an initial Incentive Option as provided in the preceding clauses because such director was also an officer or employee of the Company or its subsidiaries at the time such director was first elected as a director and who subsequently ceases to be an officer and employee of the Company and its subsidiaries, such option shall be granted automatically to such director upon the date such person becomes a Non-Employee Director. Each director who has received an initial Incentive Option pursuant to the preceding sentence shall automatically be granted an Incentive Option on each anniversary of the date of grant of the initial Incentive Option to such director if such director is a Non-Employee Director on such anniversary date. An Incentive Option shall be exercisable only to the extent it has vested. Each Incentive Option shall vest in full on the first anniversary of the date of grant if the holder thereof is a Non-Employee Director on such date; provided, that, if a person is not elected as a Non-Employee Director at the first annual meeting of the Company's shareowners following the date of grant of such Incentive Option and such option has not already vested pursuant to the first clause of this sentence, such Incentive Option shall vest and become exercisable as of the day before such annual meeting with respect to the number of shares (rounded up to the nearest whole number of shares) equal to (a) the total number of shares subject to such Incentive Option multiplied by (b) a fraction equal to the number of whole months that such director has served on the Board since the grant of such Incentive Option divided by 12. An Incentive Option or any portion of an Incentive Option that has not vested prior to the date the holder thereof ceases to be a Non-Employee Director shall expire and be forfeited as of such date. 5. General Option Terms. A. Option Agreement. Each option granted under this Plan shall be evidenced by a written agreement between the Company and the optionee in such form as the Board shall prescribe in accordance with this Plan. The option price per share of common stock for all options granted under this Plan shall be specified in the option agreement and shall be determined as set forth above. B. Expiration. An option issued pursuant to this Plan shall expire and not be exercisable after the first to occur of (i) the fifth anniversary of the date of grant of such option and (ii) three months after the optionee ceases to be a director of the Company (12 months if the optionee ceases to be a director of the Company due to death or to total and permanent disability as determined by the Board in good faith). 2 C. Non-Transferability. Options granted pursuant to this Plan shall not be sold, assigned, pledged, transferred or otherwise disposed of, except by will or the laws of descent and distribution. Any purported transfer contrary to this provision will nullify such award. All options shall be exercisable during the participant's lifetime only by the participant or the participant's legal representative. If the holder of an option dies and such option has vested and is exercisable at the date of death, then, as described in paragraph 8 below, the holder's estate, or the beneficiary or beneficiaries to whom the holder's rights under the option shall pass by reason of the holder's death, shall have the right to exercise the option as provided in and subject to this Plan and the respective option agreement. Awards under this Plan shall not be subject to execution, attachment or other process, and no person shall be entitled to exercise any rights of a participant or possess any rights of a participant by virtue of any attempted execution or other process. D. Exercise of Options. Subject to the terms of the option agreement and this Plan, options granted pursuant to this Plan may be exercised from time to time in whole or in part. Each exercise of an option shall be accomplished by delivering written notice of such exercise to the Secretary of the Company, specifying the number of shares to be purchased and accompanied by payment in full of the purchase price therefor. Payment for the options exercised shall be either in (i) cash or check, money order or bank draft to the order of Material Sciences Corporation (collectively, "cash") or (ii) shares of common stock of the Company (valued as of the date of the notice of exercise) with a value equal to or less than the aggregate option price, plus cash in the amount, if any, by which the aggregate option price exceeds the value of such shares of common stock. Payment for shares with respect to options exercised for cash shall be delivered with the notice of exercise. Payment for shares with respect to options exercised for common stock and cash, if any, shall be delivered to the Secretary of the Company not later than the end of the third business day after delivery of the notice of exercise. If payment is made in common stock, such payment shall be made by delivery of the necessary share certificates, with executed stock powers attached, to the Secretary of the Company or, if such certificates have not yet been delivered to the optionee, by written notice to the Secretary of the Company requesting that the shares represented by such certificates applied toward payment as hereinabove provided. E. Necessary Approvals. Each option granted under this Plan shall be subject to the requirement that if at any time the Board shall determine, in its discretion, that either the consent or approval of any governmental authority or the listing, registration or qualification of the shares subject to such option upon any securities exchange or under any state or federal law is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares under such option, such option may not be exercised in whole or in part and shares thereunder may not be delivered, as the case may be, unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Board. Any option may be exercised only in accordance with the provisions of all applicable law. 6. Adjustments for Changes in Capitalization or Corporate Reorganizations. Appropriate adjustments shall be made in the number, including the maximum number, and kind of shares of common stock to be issued under this Plan, and in the number and kind of shares of common stock that are the subject of any option awarded under this Plan, to give effect to any stock splits, stock dividends and other relevant changes in capitalization occurring after the Effective Date. If the Company shall effect a merger, consolidation or other reorganization, pursuant to which the outstanding shares of common stock shall be exchanged for other shares or securities of the Company or of another corporation which is a party to such merger, consolidation or other reorganization, the Company shall use its best efforts to provide in any agreement or plan which it enters into or adopts to effect any such merger, consolidation or other reorganization, that any optionee under this Plan shall have the right to purchase, at the aggregate option price provided for in his or her option agreement and on the same terms and conditions, the kind and number of shares or other securities of the Company or such other corporation which would have been issuable to him or her in respect of the number of shares of common stock which were subject to such option immediately prior to the effective date of such merger, consolidation or other reorganization if 3 such shares had been then owned by him or her. If by the date ten days prior to the scheduled effective date of any such merger, consolidation or other reorganization, the provision described in the preceding sentence has not been made with respect to any Incentive Option that is not then fully vested, such Incentive Option shall become vested and exercisable in full upon such date. Any adjustment with respect to options required by this paragraph shall be effected in such manner that the difference between the aggregate fair market value of the shares or other securities subject to the options immediately after giving effect to such adjustment and the aggregate option price of such shares or other securities shall be substantially equal to (but shall not be more than) the difference between the aggregate fair market value of the shares subject to such options immediately prior to such adjustment and the aggregate option price of such shares. Any adjustments made under this paragraph shall be determined by the Board. Upon the approval by the shareowners of the Company of a merger, consolidation or other reorganization pursuant to which the outstanding shares of common stock are to be exchanged for cash, or upon the adoption by the shareowners of the Company of a plan of complete liquidation, all Incentive Options that are not then fully vested shall become vested and exercisable in full upon such date. 7. Tax Withholding. The Board shall have the power to withhold, or require a participant to remit to the Company, an amount sufficient to satisfy any withholding or other tax due with respect to any amount payable and/or shares of common stock issuable under this Plan, and the Board may defer such payment or issuance unless indemnified to its satisfaction. Subject to the consent of the Board, a participant may make an irrevocable election to have shares of common stock otherwise issuable under an option withheld, tender back to the Company shares of common stock received pursuant to exercise of an option or deliver to the Company previously-acquired shares of common stock having a fair market value sufficient to satisfy all or part of the participant's estimated tax obligations associated with the transaction. Such election must be made by a participant prior to the date on which the relevant tax obligation arises. The Board may disapprove of any election and may limit, suspend or terminate the right to make such elections. 8. Beneficiary Designation. Subject to the restrictions on transfer and the option terms set forth in this Plan, participants may name, from time to time, beneficiaries (who may be named contingently or successively) who may exercise options granted under this Plan in the event of the death of a participant before he or she exercises such option. Each designation will revoke all prior designations by the same participant, shall be in a form approved by the Board and will be effective only when filed by the participant in writing with the Board during the participant's lifetime. In the absence of any such designation, options remaining unexercised at the participant's death may be exercised by the participant's estate. 9. Administration of the Plan. This Plan shall be administered by the Board in accordance with the provisions of this paragraph. The Board shall have full power and authority to prescribe, amend and rescind rules and procedures governing administration of this Plan. The Board shall have full power and authority (i) to interpret the terms of this Plan, the terms of the options and the rules and procedures established by the Board and (ii) to determine the meaning of or requirements imposed by or the rights of any person under this Plan, any option or any rule or procedure established by the Board. All such rules, procedures and interpretations relating to this Plan adopted by the Board shall be conclusive and binding on all parties. 