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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: February 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 1-8803
MATERIAL SCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2673173
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 EAST PRATT BOULEVARD
ELK GROVE VILLAGE, ILLINOIS 60007
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 847-439-8270
Securities registered pursuant to Section 12(b) of the Act:
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<CAPTION>
Title of each class Name of each exchange on which registered
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Common Stock, $.02 par value New York Stock Exchange
</TABLE>
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[_]
The aggregate market value of the voting stock of the registrant held by
shareowners (not including any voting stock owned by directors or officers of
the registrant (such exclusion shall not be deemed an admission that any such
person is an affiliate of the registrant)) of the registrant was approximately
$214,539,500 at May 23, 1997 (based on the closing sale price on the New York
Stock Exchange on such date, as reported by The Wall Street Journal Midwest
Edition).
At May 23, 1997, the registrant had outstanding an aggregate of 15,324,250
shares of its Common Stock.
Document Incorporated by Reference
Portions of the following document are incorporated herein by reference
into the indicated part of this Form 10-K:
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Part of Form 10-K
Document into which incorporated
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Registrant's proxy statement for the Annual Part III
Meeting of Shareowners to be held on
July 17, 1997.
</TABLE>
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PART I
ITEM 1. BUSINESS
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Introduction
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Material Sciences Corporation (unless otherwise indicated by the context,
including its subsidiaries, "MSC" or the "Company") develops, manufactures, and
markets continuously processed, coated, and laminated materials. These materials
are divided into four product groups: laminates and composites; specialty films;
coil coating; and electrogalvanizing. The Company's materials are used in motor
vehicles, building products, appliances, office equipment, furniture, lighting
products, packaging, and a wide range of other products. MSC develops
proprietary value-added materials and processes to meet specific customer and
market requirements and believes it has achieved product or technological
leadership in each of its four product groups.
Customers generally benefit from the energy savings and environmental
advantages of MSC's manufacturing processes and products. In the laminates and
composites product group and the specialty films product group, the Company is
primarily a manufacturer and marketer of its own proprietary products. In the
coil coating product group and electrogalvanizing product group, MSC generally
acts as a "toll coater" by processing its customers' metal for a fee, without
taking ownership of the metal.
Headquartered near Chicago, the Company, through its MSC Laminates and
Composites Inc. ("MSCLC"), MSC Specialty Films, Inc. ("MSCSF"), MSC Pre Finish
Metals Inc. ("PFM"), and MSC Walbridge Coatings Inc. ("MSCWC"), subsidiaries,
operates seven manufacturing plants. MSCLC operates one facility in Elk Grove
Village, Illinois. MSCSF operates a thin film sputter-deposition metallizing,
coating, and laminating facility in San Diego, California. PFM operates two
facilities in Elk Grove Village, Illinois, one facility in Morrisville,
Pennsylvania, and one facility in Middletown, Ohio. MSCWC, a subsidiary of PFM,
operates a facility in Walbridge, Ohio, on behalf of Walbridge Coatings, an
Illinois Partnership (the "Partnership"), formed among MSCWC, Inland Steel
Industries, Inc. ("Inland"), and Bethlehem Steel Corporation ("Bethlehem" or
"BSC").
Additional information concerning certain transactions and events is
included in Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7.
MSC, a Delaware corporation, was founded in 1971 and has been a publicly
traded company since 1984. The principal executive offices of the Company are
located at 2200 East Pratt Boulevard, Elk Grove Village, Illinois 60007, and its
telephone number at that address is (847) 439-8270.
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Laminates and Composites
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Laminates and composites combine layers of steel or other metals with
layers of polymers or other materials to achieve specific properties, such as
noise and vibration reduction, thermal insulation, or high reflectivity in
lighting among others. These products consist of functionally engineered
materials that are designed to meet specific customer requirements. Products in
this group largely result from the Company's research and development efforts
and the proprietary equipment and processes designed and implemented by its
engineering and manufacturing organizations. The Company supplies its laminates
and composites to a variety of markets both in the United States and
internationally. The majority of these products are used in the automotive,
lighting, and appliance industries. The major products in this product group are
Polycore Composites(R), disc brake noise dampers, and Specular+(R).
Polycore Composites are multilayer composites consisting of various metals,
adhesives, and other components, typically consisting of metal outer skins
surrounding a thin viscoelastic core material. Polycore Composites are
engineered to meet a variety of needs. The Company believes it is a leader in
developing and manufacturing continuously processed coated materials that reduce
noise and create thermal barriers. The automotive industry is the largest market
for metal composites, which are being used to replace solid sheet metal parts,
including oil pans, valve covers, front engine covers, and heat shields.
Polycore Composites are also being evaluated for use in dash panels, floor pans,
and other internal components in order to help reduce road noise. Polycore
Composites are also found in a number of other products, including lawn mower
engines, air conditioners, computer disk drive covers, and appliances, and
numerous other uses are under evaluation.
The disc brake noise damper market developed as manufacturers moved to
asbestos-free brake linings. The increased brake noise these linings produce can
be virtually eliminated by the composite materials pioneered by the Company. The
Company believes it has over a 50% share of the domestic disc brake noise
dampers original equipment market. The Company also believes it is a significant
supplier to the emerging domestic aftermarket, which it estimates will grow to
be at least three times as large as the domestic original equipment market. Disc
brake noise damper sales for the 1997 fiscal year set another record as a result
of increased sales to General Motors Corporation ("General Motors"), Ford Motor
Company, and Chrysler Corporation, and due to further penetration into the disc
brake aftermarket.
Specular+, a laminate of silver-sputtered coated film and sheet metal, was
developed by the Company for the growing high-reflective fluorescent lighting
market. Because pure silver offers unsurpassed reflectivity and precise light
control, Specular+ produces virtually the same amount of light with only half
the bulbs of a typical white painted fixture. The result is a significant
reduction in the electricity cost for lighting.
The market for laminate and composite materials is competitive, both
domestically and internationally. There are competitors in each product market
served by the Company, some of which have greater resources than the Company.
The Company believes, however, that its
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technology, product development capability, technical support, and customer
service place it in a strong competitive position in this market.
Specialty Films
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The Company uses sputter-deposition technology to metallize wide rolls of
flexible substrates, generally consisting of thin polymeric films. In the
sputter-deposition process, a target material is disintegrated, in a vacuum
chamber by ion bombardment, into its component atoms or molecules, which are
then deposited onto the surface of the base material to be coated. Such base
material (commonly called the substrate or flexible web) can be polymeric film,
foil, fabric, or paper.
Sputter-deposition permits the use of a wide range of target materials,
singly or in combination (including metals, metal alloys, and metal oxides),
some of which cannot be applied in any other way. This flexibility allows
formation of composites of metals, dielectrics, and semiconductors. Sputter-
coated, flexible polymeric substrates may be designed to have specific
properties, including energy reflectance, transmission, absorption, and
electrical conductance. After the sputtering process, these materials are often
further enhanced with other coatings, adhesives, and films, resulting in a
multilayer laminate.
The Company's specialty films sales consist principally of solar control
and safety window films for use in the automotive aftermarket and building
applications. The Company sells these products through Solar Gard International,
Inc. ("SGI") and four independent distributors. The Company believes there are
significant growth opportunities in the building market, since there is
currently low market penetration, and industrial, commercial, and residential
building owners are becoming more familiar with the benefits of solar control
and safety window films. Solar control window films can lower energy bills year-
round by reducing heat penetration in the summer and retaining residual warmth
in the winter. They also reject ultraviolet light, thereby eliminating the
damage it causes. In commercial environments, window film generally improves
productivity by reducing glare and heat generation. Safety films offer security
by making glass shatter-resistant.
This product group includes the silver-sputtered, coated film used in
Specular+, although intercompany sales of such film are excluded from this
product group's sales. The Company also has developed other products for the
high-reflective fluorescent lighting market. In addition, the Company
participates in the microwaveable food packaging market with its Insceptor(R)
film products that offer precise control of heating, browning, and crisping of
food during the cooking process. The Company has established agreements with
rigid and flexible packaging companies to supply certain customers in the
domestic market. This product group also includes security seals, which are used
in tamper-evident packaging and anti-counterfeit measures. In addition, the
Company manufactures sputtered films for photoreceptor belts used in paper
copiers and digital imaging films used in printing plates.
On May 12, 1997, a subsidiary of the Company signed a letter of intent to
purchase designated assets of a specialty films distribution business in
Australia.
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During the first quarter of fiscal 1997, the Company purchased certain
assets of a distributor of solar control and safety window film products with
operations primarily in the Western United States and throughout the world. In
September 1995, MSC acquired all of the outstanding capital stock of SGI.
Headquartered in Largo, Florida, SGI was the largest independent distributor of
professionally installed solar control window film products in the world prior
to the acquisition. It was also MSC's largest distributor, with a relationship
going back to 1980. SGI had eight wholly owned distribution centers across the
United States, one center in each of Canada and England, and a joint venture
operation in Singapore at the time of acquisition. SGI currently distributes
products in over sixty countries.
MSC believes that there are four major domestic companies producing
competitive specialty film materials in addition to the Company. Some of these
competitors have greater resources than the Company, including patented
technology. The Company competes on the basis of a number of factors, including
product performance and quality, completeness of product offering, new product
development capabilities, service, and price. The Company believes that it is
competitive in these areas.
Coil Coating
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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
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other coating methods. These savings are achieved because of high-speed material
processing and because 90% to 95% of the coatings' volatile organic compounds
are recycled back into the curing ovens and used as fuel.
Manufacturers that use prepainted materials can eliminate or significantly
reduce on-site post paint lines and the associated compliance with complex
environmental and other regulations. Prepainted materials facilitate the
adoption of just-in-time and continuous process manufacturing techniques which
can result in improvements to work in process inventory, plant utilization, and
productivity. Since prepainted metal is cleaned, treated, and painted while
flat, the result is a more uniform and higher quality finished part than can be
achieved by even the best post-fabrication painting operation. There are no
hidden areas where paint is difficult to reach and where corrosion can begin
after the product has been marketed. As a result, companies using prepainted
material generally benefit from lower manufacturing costs and improved product
quality. Use of prepainted metal may, however, require product design or
fabrication changes and more stringent handling procedures during manufacturing.
The coil coating process competes with other methods of producing coated
sheet metal, principally post-fabrication finishing methods such as spraying,
dipping, and brushing. The Company believes that coil coating accounts for
approximately 10% of all the sheet metal now being coated. The Company expects
that, although there can be no assurance in this regard, the market penetration
of coil coated metal will increase as a result of more stringent environmental
regulation and the energy efficiency, quality, and cost advantages provided by
prepainted metal as compared to post-fabrication painting, particularly in high-
volume manufacturing operations. The Company estimates that there are
approximately 85 companies operating coil coating lines in North America. The
Company believes it is one of the largest coil coaters, with approximately 15%
of the total tons processed in the United States in calendar 1996. Competition
in the coil coating industry is heavily influenced by geography, due to the high
costs involved in transporting sheet metal coils. Within geographic areas, coil
coaters compete on the basis of quality, price, customer service, technical
support, and product development capability.
Electrogalvanizing
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Electrogalvanized ("EG") steel is the primary corrosion resistant steel
product used in automobile and light truck bodies. Significant domestic demand
for EG steel started in 1985 and is estimated to have been 3.9 million tons in
calendar 1996. The Company believes that demand will continue to grow as
automobile manufacturers respond to consumer demands for longer warranty
protection against rust and, to a lesser extent, due to increased applications
for EG steel in the appliance and other non-automotive industries.
MSC participates in the electrogalvanizing market through its 50% financial
interest in and role as operator of the Partnership. The term of the Partnership
ends on June 30, 1998. Through the Partnership, MSC electrogalvanizes zinc and
zinc-alloy coatings and applies organic coatings onto sheet metal. There is
growing demand by the automotive industry for a full complement of products such
as zinc-nickel, zinc-nickel with a thin organic coating, and other organic
coated zinc-nickel products such as fuel tanks that offer additional protection
against corrosion. As a
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result, a shift from pure zinc to differentiated materials has commenced. These
newer materials are particularly in demand by Japanese automakers in the United
States - currently among the end-use customers for the Partnership's services.
The Partnership's facility is the only facility in North America capable of
meeting, in a single pass through its line, the demand for this full complement
of products.
Sales to the Partnership represented 21%, 23%, and 22% of MSC's net sales
in fiscal 1997, 1996, and 1995, respectively. MSC's net sales for
electrogalvanizing consists of various fees charged to the Partnership for
operating the facility. Such fees are the predominant financial return to MSC
from its participation in the Partnership. There are both fixed fees (for
selling, general and administrative expenses and a portion of the financing,
taxes, and insurance) and variable fees based on production volumes (for the
balance of the financing, operating expenses, and profit). The Company pays the
actual costs of operating the facility, so the overall profitability of its
participation in the Partnership depends on its skill and efficiency. The
operating expense portion of the variable fee is based on standard costs, which
may be adjusted to reflect matters beyond the Company's control, upon agreement
of the partners or informal arbitration. The fees charged to Bethlehem and
Inland by the Partnership for services fund the standard operating costs of the
Partnership (including the Company's per ton profit allowance) and, at a defined
contractual production volume, all of the Partnership's financing costs. At
lesser levels of production, the Company is obligated to fund a portion (not to
exceed 50%) of the Partnership's financing costs.
Bethlehem and Inland are two of the major suppliers of sheet steel to the
United States automobile industry. The orders for the Partnership's toll coating
services are primarily and independently generated by Bethlehem and Inland for
their respective customers, although the Partnership may also accept orders from
outside parties to the extent of available capacity and production schedules.
Through fiscal 1997, third party sales have not been significant. The sales and
marketing responsibilities of the Partnership are currently split between
Bethlehem and Inland at 76% and 24%, respectively. In addition to Bethlehem's
historic production at the facility, BSC transferred its in-house
electrogalvanizing production from its Burns Harbor facility to the Partnership
in fiscal 1996. During fiscal 1997, Inland utilized only 9% of available line
time; Bethlehem and other customers utilized the balance of Inland's available
line time. Inland is reviewing its future involvement in the Partnership, and
therefore, there is no assurance that Inland will utilize its full 24% of
available line time on a long-term basis. The Company believes that any short-
term disruption in volume that might be caused by a continued reduction in
Inland's line time requirements could be replaced by additional volume from
Bethlehem and other customers.
Bethlehem and Inland have rights to purchase all the facility's production
for the 12-year life of the Partnership. The Company's potential alternatives
upon expiration of the Partnership term in June 1998, include, among other
things, extension of the Partnership, purchase of the facility, or sale of the
facility. The partners are actively discussing the various alternatives.
Competition in the production and sale of EG steel for the automotive
industry comes from other steel companies that, either directly or through joint
ventures, produce EG steel on eight manufacturing lines in the United States,
including Inland's other facility. Limited quantities of EG
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steel also are imported from foreign steel suppliers. The Company believes the
Partnership's line is well positioned to serve the current and expected end-
users of EG steel. The Company is unable to determine the effect, if any, on the
market resulting from the existence of excess capacity, the entrance of
additional capacity, improved galvanizing technology, or the substitution of
other materials.
International
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The Company believes that significant opportunities exist internationally,
particularly for the Company's disc brake noise damper products, Polycore
Composites, Specular+, and solar control and safety window film. As a percent of
net sales, direct export sales represented 11%, 8%, and 8% in fiscal 1997, 1996,
and 1995, respectively.
The Company has certain distribution agreements and licensing and royalty
agreements with agents and companies in Europe, Latin America, and the Far East
that cover disc brake noise dampers, Polycore Composites, and lighting products.
These agreements provide the Company with opportunities for market expansion in
those geographic areas.
Approximately 39% of the specialty films' products are sold to export
markets directly or through domestic distributors. The Company believes that
export shipments will continue to grow with the expansion of its distribution
network through strategic acquisitions and as emerging markets increasingly
realize the energy saving and ultraviolet light blocking benefits this product
provides.
The Company is pursuing a variety of other business relationships,
including direct sales, distribution agreements, licensing, and other forms of
partnering to increase its international sales and expand its international
presence.
Marketing and Sales
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The Company markets its laminates and composites and coil coating products,
services, and technologies primarily through its in-house sales organization and
also through independent distributors, agents, and licensees. The Company
focuses its sales efforts on manufacturers, but also sells to steel mills and
their intermediaries, metal service centers, and metal brokers. Bethlehem and
Inland are the primary marketing partners for EG steel. The Company sells its
specialty films' products primarily through its internal distribution network,
as well as domestic and international distributors. All of the Company's selling
activities are supported by technical service departments that aid the customer
in the choice of available materials and their use in the customer's
manufacturing process.
The Company estimates that customers in the transportation industry were
the end-users for approximately 52%, 53%, and 52% of MSC's net sales in fiscal
1997, 1996, and 1995, respectively. The Company's direct sales to General Motors
were in excess of 5% during each of the last three fiscal years. In addition,
the Company believes that it has significant indirect sales to General Motors in
its coil coating and electrogalvanizing product groups. Due to concentration in
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the automobile industry, the Company believes that sales to other individual
automobile companies, including indirect sales, are significant.
On June 30, 1993, the Company acquired the assets of a coil paint facility
owned by AK Steel Corporation ("AKS"), in Middletown, Ohio. The Company also
entered into a tolling agreement in which MSC agrees to provide AKS with coil
coating and other ancillary services from the facility of up to approximately
75% of the facility's capacity for 10 years. The balance of capacity is being
marketed by the Company's sales force and shifting production from other MSC
plants that, at times, reach their capacity. AKS represented 5%, 8%, and 10% of
MSC's net sales in fiscal 1997, 1996, and 1995, respectively.
The Company's backlog of orders as of February 28, 1997, was approximately
$48.5 million, all of which is expected to be filled during the remainder of the
current fiscal year. The Company's backlog was approximately $49.9 million as of
February 29, 1996.
MSC is generally not dependent on any one source for raw materials or
purchased components essential to its business, and it is believed that such raw
materials and components will be available in adequate quantities to meet
anticipated production schedules.
MSC believes that its business, in the aggregate, is not seasonal. Certain
of its products, however, sell more heavily in some seasons than in others.
Environmental Matters
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The Company is subject to federal, state, and local environmental laws. As
a result of these laws, the Company has incurred, and will continue to incur in
the future, significant capital expenditures and operating costs and charges.
The Company is involved in two Superfund sites located in Gary and Kingsbury,
Indiana. Although the ultimate cost of the Company's share of necessary cleanup
expenses is not yet known, the Company believes that it is adequately reserved
for environmental matters given the information currently available. See Note 6
of the Notes to the Consolidated Financial Statements entitled "Environmental
and Legal Matters," which is included in Item 8. The Company cannot predict the
impact of new or changed laws or regulations.
The Company believes it operates its facilities and conducts its business,
in all material respects, in accordance with all environmental laws presently
applicable to its facilities. The Company spent approximately $2.1 million in
fiscal 1997, and has budgeted approximately $3.1 million during fiscal 1998, for
maintenance or installation of environmental controls at the Elk Grove Village,
Illinois; Walbridge, Ohio; Morrisville, Pennsylvania; Middletown, Ohio; and San
Diego, California facilities. See Item 3 "Legal Proceedings" below.
Research and Development
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Management estimates that it spent approximately $6.7 million in fiscal
1997, $6.7 million in fiscal 1996, and $5.4 million in fiscal 1995 for product
and process development activities.
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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
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At February 28, 1997, the Company had 988 full-time employees. Of these,
approximately 673 were engaged in manufacturing, 156 in marketing and sales, 109
in administrative and clerical positions, and 50 in process and product
development.
The employees at the San Diego, California; Walbridge, Ohio; and SGI
facilities are not represented by a union. Hourly manufacturing employees at Elk
Grove Village, Illinois; Morrisville, Pennsylvania; and Middletown, Ohio, are
covered by separate union contracts expiring in February 2002, November 2000,
and October 1997, respectively. The Company believes that its relations with its
employees are good.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of May 23, 1997, are as follows:
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Position and
Name Age Year First Elected
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G. Robert Evans 65 Chairman of the Board, MSC since January
1997; previously Chairman and Chief Executive
Officer, MSC since July 1991; previously
Chairman, President, and Chief Executive
Officer, MSC since February 1991.
Gerald G. Nadig 52 President and Chief Executive Officer, MSC
since January 1997; previously President and
Chief Operating Officer, MSC since July 1991;
previously President and Chief Operating
Officer, PFM since 1990; previously Executive
Vice President, PFM since 1989.
Thomas E. Moore 51 Executive Vice President and Chief Operating
Officer, MSC since May 1997; previously
Executive Vice President and General Manager,
MSCWC since 1993; previously General Manager,
MSCWC since 1984.
James J. Waclawik, Sr. 38 Vice President, Chief Financial Officer, and
Secretary, MSC since October 1996; previously
Vice President and Controller, MSC since July
1991; previously Vice President and
Controller, PFM since 1989; previously
Controller, PFM since 1988.
Frank D. Graziano 64 Senior Vice President, Technology, MSC since
July 1991; previously Senior Vice President,
Research and Development, PFM since 1990;
previously Senior Vice President, Marketing,
Research and Development, PFM since 1988.
</TABLE>
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<TABLE>
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Position and
Name Age Year First Elected
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Anton F. Vitzthum 62 Senior Vice President, Manufacturing, MSC
since March 1994; previously Senior Vice
President, Operations, PFM since 1990;
previously Vice President, Manufacturing, PFM
since 1984.
Frank J. Lazowski, Jr. 57 Vice President, Human Resources, MSC since
July 1991; previously Vice President, Human
Resources, PFM since 1988.
Robert J. Mataya 54 Vice President, Business Planning and
Development, MSC since July 1991; previously
Vice President, Business Planning and
Development, PFM since 1990; previously Vice
President, Marketing, PFM since 1986.
David J. DeNeve 29 Controller, MSC since October 1996;
previously Accounting and Tax Manager, MSC
since November 1995; previously Financial
Analyst, MSC since June 1994.
David A. Fletcher 43 President and Chief Operating Officer, MSCSF
since September 1993; previously Vice
President, Research and Development, MSCSF
since 1989.
Ronald L. Millar 46 Group Vice President and General Manager,
MSCLC since November 1995; previously Vice
President, PFM since 1991.
Kelly M. Nammari 49 Group Vice President and General Manager, PFM
since November 1995; previously Vice
President of Eastern Operations, PFM since
1993; previously Vice President and General
Manager, PFM Morrisville since 1991.
Edward A. Williams 38 Group Vice President and General Manager,
MSCWC since May 1997; previously Plant
Manager, MSCWC since 1993.
</TABLE>
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Prior to joining the Company in 1994, Mr. DeNeve was on the audit staff of
Arthur Andersen LLP. Mr. Williams was Director of Pin Mill Products, National
Steel Midwest Division, prior to joining the Company and was Superintendent,
Armco Steel Company from 1989 until 1993.
Mr. Evans serves as a director of Consolidated Freightways, Inc., Fiberboard
Corporation, and Swift Energy Company.
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ITEM 2. PROPERTIES
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The Company owns or leases facilities with an aggregate of approximately
1,288,000 square feet of space. The Company considers all of such facilities to
be in good operating condition. In addition to the principal physical properties
used by the Company in its manufacturing operations as summarized in the table
below, the Company leases numerous sales and administrative offices pursuant to
short-term leases.
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Approximate
Area in Lease Expiration
Location Square Feet (or Ownership)
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Elk Grove Village, Illinois 58,000 Owner
Plant No. 1
Elk Grove Village, Illinois 205,000 Owner
Plant No. 2
Elk Grove Village, Illinois 233,000 Owner
Plant No. 3
Morrisville, Pennsylvania 121,000 Owner
Middletown, Ohio 170,000 Owner
San Diego, California 65,000 February 2002
Walbridge, Ohio 311,000 June 2003(1)
</TABLE>
(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
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See Note 6 of the Notes to Consolidated Financial Statements entitled
"Environmental and Legal Matters," included in Item 8.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY OWNERS
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There were no matters submitted to the Company's security owners during the
fourth quarter of fiscal 1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
- ------- RELATED SHAREOWNER MATTERS
---------------------------------------------
The Company's common stock, $.02 par value, is listed on the New York Stock
Exchange under the symbol "MSC." The table below sets forth, by fiscal quarter,
the high and low sales prices of the Company's common stock during its past two
fiscal years.
<TABLE>
<CAPTION>
Fiscal Fiscal
Year Quarter High Low
------ ------- ---- ---
<S> <C> <C> <C>
1997 1st 16 7/8 14 1/2
2nd 17 1/4 15
3rd 18 15 1/8
4th 21 15 1/2
Fiscal Fiscal
Year Quarter High Low
------ ------- ---- ---
1996 1st 19 3/4 15 1/2
2nd 22 3/8 16 3/4
3rd 19 3/8 12 1/8
4th 15 12 5/8
</TABLE>
There were 1,147 owners of record of the Company's common stock at the
close of business on May 23, 1997. MSC has not paid cash dividends other than a
nominal amount in lieu of fractional shares in connection with stock dividends.
Management currently anticipates that all earnings will be retained for
development of the Company's business. If business circumstances should change,
the Board of Directors may declare and instruct the Company to pay cash
dividends.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
<TABLE>
<CAPTION>
Fiscal Year
(Dollars and number of shares in -----------------------------------------------------------------
thousands, except per share data) 1997 1996 1995 1994 1993
(restated)(5)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results
Net Sales $278,017 $236,150 $227,658 $187,701 $156,230
Gross Profit 74,208 55,596 62,171 45,752 38,828
Selling, General and Administrative Expenses 47,340 37,549 35,679 27,409 24,992
Income from Operations 26,868 13,847 26,492 18,343 13,836
Net Income(1)(2) 16,236 8,497 16,740 11,802 7,617
Per Share Information:(3)
Net Sales $ 17.82 $ 15.30 $ 14.94 $ 12.47 $ 11.67
Net Income 1.04 0.55 1.10 0.78 0.56
Cash Dividends - - - - -
Shareowners' Equity 8.55 7.66 6.92 5.74 5.48
Market Price:
High $ 21.00 $ 22.38 $ 17.75 $ 17.63 $ 12.00
Low $ 14.50 $ 12.13 $ 13.75 $ 10.63 $ 7.88
Close $ 16.38 $ 14.38 $ 15.88 $ 17.63 $ 11.00
P/E (High) 20.2x 40.7x 16.1x 22.6x 21.4x
P/E (Low) 13.9x 22.1x 12.5x 13.6x 14.1x
- -------------------------------------------------------------------------------------------------------------------
Financial Position
Total Assets $254,089 $200,026 $172,357 $151,592 $128,711
Working Capital 31,154 23,716 22,706 29,026 37,749
Net Property, Plant and Equipment 154,386 110,882 92,913 72,048 52,151
Long-Term Debt, Less Current Portion 54,761 16,815 6,933 8,853 10,696
Shareowners' Equity 133,373 118,226 105,404 86,464 73,318
Total Capital Invested 191,884 138,055 114,240 97,087 85,689
- -------------------------------------------------------------------------------------------------------------------
Key Ratios
Gross Profit as a % of Net Sales 26.7% 23.5% 27.3% 24.4% 24.9%
SG&A Expenses as a % of Net Sales 17.0% 15.9% 15.7% 14.6% 16.0%
Income from Operations as a % of Net Sales 9.7% 5.9% 11.6% 9.8% 8.9%
Net Income as a % of Net Sales 5.8% 3.6% 7.3% 6.3% 4.9%
Research and Development as a % of Net Sales 2.4% 2.8% 2.4% 2.1% 2.0%
Effective Income Tax Rate 38.5% 38.2% 38.5% 38.0% 37.0%
Current Ratio 1.7 1.6 1.6 1.9 2.5
Long-Term Debt to Shareowners' Equity 41.1% 14.2% 6.6% 10.2% 14.6%
Total Debt as a % of Total Capital Invested 30.5% 14.4% 7.7% 10.9% 14.4%
Return on Average Shareowners' Equity 12.9% 7.6% 17.4% 14.8% 13.2%
Return on Average Total Capital Invested 9.8% 6.7% 15.8% 12.9% 10.6%
- -------------------------------------------------------------------------------------------------------------------
Other Statistics
Net Cash Provided by Operating Activities $ 21,641 $ 19,542 $ 25,020 $ 18,589 $ 12,827
Capital Expenditures, Net 55,599 27,467 29,374 14,894 11,444
Operating Free Cash Flow(4) (33,958) (7,925) (4,354) 3,695 1,383
EBITDA 40,916 24,731 35,363 25,472 19,954
Depreciation and Amortization 14,323 11,098 8,747 7,385 6,455
Sales per Employee 281 268 246 227 231
Weighted Average Number of Common and
Common Equivalent Shares Outstanding(3) 15,605 15,437 15,241 15,057 13,383
Shareowners of Record 999 1,012 1,110 796 891
Number of Employees 988 882 925 826 675
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In 1996, the Company recorded a pretax special charge against income of
$4,200 for the restructuring of its four product groups.
(2) In 1993, MSC recorded the cumulative effect of adopting SFAS No. 106 and
No. 109, which reduced net income by $1,283, net of income taxes, or $0.17
per share.
(3) The above data has been restated to reflect two separate one-half share
per share dividends to shareowners of record on March 16, 1992 and
June 30, 1994.
(4) This figure represents net cash provided by operating activities less
capital expenditures, net.
(5) See Note 2 of the Notes to Consolidated Financial Statements which is
included in Item 8.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS (in thousands)
------------------------------------------------------------
<TABLE>
<CAPTION>
For the fiscal years ended February 28 or 29,
Net Sales Summary 1997 1996 1995
- ------------------------ ---- ---- ----
Product Group: Dollars Percent Dollars Percent Dollars Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Laminates and Composites $ 66,483 24% $ 56,790 24% $ 57,722 25%
Specialty Films 36,999 13% 23,662 10% 19,134 8%
Coil Coating 115,857 42% 100,652 43% 101,206 45%
Electrogalvanizing 58,678 21% 55,046 23% 49,596 22%
-------- ---- -------- ---- -------- ----
$278,017 100% $236,150 100% $227,658 100%
======== ==== ======== ==== ======== ====
For the fiscal years ended February 28 or 29,
Results of Operations 1997 1996 (restated) 1995
- -------------------------------------------- ----- --------------- ----
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 73.3 76.5 72.7
------ ------ ------
Gross Profit 26.7% 23.5% 27.3%
Selling, General and Administrative Expenses 17.0 15.9 15.7
Special Charge -- 1.7 --
------ ------ ------
Income from Operations 9.7% 5.9% 11.6%
Total Other (Income) and Expense, Net 0.2 0.1 (0.3)
------ ------ ------
Income Before Income Taxes 9.5% 5.8% 11.9%
Income Taxes 3.7 2.2 4.6
------ ------ ------
Net Income 5.8% 3.6% 7.3%
====== ====== ======
</TABLE>
Material Sciences Corporation ("MSC" or "Company") operates in one business
segment comprised of the following four product groups: laminates and
composites, specialty films, coil coating, and electrogalvanizing.
The preceding tables provide a summary of net sales and the percent of net sales
of MSC's product groups, and a summary of MSC's results of operations as a
percent of net sales.
Accounting Irregularities and Restatement of Financial Statements
As described in Note 2 of the Notes to Consolidated Financial Statements, on
April 7, 1997, the Company announced that it had discovered accounting
irregularities at one of its operating units. An independent investigation has
confirmed that the controller of that operating unit acted alone and altered and
falsified that unit's financial reports beginning in fiscal 1995. Since
learning of the accounting irregularities, the Company has taken actions
intended to prevent a recurrence of this situation.
The Company's financial statements for fiscal 1996 and the quarterly financial
information for fiscal 1997 and 1996 have been restated to reflect the
correction of the accounting irregularities. The pretax effect of this incident
on results of operations for fiscal 1995 was $1,847 and was not deemed material.
18
<PAGE>
The amount related to this period is reflected in the first quarter of fiscal
1996. After restatement, the pretax effect of the total understatement of cost
of sales related to the accounting irregularities amounted to $2,557 during the
first three quarters of fiscal 1997 and $5,638 in fiscal 1996.
The Information in the Discussion Which Follows is Presented After Restatement
of the Financial Statements
Fiscal 1997 Compared with Fiscal 1996
Net Sales
Net sales in fiscal 1997 grew 17.7% over fiscal 1996 as all four product groups
contributed to the increase. Sales of laminates and composites increased by
17.1%; specialty films 56.4%; coil coating 15.1%; and electrogalvanizing 6.6%.
Specialty films sales include nine months of activity from the May 31, 1996
acquisition of certain assets of a former West Coast distributor and our first
full year of sales from the September 7, 1995 acquisition of Solar Gard
International, Inc. ("SGI").
Laminates and Composites
Fiscal 1997 net sales of laminates and composites grew 17.1% to $66,483 from
$56,790 in fiscal 1996. Sales of Polycore Composites(R) increased due to a
higher demand to reduce noise by computer disk drive and automotive
manufacturers. Disc brake noise damper material sales were up from fiscal 1996,
as a result of increased demand in the replacement market, as well as an
increase in original equipment manufacturer ("OEM") sales. Specular+(R) sales
were flat compared to the prior fiscal year, as a result of a general market
softness and lower utility rebates offered for high-reflective lighting
fixtures. In addition, MSC completed the construction of a new, high-speed coil
coating line located in Elk Grove Village, Illinois, which was commissioned
during the first quarter of fiscal 1998. Going forward, this new coil coating
line will increase production capacity for laminates and composites products, as
we will be able to transfer coil coating products from our existing lines in Elk
Grove Village to our new coil coating line.
Specialty Films
Specialty films net sales increased 56.4% to $36,999 in fiscal 1997 from $23,662
in fiscal 1996. Included in fiscal 1997 are sales for nine months from the
acquisition of certain assets of a former West Coast distributor during the
first quarter of fiscal 1997, and sales from the SGI acquisition for the full
year of fiscal 1997, as compared to six months in fiscal 1996. The
acquisitions, due to a higher average selling price and an increase in volume,
were primarily responsible for strong gains in solar control and safety window
film, both domestically and internationally. In addition, sales of several new
products contributed to the growth.
Coil Coating
Coil coating net sales of $115,857 increased 15.1% from $100,652 in the previous
fiscal year. The major contributor to the growth was the increase in shipments
to the building, appliance, and transportation markets. The Company
successfully completed the final phase of its Middletown, Ohio expansion program
in the second quarter of fiscal 1997. In addition, our new, high-speed coil
coating line will both increase production capacity, as well as improve our
ability to compete
19
<PAGE>
as a low cost producer in current and new markets. Our coil coating business is
well positioned for long-term growth.
Electrogalvanizing
MSC participates in the electrogalvanizing market through Walbridge Coatings
(the "Partnership"), a partnership among subsidiaries of MSC, Bethlehem Steel
Corporation ("Bethlehem" or "BSC"), and Inland Steel Industries, Inc.
("Inland"). MSC's net sales for electrogalvanizing consist of various fees
charged to the Partnership for operating the facility. Bethlehem and Inland are
primarily responsible for the sales and marketing activities of the Partnership.
The Company's primary financial benefits from the Partnership are the revenues
billed to Walbridge Coatings for operating the facility. These revenues
represent 21%, 23%, and 22% of the Company's net sales in fiscal 1997, 1996, and
1995, respectively. The profitability for operating the facility is comparable
to the Company's overall operating results. Under the equity method of
accounting, the Company includes its portion of the Partnership Net Loss in
Equity in Results of Partnership shown in the Consolidated Statements of Income.
The amounts do not directly correlate to the Company's 50% ownership interest
due to contractual allocation requirements of the Partnership agreement. The
Company's potential alternatives upon expiration of the Partnership include,
among other things, extension of the Partnership, purchase of the facility, or
sale of the facility. The partners are actively discussing the various
alternatives. The Company believes its investment in the Partnership is
realizable.
MSC's electrogalvanizing sales increased 6.6% to $58,678 in fiscal 1997 from
$55,046 in fiscal 1996, while electrogalvanizing volume increased 5.3% to
477,888 tons in fiscal 1997 from 453,710 tons in the prior fiscal year. The
increase in sales and volume resulted from the shortened annual maintenance
shutdown, improved yields and efficiencies, and higher line utilization.
The sales and marketing responsibilities of the Partnership are split between
Bethlehem and Inland at approximately 76% and 24%, respectively. During fiscal
1997, Inland utilized only 9% of available production line time rather than its
24% share. Bethlehem and other customers utilized this additional available
line time. In fiscal 1998, we expect more production line time will be utilized
by customers other than Bethlehem and Inland. Inland is reviewing its future
involvement in the Partnership, and therefore, there is no assurance that Inland
will utilize its 24% share of available line time on a long-term basis. The
Company believes that any short-term disruption in volume that might be caused
by a reduction in Inland's line time requirements could be replaced by
additional volume from Bethlehem and other customers.
Gross Profit
MSC's gross profit percentage increased to 26.7% in fiscal 1997 from 23.5% in
fiscal 1996. This increase was primarily due to incremental gross profit margin
related to the SGI acquisition, higher line utilization, and improved labor and
overhead spending for volumes produced. This increase was offset, in part, by
changes in the product mix, a more competitive pricing environment, and lower
productivity at our Middletown, Ohio operation, due to scheduled shutdowns and a
large number of new business qualification trials. During the second quarter of
20
<PAGE>
fiscal 1996, the Company reached an agreement with its insurers regarding a
casualty and business interruption loss incurred in the fourth quarter of fiscal
1995. MSC recognized approximately $.7 million in operating income during the
second quarter of fiscal 1996 for this matter.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased to 17.0% of
sales in fiscal 1997 from 15.9% in fiscal 1996, excluding the impact of a $4.2
million pretax special charge recorded in the third quarter of fiscal 1996. The
increase in SG&A was largely due to additional ongoing expenses related to the
expansion of the distribution network within specialty films. SG&A was also
affected by the Company's continued strategic plan for growth utilizing
effective product marketing and international marketing efforts.
