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FORM 10-K/A
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 29, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number: 1-8803
MATERIAL SCIENCES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-2673173
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 EAST PRATT BOULEVARD
ELK GROVE VILLAGE, ILLINOIS 60007
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 847-439-8270
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, $.02 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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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
$250,197,000 at April 26, 1996 (based on the closing sale price on the New York
Stock Exchange on such date, as reported by The Wall Street Journal Midwest
Edition).
At April 26, 1996, the registrant had outstanding an aggregate of 15,396,750
shares of its Common Stock.
Documents Incorporated by Reference
Portions of the following document are incorporated herein by reference into
the indicated Part of this Form 10-K/A:
Document Part of Form 10-K/A into which incorporated
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Registrant's proxy statement for Part III
the Annual Meeting of Shareowners
held on June 20, 1996.
On April 7, 1997, Material Sciences Corporation (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 year 1995. The Company's financial statements for fiscal
year 1996 have been restated to reflect the correction of these accounting
irregularities and such restated financial statements are included in this Form
10-K/A for the fiscal year ended February 29, 1996. While this Form 10-K/A
restates in its entirety (as originally filed) the Company's Form 10-K for the
fiscal year ended February 29, 1996, for the convenience of the reader, only
Items 6, 7 and 8 of such Form 10-K have been modified to reflect such restated
financial statements and are hereby amended. For additional information
regarding such accounting irregularities, reference is made to Note 2 of the
Notes to Consolidated Financial Statements in Item 8 below.
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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
(the new name for metallizing and coating); coil coating; and
electrogalvanizing. The Company's materials are used in motor vehicles, building
products, appliances, office equipment, furniture, lighting products, packaging,
and a wide range of other products. MSC develops proprietary value-added
materials and processes to meet specific customer and market requirements and
believes it has achieved product or technological leadership in each of its four
product groups.
Customers generally benefit from the energy savings and environmental
advantages of MSC's manufacturing processes and products. In the laminates and
composites product group, and the specialty films product group, the Company is
primarily a manufacturer and marketer of its own proprietary products. In the
coil coating product group and electrogalvanizing product group, MSC generally
acts as a "toll coater" by processing its customers' metal for a fee, without
taking ownership of the metal.
Headquartered near Chicago, the Company, through its MSC Pre Finish Metals
Inc., f/k/a Pre Finish Metals Incorporated ("PFM"), MSC Specialty Films Inc.,
f/k/a/ Deposition Technologies, Inc. ("MSCSF"), MSC Laminates and Composites
Inc. ("MSCLC"), and MSC Walbridge Coatings Inc., f/k/a Pre Finish Metals (EG)
Incorporated ("MSCWC") subsidiaries, operates seven manufacturing plants. PFM
operates two facilities in Elk Grove Village, Illinois, one facility in
Morrisville, Pennsylvania, and one facility in Middletown, Ohio. MSCWC, a
subsidiary of PFM, operates a facility in Walbridge, Ohio on behalf of Walbridge
Coatings, an Illinois Partnership (the "Partnership"), formed among MSCWC,
Inland Steel Industries, Inc. ("Inland") and Bethlehem Steel Corporation
("Bethlehem" or "BSC"). MSCSF operates a thin film sputter-deposition
metallizing, coating, and laminating facility in San Diego, California. MSCLC
operates one facility in Elk Grove Village, Illinois, in conjunction with PFM.
Additional information concerning certain transactions and events is included
in Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7.
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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.
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. 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(R) 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(R) 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(R) are also being evaluated for use in dash panels, floor pans, and
other internal components in order to help reduce road noise. Polycore
Composites(R) are also found in a number of other products, including lawn mower
engines, air conditioners, computer disk drive covers, and appliances, and
numerous other uses are under evaluation.
The disc brake noise damper market developed as manufacturers moved to
asbestos-free brake linings. The increased brake noise these linings produce can
be virtually eliminated by the composite materials pioneered by the Company. The
Company believes it has a 50% share of the domestic disc brake noise dampers
original equipment market. The Company also believes it is a significant
supplier to the emerging domestic aftermarket, which it estimates will grow to
be at least three times as large as the domestic original equipment market. Disc
brake noise damper sales for the 1996 fiscal year set another record as a result
of increased sales to General Motors Corporation ("General Motors"), Ford Motor
Company and Chrysler Corporation, and due to further penetration into the disc
brake aftermarket.
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Specular+(R), 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+(R) produces virtually the same amount of light with only half
the bulbs of a typical white painted fixture. The result is a significant
reduction in the cost of electricity for lighting.