4 10. Amendment, Suspension and Termination of Plan. The Board may suspend or terminate this Plan or any portion hereof at any time and may amend it from time to time in such respects as the Board may deem advisable; provided, that no such amendment shall be made without shareowner approval to the extent such approval is required by law, agreement or the rules of any exchange upon which the common stock is listed; provided further, that the provisions of this Plan that relate to the amount, price and timing of awards shall not be amended more than once every six months, except as set forth in Rule 16b- 3(c)(2)(ii)(B) under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"). No such amendment, suspension or termination shall materially impair the rights of participants under outstanding awards without the consent of the participants affected thereby or make any change that would disqualify this Plan, or any other plan of the Company intended to be so qualified, from the exemption provided by Rule 16b-3. 11. Compliance with Rule 16b-3. It is the intent of the Company that this Plan comply in all respects with Rule 16b-3, that any ambiguities or inconsistencies in the construction of this Plan be interpreted to give effect to such intention and that if any provision of this Plan is found not to be in compliance with Rule 16b-3, that such provision shall be deemed null and void to the extent required to permit this Plan to comply with Rule 16b-3. 12. Effective Date and Term of Plan. This Plan shall become effective on March 1, 1996 (the "Effective Date"); provided, that this Plan shall cease to be effective and any options granted hereunder shall become null and void if this Plan is not approved by the Company's shareowners at the 1996 Annual Meeting of Shareowners of the Company. This Plan shall terminate on February 28, 2001, unless terminated prior thereto by action of the Board. No further grants shall be made under this Plan after termination, but termination shall not affect the right of any participant under any grants made prior to termination. 5 EX-11 5 COMP. OF NET INCOME PER SHARE EXHIBIT 11 COMPUTATION OF NET INCOME PER SHARE EXHIBIT 11 MATERIAL SCIENCES CORPORATION AND SUBSIDIARIES ---------------------------------------------- COMPUTATION OF NET INCOME PER SHARE ----------------------------------- FOR EACH OF THE FIVE YEARS ENDING FEBRUARY 28 OR 29, ---------------------------------------------------- (IN THOUSANDS, EXCEPT SHARE DATA)
1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- Net Income $ 11,979 $ 16,740 $ 11,802 $ 7,617 $ 7,141 =========== =========== =========== =========== =========== Weighted average shares outstanding during the year 15,087,000 14,851,000 14,742,600 13,177,470 11,215,125 Net addition to shares outstanding under the treasury stock options and restricted stock 350,054 389,898 315,021 206,130 43,407 ----------- ----------- ----------- ----------- ----------- Shares outstanding used in computing net income per share 15,437,054 15,240,898 15,057,621 13,383,600 11,258,532 =========== =========== =========== =========== =========== Net income per share $ 0.78 $ 1.10 $ 0.78 $ 0.56 $ 0.63 =========== =========== =========== =========== ===========
EX-13 6 ANNUAL REPORT Exhibit 13 Annual Report To Shareowners (Except as specifically incorporated herein by reference, this document shall not be deemed "filed" as a part of this Form 10-K Annual Report.) RESPONSIBILITY FOR FINANCIAL STATEMENTS William H. Vrba, Senior Vice President, Chief Financial Officer, and Secretary [PHOTO OF WILLIAM H. VRBA APPEARS HERE] Material Sciences Corporation's senior management is responsible for the information presented in this report. In fulfilling this responsibility, we make informed judgments and estimates conforming with generally accepted accounting principles, and believe the financial statements present fairly, in all material respects, the Company's results of operations, cash flows, and financial position for the periods under review. The Company's system of internal accounting controls provides reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and are properly recorded, that material errors are prevented or detected within a timely period, and that records are sufficient to produce reliable financial reports. In designing and implementing internal controls and procedures, management recognizes that errors or irregularities nevertheless may occur. Further, estimates and judgments are necessary to evaluate the relative costs and benefits of such controls and procedures. The financial statements have been audited by Arthur Andersen LLP, the Company's independent public accountants, whose report appears to the right. Our independent public accountants' responsibility is to examine the financial statements in accordance with generally accepted auditing standards and to express their opinion on the fairness of the presentation of the statements. Our audit committee, comprised entirely of outside directors of Material Sciences Corporation, is identified later in this report. The committee meets at least twice a year with the Company's management and independent public accountants to review financial results, external audit plans, recommendations, and subsequent responses by management. To guarantee independence, the audit committee and the independent public accountants have unrestricted access to each other, with or without the presence of management representatives. G. Robert Evans Chairman and Chief Executive Officer William H. Vrba Senior Vice President, Chief Financial Officer, and Secretary 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 29, 1996, and February 28, 1995, and the related consolidated statements of income and cash flows for each of the three fiscal years in the period ended February 29, 1996. 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 29, 1996, and February 28, 1995, and the results of its operations and its cash flows for each of the three fiscal years in the period ended February 29, 1996, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Arthur Andersen LLP Chicago, Illinois, April 17, 1996 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands) Material Sciences Corporation and Subsidiaries
For the fiscal years ended February 28 or 29, --------------------------------------------------------------------- Net Sales Summary 1996 1995 1994 - ------------------------------------------------- --------------------- --------------------- -------------------- PRODUCT GROUP DOLLARS PERCENT Dollars Percent Dollars Percent -------- -------- -------- -------- -------- ------- Laminates and Composites.......................... $ 56,790 24% $ 57,722 25% $ 46,266 25% Specialty Films................................... 23,662 10% 19,134 8% 16,979 9% Coil Coating...................................... 100,652 43% 101,206 45% 78,320 42% Electrogalvanizing................................ 55,046 23% 49,596 22% 46,136 24% -------- -------- -------- -------- -------- ------- $236,150 100% $227,658 100% $187,701 100% ======== ======== ======== ======== ======== =======
For the fiscal years ended February 28 or 29, ----------------------------- Results of Operations 1996 1995 1994 - ------------------------------------------------------------------------------------------ ------ ------ ------ Net Sales................................................................................. 100.0% 100.0% 100.0% Cost of Sales............................................................................. 74.1 72.7 75.6 ------ ------ ------ Gross Profit.............................................................................. 25.9% 27.3% 24.4% Selling, General and Administrative Expenses.............................................. 15.9 15.7 14.6 Special Charge............................................................................ 1.7 -- -- ------ ------ ------ Income from Operations.................................................................... 8.3% 11.6% 9.8% Total Other (Income) and Expense, Net..................................................... 0.1 (0.3) (0.3) ------ ------ ------ Income Before Income Taxes................................................................ 8.2% 11.9% 10.1% Income Taxes.............................................................................. 3.1 4.6 3.8 ------ ------ ------ Net Income................................................................................ 5.1% 7.3% 6.3% ====== ====== ======
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. 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 are specialty films sales from the September 7, 1995, acquisition of Solar Gard International, Inc. ("SGI") and coil coating sales from the June 30, 1993, acquisition of the coil coating facility from AK Steel Corporation in Middletown, Ohio. 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(R) decreased due to lower sales to Chrysler. Partially offsetting the shortfall in Polycore Composites(R) was significant growth in non-automotive uses including 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 original equipment manufacturer ("OEM") sales during the year. In the high-reflective lighting fixture market, Specular+(R) 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 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. Subsequent to the acquisition, SGI expanded in California (two distribution centers) and Florida (South American export center). SGI currently distributes product in over 50 countries. [PIE CHARTS APPEAR HERE] Net Sales by Product Group in thousands of dollars 1996 Total 236,150 Laminates and Composites 56,790 Specialty Films 23,662 Coil Coating 100,652 Electrogalvanizing 55,046 1995 Total 227,658 Laminates and Composites 57,722 Specialty Films 19,134 Coil Coating 101,206 Electrogalvanizing 49,596 1994 Total 187,701 Laminates and Composites 46,266 Specialty Films 16,979 Coil Coating 78,320 Electrogalvanizing 46,136 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands) Material Sciences Corporation and Subsidiaries During the first quarter of fiscal 1997, the Company entered into a tentative agreement to purchase certain assets of a distributor of solar control window film products in the Western U.S. and throughout the world. The Company anticipates this transaction will be completed during the first quarter of fiscal 1997. 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. New construction of a high-speed coil coating line in Elk Grove Village, Illinois, is scheduled for completion in the fourth quarter of fiscal 1997. This facility will increase MSC's capacity and ability to compete as a low cost producer in current and new markets. 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 23%, 22% and 24% of the Company's net sales in fiscal 1996, 1995 and 1994, 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. 