Total Other (Income) and Expense, Net and Income Taxes
Total other (income) and expense, net was $.5 million of expense in fiscal 1997
and $.1 million of expense in fiscal 1996. Interest expense increased during
the year due to higher levels of debt related to our increase in capital
expenditures, the acquisition of certain assets of the West Coast distributor of
solar control window film, and the Company's stock repurchase program. MSC
capitalized $1.8 million of interest expense in fiscal 1997 related to the
construction of a new coil coating line in Elk Grove Village, Illinois, and the
completion of the facility upgrade of our Middletown, Ohio facility. In fiscal
1998, we anticipate interest expense will increase significantly from fiscal
1997, resulting from less capitalized interest, higher debt levels, and fixed
interest rates higher than actual fiscal 1997 variable interest rates. Equity
in results of partnership declined due to higher utilization by the partners
replacing third party sales in fiscal 1997. MSC's effective tax rate for fiscal
1997 was approximately 38.5% compared with 38.2% in the prior year.
21
<PAGE>
Fiscal 1996 Compared with Fiscal 1995
Net Sales
Net sales in fiscal 1996 grew 3.7% over fiscal 1995. Sales of laminates and
composites and coil coating declined 1.6% and .5%, respectively. Specialty
films and electrogalvanizing grew 23.7% and 11.0%, respectively. Included in
the above amounts are specialty films sales from the September 7, 1995
acquisition of SGI.
Laminates and Composites
Fiscal 1996 net sales of laminates and composites declined 1.6% to $56,790 from
$57,722 in fiscal 1995. Sales of Polycore Composites decreased due to lower
sales to Chrysler. Partially offsetting the shortfall in Polycore Composites
was significant growth in non-automotive uses including computer disk drive
covers. Sales of disc brake noise damper materials increased significantly from
the previous fiscal year, as a result of increased aftermarket demand, as well
as a steady increase in OEM sales during the year. In the high-reflective
lighting fixture market, Specular+ sales decreased from fiscal 1995 due to
increased competitive pressure and a decline in OEM requirements.
Specialty Films
Specialty films net sales increased 23.7% to $23,662 in fiscal 1996 from $19,134
in fiscal 1995 due to a higher average selling price and an increase in volume
from the acquisition of SGI, increased domestic and international demand for
solar control and safety window film, offset by lost sales from a West Coast
distributor terminated in fiscal 1995. Increased productivity and quality
improvements also contributed to the increase in sales over the prior fiscal
year, as MSC was better able to meet seasonal demand.
On September 7, 1995, a subsidiary of MSC acquired all of the outstanding
capital stock of SGI. Headquartered in Largo, Florida, SGI was the largest
independent distributor of professionally installed solar control window film
products in the world. It was also MSC's largest distributor, with a
relationship going back to 1980. SGI had eight wholly owned distribution centers
across the United States, one center each in Canada and England, and a joint
venture operation in Singapore.
Coil Coating
Coil coating net sales of $100,652 in fiscal 1996 were flat with fiscal 1995.
Coil coating sales were affected by lingering effects of customer inventory
adjustments related to a scheduled 52 day shutdown of MSC's Middletown, Ohio
facility occurring in the fourth quarter of fiscal 1995. In addition, price
competition in the industry was partially offset by an increase in the sales of
clutch plate materials that were sold as a package. Package sales include both
coating and metal components. Sales declines were experienced in the truck
trailer, swimming pool, and the heating and air conditioning areas. During the
fourth quarter of fiscal 1996, pricing stabilized and backlog increased from the
previous quarter.
22
<PAGE>
Electrogalvanizing
MSC's electrogalvanizing sales increased 11.0% to $55,046 in fiscal 1996 from
$49,596 in fiscal 1995, while electrogalvanizing volume increased 6.2% to
453,710 tons in fiscal 1996 from 427,133 tons in the prior fiscal year. The
increase in sales and volume over the previous fiscal year resulted from
increased sales efforts, pricing, and improved yields.
The sales and marketing responsibilities of the Partnership are split between
Bethlehem and Inland at approximately 76% and 24%, respectively. During fiscal
1996, Inland utilized only 10% of available production line time rather than its
full 24% share. Bethlehem and other customers utilized this additional
available line time. In addition to Bethlehem's historic production, BSC
transferred its in-house electrogalvanizing production from its Burns Harbor
facility to Walbridge Coatings.
Gross Profit
MSC's gross profit percentage decreased from 27.3% in fiscal 1995 to 23.5% in
fiscal 1996. This percentage decline was due to higher labor and overhead
spending in relation to production volume, product mix, and competitive pricing
pressure, offset, in part, by improved manufacturing efficiencies. Significant
capital expenditures have resulted in increased yields and line speeds, as well
as reductions in set-up time and unscheduled downtime. The Company reached
agreement with its insurers regarding a casualty and business interruption loss
incurred in the fourth quarter of fiscal 1995. MSC recognized approximately $.7
million in operating income during the second quarter of fiscal 1996 for this
matter.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased to 15.9% of
sales in fiscal 1996 from 15.7% in fiscal 1995, excluding the impact of a $4.2
million pretax special charge recorded in the third quarter of fiscal 1996. The
increase in SG&A primarily was due to increased expenditures related to the SGI
acquisition, continued strategic high-growth product marketing, research and
development, and international marketing efforts, as well as some non-recurring
increases in other administrative expenses. The special charge included costs
related to severance and other related expenses, and litigation expenses.
Total Other (Income) and Expense, Net and Income Taxes
Total other (income) and expense, net was $.1 million of expense in fiscal 1996
and $.7 million of income in fiscal 1995. Interest income declined due to lower
amounts of cash investments. Equity in results of partnership declined due to
higher utilization by the partners replacing third party sales. MSC's effective
tax rate for fiscal 1996 was approximately 38.2% compared with 38.5% in the
prior year. In fiscal 1996, MSC benefited from the creation of a foreign sales
corporation and research and development ("R&D") tax credits for its increasing
investment in R&D.
23
<PAGE>
Liquidity and Capital Resources
MSC generated $21.6 million of cash from operating activities in fiscal 1997
compared with $19.5 million in the prior fiscal year. The increase was due
mainly to the increase in net income and higher depreciation and amortization
offset, in part, by higher accounts receivable and inventory levels at fiscal
year end compared with the prior year. Earnings before interest, taxes,
depreciation and amortization ("EBITDA") also increased to $40.9 million in
fiscal 1997 from $24.7 million in fiscal 1996.
In fiscal 1997, MSC invested $55.6 million in capital improvement projects
compared with $27.5 million last year. The increase was largely due to the
construction of the Company's new high-speed coil coating line in Elk Grove
Village, Illinois, and the completion of the facility upgrade of our Middletown,
Ohio location during fiscal 1997. In addition, MSC purchased certain assets of a
West Coast distributor of solar control and safety window film for approximately
$4.0 million payable in cash and subordinated convertible notes in the first
quarter of fiscal 1997.
During the third quarter of fiscal 1996, MSC acquired all of the outstanding
capital stock of SGI. Consideration for the purchase, including transaction
costs and net of cash acquired, was $8.0 million in subordinated convertible
notes and $.2 million in cash.
On May 12, 1997, a subsidiary of the Company signed a letter of intent to
purchase designated assets of a specialty films distribution business in
Australia. The Company hopes to finalize the purchase by July 14, 1997. It is
expected that incremental debt will not be incurred to purchase the facility.
Financing and start-up costs related to our $55.6 million capital spending
initiatives in fiscal 1997 will result in first quarter earnings for fiscal 1998
that are below the restated $0.26 per share in the first quarter last year. One-
time expenses associated with our investigation related to the accounting
irregularities discovered in the first quarter of fiscal 1998 will also
negatively affect first quarter earnings. The Company is pursuing recovery of
these expenses under its insurance policies.
The Company plans to decrease its capital expenditures to approximately $25.0
million in fiscal 1998, which includes investing in powder coating and
completing the construction of a new coating and laminating line in the first
quarter of fiscal 1998 in San Diego, California.
MSC's long-term debt, less current portion, increased to $54.8 million in fiscal
1997 from $16.8 million in fiscal 1996, due mainly to an increase in capital
expenditures, the acquisition of certain assets of a West Coast distributor, and
the Company's stock repurchase program. As of February 28, 1997, the Company
purchased 228,100 shares of treasury stock, at an average purchase price of
$18.14 per share. The Company was in compliance with all financial covenants for
the period ending February 28, 1997. Due to the accounting irregularities (see
Note 2 of the Notes to Consolidated Financial Statements which is included in
Item 8), the Company obtained required waivers from lenders regarding this
matter.
24
<PAGE>
The Company currently maintains a $25.0 million committed line of credit. This
agreement expires August 31, 1999, or earlier at the Company's option. There was
$15.0 million outstanding under this line at February 28, 1997. The Company has
outstanding letters of credit totaling $4.9 million against this line leaving an
available line of credit of $5.1 million at February 28, 1997. The Company also
maintains two uncommitted lines of credit totaling $50.0 million. There was no
outstanding balance under these uncommitted lines of credit at February 28,
1997.
On February 15, 1997, the Company authorized the issuance and sale of $50.0
million Senior Notes ("Notes"). As of February 28, 1997, $30.0 million of the
Notes were issued and funded. Subsequent to fiscal year end, the remaining $20.0
million was issued and funded. The interest rate on the Notes is 7.05% and the
Notes mature on May 31, 2007.
In fiscal 1998, the Company believes that its cash flow from operations,
together with available financing and cash on hand will be sufficient to fund
its working capital needs, capital expenditure program, and debt amortization.
MSC continues to participate in the implementation of settlements with the
government for clean-up of various Superfund sites. The Company has been named
as a potentially responsible party ("PRP") for the surface, soil, and ground
water contamination at these sites. Although the ultimate cost of the Company's
share of various necessary clean-up expenses is not yet known, the Company
believes it is adequately reserved for known environmental matters, given the
information currently available. The PRPs and the United States Environmental
Protection Agency ("USEPA") are discussing modifications regarding the scope of
the work required under the decree for the Kingsbury site. The remedial costs at
this site could change depending on the USEPA's position. The Company and other
PRPs that are parties to the decree for the Kingsbury site are engaged in
litigation with several non-settling PRPs including two large volume PRPs and
the United States Army, to compel such non-settling PRPs to contribute to the
clean-up effort at this site. The Company believes its range of exposure for all
known sites, based on allocations of liability among PRPs and the most recent
estimate of remedial work, is $4.2 million to $5.0 million at February 28, 1997.
The timing of the Company's cash payments for environmental matters is not
known, and no assurance can be given that the Company's environmental
obligations will not increase (see Note 6 of the Notes to Consolidated Financial
Statements which is included in Item 8).
On April 9, 1997, a plaintiff claiming to represent a class of Material Sciences
Corporation shareowners, who suffered injury as a result of the accounting
irregularities announced on April 7, 1997, filed a complaint in the United
States District Court for the Northern District of Illinois. The class
purportedly includes shareowners who purchased MSC shares between April 18, 1996
and April 7, 1997. The plaintiff claims that the Company and certain of its
officers violated the federal securities laws and were aware of, or recklessly
disregarded, material misstatements that were made in the Company's publicly
filed financial reports. The amount of the claims is uncertain. The Company
believes that the claims are without merit and intends to vigorously defend the
lawsuit. However, there
25
<PAGE>
can be no assurance with respect to the outcome of the litigation. No amounts
have been provided in the accompanying financial statements for these claims.
In addition, the Securities and Exchange Commission ("SEC") has requested the
voluntary cooperation of the Company in a request for documents related to the
accounting irregularities. Such a request should not be construed as an
indication by the SEC or its staff that any violations of law have occurred. The
Company is cooperating with the SEC in this matter.
During the first quarter of fiscal 1997, the Company entered into a settlement
agreement regarding a lawsuit with a former distributor of solar control and
safety window film. The amount of the settlement was within the range of
previously established reserves.
The Company has a capital lease obligation, which was $5.3 million as of
February 28, 1997, relating to a facility that the Company subleases to the
Partnership. In addition, throughout the term of the Partnership, the Company is
contingently responsible for 50% of the Partnership's financing requirements,
including the Company's share (approximately $1.9 million) of $3.8 million in
Partnership financing loans from third parties at February 28, 1997.
On March 3, 1997, the Financial Accounting Standards Board issued Statement No.
128 "Earnings Per Share" which is effective for fiscal years ending after
December 15, 1997. The adoption of this Statement is not expected to have a
material impact on the Company.
Certain statements in this Form 10-K and in future filings of the Company with
the SEC and in the Company's written and oral statements made by or with the
approval of an authorized officer of the Company contain, or will contain,
various "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including assumptions concerning MSC's operations, future results, and
prospects, and the Company intends that such forward-looking statements be
subject to the safe harbors created thereby. These forward-looking statements
are based on MSC's current expectations and are subject to risk and
uncertainties which could cause actual results or events to differ materially
from those set forth or implied. Examples of forward-looking statements include,
but are not limited to, statements regarding the Company's future financial
position and results of operations and cash flows (including future capital
expenditures and anticipated debt levels and strategies for growth), plans, and
objectives. Uncertainties and factors which could cause actual results or events
to differ materially from those set forth or implied include, but are not
limited to, (i) successful development and market introduction of anticipated
new products and technologies; (ii) competitive factors and competitors'
responses to MSC's initiatives; (iii) changes in the current and future business
environment; (iv) adverse changes in government laws and regulations applicable
to the Company; (v) continuation of the favorable environment to make
acquisitions, including regulatory requirements and market values of candidates;
(vi) the stability of governments and business conditions inside and outside the
United States which may affect successful penetration of the Company's products;
(vii) the health of the automobile and durable goods industries; (viii)
environmental risks associated with the manufacturing operations of the Company;
(ix) the loss of one or more significant customers of the Company; (x) risks
associated
26
<PAGE>
with the termination of the Partnership in June 1998; and (xi) increases in
the price of raw and other material inputs used by the Company that cannot
be passed on to its customers. The Company does not undertake any
obligation to update or revise any forward-looking statement made by it or
on its behalf, whether as the result of new information, future events, or
otherwise.
Inflation
The Company believes that inflation has not had a significant impact on
fiscal 1997, 1996, and 1995 results of operations in any of its product
groups.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
(a) The Consolidated Statements of Income for the years ended February 28,
1997, February 29, 1996, and February 28, 1995, Consolidated Balance Sheets
as of February 28, 1997 and February 29, 1996, Consolidated Statements of
Cash Flows for the years ended February 28, 1997, February 29, 1996, and
February 28, 1995, Notes to Consolidated Financial Statements and the
Report of Independent Public Accountants are included on the following
pages.
27
<PAGE>
Consolidated Statements of Income
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
For the years ended February 28 or 29,
----------------------------------------
(In thousands, except per share data) 1997 1996 (restated) 1995
- ----------------------------------------------------- ----------------------------------------
<S> <C> <C> <C>
Net Sales $278,017 $236,150 $227,658
Cost of Sales 203,809 180,554 165,487
-------- -------- --------
Gross Profit $ 74,208 $ 55,596 $ 62,171
Selling, General and Administrative Expenses 47,340 37,549 35,679
Special Charge -- 4,200 --
-------- -------- --------
Income from Operations $ 26,868 $ 13,847 $ 26,492
-------- -------- --------
Other (Income) and Expense:
Interest Income $ (227) $ (343) $ (667)
Interest Expense 420 217 64
Equity in Results of Partnership 1,272 931 485
Other, Net (997) (717) (609)
-------- -------- --------
Total Other (Income) and Expense, Net $ 468 $ 88 $ (727)
-------- -------- --------
Income Before Income Taxes $ 26,400 $ 13,759 $ 27,219
Income Taxes 10,164 5,262 10,479
-------- -------- --------
Net Income $ 16,236 $ 8,497 $ 16,740
======== ======== ========
Net Income Per Common and Common Equivalent Share $ 1.04 $ 0.55 $ 1.10
======== ======== ========
Weighted Average Number of Common
and Common Equivalent Shares Outstanding 15,605 15,437 15,241
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
Consolidated Balance Sheets
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
February 28 or 29,
----------------------------
(In thousands, except share data) 1997 1996 (restated)
- ------------------------------------------------------------- ----------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and Cash Equivalents $ 2,116 $ 3,379
Receivables:
Trade, Less Reserves of $2,271 in 1997 and $4,407 in 1996 35,944 25,836
Current Portion of Partnership Note 767 781
Income Taxes 1,249 2,156
Prepaid Expenses 2,791 3,069
Inventories:
Raw Materials 11,941 10,829
Finished Goods 19,011 17,573
Prepaid Taxes 1,186 3,074
-------- --------
Total Current Assets $ 75,005 $ 66,697
-------- --------
Property, Plant and Equipment:
Land and Building $ 34,580 $ 30,891
Machinery and Equipment 138,459 116,240
Leasehold Improvements 1,289 1,376
Capital Leases 17,233 17,233
Construction in Progress 50,779 19,713
-------- --------
$242,340 $185,453
Accumulated Depreciation and Amortization (87,954) (74,571)
-------- --------
Net Property, Plant and Equipment $154,386 $110,882
-------- --------
Other Assets:
Investment in Partnership $ 10,759 $ 10,727
Partnership Note Receivable, Less Current Portion 374 1,123
Intangible Assets, Net 12,837 9,556
Other 728 1,041
-------- --------
Total Other Assets $ 24,698 $ 22,447
-------- --------
Total Assets $254,089 $200,026
======== ========
</TABLE>
29
<PAGE>
Consolidated Balance Sheets
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
February 28 or 29,
--------------------------------
(In thousands, except share data) 1997 1996 (restated)
- --------------------------------------------------------------- --------------------------------
<S> <C> <C>
Liabilities
Current Liabilities:
Current Portion of Long-Term Debt $ 3,750 $ 3,014
Accounts Payable 24,092 25,343
Accrued Payroll Related Expenses 9,838 8,036
Accrued Expenses 6,171 6,588
-------- --------
Total Current Liabilities $ 43,851 $ 42,981
-------- --------
Long-Term Liabilities:
Deferred Income Taxes $ 11,392 $ 11,451
Long-Term Debt, Less Current Portion 54,761 16,815
Accrued Superfund Liability 4,071 4,177
Other 6,641 6,376
-------- --------
Total Long-Term Liabilities $ 76,865 $ 38,819
-------- --------
- ---------------------------
Shareowners' Equity
Preferred Stock, $1.00 Par Value; 10,000,000 Shares Authorized;
1,000,000 Designated Series B Junior Participating Preferred;
None Issued $ - $ -
Common Stock, $.02 Par Value; 20,000,000 Shares Authorized;
16,256,132 Shares Issued and 15,339,384 Shares Outstanding at
February 28, 1997, and 16,046,398 Shares Issued and 15,357,750
Shares Outstanding at February 29, 1996 325 321
Additional Paid-In Capital 50,142 47,097
Treasury Stock at Cost, 916,748 Shares at February 28, 1997
and 688,648 Shares at February 29, 1996 (7,518) (3,380)
Retained Earnings 90,424 74,188
-------- --------
Total Shareowners' Equity $133,373 $118,226
-------- --------
Total Liabilities and Shareowners' Equity $254,089 $200,026
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE>
Consolidated Statements of Cash Flows
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
(In thousands) For the years ended February 28 or 29,
--------------------------------------
Cash Flows From: 1997 1996 (restated) 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities:
Net Income $ 16,236 $ 8,497 $ 16,740
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 14,323 11,098 8,747
Provision for Deferred Income Taxes 1,789 1,406 986
Compensatory Effect of Stock Plans 1,255 1,188 647
Other, Net 471 918 464
-------- -------- --------
Operating Cash Flow Prior to Changes in Assets and Liabilities $ 34,074 $ 23,107 $ 27,584
-------- -------- --------
Changes in Assets and Liabilities:
Receivables $ (8,794) $ (6,488) $ (1,597)
Income Taxes Receivable 907 163 (2,319)
Prepaid Expenses (794) (659) (1,101)
Inventories (2,550) 1,766 (4,187)
Accounts Payable (1,251) 2,581 3,860
Accrued Expenses 892 (1,395) 1,866
Other, Net (843) 467 914
-------- -------- --------
Cash Flow from Changes in Assets and Liabilities $(12,433) $ (3,565) $ (2,564)
-------- -------- --------
Net Cash Provided by Operating Activities $ 21,641 $ 19,542 $ 25,020
-------- -------- --------
- ------------------------------------------------------------------------
Investing Activities:
Capital Expenditures, Net $(55,599) $(27,467) $(29,374)
Acquisitions, Net of Cash Acquired (2,489) (213) -
Investment in Partnership (1,304) (741) (1,939)
Distribution from Partnership 749 748 749
Other Long-Term Assets 313 390 205
-------- -------- --------
Net Cash Used in Investing Activities $(58,330) $(27,283) $(30,359)
-------- -------- --------
- ------------------------------------------------------------------------
Financing Activities:
Net Proceeds Under Lines of Credit $ 10,200 $ 4,800 $ -
Proceeds from Senior Notes 30,000 - -
Payments to Settle Debt (3,018) (1,969) (1,787)
Purchase of Treasury Stock (4,138) - -
Sale of Common Stock 2,382 2,473 1,012
-------- -------- --------
Net Cash Provided by (Used in) Financing Activities $ 35,426 $ 5,304 $ (775)
-------- -------- --------
Net Decrease in Cash $ (1,263) $ (2,437) $ (6,114)
Cash and Cash Equivalents at Beginning of Year 3,379 5,816 11,930
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 2,116 $ 3,379 $ 5,816
======== ======== ========
Supplemental Cash Flow Disclosures:
Interest Paid $ 2,845 $ 1,377 $ 981
Income Taxes Paid 7,606 3,842 11,195
Subordinated Convertible Notes Issued for Acquisitions $ 1,500 $ 7,981 $ -
Cash Portion of Acquisitions and Related Costs 2,489 213 -
-------- -------- --------
Total Consideration Paid for Acquisitions $ 3,989 $ 8,194 $ -
======== ======== ========
</TABLE>
The Changes in Assets and Liabilities above for the years ended February 28,
1997 and February 29, 1996, are net of assets and liabilities acquired.
The accompanying notes are an integral part of these statements.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Material Sciences Corporation and Subsidiaries
For the three years ended February 28, 1997
Note 1: Summary of Significant Accounting Policies
The significant accounting policies of Material Sciences Corporation and its
wholly owned subsidiaries ("MSC" or "Company"), as summarized below, conform
with generally accepted accounting principles that, in management's opinion,
reflect practices appropriate to the business in which it operates. Certain
prior year amounts have been reclassified to conform with the fiscal 1997
presentation.
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the comments on financial statements. Actual results could differ from those
estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts for MSC
after all intercompany transactions have been eliminated. The Company maintains
a financial interest of 50% in Walbridge Coatings ("Partnership"). Under terms
of the Partnership agreement, significant actions require unanimous consent of
all partners and, therefore, the Company does not have a controlling interest.
Accordingly, the Company accounts for the Partnership under the equity method.
Inventories
Inventories are stated at the lower of cost or market, using either the specific
identification, average cost, or first-in, first-out (FIFO) method of cost
valuation. Due to the continuous nature of the Company's operations, work in
process inventories are not material.
Property, Plant and Equipment
Property, Plant and Equipment are recorded at cost. Improvements and
replacements are capitalized, while expenditures for maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the straight-
line method over the assets' estimated useful lives.
Facilities and equipment leased through capital leases are recorded in Property,
Plant and Equipment, with their corresponding obligations recorded in Current
and Long-Term Liabilities. The amount capitalized is the lower of the present
value of minimum lease payments or the fair value of the leased property.
Amortization of capital lease assets is recorded on a straight-line basis, over
the lease term.
The Company capitalizes interest costs as a part of the cost of constructing
major facilities and equipment.
32
<PAGE>
Intangible Assets
Intangible assets consist principally of the excess of cost over the fair market
value of net assets acquired ("goodwill") and non-compete agreements. These
assets are being amortized on a straight-line basis over periods of 4 to 20
years. Accumulated amortization of intangible assets was $1,659 and $713 at
February 28, 1997 and February 29, 1996, respectively. The Company periodically
reviews whether subsequent events and circumstances have occurred that indicate
the remaining estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable. If events and
circumstances indicate that goodwill related to a particular business should be
reviewed for possible impairment, the Company uses projections to assess whether
future operating income on a non-discounted basis (before goodwill amortization)
of the unit is likely to exceed the goodwill amortization over the remaining
life of the goodwill, to determine whether a writedown of goodwill to
recoverable value is appropriate. This policy is consistent with Statement of
Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. "
Fair Market Value of Financial Instruments
The Company believes that the carrying amounts of all financial instruments
approximate fair market value.
Revenue Recognition
The Company generally recognizes revenue upon shipment.
Research and Development
The Company expenses all research and development costs in the period incurred.
Research and development expenses were $6,682 in fiscal 1997, $6,653 in fiscal
1996, and $5,404 in fiscal 1995.
Net Income Per Share
Net income per common and common equivalent share is computed using the weighted
average number of common and common equivalent shares outstanding during the
periods. Common equivalent shares are determined by the treasury stock method.
Concentrations of Credit Risks
Certain financial instruments potentially subject the Company to concentrations
of credit risk. These financial instruments consist primarily of temporary cash
investments and trade receivables.
The Company places its temporary cash investments with high credit, quality
financial institutions and in investment grade securities with maturities less
than 90 days. Approximately 43% of the Company's receivables are concentrated
with customers in the motor vehicle industry.
Stock Dividend
On June 16, 1994, the Board of Directors of the Company declared a stock
dividend of one-half share per share of the Company's common stock, which was
paid on July 28, 1994, to shareowners of record at the close of business on June
30, 1994. All share and per share data has been restated to retroactively
reflect this stock dividend.
33
<PAGE>
Note 2: Accounting Irregularities and Restatement of Financial Statements
On April 7, 1997, the Company announced that it had discovered accounting
irregularities at one of its operating units. An independent investigation has
confirmed that the controller of that operating unit acted alone and altered and
falsified that unit's financial reports beginning in fiscal 1995. After
restatement, the pretax effect of the total understatement of cost of sales
related to the accounting irregularities amounted to $2,557 during the first
three quarters of fiscal 1997 and $5,638 in fiscal 1996. Since learning of the
accounting irregularities, the Company has taken actions intended to prevent a
recurrence of this situation.
The Company's fiscal 1996 financial statements and the quarterly financial
information for fiscal 1997 and 1996 have been restated to reflect the
correction of the accounting irregularities. In addition, see Note 16 for
restated interim financial information for fiscal 1997 and fiscal 1996. The
pretax effect of this incident on results of operations for fiscal 1995 was
$1,847 and was not deemed material. The amount related to this period is
reflected in the first quarter of fiscal 1996. The effect of the restatement of
fiscal 1996 results of operations is as follows:
<TABLE>
<CAPTION>
For the year ended February 29, 1996
------------------------------------
Previously
Reported Restated
---------- --------
<S> <C> <C>
Net Sales $236,150 $236,150
Gross Profit 61,234 55,596
Income from Operations 19,485 13,847
Net Income 11,979 8,497
Net Income Per Share $ 0.78 $ 0.55
</TABLE>
The effect of the restatement on the February 29, 1996 Consolidated Balance
Sheet resulted in corresponding decreases of $4,245 in Inventories and $3,482 in
Retained Earnings and increases of $2,156 in Income Taxes Receivable and $1,393
in Accounts Payable compared to February 29, 1996 amounts previously reported.
Note 3: Special Charge
During the third quarter of fiscal 1996, the Company provided $4,200 primarily
for the restructuring of its four product groups. The special charge included
projected costs related to severance and other related costs, and litigation
expenses. Cash related components represented approximately $3,900 with the
remainder related to a writedown to net realizable value for purchased computer
software as a result of the four product group structure. The remaining reserve
of $2,317 at February 29, 1996, was paid during fiscal 1997.
Note 4: Acquisitions
On May 31, 1996, the Company purchased certain assets of a distributor of solar
control and safety window film in the Western United States and throughout the
world. Consideration for the purchase, including transaction costs, was $1,500
in subordinated convertible notes and $2,489 in cash. Net tangible assets of
$1,027 and goodwill and a non-compete agreement totaling $2,962 were recorded in
the Consolidated Balance Sheets. The acquisition has been accounted for under
the purchase method
34
<PAGE>
of accounting and is included in the Consolidated Financial
Statements of the Company since the date of acquisition.
On September 7, 1995, the Company purchased all of the outstanding capital stock
of Solar Gard International, Inc. ("SGI"). Consideration for the purchase,
including transaction costs and net of cash acquired, was $7,981 in subordinated
convertible notes and $213 in cash. As a result of the SGI acquisition, net
tangible assets of $1,249 and goodwill and a non-compete agreement totaling
$6,945 were recorded in the Consolidated Balance Sheets. The acquisition has
been accounted for under the purchase method of accounting and is included in
the Consolidated Financial Statements of the Company since the date of
acquisition.
Note 5: Partnership
On August 31, 1984, the Company entered into a Partnership ("Walbridge
Coatings") with subsidiaries of Bethlehem Steel Corporation ("Bethlehem") and
Inland Steel Industries, Inc. ("Inland") to pursue the production and further
development of electroplated steel.
The Company acted as general contractor to expand and modify its Walbridge, Ohio
facility and install electroplating equipment. The facility was transferred to
the Partnership in April 1986. The line is capable of electroplating, coil
coating, or performing both processes continuously to sheet metal. Bethlehem
and Inland have rights to purchase all the facility's production for the 12-year
life of the Partnership. The Company's potential alternatives upon expiration
of the Partnership term in June 1998 include, among other things, extension of
the Partnership, purchase of the facility, or sale of the facility. The
partners are actively discussing the various alternatives. The Company believes
its investment in the Partnership is realizable.
Summarized financial information for the Partnership is presented below.
<TABLE>
<CAPTION>
Summarized Financial Information For the years ended
of Walbridge Coatings February 28 or 29,
Earnings Information 1997 1996 1995
- -------------------------------- -------- -------- --------
<S> <C> <C> <C>
Net Revenues $67,761 $64,941 $60,887
Gross Profit 947 2,286 3,729
Income (Loss) from Operations (1,567) (153) 1,333
Net Loss (2,618) (1,852) (950)
February 28 or 29,
Balance Sheet Information 1997 1996 1995
- -------------------------------- -------- -------- --------
Current Assets $ 9,726 $ 9,375 $10,005
Total Assets 31,726 36,458 42,824
Current Liabilities 7,883 7,653 8,590
Total Liabilities 10,351 15,059 21,433
Partners' Capital 21,375 21,399 21,391
</TABLE>
35
<PAGE>
The Company's primary financial benefits from the Partnership are the revenues
billed to Walbridge Coatings for operating the facility. MSC's
electrogalvanizing revenues billed to Walbridge Coatings exclude financing and
other items which are included in Walbridge Coatings' revenues billed to
Bethlehem and Inland. The profitability for operating the facility is
comparable to the Company's overall operating results. Under the equity method
of accounting, the Company includes its portion of the Partnership Net Loss
summarized above in Equity in Results of Partnership shown in the Consolidated
Statements of Income. The amounts do not directly correlate to the Company's
50% ownership interest due to contractual allocation requirements of the
Partnership agreement.
As of February 28, 1997, the Company holds a $1,122 note receivable from the
Partnership requiring semi-annual interest and level principal repayments over
the life of the Partnership. Trade receivables include amounts due from the
Partnership of $2,256 at February 28, 1997, and $1,752 at February 29, 1996.
The Company has guaranteed 50% of the third party debt of the Partnership. At
February 28, 1997, the Partnership debt totaled $3,750. This debt is scheduled
to be retired ratably throughout the Partnership's life by revenues paid to the
Partnership by Bethlehem, Inland, and, if production does not reach a defined
contractual volume, the Company.
Note 6: Environmental and Legal Matters
The Company is a party to various legal proceedings connected with the clean-up
of environmental problems. These proceedings are pending against numerous other
parties, in addition to the Company. The most significant proceedings relate to
the Company's involvement in Superfund sites in Kingsbury, Indiana and Gary,
Indiana. The Company has been named as a potentially responsible party ("PRP")
for the surface, soil, and ground water contamination at these sites. The
activities related to MSC's involvement were alleged to have occurred prior to
1984.
At the Kingsbury site, the United States District Court for the Northern
District of Indiana has entered a Consent Decree between the government and PRPs
accounting for approximately 75% of the waste volume sent to the site, including
the Company, regarding the scope of the remediation work to be performed at the
site. The estimated range of the Company's liability is $2,900 to $3,400 for
this site. Certain maintenance and long-term monitoring expenditures included
in the estimated range have been discounted approximately $1,000 at a 5%
discount rate. The expenditures related to the discounted portion of the
liability are expected to be paid ratably over 30 years. MSC maintains a letter
of credit for approximately $3,200 to secure its obligation to pay its currently
estimated share of the clean-up expenses at the site.
The United States District Court for the Northern District of Indiana has also
entered a Consent Decree with respect to the scope of the remediation work at
the Gary site. The estimated range of the Company's liability is $1,100 to
$1,300 for this site. This work has commenced and the Company maintains a
letter of credit for approximately $1,200 to secure its obligation to pay its
currently estimated share of the clean-up expenses at the Gary site.
The ultimate cost of remediation work at the Kingsbury and Gary sites and the
Company's final share thereof, net of contributions from the other PRPs, has not
yet been determined. Based on the
36
<PAGE>
allocations of liability among PRPs who are parties to the decrees entered in
these proceedings and the most recent estimates of remedial costs prepared by
the engineering consulting firms retained to supervise the remedial work, the
Company estimates that its share of remedial costs and reimbursable past costs
of the government will fall within the amount reserved by the Company for such
costs as of February 28, 1997. The PRPs and the United States Environmental
Protection Agency ("USEPA") are discussing modifications regarding the scope of
the work required under the decree for the Kingsbury site. The remedial costs at
this site could change depending on the USEPA's position. The Company and other
PRPs that are parties to the decree for the Kingsbury site are engaged in
litigation with several non-settling PRPs, including two large volume PRPs and
the United States Army, to compel such non-settling PRPs to contribute to the
clean-up effort at this site.
The Company is involved in other environmental matters that, on an individual
basis, are not material. MSC believes that the estimated range of exposure on
all environmental matters is between $4,200 and $5,000. The Company's
environmental reserves total approximately $4,800 at February 28, 1997.
The Company currently believes that the ultimate outcome of these proceedings,
net of contributions from other PRPs, will not have a material effect on the
financial condition or the results of operations of the Company given existing
reserves recorded at February 28, 1997. However, no assurance can be given that
such information, including estimates of remedial expenses, will not change.
During the first quarter of fiscal 1997, the Company entered into a settlement
agreement regarding a lawsuit with a former distributor of solar control and
safety window film. The amount of the settlement was within the range of
previously established reserves.
On April 9, 1997, a plaintiff claiming to represent a class of Material Sciences
Corporation shareowners, who suffered injury as a result of the accounting
irregularities announced on April 7, 1997, filed a complaint in the United
States District Court for the Northern District of Illinois. The class
purportedly includes shareowners who purchased MSC shares between April 18, 1996
and April 7, 1997. The plaintiff claims that the Company and certain of its
officers violated the federal securities laws and were aware of, or recklessly
disregarded, material misstatements that were made in the Company's publicly
filed financial reports. The amount of the claims is uncertain. The Company
believes that the claims are without merit and intends to vigorously defend the
lawsuit. However, there can be no assurance with respect to the outcome of the
litigation. No amounts have been provided in the accompanying financial
statements for these claims.
In addition, the Securities and Exchange Commission ("SEC") has requested the
voluntary cooperation of the Company in a request for documents related to the
accounting irregularities. Such a request should not be construed as an
indication by the SEC or its staff that any violations of law have occurred. The
Company is cooperating with the SEC in this matter.
37
<PAGE>
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.
<TABLE>
<CAPTION>
February 28 or 29,
--------------------------
Long-Term Debt Obligations 1997 1996
- ----------------------------------------- ----------------- -------
<S> <C> <C>
Borrowings Under Lines of Credit $15,000 $ 4,800
Senior Notes 30,000 -
Subordinated Convertible Notes 8,151 7,981
Obligations Under Capital Leases (Note 8) 5,298 6,932
Other 62 116
------- -------
$58,511 $19,829
Less Current Portion 3,750 3,014
------- -------
Long-Term Debt $54,761 $16,815
======= =======
Projected Maturities of Long-Term Debt February 28, 1997
- -------------------------------------- -----------------
1998 $ 3,750
1999 5,513
2000 16,974
2001 1,974
2002 300
2003 and thereafter 30,000
-------
Total $58,511
=======
</TABLE>
The Company maintains a $25,000 committed line of credit. At the option of the
Company, interest is at the bank's reference rate (8.25% at February 28, 1997),
or at LIBOR plus 1/2%, which generally is lower than the bank's reference rate.
This agreement expires on August 31, 1999, or earlier at the Company's option.
There was $15,000 outstanding under this line of credit at February 28, 1997.
The Company has four irrevocable letters of credit totaling $4,881 against this
line, leaving an available line of credit of $5,119 at February 28, 1997. MSC
pays a commitment fee of 1/4% per annum on the daily average of the unused
amount during the period, and is required to maintain $500 in compensating
balances. The agreement requires the Company to adhere to certain covenants,
some of which are adjusted quarterly. The most significant of these covenants
include restrictions relating to its current ratio (1.2:1.0), liabilities to net
worth (1.5:1.0), tangible net worth ($107,431), and interest coverage (2.0x).
The Company was in compliance with all financial covenants for the period ending
February 28, 1997. Due to the accounting irregularities discussed in Note 2,
the Company obtained a waiver from the lender regarding this matter.
The Company also maintains two uncommitted lines of credit totaling $50,000.
The interest rate is based on a market rate to be agreed upon by the parties at
the time of the borrowing. There is no commitment fee for these uncommitted
lines of credit. There was no outstanding balance under these uncommitted lines
of credit at February 28, 1997.