The market for laminate and composite materials is competitive, both
domestically and internationally. There are competitors in each product market
served by the Company, some of which have greater resources than the Company.
The Company believes, however, that its technology, product development
capability, technical support, and customer service place it in a strong
competitive position in this market.
Specialty Films
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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 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.
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This product group includes the silver-sputtered, coated film used in
Specular+(R), although intercompany sales of such film are excluded from this
product group's sales. The Company has developed other products for the high
reflective fluorescent lighting market. In addition, the Company participates in
the microwaveable food packaging market with its Insceptor(R) film products that
offer precise control of heating, browning and crisping of food during the
cooking process. The Company has established agreements with rigid and flexible
packaging companies to supply certain customers in the domestic market. This
product group also includes security seals, which are used in tamper-evident
packaging and anti-counterfeit measures.
In September 1995, MSC acquired all of the outstanding capital stock of Solar-
Gard International, Inc. ("SGI"). Headquartered in Largo, Florida, SGI was the
largest independent distributor of professionally installed solar control window
film products in the world prior to the acquisition. It was also MSC's largest
distributor, with a relationship going back to 1980. SGI had eight wholly owned
distribution centers across the United States, one center in each of Canada and
England, and a joint venture operation in Singapore at the time of acquisition
and subsequent to the acquisition, SGI has expanded in California (two
distribution centers) and Florida (Latin American export center). SGI currently
distributes products in over sixty countries.
During the first quarter of fiscal 1997, the Company entered into an agreement
to purchase certain assets of a distributor of solar control and safety window
film products with operations primarily in the Western United States and
throughout the world. The Company anticipates this transaction will be completed
during the first quarter of fiscal 1997.
MSC believes that there are four major domestic companies producing
competitive specialty film materials in addition to the Company. Some of these
competitors have greater resources than the Company, including patented
technology. The Company competes on the basis of a number of factors, including
product performance and quality, completeness of product offering, new product
development capabilities, service, and price. The Company believes that it is
competitive in these areas.
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
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material capable of being drawn, formed, bent, bolted, riveted, chemically
bonded and welded. The Company generally acts as a "toll coater" by processing
coils for steel mills, or their customers, without taking ownership of the
metal. The Company charges by weight or surface area processed.
The Company's coil coated products are used by manufacturers in building
products, heating and air conditioning, fuel tanks, lighting, truck trailer,
above-ground swimming pools, and other products. The Company's strategy in its
coil coating business has been to produce high-volume competitive coated
products at low cost, as well as to identify, develop and produce specialty
niche products meeting specific customer requirements. The Company also offers
proprietary products such as Weldrite(R), a weldable coating; Enduratex(R), an
embossed plastisol coated material capable of being stained to simulate the look
of wood; and ER6, a patented high temperature non-stick coating designed for
bakeware and cookware products.
Coil coating technology reduces the environmental impact of painting and
reduces manufacturers' energy needs. In coil coating processes, over 95% of the
coating material is applied, in contrast with the significant waste from
"overspray" typical in post-fabrication painting. The energy required to cure
coil coated metal is substantially less than that required by other coating
methods. These savings are achieved because of high-speed material processing
and because 90% to 95% of the coatings' volatile organic compounds are recycled
back into the curing ovens and used as fuel.
Manufacturers that use prepainted materials can eliminate or significantly
reduce on-site post paint lines and the associated compliance with complex
environmental and other regulations. Prepainted materials facilitate the
adoption of just-in-time and continuous process manufacturing techniques which
can result in improvements to work in process inventory, plant utilization, and
productivity. Since prepainted metal is cleaned, treated and painted while flat,
the result is a more uniform and higher quality 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
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Company believes it is one of the largest coil coaters, with approximately 14%
of the total tons processed in the United States in calendar 1995. Competition
in the coil coating industry is heavily influenced by geography, due to the high
costs involved in transporting sheet metal coils. Within geographic areas, coil
coaters compete on the basis of quality, price, customer service, technical
support, and product development capability.
Electrogalvanizing
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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 3.4 million tons in
calendar 1995. The Company believes that demand will continue to grow as
automobile manufacturers respond to consumer demands for longer warranty
protection against rust and, to a lesser extent, due to increased applications
for EG steel in the appliance and other non-automotive industries.