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 77% and 23%, respectively. During fiscal 1996, Inland utilized only 10% of available production line time rather than its 23% 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. Inland is reviewing its future involvement in the Partnership, and therefore, there is no assurance that Inland will utilize its 23% 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 decreased from 27.3% in fiscal 1995 to 25.9% in fiscal 1996. This percentage decline was due to lower line utilization, 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. [BAR CHART APPEARS HERE] Gross Profit Percentage ----------------------- 1994 24.4% 1995 27.3% 1996 25.9% ----------------------- 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 includes costs related to severance and other related expenses, and litigation expenses. The savings associated with the restructuring will positively affect the Company's gross margin, as well as operating expenses. TOTAL OTHER (INCOME) AND EXPENSE, NET AND INCOME TAXES Total other (income) and expense, net was an expense of $.1 million 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. MSC expects comparable benefits in fiscal 1997. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands) Material Sciences Corporation and Subsidiaries Fiscal 1995 Compared with Fiscal 1994 NET SALES Net sales in fiscal 1995 grew 21.3% over fiscal 1994. Sales of laminates and composites grew 24.8%; specialty films 12.7%; coil coating 29.2%; and electrogalvanizing 7.5%. Included in the above are coil coating sales from the June 30, 1993, acquisition of the coil coating facility from AK Steel Corporation in Middletown, Ohio. Laminates and Composites Fiscal 1995 net sales of laminates and composites grew 24.8% to $57,722 from $46,266 in fiscal 1994. Sales of Polycore Composites(R) generated a significant increase over the previous year, boosted by new product applications and market expansion activities in both automotive and non-automotive end uses. In the high-reflective lighting fixture market, Specular+(R) sales increased from fiscal 1994 due to increased worldwide demand for energy-efficient lighting. Sales of disc brake noise damper materials were up from the previous fiscal year as a result of increased aftermarket demand, as well as a steady increase in original equipment manufacturer ("OEM") sales during the year. Specialty Films Specialty films net sales increased 12.7% to $19,134 in fiscal 1995 from $16,979 in fiscal 1994 due primarily to increased domestic and international demand for solar control window and safety film. Increased productivity and quality improvements also contributed to the increase in sales over the prior fiscal year, as MSC was better able to meet seasonable demand. Coil Coating Coil coating net sales grew 29.2% in fiscal 1995 to $101,206 from $78,320 in the prior fiscal year. The broad increase in sales was due largely to expanded market coverage and new product introductions. MSC benefited from a strong economy but also out performed the economy due to the conversion of new prepainted metals from post-manufacturing painting applications. The biggest sales advances came from heating and air conditioning, truck trailer, fuel tank and lighting areas. A portion of this coil coating sales increase is attributable to MSC's June 1993 acquisition of the Middletown coil coating facility. Comparable sales in this product group were up approximately 14.8% from the prior fiscal year. During the fourth quarter of fiscal 1995, the Middletown facility was shut down for 52 days for planned upgrading and expansion of that facility. The shutdown decreased sales and earnings in the fourth quarter of fiscal 1995. Electrogalvanizing MSC's electrogalvanizing sales increased 7.5% to $49,596 in fiscal 1995 from $46,136 in fiscal 1994, while electrogalvanizing volume increased 2.6% to 427,133 tons in fiscal 1995 from 416,214 tons in the prior fiscal year. The increase in sales and volume over the previous fiscal year resulted from a strong demand for new autos and trucks, plus a continuing shift to higher value- added electrogalvanized and coil coated materials. These higher value-added sales (principally zinc-nickel with a coil coated topcoat) represented 6.5% of electrogalvanizing sales in fiscal 1995 up from 5.3% in fiscal 1994. The sales and marketing responsibilities of the Partnership are split between Bethlehem and Inland at 77% and 23%, respectively. During fiscal 1995, Inland utilized only 17% of available production line time rather than its 23% share. Bethlehem and other customers utilized this additional available line time. GROSS PROFIT MSC's gross profit percentage increased to 27.3% in fiscal 1995 from 24.4% in fiscal 1994. This improvement was due to increasing higher value-added product mix, pricing, higher line utilization and improving manufacturing efficiencies. Significant capital expenditures have resulted in increased yields and line speeds, as well as reductions in set-up time and unscheduled downtime. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to 15.7% of sales in fiscal 1995 from 14.6% in fiscal 1994. This increase was primarily due to increased expenditures for strategic purposes such as high-growth product marketing, research and development, and international marketing efforts, as well as some non-recurring increases in other administrative expenses. TOTAL OTHER INCOME, NET AND INCOME TAXES Total other income, net was income of $.7 million in fiscal 1995 and fiscal 1994. Decreased interest income, due to lower amounts of cash investments, was more than offset by a reduction in interest expense (from lower debt levels), equity in results of partnership and other, net. MSC's effective tax rate for fiscal 1995 was approximately 38.5% compared with 38.0% in the prior year. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands) Material Sciences Corporation and Subsidiaries [BAR CHART APPEARS HERE] ------------------------- Operating Cash Flow ------------------------- in millions of dollars 1994 18.6 1995 25.0 1996 19.5 ------------------------- Liquidity and Capital Resources MSC generated $19.5 million of cash from operating activities in fiscal 1996 compared with $25.0 million in the prior fiscal year. An increased level of sales in the fourth quarter of fiscal 1996 over fiscal 1995 led to higher accounts receivable at year-end compared with the prior year. Increased inventory levels resulted from the SGI acquisition in the slow selling season and MSC's participation in package sales. MSC expects to reduce inventory levels during the next fiscal year because of available capacity and continued emphasis on shortening production lead times. In fiscal 1996, MSC invested $27.5 million in capital improvement projects compared with $29.4 million last year. Fiscal 1996's capital expenditures included the construction in process of a new coil coating line in Elk Grove Village, Illinois. Nearly all of fiscal 1996's capital expenditures were directly related to increasing MSC's efficiency or expanding new product and market opportunities. 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 June 30, 1993, a subsidiary of MSC purchased from AK Steel Corporation, certain of the assets (including inventory) of its coil paint facility in Middletown, Ohio, for approximately $14.5 million, including acquisition related costs. Available cash was used to purchase the facility. The Company also plans to increase its capital expenditures to $46.3 million in fiscal 1997, including investments for completing the construction of the coil coating line in Elk Grove Village and the last phase of the Middletown facility upgrade. MSC's long-term debt, less current portion, increased at fiscal year-end 1996 to $16.8 million from $6.9 million in fiscal 1995, due to convertible debt issued in conjunction with the SGI acquisition and borrowings under the Company's line of credit. Long-term debt is expected to increase by approximately $10.0 million in fiscal 1997 as MSC utilizes its unsecured line of credit to finance a portion of its capital expenditure program. In fiscal 1995, the Company entered into a new $25 million unsecured line of credit that expires August 31, 1998. There was $4.8 million outstanding under this line of credit at February 29, 1996. The Company also has executed letters of credit totaling $4.9 million against the credit facility, leaving an available line of credit of $15.3 million at February 29, 1996. In addition, in fiscal 1996, MSC entered into a separate financing arrangement with a second banking source for an additional $25 million unsecured line of credit. There was no outstanding balance under this line of credit at February 29, 1996. In fiscal 1997, 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. [BAR CHART APPEARS HERE] ------------------------------------------- Long-Term Debt and Shareowners' Equity ---------------------- in millions of dollars Equity Long-Term Debt ------ -------------- 1994 86.5 8.9 1995 105.4 6.9 1996 121.7 16.8 ------------------------------------------- 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 three large volume PRPs, to compel such non-settling PRPs to contribute to the clean-up effort at this site. During fiscal 1994, the Company reached agreement with various liability insurers for environmental-related costs. The agreements included cash settlements of $4,275, of which $1,800 represented the reimbursement of previously accrued costs. The balance of the settlements was for future environmental costs and was included in the Company's environmental accruals. 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 $4,300 to $5,100 at February 29, 1996. 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 accompanying Notes to Consolidated Financial Statements). During the first quarter of fiscal 1997, the Company entered into a tentative settlement agreement regarding a lawsuit with a former distributor of solar control and safety window film. The settlement is expected to be finalized in the first quarter of fiscal 1997, and the amount of the settlement is within the range of previously established reserves. The Company has a capital lease obligation, which was $6.9 million as of February 29, 1996, 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 $3.4 million) of $6.8 million in Partnership financing loans from third parties at February 29, 1996. The Company's adoption of Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," at February 29, 1996, did not have a material effect on the Consolidated Financial Statements. Inflation The Company believes that inflation has not had a significant impact on fiscal 1996, 1995 and 1994 results of operations in any of its product groups. 23 CONSOLIDATED STATEMENTS OF INCOME Material Sciences Corporation and Subsidiaries
For the years ended February 28 or 29, -------------------------------- (In thousands, except per share data) 1996 1995 1994 - --------------------------------------------- -------- -------- -------- NET SALES.................................... $236,150 $227,658 $187,701 Cost of Sales................................ 174,916 165,487 141,949 -------- -------- -------- Gross Profit................................. $ 61,234 $ 62,171 $ 45,752 Selling, General and Administrative Expenses. 37,549 35,679 27,409 Special Charge............................... 4,200 -- -- -------- -------- -------- Income from Operations....................... $ 19,485 $ 26,492 $ 18,343 Other (Income) and Expense: Interest Income............................. $ (343) $ (667) $ (1,057) Interest Expense............................ 217 64 112 Equity in Results of Partnership............ 931 485 589 Other, Net.................................. (717) (609) (333) -------- -------- -------- Total Other (Income) and Expense, Net...... $ 88 $ (727) $ (689) -------- -------- -------- Income Before Income Taxes................... $ 19,397 $ 27,219 $ 19,032 Income Taxes................................. 7,418 10,479 7,230 -------- -------- -------- NET INCOME................................... $ 11,979 $ 16,740 $ 11,802 ======== ======== ======== Net Income Per Common and Common Equivalent Share..................... $ 0.78 $ 1.10 $ 0.78 ======== ======== ======== Weighted Average Number of Common and Common Equivalent Shares Outstanding........ 15,437 15,241 15,057 ======== ======== ========