38
<PAGE>
On February 15, 1997, the Company authorized the issuance and sale of $50,000
Senior Notes ("Notes"). As of February 28, 1997, $30,000 of the Notes were
issued and funded. Subsequent to fiscal year end, the remaining $20,000 was
issued and funded. The interest rate on the Notes is 7.05% and the Notes mature
on May 31, 2007. Interest payments are due semi-annually on May 31 and November
30 of each year, commencing May 31, 1997. The agreement requires the Company to
adhere to certain covenants. The most significant of these covenants includes
restrictions related to its consolidated net worth ($105,000), consolidated
senior debt ratio (55%), and total indebtedness ratio (60%). The Company was in
compliance with all financial covenants for the period ending February 28, 1997.
Due to the accounting irregularities discussed in Note 2, the Company obtained a
waiver from the lenders regarding this matter.
In addition, the Company has subordinated convertible notes ("Subordinated
Notes") as of February 28, 1997, which were issued in consideration for the
purchase of SGI and certain assets of a West Coast distributor. The Subordinated
Notes bear interest at a rate of 7%. The Subordinated Notes for SGI and the
West Coast distributor are convertible into shares of the Company's common stock
at a conversion price of $24.27 and $20.80 per share, respectively. The
Subordinated Notes mature in five equal installments and became due annually
beginning on September 8, 1996, for SGI, and June 1, 1997, for the West Coast
distributor. A maximum of 346,140 shares of common stock have been reserved for
the conversion option contained in the Subordinated Notes. As of February 28,
1997, a portion of these Subordinated Notes ($1,434) was issued to certain
individuals who are currently employed with the Company.
Note 8: Leases
The Company leases one manufacturing facility under a capital lease that
includes a renewal option. Another manufacturing facility, 13 distribution
centers, and other equipment are leased under non-cancelable operating leases.
The Walbridge, Ohio facility lease contains certain covenants with which the
Company is in compliance. The Company subleases its interest in this facility
to the Partnership. The sublease contains substantially the same terms and
conditions as the lease, with the monthly payment paid directly to the lessor by
the Partnership. The Company has assigned all of its rights under the sublease
to the lessor. The Company also has agreed to purchase the mortgage loan on the
facility in the event of default by the lessor. The lease is renewable, at the
Company's option, for additional periods totaling 25 years.
39
<PAGE>
Some leases also contain escalation provisions based upon specified inflation
indices. The table below presents future minimum lease payments and sublease
income.
<TABLE>
<CAPTION>
Minimum Lease Capital Sublease Operating
Payments Lease Income Leases
- -------------------------------- ------- -------- ---------
<S> <C> <C> <C>
1998 $2,294 $2,294 $2,167
1999 1,359 955 1,609
2000 692 - 1,357
2001 692 - 951
2002 692 - 577
2003 and thereafter 970 - 2,731
------ ------ ------
Total Minimum Lease Payments $6,699 $3,249 $9,392
====== ======
Amount Representing Interest 1,401
------
Present Value of Minimum Lease
Payments $5,298
======
</TABLE>
Amortization of leased property was $997 in fiscal 1997, $988 in fiscal 1996,
and $980 in fiscal 1995.
Total rental expense under operating leases was $2,686 in fiscal 1997, $2,689 in
fiscal 1996, and $2,511 in fiscal 1995.
Note 9: Retirement Plans
The Company has non-contributory defined benefit and defined contribution
pension plans that cover a majority of its employees. The Company funds amounts
required to meet ERISA funding requirements for the defined benefit plans. The
Company makes an annual contribution for the defined contribution plans after
the end of each calendar year for the amount earned by participating employees
during that preceding calendar year. In addition to the benefits previously
described, some Company officers participate in a non-contributory supplemental
pension plan.
Certain of the Company's defined benefit plans have been frozen. During fiscal
1996, the Material Sciences Corporation Pension Plan for Salaried Employees was
terminated, and all assets were distributed to the plan participants. These
plans were replaced with defined contribution plans. The discount rate used for
the terminated and frozen plans is 8.0% in 1997, 8.0% in 1996, and 7.5% to 8.0%
in 1995. For plans that have not been terminated or frozen, the discount rate
was 8.0% in all years presented. The following tables detail the defined
benefit and non-contributory supplemental pension plans.
40
<PAGE>
<TABLE>
<CAPTION>
Components of Net Periodic For the years ended February 28 or 29,
Pension Cost 1997 1996 1995
- ------------ ---- ---- ----
<S> <C> <C> <C>
Service Cost Benefits Earned
During the Period $385 $384 $353
Interest Cost on Projected
Benefit Obligation 504 442 737
Actual Return on Assets (230) (426) (612)
Net Amortization
and Deferral 51 271 41
---- ---- ----
Net Periodic Pension Cost $710 $671 $519
==== ==== ====
Assumptions Used in Determining For the years ended February 28 or 29,
the Plans' Funded Status 1997 1996 1995
- ------------------------ ---- ---- ----
Expected Long-Term 8.0% 8.0% 8.0%
Rate of Return on Assets
Rate of Increase in
Compensation Levels 6.0% 6.0% 6.0%
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
February 28 or 29,
--------------------------------------
Plans Whose Plans Whose
Assets Exceed Accumulated
Accumulated Benefits Exceed
Benefits Assets
Pension Plans' ------------------ ------------------
Funded Status 1997 1996 1997 1996
- -------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Plan Assets
at Fair Value $3,268 $2,882 $ -- $ --
------ ------ ------ ------
Accumulated
Benefit Obligation
Vested $2,755 $2,504 $2,836 $2,363
Unvested 189 162 38 79
------ ------ ------ ------
Accumulated Benefit
Obligation $2,944 $2,666 $2,874 $2,442
Additional Benefits
Based on Projected Salary
and Service Levels 177 127 1,230 1,111
------ ------ ------ ------
Projected Benefit
Obligation $3,121 $2,793 $4,104 $3,553
------ ------ ------ ------
Projected Benefit
Obligation in Excess of
(Less Than) Plan Assets $ (147) $ (89) $4,104 $3,553
Unrecognized Gain (Loss) 317 258 (270) (64)
Prior Service Cost (369) (366) (214) (234)
Unrecognized Net
Obligation on March 1 11 12 (36) (40)
------ ------ ------ ------
Pension (Asset)
Liability Recognized in
the Consolidated
Balance Sheets $ (188) $ (185) $3,584 $3,215
====== ====== ====== ======
</TABLE>
The Company sponsors a defined contribution plan for certain salaried and hourly
employees based upon a percentage of the employees' covered earnings as provided
for in the plan. The cost of this plan was $1,218 in fiscal 1997, $1,360 in
fiscal 1996, and $1,296 in fiscal 1995.
The Company provides its retired employees with certain post-retirement health
care benefits, which the Company may periodically amend or modify.
Substantially all employees may be eligible for these benefits if they reach
normal retirement age while employed by the Company. Payments for post-
retirement health care benefits were $149 in fiscal 1997, $59 in fiscal 1996,
and $95 in fiscal 1995.
42
<PAGE>
The following table presents a reconciliation of the funded status of the plan
to the accrued benefit cost:
<TABLE>
<CAPTION>
February 28 or 29,
Post-Retirement Plan ------------------
Funded Status 1997 1996
- ------------- ---- ----
<S> <C> <C>
Plan Assets at Fair Value $ 49 $ 24
------ ------
Retirees $1,030 $ 893
Other Fully Eligible Participants 278 322
Other Active Participants 588 601
------ ------
Accumulated Post-Retirement Benefit
Obligation $1,896 $1,816
------ ------
Projected Post-Retirement Benefit
Obligation $1,847 $1,792
Unrecognized Net Gain and Prior
Service Cost 1,334 1,414
------ ------
Accrued Post-Retirement Benefit Cost $3,181 $3,206
====== ======
</TABLE>
<TABLE>
<CAPTION>
For the years ended February 28 or 29,
Net Periodic Post- --------------------------------------
Retirement Benefit Cost 1997 1996 1995
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Service Cost $ 66 $ 79 $ 73
Interest Cost on Accumulated Benefit
Obligation 136 132 104
Actual Return on Assets (2) (1) -
Net Amortization and Deferral (77) (71) (79)
----- ----- -----
Net Periodic Post-Retirement Benefit Cost $ 123 $ 139 $ 98
===== ===== =====
</TABLE>
The discount rate used in determining the Accumulated Post-Retirement Benefit
Obligation was 8.0% in 1997, 1996, and 1995.
The Company continues to review its post-retirement benefits, incorporating
actual and anticipated benefit changes. In determining the present value of the
Accumulated Post-Retirement Benefit Obligation, of which only a minor amount has
been funded, and net cost, MSC used a 10% health care cost trend rate decreasing
until leveling off at 5% in Year 2010.
A 1% increase in the assumed health care cost trend rate would increase the
Accumulated Post-Retirement Benefit Obligation as of February 28, 1997, by
approximately $270 and the total of the service and interest cost components of
net post-retirement health care cost for the year then ended by approximately
$38.
43
<PAGE>
Note 10: Interest Expense
The table presented below analyzes the components of interest expense.
<TABLE>
<CAPTION>
For the years ended February 28 or 29,
--------------------------------------
Interest Expense 1997 1996 1995
- ---------------- ---- ---- ----
<S> <C> <C> <C>
Interest Expense $ 2,216 $ 589 $ 124
Capitalized Interest (1,796) (372) (60)
------- ----- -----
Total $ 420 $ 217 $ 64
======= ===== =====
</TABLE>
The table above excludes interest expense of $625, $792, and $869 for fiscal
years 1997, 1996, and 1995, respectively, relating to the Walbridge, Ohio
facility. This facility is subleased to the Partnership. The interest expense
and amortization relating to this lease is reduced by sublease income received
from the Partnership, and the net result is included in Other, Net.
Note 11: Income Taxes
Deferred income taxes are provided for differences arising between financial and
taxable income resulting primarily from the use of accelerated cost recovery
methods and certain transactions that are deferred for recognition until
economic occurrence of the event.
The components of the provision for income taxes and a reconciliation between
the statutory rate for federal income taxes and the effective tax rate are
summarized and presented below.
<TABLE>
<CAPTION>
For the years ended February 28 and 29,
---------------------------------------
Tax Provision 1997 1996 (restated) 1995
- ------------- ---- --------------- ----
<S> <C> <C> <C>
Current:
Federal $ 7,166 $3,291 $ 8,130
State 1,209 565 1,363
------- ------ -------
$ 8,375 $3,856 $ 9,493
------- ------ -------
Deferred:
Federal $ 1,546 $1,215 $ 852
State 243 191 134
------- ------ -------
$ 1,789 $1,406 $ 986
------- ------ -------
Total Provision $10,164 $5,262 $10,479
======= ====== =======
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
For the years ended February 28 or 29,
--------------------------------------
Tax Rate Reconciliation 1997 1996 (restated) 1995
- ----------------------- ---- --------------- ----
<S> <C> <C> <C>
Federal Statutory Rate 35.0% 35.0% 35.0%
State and Local Taxes, Net of
Federal Tax Benefit 5.5 5.5 5.5
Research and Development
Tax Credits (0.3) (1.6) (0.7)
Foreign Sales Corp. Benefit (1.3) (0.7) -
Tax Exempt Interest Income - - (0.4)
Other, Net (0.4) - (0.9)
---- ---- ----
Effective Income Tax Rate 38.5% 38.2% 38.5%
==== ==== ====
</TABLE>
Temporary differences that give rise to deferred tax (assets) and liabilities
are as follows:
<TABLE>
<CAPTION>
February 28 or 29,
------------------
1997 1996
---- ----
<S> <C> <C>
Property and Equipment $15,654 $15,539
Reserves not Deductible Until Paid (2,695) (4,220)
Employee Benefit Liabilities (3,664) (4,013)
Deferred State Income Taxes, Net 1,386 1,140
Other (475) (69)
------- -------
Deferred Tax Liabilities, Net $10,206 $ 8,377
======= =======
</TABLE>
Deferred Tax Liabilities, Net, have been recorded on the Company's Consolidated
Balance Sheets as follows:
<TABLE>
<CAPTION>
February 28 or 29,
------------------
1997 1996
---- ----
<S> <C> <C>
Long-Term Liabilities -
Deferred Income Taxes $11,392 $11,451
Current Assets - Prepaid Taxes (1,186) (3,074)
------- -------
$10,206 $ 8,377
======= =======
</TABLE>
Note 12: Significant Customers and Export Sales
The Partnership represented 21%, 23%, and 22% of the Company's net sales in
fiscal 1997, 1996, and 1995, respectively. Sales to AK Steel Corporation
amounted to 5%, 8%, and 10% of MSC's net sales in fiscal 1997, 1996, and 1995,
respectively. Export sales represented 11% of the Company's net sales in fiscal
1997, and 8% in both fiscal 1996 and 1995.
45
<PAGE>
Note 13: Subsequent Event (Unaudited)
On May 12, 1997, a subsidiary of the Company signed a letter of intent to
purchase designated assets of a specialty films distribution business in
Australia. The Company hopes to finalize the purchase by July 14, 1997. It is
expected that incremental debt will not be incurred to purchase the facility.
Note 14: Equity Plans
The Company has four stock option plans: the Material Sciences Corporation 1985
Stock Option Plan for Key Employees ("1985 Plan"); the Material Sciences
Corporation 1991 Stock Option Plan for Directors ("1991 Directors Plan"); the
Material Sciences Corporation 1992 Omnibus Awards Plan for Key Employees ("1992
Plan"); and the Material Sciences Corporation Stock Option Plan for Non-Employee
Directors ("1996 Directors Plan"). The Company accounts for all plans under APB
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for stock options awarded under the plans been determined
consistent with SFAS No. 123, the Company's net income and net income per share
would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996(restated)
------- --------------
<S> <C> <C> <C>
Net Income As Reported $16,236 $8,497
======= ======
Pro Forma $14,723 $7,781
======= ======
Net Income Per Share As Reported $1.04 $0.55
===== =====
Pro Forma $0.94 $0.50
===== =====
</TABLE>
There are 1,687,500 shares authorized under the 1985 Plan to provide for the
options granted under the 1985 Plan, the 1991 Directors Plan, and the shares
purchased under the Material Sciences Corporation Employee Stock Purchase
Program. The options granted under the 1985 Plan consist of both non-qualified
and incentive stock options ("ISOs") which vest ratably on the first four
anniversary dates of grant, or earlier if the Company's stock reaches certain
trading levels. All of these options expire ten years after the date of grant.
The 1991 Directors Plan vests ratably over the first five anniversary dates of
grant and expire ten years after the date of grant.
There are 2,287,500 shares authorized under the 1992 Plan. Three grants provide
options for the Non-Qualified Stock Option Program, the 1993 Restricted
Stock/Incentive Stock Option Awards Program, and the 1995 Stock Option Program.
Each grant under the Non-Qualified Stock Option Program vests three years after
the date of grant and expires ten years after the date of grant. The 1993
Restricted Stock/Incentive Stock Option Awards Program consists of tandem grants
of restricted stock and ISOs to the extent allowed under the Internal Revenue
Code. A fifth of the restricted shares vest as trading levels of the Company's
stock reach predetermined levels. Once the vested restricted stock is held by
the optionee for a period of two years, the holder vests in an ISO for an equal
number of shares. All unvested ISOs vest nine years and eleven months after the
date of grant. All options expire ten years after the date of grant. All
unvested restricted shares vest at the end of a five to eight year period after
the date of grant, depending on the trading level of the Company's stock. The
1995 Stock
46
<PAGE>
Option Program (non-qualified) consists of an initial grant on March 1, 1995,
and two additional grants of equal amounts per optionee on the first and second
anniversary dates of the initial grant. Each grant vests ratably over three
years on the anniversary date of grant. All options granted under the 1995 Stock
Option Program expire ten years after the date of grant.
There are 250,000 shares authorized under the 1996 Directors Plan. This plan
consists of grants which provide for fifty percent of each non-employee
director's annual retainer ("Retainer Option"), and an annual incentive stock
option ("Incentive Option"). The Retainer Options vest on the date of grant and
expire five years after the grant date. The Incentive Options vest one year from
the date of grant and expire five years after the date of grant.
The exercise price of all options equals the market price of the Company's stock
either on the date of grant or, in the case of the 1996 Directors Plan, on the
day prior to the grant.
A summary of transactions under the stock option plans is presented below.
Stock Option Activity
<TABLE>
<CAPTION>
Weighted
Key Average Option Price
Directors Employees Exercise Price Per Share
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at February 28, 1994 108,000 1,183,800 $10.43 $ 4.95 to $15.00
Granted - 47,550 $14.56 $14.67 to $17.33
Exercised (3,600) (37,000) $ 7.39 $ 4.95 to $10.05
Canceled - (7,500) $14.25 $14.25
------- ---------
Outstanding at February 28, 1995 104,400 1,186,850 $10.65 $ 4.95 to $17.33
Granted - 360,025 $16.42 $13.88 to $18.75
Exercised - (153,337) $10.05 $10.05
Canceled - (43,620) $15.65 $14.25 to $18.75
------- ---------
Outstanding at February 29, 1996 104,400 1,349,918 $11.99 $ 4.95 to $18.75
Granted 20,022 418,050 $14.86 $14.38 to $18.00
Exercised - (141,900) $ 9.80 $ 5.28 to $16.25
Canceled - (88,693) $15.14 $14.25 to $18.75
------- ---------
Outstanding at February 28, 1997 124,422 1,537,375 $12.77 $ 4.95 to $18.75
======= =========
The number of exercisable shares for the above mentioned years is presented below.
Exercisable at February 28, 1995 39,600 756,350 $ 9.13 $ 4.95 to $14.09
======= =========
Exercisable at February 29, 1996 61,200 648,013 $ 8.77 $ 4.95 to $14.09
======= =========
Exercisable at February 28, 1997 95,322 714,508 $10.32 $ 4.95 to $18.75
======= =========
</TABLE>
The 1,661,797 outstanding shares as of February 28, 1997, have a remaining
contractual life of 8.5 years. The 438,072 options granted in fiscal 1997 have a
weighted average fair value price of $9.06 per share. The 1,454,318 outstanding
shares as of February 29, 1996, have a remaining contractual life of 8.0 years.
The 360,025 options granted in fiscal 1996 have a weighted average fair value
price of $10.59 per share.
47
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for the option grants in fiscal 1997 and 1996, respectively:
risk-free interest rates of 6.05% and 7.16%; expected life of ten years; and
expected volatility of 38.56% and 38.76%.
Shares of restricted stock are awarded in the name of the employee, who has all
rights of a shareowner, subject to certain restrictions or forfeitures.
Restricted shares issued in 1994 and 1995 generally expire and vest over a five
to eight year period and are subject to accelerated vesting if the market value
of the Company's stock exceeds the levels specified in the plan. As an incentive
to participants to retain these shares upon vesting, the Company granted a
matching option at fair market value that vests two years after the vesting of
the restricted stock if that restricted stock is still owned by the participant.
The number of options and price per share are included in the stock option
activity table above. The market value of the restricted shares is amortized to
compensation expense over the period in which the shares vest based upon the
passage of time. In the event of accelerated vesting due to the achievement of
market value appreciation as defined by the plan, the recognition of the
unamortized expense would be accelerated.
A summary of transactions under the restricted stock plans is presented below.
<TABLE>
<CAPTION>
Key
Restricted Stock Activity Employees
- ------------------------------- ----------
<S> <C>
Unvested at February 28, 1994 223,950
Granted 47,550
Vested -
Canceled (1,500)
--------
Unvested at February 28, 1995 270,000
Granted -
Vested (49,110)
Canceled (14,070)
--------
Unvested at February 29, 1996 206,820
Granted -
Vested -
Canceled (12,840)
--------
Unvested at February 28, 1997 193,980
========
</TABLE>
Compensation effects arising from restricted stock issuance is $471 in fiscal
1997, $1,188 in fiscal 1996, and $647 in fiscal 1995, and have been charged
against income and recorded as Additional Paid-In Capital.
The Employee Stock Purchase Plan permits eligible employees to purchase shares
of common stock at 85% of the lower fair market value of the stock as of two
measurement dates six months apart. During fiscal years 1997, 1996, and 1995,
80,674, 68,057, and 53,382 shares, respectively, were sold to employees under
this plan.
48
<PAGE>
On June 20, 1996, the Company issued a dividend to shareowners of record on
July 2, 1996, of one right ("Right") for each outstanding share of the
Company's common stock. Each Right entitles the shareowners to buy 1/100th
of a share of Series B Junior Participating Preferred Stock at an initial
exercise price of $70.00. The Rights will be exercisable only if a person
or group acquires, or announces a tender offer, for 20 percent or more of
MSC's common stock. Upon an acquisition of 20 percent or more of MSC's
common stock by a person or group, the Rights (other than those held by
such person or group) "flip in" to the right to buy the number of shares of
MSC's common stock valued at two times the exercise price of the Rights.
Additionally, if MSC enters into a merger or other business combination
with a person or group owning 20 percent or more of MSC's outstanding
common stock, the Rights (other than those held by such person or group)
"flip over" into the right to buy that number of shares of common stock of
the acquiring company valued at two times the exercise price of the Rights.
MSC may exchange the Rights for its common stock on a one-for-one basis at
any time after a person or group has acquired 20 percent or more of its
outstanding common stock. MSC will be entitled to redeem the Rights at one
cent per Right (payable in common stock of the Company, cash or other
consideration, at MSC's option) at any time before public disclosure that a
20 percent position has been acquired. The Rights will expire on July 1,
2006, unless previously redeemed or exercised.
Note 15: Shareowners' Equity
The table presented below reconciles the Shareowners' Equity accounts.
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
-------------------------- Paid-In Retained -----------------------
Shares Amount Capital Earnings Shares Amount
-------------- ---------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at February 28, 1994 10,465,155 $210 $40,574 $49,060 (459,099) $(3,380)
Net Income - - - 16,740 - -
Sale of Common Stock 85,324 1 1,014 - - -
Compensatory Effect of Stock Plans 31,700 - 647 - - -
Tax Benefit from Exercise of Stock
Options - - 541 - - -
Impact of Stock Dividend 5,256,895 106 - (109) (229,549) -
---------- ---- ------- ------- -------- -------
Balance at February 28, 1995 15,839,074 $317 $42,776 $65,691 (688,648) $(3,380)
Net Income (restated) - - - 8,497 - -
Sale of Common Stock 221,394 4 2,469 - - -
Compensatory Effect of Stock Plans (14,070) - 1,188 - - -
Tax Benefit from Exercise of Stock
Options - - 664 - - -
---------- ---- ------- ------- -------- -------
Balance at February 29, 1996 (restated) 16,046,398 $321 $47,097 $74,188 (688,648) $(3,380)
Net Income - - - 16,236 - -
Sale of Common Stock 222,574 4 2,378 - - -
Purchase of Treasury Stock - - - - (228,100) (4,138)
Compensatory Effect of Stock Plans (12,840) - 471 - - -
Tax Benefit from Exercise of Stock
Options - - 196 - - -
---------- ---- ------- ------- -------- -------
Balance at February 28, 1997 16,256,132 $325 $50,142 $90,424 (916,748) $(7,518)
========== ==== ======= ======= ======== =======
</TABLE>
49
<PAGE>
Note 16: Selected Quarterly Results of Operations (Unaudited)
The table presented below is a summary of quarterly data for the years ended
February 28, 1997 and February 29, 1996.
<TABLE>
<CAPTION>
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------
Previously Previously Previously
Reported Restated Reported Restated Reported Restated Reported
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales $68,884 $68,884 $70,420 $70,420 $69,658 $69,658 $69,055
Gross Profit 18,569 17,509 19,744 19,283 19,774 18,738 18,678
Net Income 4,621 3,969 4,532 4,248 4,880 4,243 3,776
Net Income
Per Share $ 0.30 $ 0.26 $ 0.29 $ 0.27 $ 0.31 $ 0.27 $ 0.24
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
-----------------------------------------------------------------------------------------------
Previously Previously Previously Previously
Reported Restated Reported Restated Reported Restated Reported Restated
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales $60,406 $60,406 $58,650 $58,650 $58,020 $58,020 $59,074 $59,074
Gross Profit 16,537 13,761 15,583 14,697 14,554 12,930 14,560 14,208
Net Income
(Loss) 4,866 3,152 4,066 3,519 333 (670) 2,714 2,496
Net Income (Loss)
Per Share $ 0.32 $ 0.20 $ 0.26 $ 0.23 $ 0.02 $ (0.04) $ 0.18 $ 0.16
</TABLE>
During the third quarter of fiscal 1996, the Company recorded a special charge
of $4,200 for the restructuring of its four product groups (see Note 3).
The unaudited quarterly information for the first three quarters of fiscal 1997
and all of fiscal 1996 has been restated due to the accounting irregularities
discovered at one of the Company's operating units (See Note 2).
50
<PAGE>
Report of Independent Public Accountants
To the Shareowners and Board of Directors of Material Sciences Corporation:
We have audited the accompanying consolidated balance sheets of Material
Sciences Corporation (a Delaware Corporation) and subsidiaries as of February
28, 1997, and February 29, 1996, (as restated - see Note 2) and the related
consolidated statements of income and cash flows for each of the three fiscal
years in the period ended February 28, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Material Sciences Corporation
as of February 28, 1997, and February 29, 1996, and the results of its
operations and its cash flows for each of the three fiscal years in the period
ended February 28, 1997, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 29, 1997
51
<PAGE>
(b) The unaudited selected quarterly financial data which is referred to in
Item 8(a) above and is set forth in Note 16 of the Notes to Consolidated
Financial Statements under the caption "Summary of Quarterly Data
(Unaudited)".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------ ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------- --------------------------------------------------
Reference is made to the information found under the caption "Election of
Directors" on pages 2 through 5 of the Company's proxy statement for the
1997 annual meeting of shareowners (the "proxy statement"), all of which is
incorporated by reference herein, for information on the directors of the
Company. Reference is made to Part I of this report for information on the
executive officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
------- ----------------------
Reference is made to the information under the captions "Compensation of
Executive Officers", "Compensation and Organization Committee Report", "MSC
Performance Graph", "Employment and Other Agreements", and "Employee and
Other Plans" on pages 8 through 16 of the proxy statement, all of which is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
------- HOLDERS AND MANAGEMENT
----------------------
Reference is made to the information under the captions "Security
Ownership of Management of the Company" and "Information with Respect to
Certain Shareowners" set forth on pages 6 and 7 of the proxy statement, all
of which is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
------- ----------------------------------------------
There were no relationships or related transactions requiring disclosure
in fiscal 1997.
52
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
- ------- REPORTS ON FORM 8-K
-------------------
(A) FINANCIAL STATEMENTS AND SCHEDULES OF THE COMPANY
I Financial Statements of the Company
-----------------------------------
(i) Consolidated Statements of Income for the years ended
February 28 or 29, 1997, 1996, and 1995
(ii) Consolidated Balance Sheets - February 28, 1997 and February
29, 1996
(iii) Consolidated Statements of Cash Flows for the years ended
February 28 or 29, 1997, 1996, and 1995
(iv) Notes to Consolidated Financial Statements
(v) Report of Independent Public Accountants
II Supplemental Schedule
---------------------
(i) Report of Independent Public Accountants with respect to
Supplemental Schedule to the Financial Statements
(ii) Schedule II - Reserve for Receivable Allowances and Deferred
Tax Asset Valuation Allowance
All other schedules have been omitted, since the required information is not
significant, is included in the financial statements or the notes thereto, or is
not applicable.
53
<PAGE>
(c) EXHIBITS
Exhibit
Number Description of Exhibit
------ ----------------------
2(a) Parent Agreement dated as of October 15, 1984, by and among
Bethlehem Steel Corporation, Inland Steel Company, Pre Finish
Metals Incorporated and Material Sciences Corporation.(1)
2(b) Partnership Agreement dated as of August 30, 1984, by and among
EGL Steel Inc., Inland Steel Electrogalvanizing Corporation and
Pre Finish Metals (EG) Incorporated.(1)
2(c) Amendment No. 1 to the Partnership Agreement dated as of August
30, 1984.(2)
2(d) Amendment No. 2 to the Partnership Agreement dated as of August
30, 1984.(2)
2(e) Operating Agreement dated as of October 15, 1984, by and between
Pre Finish Metals (EG) Incorporated and Walbridge Coatings, An
Illinois Partnership.(1)
2(f) Coating Agreement dated as of October 15, 1984, by and between
Bethlehem Steel Corporation and Walbridge Coatings, An Illinois
Partnership.(1)
2(g) Coating Agreement dated as of October 15, 1984, by and between
Inland Steel Company and Walbridge Coatings, An Illinois
Partnership.(1)
2(h) Amendments to Definitive Agreements dated as of March 31, 1986,
among EGL Steel Inc., Inland Steel Electrogalvanizing
Corporation, Pre Finish Metals (EG) Incorporated, Bethlehem
Steel Corporation, Inland Steel Company, Pre Finish Metals
Incorporated and Material Sciences Corporation.(6)
2(i) Further Amendments to Definitive Agreements dated as of July 24,
1986, among EGL Steel Inc., Inland Steel Electrogalvanizing
Corporation, Pre Finish Metals (EG) Incorporated, Bethlehem
Steel Corporation, Inland Steel Company, Inland Steel
Industries, Inc., Pre Finish Metals Incorporated and Material
Sciences Corporation.(3)
54
<PAGE>
Exhibit
Number Description of Exhibit
------ ----------------------
2(j) Further Amendments to Definitive Agreements dated as of April
23, 1992, among EGL Steel Inc., Inland Steel Electrogalvanizing
Corporation, Pre Finish Metals (EG) Incorporated, Bethlehem
Steel Corporation, Inland Steel Company, Inland Steel
Industries, Inc., Pre Finish Metals Incorporated and Material
Sciences Corporation.(7)
3(a) Registrant's Certificate of Incorporation, as amended.(1)
3(b) Amendment to Registrant's Certificate of Incorporation.(2)
3(c) Amendment to Registrant's Certificate of Incorporation.(4)
3(d) Certificate of Designation, Preferences and Rights of Series B
Junior Participating Preferred Stock.(9)
3(e) Registrant's By-laws, as amended.(6)
4(a) Credit Agreement dated as of September 1, 1994, between Material
Sciences Corporation and Bank of America Illinois.(5)
4(b) First Amendment to Credit Agreement dated as of September 5,
1995, by and between Material Sciences Corporation and Bank of
America Illinois.(10)
4(c) Money Market Demand Note (Fixed and Floating Rate Corporation)
dated December 20, 1995 executed by Material Sciences
Corporation in favor of The Northern Trust Company in the
aggregate principal amount of $25,000,000.(10)
4(d) Note Agreement, dated as of February 15, 1997, by and among the
Registrant and the purchasers described on Schedule I attached
thereto.
55
<PAGE>
Exhibit
Number Description of Exhibit
------ ----------------------
4(e) Rights Agreement, dated as of June 20, 1996, between Material
Sciences Corporation and Chase Mellon Shareholder Services,
L.L.C. as Rights Agent.(9)
There are omitted certain instruments with respect to long-term
debt, the total amount of securities authorized under each of
which does not exceed 10% of the total assets of the registrant
and its subsidiaries on a consolidated basis. A copy of each
such instrument will be furnished to the Commission upon
request.
10(a) Material Sciences Corporation Stock Purchase Plan.(1)
10(b) Material Sciences Corporation Supplemental Pension Plan.(1)
10(c) Material Sciences Corporation Employee Stock Purchase Plan.(6)
10(d) Material Sciences Corporation 1985 Stock Option Plan for Key
Employees.(6)
10(e) Material Sciences Corporation 1985 Stock Option Plan for
Directors.(6)
10(f) Material Sciences Corporation 1992 Omnibus Stock Awards Plan
for Key Employees.(11)
10(g) Employment Agreement effective February 27, 1991, between
Material Sciences Corporation and G. Robert Evans.(6)
10(h) Material Sciences Corporation 1991 Stock Option Plan for
Directors.(6)
10(i) Material Sciences Corporation Directors Deferred Compensation
Plan.(6)
10(j) Material Sciences Corporation 1996 Stock Option Plan for
Non-Employee Directors.(12)
10(k) Deferred Compensation Plan of Material Sciences Corporation and
Certain Participating Subsidiaries.(6)
56
<PAGE>
Exhibit
Number Description of Exhibit
------ ----------------------
10(l) Lease and Agreement dated as of December 1, 1980, between Line
6 Corp. and Pre Finish Metals Incorporated, relating to
Walbridge, Ohio facility.(1)
10(m) First Amendment to Lease and Agreement dated as of May 30, 1986,
between Corporate Property Associates and Corporate Property
Associates 2 and Pre Finish Metals Incorporated.(3)
10(n) Sublease dated as of May 30, 1986, between Pre Finish Metals
Incorporated and Walbridge Coatings, An Illinois Partnership.(3)
10(o) Lease Guaranty dated as of May 30, 1986, from Material Sciences
Corporation to Corporate Property Associates and Corporate
Property Associates 2.(3)
10(p) Note Purchase Agreement dated as of May 30, 1986, between
Material Sciences Corporation and Creditanstalt-Bankverein (New
York Branch).(3)
10(q) Agreement dated as of May 30, 1986, between Material Sciences
Corporation and Corporate Property Associates and Corporate
Property Associates 2.(3)
10(r) Term Loan Agreement dated as of July 23, 1986, among Walbridge
Coatings, An Illinois Partnership, Creditanstalt-Bankverein (New
York Branch) and The Toledo Trust Company, including the related
guaranties by Material Sciences Corporation and Pre Finish
Metals Incorporated.(3)
10(s) Amendment No. 1 to Term Loan Agreement dated as of March 31,
1987, among Walbridge Coatings, An Illinois Partnership,
Creditanstalt-Bankverein (New York Branch) and The Toledo Trust
Company.(3)
10(t) Amended and Restated Credit Facility Agreement dated as of July
23, 1986, between Walbridge Coatings, An Illinois Partnership,
and Creditanstalt-Bankverein, including the related guaranties
by Material Sciences Corporation and Pre Finish Metals
Incorporated.(3)
57
<PAGE>
Exhibit
Number Description of Exhibit
------ ----------------------
10(u) Amendment and Consent Agreement dated as of April 23, 1992,
among Walbridge Coatings, An Illinois Partnership, Bethlehem
Steel Corporation, EGL Steel, Inc., Inland Steel Industries,
Inc., Inland Steel Company, Inland Steel Electrogalvanizing
Corporation, Material Sciences Corporation, Pre Finish Metals
Incorporated, Pre Finish Metals (EG) Incorporated, and
Creditanstalt-Bankverein, amending the Term Loan Agreement dated
as of July 23, 1986, as amended on March 31, 1987, and amending
the Amended and Restated Credit Facility Agreement dated as of
July 23, 1986, including the related guaranties by Material
Sciences Corporation and Pre Finish Metals Incorporated.(7)
10(v) Form of Standstill Agreement dated as of January 29, 1986, among
Material Sciences Corporation, Richard L. Burns and Joyce
Burns.(6)
10(w) Form of Indemnification Agreement between Material Sciences
Corporation and each of its officers and directors.(7)
10(x) Supplemental Retirement Agreement dated as of December 28, 1992
between Material Sciences Corporation and William H. Vrba.(8)
10(y) Letter Agreement dated as of May 8, 1991 between Material
Sciences Corporation and William H. Vrba.(8)
10(z) Severance Benefits Agreement, dated October 22, 1996 between
Material Sciences Corporation and James J. Waclawik, Sr.
11 Computation of net income per share.
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.(13)
58
<PAGE>
- --------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 2-93414), which was declared effective on
November 27, 1984.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (Registration No. 33-00828), which was filed on October 11,
1985.
(3) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 28, 1989 (File No. 1-8803).
(4) Incorporated by reference to the Registrant's Form 8-A dated June 17,
1986 (File No. 1-8803).
(5) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report
for the Quarter Ended August 31, 1994 (File No. 1-8803).
(6) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 28, 1991 (File No. 1-8803).
(7) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 29, 1992 (File No. 1-8803).
(8) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 28, 1993 (File No. 1-8803).
(9) Incorporated by reference to the Registrant's Form 8-A filed on June 25,
1996 (File No. 1-8803).
(10) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 29, 1996 (File No. 1-8803).
(11) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-15679) which was filed on November 6,
1996.
(12) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 333-15677) which was filed on November 6,
1996.
(13) Appears only in the electronic filing of this report with the Securities
and Exchange Commission.
59
<PAGE>
(d) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter.
[THIS SPACE INTENTIONALLY LEFT BLANK.]
--------------------------------------
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MATERIAL SCIENCES CORPORATION
By: /s/ Gerald G. Nadig
---------------------
Gerald G. Nadig
President and Chief Executive Officer
Date: May 23, 1997
Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed by the following persons in the capacities indicated on May 23,
1997.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Gerald G. Nadig President and Chief Executive Officer and Director
- --------------------------- (Principal Executive Officer)
Gerald G. Nadig
/s/ James J. Waclawik, Sr. Vice President, Chief Financial Officer, and
- --------------------------- Secretary
James J. Waclawik, Sr. (Principal Financial Officer)
/s/ David J. DeNeve Controller
- --------------------------- (Principal Accounting Officer)
David J. DeNeve
/s/ Jerome B. Cohen Director
- ---------------------------
Jerome B. Cohen
/s/ Roxanne J. Decyk Director
- ---------------------------
Roxanne J. Decyk
/s/ Eugene W. Emmerich Director
- ---------------------------
Eugene W. Emmerich
/s/ G. Robert Evans Chairman of the Board and Director
- ---------------------------
G. Robert Evans
/s/ E. F. Heizer, Jr. Director
- ---------------------------
E. F. Heizer, Jr.
/s/ J. Frank Leach Director
- ---------------------------
J. Frank Leach
/s/ Irwin P. Pochter Director
- ---------------------------
Irwin P. Pochter
</TABLE>
61
<PAGE>
EXHIBIT INDEX
MATERIAL SCIENCES CORPORATION
ANNUAL REPORT ON FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
- -------- --------------------------------------------
REPORTS ON FORM 8-K
-------------------
(a) FINANCIAL STATEMENTS AND SCHEDULES OF THE COMPANY
I Financial Statements of the Company
-----------------------------------
(i) Consolidated Statements of Income for the years ended
February 28 or 29, 1997, 1996, and 1995
(ii) Consolidated Balance Sheets -February 28, 1997 and
February 29, 1996
(iii) Consolidated Statements of Cash Flows for the years ended
February 28 or 29, 1997, 1996, and 1995
(iv) Notes to Consolidated Financial Statements
(v) Report of Independent Public Accountants
II Supplemental Schedule
---------------------
(i) Report of Independent Public Accountants with respect to
Supplemental Schedule to the Financial Statements
(ii) Schedule II - Reserve for Receivable Allowances and Deferred
Tax Asset Valuation Allowance
All other schedules have been omitted, since the required information is not
significant, is included in the financial statements or the notes thereto, or is
not applicable.