MSC participates in the electrogalvanizing market through its 50% financial
interest in and role as operator of the Partnership. The term of the Partnership
ends on June 30, 1998. Through the Partnership, MSC electrogalvanizes zinc and
zinc-alloy coatings and applies organic coatings onto sheet metal. There is
growing demand by the automotive industry for a full complement of products such
as zinc-nickel, zinc-nickel with a thin organic coating, and other organic
coated zinc-nickel products such as fuel tanks that offer additional protection
against corrosion. As a result, a shift from pure zinc to differentiated
materials has commenced. These newer materials are particularly in demand by
Japanese automakers in the United States -- currently among the end-use
customers for the Partnership's services. The Partnership's facility is the only
facility in North America capable of meeting, in a single pass through its line,
the demand for this full complement of products.
Sales to the Partnership represented 23%, 22% and 24% of MSC's net sales in
fiscal 1996, 1995 and 1994, respectively. MSC's net sales for electrogalvanizing
consists of various fees charged to the Partnership for operating the facility.
Such fees are the predominant financial return to MSC from its participation in
the Partnership. There are both fixed fees (for selling, general and
administrative expenses, a portion of the financing, taxes, and insurance) and
variable fees based on production volumes (for the balance of the financing,
operating expenses, and profit). The Company pays the actual costs of operating
the facility, so the overall profitability of its participation in the
Partnership depends on its skill and efficiency. The operating expense portion
of the variable fee is based on standard costs, which may be adjusted to reflect
matters beyond the Company's control, upon agreement of the partners or informal
arbitration. The fees charged to Bethlehem and Inland by the Partnership for
services fund the standard operating costs of the Partnership (including the
Company's per ton profit allowance) and, at a defined contractual production
volume, all of the Partnership's financing costs. At lesser levels of
production, the Company is obligated to fund a portion (not to exceed 50%) of
the Partnership's financing costs.
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Bethlehem and Inland are two of the major suppliers of sheet steel to the U.S.
automobile industry. The orders for the Partnership's toll coating services are
primarily and independently generated by Bethlehem and Inland for their
respective customers, although the Partnership may also accept orders from
outside parties to the extent of available capacity and production schedules.
Historically, third party sales have not been significant. The sales and
marketing responsibilities of the Partnership are currently split between
Bethlehem and Inland at 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 1996, Inland utilized only 10% of available line
time; Bethlehem and other customers utilized the balance of Inland's available
line time. Inland is reviewing its future involvement in the Partnership, and
therefore, there is no assurance that Inland will utilize its full 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.
Competition in the production and sale of electrogalvanized steel for the
automotive industry comes from other steel companies that, either directly or
through joint ventures, produce electrogalvanized steel on eight manufacturing
lines in the United States, including Inland's other facility. Limited
quantities of electrogalvanized steel also are imported from foreign steel
suppliers. The Company believes the Partnership's line is well-positioned to
serve the current and expected end-users of electrogalvanized steel. The Company
is unable to determine the effect, if any, on the market resulting from the
existence of excess capacity, the entrance of additional capacity, improved
galvanizing technology or the substitution of other materials.
International
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The Company believes that significant opportunities exist internationally,
particularly for the Company's disc brake noise damper products, Polycore
Composites(R), Specular+(R), and solar control and safety window film. As a
percent of net sales, direct export sales represented 8%, 8% and 7% in fiscal
1996, 1995 and 1994, respectively.
The Company has certain distribution agreements and licensing and royalty
agreements with agents and companies in Europe, Latin America, and the Far East
that cover disc brake noise dampers, Polycore Composites(R), and lighting
products. These agreements provide the Company with opportunities for market
expansion in those geographic areas.
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Approximately 38% of the specialty films' products are sold to export markets
directly or through domestic distributors. The Company believes that export
shipments will continue to grow with the acquisition of SGI and as emerging
markets increasingly realize the energy saving and ultraviolet light blocking
benefits this product provides.
The Company is pursuing a variety of other business relationships, including
direct sales, distribution agreements, licensing, and other forms of partnering,
to increase its international sales and expand its international presence.
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 electrogalvanized steel. The Company
sells its specialty films' products primarily through SGI and to other domestic
and international distributors. All of the Company's selling activities are
supported by technical service departments that aid the customer in the choice
of available materials and their use in the customer's manufacturing process.
The Company estimates that customers in the transportation industry were the
end-users for approximately 53%, 52% and 52% of MSC's net sales in fiscal 1996,
1995 and 1994, respectively. The Company's direct sales to General Motors were
in excess of 5% during each of the last three fiscal years. In addition, the
Company believes that it has significant indirect sales to General Motors in its
coil coating and electrogalvanizing product groups. Due to concentration in the
automobile industry, the Company believes that sales to other individual
automobile companies, including indirect sales, are significant.