The accompanying notes are an integral part of these statements. 24 CONSOLIDATED BALANCE SHEETS Material Sciences Corporation and Subsidiaries
At February 28 or 29, ---------------------- (In thousands, except share data) 1996 1995 - ----------------------------------------------------------------------------------------------------------- --------- --------- ASSETS Current Assets: Cash and Cash Equivalents................................................................................ $ 3,379 $ 5,816 Receivables: Trade Less Reserves of $4,407 in 1996 and $3,628 in 1995............................................... 25,836 24,518 Current Portion of Partnership Note.................................................................... 781 792 Income Taxes........................................................................................... -- 2,319 Prepaid Expenses......................................................................................... 3,069 2,343 Inventories: Raw Materials.......................................................................................... 11,311 9,630 Finished Goods......................................................................................... 21,336 14,135 Prepaid Taxes............................................................................................ 3,074 2,246 -------- -------- Total Current Assets................................................................................... $ 68,786 $ 61,799 -------- -------- Property, Plant and Equipment: Land and Building........................................................................................ $ 30,891 $ 28,341 Machinery and Equipment.................................................................................. 116,240 103,704 Leasehold Improvements................................................................................... 1,376 1,156 Capital Leases........................................................................................... 17,233 17,233 Construction in Progress................................................................................. 19,713 7,695 -------- -------- $185,453 $158,129 Accumulated Depreciation and Amortization................................................................ (74,571) (65,216) -------- -------- Net Property, Plant and Equipment...................................................................... $110,882 $ 92,913 -------- -------- Other Assets: Investment in Partnership................................................................................ $ 10,727 $ 10,917 Partnership Note Receivable, Less Current Portion........................................................ 1,123 1,871 Intangible Assets, Net................................................................................... 9,556 3,193 Other.................................................................................................... 1,041 1,664 -------- -------- Total Other Assets..................................................................................... $ 22,447 $ 17,645 -------- -------- TOTAL ASSETS......................................................................................... $202,115 $172,357 ======== ======== - ----------------------------------------------------------------------------------------------------------- LIABILITIES Current Liabilities: Current Portion of Long-Term Debt........................................................................ $ 3,014 $ 1,903 Accounts Payable......................................................................................... 23,950 22,521 Accrued Payroll Related Expenses......................................................................... 8,036 9,274 Accrued Expenses......................................................................................... 6,588 5,395 -------- -------- Total Current Liabilities.............................................................................. $ 41,588 $ 39,093 -------- -------- Long-Term Liabilities: Deferred Income Taxes.................................................................................... $ 11,451 $ 10,750 Long-Term Debt, Less Current Portion..................................................................... 16,815 6,933 Accrued Superfund Liability.............................................................................. 4,177 4,198 Other.................................................................................................... 6,376 5,979 -------- -------- Total Long-Term Liabilities............................................................................ $ 38,819 $ 27,860 -------- -------- - ----------------------------------------------------------------------------------------------------------- SHAREOWNERS' EQUITY Preferred Stock, $1.00 Par Value; 10,000,000 Shares Authorized; 7,500,000 Designated Series A Junior Participating Preferred; None Issued..................................................................... $ -- $ -- Common Stock, $.02 Par Value; 20,000,000 Shares Authorized; 16,046,398 Shares Issued and 15,357,750 Shares Outstanding at February 29, 1996, and 15,839,074 Shares Issued and 15,150,426 Shares Outstanding at February 28, 1995........................................................................................ 321 317 Additional Paid-In Capital................................................................................. 47,097 42,776 Treasury Stock at Cost, 688,648 Shares at February 29, 1996 and February 28, 1995.......................... (3,380) (3,380) Retained Earnings.......................................................................................... 77,670 65,691 -------- -------- Total Shareowners' Equity.............................................................................. $121,708 $105,404 -------- -------- TOTAL LIABILITIES AND SHAREOWNERS' EQUITY............................................................ $202,115 $172,357 ======== ========
The accompanying notes are an integral part of these statements. 25 CONSOLIDATED STATEMENTS OF CASH FLOWS Material Sciences Corporation and Subsidiaries
(In thousands) For the years ended February 28 or 29, -------------------------------------- CASH FLOWS FROM: 1996 1995 1994 - ------------------------------------------------------------------------------------------- -------- -------- -------- OPERATING ACTIVITIES: Net Income................................................................................. $ 11,979 $ 16,740 $ 11,802 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization............................................................ 11,098 8,747 7,385 Provision (Benefit) for Deferred Income Taxes............................................ 1,406 986 (1,069) Compensatory Effect of Stock Plans....................................................... 1,188 647 388 Other, Net............................................................................... 918 464 612 -------- -------- -------- Operating Cash Flow Prior to Changes in Assets and Liabilities......................... $ 26,589 $ 27,584 $ 19,118 -------- -------- -------- Changes in Assets and Liabilities: Receivables.............................................................................. $ (6,488) $ (1,597) $ (4,289) Income Taxes Receivable.................................................................. 2,319 (2,319) 866 Prepaid Expenses......................................................................... (659) (1,101) (297) Inventories.............................................................................. (2,479) (4,187) (5,021) Accounts Payable......................................................................... 1,188 3,860 4,293 Accrued Expenses......................................................................... (1,395) 1,866 4,228 Other, Net............................................................................... 467 914 (309) -------- -------- -------- Cash Flow from Changes in Assets and Liabilities....................................... $ (7,047) $ (2,564) $ (529) -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES............................................ $ 19,542 $ 25,020 $ 18,589 -------- -------- -------- - ------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Capital Expenditures, Net.................................................................. $(27,467) $(29,374) $(14,894) Acquisitions, Net of Cash Acquired......................................................... (213) - (12,300) Investment in Partnership.................................................................. (741) (1,939) (1,091) Distribution from Partnership.............................................................. 748 749 748 Other Long-Term Assets..................................................................... 390 205 (1,841) -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES................................................ $(27,283) $(30,359) $(29,378) - ------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Proceeds of Debt........................................................................... $ 64,207 $ 150 $ 143 Payments to Settle Debt.................................................................... (61,376) (1,937) (1,891) Sale of Common Stock....................................................................... 2,473 1,012 956 -------- -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES.................................. $ 5,304 $ (775) $ (792) -------- -------- -------- NET DECREASE IN CASH....................................................................... $ (2,437) $ (6,114) $(11,581) Cash and Cash Equivalents at Beginning of Year............................................. 5,816 11,930 23,511 -------- -------- -------- Cash and Cash Equivalents at End of Year................................................... $ 3,379 $ 5,816 $ 11,930 ======== ======== ======== Supplemental Cash Flow Disclosures: Interest Paid............................................................................ $ 1,377 $ 981 $ 1,008 Income Taxes Paid........................................................................ 3,842 11,195 7,382 Subordinated Convertible Notes Issued for Acquisition.................................... $ 7,981 $ -- $ -- Cash Portion of Acquisition and Related Costs............................................ 213 -- -- -------- -------- -------- Total Consideration Paid for Acquisition................................................. $ 8,194 $ -- $ -- ======== ======== ======== The Changes in Assets and Liabilities above for the year ended February 29, 1996, are net of assets and liabilities acquired.