62
<PAGE>
MATERIAL SCIENCES CORPORATION
ANNUAL REPORT ON FORM 10-K
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------- ---------------------- -----
2(a) Parent Agreement dated as of October
15, 1984, by and among Bethlehem
Steel Corporation, Inland Steel
Company, Pre Finish Metals
Incorporated and Material Sciences
Corporation.(1)
2(b) Partnership Agreement dated as of
August 30, 1984, by and among EGL
Steel Inc., Inland Steel
Electrogalvanizing Corporation and
Pre Finish Metals (EG)
Incorporated.(1)
2(c) Amendment No. 1 to the Partnership
Agreement dated as of August 30,
1984.(2)
2(d) Amendment No. 2 to the Partnership
Agreement dated as of August 30,
1984.(2)
2(e) Operating Agreement dated as of
October 15, 1984, by and between Pre
Finish Metals (EG) Incorporated and
Walbridge Coatings, An Illinois
Partnership.(1)
2(f) Coating Agreement dated as of
October 15, 1984, by and between
Bethlehem Steel Corporation and
Walbridge Coatings, An Illinois
Partnership.(1)
2(g) Coating Agreement dated as of
October 15, 1984, by and between
Inland Steel Company and Walbridge
Coatings, An Illinois Partnership.(1)
2(h) Amendments to Definitive Agreements
dated as of March 31, 1986, among
EGL Steel Inc., Inland Steel
Electrogalvanizing Corporation, Pre
Finish Metals (EG) Incorporated,
Bethlehem Steel Corporation, Inland
Steel Company, Pre Finish Metals
Incorporated and Material Sciences
Corporation.(6)
63
<PAGE>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------- ---------------------- -----
2(i) Further Amendments to Definitive
Agreements dated as of July 24,
1986, among EGL Steel Inc., Inland
Steel Electrogalvanizing
Corporation, Pre Finish Metals (EG)
Incorporated, Bethlehem Steel
Corporation, Inland Steel Company,
Inland Steel Industries, Inc., Pre
Finish Metals Incorporated and
Material Sciences Corporation.(3)
2(j) Further Amendments to Definitive
Agreements dated as of April 23,
1992, among EGL Steel Inc., Inland
Steel Electrogalvanizing
Corporation, Pre Finish Metals (EG)
Incorporated, Bethlehem Steel
Corporation, Inland Steel Company,
Inland Steel Industries, Inc., Pre
Finish Metals Incorporated and
Material Sciences Corporation.(7)
3(a) Registrant's Certificate of
Incorporation, as amended.(1)
3(b) Amendment to Registrant's
Certificate of Incorporation.(2)
3(c) Amendment to Registrant's
Certificate of Incorporation.(4)
3(d) Certificate of Designation,
Preferences and Rights of Series B
Junior Participating Preferred
Stock.(9)
3(e) Registrant's By-laws, as amended.(6)
4(a) Credit Agreement dated as of
September 1, 1994 between Material
Sciences Corporation and Bank of
America Illinois.(5)
4(b) First Amendment to Credit Agreement
dated as of September 25, 1995 by
and between Material Sciences
Corporation and Bank of America
Illinois.(10)
64
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
- ------ ---------------------- -----
<S> <C>
4(c) Money Market Demand Note (Fixed and
Floating Rate Corporation) dated
December 20, 1995 executed by
Material Sciences Corporation in
favor of The Northern Trust Company
in the aggregate principal amount of
$25,000,000.(10)
4(d) Note Agreement, dated as of February
15, 1997, by and among the
Registrant and the purchasers
described on Schedule I attached
thereto.
4(e) Rights Agreement, dated as of June
20, 1996, between Material Sciences
Corporation and Chase Mellon
Shareholder Services, L.L.C. as
Rights Agent.(9)
There are omitted certain
instruments with respect to
long-term debt, the total amount of
securities authorized under each of
which does not exceed 10% of the
total assets of the registrant and
its subsidiaries on a consolidated
basis. A copy of each such
instrument will be furnished to the
Commission upon request.
10(a) Material Sciences Corporation Stock
Purchase Plan. (1)
10(b) Material Sciences Corporation
Supplemental Pension Plan.(1)
10(c) Material Sciences Corporation
Employee Stock Purchase Plan.(6)
10(d) Material Sciences Corporation 1985
Stock Option Plan for Key
Employees.(6)
10(e) Material Sciences Corporation 1985
Stock Option Plan for Directors.(6)
10(f) Material Sciences Corporation 1992
Omnibus Stock Awards Plan for Key
Employees. (11)
</TABLE>
65
<PAGE>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------- ---------------------- -----
10(g) Employment Agreement effective
February 27, 1991, between Material
Sciences Corporation and
G. Robert Evans.(6)
10(h) Material Sciences Corporation 1991
Stock Option Plan for Directors.(6)
10(i) Material Sciences Corporation
Directors Deferred Compensation
Plan.(6)
10(j) Material Sciences Corporation 1996
Stock Option Plan for Non-Employee
Directors.(12)
10(k) Deferred Compensation Plan of
Material Sciences Corporation and
Certain Participating
Subsidiaries.(6)
10(l) Lease and Agreement dated as of
December 1, 1980, between Line 6
Corp. and Pre Finish Metals
Incorporated, relating to Walbridge,
Ohio facility.(1)
10(m) First Amendment to Lease and
Agreement dated as of May 30, 1986,
between Corporate Property
Associates and Corporate Property
Associates 2 and Pre Finish Metals
Incorporated.(3)
10(n) Sublease dated as of May 30, 1986,
between Pre Finish Metals
Incorporated and Walbridge Coatings,
An Illinois Partnership.(3)
10(o) Lease Guaranty dated as of May 30,
1986, from Material Sciences
Corporation to Corporate Property
Associates and Corporate Property
Associates 2.(3)
66
<PAGE>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------- ---------------------- ----
10(p) Note Purchase Agreement dated as of
May 30, 1986, between Material
Sciences Corporation and
Creditanstalt-Bankverein (New York
Branch).(3)
10(q) Agreement dated as of May 30, 1986,
between Material Sciences
Corporation and Corporate Property
Associates and Corporate Property
Associates 2.(3)
10(r) Term Loan Agreement dated as of July
23, 1986, among Walbridge Coatings,
An Illinois Partnership,
Creditanstalt-Bankverein (New York
Branch) and The Toledo Trust
Company, including the related
guaranties by Material Sciences
Corporation and Pre Finish Metals
Incorporated.(3)
10(s) Amendment No. 1 to Term Loan
Agreement dated as of March 31,
1987, among Walbridge Coatings, An
Illinois Partnership,
Creditanstalt-Bankverein (New York
Branch) and The Toledo Trust
Company.(3)
10(t) Amended and Restated Credit Facility
Agreement dated as of July 23, 1986,
between Walbridge Coatings, An
Illinois Partnership, and
Creditanstalt-Bankverein, including
the related guaranties by Material
Sciences Corporation and Pre Finish
Metals Incorporated.(3)
67
<PAGE>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------- ---------------------- ----
10(u) Amendment and Consent Agreement
dated as of April 23, 1992, among
Walbridge Coatings, An Illinois
Partnership, Bethlehem Steel
Corporation, EGL Steel, Inc., Inland
Steel Industries, Inc., Inland Steel
Company, Inland Steel
Electrogalvanizing Corporation,
Material Sciences Corporation, Pre
Finish Metals Incorporated, Pre
Finish Metals (EG) Incorporated, and
Creditanstalt-Bankverein, amending
the Term Loan Agreement dated as of
July 23, 1986, as amended on March
31, 1987, and amending the Amended
and Restated Credit Facility
Agreement dated as of July 23, 1986,
including the related guaranties by
Material Sciences Corporation and
Pre Finish Metals Incorporated.(7)
10(v) Form of Standstill Agreement dated
as of January 29, 1986, among
Material Sciences Corporation,
Richard L. Burns and Joyce Burns.(6)
10(w) Form of Indemnification Agreement
between Material Sciences
Corporation and each of its officers
and directors.(7)
10(x) Supplemental Retirement Agreement
dated as of December 28, 1992
between Material Sciences
Corporation and William H. Vrba.(8)
10(y) Letter Agreement dated as of May 8,
1991 between Material Sciences
Corporation and William H. Vrba.(8)
10(z) Severance Benefits Agreement, dated
October 22, 1996 between Material
Sciences Corporation and James J.
Waclawik, Sr.
11 Computation of net income per share.
21 Subsidiaries of the Registrant.
68
<PAGE>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------- ---------------------- -----
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.(13)
-------------------------------
(1) Incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 2-93414), which was declared effective on
November 27, 1984.
(2) Incorporated by reference to the Registrant's
Registration Statement on Form S-1 (Registration
No. 33-00828), which was filed on October 11, 1985.
(3) Incorporated by reference to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended
February 28, 1989 (File No. 1-8803).
(4) Incorporated by reference to the Registrant's Form
8-A dated June 17, 1986 (File No. 1-8803).
(5) Incorporated by reference to the Registrant's Form
10-Q Quarterly Report for the Quarter Ended August
31, 1994 (File No. 1-8803).
(6) Incorporated by reference to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended
February 28, 1991 (File No. 1-8803).
(7) Incorporated by reference to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended
February 29, 1992 (File No. 1-8803).
(8) Incorporated by reference to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended
February 28, 1993 (File No. 1-8803).
(9) Incorporated by reference to the Registrant's Form
8-A filed on June 25, 1996 (File No. 1-8803).
(10) Incorporated by reference to the Registrant's Form
10-K Annual Report for the Fiscal Year Ended
February 29, 1996 (File No. 1-8803).
(11) Incorporated by reference to the Registrant's
Registration Statement on Form S-8 (Registration
No. 333-15679) which was filed on November 6, 1996.
69
<PAGE>
(12) Incorporated by reference to the Registrant's
Registration Statement on Form S-8 (Registration
No. 333-15677) which was filed on November 6, 1996.
(13) Appears only in the electronic filing of this
report with the Securities and Exchange Commission.
70
<PAGE>
MATERIAL SCIENCES CORPORATION
Supplemental Schedule
71
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
WITH RESPECT TO SUPPLEMENTAL SCHEDULE
TO THE FINANCIAL STATEMENTS
To the Shareowners and Board of Directors of Material Sciences Corporation:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements included in the Material Sciences Corporation
1997 Annual Report to Shareowners included in this Form 10-K, and have issued
our report thereon dated April 29, 1997. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The supplemental financial statement schedule is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. The supplemental financial statement schedule
has been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 29, 1997
72
<PAGE>
SCHEDULE II
MATERIAL SCIENCES CORPORATION AND SUBSIDIARIES
RESERVE FOR RECEIVABLE ALLOWANCES AND DEFERRED TAX ASSET VALUATION ALLOWANCE
(in thousands)
<TABLE>
<CAPTION>
Additions
---------------------------------------
Balance at Charged to Charged Reclassifications Deductions Balance at
beginning costs and to other and from end of
of year expense accounts Acquisition reserve year
------------ ---------- -------- ----------------- ---------- ----------
1995
- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Receivable Allowances $3,502 $4,123 $ - $ - $3,997 $3,628
Deferred Tax Asset
Valuation Allowance 1,620 - - - 1,620 -
------ ------ ------ ------ ------ ------
Total $5,122 $4,123 $ - $ - $5,617 $3,628
====== ====== ====== ====== ====== ======
1996
- ------------------------
Receivable Allowances $3,628 $6,612 $ - $1,934 $7,767 $4,407
====== ====== ====== ====== ====== ======
1997
- ------------------------
Receivable Allowances $4,407 $4,132 $ - $ - $6,268 $2,271
====== ====== ====== ====== ====== ======
</TABLE>
The activity in the Receivable Allowances account includes the Company's bad
debt, claim, and scrap allowance.
73
<PAGE>
Exhibit 4(d)
================================================================================
================================================================================
MATERIAL SCIENCES CORPORATION
NOTE AGREEMENT
Dated as of February 15, 1997
$26,500,000 Principal Amount, dated February 27, 1997
7.05% Series A Senior Notes
Due May 31, 2007
$3,500,000 Principal Amount, dated February 28, 1997
7.05% Series A Senior Notes
Due May 31, 2007
$20,000,000 Principal Amount
7.05% Series B Senior Notes
Dated April 30, 1997
Due May 31, 2007
================================================================================
PPN: Series A: 576674 A* 6
PPN: Series B: 576674 A@ 4
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<C> <S> <C>
(S)1. DESCRIPTION OF NOTES AND COMMITMENT................................ 1
1.1. Description of Notes............................................. 1
1.2. Commitment; Closing Date......................................... 1
1.3. Guaranty......................................................... 2
(S)2. PREPAYMENT OF NOTES................................................ 2
2.1. Required Prepayments............................................. 2
2.2. Optional Prepayments............................................. 2
2.3. Notice of Prepayments............................................ 3
2.4. Surrender of Notes on Prepayment or Exchange..................... 3
2.5. Direct Payment and Deemed Date of Receipt........................ 4
2.6. Allocation of Payments........................................... 4
2.7. Payments Due on Saturdays, Sundays and Holidays.................. 4
(S)3. REPRESENTATIONS.................................................... 4
3.1. Representations of the Company................................... 4
3.2. Representations of the Purchaser................................. 11
(S)4. CLOSING CONDITIONS................................................. 13
4.1. Representations and Warranties................................... 13
4.2. Legal Opinions................................................... 13
4.3. Events of Default................................................ 13
4.4. Payment of Fees and Expenses..................................... 13
4.5. Legality of Investment........................................... 13
4.6. Subsidiary Guaranty.............................................. 14
4.7. Private Placement Number......................................... 14
4.8. Sale of All Notes................................................ 14
4.9. Proceedings and Documents........................................ 14
(S)5. INTERPRETATION OF AGREEMENT........................................ 14
5.1. Certain Terms Defined............................................ 14
5.2. Accounting Principles............................................ 22
5.3. Valuation Principles............................................. 23
5.4. Direct or Indirect Actions....................................... 23
(S)6. AFFIRMATIVE COVENANTS.............................................. 23
6.1. Corporate Existence.............................................. 23
6.2. Insurance........................................................ 23
6.3. Taxes, Claims for Labor and Materials............................ 23
6.4. Maintenance of Properties........................................ 24
6.5. Maintenance of Records........................................... 24
6.6. Financial Information and Reports................................ 24
6.7. Inspection of Properties and Records............................. 26
6.8. ERISA............................................................ 27
6.9. Compliance with Laws............................................. 27
6.10. Acquisition of Notes............................................. 28
6.11. Additional Subsidiary Guarantors................................. 28
</TABLE>
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<TABLE>
<CAPTION>
<C> <S> <C>
6.12. Private Placement Number......................................... 28
(S)7. NEGATIVE COVENANTS................................................. 28
7.1. Consolidated Adjusted Net Worth.................................. 28
7.2. Consolidated Senior Debt......................................... 28
7.3. Total Indebtedness............................................... 28
7.4. Liens............................................................ 28
7.5. Merger or Consolidation.......................................... 30
7.6. Sale of Assets................................................... 30
7.7. Disposition of Stock of Restricted Subsidiaries.................. 31
7.8. Designation of Unrestricted Subsidiaries......................... 31
7.9. No Impairment of Subsidiaries.................................... 31
7.10. Transactions with Affiliates..................................... 31
7.11. Nature of Business............................................... 32
(S)8. EVENTS OF DEFAULT AND REMEDIES THEREFOR............................ 32
8.1. Nature of Events................................................. 32
8.2. Remedies on Default.............................................. 34
8.3. Annulment of Acceleration of Notes............................... 34
8.4. Other Remedies................................................... 34
8.5. Conduct No Waiver; Collection Expenses........................... 35
8.6. Remedies Cumulative.............................................. 35
8.7. Notice of Default................................................ 35
(S)9. AMENDMENTS, WAIVERS AND CONSENTS................................... 35
9.1. Matters Subject to Modification.................................. 35
9.2. Solicitation of Holders of Notes................................. 36
9.3. Binding Effect................................................... 36
9.4. Notes held by Company, etc....................................... 36
(S)10. FORM OF NOTES, REGISTRATION, TRANSFER, EXCHANGE AND REPLACEMENT.... 37
10.1. Form of Notes.................................................... 37
10.2. Note Register.................................................... 37
10.3. Issuance of New Notes upon Exchange or Transfer.................. 37
10.4. Replacement of Notes............................................. 37
(S)11. MISCELLANEOUS...................................................... 38
11.1. Expenses......................................................... 38
11.2. Notices.......................................................... 38
11.3. Reproduction of Documents........................................ 38
11.4. Successors and Assigns........................................... 39
11.5. Law Governing.................................................... 39
11.6. Headings......................................................... 39
11.7. Counterparts..................................................... 39
11.8. Reliance on and Survival of Provisions........................... 39
11.9. Integration and Severability..................................... 39
11.10. Confidential Information......................................... 39
</TABLE>
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SCHEDULE I
Annex I - Subsidiaries
Annex II - Indebtedness
Annex III - Restricted Investments
Annex IV - Liens
Exhibit A-1 - Form of Series A Senior Note
Exhibit A-2 - Form of Series B Senior Note
Exhibit B - Subsidiary Guaranty
Exhibit C - Form of Legal Opinion of Purchaser's Counsel
Exhibit D - Form of Legal Opinion of Company's Counsel
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MATERIAL SCIENCES CORPORATION
NOTE AGREEMENT
Dated as of February 15, 1997
To Each of the Purchasers
Named in the Attached Schedule I
Ladies and Gentlemen:
MATERIAL SCIENCES CORPORATION, a Delaware corporation (the "Company")
agrees with you as follows:
(S)1. DESCRIPTION OF NOTES AND COMMITMENT
1.1. Description of Notes. The Company has authorized the issuance and
sale of (a) $26,500,000 aggregate principal amount of its Series A Senior Notes
to be dated February 27, 1997 and $3,500,000 aggregate principal amount of its
Series A Senior Notes to be dated February 28, 1997 (together, the Senior Notes
dated February 27, 1997 and February 28, 1997 shall be hereinafter referred to
as the "Series A Notes"), and (b) $20,000,000 aggregate principal amount of its
Series B Senior Notes (the "Series B Notes"), to be dated April 30, 1997
(together, the Series A Notes and the Series B Notes and each Series A and
Series B Note delivered in substitution therefore shall be referred to herein as
the "Notes"). Each of the Notes shall bear interest from its date of issuance
(computed on the basis of a 360-day year comprised of twelve 30-day months),
payable semi-annually on May 31 and November 30 of each year, commencing May 31,
1997, and at maturity, at the rate of 7.05% per annum prior to maturity and to
bear interest on any overdue principal (including any overdue optional or
required prepayment), and (to the extent legally enforceable) on any overdue
Make-Whole Amount and on any overdue installment of interest at the rate of
9.05% per annum. The Notes shall be expressed to mature on May 31, 2007 and
shall be substantially in the forms attached as Exhibits A-1 and A-2. The term
"Notes" as used herein shall include the singular number as well as the plural.
Any reference to you in this Agreement shall in all instances be deemed to
include any nominee of yours or any separate account or other person on whose
behalf you are purchasing Notes. You and the other purchasers are sometimes
referred to herein individually as a "Purchaser" and collectively as the
"Purchasers."
1.2. Commitment; Closing Date. Subject to the terms and conditions
hereof and on the basis of the representations and warranties hereinafter set
forth, the Company agrees to issue and sell to you, and you agree to purchase
from the Company, Notes in the aggregate principal amount set forth opposite
your name in the attached Schedule I at a price of 100% of the principal amount
thereof.
<PAGE>
Delivery of and payment for the Notes shall be made at the offices of
Gardner, Carton & Douglas, Quaker Tower, 321 North Clark Street, Suite 3400,
Chicago, Illinois 60610, at 9:00 a.m., Chicago time, on February 27, 1997, with
respect to $26,500,000 principal amount of Series A Notes (the "Series A Closing
Date") and on February 28, 1997 with respect to $3,500,000 principal amount of
the Series A Notes, and on April 30, 1997 with respect to the Series B Notes
(the "Series B Closing Date") or such other times on such later dates as may be
mutually agreed upon by the Company and the Purchasers then purchasing each
series of Notes (together, the Series A Closing Date and the Series B Closing
Date will be hereinafter referred to as the "Closing Dates"). The Notes shall be
delivered to you in the form of one or more Notes in fully registered form,
issued in your name or in the name of your nominee. Delivery of the Notes to you
on the Closing Date shall be against payment of the purchase price thereof in
Federal funds or other funds in U.S. dollars immediately available at Bank of
America, Chicago, Illinois, ABA No. 071000039, for credit to the account of
Material Sciences Corporation, Account No. 79-36206. If on any Closing Date the
Company shall fail to tender the required Notes to any Purchaser, such Purchaser
shall be relieved of all remaining obligations under this Agreement. Nothing in
the preceding sentence shall relieve the Company of any liability occasioned by
such failure to deliver the Notes. The funding and other obligations of the
Purchasers under this Agreement shall be joint and not several.
1.3. Guaranty. The Notes will be guaranteed by the Subsidiary Guarantors
pursuant to the Subsidiary Guaranty. The Subsidiary Guaranty shall be released
upon the receipt by the Noteholders of evidence that guaranties from the
Subsidiary Guarantors to the Company's bank lenders have been released; such
evidence shall be accompanied by a written request by the Company that the
Subsidiary Guaranty be promptly returned to the Company upon delivery of such
evidence. Upon delivery of such evidence the Subsidiary Guaranty shall be deemed
terminated and shall cease to be in full force and effect. The original
Subsidiary Guaranty shall be promptly returned to the Company upon receipt of
such evidence.
(S)2. PREPAYMENT OF NOTES
2.1. Required Prepayments. In addition to payment of all outstanding
principal of the Notes at maturity and regardless of the amount of Notes which
may be outstanding from time to time, the Company shall prepay and there shall
become due and payable on May 31 in each year, commencing May 31, 2001 and
ending May 31, 2006, inclusive, $4,285,714 of the principal amount of the Series
A Notes and $2,857,143 of the principal amount of the Series B Notes or such
lesser amount as would constitute payment in full on the Series A Notes and
Series B Notes, respectively, with the remaining principal payable at maturity
on May 31, 2007. Each such prepayment shall be at a price of 100% of the
principal amount prepaid, together with interest accrued thereon to the date of
prepayment. No premium (including any Make-Whole Amount) shall be payable in
connection with any required prepayment.
2.2. Optional Prepayments. (a) Upon notice as provided in Section 2.3(a)
and (b) or, in case of a prepayment made pursuant to Section 7.6, upon notice as
provided in Section 2.3(c), the Company may prepay the Notes, in whole or in
part, on any interest payment date, in an
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amount not less than $1,000,000, in integral multiples of $100,000 in excess
thereof or such lesser amount as shall constitute payment in full of the Notes,
at a price of 100% of the principal amount to be prepaid, plus interest accrued
thereon to the date of prepayment, plus the Make-Whole Amount.
(b) Any optional prepayment of less than all of the Notes outstanding
pursuant to Section 2.2(a) shall be applied to reduce, on a pro rata basis, the
required prepayments and payment at maturity required by Section 2.1.
(c) Except as provided in Section 2.1, Section 7.6 or this Section 2.2,
the Notes shall not be prepayable in whole or in part.
2.3. Notice of Prepayments. (a) The Company shall give notice of any
optional prepayment of the Notes pursuant to Section 2.2(a) to each holder of
the Notes not less than 30 nor more than 60 days before the date fixed for
prepayment, specifying (i) such date, (ii) the principal amount of the holder's
Notes to be prepaid on such date, (iii) the Determination Date for calculating
the Make-Whole Amount, (iv) a calculation of the estimated amount of the Make-
Whole Amount showing in detail the method of calculation, and (v) the accrued
interest applicable to the prepayment. Notice of prepayment having been so
given, the aggregate principal amount of the Notes specified in such notice,
together with accrued interest thereon and the actual Make-Whole Amount, shall
become due and payable on the prepayment date.
(b) The Company also shall give notice on the Determination Date to each
holder of the Notes to be prepaid pursuant to Section 2.2(a), by telecopy,
telegram or other same-day written communication, of the Make-Whole Amount
applicable to such prepayment and the details of the calculations used to
determine the amount of such Make-Whole Amount. Such calculations shall be
subject to the concurrence of the holders of a majority in aggregate principal
amount of the Notes to be prepaid.
(c) In the event of a prepayment of Notes pursuant to Section 7.6, the
notice provided by the Company pursuant to paragraphs (a) and (b) of this
Section 2.3 shall also provide, in bold face type, that any Noteholder may,
within 15 days of receipt of notice of prepayment from the Company, direct the
Company in writing not to prepay its Notes. Failure by a Noteholder to
acknowledge such notice of prepayment shall constitute acceptance of the
Company's prepayment of the Notes. Nothing contained in this Section 2.3(c)
shall limit the Company's rights to optionally prepay the Notes pursuant to
Section 2.2 hereof. With respect to any specified sale of assets pursuant to
Section 7.6, if the Noteholders refuse prepayment of the Notes pursuant to this
paragraph (c), the Company shall be deemed to have satisfied its obligations
with respect to clauses (1) and (2) of Section 7.6.
2.4. Surrender of Notes on Prepayment or Exchange. Subject to Section 2.5,
upon any partial prepayment of a Note pursuant to this Section 2 or partial
exchange of a Note pursuant to Section 10.3, such Note may, at the option of the
holder thereof, (i) be surrendered to the Company pursuant to Section 10.3 in
exchange for a new Note or Notes equal to the principal amount remaining unpaid
on the surrendered Note, or (ii) be made available to the Company, at
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<PAGE>
the Company's principal office, for notation thereon of the portion of the
principal so prepaid or exchanged. In case the entire principal amount of any
Note is prepaid or exchanged, such Note shall be surrendered to the Company
following such prepayment for cancellation and shall not be reissued, and no
Note shall be issued in lieu of such Note.
2.5. Direct Payment and Deemed Date of Receipt. Notwithstanding any other
provision contained in the Notes or this Agreement, the Company will pay all
sums becoming due on each Note held by you or any subsequent Institutional
Holder by wire transfer of immediately available funds to such account as you
have designated in Schedule I, or as you or such subsequent Institutional Holder
may otherwise designate by notice to the Company, in each case without
presentment and without notations being made thereon, except that any such Note
so paid or prepaid in full shall be surrendered to the Company for cancellation.
Any wire transfer shall identify such payment in the manner set forth in
Schedule I and shall identify the payment as principal, Make-Whole Amount, if
any, and/or interest. You and any subsequent Institutional Holder of a Note to
which this Section 2.5 applies agree that, before selling or otherwise
transferring any such Note, you or it will make a notation thereon of the
aggregate amount of all payments of principal theretofore made and of the date
to which interest has been paid and, upon written request of the Company, will
provide a copy of such notations to the Company. You will notify the Company if
you sell or otherwise transfer a Note. Any payment made pursuant to this Section
2.5 shall be deemed received on the payment date only if received before 11:00
A.M., Chicago time. Payments received after 11:00 A.M., Chicago time, shall be
deemed received on the next succeeding Business Day.
2.6. Allocation of Payments. In the case of a prepayment pursuant to
Section 2.1 or 2.2(a), if less than the entire principal amount of all of the
Notes outstanding is to be paid, the Company will prorate the aggregate
principal amount to be prepaid among the outstanding Notes in proportion to the
unpaid principal amounts thereof.
2.7. Payments Due on Saturdays, Sundays and Holidays. If any interest
payment date on the Notes or the date fixed for any other payment of any Note or
exchange of any Note is not a Business Day, then such payment or exchange need
not be made on such date but may be made on the next succeeding Business Day;
provided that if such date is in connection with a payment or prepayment of
principal, interest shall be paid to such succeeding Business Day.
(S)3. REPRESENTATIONS
3.1. Representations of the Company. As an inducement to, and as part of
the consideration for, your purchase of the Notes pursuant to this Agreement,
the Company represents and warrants to each Purchaser as of the Series A Closing
Date and each Purchaser of the Series B Notes as of the Series B Closing Date as
follows:
(a) Corporate Organization and Authority. The Company is a solvent
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has all requisite corporate power and
authority to own and operate its properties, to carry on its business as now
conducted and as presently proposed to be conducted, to enter
4
<PAGE>
into and perform this Agreement and to issue and sell the Notes as contemplated
in this Agreement.
(b) Qualification to Do Business. The Company is duly qualified or
licensed and in good standing as a foreign corporation authorized to do business
in each jurisdiction where the nature of the business transacted by it or the
character of its properties owned or leased makes such qualification or
licensing necessary, except for jurisdictions where the failure to be so
licensed or qualified would not, individually or in the aggregate, reasonably be
expected to have a Material Adverse Effect.
(c) Subsidiaries. The Company has no Subsidiaries except those listed in
the attached Annex I, which correctly sets forth the jurisdiction of
incorporation and the percentage of the outstanding Voting Stock of each
Subsidiary which is owned, of record or beneficially, by the Company and/or one
or more Subsidiaries. Each Restricted Subsidiary is so designated on Annex I.
Each Subsidiary has been duly organized and is validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization and
is duly licensed or qualified and in good standing as a foreign corporation or
other organization in each other jurisdiction where the nature of the business
transacted by it or the character of its properties owned or leased makes such
qualification or licensing necessary, except for jurisdictions, individually or
in the aggregate, where the failure to be so licensed or qualified would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect. Each Subsidiary has all requisite corporate power and authority
to own and operate its properties and to carry on its business as now conducted
and as presently proposed to be conducted. The Company and each Subsidiary have
good and marketable title to all of the shares they purport to own of the
capital stock of each Subsidiary, free and clear in each case of any Lien,
except as otherwise disclosed in the attached Annex IV or in the Private
Placement Memorandum, and all such shares have been duly issued and are fully
paid and nonassessable.
(d) Financial Statements. The consolidated balance sheets of the Company
and its Subsidiaries as of February 28 or 29, 1996, 1995, 1994, 1993 and 1992,
and the related consolidated statements of earnings, shareholders' equity and
cash flows for the years ended on such dates, accompanied by the reports and
unqualified opinions of Arthur Andersen LLP, independent public accountants,
copies of which have heretofore been delivered to you, were prepared in
conformity with GAAP consistently applied throughout the periods involved
(except as otherwise noted therein) and present fairly the consolidated
financial position of the Company and its Subsidiaries on such dates and their
consolidated results of operations and cash flows for the years then ended.
The unaudited consolidated balance sheet of the Company and its
Subsidiaries as of November 30, 1996 and the unaudited consolidated statements
of earnings and the unaudited consolidated statements of cash flows for the nine
months ended November 30, 1996 and 1995, copies of which have heretofore been
delivered to you, were prepared in conformity with GAAP except for year end
adjustments consistently applied throughout the periods involved and present
fairly the consolidated financial position of the Company and its Subsidiaries
on such date and their consolidated results of operations and cash flows for the
periods ended on such dates.
5
<PAGE>
(e) No Contingent Liabilities or Adverse Changes. Except as disclosed in
the Private Placement Memorandum, neither the Company nor any of its
Subsidiaries has any contingent liabilities which, individually or in the
aggregate, are material to the Company and its Subsidiaries taken as a whole,
other than as indicated in the most recent audited financial statements
described in Section 3.1(d), and, except as set forth in such financial
statements, since February 29, 1996 there have been no adverse changes in the
condition, financial or otherwise, of the Company and its Subsidiaries, taken as
a whole, except changes occurring in the ordinary course of business, none of
which, individually or in the aggregate, are material.
(f) No Pending Litigation or Proceedings. Except as disclosed in the
Private Placement Memorandum, there are no actions, suits or proceedings at law
or in equity or before or by any Federal, state, municipal or other governmental
or administrative instrumentality or other agency, domestic or foreign, pending
or, to the knowledge of the Company, threatened against the Company or any
Subsidiary which would be reasonably expected to result in a Material Adverse
Effect.
(g) Compliance with Law. (i) Neither the Company nor any Subsidiary is:
(x) in default with respect to any order, writ, injunction or decree of any
court to which it is a party; or (y) in default in any respect under any law,
rule, regulation, ordinance or order, relating to its or their respective
businesses which default would reasonably be expected to have a Material Adverse
Effect.
(ii) None of the Company, any Subsidiary, or any Affiliate of the
Company is an entity defined as a "designated national" within the meaning of
the Foreign Assets Control Regulations, 31 C.F.R. Chapter V, or is in material
violation of any Federal statute or Presidential Executive Order, or any rules
or regulations of any department, agency or administrative body promulgated
under any such statute or Order, concerning trade or other relations with any
foreign country or any citizen or national thereof or the ownership or operation
of any property.
(h) ERISA. (i) The Company and each ERISA Affiliate have operated and
administered each Plan in compliance in all material respects with all
applicable laws. Neither the Company nor any ERISA Affiliate has incurred any
material liability pursuant to Title I or IV of ERISA or the penalty or excise
tax provisions of the Code relating to employee benefit plans (as defined in
Section 3 of ERISA), and no event, transaction or condition has occurred or
exists that could reasonably be expected to result in the incurrence of any such
liability by the Company or any ERISA Affiliate, or in the imposition of any
Lien on any of the rights, properties or assets of the Company or any ERISA
Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty
or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than
such liabilities or Liens as would not be individually or in the aggregate
material.
(ii) No single Plan is underfunded and the Plans in the aggregate are
not underfunded. The term "benefit liabilities" has the meaning specified in
section 4001 of
6
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ERISA and the terms "current value" and "present value" have the meaning
specified in section 3 of ERISA.
(iii) The Company and its ERISA Affiliates have not incurred
withdrawal liabilities (and are not subject to contingent withdrawal
liabilities) under section 4201 or 4204 of ERISA in respect of Multiemployer
Plans that individually or in the aggregate are material.
(iv) The expected postretirement benefit obligation (determined
as of the last day of the Company's most recently ended fiscal year in
accordance with Financial Accounting Standards Board Statement No. 106, without
regard to liabilities attributable to continuation coverage mandated by section
4980B of the Code) of the Company and its Subsidiaries, is not material.
(v) The execution and delivery of this Agreement and the
issuance and sale of the Notes hereunder will not involve any transaction that
is subject to the prohibitions of section 406 of ERISA or in connection with
which a tax could be imposed pursuant to section 4975(c)(1)(A)-(D) of the Code.
The representation by the Company in the first sentence of this clause (v) is
made in reliance upon and subject to the accuracy of your representation in
Section 3.2(b) as to the sources of the funds used to pay the purchase price of
the Notes to be purchased by you.
(i) Title to Properties. Except as disclosed on the most recent audited
consolidated balance sheet described in Section 3.1(d), the Company and each
Subsidiary have (i) good and sufficient title in fee simple or its equivalent
under applicable law to all the real property owned by them and (ii) good and
sufficient title to all of the other property reflected in such balance sheet or
subsequently acquired by the Company or any Subsidiary (except as sold or
otherwise disposed of in the ordinary course of business), in each case free
from all Liens or defects in title except those permitted by Section 7.4.
(j) Leases. The Company and each Subsidiary enjoy peaceful and undisturbed
possession under all leases under which the Company or such Subsidiary is a
lessee or is operating, except for leases the termination of which, individually
or in the aggregate, would not have a Material Adverse Effect.
(k) Franchises, Patents, Trademarks and Other Rights. The Company and each
Subsidiary have all franchises, permits, licenses and other authority necessary
to carry on or used in their businesses as now being conducted, and none are in
default under any of such franchises, permits, licenses or other authority
except for franchises, permits, licenses or other authority, the lack or loss of
which, or default under, individually or in the aggregate, would not reasonably
be expected to have a Material Adverse Effect. The Company and each Subsidiary
own or possess or have the right to use all patents, trademarks, service marks,
trade names, copyrights, licenses and rights with respect to the foregoing
necessary for, or used by them in, the present conduct of their businesses.
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<PAGE>
(l) Authorization. This Agreement and the Notes have been duly authorized
by all necessary corporate action on the part of the Company and the Agreement
does, and the Notes when issued will, constitute the legal, valid and binding
obligations of the Company, enforceable in accordance with their terms, except
to the extent that enforcement of this Agreement and the Notes may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of
general application relating to or affecting the enforcement of the rights of
creditors or by equitable principles, regardless of whether enforcement is
sought in equity or at law. The sale of the Notes, the execution and delivery of
the Agreement and compliance by the Company with all of the provisions of this
Agreement and the Notes (i) will not violate any provisions of any law, rule,
regulation or ordinance or any order, judgment, decree or ruling of any court,
arbitrator, governmental authority or agency applicable to the Company, and (ii)
will not result in any breach of any of the provisions of, constitute a default
under, or result in the creation of any Lien on any property of the Company or
any Subsidiary under the provisions of any charter document, by-law, loan
agreement or other material agreement or material instrument to which the
Company or any Subsidiary is a party or by which any of them or their property
are bound. The Subsidiary Guaranty has been duly authorized by all necessary
corporate action on the part of each Subsidiary Guarantor, and constitutes the
legal, valid and binding obligation of such Subsidiary Guarantor enforceable in
accordance with its terms, except to the extent that the enforcement thereof may
be limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws of general application relating to or affecting the enforcement of
the rights of creditors or by equitable principles, regardless of whether
enforcement is sought in equity or at law. The execution, delivery and
performance by each Subsidiary Guarantor of the Subsidiary Guaranty, (i) will
not violate any provisions of any law, rule, regulation or ordinance or any
order, judgment, decree or ruling of any court, arbitrator, governmental
authority or agency applicable to the Subsidiary Guarantor and will not result
in any breach of any of the provisions of, or constitute a default under, or
result in the creation of any Lien on any property of such Subsidiary Guarantor
under the provisions of, any charter document, by-law, loan, agreement or any
other material agreement or material instrument to which it is a party or by
which it or its property may be bound or affected.