On June 30, 1993, the Company acquired the assets of a coil paint facility
owned by AK Steel Corporation ("AKS"), in Middletown, Ohio. The Company also
entered into a tolling agreement in which MSC agrees to provide AKS with coil
coating and other ancillary services from the facility of up to approximately
75% of the facility's capacity for 10 years. The balance of capacity is being
marketed by the Company's sales force and shifting production from other MSC
plants that, at times, reach their capacity. AKS represented 8%, 10% and 8% of
MSC's net sales in fiscal 1996, 1995 and 1994, respectively.
The Company's backlog of orders as of February 29, 1996, was approximately
$49.9 million, all of which is expected to be filled during the remainder of the
current fiscal year. The Company's backlog was approximately $43.6 million as of
February 28, 1995.
MSC is generally not dependent on any one source for raw materials or
purchased components essential to its business, and it is believed that such raw
materials and
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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 7
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 $0.7 million in
fiscal 1996, and has budgeted approximately $1.1 million during fiscal 1997, for
maintenance or installation of environmental controls at the Elk Grove Village,
Illinois; Walbridge, Ohio; Morrisville, Pennsylvania; Middletown, Ohio; and San
Diego, California facilities. See Item 3 "Legal Proceedings" below.
Research and Development
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Management estimates that it spent approximately $6.7 million in fiscal 1996,
$5.4 million in fiscal 1995 and $4.0 million in fiscal 1994 for product and
process development activities.
While it considers its various patents, licenses and trademarks to be
important, it does not believe that the loss of any individual patent, license,
or trademark would have a material adverse effect upon its business.
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Employees
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At February 29, 1996, the Company had 882 full-time employees. Of these,
approximately 611 were engaged in manufacturing, 116 in marketing and sales, 103
in administrative and clerical positions, and 52 in process and product
development.
The employees at the San Diego, California; Walbridge, Ohio; and SGI
facilities are not represented by a union. Hourly manufacturing employees at Elk
Grove Village, Illinois; 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 April 26, 1996 are as follows:
<TABLE>
<CAPTION>
Position and
Name Age Year First Elected
---- --- ------------------
<S> <C> <C>
G. Robert Evans............ 64 Chairman and Chief Executive Officer, MSC
since July 1991; previously Chairman,
President, and Chief Executive Officer, MSC
since February 1991.
Gerald G. Nadig............ 51 President and Chief Operating Officer, MSC
since July 1991; previously President and
Chief Operating Officer, PFM since 1990;
previously Executive Vice President, PFM
since 1989.
William H. Vrba............ 64 Senior Vice President, Chief Financial
Officer, and Secretary, MSC since July 1991.
Frank D. Graziano.......... 63 Senior Vice President, Technology, MSC since
July 1991; previously Senior Vice President,
Research and Development, PFM since 1990;
previously Senior Vice President, Marketing,
Research and Development, PFM since 1988.
Anton F. Vitzthum.......... 61 Senior Vice President, Manufacturing, MSC
since March, 1994; previously Senior Vice
President, Operations, PFM since 1990;
previously Vice President, Manufacturing, PFM
since 1984.
Frank J. Lazowski, Jr...... 56 Vice President, Human Resources, MSC since
July 1991; previously Vice President, Human
Resources PFM since 1988.
Robert J. Mataya........... 53 Vice President, Business Planning and
Development, MSC since July 1991; previously
Vice President, Business Planning and
Development, PFM since 1990; previously Vice
President, Marketing, PFM since 1986.
</TABLE>
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Position and
Name Age Year First Elected
---- --- ------------------
James J. Waclawik, Sr...... 37 Vice President and Controller, MSC since July
1991; previously Vice President and
Controller, PFM since 1989; previously
Controller PFM since 1988.
David A. Fletcher.......... 42 President and Chief Operating Officer, MSCSF
since September 1993; previously Vice
President, Research and Development, MSCSF
since 1989.
During the past five years, Messrs. Evans, Nadig, Vrba, Graziano, Vitzthum,
Lazowski, Mataya, Waclawik, and Fletcher have been employed in management
capacities by the Company.
Mr. Evans serves as a director of Consolidated Freightways, Inc.,
Fiberboard Corporation, and Swift Energy Company.
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ITEM 2. PROPERTIES
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The Company owns or leases facilities with an aggregate of approximately
1,126,000 square feet of space. The Company considers all of such facilities to
be in good operating condition. In addition to the principal physical properties
used by the Company in its manufacturing operations as summarized in the table
below, the Company leases numerous sales and administrative offices pursuant to
short term leases.