The accompanying notes are an integral part of these statements. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share data) Material Sciences Corporation and Subsidiaries For the three years ended February 29, 1996 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 1996 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. 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 10 to 20 years. Accumulated amortization of intangible assets was $713 and $327 at February 29, 1996 and February 28, 1995, 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 $6,653 in fiscal 1996, $5,404 in fiscal 1995 and $3,972 in fiscal 1994. 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 41% 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. Note 2: Subsequent Event During the first quarter of fiscal 1997, the Company entered into a tentative agreement to purchase certain assets of a West Coast distributor. Consideration for the purchase will be $1,500 in subordinated convertible notes and $2,400 in cash. The subordinated convertible notes bear interest at a rate of 7% per annum and are convertible into shares of the Company's common stock. The conversion price will be determined based upon a 25% premium over the last 20 days average closing price prior to closing. The acquisition will be accounted for under the purchase method of accounting. 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 includes projected costs related to severance and other related costs, and litigation expenses. Cash related components represent 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. As of February 29, 1996, the remaining reserve of $2,317 is classified as a Current Liability and is expected to be paid in fiscal 1997. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share data) Material Sciences Corporation and Subsidiaries Note 4: Acquisitions 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. On June 30, 1993, the Company acquired the assets of a coil paint facility owned by AK Steel Corporation ("AKS") in Middletown, Ohio. Consideration for the purchase, including acquisition related costs, was $14,504 in cash and the assumption of certain employee benefit liabilities as follows: - ----------------------------------- ------- Property, Plant and Equipment...... $12,300 Non-Compete Agreement.............. 700 Deferred Income Taxes.............. 196 Other Intangible Assets............ 2,445 Employee Benefit Liabilities....... (1,137) ------- Acquisition Cost.................. $14,504 =======
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 existing sales force and shifting production from other MSC plants that, at times, reach their capacity. AKS represented 8%, 10% and 8% of MSC's net sales in fiscal 1996, 1995 and 1994, respectively. 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 coils of 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. 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 1996 1995 1994 - ---------------------------------- ------- ------- ------- Net Revenues...................... $64,941 $60,887 $57,696 Gross Profit...................... 2,286 3,729 4,192 Income from Operations............ (153) 1,333 1,951 Net Loss.......................... (1,852) (950) (1,018) For the years ended February 28 or 29, --------------------------- BALANCE SHEET INFORMATION 1996 1995 1994 - ---------------------------------- ------- ------- ------- Current Assets.................... $ 9,375 $10,005 $ 9,083 Total Assets...................... 36,458 42,824 46,132 Current Liabilities............... 7,653 8,590 8,611 Total Liabilities................. 15,059 21,433 27,391 Partners' Capital................. 21,399 21,391 18,741
The Company's primary financial benefits from the Partnership are the revenues billed to Walbridge Coatings for operating the facility. These revenues represent 23%, 22% and 24% of the Company's net sales in fiscal years 1996, 1995 and 1994, respectively. MSC's electrogalvanizing revenues billed to Walbridge Coatings exclude financing and other items that 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 to the left 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 29, 1996, the Company holds a $1,871 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 $1,752 at February 29, 1996 and $1,268 at February 28, 1995. The Company has guaranteed 50% of the third party debt of the Partnership. At February 29, 1996, the Partnership debt totaled $6,750. 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 also has 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 $1,200 to $1,400 for this site. This work has commenced and the Company has maintained a Letter of 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share data) Material Sciences Corporation and Subsidiaries 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 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 29, 1996. 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 three large volume PRPs, 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 $4,300 and $5,100. The Company's environmental reserves total approximately $4,900 at February 29, 1996. 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 29, 1996. However, no assurance can be given that such information, including estimates of remedial expenses, will not change. During fiscal 1994, the Company reached agreement with various liability insurers for environmental-related costs. The agreements included cash settlements of $4,275, of which $1,800, that was previously charged to operations, was included in gross profit in fiscal 1994. The balance of the settlements was for future environmental costs and was included in the Company's environmental accruals. During the first quarter of fiscal 1997, the Company entered into a tentative settlement agreement regarding a lawsuit with a former distributor of solar control and safety window film. The settlement is expected to be finalized in the first quarter of fiscal 1997, and the amount of the settlement is within the range of previously established reserves. 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 1996 1995 - --------------------------------------------------- ------- ------- Borrowings under Unsecured Line of Credit.......... $ 4,800 $ -- Subordinated Convertible Notes..................... 7,981 436 Obligations Under Capital Leases (Note 8)......................................... 6,932 8,400 Other.............................................. 116 -- ------- ------- $19,829 $ 8,836 Less Current Portion............................... 3,014 1,903 ------- ------- Long-Term Debt..................................... $16,815 $ 6,933 ======= ======= PROJECTED MATURITIES OF LONG-TERM DEBT At February 29, 1996 - ---------------------------------------------------------------------- 1997........................................................ $ 3,014 1998........................................................ 3,456 1999........................................................ 7,541 2000........................................................ 2,133 2001........................................................ 2,185 2002 and thereafter......................................... 1,500 ------- Total................................................... $19,829 =======
The Company maintains a $25,000 unsecured line of credit. At the option of the Company, interest is at the bank's reference rate (8.25% at February 29, 1996), or at LIBOR plus 1/2%, which generally is lower than the bank's reference rate. This agreement expires on August 31, 1998, or earlier at the Company's option. There was $4,800 outstanding under this line of credit at February 29, 1996. The Company has four irrevocable letters of credit totalling $4,940 against this line leaving an available line of credit of $15,260 at February 29, 1996. MSC pays a commitment fee of 3/8% per annum on the unused balance of the first $10,000 of credit; 1/4% per annum on $15,000 of reserved credit; 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 ($97,635) and interest coverage (2.0x). The Company was in compliance with all covenants for the period ending February 29, 1996. In addition, on December 19, 1995, the Company entered into a separate financing arrangement with a second banking source for an additional $25,000 unsecured line of credit. The interest rate is based on a market rate to be agreed upon by the parties at the time of borrowng. At February 29, 1996, the rate would have been LIBOR plus 1/2%. There is no commitment fee for this unsecured line of credit. There was no outstanding balance under this line of credit at February 29, 1996. The subordinated convertible notes ("Notes") as of February 29, 1996, were issued in consideration for the purchase of SGI. The Notes bear interest at a rate of 7% per annum. The Notes are convertible into shares of the Company's common stock at a conversion price of $24.27 per share. The Notes mature in five equal installments with one series of notes becoming due annually beginning on September 8, 1996. A maximum of 328,787 shares of common stock have been reserved for the conversion option contained in the Notes. A portion of these Notes ($1,766) were issued to certain individuals who are currently employed with the Company. The subordinated convertible notes outstanding as of February 28, 1995, were convertible into shares of the Company's common stock at the rate of $10.22 per share. The final principal redemption payment of $436 was made in fiscal 1996. Note 8: Leases The Company leases one manufacturing facility and some machinery and equipment under capital leases that include renewal options. Another manufacturing facility, 10 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. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share data) Material Sciences Corporation and Subsidiaries 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 Leases Income Leases - --------------------- ------ ------ ------ 1997................. $2,365 $2,363 $2,339 1998................. 2,373 2,373 1,669 1999................. 1,440 992 1,255 2000................. 768 - 840 2001................. 768 - 887 2002 and thereafter.. 1,729 - 676 ------ ------ ------ Total Minimum Lease Payments...... $9,443 $5,728 $7,666 ====== ====== Amount Representing Interest............ 2,511 ------ Present Value of Minimum Lease Payments............ $6,932 ======
Amortization of leased property was $988 in fiscal 1996, $980 in fiscal 1995 and $971 in fiscal 1994. Total rental expense under operating leases was $2,689 in fiscal 1996, $2,511 in fiscal 1995 and $2,145 in fiscal 1994. 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 1996, 7.5% to 8.0% in 1995 and 6.0% in 1994. For plans that have not been terminated, the discount rate was 8.0% in all years presented. The following tables detail the defined benefit and non-contributory supplemental pension plans.