(m) No Defaults. No event has occurred and no condition exists which, upon
the issuance of the Notes, would constitute a Default or an Event of Default
under this Agreement. Neither the Company nor any Subsidiary is in default under
any charter document, by-law, loan agreement or other material agreement or
material instrument to which it is a party or by which it or its property is
bound.
(n) Governmental Consent. None of (i) the nature of the Company or any of
its Subsidiaries, their respective businesses or properties, (ii) any
relationship between the Company or any of its Subsidiaries and any other
Person, or (iii) any circumstances relative to the offer, issuance, sale or
delivery of the Notes or execution and delivery of this Agreement is such as to
require a consent, approval or authorization of, withholding of objection on the
part of, or filing (except for the filing by the Company of Form 8 in the
Province of Manitoba, Canada (the "Form 8")), registration or qualification
with, any governmental authority on the part of the Company or any of its
Subsidiaries in connection with the execution and delivery of this Agreement,
the Subsidiary Guaranty, or the offer, issuance, sale or delivery of the Notes.
8
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(o) Taxes. All tax returns required to be filed by the Company or any
Subsidiary in any jurisdiction have been filed, and all taxes, assessments, fees
and other governmental charges upon the Company or any Subsidiary, or upon any
of their respective properties, income or franchises, which are due and payable,
have been paid timely or within appropriate extension periods or contested in
good faith by appropriate proceedings that stay the collection thereof by the
applicable governmental authority during the period of the contest and as to
which adequate reserves are maintained in accordance with generally accepted
accounting principles. The Federal income tax liability of the Company and its
Subsidiaries for all taxable years up to and including the taxable year ended
February 28, 1992 have been finally resolved and no material controversy in
respect of additional taxes due since such date is pending or, to the Company's
knowledge, threatened. The provisions for taxes on the books of the Company and
each Subsidiary are adequate for all open years and for the current fiscal
period.
(p) Status under Certain Statutes. Neither the Company nor any Subsidiary
is: (i) a "public utility company" or a "holding company," or an "affiliate" or
a "subsidiary company" of a "holding company," or an "affiliate" of such a
"subsidiary company," as such terms are defined in the Public Utility Holding
Company Act of 1935, as amended, (ii) a "public utility" as defined in the
Federal Power Act, as amended, or (iii) an "investment company" or an
"affiliated person" thereof or an "affiliated person" of any such "affiliated
person," as such terms are defined in the Investment Company Act of 1940, as
amended.
(q) Private Offering. Neither the Company nor BancAmerica Securities,
Inc., the only other Person authorized or employed by the Company as agent,
broker, dealer or otherwise in connection with the offering of the Notes or any
similar security of the Company, has offered any of the Notes or any similar
security of the Company for sale to, solicited offers to buy any thereof from,
or otherwise approached or negotiated with respect thereto with any prospective
purchaser, other than 3 institutional investors (excluding the Purchasers),
including the Purchasers, each of whom was offered all or a portion of the Notes
at private sale for investment. Neither the Company nor anyone acting on its
authorization will offer the Notes, or any part thereof or any similar security
for issuance or sale to, or solicit any offer to acquire any of the same from,
anyone so as to bring the issuance and sale of the Notes within the provisions
of Section 5 of the Securities Act.
(r) Effect of Other Instruments. Neither the Company nor any Subsidiary is
bound by any agreement or instrument or subject to any charter which in any way
restricts any Subsidiary's ability to pay dividends or make advances to the
Company
(s) Use of Proceeds. The Company will apply the net proceeds from the sale
of the Notes to refinance existing Indebtedness, repurchase the Company's common
stock as described in the Private Placement Memorandum and for general corporate
purposes. None of the transactions contemplated in this Agreement (including,
without limitation thereof, the use of the proceeds from the sale of the Notes)
will violate or result in a violation of Section 7 of the Exchange Act, or any
regulations issued pursuant thereto, including, without limitation, Regulations
G, T and X of the Board of Governors of the Federal Reserve System (12 C.F.R.,
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Chapter II). None of the proceeds from the sale of the Notes will be used to
purchase or carry or refinance any borrowing the proceeds of which were used to
purchase or carry any "margin stock" or "margin security" in violation of
Regulations G, T or X.
(t) Condition of Property. All of the facilities of the Company and its
Subsidiaries are in sound operating condition and repair, except for facilities
being repaired in the ordinary course of business or facilities which,
individually or in the aggregate, are not material to the Company and its
Subsidiaries, taken as a whole.
(u) Books and Records. The Company and each Subsidiary (i) maintain books,
records and accounts in reasonable detail which accurately and fairly reflect
their respective transactions and business affairs in all material respects, and
(ii) maintain a system of internal accounting controls sufficient to provide
reasonable assurances that transactions are executed in accordance with
management's general or specific authorization and to permit preparation of
financial statements in accordance with GAAP.
(v) Environmental Compliance. Except as disclosed in the Private Placement
Memorandum, (i) the Company and each Subsidiary (including their operations and
the conditions at or in their Facilities) are in compliance with all
Environmental Laws except for violations which, individually or in the
aggregate, would reasonably be expected not to have a Material Adverse Effect;
(ii) the Company and each Subsidiary have obtained all permits under
Environmental Laws necessary to their respective operations, all such permits
are in full force and effect; and the Company and each Subsidiary are in
compliance with all material terms and conditions of such permits except for
such permits, individually or in the aggregate, the lack of which or
noncompliance with which would reasonably be expected not to have a Material
Adverse Effect; and (iii) neither the Company nor any of its Subsidiaries has
any material liability (contingent or otherwise) or knowledge of any
Environmental Claim against the Company, any Subsidiary or any of their
Facilities in connection with any Release of any Hazardous Material or the
existence of any Hazardous Material on, under or about any Facility that could
give rise to an Environmental Claim or proceedings that would reasonably be
expected to have a Material Adverse Effect.
(w) Indebtedness. Annex II-A sets forth a list of all outstanding
Indebtedness of the Company and its Subsidiaries as of the date of January 31,
1997, since which date there has been no material change in the amounts,
interest rates, sinking funds, installment payments or maturities thereof. Annex
II-B will set forth a list of all outstanding Indebtedness of the Company and
its Subsidiaries as of the date of March 31, 1997, as of which date other than
as otherwise disclosed in Annex II-B, there will have been no material change in
the amounts, interest rates, sinking funds, installment payments or maturities
thereof. Neither the Company nor any Subsidiary is in default, and no waiver of
default is currently in effect, in the payment of any principal or interest on
any Indebtedness of the Company or such Subsidiary and no event or condition
exists with respect to any Indebtedness of the Company or any Subsidiary that
would permit (or that with notice or the lapse of time, or both, would permit)
one or more Persons to cause such Indebtedness to become due and payable before
its stated maturity or before its regularly scheduled dates of payment. With
respect to the Series A Closing Date, except as
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disclosed in Annex II-A, and with respect to the Series B Closing Date, except
as disclosed in Annex II-B, neither the Company nor any Subsidiary has agreed or
consented to cause or permit in the future (upon the happening of a contingency
or otherwise) any of its property, whether now owned or hereafter acquired, to
be subject to a Lien not permitted by Section 7.4.
(x) Full Disclosure. None of the Private Placement Memorandum, the
financial statements referred to in Section 3.1(d), the Company's Annual Report
on Form 10-K for the year ended February 29, 1996, its Quarterly Report on Form
10-Q for the period ended November 30, 1996, its Annual Reports to Shareholders
for the years ended February 28 or 29, 1992, 1993, 1994, 1995 and 1996, this
Agreement, any other written statement or document furnished by or on behalf of
the Company to you in connection with the negotiation of the sale of the Notes
and the execution and delivery of the Agreement, taken together, contain any
untrue statement of a material fact or omit a material fact necessary to make
the statements contained therein or herein not misleading in light of the
circumstances under which they were made. There is no fact known, or which with
reasonable diligence would be known by any Responsible Officer of the Company
that the Company has not disclosed to you and that has a Material Adverse Effect
or, so far as the Company can now reasonably foresee, will have, individually or
in the aggregate, a Material Adverse Effect.
3.2. Representations of the Purchaser. (a) You represent, and in
entering into this Agreement the Company understands, that you are acquiring the
Notes for your own account and not with a view to any distribution thereof, and
that you have no present intention of selling, negotiating or otherwise
disposing of the Notes, it being understood, however, that the disposition of
your property shall at all times be and remain within your control; subject,
however, to compliance with Federal securities laws. You acknowledge that the
Notes have not been registered under the Securities Act or any state securities
laws and you understand that the Notes must be held indefinitely unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available and all applicable state securities laws are complied
with. You have been advised that the Company does not contemplate registering,
and is not legally required to register, the Notes under the Securities Act or
any other securities laws.
(b) You further represent that, as of the date of this Agreement, at
least one of the following statements is an accurate representation as to each
source of funds (a "Source") to be used by you to pay the purchase price of the
Notes to be purchased by you hereunder:
(i) if you are an insurance company, the Source does not include
assets allocated to any separate account maintained by you in which any
employee benefit plan (or its related trust) has any interest, other than a
separate account that is maintained solely in connection with your fixed
contractual obligations under which the amounts payable, or credited, to
such plan and to any participant or beneficiary of such plan (including any
annuitant) are not affected in any manner by the investment performance of
the separate account;
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(ii) the Source is either (i) an insurance company pooled
separate account, within the meaning of Prohibited Transaction Exemption
("PTE") 90-1 (issued January 29, 1990), or (ii) a bank collective
investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991)
and, except as you have disclosed to the Company in writing pursuant to
this paragraph (b), no employee benefit plan or group of plans maintained
by the same employer or employee organization beneficially owns more than
10% of all assets allocated to such pooled separate account or collective
investment fund;
(iii) the Source constitutes assets of an "investment fund"
(within the meaning of Part V of the QPAM Exemption) managed by a
"qualified professional asset manager" or "QPAM" (within the meaning of
Part V of the QPAM Exemption), no employee benefit plan's assets that are
included in such investment fund, when combined with the assets of all
other employee benefit plans established or maintained by the same employer
or by an affiliate (within the meaning of Section V(c)(1) of the QPAM
Exemption) of such employer or by the same employee organization and
managed by such QPAM, exceed 20% of the total client assets managed by such
QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are
satisfied, neither the QPAM nor a person controlling or controlled by the
QPAM (applying the definition of "control" in Section V(e) of the QPAM
Exemption) owns a 5% or more interest in the Company and (i) the identity
of such QPAM and (ii) the names of all employee benefit plans whose assets
are included in such investment fund have been disclosed to the Company in
writing pursuant to this clause (iii);
(iv) the Source is a governmental plan;
(v) the Source is one or more employee benefit plans, or a
separate account or trust fund comprised of one or more employee benefit
plans, each of which has been identified to the Company in writing pursuant
to this paragraph (b)(v);
(vi) the Source does not include assets of any employee benefit
plan, other than a plan exempt from the coverage of ERISA; or
(vii) if you are an insurance company and the Source includes
assets of your general account, such acquisition would be exempt under PTE
95-60 (issued July 12, 1995).
As used in this Section 3.2(b), the terms "employee benefit plan," "governmental
plan," "party in interest" and "separate account" shall have the respective
meanings assigned to such terms in Section 3 of ERISA.
(c) You represent that you are an accredited investor within the
meaning of Regulation D under the Securities Act.
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(d) You represent that you (i) have received the Private Placement
Memorandum, (ii) have had an opportunity to discuss the Company's business,
management and financial affairs with directors, officers and management of the
Company, (iii) have had the opportunity to review the Company's operations and
facilities and (iv) have also had the opportunity to ask questions of and
receive answers from, the Company and its management regarding the terms and
conditions of this investment.
(S)4. CLOSING CONDITIONS
Your respective obligations to purchase the respective Notes on each
of the applicable Closing Dates shall be subject to the performance by the
Company of its agreements hereunder which are to be performed at or prior to the
time of delivery of the respective Notes, and to the following conditions to be
satisfied on or before each of the respective Closing Dates:
4.1. Representations and Warranties. The representations and
warranties of the Company contained in this Agreement, in the certificates
delivered pursuant to this Section 4 or otherwise made in connection herewith
shall be true and correct in all material respects on or as of each of the
Closing Dates and the Company shall have delivered to the Purchasers of the
Series A and Series B Notes on the Series A Closing Date and to the Purchasers
of the Series B Notes on the Series B Closing Date a certificate to such effect,
dated as of such Closing Date and executed by the president, the chief financial
officer or the chief accounting officer of the Company.
4.2. Legal Opinions. Each Purchaser shall have received from
Gardner, Carton & Douglas, who is acting as your special counsel in this
transaction, and from Kirkland & Ellis, counsel to the Company, their opinions,
dated as of each Closing Date (the opinion dated as of the Series A Closing Date
to be delivered to all Purchasers of Notes and the opinion dated the Series B
Closing Date to be delivered to the Purchasers of the Series B Notes), in form
and substance reasonably satisfactory to you and covering substantially the
matters set forth or provided in the attached Exhibits B and C, respectively.
4.3. Events of Default. No event shall have occurred and be
continuing as of such Closing Date which would constitute a Default or an Event
of Default, and the Company shall have delivered to you a certificate to such
effect, dated as of the Closing Dates and executed by the president, the chief
financial officer or the chief accounting officer of the Company.
4.4. Payment of Fees and Expenses. The Company shall have paid all
reasonable and documented fees, expenses, costs and charges, including the
reasonable fees and expenses of Gardner, Carton & Douglas, your special counsel,
incurred by you through each of the Closing Dates and incident to the
proceedings in connection with, and transactions contemplated by, this Agreement
and the Notes.
4.5. Legality of Investment. Your acquisition of the Notes shall
constitute a legal investment as of the Closing Date on which your purchase is
consummated under the laws and
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regulations of each jurisdiction to which you may be subject (without resort to
any "basket" or "leeway" provision which permits the making of an investment
without restrictions as to the character of the particular investment being
made), and such acquisition shall not subject you to any penalty or other
onerous condition in or pursuant to any such law or regulation. If requested by
you, you shall have received an Officer's Certificate certifying as to such
matters of fact as you may reasonably specify to enable you to determine such
purchase is permitted.
4.6. Subsidiary Guaranty. The Subsidiary Guarantors shall have executed
and delivered the Subsidiary Guaranty.
4.7. Private Placement Number. A private placement number with respect to
the Notes shall have been issued by S&P.
4.8. Sale of All Notes. As a condition to the purchase of any Series A
Note, the Company will complete and close the sale of $26,500,000 principal
amount of Series A Notes on February 27, 1997 and $3,500,000 principal amount of
Series A Notes on February 28, 1997. The purchase of the Series B Notes by the
Purchasers thereof is conditional upon the purchase by the Purchasers of all of
the Series A Notes.
4.9. Proceedings and Documents. All corporate proceedings taken in
connection with the transactions contemplated by this Agreement and all
documents necessary to the consummation of such transactions shall be reasonably
satisfactory in form and substance to you and your special counsel, and you and
your special counsel shall have received copies (executed or certified as may be
appropriate) of all legal documents or proceedings which you and they may
reasonably request.
(S)5. INTERPRETATION OF AGREEMENT
5.1. Certain Terms Defined. The terms hereinafter set forth when used in
this Agreement shall have the following meanings:
Affiliate - Any Person (other than a Restricted Subsidiary) (i) who is a
director or executive officer of the Company or any Subsidiary, (ii) which
directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, the Company, (iii) which
beneficially owns or holds securities representing 10% or more of the combined
voting power of the Voting Stock of the Company or any Subsidiary, or (iv) of
which securities representing 10% or more of the combined voting power of its
Voting Stock (or in the case of a Person not a corporation, 10% or more of its
equity) is beneficially owned or held by the Company or any Subsidiary. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise.
Agreement - As defined in Section 1.1.
---------
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Business Day - Any day, other than Saturday, Sunday or a legal holiday or
any other day on which banking institutions in Chicago, Illinois generally are
authorized by law to close.
Capitalized Lease - Any lease the obligation for Rentals with respect to
which, in accordance with GAAP, would be required to be capitalized on a balance
sheet of the lessee or for which the amount of the asset and liability
thereunder, as if so capitalized, would be required to be disclosed in a note to
such balance sheet.
Capitalized Lease Obligation - Any amounts required to be capitalized under
any Capitalized Lease.
Closing Dates - As defined in Section 1.2.
Code - The Internal Revenue Code of 1986, as amended.
Consolidated Adjusted Net Worth - Without duplication, the consolidated
shareowners' equity of the Company and its Restricted Subsidiaries determined in
accordance with GAAP, less Restricted Investments in excess of 10% of
consolidated shareowners' equity as so determined.
Consolidated Adjusted Total Capitalization - Without duplication, on a
consolidated basis for the Company and its Restricted Subsidiaries (i) the sum
of (a) total shareowners' equity determined in accordance with GAAP (including
common stock, additional paid-in capital, retained earnings after deducting
treasury stock and cumulative foreign currency translation adjustments), (b)
Consolidated Senior Debt, and (c) Subordinated Debt, less (ii) Restricted
Investments in excess of 10% of consolidated shareholders' equity as so
determined.
Consolidated Senior Debt - All Indebtedness of the Company and its
Subsidiaries on a consolidated basis other than Subordinated Debt.
Consolidated Total Assets - The total assets of the Company and its
Restricted Subsidiaries determined on a consolidated basis in accordance with
GAAP.
Default - Any event which, with the lapse of time or the giving of notice,
or both, would become an Event of Default.
Determination Date - One Business Day before the date fixed for a
prepayment pursuant to Section 2.2(a) or Section 7.6 or the date of declaration
pursuant to Section 8.2.
Environmental Claim - Any notice of violation, claim, demand, abatement
order or other order by any Person for any damage, including personal injury
(including sickness, disease or death), tangible or intangible property damage,
contribution, indemnity, indirect or consequential damages, damage to the
environment, nuisance, pollution, contamination or other adverse effects on the
environment, or for fines, penalties or restrictions, resulting from or based
upon (i) the existence of a Release (whether sudden or non-sudden or accidental
or non-accidental) of, or
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exposure to, any Hazardous Material in, into or onto the environment at, in, by,
from or related to any Facility, (ii) the use, handling, transportation,
storage, treatment or disposal of Hazardous Materials in connection with the
operation of any Facility, or (iii) the violation, or alleged violation, of any
statute, rule, regulation, ordinance, order, permit, license or authorization of
or from any governmental authority, agency or court relating to environmental
matters pertaining to the Facilities.
Environmental Laws - All laws relating to pollution or protection of the
environment, including those relating to (i) fines, orders, injunctions,
penalties, damages, contribution, cost recovery compensation, losses or injuries
resulting from the Release or threatened Release of Hazardous Materials and to
the generation, use, storage, transportation, or disposal of Hazardous
Materials, in any manner applicable to the Company or any of its Subsidiaries or
any of their respective properties, including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act (42 U.S.C.
(S) 9601 et seq.), the Hazardous Material Transportation Act (49 U.S.C. (S) 1801
et seq.), the Resource Conservation and Recovery Act (42 U.S.C. (S) 6901 et
seq.), the Federal Water Pollution Control Act (33 U.S.C. (S) 1251 et seq.), the
Clean Air Act (42 U.S.C. (S) 7401 et seq.), the Toxic Substances Control Act (15
U.S.C. (S) 2601 et seq.), the Emergency Planning and Community Right-to-Know Act
(42 U.S.C. (S) 11001 et seq.), and (ii) environmental protection, including the
National Environmental Policy Act (42 U.S.C. (S) 4321 et seq.), and comparable
state laws, each as amended or supplemented, and any similar or analogous local,
state and federal statutes and regulations promulgated pursuant thereto, each as
in effect as of any applicable Closing Date.
ERISA - The Employee Retirement Income Act of 1974, as amended from time to
time and any successor statute.
ERISA Affiliate - The Company and (i) any corporation that is a member of a
controlled group of corporations within the meaning of Section 414(b) of the
Code of which the Company is a member, (ii) any trade or business (whether or
not incorporated) which is a member of a group of trades or businesses under
common control within the meaning of Section 414(c) of the Code of which the
Company is a member, and (iii) any member of an affiliated service group within
the meaning of Section 414(m) or (o) of the Code of which the Company, any
corporation described in clause (i) above or any trade or business described in
clause (ii) above is a member.
Event of Default - As defined in Section 8.1.
Exchange Act - The Securities Exchange Act of 1934, as amended.
Facility - Any and all real property (including all buildings, fixtures or
other improvements located thereon) now or heretofore or hereafter owned,
leased, operated or used (under permit or otherwise) by the Company or any of
its Subsidiaries.
GAAP - Generally accepted accounting principles in effect from time to time
in the United States.
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Guaranties - All obligations (other than endorsements in the ordinary
course of business of negotiable instruments for deposit or collection) of a
Person guaranteeing, or in effect guaranteeing, any Indebtedness, dividend or
other financial obligation of any other Person in any manner, whether directly
or indirectly, including, without limitation, all obligations incurred through
an agreement, contingent or otherwise, by such Person: (i) to purchase such
Indebtedness or obligation or any property or assets constituting security
therefor; (ii) to advance or supply funds (x) for the purchase or payment of
such Indebtedness or financial obligation, (y) to maintain working capital or
other balance sheet condition, or (z) otherwise to advance or make available
funds for the purchase or payment of such Indebtedness or financial obligation;
(iii) to lease property or to purchase securities or other property or services
primarily for the purpose of assuring the owner of such Indebtedness or
financial obligation against loss in respect thereof; or (iv) otherwise to
assure the owner of the Indebtedness or financial obligation against loss in
respect thereof. For the purposes of all computations made under this Agreement,
Guaranties in respect of any Indebtedness for borrowed money shall be deemed to
be Indebtedness equal to the principal amount of such Indebtedness but only to
the extent to which such Indebtedness has been guaranteed.
Hazardous Materials - (i) Any chemical, material or substance defined as or
included in the definition of "hazardous substances," "hazardous wastes,"
"hazardous materials," "extremely hazardous waste," "restricted hazardous
waste," or "toxic substances" or words of similar import under any Environmental
Laws; (ii) any oil, petroleum or petroleum derived substance, any drilling
fluid, produced water or other waste associated with the exploration,
development or production of crude oil, any flammable substance or explosive,
any radioactive material, any hazardous waste or substance, any toxic waste or
substance or any other material or pollutant that (x) poses a hazard to any
property of the Company or any of its Subsidiaries or to Persons on or about
such property or (y) causes such property to be in violation of any
Environmental Law; (iii) any friable asbestos, urea formaldehyde foam
insulation, electrical equipment which contains any oil or dielectric fluid with
levels of polychlorinated biphenyls in excess of fifty parts per million; and
(iv) any other chemical, material or substance, exposure to which is prohibited,
limited or regulated pursuant to Environmental Laws.
Indebtedness - Without duplication, on a consolidated basis for the Company
and its Restricted Subsidiaries, (i) obligations for borrowed money, including,
without limitation, (a) bonds and notes and (b) obligations for borrowed money
which are non-recourse to the credit of such Person but which are secured by any
asset of such Person, (ii) obligations for deferred purchase price of any
property or service, except accounts payable arising in the ordinary course of
business, (iii) the face amount of all letters of credit issued and all drafts
thereunder, other than undrawn amounts under letters of credit used in the
ordinary course of business, (iv) Capitalized Lease Obligations, (v)
Indebtedness secured by Liens on property, and (vi) Guaranties.
Institutional Holder - Any bank, trust company, insurance company, pension
fund, mutual fund or other similar financial institution, including, without
limiting the foregoing, any "qualified institutional buyer" within the meaning
of Rule 144A under the Securities Act, which is or becomes a holder of any Note.
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Investment Grade - (a) For short-term Indebtedness, a rating of "A-2" or
better by S&P or "P-2" or better by Moody's, or (b) for long-term Indebtedness,
a rating of "BBB-" or better by S&P or "Baa3" or better by Moody's.
Investments - All investments made, in cash or by delivery of property,
directly or indirectly, by any Person, in any other Person, whether by
acquisition of shares of capital stock, indebtedness or other obligations or
securities or by loan, advance, capital contribution or otherwise; provided,
however, that "Investments" shall not mean or include investments in property to
be used or consumed in the ordinary course of business.
Lien - Any mortgage, pledge, security interest, encumbrance, lien or charge
of any kind, including any agreement to grant any of the foregoing, any
conditional sale or other title retention agreement, any lease in the nature
thereof, including a Capitalized Lease.
Make-Whole Amount - As of any Determination Date, to the extent that the
Reinvestment Yield on such Determination Date is lower than the interest rate
payable on or in respect of the Notes, the excess of (a) the present value of
the principal and interest payments to be foregone by any prepayment (exclusive
of accrued interest on such Notes through the date of prepayment) on such Notes
(taking into account the manner of application of such prepayment required by
Section 2.2(b)), determined by discounting (semi-annually on the basis of a 360-
day year composed of twelve 30-day months), such payments at a rate that is
equal to the Reinvestment Yield, over (b) the aggregate principal amount of such
Notes then to be prepaid or paid. To the extent that the Reinvestment Yield on
any Determination Date is equal to or higher than the interest rate payable on
or in respect of such Notes, the Make-Whole Amount shall be zero.
Material Adverse Effect - A material adverse effect on (i) the business,
properties, operations or condition, financial or otherwise, of the Company and
its Restricted Subsidiaries, taken as a whole, (ii) the ability of the Company
to perform its obligations under this Agreement or the Notes, (iii) the ability
of any Subsidiary Guarantor to perform its obligations under the Subsidiary
Guaranty, or (iv) the validity or enforceability of this Agreement or the Notes.
Material Subsidiary - Any Restricted Subsidiary which either individually
or in the aggregate (i) accounts for more than 5% of the consolidated assets of
the Company and its Restricted Subsidiaries, determined in accordance with GAAP
or (ii) accounts for more than 5% of the consolidated gross revenue of the
Company and its Restricted Subsidiaries, determined in accordance with GAAP.
Moody's - Moody's Investor Services, Inc.
Multiemployer Plan - As defined in Section 3.1(h).
Noteholder - Any holder of a Note.
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Notes - As defined in Section 1.1.
Partnership - Walbridge Coatings Partnership, a general partnership
organized under the laws of Illinois.
PBGC - The Pension Benefit Guaranty Corporation or any successor thereto.
Person - Any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization or
government, or any governmental authority, agency or political subdivision.
Plan - Any employee pension benefit plan, as defined in Section 3(2) of
ERISA, that has been established by, or contributed to, or is maintained by the
Company or any ERISA Affiliate.
Private Placement Memorandum - The Private Placement Memorandum of the
Company dated January 1997 including all exhibits and attachments thereto.
Purchaser - As defined in Section 1.1.
Reinvestment Yield - The sum of (i) 0.50% plus (ii) the per annum yield
reported, as of 10:00 A.M. (New York City time) on the Determination Date, on
the Cantor-Fitzgerald Brokerage Screen available on the Bloomberg and Knight
Ridder Information System (or, if not available, any other nationally recognized
trading screen reporting on-line intraday trading in United States government
securities) for actively traded U.S. Treasury securities having a final maturity
equal to the Weighted Average Life to Maturity of the Notes then being prepaid
or paid as of the date of prepayment or payment, rounded to the nearest month,
or if such yields shall not be reported as of such time or the yields reported
as of such time are not ascertainable in accordance with the preceding clause,
then the arithmetic mean of the yields published in the statistical release
designated H.15(519) (or any successor publication) of the Board of Governors of
the Federal Reserve System under the caption "U.S. Government Securities--
Treasury Constant Maturities" (the "statistical release") for the maturity
corresponding to the remaining Weighted Average Life to Maturity of the Notes as
of the date of such prepayment or payment rounded to the nearest month. For
purposes of calculating the Reinvestment Yield, the most recent weekly
statistical release published prior to the applicable Determination Date shall
be used. In the event the statistical release is not published, the arithmetic
mean of such reasonably comparable index as may be designated by the holders of
at least 51% in aggregate principal amount of the Notes, for the maturity
corresponding to the remaining Weighted Average Life to Maturity of the Notes as
of the date of prepayment or payment, as the case may be, rounded to the nearest
month shall be used. If no maturity exactly corresponding to such rounded
Weighted Average Life to Maturity shall appear therein, yields for the two most
closely corresponding published maturities (one of which occurs prior and the
other subsequent to the Weighted Average Life to Maturity) shall be calculated
pursuant to the foregoing sentence and the Reinvestment Yield shall be
interpolated from such yields on a straight-line basis (rounding, in each of
such relevant periods, to the nearest month).
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Release - Any release, spill, emission, leaking, pumping, pouring,
emptying, dumping, injection, escaping, deposit, disposal, discharge, dispersal,
leaching or migration into the environment (including the abandonment or
disposal of any barrel, container or other closed receptacle containing any
Hazardous Material), or into or out of any Facility, including the movement of
any released Hazardous Material through the air, soil, surface water,
groundwater or property.
Rentals - As of the date of any determination thereof, all fixed payments
(including all payments which the lessee is obligated to make to the lessor on
termination of the lease or surrender of the property) payable by the Company or
a Restricted Subsidiary, as lessee or sublessee under a lease of real or
personal property, but exclusive of any amounts required to be paid by the
Company or a Restricted Subsidiary (whether or not designated as rents or
additional rents) on account of maintenance, repairs, insurance, taxes,
assessments, amortization and similar charges. Fixed rents under any so-called
"percentage leases" shall be computed on the basis of the minimum rents, if any,
required to be paid by the lessee, regardless of sales volume or gross revenues.
Responsible Officer - (i) The chief executive officer, chief operating
officer, chief financial officer and any senior vice president of the Company
and (ii) any officer of the Company with responsibility for the administration
of the relevant portion of this Agreement.
Restricted Investments - All Investments of the Company or any Restricted
Subsidiary except:
(i) property of the Company or any Restricted Subsidiary to be used
in the ordinary course of business;
(ii) assets arising from the sale of goods and services in the
ordinary course of business;
(iii) loans or capital contributions to the Partnership in an
aggregate amount not to exceed $5,000,000 in any fiscal year;
(iv) Investments in, and advances to, Restricted Subsidiaries, or
Investments in any corporation, which after giving effect to such Investment,
becomes a Restricted Subsidiary (in each case whether by contributions to
capital, loans, advances, or guarantees);
(v) advances made in the ordinary course of business to officers and
employees (not to exceed, in the aggregate, $1,000,000), and to subcontractors
or suppliers;
(vi) shares of stock or other securities received in settlement for
claims arising in the ordinary course of business;
(vii) Investments in obligations issued by or fully guaranteed by the
United States of America or an agency thereof maturing within three years after
the date of issuance;
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(viii) Investments in tax-exempt obligations maturing within one year
from the date of issuance, which are rated within one of the top two rating
classifications by at least one nationally recognized rating agency;
(ix) Investments in commercial paper, maturing within 270 days from
the date of issuance which is rated no lower than Investment Grade;
(x) participations in short-term notes maturing within 180 days
from the date of issuance issued by corporations or other entities which are
rated no lower than Investment Grade;
(xi) certificates of deposit or banker's acceptances issued by a
bank or trust company organized under the laws of the United States or any state
thereof having capital, surplus and undivided profits aggregating at least
$100,000,000 and whose long-term debt is rated in one of the top two rating
classifications by at least one nationally recognized rating agency;
(xii) Investments in money market instrument programs which are
classified as current assets in accordance with GAAP; and
(xiii) other Investments existing as of the date of this Agreement and
listed in the attached Annex III, including the Guaranty dated January 31, 1997
of the Indebtedness of the Partnership by MSC Pre Finish Metals Inc. and the
Company.
Restricted Subsidiary - Any Subsidiary (i) of which at least a majority of
the Voting Stock is owned by the Company and/or one or more Wholly-Owned
Restricted Subsidiaries, (ii) which is organized under the laws of the United
States and which maintains substantially all of its assets and conducts
substantially all of its business within the United States, Canada, Western
Europe, or Mexico, and (iii) which the Company then designates as a "Restricted
Subsidiary" by notice in writing given to the holders of the Notes, provided
that the designation of a Subsidiary as "Unrestricted" or "Restricted" shall not
be changed more than twice and shall be made pursuant to Section 7.8.
S&P - Standard & Poor's Rating Group.
Securities Act - The Securities Act of 1933, as amended.
Subordinated Debt - The sum of (a) the subordinated convertible notes dated
September 7, 1995 issued by the Company in partial consideration for the
purchase of Solar Gard International, Inc., (b) the subordinated convertible
notes dated May 31, 1996 issued by the Company in partial consideration for the
purchase of Sun-Protective International Corporation, and (c) obligations of the
Company or its Restricted Subsidiaries outstanding at any time which are
subordinated in right of payment or security to all Consolidated Senior Debt.
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Subsidiary - Any corporation of which at least a majority of the
outstanding voting securities are owned or controlled by the Company.
Subsidiary Guarantors - MSC Pre Finish Metals Inc., MSC Pre Finish
Metals (EGV) Inc., MSC Pre Finish Metals (MV) Inc., MSC Pre Finish Metals (MT)
Inc., MSC Laminates and Composites Inc., MSC Laminates and Composites (EGV)
Inc., MSC Walbridge Coatings Inc., MSC Specialty Films Inc., Solar-Gard
International, Inc. and any other Person which hereafter executes and delivers
to the holders of the Notes pursuant to Section 6.11 hereof or otherwise a
counterpart signature page to the Subsidiary Guaranty.
Subsidiary Guaranty - The Subsidiary Guaranty in substantially the
form of the attached Exhibit B, as amended from time to time.
Total Indebtedness - Total Indebtedness of the Company and its
Restricted Subsidiaries, determined on a consolidated basis in accordance with
GAAP.
Unrestricted Subsidiary - Any Subsidiary which is not then designated
as a Restricted Subsidiary, including any Subsidiary hereafter designated an
Unrestricted Subsidiary by the Company pursuant to Section 7.8.
Voting Stock - Capital stock of any class of a corporation having
power under ordinary circumstances to vote for the election of members of the
board of directors of such corporation, or persons performing similar functions.
Weighted Average Life to Maturity - As applied to any prepayment of
principal of the Notes, at any date, the number of years obtained by dividing
(a) the then outstanding principal amount of the Notes to be prepaid, into (b)
the sum of the products obtained by multiplying (i) the amount of each then
remaining installment, sinking fund, serial maturity, or other required
principal payment, including payment at final maturity, foregone by virtue of
such prepayment of the Notes, by (ii) the number of years (calculated to the
nearest 1/12th) which would have elapsed between such date and the making of
such payment.
Wholly-Owned - When applied to a Subsidiary or a Restricted
Subsidiary, any Subsidiary or Restricted Subsidiary 100% of the Voting Stock of
which is owned by the Company and/or its Wholly-Owned Subsidiaries, other than
directors' qualifying shares.
Terms which are not defined in this Section and are defined in other
Sections of this Agreement shall have the meanings specified therein.
5.2. Accounting Principles. Where the character or amount of any
asset or liability or item of income or expense is required to be determined or
any consolidation or other accounting computation is required to be made for the
purposes of this Agreement, the same shall be done in accordance with GAAP,
except where such principles are inconsistent with the requirements of this
Agreement.
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5.3. Valuation Principles. Except where indicated expressly to the
contrary by the use of terms such as "fair value," "fair market value" or
"market value," each asset, each liability and each capital item of any Person,
and any quantity derivable by a computation involving any of such assets,
liabilities or capital items, shall be taken at the net book value thereof for
all purposes of this Agreement. "Net book value" with respect to any asset,
liability or capital item of any Person shall mean the amount at which the same
is recorded or, in accordance with GAAP should have been recorded, in the books
of account of such Person, as reduced by any reserves which have been or, in
accordance with GAAP should have been, set aside with respect thereto, but in
every case (whether or not permitted in accordance with GAAP) without giving
effect to any write-up, write-down or write-off (other than any write-down or
write-off the entire amount of which was charged to Consolidated Net Income or
to a reserve which was a charge to Consolidated Net Income) relating thereto
which was made after the date of this Agreement.
5.4. Direct or Indirect Actions. Where any provision in this Agreement
refers to action to be taken by any Person, or which such Person is prohibited
from taking, such provision shall be applicable whether the action in question
is taken directly or indirectly by such Person.
(S)6. AFFIRMATIVE COVENANTS
The Company agrees that, for so long as any amount remains unpaid on any
Note:
6.1. Corporate Existence. The Company will maintain and preserve, and
will cause each Restricted Subsidiary to maintain and preserve, its corporate
existence and right to carry on its business and maintain, preserve, renew and
extend all of its rights, powers, privileges and franchises necessary to the
proper conduct of its business; provided, however, that the foregoing shall not
prevent any transaction permitted by Section 7.5, Section 7.6 or Section 7.7 or
the termination of the corporate existence of any Restricted Subsidiary if, in
the opinion of the Board of Directors of the Company, such termination is in the
best interests of the Company, is not disadvantageous to holders of the Notes
and is not otherwise prohibited by this Agreement.
6.2. Insurance. The Company will, and will cause each Restricted
Subsidiary to, maintain insurance coverage with financially sound and reputable
insurers in such forms and amounts, with such deductibles and against such risks
as are required by law or sound business practice and are customary for
corporations of the Company's size engaged in the same or similar businesses and
owning and operating similar properties as the Company and its Restricted
Subsidiaries.
6.3. Taxes, Claims for Labor and Materials. The Company will pay and
discharge when due, and will cause each Subsidiary to pay and discharge when
due, all taxes, assessments and governmental charges or levies imposed upon it
or its property or assets, or upon properties leased by it (but only to the
extent required to do so by the applicable lease), prior to the date on which
penalties other than application of interest or revocation of discount attach
thereto, and all lawful claims which, if unpaid, could reasonably be expected to
become a Lien upon its property or assets, provided that neither the Company nor
any Subsidiary shall be required to pay any such tax, assessment, charge, levy
or claim, (i) the payment of which is being contested in good
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faith and by proper proceedings that will stay the forfeiture or sale of any
property and with respect to which adequate reserves are maintained in
accordance with GAAP or (ii) the nonpayment of which in the aggregate would not
reasonably be expected to have a Material Adverse Effect.
6.4. Maintenance of Properties. The Company will maintain, preserve and
keep, and will cause each Restricted Subsidiary to maintain, preserve and keep,
its properties (whether owned in fee or a leasehold interest) essential to its
business in good repair and working order, ordinary wear and tear excepted, and
from time to time will make all necessary repairs, replacements, renewals,
improvements and additions excluding property which is obsolete or no longer
necessary for the operation of the Company and its Restricted Subsidiaries.
6.5. Maintenance of Records. The Company will keep, and will cause each
Restricted Subsidiary to keep, at all times proper books of record and account
in which full, true and correct entries will be made of all dealings or
transactions of or in relation to the business and affairs of the Company or
such Restricted Subsidiary, in accordance with GAAP consistently applied
throughout the period involved (except for such changes as are disclosed in such
financial statements or in the notes thereto and concurred in by the Company's
independent certified public accountants), and the Company will, and will cause
each Restricted Subsidiary to, provide reasonable protection against loss or
damage to such books of record and account.
6.6. Financial Information and Reports. The Company will furnish to you
and to any other Institutional Holder, in each case, then holding a Note, (in
duplicate if you or such other holder so request) the following:
(a) As soon as available and in any event within 60 days after the end of
each of the first three quarterly accounting periods of each fiscal year of the
Company, a consolidated balance sheet of the Company and its Subsidiaries as of
the end of such period and consolidated statements of earnings and cash flows of
the Company and its Subsidiaries for the periods beginning on the first day of
such fiscal year and the first day of such quarterly accounting period (with
respect to earnings only) and ending on the date of such balance sheet, setting
forth in comparative form the corresponding consolidated figures for the
corresponding periods of the preceding fiscal year, all in reasonable detail,
prepared in accordance with GAAP consistently applied throughout the period
involved (except for changes disclosed in such financial statements or in the
notes thereto and concurred in by the Company's independent certified public
accountants) and certified by the chief financial officer or chief accounting
officer of the Company (i) outlining the basis of presentation, and (ii) stating
that the information presented in such statements presents fairly in all
material respects the financial condition of the Company and its Subsidiaries
and the results of operations for the period, subject to customary year-end
audit adjustments; provided that delivery within the time period specified above
of copies of the Company's Quarterly Report on Form 10-Q prepared in compliance
with the requirements therefor and filed with the Securities and Exchange
Commission shall be deemed to satisfy the requirements of this Section 6.6(a);
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(b) As soon as available and in any event within 90 days after the last day
of each fiscal year, a consolidated balance sheet of the Company and its
Subsidiaries as of the end of such fiscal year and the related consolidated
statements of operations, shareholders' equity and cash flows for such fiscal
year, in each case setting forth in comparative form figures for the preceding
fiscal year, all in reasonable detail, prepared in accordance with GAAP
consistently applied throughout the period involved (except for changes
disclosed in such financial statements or in the notes thereto and concurred in
by independent certified public accountants) and accompanied by a report
unqualified as to scope of audit and unqualified as to going concern as to the
consolidated balance sheet and the related consolidated statements of earnings,
shareholders' equity and cash flows by Arthur Andersen LLP, or any other firm of
independent public accountants of recognized national standing selected by the
Company, to the effect that such financial statements have been prepared in
conformity with GAAP and present fairly, in all material respects, the financial
position and results of operations and cash flows of the Company and its
Subsidiaries and that the examination of such financial statements by such
accounting firm has been made in accordance with generally accepted auditing
standards; provided that the delivery within the time period specified above of
the Company's Annual Report on Form 10-K for such fiscal year (together with the
Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3
under the Exchange Act) prepared in accordance with the requirements therefor
and filed with the Securities and Exchange Commission, together with the
accountant's report described in this Section 6.6(b), shall be deemed to satisfy
the requirements of this Section 6.6(b);
(c) In the event that one or more Unrestricted Subsidiaries shall own more
than 10% of the consolidated assets of the Company and its Subsidiaries or shall
account for more than 10% of the consolidated gross revenue of the Company and
its Subsidiaries, determined in accordance with GAAP, then the financial
statements and information delivered pursuant to (a) and (b) of this Section 6.6
shall be accompanied by unaudited financial statements for all Unrestricted
Subsidiaries of the Company taken as a group, together with consolidating
statements reflecting eliminations or adjustments required to reconcile such
group statements to the consolidated financial statements of the Company and its
Subsidiaries.
(d) Together with the financial statements delivered pursuant to paragraphs
(a) and (b) of this Section 6.6, a certificate of the chief financial officer or
chief accounting officer of the Company, (i) to the effect that such officer has
reexamined the terms and provisions of this Agreement and that no Default or
Event of Default is occurring or has occurred as of the date of such
certificate, during such periods and as of the end of such periods, or if such
officer is aware of any Default or Event of Default, such officer shall disclose
in such statement the nature thereof, its period of existence and what action,
if any, the Company has taken or proposes to take with respect thereto, and (ii)
stating whether the Company is in compliance with Sections 7.1 through 7.11 and
setting forth, in sufficient detail, the information and computations required
to establish whether or not the Company was in compliance with the requirements
of Sections 7.1 through 7.3 and, if applicable, Sections 7.4 through 7.8 for the
period covered by the financial reports then being furnished and as of the end
of such periods;
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(e) Promptly after any Responsible Officer of the Company obtains knowledge
thereof, notice of any litigation or any governmental proceeding pending against
the Company or any Subsidiary which, individually or in the aggregate, or which
might reasonably be expected to result in a Material Adverse Effect;
(f) As soon as available, copies of each financial statement, notice,
report and proxy statement which the Company shall furnish to its stockholders;
within 5 days after the effective date thereof, copies of each registration
statement (without exhibits, except as expressly requested and excluding
registration statements on Form S-8) and periodic report which the Company may
file with the Securities and Exchange Commission, and any similar or successor
agency of the Federal government administering the Securities Act, the Exchange
Act or the Trust Indenture Act of 1939, as amended; without duplication, within
15 days after filing, copies of each report (other than reports relating solely
to the issuance of, or transactions by others involving, its securities)
relating to the Company or its securities which the Company may file with any
securities exchange on which any of the Company's securities may be registered;
copies of any orders in any material proceedings to which the Company or any of
its Subsidiaries is a party, issued by any governmental agency, Federal or
state, having jurisdiction over the Company or any of its Subsidiaries; and,
except at such times as the Company is a reporting company under Section 13 or
15(d) of the Exchange Act or has complied with the requirements for the
exemption from registration under the Exchange Act set forth in Rule 12g-3-2(b),
such financial or other information as any holder of the Notes or prospective
purchaser of the Notes may reasonably request;
(g) Promptly following any change in the composition of the Company's
Restricted Subsidiaries and annually following any change in the composition of
the Company's other Subsidiaries from that set forth in Annex I, as theretofore
updated pursuant to this paragraph, an updated list setting forth the
information specified in Annex I; and
(h) Such additional information as you or such other Institutional Holder
of the Notes may reasonably request concerning the Company and its Restricted
Subsidiaries.
6.7. Inspection of Properties and Records. The Company will allow, and
will cause each Restricted Subsidiary to allow, any representative of you or any
other Institutional Holder, so long as you or such other Institutional Holder
holds any Note, to visit and inspect any of its properties, to examine its books
of record and account and to discuss its affairs, finances and accounts with its
officers and its present and former public accountants (and by this provision
the Company authorizes, at the time any Default or Event of Default has occurred
and is continuing, such accountants to discuss with you or such Institutional
Holder its affairs, finances and accounts all at such reasonable times, upon
reasonable notice and as often as you or such Institutional Holder may
reasonably request), and if, at the time thereof any Default or Event of Default
has occurred and is continuing, at the Company's expense. If no Default or Event
of Default has occurred or is continuing, then, upon the consent of the Company,
which consent shall not be unreasonably withheld, the Company shall permit its
present and former accountants to discuss with you or any Institutional Holder
its affairs, finances and accounts.
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6.8. ERISA. (a) All assumptions and methods used to determine the
actuarial valuation of employee benefits, both vested and unvested, under any
Plan subject to Title IV of ERISA, and each such Plan, whether now existing or
adopted after the date hereof, will comply in all material respects with ERISA.
(b) The Company will not at any time permit any Plan established,
maintained or contributed to by it or any ERISA Affiliate to:
(i) engage in any "prohibited transaction" as such term is defined in
Section 4975 of the Code or in Section 406 of ERISA;
(ii) incur any "accumulated funding deficiency" as such term is
defined in Section 302 of ERISA, whether or not waived; or
(iii) be terminated under circumstances which are likely to result in
the imposition of a Lien on the property of the Company or any ERISA Affiliate
pursuant to Section 4068 of ERISA;
if the event or condition described in clauses (i), (ii) or (iii) above is
likely to subject the Company or an ERISA Affiliate to liabilities which,
individually or in the aggregate, might reasonably be expected to have a
Material Adverse Effect.
(c) Upon the request of you or any subsequent Institutional Holder, the
Company will furnish a copy of the annual report of each Plan (Form 5500)
required to be filed with the Internal Revenue Service.
(d) Within 5 days after obtaining knowledge thereof, the Company will give
you and any subsequent Institutional Holder written notice of (i) a reportable
event with respect to any Plan; (ii) the institution of any steps by any of the
Company, any ERISA Affiliate or the PBGC to terminate any Plan; (iii) the
institution of any steps by any of the Company or any ERISA Affiliate to
withdraw from any Plan; (iv) a prohibited transaction in connection with any
Plan; (v) any material increase in the contingent liability of the Company or
any Restricted Subsidiary with respect to any post-retirement welfare liability;
or (vi) the taking of any action by the Internal Revenue Service, the Department
of Labor or the PBGC with respect to any of the foregoing which, in any of the
events specified above, might reasonably be expected to result in a Material
Adverse Effect.
6.9. Compliance with Laws. (a) The Company will comply and will cause
each Restricted Subsidiary to comply, in all material respects, with all laws,
rules and regulations, including Environmental Laws, applicable to its or their
respective businesses, other than laws, rules and regulations the failure to
comply with which or the sanctions and penalties resulting therefrom,
individually or in the aggregate, would not have a Material Adverse Effect;
provided, however, that the Company and its Restricted Subsidiaries shall not be
required to comply with laws, rules and regulations the validity or
applicability of which are being contested in good faith
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and by appropriate proceedings and as to which the Company has established
adequate reserves on its books in accordance with GAAP.
(b) Promptly upon the occurrence thereof, the Company will give you and
each other Institutional Holder, so long as such Institutional Holder holds a
Note, notice of the institution of any proceedings against, or the receipt of
notice of potential liability or responsibility of, the Company or any
Subsidiary for violation, or the alleged violation, of any Environmental Law
which violation could reasonably be expected to result in a Material Adverse
Effect.
6.10. Acquisition of Notes. Neither the Company, any Subsidiary of any of
them, directly or indirectly, will repurchase, redeem, prepay or otherwise
acquire, directly or indirectly, any Notes except upon the payment or prepayment
of the Notes pursuant to Section 2.1, Section 2.2(a) or Section 7.6.
6.11. Additional Subsidiary Guarantors. In the event that (a) any
Subsidiary other than a Subsidiary Guarantor existing on the Closing Dates shall
hereafter guaranty Indebtedness of the Company to bank lenders, the Company
agrees to cause such Subsidiary to guaranty the Notes concurrently therewith and
to the same extent and (b) any Subsidiary becomes a Material Subsidiary, the
Company agrees to cause such Material Subsidiary to execute and deliver a
counterpart signature page to the Subsidiary Guaranty.
6.12. Private Placement Number. The Company consents to the filing by
your special counsel of copies of this Agreement with S&P to obtain a private
placement number.
(S)7. NEGATIVE COVENANTS
The Company agrees that, for so long as any amount remains unpaid on any
Note:
7.1. Consolidated Adjusted Net Worth. The Company shall not permit at any
time its Consolidated Adjusted Net Worth to be less than $105,000,000, as
measured as of the last day of each fiscal quarter.
7.2. Consolidated Senior Debt. The Company shall not at any time permit
the ratio of Consolidated Senior Debt to Consolidated Adjusted Total
Capitalization to exceed 55%, as measured on the last day of each fiscal
quarter.
7.3. Total Indebtedness. The Company shall not permit at any time the
ratio of Total Indebtedness to Consolidated Adjusted Total Capitalization to
exceed 60%, as measured on the last day of each fiscal quarter.
7.4. Liens. The Company will not, and will not permit any Restricted
Subsidiaries to, permit to exist, create, assume or incur, directly or
indirectly, any Lien on its properties or assets, whether now owned or hereafter
acquired, except:
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(a) Liens for property taxes, assessments, or other governmental charges
not then due and delinquent or the validity of which is being contested in good
faith and as to which the Company has established adequate reserves on its
books,
(b) Liens arising in the ordinary course of business and not incurred in
connection with the borrowing of money, including Liens securing claims of
carriers, warehousemen, mechanics, materialmen, landlords and other similar
Liens that in the aggregate do not materially interfere with the conduct of
business of the Company and its Restricted Subsidiaries taken as a whole or
materially impair the value of the property or assets of the Company and its
Restricted Subsidiaries taken as a whole;
(c) Liens incidental to the normal conduct of the business of the Company
or any Restricted Subsidiary (not incurred for the borrowing of money),
including Liens in connection with workers' compensation, unemployment
insurance, and other governmental insurance or benefits;
(d) Liens resulting from judgments or court proceedings, provided the
execution of such Liens is effectively stayed, such Liens are being contested in
good faith by appropriate proceedings which have been in existence for less than
60 days which the Company is protesting in good faith, provided that the Company
has established adequate reserves for such matters on its books;
(e) minor survey exceptions, easements, encroachments, rights-of-way, and
zoning ordinances which customarily exist on real property and which do not
materially detract from the value of such property;
(f) Liens securing Indebtedness of a Restricted Subsidiary to the Company
or another Restricted Subsidiary;
(g) existing Liens on property of the Company or any Restricted Subsidiary
described in the attached Annex IV;
(h) Liens securing the payment of the purchase price of assets provided (i)
any such Liens are created within 90 days after the acquisition of such assets;
(ii) at the time of acquisition of such assets, Indebtedness secured by such
Liens does not exceed the purchase price thereof; (iii) such Liens do not extend
to other property of the Company or any Restricted Subsidiary; and (iv)
Indebtedness secured by such Liens is permitted by Sections 7.2 and 7.3 hereof;
(i) Liens created pursuant to Capitalized Leases permitted by Section 7.2
and Section 7.3 hereof;
(j) leases or subleases granted to third parties which do not interfere in
any material respect with the business of the Company or its Restricted
Subsidiaries;
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(k) subject to Section 7.6, any interest or title of a lessor or sublessor
under any lease entered into in the ordinary course of business; and
(l) Liens not permitted by paragraphs (a) through (k) above to secure
Indebtedness; provided that at the time of incurrence of such Indebtedness, (i)
the aggregate amount of Indebtedness secured by such Liens permitted by this
Section 7.4(l) does not exceed 15% of Consolidated Adjusted Total Capitalization
and (ii) the Company is in compliance with Sections 7.2 and 7.3 hereof.
7.5. Merger or Consolidation. The Company will not, and will not permit
any Restricted Subsidiary to, merge or consolidate with, or sell all or
substantially all of its assets to, any Person, except that:
(a) The Company may merge into or consolidate with, or sell all or
substantially all of its assets to, any Person or permit any Person to merge
into it, provided that immediately after giving effect thereto,
(i) The Company is the successor corporation or, if the Company is not
the successor corporation, the successor corporation is a solvent corporation
organized under the laws of a state of the United States of America or the
District of Columbia and expressly assumes in writing the Company's obligations
under this Agreement and the Notes;
(ii) There shall exist no Default or Event of Default; and
(iii) The Company or such successor corporation could incur at least
$1.00 of Consolidated Senior Debt pursuant to Section 7.2; and
(b) Any Restricted Subsidiary may (i) merge into the Company or a Wholly-
Owned Restricted Subsidiary, and (ii) merge with any Unrestricted Subsidiary so
long as the Restricted Subsidiary shall remain the surviving Person; provided in
each instance set forth in clauses (i) and (ii) that immediately before and
after giving effect thereto there shall exist no Default or Event of Default.
7.6. Sale of Assets. The Company will not, and will not permit any
Restricted Subsidiary to, sell, lease, transfer or otherwise (including by way
of merger) dispose of (collectively a "Disposition") any assets, including
capital stock of Subsidiaries, in one or a series of transactions, other than in
the ordinary course of business, to any Person, except to the Company or a
Wholly-Owned Restricted Subsidiary, (i) if, in any fiscal year, after giving
effect to such Disposition, the aggregate net book value of assets subject to
Dispositions during such fiscal year would exceed 15% of Consolidated Total
Assets as of the end of the immediately preceding fiscal quarter or (ii) if a
Default or Event of Default exists or would exist. Notwithstanding the
foregoing, the Company may, or may permit a Restricted Subsidiary to, make a
Disposition and the assets subject to such Disposition shall not be subject to
or included in the foregoing limitation and computation contained in clause (i)
of the preceding sentence to the extent that (x) such assets are leased back by
the Company or such Restricted Subsidiary, as
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lessee, within 180 days following the acquisition by the Company or such
Restricted Subsidiary or completion of construction of such assets or (y) the
net proceeds from such Disposition are (1) reinvested in productive assets of
the Company or a Restricted Subsidiary of at least equivalent value within 180
days of such Disposition or (2) applied to the payment or prepayment of
outstanding Consolidated Senior Debt. Any prepayment of Notes pursuant to this
Section 7.6 shall be in accordance with Section 2.2.
7.7. Disposition of Stock of Restricted aries. The Company will not permit
any Restricted Subsidiary to issue its capital stock, or any warrants, rights or
options to purchase, or securities convertible into or exchangeable for, such
capital stock, to any Person other than the Company or a Wholly-Owned Restricted
Subsidiary. The Company will not, and will not permit any Restricted Subsidiary
to, sell, transfer or otherwise dispose of (other than to the Company or a
Wholly-Owned Restricted Subsidiary) any capital stock (including any warrants,
rights or options to purchase, or securities convertible into or exchangeable
for, capital stock) or Indebtedness of any Restricted Subsidiary, unless:
(a) simultaneously therewith all Investments in such Restricted
Subsidiary owned by the Company and every other Restricted Subsidiary are
disposed of as an entirety;
(b) such Restricted Subsidiary does not have any continuing Investment in
the Company or any other Subsidiary not being simultaneously disposed of; and
(c) such sale, transfer or other disposition is permitted by Section 7.6.
7.8 Designation of Unrestricted Subsidiaries The Company will not
designate any Restricted Subsidiary as an Unrestricted Subsidiary if such
Subsidiary has been designated an Unrestricted Subsidiary more than once
previously and unless immediately before and after such designation:
(a) such Subsidiary does not own any Investment in the Company or any
Restricted Subsidiary;
(b) there exists no Default or Event of Default; and
(c) the Company could incur at least $1.00 of additional Indebtedness.
7.9. No Impairment of Subsidiaries. The Company will not, and will not
permit any Restricted Subsidiary to, enter into any agreement or amend the
charter or by-laws of such Restricted Subsidiary or take or omit to take any
action, the effect of which is to restrict the ability of any Restricted
Subsidiary to pay dividends or make distributions to the Company, or if the
Company is not its parent, to its parent.
7.10. Transactions with Affiliates. The Company will not, and will not
permit any Restricted Subsidiary to, enter into any transaction (including the
furnishing of goods or
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services) with an Affiliate (other than the Company), except on terms and
conditions no less favorable to the Company or such Restricted Subsidiary than
would be obtained in a comparable arm's-length transaction with a Person not an
Affiliate.
7.11. Nature of Business. The Company will not, and will not permit any
Restricted Subsidiary to, engage in any business if, as a result thereof, the
business then to be conducted by the Company and its Restricted Subsidiaries,
taken as a whole, would cease to be substantially the same or related to the
business described in the Private Placement Memorandum.
(S)8. EVENTS OF DEFAULT AND REMEDIES THEREFOR
8.1. Nature of Events. An "Event of Default" shall exist if any one or
more of the following occurs:
(a) Any default in the payment of interest when due on any of the Notes
and continuance of such default for a period of five Business Days;
(b) Any default in the payment of the principal or Make-Whole Amount of
any of the Notes at maturity, upon acceleration of maturity or at any date fixed
for prepayment;
(c) (i) Any default in the payment of the principal of, or interest or
premium on, any other Indebtedness of the Company and its Material Subsidiaries
aggregating in excess of $5,000,000 as and when due and payable (whether by
lapse of time, declaration, call for redemption or otherwise) and the
continuation of such default beyond the period of grace, if any, allowed with
respect thereto, or (ii) default (other than a payment default) under any loan
agreements or other instruments of the Company and its Restricted Subsidiaries
under or pursuant to which such Indebtedness aggregating in excess of $5,000,000
is issued, and the continuation of such default beyond the period of grace, if
any, allowed with respect thereto and the sums due under clauses (i) or (ii)
under such Indebtedness shall have been accelerated and such acceleration shall
not have been annulled.
(d) Any default in the observance or performance of Section 6.11,
Sections 7.1 through 7.11 or Section 8.7;
(e) Any default in the observance or performance of any other covenant or
provision of this Agreement which is not remedied within 30 days after notice
thereof to the Company by any holder of a Note;
(f) Default under the Subsidiary Guaranty which continues beyond the
period of grace, if any, allowed with respect thereto;
(g) The Subsidiary Guaranty shall cease to be in full force and effect
for any reason whatsoever, including, without limitation, a determination by any
governmental body or court that the Subsidiary Guaranty is invalid, void or
unenforceable insofar as any Subsidiary
32
<PAGE>
Guarantor is concerned or any Subsidiary Guarantor shall contest or deny in
writing the validity or enforceability of any of its obligations under the
Subsidiary Guaranty;
(h) Any representation or warranty made by or on behalf of the Company or
any Subsidiary Guarantor in this Agreement, or made by or on behalf of the
Company or any Subsidiary Guarantor in any written statement or certificate
furnished by or on behalf of the Company in connection with the issuance and
sale of the Notes or furnished by or on behalf of the Company or any Subsidiary
Guarantor pursuant to this Agreement, proves incorrect in any material respect
as of the date of the issuance or making thereof;
(i) Any judgment, writ or warrant of attachment or any similar process in
an aggregate amount in excess of $5,000,000 shall be entered or filed against
the Company or any Material Subsidiary or against any property or assets of
either and remain unpaid, uninsured, unindemnified, unvacated, unbonded or
unstayed (through appeal or otherwise) for sixty (60) days or, if stayed pending
appeal, are not discharged within sixty (60) days after expiration of such stay;
(j) The Company or any Material Subsidiary shall
(i) generally not pay its debts as they become due or admit in
writing its inability to pay its debts generally as they become due;
(ii) file a petition in bankruptcy or for reorganization or for the
adoption of an arrangement under the Federal Bankruptcy Code, or any similar
applicable bankruptcy or insolvency law, as now or in the future amended (herein
collectively called "Bankruptcy Laws"); file an answer or other pleading
admitting or failing to deny the material allegations of such a petition; fail
to obtain the dismissal of such a petition within 60 days of its filing or be
subject to an order for relief or a decree approving such a petition; or file an
answer or other pleading seeking, consenting to or acquiescing in relief
provided for under the Bankruptcy Laws;
(iii) make an assignment of all or a substantial part of its property
for the benefit of its creditors;
(iv) seek or consent to or acquiesce in the appointment of a receiver,
liquidator, custodian or trustee of it or for all or a substantial part of its
property;
(v) be finally adjudicated bankrupt or insolvent;
(vi) be subject to the entry of a court order, which shall not be
vacated, set aside or stayed within 60 days of the date of entry, (A) appointing
a receiver, liquidator, custodian or trustee of it or for all or a substantial
part of its property, (B) for relief pursuant to an involuntary case brought
under, or effecting an arrangement in, bankruptcy, (C) for a reorganization
pursuant to the Bankruptcy Laws, or (D) for any other judicial modification or
alteration of the rights of creditors; or
33
<PAGE>
(vii) be subject to the assumption of custody or sequestration by a
court of competent jurisdiction of all or a substantial part of its property,
which custody or sequestration shall not be suspended or terminated within 60
days from its inception.
8.2. Remedies on Default. When any Event of Default described in
paragraphs (c) through (i) of Section 8.1 has occurred and is continuing, the
holders of more than 33% in aggregate principal amount of the Notes then
outstanding may, by notice to the Company, declare the entire principal,
together with the Make-Whole Amount (to the extent permitted by law) and all
interest accrued on all Notes to be, and such Notes shall thereupon become,
forthwith due and payable, without any presentment, demand, protest or other
notice of any kind, all of which are expressly waived. Notwithstanding the
foregoing, (i) when any Event of Default described in paragraphs (a) or (b) of
Section 8.1 has occurred and is continuing, any holder may by notice to the
Company declare the entire principal, and all interest accrued on the Notes,
together with the Make-Whole Amount (to the extent permitted by law), then held
by such holder to be, and such Notes shall thereupon become, forthwith due and
payable, without any presentment, demand, protest or other notice of any kind,
all of which are expressly waived, and (ii) when any Event of Default described
in paragraph (j) of Section 8.1 has occurred, then the entire principal,
together with the Make-Whole Amount (to the extent permitted by law) and all
interest accrued on all outstanding Notes shall immediately become due and
payable without presentment, demand or notice of any kind. Upon the Notes or any
of them becoming due and payable as aforesaid, the Company will forthwith pay to
the holders of such Notes the entire principal of and interest accrued on such
Notes, plus the Make-Whole Amount which shall be calculated on the Determination
Date.
8.3. Annulment of Acceleration of Notes. The provisions of Section 8.2 are
subject to the condition that if the principal of, the Make-Whole Amount and
accrued interest on the Notes have been declared immediately due and payable by
reason of the occurrence of any Event of Default described in paragraphs (a)
through (i), inclusive, of Section 8.1, the holder or holders of 66-2/3% in
aggregate principal amount of the Notes then outstanding may, by written
instrument filed with the Company, rescind and annul such declaration and the
consequences thereof, provided that (i) at the time such declaration is annulled
and rescinded no judgment or decree has been entered for the payment of any
monies due pursuant to the Notes or this Agreement, (ii) all arrears of interest
upon all the Notes and all other sums payable under the Notes and under this
Agreement (except any principal, Make-Whole Amount or interest on the Notes
which has become due and payable solely by reason of such declaration under
Section 8.2) shall have been duly paid, and (iii) each and every Default or
Event of Default shall have been cured or waived; and provided further, that no
such rescission and annulment shall extend to or affect any subsequent Default
or Event of Default or impair any right consequent thereto.
8.4. Other Remedies. If any Event of Default shall be continuing, any
holder of Notes may enforce its rights by suit in equity, by action at law, or
by any other appropriate proceedings, whether for the specific performance (to
the extent permitted by law) of any covenant or agreement contained in this
Agreement or in the Notes or in the Subsidiary Guaranty or in aid of the
exercise of any power granted in this Agreement or in the Subsidiary Guaranty,
and may
34
<PAGE>
enforce the payment of any Note held by such holder and any of its other legal
or equitable rights.
8.5. Conduct No Waiver; Collection Expenses. No course of dealing on the
part of any holder of Notes, nor any delay or failure on the part of any holder
of Notes to exercise any of its rights, shall operate as a waiver of such rights
or otherwise prejudice such holder's rights, powers and remedies. If the Company
fails to pay, when due, the principal of, the Make-Whole Amount, or the interest
on, any Note, or fails to comply with any other provision of this Agreement, the
Company will pay to each holder, to the extent permitted by law, on demand, such
further amounts as shall be sufficient to cover the cost and expenses, including
but not limited to reasonable attorneys' fees, incurred by such holders of the
Notes in collecting any sums due on the Notes or in otherwise enforcing any of
their rights incident to an Event of Default.
8.6. Remedies Cumulative. No right or remedy conferred upon or reserved to
any holder of Notes under this Agreement or the Subsidiary Guaranty is intended
to be exclusive of any other right or remedy, and every right and remedy shall
be cumulative and in addition to every other right or remedy given under this
Agreement or the Subsidiary Guaranty or now or hereafter existing under any
applicable law. Every right and remedy given by this Agreement or by applicable
law to any holder of Notes may be exercised from time to time and as often as
may be deemed expedient by such holder, as the case may be.
8.7. Notice of Default. With respect to Defaults, Events of Default or
claimed defaults, the Company will give the following notices:
(a) Within five days of a Responsible Officer of the Company becoming
aware of any Default or Event of Default, the Company promptly will furnish to
each holder of a Note written notice of the occurrence of a Default or an Event
of Default. Such notice shall specify the nature of such default, the period of
existence thereof and what action the Company has taken or is taking or proposes
to take with respect thereto.
(b) If the holder of any Note or of any other evidence of Indebtedness of
the Company or any Subsidiary gives any notice or takes any other action with
respect to a claimed default, the Company will forthwith give written notice
thereof to each holder of the then outstanding Notes, describing the notice or
action and the nature of the claimed default.
(S)9. AMENDMENTS, WAIVERS AND CONSENTS
9.1. Matters Subject to Modification. Any term, covenant, agreement or
condition of this Agreement may, with the consent of the Company, be amended, or
compliance therewith may be waived (either generally or in a particular instance
and either retroactively or prospectively), if the Company shall have obtained
the consent in writing of the holder or holders of a majority in aggregate
principal amount of outstanding Notes; provided, however, that, without the
written consent of the holder or holders of all of the Notes then outstanding,
no such waiver, modification, alteration or amendment shall be effective which
will (i) change any of the
35
<PAGE>
provisions, including definitions, relating to payment (including any required
prepayment) of the principal of, Make-Whole Amount or the interest on any Note,
(ii) change the amount of any payment or prepayment of principal or Make-Whole
Amount, or reduce the rate of interest thereon, or (iii) change any of the
provisions of Section 8.1, Section 8.2, Section 8.3 or this Section 9.
9.2. Solicitation of Holders of Notes. Neither the Company nor any Person
acting on the Company's behalf will solicit, request or negotiate for or with
respect to any proposed waiver or amendment of any of the provisions of this
Agreement or the Notes or the Subsidiary Guaranty unless each holder of the
Notes (irrespective of the amount of Notes then owned by it) shall concurrently
be informed thereof by the Company and shall be afforded the opportunity of
considering the same and shall be supplied by the Company with sufficient
information to enable it to make an informed decision with respect thereto.
Executed or true and correct copies of any waiver or consent effected pursuant
to the provisions of this Section 9 shall be delivered by the Company to each
holder of outstanding Notes forthwith following the date on which the same shall
have been executed and delivered by the holder or holders of the requisite
percentage of outstanding Notes. The Company will not, directly or indirectly,
pay or cause to be paid any remuneration, whether by way of supplemental or
additional interest, fees or otherwise, to any holder of the Notes as
consideration for or as an inducement to the entering into by any holder of the
Notes of any waiver or amendment of any of the terms and provisions of this
Agreement or the Subsidiary Guaranty, unless such remuneration is concurrently
paid, on the same terms, ratably to each holder of the then outstanding Notes.
Any consent made by a holder of Notes that has transferred or has agreed to
transfer its Notes to the Company, any Subsidiary, or any Affiliate thereof and
has provided or has agreed to provide such written consent as a condition to
such transfer shall be void and of no force and effect except solely as to such
holder, and any amendments effected or waivers granted or to be effected or
granted that would not have been or would not be so effected or granted but for
such consent (and the consents of all other holders of Notes that were acquired
under the same or similar conditions) shall be void and of no force and effect
retroactive to the date such amendment or waiver initially took or takes effect,
except solely as to such holder.
9.3. Binding Effect. Any such amendment or waiver shall apply equally to
all the holders of the Notes and shall be binding upon them, upon each future
holder of any Note and upon the Company whether or not such Note shall have been
marked to indicate such amendment or waiver. No such amendment or waiver shall
extend to or affect any obligation not expressly amended or waived or impair any
right related thereto.
9.4. Notes held by Company, etc. Solely for the purpose of determining
whether the holders of the requisite percentage of the aggregate principal
amount of Notes then outstanding approved or consented to any amendment, waiver
or consent to be given under this Agreement or the Notes or the Subsidiary
Guaranty, or have directed the taking of any action provided herein or in the
Notes or in the Subsidiary Guaranty to be taken upon the direction of the
holders of a specified percentage of the aggregate principal amount of Notes
then outstanding, Notes directly or indirectly owned by the Company, any
Subsidiaries or any Affiliates shall be deemed not to be outstanding.
36
<PAGE>
(S)10. FORM OF NOTES, REGISTRATION, TRANSFER, EXCHANGE AND REPLACEMENT
10.1. Form of Notes. Each Note initially delivered under this Agreement
will be in the form of one fully registered Note in the form attached as Exhibit
A. The Notes are issuable only in fully registered form and in denominations of
at least $250,000 (or the remaining outstanding balance thereof, if less than
$250,000).
10.2. Note Register. The Company shall cause to be kept at its
principal office a register (the "Note Register") for the registration and
transfer of the Notes. The names and addresses of the holders of Notes, the
transfer thereof and the names and addresses of the transferees of the Notes
shall be registered in the Note Register. The Company may deem and treat the
person in whose name a Note is so registered as the holder and owner thereof for
all purposes (subject to the provisions of Section 2.5) and shall not be
affected by any notice to the contrary, until due presentment of such Note for
registration of transfer as provided in this Section 10.
10.3. Issuance of New Notes upon Exchange or Transfer. Upon surrender
for exchange or registration of transfer of any Note at the office of the
Company designated for notices in accordance with Section 11.2, the Company
shall execute and deliver, at its expense, one or more new Notes of any
authorized denominations requested by the holder of the surrendered Note
(subject to Section 10.1), each dated the date to which interest has been paid
on the Notes so surrendered (or, if no interest has been paid, the date of such
surrendered Note), but in the same aggregate unpaid principal amount as such
surrendered Note, and registered in the name of such person or persons as shall
be designated in writing by such holder. Every Note surrendered for registration
of transfer shall be duly endorsed, or be accompanied by a written instrument of
transfer duly executed, by the holder of such Note or by his attorney duly
authorized in writing. The Company may condition its issuance of any new Note in
connection with a transfer by any Person on compliance with Section 3.2, by
Institutional Holders on compliance with Section 2.4 and on the payment to the
Company of a sum sufficient to cover any stamp tax or other governmental charge
imposed in respect of such transfer.
10.4. Replacement of Notes. Upon receipt of evidence satisfactory to
the Company of the loss, theft, mutilation or destruction of any Note, and in
the case of any such loss, theft or destruction upon delivery of a bond of
indemnity in such form and amount as shall be reasonably satisfactory to the
Company or in the event of such mutilation upon surrender and cancellation of
the Note, the Company, without charge to the holder thereof, will make and
deliver a new Note of like tenor in lieu of such lost, stolen, destroyed or
mutilated Note. If any such lost, stolen or destroyed Note is owned by you or
any other Institutional Holder, then the affidavit of an authorized officer of
such owner setting forth the fact of such loss, theft or destruction and of its
ownership of the Note at the time of such loss, theft or destruction shall be
accepted as satisfactory evidence thereof, and no further indemnity shall be
required as a condition to the execution and delivery of a new Note, other than
a written agreement of such owner (in form reasonably satisfactory to the
Company) to indemnify the Company.
37
<PAGE>
(S)11. MISCELLANEOUS
11.1. Expenses. Whether or not the purchase of Notes herein
contemplated shall be consummated, the Company agrees to pay directly all
reasonable and documented expenses in connection with the preparation, execution
and delivery of this Agreement and the Subsidiary Guaranty and the transactions
contemplated by this Agreement, including, but not limited to, out-of-pocket
expenses, recording and filing fees, including the filing fees of S&P in
connection with obtaining a private placement number, recording fees and filing
charges and fees and disbursements of one special counsel for Purchaser,
photocopying and printing costs and charges for shipping the Notes, adequately
insured, to you at your home office or at such other address as you may
designate, and all similar expenses (including the fees and expenses of counsel,
the reasonable allocated costs of staff counsel and the fees and expenses of a
financial advisor, but only in connection with any work-out, renegotiation or
restructuring in the case of a financial advisor) relating to any amendments,
waivers or consents in connection with this Agreement or the Notes or the
Subsidiary Guaranty, including, but not limited to, any such amendments, waivers
or consents resulting from any Default, Event of Default, work-out,
renegotiation or restructuring relating to the performance by the Company or any
Subsidiary Guarantor of their obligations under this Agreement or the Notes. The
Company also agrees that it will pay and save you harmless against any and all
liability with respect to stamp and other documentary taxes, if any, which may
be payable, or which may be determined to be payable in connection with the
execution and delivery of this Agreement or the Notes (but not in connection
with a transfer of any Notes), whether or not any Notes are then outstanding.
The obligations of the Company under this Section 11.1 shall survive the
retirement of the Notes.