COMPONENTS OF NET PERIODIC For the years ended February 28 or 29, PENSION COST 1996 1995 1994 - --------------------------------- ---- ---- ---- Service Cost Benefits Earned During the Period............... $ 384 $ 353 $ 375 Interest Cost on Projected Benefit Obligation.............. 442 737 675 Actual Return on Assets.......... (426) (612) (594) Net Amortization and Deferral.................... 271 41 81 ----- ----- ----- Net Periodic Pension Cost........ $ 671 $ 519 $ 537 ===== ===== ===== ASSUMPTIONS USED IN DETERMINING For the years ended February 28 or 29, THE PLAN'S FUNDED STATUS 1996 1995 1994 - --------------------------------- ---- ---- ---- Expected Long-Term Rate of Return on Assets........ 8.0% 8.0% 8.0% Rate of Increase in Compensation Levels............. 6.0% 6.0% 6.0% February 28 or 29, Plans Whose Plans Whose Assets Exceed Accumulated Accumulated Benefits Exceed PENSION PLANS' Benefits Assets FUNDED STATUS 1996 1995 1996 1995 - -------------------------- ------ ------ ----- ------ Plan Assets at Fair Value.......... $2,882 $5,643 $ - $1,966 ------ ------ ------ ------ Accumulated Benefit Obligation Vested................ $2,504 $3,977 $2,363 $3,853 Unvested.............. 162 808 79 579 ------ ------ ------ ------ Accumulated Benefit Obligation............. $2,666 $4,785 $2,442 $4,432 Additional Benefits Based on Projected Salary and Service Levels..... 127 - 1,111 914 ------ ------ ------ ------ Projected Benefit Obligation............. $2,793 $4,785 $3,553 $5,346 ------ ------ ------ ------ Projected Benefit Obligation in Excess of (Less Than) Plan Assets $ (89) $ (858) $3,553 $3,380 Unrecognized (Loss) Gain 258 338 (64) (132) Prior Service Cost...... (366) (112) (234) (369) Unrecognized Net Obligation on March 1.. 12 18 (40) (47) Adjustment to Recognize Minimum Liability.............. - - - 297 ------ ------ ------ ------ Pension (Asset) Liability Recognized in the Consolidated Balance Sheets......... $ (185) $ (614) $3,215 $3,129 ====== ====== ====== ======
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 $1,360 in fiscal 1996, $1,296 in fiscal 1995 and $958 in fiscal 1994. 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 $59 in fiscal 1996, $95 in fiscal 1995 and $112 in fiscal 1994. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share data) Material Sciences Corporation and Subsidiaries The following table presents a reconciliation of the funded status of the plan to the accrued benefit cost:
POST-RETIREMENT PLAN February 28 or 29, FUNDED STATUS 1996 1995 ------ ------ Plan Assets at Fair Value..................... $ 24 $ - ------ ------ Retirees...................................... $ 893 $ 709 Other Fully Eligible Participants............. 322 266 Other Active Participants..................... 601 468 ------ ------ Accumulated Post-Retirement Benefit Obligation........................... $1,816 $1,443 ------ ------ Projected Post-Retirement Benefit Obligation.. $1,792 $1,443 Unrecognized Net Gain and Prior Service Cost.. 1,414 1,683 ------ ------ Accrued Post-Retirement Benefit Cost................................. $3,206 $3,126 ====== ====== NET PERIODIC POST- For the years ended February 28 or 29, RETIREMENT BENEFIT COST 1996 1995 1994 ---- ---- ---- Service Cost.................................. $ 79 $ 73 $ 49 Interest Cost on Accumulated Benefit Obligation............... 132 104 132 Actual Return on Assets....................... (1) - - Net Amortization and Deferral................. (71) (79) (28) --- ---- ---- Net Periodic Post-Retirement Benefit Cost................. $139 $ 98 $153 ==== ==== ====
The discount rate used in determining the accumulated post-retirement benefit obligation was 8% in 1996, 1995 and 1994. 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% to 15% 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 29, 1996 by approximately $99 and the total of the service and interest cost components of net post-retirement health care cost for the year then ended by approximately $39.
NOTE 10: SHAREOWNERS' EQUITY The table presented below reconciles Additional the Shareowners' Equity accounts. Common Stock Paid-in Retained Treasury Stock Shares Amount Capital Earnings Shares Amount - ---------------------------------------------- ---------- ------ ---------- -------- -------- ------- BALANCE February 28, 1993..................... 10,233,556 $205 $39,235 $37,258 (459,099) $(3,380) Net Income.................................... - - - 11,802 - - Sale of Common Stock.......................... 91,995 2 954 - - - Compensatory Effect of Stock Plans............ 139,604 3 385 - - - ---------- ---- ------- ------- ------- ------- BALANCE 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 February 28, 1995..................... 15,839,074 $317 $42,776 $65,691 (688,648) $(3,380) Net Income.................................... - - - 11,979 - - 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 February 28, 1996..................... 16,046,398 $321 $47,097 $77,670 (688,648) $(3,380) ========== ==== ======= ======= ======== =======
31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share data) Material Sciences Corporation and Subsidiaries Note 11: Equity Plans The Company maintains various director and employee stock plans. On February 29, 1996, the Company had either granted options, awarded restricted stock, or sold stock totalling 3,274,199 shares out of a maximum of 4,200,000 authorized for all plans. In June 1995, the shareowners of the Company approved the authorization of an additional 600,000 shares under the 1992 Omnibus Plan. Options granted under the 1985 plan have been for the purchase of shares of common stock at 100% of the fair market value at the grant date. The options expire after five or 10 years from the date of grant and vest ratably over five years. Options granted under the 1992 Omnibus Plan have been for the purchase of common stock at 100% of the fair market value at the grant date. The options expire after 10 years from the date of grant and vest at the end of two or more years from the date of grant. A summary of transactions under the stock option plans is presented below.