11.2. Notices. Except as otherwise expressly provided herein, all
communications provided for in this Agreement shall be in writing and delivered
or sent by registered or certified mail, return receipt requested, or by
overnight courier (i) if to you, to the address set forth below your name in
Schedule I, or to such other address as you may in writing designate, (ii) if to
any other holder of the Notes, to such address as the holder may designate in
writing to the Company, and (iii) if to the Company, to Material Sciences
Corporation, 2200 East Pratt Boulevard, Elk Grove Village, Illinois 60007,
Attention: Chief Financial Officer, or to such other address as the Company may
in writing designate.
11.3. Reproduction of Documents. This Agreement and all documents
relating hereto, including, without limitation, (i) consents, waivers and
modifications which may hereafter be executed, (ii) documents received by you at
the closing of the purchase of the Notes (except the Notes themselves), and
(iii) financial statements, certificates and other information previously or
hereafter furnished to you, may be reproduced by you by any photographic,
photostatic, microfilm, micro-card, miniature photographic or other similar
process, and you may destroy any original document so reproduced. The Company
agrees and stipulates that any such reproduction which is legible shall be
admissible in evidence as the original itself in any judicial or administrative
proceeding (whether or not the original is in existence and whether or not such
reproduction was made by you in the regular course of business) and that any
enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence;
38
<PAGE>
provided that nothing herein contained shall preclude the Company from objecting
to the admission of any reproduction on the basis that such reproduction is not
accurate, has been altered or is otherwise incomplete or to the same extent that
the Company could contest the original.
11.4. Successors and Assigns. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and
assigns.
11.5. Law Governing. This Agreement shall be governed by and construed in
accordance with the internal laws (and not the law of conflicts) of the State of
Illinois.
11.6. Headings. The headings of the sections and subsections of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
11.7. Counterparts. This Agreement may be executed simultaneously in one
or more counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument, and it shall
not be necessary in making proof of this Agreement to produce or account for
more than one such counterpart or reproduction thereof permitted by Section
11.3.
11.8. Reliance on and Survival of Provisions. All written covenants,
representations and warranties made by the Company herein and in any
certificates delivered pursuant to this Agreement, whether or not in connection
with a closing, (i) shall be presumed to have been relied upon by you,
notwithstanding any investigation heretofore or hereafter made by you or on your
behalf and (ii) shall survive the delivery of this Agreement and the Notes.
11.9. Integration and Severability. This Agreement embodies the entire
agreement and understanding between you and the Company, and supersedes all
prior agreements and understandings relating to the subject matter hereof. In
case any one or more of the provisions contained in this Agreement or in any
Note, or application thereof, shall be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained in this Agreement and in any Note, and any other application thereof,
shall not in any way be affected or impaired thereby.
11.10. Confidential Information. For the purposes of this Section 11.10,
"Confidential Information" means information delivered to you by or on behalf of
the Company or any Subsidiary in connection with the transactions contemplated
by or otherwise pursuant to this Agreement that is proprietary in nature and
that was clearly marked or labeled or otherwise adequately identified when
received by you as being confidential information of the Company or such
Subsidiary, provided that such term does not include information that (a) was
publicly known or otherwise known to you prior to the time of such disclosure,
(b) subsequently becomes publicly known through no act or omission by you or any
person acting on your behalf, (c) otherwise becomes known to you other than
through disclosure by the Company or any Subsidiary or (d) constitutes financial
statements delivered to you under Section 6.6(a) and (b) that are otherwise
publicly available. You will maintain the confidentiality of such Confidential
39
<PAGE>
Information in accordance with procedures adopted by you in good faith to
protect confidential information of third parties delivered to you, provided
that you may deliver or disclose Confidential Information to (i) your directors,
officers, employees, agents, accountants, attorneys and affiliates, (to the
extent such disclosure reasonably relates to the administration of the
investment represented by your Notes), (ii) your financial advisors and other
professional advisors who agree to hold confidential the Confidential
Information substantially in accordance with the terms of this Section 11.10,
(iii) any other holder of any Note, (iv) any Institutional Investor to which you
sell or offer to sell such Note or any part thereof or any participation therein
(if such Person has agreed in writing prior to its receipt of such Confidential
Information to be bound by the provisions of this Section 11.10), (v) any Person
from which you offer to purchase any security of the Company (if such Person has
agreed in writing prior to its receipt of such Confidential Information to be
bound by the provisions of this Section 11.10), (vi) any federal or state
regulatory authority having jurisdiction over you, (vii) the National
Association of Insurance Commissioners or any similar organization, or any
nationally recognized rating agency that requires access to information about
your investment portfolio, or (viii) any other Person to which such delivery or
disclosure may be necessary or appropriate (w) to effect compliance with any
law, rule, regulation or order applicable to you, (x) in response to any
subpoena or other legal process, (y) in connection with any litigation to which
you are a party or (z) if an Event of Default has occurred and is continuing, to
the extent you may reasonably determine such delivery and disclosure to be
necessary or appropriate in the enforcement or for the protection of the rights
and remedies under your Notes and this Agreement. Each holder of a Note, by its
acceptance of a Note, will be deemed to have agreed to be bound by and to be
entitled to the benefits of this Section 11.10 as though it were a party to this
Agreement. On reasonable request by the Company in connection with the delivery
to any holder of a Note of information required to be delivered to such holder
under this Agreement or requested by such holder (other than a holder that is a
party to this Agreement or its nominee), such holder will enter into an
agreement with the Company embodying the provisions of this Section 11.10.
40
<PAGE>
IN WITNESS WHEREOF, the Company and the Purchasers have caused this
Agreement to be executed and delivered by their respective officer or officers
thereunto duly authorized.
MATERIAL SCIENCES CORPORATION
By: /s/ Gerald G. Nadig
----------------------------------------
Title: President and Chief Executive Officer
PRINCIPAL MUTUAL LIFE INSURANCE COMPANY
By: /s/ Shabnam Miglani
----------------------------------------
Title: Counsel
By: /s/ Warren Shank
----------------------------------------
Title: Counsel
GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY
By: /s/ E. A. Marr
----------------------------------------
Title: Assistant Vice President, Investments
By: /s/ Wayne T. Hoffmann
---------------------
Title: Vice President, Investments
THE GREAT-WEST LIFE ASSURANCE COMPANY
By: /s/ W. W. Lovatt
----------------------------------------
Title: Vice President, Fixed Income Investments
By: /s/ B. R. Allison
----------------------------------------
Title: Manager, Bond Investments
41
<PAGE>
NATIONWIDE LIFE INSURANCE COMPANY
By: /s/ Michael D. Groseclose
------------------------------------
Title: Associate Vice President
Corporate Fixed-Income Securities
NATIONWIDE LIFE & ANNUITY INSURANCE
COMPANY
By: /s/ Michael D. Groseclose
------------------------------------
Title: Associate Vice President
Corporate Fixed-Income Securities
WEST COAST LIFE INSURANCE COMPANY
By: /s/ Michael D. Groseclose
------------------------------------
Title: Attorney-In-Fact
42
<PAGE>
SCHEDULE I
----------
Principal Amount of Notes to Be Purchased
-----------------------------------------
Name and Address of Purchaser Principal Amount of Notes
- ----------------------------- -------------------------
Principal Mutual Life Insurance Company Series A $20,000,000
711 High Street
Des Moines, Iowa 50392-0800
Attention: Investment Department
Securities Division
Address for all communications is as above,
except notices of payment and written confirmations
of wire or inter-bank transfers, which shall be addressed to:
Principal Mutual Life Insurance Company
711 High Street
Des Moines, Iowa 50392-0960
Attention: Investment Department
Accounting and Treasury
All payments are to be by bank wire transfer of
immediately available funds to:
ABA 073000228
Norwest Bank Iowa, N.A.
7th and Walnut Streets
Des Moines, Iowa 50309
OBI PFGSE (S) B61002 ()
For credit to Principal Mutual Life Insurance Company
General Account No. 014752
Payments with respect to Bond No. 1-B-61002
(indicate whether payment is for principal or interest,
interest rate, and the name of the bond)
Taxpayer ID # 42-012-7290
SCHEDULE I
<PAGE>
SCHEDULE I
----------
Principal Amount of Notes to Be Purchased
-----------------------------------------
Name and Address of Purchaser Principal Amount of Notes
- ----------------------------- -------------------------
GREAT-WEST LIFE & ANNUITY INSURANCE Series A $6,500,000
COMPANY
8515 East Orchard Road
Third Floor, Tower 2
Englewood, Colorado 80111
Payments of Principal and Interest
- ----------------------------------
Wire Instructions:
- ------------------
Norwest Bank Minnesota, N.A.
ABA #091-000-019 NW MPLS/TRUST CLEARING
Great-West Life & Annuity Insurance Company
Account #08-40-245 ATTN: Acct. #12468800
Material Sciences Corporation
DPP (PPN: 576674 A* 6)
Special Instructions:
- ---------------------
(1) security description (PPN #)
(2) allocation of payment between principal and interest; and
(3) confirmation of principal balance
Notice of Such Payments
- -----------------------
Norwest Bank Minnesota, N.A.
733 Marquette Avenue
Investors Building, 5th Floor
Minneapolis, MN 55479-0047
Attention: Income Collections
Notice for other Communications/Financial Statement, Trustee Reports, etc.
- --------------------------------------------------------------------------
Great-West Life & Annuity Insurance Company
8515 East Orchard Road
Third Floor, Tower 2
Englewood, CO 80111
Attention: U.S. Private Placements
2
SCHEDULE I
<PAGE>
Telecopier: (303) 689-6193
Securities to be delivered to:
- ------------------------------
Norwest Bank Minnesota, N.A.
Attention: Security Clearance
733 Marquette Avenue, 5th Floor
Minneapolis, Minnesota 55479-0047
Tax ID #84-0467907
3
SCHEDULE I
<PAGE>
SCHEDULE I
----------
Principal Amount of Notes to Be Purchased
-----------------------------------------
Name and Address of Purchaser Principal Amount of Notes
- ----------------------------- -------------------------
THE GREAT-WEST LIFE ASSURANCE Series A $3,500,000
COMPANY
100 Osborne Street North
Winnipeg, Manitoba
CANADA R3C 385
Facsimile: (204) 946-4405
Payments of Principal and Interest
- ----------------------------------
Wire Instructions:
- ------------------
Citibank NYC/Cust
ABA #021000089
Account #091595 Great-West Life Assurance Co. Bonds U.S.
Material Sciences Corporation
DPP (PPN: 576674 A* 6)
Special Instructions:
- ---------------------
(1) security description (PPN #)
(2) allocation of payment between principal and interest; and
(3) confirmation of principal balance
Notice of Such Payments
- -----------------------
All notices of payments, on or in respect of the Notes and written confirmation
of each such payment to:
Citibank, N.A.
Investor Services Division
Securities Processing Services
20 Exchange Place/Level C
New York, NY 10043
4
SCHEDULE I
<PAGE>
Notice for other Communications
- -------------------------------
The Great-West Life Assurance Company
100 Osborne Street North
Winnipeg, Manitoba
CANADA R3C 385
Attention: Securities Accounting
Facsimile: (204) 946-8849
copy to:
Great-West Life & Annuity Insurance Company
Investments Division
8515 East Orchard Road
Third Floor, Tower 2
Englewood, CO 80111
Securities to be delivered to:
- ------------------------------
Citibank, N.A.
Investor Services Division
Securities Processing Services
20 Exchange Place/Level C
New York, NY 10043
Account No. 091595 Great-West Assurance Co. Bonds U.S.
5
SCHEDULE I
<PAGE>
SCHEDULE I
----------
Principal Amount of Notes to Be Purchased
-----------------------------------------
Name and Address of Purchaser Principal Amount of Notes
- ----------------------------- -------------------------
Nationwide Life Insurance Company Series B $15,500,000
One Nationwide Plaza
Columbus, Ohio 43215-2220
Send notices and communications to:
Nationwide Life Insurance Company
One Nationwide Plaza (1-33-07)
Columbus, Ohio 43515-2220
Attention: Corporate Fixed-Income Securities
Wiring instructions:
The Bank of New York
ABA #021-000-018
BNF: IOC566
F/A/O Nationwide Life
Insurance Company
Attention: P & I Department
PPN: 576674 A@4
Security Description: Material Sciences Corporation, 7.05% Series B
Senior Notes due May 31, 2007
All notices of payment on or in respect
to the security should be sent to:
Nationwide Life Insurance Company
c/o The Bank of New York
P.O. Box 19266
Attention: P & I Department
Newark, NJ 07195
with a copy to:
Nationwide Life Insurance Company
Attention: Investment Accounting
One Nationwide Plaza (1-32-05)
Columbus, Ohio 43215-2220
6
SCHEDULE I
<PAGE>
The original note should be registered in the name of
Nationwide Life Insurance Company and delivered to:
The Bank of New York
One Wall Street
Third Floor - Window A
New York, NY 10286
F/A/O Nationwide Life Insurance Co. Acct. #267829
Taxpayer ID #31-4156830
7
SCHEDULE I
<PAGE>
SCHEDULE I
----------
Principal Amount of Notes to Be Purchased
-----------------------------------------
Name and Address of Purchaser Principal Amount of Notes
- ----------------------------- -------------------------
Nationwide Life and Annuity Series B $2,500,000
Insurance Company
One Nationwide Plaza
Columbus, Ohio 43215-2220
Send notices and communications to:
Nationwide Life and Annuity Insurance Company
One Nationwide Plaza (1-33-07)
Columbus, Ohio 43515-2220
Attention: Corporate Fixed-Income Securities
Wiring instructions:
The Bank of New York
ABA #021-000-018
BNF: IOC566
F/A/O Nationwide Life and Annuity Insurance Company
Attention: P & I Department
PPN: 576674 A@ 4
Security Description: Material Sciences Corporation, 7.05% Series B
Senior Notes due May 31, 2007
All notices of payment on or in respect
to the security should be sent to:
Nationwide Life and Annuity Insurance Company
c/o The Bank of New York
P.O. Box 19266
Attention: P & I Department
Newark, NJ 07195
with a copy to:
Nationwide Life and Annuity Insurance Company
Attention: Investment Accounting
One Nationwide Plaza (1-32-05)
Columbus, Ohio 43215-2220
8
SCHEDULE I
<PAGE>
The original note should be registered in the name of
Nationwide Life and Annuity Insurance Company and delivered to:
The Bank of New York
One Wall Street
Third Floor - Window A
New York, NY 10286
F/A/O Nationwide Life and Annuity Insurance Co. Acct. #267961
Taxpayer ID #31-1000740
9
SCHEDULE I
<PAGE>
SCHEDULE I
----------
Principal Amount of Notes to Be Purchased
-----------------------------------------
Name and Address of Purchaser Principal Amount of Notes
- ----------------------------- -------------------------
West Coast Life Insurance Company Series B $2,000,000
343 Sansome Street
San Francisco, CA 94104
Send notices and communications to:
West Coast Life Insurance Company
One Nationwide Plaza (1-33-07)
Columbus, Ohio 43515-2220
Attention: Corporate Fixed-Income Securities
Wiring instructions:
The Bank of New York
ABA #021-000-018
BNF: IOC566
F/A/O West Coast Life Insurance Company
Attention: P & I Department
PPN: 576674 A@4
Security Description: Material Sciences Corporation, 7.05% Series B
Senior Notes due May 31, 2007
All notices of payment on or in respect
to the security should be sent to:
West Coast Life Insurance Company
c/o The Bank of New York
P.O. Box 19266
Attention: P & I Department
Newark, NJ 07195
with a copy to:
West Coast Life Insurance Company
Attention: Investment Accounting
One Nationwide Plaza (1-32-05)
Columbus, Ohio 43215-2220
10
SCHEUDLE I
<PAGE>
The original note should be registered in the name of
West Coast Life Insurance Company and delivered to:
The Bank of New York
One Wall Street
Third Floor - Window A
New York, NY 10286
F/A/O Nationwide Life and Annuity Insurance Co. Acct. #382426
Taxpayer ID #94-0971150
11
SCHEDULE I
<PAGE>
ANNEX I
SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION PERCENTAGE OF OUTSTANDING
SUBSIDIARY OF INCORPORATION VOTING STOCK OWNED
- ----------------------------------- ----------------- -------------------------
<S> <C> <C>
MSC Specialty Films Inc./1/ California 100% owned by the Company
Solar-Gard International, Inc./1/ Florida 100% owned by MSC Specialty
Films Inc.
Solar-Gard International United Kingdom 100% owned by Solar-Gard
(U.K.) Limited International, Inc.
Solar-Gard (SEA) Pte, Ltd./2/ Singapore 49% owned by Solar-Gard
International, Inc.
Solar Gard (Canada) Inc. Canada 100% owned by Solar-Gard
International, Inc.
MSC Laminates and Delaware 100% owned by the Company
Composites Inc./1/
MSC Laminates and Delaware 100% owned by MSC Laminates and
Composites (EGV) Inc./1/ Composites Inc.
MSC Pre Finish Metals Inc./1/ Illinois 100% owned by the Company
MSC Pre Finish Metals (EGV) Inc./1/ Delaware 100% owned by MSC Pre Finish
Metals Inc.
MSC Pre Finish Metals (MV) Inc./1/ Delaware 100% owned by MSC Pre Finish
Metals Inc.
MSC Pre Finish Metals (MT) Inc./1/ Delaware 100% owned by MSC Pre Finish
Metals (MV) Inc.
MSC Walbridge Coatings Inc./1/ Delaware 100% owned by MSC Pre Finish
Metals Inc.
Walbridge Coatings Partnership Illinois 50% owned by MSC Walbridge
Coatings Inc.
</TABLE>
- ---------------------------
/1/Restricted subsidiaries.
/2/Singapore Joint Venture.
ANNEX I
<PAGE>
MATERIAL SCIENCES CORPORATION
ANNEX II-A
INDEBTEDNESS
<TABLE>
<CAPTION>
OUTSTANDING
INDEBTEDNESS
AT JANUARY 31, 1997
-------------------
<S> <C>
CONVERTIBLE NOTES - SOLAR GARD ACQUISITION $ 6,651,000
CONVERTIBLE NOTES - SUN PRO ACQUISITION 1,500,000
BANK OF AMERICA UNSECURED LINES OF CREDIT* 38,400,000
WALBRIDGE COATINGS LEASE OBLIGATION 5,441,000
OTHER INDEBTEDNESS 61,000
-----------
$52,053,000
===========
</TABLE>
OTHER
- -----
This Annex II-A excludes intercompany indebtedness.
Each domestic Subsidiary has guaranteed the obligations of Material Sciences
Corporation ("MSC") to Bank of America Illinois.
Money Market Demand Note (Fixed and Floating Rate-Corporation) dated December
20, 1995 in favor of The Northern Trust Company. As of January 31, 1997, there
was no outstanding balance.
MSC and MSC Pre Finish Metals Inc. guarantee the obligations of MSC Walbridge
Coatings Inc. under the Walbridge agreements pursuant to the Parent Agreement
dated as of October 15, 1984, by and among Bethlehem Steel Corporation, Inland
Steel Company, MSC and MSC Pre Finish Metals Inc., the MSC Guaranty dated as of
July 24, 1986 by Material Sciences Corporation in favor of the Lenders to
Walbridge Coatings and the MSC Pre Finish Metals, Inc. Guaranty dated as of July
in favor of the Lenders to Walbridge Coatings.
Lease Guaranty dated as of May 30, 1986, from Material Sciences Corporation to
Corporate Property Associates and Corporate Property Associates 2.
- -----------------
* Pursuant to the Credit Agreement dated as of September 1, 1994, as amended
September 5, 1995 and August 30, 1996, between Bank of America Illinois and
Material Sciences Corporation and the related Note dated August 30, 1996 in the
aggregate principal amount of $35,000,000 in favor of Bank of America.
Promissory Note dated September 10, 1996 in the aggregate principal amount of
$25,000,000 in favor of Bank of America Illinois.
ANNEX II
<PAGE>
MATERIAL SCIENCES CORPORATION
ANNEX II-B
INDEBTEDNESS
<TABLE>
<CAPTION>
OUTSTANDING INDEBTEDNESS
AT FEBRUARY 28, 1997 AT MARCH 31, 1997
-------------------- -----------------
<S> <C> <C>
CONVERTIBLE NOTES - SOLAR GARD ACQUISITION $ 6,651,000 $ 6,651,000
CONVERTIBLE NOTES - SUN PRO ACQUISITION 1,500,000 1,500,000
BANK OF AMERICA UNSECURED LINES OF CREDIT* 15,000,000 22,700,000
SERIES A SENIOR NOTES 30,000,000 30,000,000
WALBRIDGE COATINGS LEASE OBLIGATION 5,298,000 5,154,000
OTHER INDEBTEDNESS 62,000 61,000
----------- -----------
$58,511,000 $66,066,000
=========== ===========
</TABLE>
OTHER
- -----
This Annex II-B excludes intercompany indebtedness.
Each domestic Subsidiary has guaranteed the obligations of Material Sciences
Corporation ("MSC") to Bank of America Illinois.
Money Market Demand Note (Fixed and Floating Rate-Corporation) dated December
20, 1995 in favor of The Northern Trust Company. As of March 31, 1997, there
was no outstanding balance.
MSC and MSC Pre Finish Metals Inc. guarantee the obligations of MSC Walbridge
Coatings Inc. under the Walbridge agreements pursuant to the Parent Agreement
dated as of October 15, 1984, by and among Bethlehem Steel Corporation, Inland
Steel Company, MSC and MSC Pre Finish Metals Inc., the MSC Guaranty dated as of
July 24, 1986 by Material Sciences Corporation in favor of the Lenders to
Walbridge Coatings and the MSC Pre Finish Metals, Inc. Guaranty dated as of July
in favor of the Lenders to Walbridge Coatings.
Lease Guaranty dated as of May 30, 1986, from Material Sciences Corporation to
Corporate Property Associates and Corporate Property Associates 2.
- -----------------------
*Pursuant to the Credit Agreement dated as of September 1, 1994, as amended
September 5, 1995 and August 30, 1996, between Bank of America Illinois and
Material Sciences Corporation and the related Note dated August 30, 1996 in the
aggregate principal amount of $35,000,000 in favor of Bank of America.
Promissory Note dated September 10, 1996 in the aggregate principal amount of
$25,000,000 in favor of Bank of America Illinois.
ANNEX II-B
<PAGE>
MATERIAL SCIENCES CORPORATION
ANNEX III
RESTRICTED INVESTMENTS
<TABLE>
<CAPTION>
INVESTMENTS
AT JANUARY 31, 1997
-------------------
<S> <C>
GUARANTY OF PARTNERSHIP INDEBTEDNESS $1,875,000
HORIZON PRIME SERVICE SHARES
(MATERIAL SCIENCES CORPORATION) 148,000
HORIZON PRIME SERVICE SHARES
(MSC WALBRIDGE COATINGS INC.) 2,041,000
</TABLE>
Cross reference is hereby made to Annexes I and II-A.
ANNEX III
<PAGE>
MATERIAL SCIENCES CORPORATION
ANNEX III-A
RESTRICTED INVESTMENTS
<TABLE>
<CAPTION>
INVESTMENTS
AT FEBRUARY 28, 1997 AT MARCH 31, 1997
-------------------- -----------------
<S> <C> <C>
GUARANTY OF PARTNERSHIP INDEBTEDNESS $1,875,000 $1,875,000
HORIZON PRIME SERVICE SHARES
(MATERIAL SCIENCES CORPORATION) 544,000 250,000
HORIZON PRIME SERVICE SHARES
(MSC WALBRIDGE COATINGS INC.) 298,000 210,000
</TABLE>
Cross reference is hereby made to Annexes I, II-A and II-B.
ANNEX III-A
<PAGE>
MATERIAL SCIENCES CORPORATION
ANNEX IV
Liens
1. See attached schedule.
2. Precautionary filings by lessors of personal property.
3. Right of setoff by Bank of America with respect to bank accounts held at
such bank.
ANNEX IV
<PAGE>
AS OF 2/24/97
-------------
MATERIAL SCIENCES CORPORATION
UCC SEARCH RESULTS
------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Debtor Name County State UCCs Date Filed Secured Party Description
----------- ------ ----- ---- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Material Sciences Corporation San Diego California/1/ Verbal -- no record as of
2/19/97. Evidence to arrive
2/25/97.
- ------------------------------------------------------------------------------------------------------------------------------------
Material Sciences Corporation California/1/ 94000302 01/03/94 Winthrop Resources Corp. IBM Computer equipment
1015 Opus Center and software
9900 Bren Rd. E.
Minnetonka, MN 55343
- ------------------------------------------------------------------------------------------------------------------------------------
Material Sciences Corporation California/1/ 94063589 03/30/94 Winthrop Resources Corp. Telephone equipment
1015 Opus Center
9900 Bren Rd. E.
Minnetonka, MN 55343
- ------------------------------------------------------------------------------------------------------------------------------------
Material Sciences Corporation California/1/ 94152995 07/27/94 Winthrop Resources Corp. Office equipment
1015 Opus Center
9900 Bren Rd. E.
Minnetonka, MN 55343
- ------------------------------------------------------------------------------------------------------------------------------------
Material Sciences Corporation California/1/ 952656048 09/15/95 Winthrop Resources Corp. Computer equipment and
1015 Opus Center software and phones
9900 Bren Rd. E. Lease Schedule #018R
Minnetonka, MN 55343
- ------------------------------------------------------------------------------------------------------------------------------------
Material Sciences Corporation Cook Illinois None No statements on file as of
2/6/97
- ------------------------------------------------------------------------------------------------------------------------------------
Material Sciences Corporation Illinois 3189207 11/16/93 Winthrop Resources Corp. IBM computer equipment
1015 Opus Center
9900 Bren Road East
Minnetonka, MN 55343
Assignee:
---------
Firstar Bank of Minnesota
1550 E. 79th Street
Bloomington, MN 55425
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------------------------
/1/ Preliminary search.
<PAGE>
AS OF 2/24/97
-------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Debtor Name County State UCCs Date Filed Secured Party Description
----------- ------ ----- ---- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
Material Sciences Corporation Illinois 3196791 12/08/93 Winthrop Resources Corporation IBM computer equipment
1015 Opus Center
990 Bren Road East
Minnetonka, MN 55343
Assignee:
---------
Firstar Bank of Minnesota
1550 E. 79th Street
Bloomington, MN 55425
- ------------------------------------------------------------------------------------------------------------------------------------
Material Sciences Corporation Illinois 3196793 12/08/93 Winthrop Resources Corporation Equipment
1015 Opus Center
990 Bren Road East
Minnetonka, MN 55343
Assignee:
---------
First Bank of Minnesota
1550 E. 79th Street
Bloomington, MN 55425
- ------------------------------------------------------------------------------------------------------------------------------------
Material Sciences Corporation Illinois 3196795 12/08/93 Winthrop Resources Corporation IBM computer and
1015 Opus Center software equipment
990 Bren Road East
Minnetonka, MN 55343
Assignee:
---------
Firstar Bank of Minnesota
1550 E. 79th Street
Bloomington, MN 55425
- ------------------------------------------------------------------------------------------------------------------------------------
Material Sciences Corporation Illinois 3206888 01/05/94 Winthrop Resources Corporation IBM equipment
1015 Opus Center
990 Bren Road East
Minnetonka, MN 55343
Assignee:
---------
Firstar Bank of Minnesota
1550 E. 79th Street
Bloomington, MN 55425
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-2-
<PAGE>
AS OF 2/24/97
-------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Debtor Name County State UCCs Date Filed Secured Party
----------- ------ ----- ----- ---------- -------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Material Sciences Corporation Illinois 3241205 04/05/94 Winthrop Resources Corporation
1015 Opus Center
990 Bren Road East
Minnetonka, MN 55343
Assignee:
---------
Firstar Bank of Minnesota
1550 E. 79th Street
Bloomington, MN 55425
- ----------------------------------------------------------------------------------------------------------
Material Sciences Corporation Illinois 3405513 05/25/95 IBM Credit Corporation (Lessor)
Dept. C4E Mail Stop 311
290 Harbor Drive
Stanford, CT 06904
- ----------------------------------------------------------------------------------------------------------
Material Sciences Corporation Illinois 3405519 05/25/95 IBM Credit Corporation (Lessor)
Dept. C4E Mail Stop 311
290 Harbor Drive
Stanford, CT 06904
- ----------------------------------------------------------------------------------------------------------
Material Sciences Corporation Illinois 3447251 09/15/95 Winthrop Resources Corporation
1015 Opus Center
990 Bren Road East
Minnetonka, MN 55343
Assignee:
---------
State Bank of Fargo
3100 13th Avenue South
P.O. Box 10877
Fargo, ND 58103
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Description
- --------------------------------------------------------------------------------
Equipment
- --------------------------------------------------------------------------------
IBM equipment (including all additions, accessions, upgrades, and replacements)
referenced on IBM SUP #214228 dated 05/18/95 qty-type 001-U90179 Note: IBM
Credit Corporation, as lessor in an equipment leasing transaction with the
above-referenced lessee, files this notice pursuant to Section 9-408 of the
Uniform Commercial Code. (05/23/95) equipment is installed as PreFinish Metals
Corp. located at 2300 E. Pratt, Elk Grove Vlg. IL 60007-5919 UCC Log Number: CPM
6S2142 5532647.
- --------------------------------------------------------------------------------
IBM equipment (including all additions, accessions, upgrades, and replacements)
referenced on IBM SUP #211034 dated 05/18/95 qty-type 001-9406 001-G29646 001-
M51893 001-U88289 Note: IBM Credit Corporation, as lessor in an equipment
leasing transaction with the above-referenced lessee, files this notice pursuant
to Section 9-408 of the Uniform Commercial Code. (05/23/95) equipment is
installed as PreFinish Metals Corp. located at 2300 E. Pratt, Elk Grove Vlg., IL
60007-5919 UCC Log Number: CPM6S211034 5532647.
- --------------------------------------------------------------------------------
Computer equipment and software
- --------------------------------------------------------------------------------
-3-
<PAGE>
AS OF 2/24/97
-------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Debtor Name County State UCCs Date Filed
----------- ------ ----- ---- ----------
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Material Sciences Corporation Illinois 3454522 10/5/95
- --------------------------------------------------------------------------------
Material Sciences Corporation Illinois 35172709 7/31/96
- --------------------------------------------------------------------------------
Material Sciences Corporation Illinois 3622542 12/09/96
- --------------------------------------------------------------------------------
Material Sciences Corporation Muskingum Ohio
================================================================================
MSC Laminates and Composites Cook Illinois None
Inc.
- --------------------------------------------------------------------------------
MSC Laminates and Composites Illinois 3596192 10/08/96
Inc.
================================================================================
MSC Laminates and Composites Cook Illinois 96-U12301 10/03/96
(EGV) Inc.
- --------------------------------------------------------------------------------
MSC Laminates and Composites Illinois None
(EGV) Inc.
================================================================================
</TABLE>
- -----------------------------------
Secured Party
-------------
- -----------------------------------
Winthrop Resources Corporation
1015 Opus Center
990 Bren Road East
Minnetonka, MN 55343
Assignee:
- --------
State Bank of Fargo
3100 13th Avenue South
P.O. Box 10877
Fargo, ND 58103
- -----------------------------------
Winthrop Resources Corporation
1015 Opus Center
990 Bren Road East
Minnetonka, MN 55343
- -----------------------------------
IBM Credit Corporation (Lessor)
1133 Westchester Avenue
White, Plains, NY 10604
- -----------------------------------
===================================
- -----------------------------------
Signode Packaging Systems
3610 W. Lake Avenue
Glenview, IL 60025
===================================
Signode Packaging Systems
3610 W. Lake Avenue
Glenview, IL 60025
- -----------------------------------
===================================
- --------------------------------------------------------------------------------
Description
-----------
- --------------------------------------------------------------------------------
Phone equipment
- --------------------------------------------------------------------------------
Computer equipment and software
- --------------------------------------------------------------------------------
IBM equipment (including all additions, accessions, upgrades, and replacements)
referenced on IBM SUP #299039 dated 11/19/96 qty-type 001-F65460 001-F65995
Note: IBM Credit Corporation, as lessor in an equipment leasing transaction with
the above-referenced lessee, files this notice pursuant to Section 9-408 of the
Uniform Commercial Code. (11/26/96) equipment is installed as PreFinish Metals
Corp. located at 2300 E. Pratt, Elk Grove Vlg., IL 60007-5919 UCC Log Number:
CP7MW299039 5532647.
- --------------------------------------------------------------------------------
VERBAL--no record as of 2/17/97. Evidence to arrive 2/25/97.
================================================================================
No statements of file as of 2/2/97
- --------------------------------------------------------------------------------
Debtor's inventory of Signode steel packaging strapping now or hereafter on the
premises or on consignment to the debtor at the debtor's plant in Elk Grove
Village, IL
================================================================================
Debtor's inventory of Signode steel packaging strapping now or hereafter on the
premises or on consignment to the debtor at the debtor's plant in Elk Grove
Village, IL
- --------------------------------------------------------------------------------
No statements on file as of 2/20/97
================================================================================
-4-
<PAGE>
<TABLE>
<CAPTION>
AS OF 2/24/97
-------------
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Debtor Name County State UCCs Date Filed Secured Party Description
----------- -------- ----------- --------- ---------- ------------- -----------
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Pre Finish Metals Inc. Cook Illinois None No statements on
file as of
2/6/97
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Pre finish Metals Inc. Illinois None No statements on
file as of
2/20/97
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Pre Finish Metals Inc. Muskingum Ohio VERBAL-no record
as of 2/17/97.
Evidence to
arrive 2/25/97
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Pre Finish Metals Inc. Ohio None No statements on
file as of
1/30/97
====================================================================================================================================
MSC Pre Finish Metals (EGV) Inc. Cook Illinois None No statements on
file as of
2/6/97
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Pre Finish Metals (EGV) Inc. Illinois None No statements on
file as of
2/20/97
====================================================================================================================================
MSC Pre Finish Metals (MT) Inc. Cook Illinois None No statements on
file as of
2/6/97
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Pre Finish Metals (MT) Inc. Illinois None No statements on
file as of
2/20/97
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Pre Finish Metals (MT) Inc. Muskingum Ohio VERBAL-no record
on file as of
2/17/97. Evidence
to arrive
2/25/97.
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Pre Finish Metals (MT) Inc. Ohio None No statements on
file as of
1/30/97
====================================================================================================================================
MSC Pre Finish Metals (MV) Inc. Cook Illinois None No statements on
file as of
2/6/97
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Pre Finish Metals (MV) Inc. Illinois None No statements on
file as of
2/20/97
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Pre Finish Metals (MV) Inc. Bucks Pennsylvania VERBAL-no record
as of 2/14/97.
Evidence to
arrive 2/25/97.
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Pre Finish Metals (MV) Inc. Pennsylvania None No statements on
file as of
2/13/97
====================================================================================================================================
MSC Specialty Films, Inc. San Diego California VERBAL-no record
as of 2/19/97.
Evidence to
arrive 2/25/97.
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Specialty Films, Inc. California 9626160073 09/12/96 SNS Credit Corp. Networking
9130 Jollyville Rd. Equipment
Suite 200
Austin, CA 78759
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Specialty Films, Inc. Cook Illinois None No statements on
file as of
2/6/97
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Specialty Films, Inc. Illinois None No statements on
file as of
2/20/97
====================================================================================================================================
MSC Walbridge Coatings Inc. Cook Illinois None No statements on
file as of
2/6/97
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Walbridge Coatings Inc. Illinois None No statements on
file as of
2/2/97
- ------------------------------------------------------------------------------------------------------------------------------------
5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AS OF 2/24/97
-------------
- ------------------------------------------------------------------------------------------------------------------------------------
Debtor Name County State UCCs Date Filed Secured Party Description
----------- -------- ---------- ------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
MSC Walbridge Coatings Inc. Wood Ohio VERBAL-no record
as of 2/19/97.
Evidence to
arrive 2/25/97.
- ------------------------------------------------------------------------------------------------------------------------------------
MSC Walbridge Coatings Inc. Ohio None No statements on
file as of
1/3/97
====================================================================================================================================
Solar-Gard International Inc. Orange California None No statements on
file as of
2/18/97
- ------------------------------------------------------------------------------------------------------------------------------------
Solar-Gard International Inc. California None No statements on
file as of
2/3/97
- ------------------------------------------------------------------------------------------------------------------------------------
Solar-Gard International Inc. Cook Illinois None No statements on
file as of
2/6/97
- ------------------------------------------------------------------------------------------------------------------------------------
Solar-Gard International Inc. Illinois None No statements on
file as of
2/20/97
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
-6-
<PAGE>
EXHIBIT A-1
FORM OF SERIES A NOTE
<PAGE>
EXHIBIT A-1
-----------
MATERIAL SCIENCES CORPORATION
7.05% SERIES A SENIOR NOTE
DUE MAY 31, 2007
No. R-___ February __, 1997
$__________
MATERIAL SCIENCES CORPORATION, a Delaware corporation (the "Company),
for value received, promises to pay to __________________________ or registered
assigns, on May 31, 2007, the principal amount of $____________ and to pay
interest (computed on the basis of a 360-day year of twelve 30-day months) on
the principal amount from time to time remaining unpaid hereon at the rate of
7.05% per annum from the date hereof until maturity, payable on May 31 and
November 30 in each year, commencing May 31, 1997, and at maturity, and to pay
interest on any overdue principal and (to the extent legally enforceable), on
any overdue Make-Whole Amount and on any overdue installment of interest at a
per annum rate of 9.05% until paid. Payments of the principal of, the Make-
Whole Amount, if any, and the interest on this Note shall be made in lawful
money of the United States of America at the principal office of the Company.
This Note is issued under and pursuant to the terms and provisions of
the Note Agreement, dated as of February 15, 1997, entered into by the Company
with the Purchasers named in Schedule I thereto (the "Note Agreement"), and this
Note and any holder hereof are entitled to all of the benefits provided for by
such Note Agreement and are bound by the terms provided for by such Note
Agreement or referred to therein. The provisions of the Note Agreement are
incorporated in this Note to the same extent as if set forth at length herein.