STOCK OPTION Key Option ACTIVITY Directors Employees Price Per Share - ------------------------ --------- --------- --------------- Outstanding at February 28, 1993 67,500 989,550 $ 4.95 to $10.05 Granted................. 54,000 351,900 $11.42 to $15.00 Exercised............... (13,500) (67,500) $ 5.28 to $ 6.00 Cancelled............... - (90,150) $10.05 to $14.25 --------- --------- Outstanding at February 28, 1994 108,000 1,183,800 $ 4.95 to $15.00 Granted................. - 47,550 $14.67 to $17.33 Exercised............... (3,600) (37,000) $ 4.95 to $10.05 Cancelled............... - (7,500) $14.25 --------- --------- Outstanding at February 28, 1995 104,400 1,186,850 $ 4.95 to $17.33 Granted................. - 360,025 $13.88 to $18.75 Exercised............... - (153,337) $10.05 Cancelled............... - (43,620) $14.25 to $18.75 --------- --------- OUTSTANDING AT FEBRUARY 29, 1996 104,400 1,349,918 $ 4.95 to $18.75 ========= ========= ================ EXERCISABLE AT FEBRUARY 29, 1996 61,200 648,013 $ 4.95 to $10.05 ========= ========= ================
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. Shares issued prior to 1992 vested in 1993 or 1994 based on the achievement of certain performance based criteria specified in the plan or upon the passage of time. 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 to the left. 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 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, 1993...................... 231,300 Granted............................................ 231,750 Vested............................................. (216,756) Cancelled.......................................... (22,344) -------- Unvested at February 28, 1994...................... 223,950 Granted............................................ 47,550 Vested............................................. - Cancelled.......................................... (1,500) -------- Unvested at February 28, 1995...................... 270,000 Granted............................................ - Vested............................................. (49,110) Cancelled.......................................... (14,070) -------- UNVESTED AT FEBRUARY 29, 1996...................... 206,820 ========
Compensation effects arising from the difference between market and exercise prices at date of option grant or restricted stock issuance is $1,188 in 1996, $647 in 1995 and $388 in 1994, 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 1996, 1995 and 1994, 68,057, 53,382 and 56,993 shares, respectively, were sold to employees under this plan. On July 2, 1986, the Company issued a dividend of one right for each outstanding common share to shareowners of record on that date. Each right entitles the owner, upon the occurrence of certain events relating to changes in ownership of the Company, to buy from the Company two-thirds of one share of Series A junior participating preferred stock for $80.00 per share. If the Company is involved in a business combination or other defined transaction, the rights owners will be entitled to buy certain stock of the acquiring company. Alternatively, upon the occurrence of defined events, rights owned by certain shareowners would become exercisable for a defined number of shares of common stock of the Company. The Company is entitled to redeem the rights at $0.022 per right under certain circumstances. The rights expire on July 1, 1996. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share data) Material Sciences Corporation and Subsidiaries Note 12: Interest Expense The table presented below analyzes the components of interest expense.
For the years ended February 28 or 29, INTEREST EXPENSE 1996 1995 1994 - --------------------------------------------- ---- ---- ---- Other........................................ $ 589 $124 $112 Capitalized.................................. (372) (60) - ----- ---- ---- Total........................................ $ 217 $ 64 $112 ===== ==== ====
The table above excludes interest expense of $792, $869 and $888 for fiscal years 1996, 1995 and 1994, 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 13: 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 or 29, TAX PROVISION 1996 1995 1994 ------ ------- ------- Current: Federal....................... $5,136 $ 8,130 $ 7,053 State......................... 876 1,363 1,246 ------ ------- ------- $6,012 $ 9,493 $ 8,299 Deferred: Federal....................... 1,215 852 (907) State......................... 191 134 (162) ------ ------- ------- $1,406 $ 986 $(1,069) ------ ------- ------- Total Provision................ $7,418 $10,479 $ 7,230 ====== ======= ======= For the years ended February 28 or 29, TAX RATE RECONCILIATION 1996 1995 1994 ---- ---- ---- Federal Statutory Rate....................................... 35.0% 35.0% 35.0% State and Local Taxes, Net of Federal Tax Benefit...................................... 5.5 5.5 5.7 Research and Development Tax Credits................................................. (1.1) (0.7) (1.2) Foreign Sales Corp. Benefit.................................. (0.5) - - Tax Exempt Interest Income................................... - (0.4) (0.6) Other, Net................................................... (0.7) (0.9) (0.9) ---- ---- ---- Effective Income Tax Rate.................................... 38.2% 38.5% 38.0% ==== ==== ==== Temporary differences that give rise to deferred tax (assets) and liabilities are as follows: February 28 or 29, 1996 1995 - ------------------------------------------------------------- ------- ------- Property and Equipment....................................... $15,539 $13,821 Reserves not Deductible Until Paid........................... (4,220) (3,668) Employee Benefit Liabilities................................. (4,013) (2,945) Deferred State Income Taxes, Net............................. 1,140 1,155 Other........................................................ (69) 141 ------- ------- Deferred Tax Liabilities, Net................................ $ 8,377 $ 8,504 ======= ======= Deferred Tax Liabilities, Net, have been recorded on the Company's balance sheet as follows: February 28 or 29, 1996 1995 - ------------------------------------------------------------- ------- ------- Long-Term Liabilities -- Deferred Income Taxes....................................... $11,451 $10,750 Current Assets -- Prepaid Taxes.............................. (3,074) (2,246) ------- ------- $ 8,377 $ 8,504 ======= ======= Note 14: Summary of Quarterly Data (Unaudited) The table presented below is a summary of quarterly data for the years ended February 29, 1996 and February 28, 1995. First Second Third Fourth 1996 Quarter Quarter Quarter Quarter - -------------------------- ------- ------- ------- ------- NET SALES................. $60,406 $58,650 $58,020 $59,074 GROSS PROFIT.............. 16,537 15,583 14,554 14,560 NET INCOME................ 4,866 4,066 333 2,714 NET INCOME PER SHARE................ $ 0.32 $ 0.26 $ 0.02 $ 0.18 1995 - -------------------------- Net Sales................. $58,822 $59,415 $56,798 $52,623 Gross Profit.............. 15,050 15,589 16,776 14,756 Net Income................ 4,081 4,463 4,600 3,596 Net Income Per Share................ $ 0.27 $ 0.29 $ 0.30 $ 0.24
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 to Consolidated Financial Statements). 33 SELECTED FINANCIAL DATA Material Sciences Corporation and Subsidiaries
-------- -------- -------- -------- -------- (Dollars and numbers of shares in thousands, except per share data) 1996 1995 1994 1993 1992 - ------------------------------------------------------------------- -------- -------- -------- -------- -------- OPERATING RESULTS Net Sales.......................................................... $236,150 $227,658 $187,701 $156,230 $142,599 Gross Profit....................................................... 61,234 62,171 45,752 38,828 34,359 Selling, General and Administrative Expenses....................... 37,549 35,679 27,409 24,992 22,710 Income from Operations............................................. 19,485 26,492 18,343 13,836 11,649 Net Income (Loss) (1) (2) (3)...................................... 11,979 16,740 11,802 7,617 7,141 Per Share Information:(4) Net Sales........................................................ $ 15.30 $ 14.94 $ 12.47 $ 11.67 $ 12.67 Net Income (Loss)................................................ 0.78 1.10 0.78 0.56 0.63 Cash Dividends................................................... -- -- -- -- -- Shareowners' Equity.............................................. 7.88 6.92 5.74 5.48 3.73 Market Price: High........................................................... $ 22.38 $ 17.75 $ 17.63 $ 12.00 $ 10.38 Low............................................................ $ 12.13 $ 13.75 $ 10.63 $ 7.88 $ 4.88 Close.......................................................... $ 14.38 $ 15.88 $ 17.63 $ 11.00 $ 10.38 P/E (High)....................................................... 28.7X 16.1x 22.6x 21.4x 16.5x P/E (Low)........................................................ 15.6X 12.5x 13.6x 14.1x 7.7x - ------------------------------------------------------------------- -------- -------- -------- -------- -------- FINANCIAL POSITION Total Assets....................................................... $202,115 $172,357 $151,592 $128,711 $100,967 Working Capital.................................................... 27,198 22,706 29,026 37,749 9,709 Net Property, Plant and Equipment.................................. 110,882 92,913 72,048 52,151 47,163 Long-Term Debt, Less Current Portion............................... 16,815 6,933 8,853 10,696 13,801 Shareowners' Equity................................................ 121,708 105,404 86,464 73,318 41,995 Total Capital Invested............................................. 141,537 114,240 97,087 85,689 58,032 - ------------------------------------------------------------------- -------- -------- -------- -------- -------- KEY RATIOS Gross Profit as a % of Net Sales................................... 25.9% 27.3% 24.4% 24.9% 24.1% SG&A Expenses as a % of Net Sales.................................. 15.9% 15.7% 14.6% 16.0% 15.9% Income From Operations as a % of Net Sales......................... 8.3% 11.6% 9.8% 8.9% 8.2% Net Income (Loss) as a % of Net Sales.............................. 5.1% 7.3% 6.3% 4.9% 5.0% Research and Development as a % of Net Sales....................... 2.8% 2.4% 2.1% 2.0% 2.0% Effective Income Tax Rate.......................................... 38.2% 38.5% 38.0% 37.0% 39.0% Current Ratio...................................................... 1.7 1.6 1.9 2.5 1.4 Long-Term Debt to Shareowners' Equity.............................. 13.8% 6.6% 10.2% 14.6% 32.9% Outstanding Debt as a % of Total Capital Invested.................. 14.0% 7.7% 10.9% 14.4% 27.6% Return on Average Shareowners' Equity.............................. 10.5% 17.4% 14.8% 13.2% 19.6% Return on Average Total Capital Invested........................... 9.4% 15.8% 12.9% 10.6% 11.9% - ------------------------------------------------------------------- -------- -------- -------- -------- -------- OTHER STATISTICS Capital Expenditures, Net.......................................... $ 27,467 $ 29,374 $ 14,894 $ 11,444 $ 8,333 Cash Flows Before Financing Activities(5).......................... (7,741) (5,339) (10,789) 4,677 11,060 Depreciation and Amortization...................................... 11,098 8,747 7,385 6,455 6,383 Sales per Employee................................................. 268 246 227 231 223 Weighted Average Number of Common and Common Equivalent Shares Outstanding(4)............................................. 15,437 15,241 15,057 13,383 11,259 Shareowners of Record.............................................. 1,012 1,110 796 891 750 Number of Employees................................................ 882 925 826 675 639
(1) In 1996, the Company recorded a pretax special charge against income of $4,200 for the restructuring of its four product groups. MSC recorded a pretax special charge against income of $2,000 in 1991 to provide for a management reorganization. In 1990, the Company recorded pretax special charges of $13,377 against income for the restructuring of its investment in metallizing and coating operations and $4,750 for environmental matters. (2) Total Other (Income) and Expense for 1990 includes a pretax loss of $23,490 on the disposition of its former subsidiary, Scharr Industries, Inc. (3) 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. (4) 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. (5) This figure represents net cash provided by operating activities less net cash used in investing activities. The 1994 figure includes a cash outflow of $14,504 for the investment in acquired facility. NM: Not meaningful. 34 SELECTED FINANCIAL DATA Material Sciences Corporation and Subsidiaries
-------- -------- -------- -------- -------- -------- (Dollars and numbers of shares in thousands, except per share data) 1991 1990 1989 1988 1987 1986 - ------------------------------------------------------------------- -------- -------- -------- -------- -------- -------- OPERATING RESULTS Net Sales.......................................................... $139,459 $152,747 $172,393 $152,305 $126,270 $113,704 Gross Profit....................................................... 33,529 26,793 34,876 29,944 24,329 32,908 Selling, General and Administrative Expenses....................... 22,556 22,824 20,272 18,151 14,070 10,198 Income from Operations............................................. 8,973 (14,158) 14,604 11,793 10,259 22,710 Net Income (Loss) (1) (2) (3)...................................... 4,688 (30,417) 7,874 5,668 6,480 10,708 Per Share Information:(4) Net Sales........................................................ $ 12.56 $ 13.61 $ 15.35 $ 13.14 $ 10.82 $ 9.89 Net Income (Loss)................................................ 0.42 (2.71) .70 0.49 0.56 0.93 Cash Dividends................................................... -- -- -- -- -- -- Shareowners' Equity.............................................. 2.79 2.27 5.04 4.14 3.79 3.22 Market Price: High........................................................... $ 7.63 $ 7.75 $ 8.88 $ 12.13 $ 12.63 $ 8.63 Low............................................................ $ 4.13 $ 5.00 $ 6.00 $ 4.75 $ 7.50 $ 5.75 Close.......................................................... $ 5.25 $ 5.00 $ 7.00 $ 6.75 $ 11.00 $ 8.00 P/E (High)....................................................... 18.2x NM 12.7x 24.8x 22.6x 9.3x P/E (Low)........................................................ 9.8x NM 8.6x 9.7x 13.4x 6.2x - ------------------------------------------------------------------- -------- -------- -------- -------- -------- -------- FINANCIAL POSITION Total Assets....................................................... $104,233 $110,801 $131,407 $117,631 $112,617 $141,839 Working Capital.................................................... 17,369 23,191 24,088 12,877 8,935 10,646 Net Property, Plant and Equipment.................................. 46,019 42,966 56,860 52,026 49,081 94,901 Long-Term Debt, Less Current Portion............................... 29,400 42,370 37,434 33,826 32,955 76,396 Shareowners' Equity................................................ 30,949 25,477 56,583 48,017 44,263 37,004 Total Capital Invested............................................. 62,118 70,072 96,119 84,767 80,697 116,633 - ------------------------------------------------------------------- -------- -------- -------- -------- -------- -------- KEY RATIOS Gross Profit as a % of Net Sales................................... 24.0% 17.5% 20.2% 19.7% 19.3% 28.9% SG&A Expenses as a % of Net Sales.................................. 16.2% 14.9% 11.8% 11.9% 11.2% 9.0% Income From Operations as a % of Net Sales......................... 6.4% (9.3%) 8.5% 7.7% 8.1% 20.0% Net Income (Loss) as a % of Net Sales.............................. 3.4% (19.9%) 4.6% 3.7% 5.1% 9.4% Research and Development as a % of Net Sales....................... 1.8% 1.5% 1.1% 1.6% 1.2% 1.6% Effective Income Tax Rate.......................................... 40.0% 22.1% 39.3% 40.9% 17.7% 49.2% Current Ratio...................................................... 1.7 1.9 2.0 1.5 1.3 1.4 Long-Term Debt to Shareowners' Equity.............................. 95.0% 166.3% 66.2% 70.4% 74.5% 206.5% Outstanding Debt as a % of Total Capital Invested.................. 50.2% 63.6% 41.1% 43.4% 45.1% 68.3% Return on Average Shareowners' Equity.............................. 16.6% NM 15.1% 12.3% 15.9% 34.0% Return on Average Total Capital Invested........................... 7.1% NM 8.7% 6.9% 6.6% 11.7% - ------------------------------------------------------------------- -------- -------- -------- -------- -------- -------- OTHER STATISTICS Capital Expenditures, Net.......................................... $ 7,558 $ 9,633 $ 10,150 $ 7,661 $ 7,134 $ 6,495 Cash Flows Before Financing Activities(5).......................... 11,840 (7,374) (3,600) 5,358 41,248 (33,431) Depreciation and Amortization...................................... 5,673 6,710 6,108 5,509 4,979 3,882 Sales per Employee................................................. 212 228 216 198 173 196 Weighted Average Number of Common and Common Equivalent Shares Outstanding(4)............................................. 11,106 11,226 11,228 11,588 11,672 11,492 Shareowners of Record.............................................. 856 824 1,316 1,433 1,537 1,853 Number of Employees................................................ 657 670 797 771 730 579
35 EX-21 7 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Subsidiaries Of The Registrant SUBSIDIARIES OF THE REGISTRANT State of Jurisdiction of Name of Subsidiary Incorporation - ---------------------- ------------- MSC Pre Finish Metals Inc. Illinois MSC Pre Finish Metals (EGV) Inc. Delaware MSC Pre Finish Metals (MV) Inc. Delaware MSC Pre Finish Metal (MT) Inc. Delaware MSC Walbridge Coatings Inc. Delaware MSC Specialty Films Inc. California MSC Laminates and Composites Inc. Delaware MSC Laminates and Composites (EGV) Inc. Delaware Material Sciences Foreign Sales U.S. Virgin Corporation Islands Solar-Gard International, Inc. Florida Solar-Gard International (UK) Limited United Kingdom Solar-Gard (SEA) Pte., Ltd. Singapore Solar-Gard (Canada) Inc. Canada EX-23 8 CONSENT OF ARTHUR ANDERSEN EXHIBIT 23 Consent of Arthur Andersen LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation by reference of our reports dated April 17, 1996, included in or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (No. 33-00067, 33-40610, 33-41310, 33-57648 and 33-81064). /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Chicago, Illinois, May 28, 1996 EX-27 9 FINANCIAL DATA REPORT
5 This schedule contains summary financial information extracted from the Consolidated Statements of Income and Consolidated Balance Sheets and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS FEB-29-1996 MAR-01-1995 FEB-29-1996 3,379 0 30,243 4,407 32,647 68,786 185,453 74,571 202,115 41,588 16,815 321 0 0 121,387 202,115 236,150 236,150 174,916 174,916 0 0 217 19,397 7,418 11,979 0 0 0 11,979 0.78 0.78
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