As provided in the Note Agreement, upon surrender of this Note for
registration of transfer, duly endorsed or accompanied by a written instrument
of transfer duly executed by the registered holder hereof or its attorney duly
authorized in writing, a new Note for a like unpaid principal amount will be
issued to, and registered in the name of, the transferee upon the payment of the
taxes or other governmental charges, if any, that may be imposed in connection
therewith. The Company may treat the person in whose name this Note is
registered as the owner hereof for the purpose of receiving payment and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
This Note may be declared due prior to its expressed maturity date,
voluntary prepayments may be made hereon and certain prepayments are required to
be made hereon all in the events, on the terms and in the manner as provided in
the Note Agreement. Such prepayments include certain required prepayments on
May 31 of each year commencing May 31,
EXHIBIT A-1
<PAGE>
2001 through May 31, 2006, inclusive, with the remaining principal payable on
May 31, 2007, and certain optional prepayments with a Make-Whole Amount (as
defined in the Note Agreement).
Should the indebtedness represented by this Note or any part thereof
be collected in any proceeding provided for in the Note Agreement or be placed
in the hands of attorneys for collection, the Company agrees to pay, in addition
to the principal, Make-Whole Amount, if any, and interest due and payable
hereon, all costs of collecting this Note, including reasonable attorneys' fees
and expenses.
This Note and the Note Agreement are governed by and construed in
accordance with the internal laws (and not the law of conflicts) of the State of
Illinois.
MATERIAL SCIENCES CORPORATION
By:
------------------------------------------
Its: President and Chief Executive Officer
2
EXHIBIT A-1
<PAGE>
GUARANTY ENDORSEMENT
Payment of principal, interest and Make-Whole Amount, if any, with respect
to this Note is guaranteed pursuant to the terms of the Subsidiary Guaranty
dated February 27, 1997 of the undersigned. Subject to the terms thereof, which
are incorporated herein by reference, the undersigned guarantees the prompt
payment when due of the principal, Make-Whole Amount, if any, and interest, on
this Note.
MSC Pre Finish Metals Inc. MSC Laminates and Composites (EGV) Inc.
By: By:
------------------- --- -------------------
Title: Chief Executive Officer Title: Chief Executive Officer
MSC Pre Finish Metals (EGV) Inc. MSC Walbridge Coatings Inc.
By: By:
------------------- --- -------------------
Title: Chief Executive Officer Title: Chief Executive Officer
MSC Pre Finish Metals (MV) Inc. MSC Specialty Films Inc.
By: By:
------------------- --- -------------------
Title: Chief Executive Officer Title: Chief Executive Officer
MSC Pre Finish Metals (MT) Inc. Solar-Gard International, Inc.
By: By:
------------------- --- -------------------
Title: Chief Executive Officer Title: Chief Executive Officer
MSC Laminates and Composites Inc.
By:
-------------------
Title: Chief Executive Officer
3
EXHIBIT A-1
<PAGE>
EXHIBIT A-2
FORM OF SERIES B NOTE
<PAGE>
EXHIBIT A-2
-----------
MATERIAL SCIENCES CORPORATION
7.05% SERIES B SENIOR NOTE
DUE May 31, 2007
No. R-___ April 30, 1997
$__________
MATERIAL SCIENCES CORPORATION, a Delaware corporation (the "Company), for
value received, promises to pay to __________________________ or registered
assigns, on May 31, 2007, the principal amount of $____________ and to pay
interest (computed on the basis of a 360-day year of twelve 30-day months) on
the principal amount from time to time remaining unpaid hereon at the rate of
7.05% per annum from the date hereof until maturity, payable on May 31 and
November 30 in each year, commencing May 31, 1997, and at maturity, and to pay
interest on any overdue principal and (to the extent legally enforceable), on
any overdue Make-Whole Amount and on any overdue installment of interest at a
per annum rate of 9.05% until paid. Payments of the principal of, the Make-Whole
Amount, if any, and the interest on this Note shall be made in lawful money of
the United States of America at the principal office of the Company.
This Note is issued under and pursuant to the terms and provisions of the
Note Agreement, dated as of February 15, 1997, entered into by the Company with
the Purchasers named in Schedule I thereto (the "Note Agreement"), and this Note
and any holder hereof are entitled to all of the benefits provided for by such
Note Agreement and are bound by the terms provided for by such Note Agreement or
referred to therein. The provisions of the Note Agreement are incorporated in
this Note to the same extent as if set forth at length herein.
As provided in the Note Agreement, upon surrender of this Note for
registration of transfer, duly endorsed or accompanied by a written instrument
of transfer duly executed by the registered holder hereof or its attorney duly
authorized in writing, a new Note for a like unpaid principal amount will be
issued to, and registered in the name of, the transferee upon the payment of the
taxes or other governmental charges, if any, that may be imposed in connection
therewith. The Company may treat the person in whose name this Note is
registered as the owner hereof for the purpose of receiving payment and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
This Note may be declared due prior to its expressed maturity date,
voluntary prepayments may be made hereon and certain prepayments are required to
be made hereon all in the events, on the terms and in the manner as provided in
the Note Agreement. Such prepayments include certain required prepayments on May
31 of each year commencing May 31,
EXHIBIT A-2
<PAGE>
2001 through May 31, 2006, inclusive, with the remaining principal payable on
May 31, 2007, and certain optional prepayments with a Make-Whole Amount (as
defined in the Note Agreement).
Should the indebtedness represented by this Note or any part thereof be
collected in any proceeding provided for in the Note Agreement or be placed in
the hands of attorneys for collection, the Company agrees to pay, in addition to
the principal, Make-Whole Amount, if any, and interest due and payable hereon,
all costs of collecting this Note, including reasonable attorneys' fees and
expenses.
This Note and the Note Agreement are governed by and construed in
accordance with the internal laws (and not the law of conflicts) of the State of
Illinois.
MATERIAL SCIENCES CORPORATION
By:
--------------------------
Its:
2
EXHIBIT A-2
<PAGE>
GUARANTY ENDORSEMENT
Payment of principal, interest and Make-Whole Amount, if any, with respect
to this Note is guaranteed pursuant to the terms of the Subsidiary Guaranty
dated __________, 1997 of the undersigned. Subject to the terms thereof, which
are incorporated herein by reference, the undersigned guarantees the prompt
payment when due of the principal, Make-Whole Amount, if any, and interest, on
this Note.
MSC Pre Finish Metals Inc. MSC Laminates and Composites (EGV) Inc.
By: By:
-------------------------------- --------------------------------
Title: Title:
MSC Pre Finish Metals (EGV) Inc. MSC Walbridge Coatings Inc.
By: By:
-------------------------------- --------------------------------
Title: Title:
MSC Pre Finish Metals (MV) Inc. MSC Specialty Films Inc.
By: By:
-------------------------------- --------------------------------
Title: Title:
MSC Pre Finish Metals (MT) Inc. Solar-Gard International, Inc.
By: By:
-------------------------------- --------------------------------
Title: Title:
MSC Laminates and Composites Inc.
By:
--------------------------------
Title:
3
EXHIBIT A-2
<PAGE>
EXHIBIT B
FORM OF SUBSIDIARY GUARANTY
<PAGE>
EXHIBIT B
---------
SUBSIDIARY GUARANTY
THIS SUBSIDIARY GUARANTY dated ___________, 1997 (the "Guaranty") is
made, jointly and severally, by __________________, _________________ and
____________, and those additional entities that hereafter become parties hereto
by executing counterpart signature pages hereof (each a "Guarantor" and
collectively the "Guarantors") in favor of (i) the Purchasers named in Schedule
I to the Note Agreement dated as of February 15, 1997 (as amended or modified
and in effect from time to time, referred to herein as the "Note Agreement")
between Material Sciences Corporation, a Delaware corporation (the "Company"),
and the Purchasers and (ii) each other holder of the Company's 7.05% Series A
and Series B Senior Notes due May 31, 2007 (the "Notes") from time to time
(collectively, such holders are hereinafter referred to as the "Holders"). All
capitalized terms used herein and not otherwise defined herein shall have the
meanings attributed to such terms in the Note Agreement.
W I T N E S S E T H :
---------------------
WHEREAS, as an inducement to, and as part of the consideration for,
their purchase of the Notes, the Purchasers are to receive, in accordance with
the terms of the Note Agreement, a guarantee of the Company's obligations under
the Note Agreement and the Notes from each of the Guarantors, each of which is a
Subsidiary of the Company;
WHEREAS, certain of the proceeds of the Notes have been and will be
advanced to or for the benefit of the Guarantors, and thus, all unpaid principal
of and accrued and unpaid interest on the Notes and all other obligations of the
Company to the Holders now existing or hereafter arising under the Note
Agreement were and continue to be incurred for and have inured and will continue
to inure to the benefit of the Guarantors (which benefits are hereby
acknowledged); and
WHEREAS, in consideration of the benefits that inure to the
Guarantors, the Guarantors desire to guarantee the due and punctual payment of
all Guaranteed Debt (as hereinafter defined);
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and sufficiency of which are
acknowledged, the Guarantors, jointly and severally, covenant and agree as
follows:
1. Guaranty. Each Guarantor, jointly and severally, irrevocably and
unconditionally guarantees, subject to the limitations set forth in Section 7,
the full and prompt payment when due (whether at stated maturity, upon
acceleration or otherwise) of all unpaid principal of, accrued and unpaid
interest and Make-Whole Amount, if any, on the Notes, all accrued and unpaid
fees and all other obligations of the Company to the Holders now existing or
hereafter incurred under or arising out of or in connection with the Notes or
the Note Agreement, and the performance of the Notes and the Note Agreement (all
such principal, interest, Make-Whole
EXHIBIT B
<PAGE>
Amount, fees, obligations and liabilities being collectively referred to herein
as the "Guaranteed Debt"), whether according to the present terms of the
Guaranteed Debt or any change or changes in the terms, covenants and conditions
of any of the Guaranteed Debt, now or at any time hereafter made or granted, or
any earlier or accelerated date or dates for payment in the Guaranteed Debt. It
is understood that this Guaranty is a continuing guarantee of the payment of the
indebtedness represented by the Guaranteed Debt and shall remain in full force
and effect until the indefeasible payment in full of the Guaranteed Debt or,
with respect to any Guarantor, or the occurrence of a Release Event (as defined
below). Each Guarantor agrees that all references in this Guaranty to Guaranteed
Debt of the Company shall include any successor or assignee of the Company so
long as this Guaranty remains in effect. For purposes of this Guaranty, a
"Release Event" shall mean the date on which the evidence is delivered to a
Holder that a Guarantor has been released in full from its guaranty in favor of
the Company's senior bank lenders.
2. Waiver. Each Guarantor waives notice of the acceptance of this
Guaranty and of the occurrence of any and all of the events described in Section
3. Each Guarantor further waives presentment, protest, notice, demand or action
on delinquency in respect of the Guaranteed Debt or any part thereof. Each
Guarantor agrees that the time or place of payment of the Guaranteed Debt may be
changed or extended, in whole or in part, to a time certain or otherwise, and
may be renewed or accelerated, in whole or in part; that the Company may be
granted indulgences generally; that any of the provisions of the Notes or the
Note Agreement may be modified, amended or waived; that any party liable for the
payment thereof may be granted indulgences or released; and that any other party
liable for the payment of the Guaranteed Debt or liable upon any security
therefor may be released, in whole or in part, at, before and/or after the
stated, extended or accelerated maturity of the Guaranteed Debt, all without
notice to or further assent by any Guarantor, which shall remain bound thereon,
notwithstanding any such exchange, compromise, surrender, extension, renewal,
acceleration, modification, indulgence or release.
3. Certain Rights of Holders. The validity and enforceability of
this Guaranty against each Guarantor shall not be impaired or affected by any of
the following, whether occurring before or after receipt by the Holders of any
notice of termination of this Guaranty: (a) any extension, modification,
continuation or renewal of, or indulgence with respect to, or substitutions for,
the Guaranteed Debt or any part thereof or any agreement relating thereto (other
than any agreement between the Purchaser or any other Holder and one or more
Guarantors specifically modifying or amending the terms of this Guaranty in
accordance with Section 9) at any time; (b) any failure or omission to enforce
any right, power or remedy with respect to the Guaranteed Debt or any part
thereof or any agreement relating thereto; (c) any waiver of any right, power or
remedy or of any default with respect to the Guaranteed Debt or any part thereof
or any agreement relating thereto; (d) any release, surrender, compromise,
settlement, waiver, subordination or modification, with or without
consideration, of any other guaranties with respect to the Guaranteed Debt or
any part thereof, or any other obligation of any Person with respect to the
Guaranteed Debt or any part thereof; (e) the enforceability or validity of the
Guaranteed Debt or any part thereof or the genuineness, enforceability or
validity of any agreement relating thereto; (f) the application of payments
received from any source to the
2
EXHIBIT B
<PAGE>
payment of indebtedness of the Company or any Subsidiary other than the
Guaranteed Debt, any part thereof or amounts which are not covered by this
Guaranty even though a Holder might lawfully have elected to apply such payments
to any part or all of the Guaranteed Debt or to amounts which are not covered by
this Guaranty; or (g) any other circumstances which otherwise under the laws of
any jurisdiction constitute a legal or equitable discharge of a surety or a
guarantor or a bar (in the nature of a moratorium or otherwise) to the
enforcement of the rights of a Holder against the Company, all whether or not
any Guarantor shall have had notice or knowledge of any act or omission referred
to in the foregoing clauses (a) through (g) of this paragraph. Each Guarantor
agrees that such Guarantor's obligation to make payment in accordance with the
terms of this Guaranty shall not be impaired, modified, changed, released or
limited in any manner whatsoever in the event any portion of the Guaranteed Debt
is invalid or unenforceable against the Company, or by any impairment,
modification, change, release or limitations of the liability of the Company or
its estate in bankruptcy resulting from the operation of any present or future
provision of the Federal Bankruptcy Code or other similar federal or state
statute, or from the decision of any court.
4. Absolute Guaranty. The obligations of each Guarantor under this
Guaranty are joint and several and are absolute and unconditional and shall
remain in full force and effect without regard to, and shall not be released,
suspended, discharged, terminated or otherwise affected by, without limitation,
(i) any action or inaction by a Holder or any other circumstance contemplated in
Section 3; or (ii) the existence of any other guaranties of the Guaranteed Debt,
whether or not such other guaranties have been acted upon in any way.
5. Primary Liability of Guarantors. This Guaranty is a primary
obligation of each Guarantor. Each Guarantor agrees that this Guaranty may be
enforced by the Holders, or any of them, and each Guarantor hereby waives the
right to require the Holders (or any of them) to proceed against the Company or
any other person (including a co-guarantor) or to require the Holders (or any of
them) to pursue any other remedy or enforce any other right. Each Guarantor
further agrees that nothing contained herein shall prevent the Holders, or any
of them, from suing on the Notes or the Note Agreement or from exercising any
other rights available to it under the Notes or the Note Agreement and the
exercise of any of the aforesaid rights and the completion of any foreclosure
proceedings shall not constitute a discharge of any of the Guarantor's
obligations hereunder until the indefeasible payment in full of the Guaranteed
Debt or, with respect to any Guarantor, the occurrence of a Release Event.
6. Continuing Guaranty, etc. This Guaranty shall continue in full
force and effect until the Guaranteed Debt is indefeasibly paid in full,
notwithstanding any extensions, modifications, renewals or indulgences with
respect to, or substitutions for, the Guaranteed Debt. Notwithstanding the
foregoing, this Guaranty shall continue to be effective, or be reinstated, as
the case may be, if at any time payment, or any part thereof, of any of the
Guaranteed Debt is rescinded or must otherwise be restored or returned by any
Holder upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of the Company, or upon or as a result of the appointment of a
receiver, intervenor or conservator of, or trustee or similar officer for, the
Company or any substantial part of its property, or otherwise, all as though
such payments had
3
EXHIBIT B
<PAGE>
not been made. No failure or delay on the part of any Holder in exercising any
right, power or privilege hereunder and no course of dealing between any
Guarantor or any Holder shall operate as a waiver thereof; nor shall any single
or partial exercise of any right, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, power or
privilege. The rights, powers and remedies herein expressly provided are
cumulative and not exclusive of any rights, powers or remedies which any Holder
would otherwise have. No notice to or demand on any Guarantor in any case shall
entitle any Guarantor to any other or future notice or demand in similar or
other circumstances or constitute a waiver of the rights of any Holder to act in
any circumstances without notice or demand. Credit may be granted or continued
from time to time by the Holders to the Company without notice to or
authorization from any Guarantor regardless of the Company's financial or other
condition at the time of any such grant or continuation.
7. Maximum Liability of Guarantor. Anything herein or in any other
document, instrument or agreement executed and delivered in connection herewith
to the contrary notwithstanding, the maximum liability of a Guarantor hereunder
as at any date of determination thereof shall in no event exceed such
Guarantor's Maximum Guaranteed Amount (as defined below) as determined as of the
date of the execution and delivery of this Guaranty (unless a later date shall
be deemed by a court of competent jurisdiction to be applicable to the
determination of the solvency of such Guarantor for purposes of any applicable
federal or state fraudulent transfer, fraudulent conveyance or similar law
governing debtors and the enforceability of debtors' obligations ("Applicable
Insolvency Law"), in which event such other date shall apply), increased by any
increase (but not decreased by any subsequent decrease) in such Guarantor's
Maximum Guaranteed Amount, unless the inclusion of any such increase is contrary
to any Applicable Insolvency Law. For the purpose of this paragraph, "Maximum
Guaranteed Amount" shall mean the greater of (i) the aggregate amount of the
Guaranteed Debt the proceeds of which are used to make a Valuable Transfer (as
defined below) to such Guarantor and (ii) ninety-five percent (95%) of the
Adjusted Net Worth (as defined below) of such Guarantor, provided that in no
event shall the amount specified in this clause (ii) be an amount that would
result in such Guarantor having unreasonably small capital, as such term is used
in any Applicable Insolvency Law. For the purpose of this paragraph, "Valuable
Transfer" shall mean the amount of (i) all loans, advances or capital
contributions made to the Guarantor with proceeds of the Guaranteed Debt; (ii)
all debt securities or other obligations of the Guarantor acquired from the
Guarantor or retired by the Guarantor with proceeds of the Guaranteed Debt;
(iii) the fair market value of all property acquired with proceeds of the
Guaranteed Debt and transferred, absolutely and not as collateral, to the
Guarantor; (iv) all equity securities of the Guarantor acquired from the
Guarantor with proceeds of the Guaranteed Debt; and (v) the value of any
quantifiable economic benefits not included in clauses (i) through (iv), above,
but includable in accordance with Applicable Insolvency Law, accruing to the
Guarantor as a result of the Guaranteed Debt. For purposes of this paragraph,
"Adjusted Net Worth" shall mean the excess of (i) the amount of the "present
fair salable value" of the assets of the Guarantor as of the date of
determination, over (ii) the amount of all "liabilities of such Guarantor,
contingent or otherwise", as of the date of determination, as such quoted terms
are determined in accordance with Applicable Insolvency Law. In determining the
Adjusted Net Worth of the Guarantor for purposes of calculating the
4
EXHIBIT B
<PAGE>
Maximum Guaranteed Amount for the Guarantor, the liabilities of the Guarantor to
be used in such determination pursuant to clause (ii) of the preceding sentence
shall in any event include any amounts guaranteed by the Guarantor pursuant to
clause (i) of the definition of Maximum Guaranteed Amount.
8. Successors; Assigns. This Guaranty shall be binding upon each
Guarantor and its respective successors and permitted assigns and shall inure to
the benefit of the Purchaser, each other Holder and their respective successors
and assigns so long as such successor and assign holds a Note. Each Guarantor
expressly waives notice of transfer or assignment of the Guaranteed Debt, or any
part thereof, or of the rights of any Holder hereunder. Failure to give notice
will not affect the liabilities of each Guarantor hereunder.
9. Amendment; Waiver. This Guaranty may be amended only by an instrument
in writing executed jointly by the Guarantors and a majority in aggregate
principal amount of outstanding Notes.
10. Note Agreement. Each Guarantor acknowledges that an executed (or
conformed) copy of the Note Agreement has been made available to its principal
executive officers and such officers are familiar with the contents thereof.
11. Setoff. In addition to, and without limitation of, any rights of the
Holders under applicable law, any indebtedness from such Holders to any
Guarantor (including all account balances, whether provisional or final and
whether or not collected or available) may be offset, upon the occurrence and
continuance of a Default or Event of Default, and applied toward the payment of
the obligations owing to such Holders, whether or not the Guaranteed Debt, or
any part thereof, shall then be due.
12. Notices. All notices and other communications hereunder shall be made
in the manner and with the effect provided in Section 11.2 of the Note
Agreement, if to any Holder, at the address for notices specified in the Note
Agreement, and, if to any Guarantor, to the address set forth below:
c/o Material Sciences Corporation
2200 East Pratt Boulevard
Elk Grove Village, IL 60007
Attention: Chief Financial Officer
13. Choice of Law. This Guaranty shall be construed in accordance with the
internal laws (and not the law of conflicts) of the State of Illinois.
14. Expenses; Indemnity. In addition to its Maximum Guaranteed Amount,
each Guarantor agrees to reimburse (to the extent the Holder is not so
reimbursed by the Company or any other Guarantor) (i) each Holder for any costs
and out-of-pocket expenses (including reasonable attorneys' fees and reasonable
time charges of attorneys for such Holder, which attorneys may be employees of
such Holder) paid or incurred by such Holder in connection with any amendment
and modification of this Guaranty and (ii) each Holder for any costs and out-of-
pocket expenses (including attorneys' fees and time charges of attorneys for
such Holder, which
5
EXHIBIT B
<PAGE>
attorneys may be employees of such Holder) paid or incurred by such Holder in
connection with the collection and enforcement of this Guaranty. Each Guarantor
further agrees to indemnify each Holder, and its directors, officers and
employees, against all losses, claims, damages, penalties, judgments,
liabilities and expenses (including, without limitation, all expenses of
litigation or preparation therefor whether or not such Holder is a party
thereto) which it may pay or incur arising out of or relating to this Guaranty,
provided, however, that such Holder, and its directors, officers or employees,
shall not have a right to be indemnified or held harmless hereunder for its own
gross negligence or willful misconduct. The obligations of the Guarantors under
this Section 14 shall survive the termination of this Guaranty.
15. Submission to Jurisdiction. Each Guarantor hereby irrevocably submits
to the jurisdiction of the courts of the State of Illinois and of the courts of
the United States of America having jurisdiction in the State of Illinois for
the purpose of any legal action or proceeding in any such court with respect to,
or arising out of, this Guaranty, the Note Agreement or the Notes. The
Guarantors designate and appoint CT Corporation System, Chicago, Illinois as
their lawful agent in the State of Illinois upon which may be served and which
may accept and acknowledge, for and on behalf of each Guarantor all process in
any action, suit or proceedings that may be brought against any Guarantor in any
of the courts referred to in this Section 15 and agrees that such service of
process, or the acceptance or acknowledgment thereof by said agent, shall be
valid, effective and binding in every respect, provided, however, that if said
agency shall cease for any reason whatsoever, each Guarantor designates and
appoints, without power or revocation, the Secretary of State of the State of
Illinois to serve as its agent for service of process. If the Purchaser or any
other holder of any Note shall cause process to be served upon any Guarantor by
being served upon such agent, a copy of such process shall also be mailed to
such Guarantor by United States registered mail, first class postage prepaid, at
such Guarantor's address set forth in Section 12.
16. Entire Agreement; Severability of Provisions. This Guaranty
constitutes the entire agreement of the Guarantors with the Purchaser with
respect to the subject matter hereof and supersedes all prior agreements and
understandings relating to the subject matter hereof. Any provision in this
Guaranty that is held to be inoperative, unenforceable, or invalid in any
jurisdiction shall, as to that jurisdiction, be inoperative, unenforceable, or
invalid without affecting the remaining provisions in that jurisdiction or the
operation, enforceability, or validity of that provision in any other
jurisdiction, and to this end the provisions of this Guaranty are declared to be
severable.
17. Captions. Captions are for reference only and in no way limit the
terms of the Guaranty.
18. Counterparts. This Guaranty may be executed in one or more
counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and
6
EXHIBIT B
<PAGE>
the same instrument. The failure of any Guarantor to execute a counterpart
hereof shall not affect or impair the validity or enforceability of this
Guaranty against any Guarantor executing this Guaranty.
19. Severability of Provisions. Any provision in this Guaranty that is
held to be inoperative, unenforceable, or invalid in any jurisdiction shall, as
to that jurisdiction, be inoperative, unenforceable, or invalid without
affecting the remaining provisions in that jurisdiction or the operation,
enforceability, or validity of that provision in any other jurisdiction, and to
this end the provisions of this Guaranty are declared to be severable.
7
EXHIBIT B
<PAGE>
IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to be
executed and delivered as of the date first above written.
MSC Pre Finish Metals Inc.
MSC Pre Finish Metals (EGV) Inc.
MSC Pre Finish Metals (MV) Inc.
MSC Pre Finish Metals (MT) Inc.
MSC Laminates and Composites Inc.
MSC Laminates and Composites (EGV) Inc.
MSC Walbridge Coatings Inc.
MSC Specialty Films Inc.
Solar-Gard International, Inc.
By:
-------------------
Title: President and Chief Executive Officer
Signing on behalf of each of the foregoing
Guarantors
8
EXHIBIT B
<PAGE>
EXHIBIT C
FORM OF LEGAL OPINION OF
PURCHASER'S SPECIAL COUNSEL
<PAGE>
EXHIBIT C
---------
LEGAL OPINIONS
The opinion of Gardner, Carton & Douglas, special counsel for the
Purchaser, shall be to the effect that:
1. The Company is a corporation organized and validly existing in good
standing under the laws of the State of Illinois, with all requisite corporate
power and authority to enter into the Agreement and to issue and sell the Notes.
2. The Agreement and the Notes have been duly authorized by proper
corporate action on the part of the Company, have been duly executed and
delivered by an authorized officer of the Company, and constitute the legal,
valid and binding agreements of the Company, enforceable in accordance with
their terms, except to the extent that enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of
general application relating to or affecting the enforcement of the rights of
creditors or by equitable principles, regardless of whether enforcement is
sought in a proceeding in equity or at law.
3. The Subsidiary Guaranty has been duly authorized by proper corporate
action on the part of each Subsidiary Guarantor, has been duly executed and
delivered by an authorized officer of each Subsidiary Guarantor, and constitutes
the legal, valid and binding obligation of each Subsidiary Guarantor,
enforceable in accordance with its terms, except to the extent the enforcement
of the Subsidiary Guaranty may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws of general application relating to or
affecting the enforcement of the rights of creditors or by equitable principles,
regardless of whether enforcement is sought in a proceeding in equity or at law.
4. Based upon the representations set forth in the Agreement, the
offering, sale and delivery of the Notes and the issuance and delivery of the
Subsidiary Guaranty do not require the registration of the Notes or the
Subsidiary Guaranty under the Securities Act of 1933, as amended, nor the
qualification of an indenture under the Trust Indenture Act of 1939, as amended.
5. The issuance and sale of the Notes, the execution and delivery of the
Agreement and compliance with the terms and provisions of the Notes and the
Agreement will not conflict with or result in any breach of any of the
provisions of the Certificate of Incorporation or By-Laws of the Company.
EXHIBIT C
<PAGE>
6. The execution, delivery and performance of the Subsidiary Guaranty
will not violate any provisions of the Certificates of Incorporation or By-Laws
of the Subsidiary Guarantors.
7. No approval, consent or withholding of objection on the part of, or
filing, registration or qualification with, any governmental body, Federal or
state, is necessary in connection with the execution and delivery of the Note
Agreement or the Notes.
The opinion of Gardner, Carton & Douglas also shall state that the legal opinion
of Kirkland & Ellis, counsel for the Company, delivered to you pursuant to the
Agreement, is satisfactory in form and scope to Gardner, Carton & Douglas, and,
in its opinion, the Purchasers and it are justified in relying thereon and shall
cover such other matters relating to the sale of the Notes and the execution and
delivery of the Agreement as the Purchasers may reasonably request.
2
EXHIBIT C
<PAGE>
EXHIBIT D
FORM OF LEGAL OPINION OF
COUNSEL TO THE COMPANY
<PAGE>
EXHIBIT D
---------
LEGAL OPINIONS
The opinion of Kirkland & Ellis, counsel for the Company, shall be to the
effect that:
1. Each of the Company and each Subsidiary is a corporation duly
incorporated, validly existing in good standing under the laws of its
jurisdiction of incorporation, and each has all requisite corporate power and
authority to own and operate its properties, to carry on its business as now
conducted, and, in the case of the Company, to enter into and perform under the
Note Agreement and to issue and sell the Notes.
2. The Note Agreement and the Notes have been duly authorized by proper
corporate action on the part of the Company, have been duly executed and
delivered by an authorized officer of the Company, and constitute the legal,
valid and binding agreements of the Company, enforceable in accordance with
their terms, except to the extent that enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws of
general application relating to or affecting the enforcement of the rights of
creditors or by equitable principles, regardless of whether enforcement is
sought in a proceeding in equity or at law.
3. Based upon the representations set forth in the Note Agreement, the
offering, sale and delivery of the Notes and delivery of the Subsidiary Guaranty
do not require the registration of the Notes or the Subsidiary Guaranty under
the Securities Act of 1933, as amended, or the qualification of an indenture
under the Trust Indenture Act of 1939, as amended.
4. No authorization, approval or consent of any governmental or regulatory
body is necessary or required in connection with the execution and delivery by
the Company of the Note Agreement or the offering, issuance and sale by the
Company of the Notes, and no designation, filing, declaration, registration
and/or qualification with any governmental authority is required in connection
with the offer, issuance and sale of the Notes by the Company.
5. The issuance and sale of the Notes by the Company, the performance of
the terms and conditions of the Notes and the Note Agreement and the execution
and delivery of the Note Agreement do not conflict with, or result in any breach
or violation of any of the provisions of, or constitute a default under, or
result in the creation or imposition of any Lien upon the property of the
Company or any Subsidiary pursuant to the provisions of (i) the Certificate of
Incorporation or By-laws of the Company or any Subsidiary, (ii) any loan
agreement to which the Company or any Subsidiary is a party or by which any of
them or their property is bound, (iii) any other agreement or instrument known
to such counsel to which the Company or any Subsidiary is a party or by which
any of them or their property is bound, (iv) any law (including usury laws) or
EXHIBIT D
<PAGE>
regulation applicable to the Company, or (v) any order, writ, injunction or
decree of any court or governmental authority applicable to the Company.
6. All of the issued and outstanding shares of capital stock of each
Subsidiary have been duly and validly issued, are fully paid and nonassessable
and are owned of record by the Company.
7. Neither the Company nor any Subsidiary is (i) a "public utility
company" or a "holding company," or an "affiliate" or a "subsidiary company" of
a "holding company," or an "affiliate" of such a "subsidiary company," as such
terms are defined in the Public Utility Holding Company Act of 1935, as amended
(the "1935 Act"), (ii) a "public utility" as defined in the Federal Power Act,
as amended, or (iii) an "investment company" or an "affiliated person" thereof,
as such terms are defined in the Investment Company Act of 1940, as amended (the
"1940 Act").
8. The issuance of the Notes and the intended use of the proceeds of the
sale of the Notes do not violate or conflict with Regulation G, T, U or X of the
Board of Governors of the Federal Reserve System.
The opinion of Kirkland & Ellis, counsel for the Company, shall cover such
other matters relating to the sale of the Notes as the Purchasers may reasonably
request. With respect to matters of fact on which such opinion is based, such
counsel shall be entitled to rely on appropriate certificates of public
officials and officers of the Company and with respect to matters governed by
the laws of any jurisdiction other than the United States of America, the
General Corporation Law of the State of Delaware, and the laws of the State of
Illinois, such counsel may rely upon the opinions of counsel deemed (and stated
in their opinion to be deemed) by them to be competent and reliable.
2
EXHIBIT D
<PAGE>
SEVERANCE BENEFITS AGREEMENT
----------------------------
This Severance Benefits Agreement ("Agreement") is made as of this ____ day
of October, 1996, by and between Material Sciences Corporation, a Delaware
corporation (the "Company"), and James J. Waclawik, Sr. (the "Executive").
1. Severance Pay. In the event the Executive's employment with the
Company is terminated by the Company other than for "Good Cause" (as defined in
Paragraph 2 below) or by the Executive for "Good Reason" (as defined in
Paragraph 3 below), the Company (i) shall pay the Executive eighteen (18)
monthly severance payments, each payment being in an amount equal to the
Executive's monthly Base Salary at the time of such termination, exclusive of
any special payments, bonuses, fringe benefits or other compensation to which
the Executive may then be entitled and (ii) shall pay the Executive's COBRA
premiums for a period of eighteen (18) months after such termination. The
Executive shall not be entitled to receive such monthly severance payments or to
have his COBRA premiums paid by the Company if the Company terminates the
Executive's employment for Good Cause or if the Executive terminates his own
employment for other than Good Reason.
2. Good Cause. For purposes of this Agreement, the term "Good Cause"
shall be defined as (i) the Executive's commission of any act of theft,
embezzlement or dishonesty; (ii) the Executive's commission of any crime or
other activity which results in injury to the business, property, reputation or
business relations of the Company or any of its affiliates, subsidiaries,
successors or other related entities; (iii) the Executive's commission of any
act of gross, willful or wanton negligence in the performance of his job duties
for the Company; (iv) The Executive's willful refusal to perform or substantial
neglect of any job duties assigned to him by the Company; or (v) the Executive's
violation or breach of any statutory or common law fiduciary duty or duty of
loyalty to the Company
3. Good Reason. For purposes of this Agreement, the term "Good
Reason" shall be defined as (i) a material diminution in the Executive's
responsibilities, duties and powers in the Company; or (ii) a relocation of the
Company's principal executive offices or the Executive's office from their
present location to a location outside of the northern Illinois area, including,
but not limited to, the greater Chicago metropolitan area.
4. Withholding of Taxes. The company may withhold from any amounts
payable under this Agreement all Federal, State, city or other taxes as may be
required pursuant to any law, governmental regulation or ruling.
5. Not An Employment Agreement. Nothing in this Agreement shall give
the Executive any rights (or impose any obligations) to continue in the employ
of the Company or any subsidiary or successor of the Company, nor shall it give
the Company any rights (or impose any obligations) for the continued performance
of duties by the Executive for the Company or any subsidiary or successor of the
Company.
<PAGE>
6. No Assignment. The Executive's right to receive payments under this
Agreement shall not be assignable or transferable, whether by pledge, creation
of a security interest or otherwise, other than a transfer by will or by laws of
descent or distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
7. Successors. This Agreement shall be binding upon and inure to the
benefit of the Company, its successors and assigns (including, without
limitation, any company into or with which the Company may merge or
consolidate).
8. Applicable Law. This Agreement is entered into and shall be
governed for all purposes by the laws of the State of Illinois.
IN WITNESS WHEREOF, the parties hereto affix their signatures to this
Agreement as their own free act and deed as follows:
JAMES J. WACLAWIK, SR. MATERIAL SCIENCES CORPORATION
__________________________________ By:_________________________________
Frank J. Lazowski, Jr.
Vice President - Human Resources
-2-
<PAGE>
EXHIBIT 11
COMPUTATION OF NET INCOME PER SHARE
For Each of the Five Years ending February 28 or 29,
(in thousands, except share data)
<TABLE>
<CAPTION>
1997 1996 (restated) 1995 1994 1993
----------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Income $ 16,236 $ 8,497 $ 16,740 $ 11,802 $ 7,617
=========== =========== =========== =========== ===========
Weighted average shares
outstanding during the
year 15,250,000 15,087,000 14,851,000 14,742,600 13,177,470
Net addition to shares
outstanding under the
treasury stock method
due to stock options
and restricted stock 355,068 350,054 389,898 315,021 206,130
----------- ----------- ----------- ----------- -----------
Shares outstanding used
in computing net income
per share 15,605,068 15,437,054 15,240,898 15,057,621 13,383,600
=========== =========== =========== =========== ===========
Net income per share $ 1.04 $ 0.55 $ 1.10 $ 0.78 $ 0.56
=========== =========== =========== =========== ===========
</TABLE>
74
<PAGE>
EXHIBIT 21
Subsidiaries Of The Registrant
<TABLE>
<CAPTION>
State or
Jurisdiction of
Name of Subsidiary Incorporation
------------------ ---------------
<S> <C>
MSC Pre Finish Metals Inc. Illinois
MSC Pre Finish Metals (EGV) Inc. Delaware
MSC Pre Finish Metals (MV) Inc. Delaware
MSC Pre Finish Metals (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 Corporation U. S. Virgin Islands
Solar-Gard International, Inc. Florida
Solar-Gard International (UK) Limited United Kingdom
Solar-Gard (SEA) Pte., Ltd. Singapore
Solar-Gard (Canada) Inc. Canada
</TABLE>
75
<PAGE>
EXHIBIT 23
Consent of Arthur Andersen LLP
76
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports dated April 29, 1997, 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, 33-81064,
333-15679, and 333-15677).
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
May 27, 1997
77
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> 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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 2,116
<SECURITIES> 0
<RECEIVABLES> 38,215
<ALLOWANCES> 2,271
<INVENTORY> 30,952
<CURRENT-ASSETS> 75,005
<PP&E> 242,340
<DEPRECIATION> 87,954
<TOTAL-ASSETS> 254,089
<CURRENT-LIABILITIES> 43,851
<BONDS> 54,761
<COMMON> 325
0
0
<OTHER-SE> 133,048
<TOTAL-LIABILITY-AND-EQUITY> 254,089
<SALES> 278,017
<TOTAL-REVENUES> 278,017
<CGS> 203,809
<TOTAL-COSTS> 203,809
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 420
<INCOME-PRETAX> 26,400
<INCOME-TAX> 10,164
<INCOME-CONTINUING> 16,236
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,236
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.04
</TABLE>