<TABLE>
<CAPTION>
Approximate
Area in Lease Expiration
Location Square Feet (or Ownership)
-------- ----------- --------------
<S> <C> <C>
Elk Grove Village, Illinois 58,000 Owner
Plant No. 1
Elk Grove Village, Illinois 205,000 Owner
Plant No. 2
Elk Grove Village, Illinois 152,000 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>
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(1) The lease is renewable, at the Company's option, for additional periods
totaling 25 years. Since April 1, 1986, this facility has been subleased to the
Partnership and the sublease is scheduled to expire on June 30, 1998 (see
"Electrogalvanizing").
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
See Note 7 of the Notes to Consolidated Financial Statements entitled
"Environmental and Legal Matters," which is included in Item 8. In May 1996,
the lawsuit with a former distributor of solar control and safety window film
referenced in Note 7 was settled and the lawsuit was dismissed.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY OWNERS
- ------- --------------------------------------------------
There were no matters submitted to the Company's security owners during the
fourth quarter of fiscal 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
- ------- ----------------------------------------------
RELATED SHAREOWNER MATTERS
--------------------------
The Company's Common Stock, $.02 par value, is listed on the New York Stock
Exchange under the symbol "MSC." The table below sets forth, by fiscal quarter,
the high and low sales prices of the Company's Common Stock during its past two
fiscal years. Sales prices for the first quarter of fiscal 1995 have been
retroactively adjusted to give effect to the one-half share per share dividend
declared and paid in the second quarter of fiscal 1995.
<TABLE>
<CAPTION>
Fiscal Fiscal
Year Quarter High Low
---- ------- ---- ---
<S> <C> <C> <C>
1996 1st 19 3/4 15 1/2
2nd 22 3/8 16 3/4
3rd 19 3/8 12 1/8
4th 15 12 5/8
Fiscal Fiscal
Year Quarter High Low
---- ------- ---- ---
1995 1st 17 3/4 14 3/8
2nd 17 1/2 14 7/8
3rd 17 1/4 14 1/8
4th 17 1/8 13 3/4
</TABLE>
There were 1,143 owners of record of the Company's Common Stock at the
close of business on April 26, 1996. MSC has not paid cash dividends other than
a nominal amount in lieu of fractional shares in connection with stock
dividends. Management currently anticipates that all earnings will be retained
for development of the Company's business. If business circumstances should
change, the Board of Directors may declare, and instruct the Company to pay,
cash dividends.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
<TABLE>
<CAPTION>
(Dollars and numbers of shares in
thousands, except per share data) Fiscal Year
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
(restated)(5)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results
Net Sales $236,150 $227,658 $187,701 $156,230 $142,599
Gross Profit 55,596 62,171 45,752 38,828 34,359
Selling, General and Administrative 37,549 35,679 27,409 24,992 22,710
Expenses
Income from Operations 13,847 26,492 18,343 13,836 11,649
Net Income (1)(2) 8,497 16,740 11,802 7,617 7,141
Per Share Information:(3)
Net Sales $ 15.30 $ 14.94 $ 12.47 $ 11.67 $ 12.67
Net Income 0.55 1.10 0.78 0.56 0.63
Cash Dividends - - - - -
Shareowners' Equity 7.66 6.92 5.74 5.48 3.73
Market Price:
High $ 22.38 $ 17.75 $ 17.63 $ 12.00 $ 10.38
Low $ 12.13 $ 13.75 $ 10.63 $ 7.88 $ 4.88
Close $ 14.38 $ 15.88 $ 17.63 $ 11.00 $ 10.38
P/E (High) 40.7x 16.1x 22.6x 21.4x 16.5x
P/E (Low) 22.1x 12.5x 13.6x 14.1x 7.7x
- ---------------------------------------------------------------------------------------------------------------------
Financial Position
Total Assets $200,026 $172,357 $151,592 $128,711 $100,967
Working Capital 23,716 22,706 29,026 37,749 9,709
Net Property, Plant and Equipment 110,882 92,913 72,048 52,151 47,163
Long-Term Debt, Less Current Portion 16,815 6,933 8,853 10,696 13,801
Shareowners' Equity 118,226 105,404 86,464 73,318 41,995
Total Capital Invested 138,055 114,240 97,087 85,689 58,032
- ---------------------------------------------------------------------------------------------------------------------
Key Ratios
Gross Profit as a % of Net Sales 23.5% 27.3% 24.4% 24.9% 24.1%
SG&A Expenses as a % of Net Sales 15.9% 15.7% 14.6% 16.0% 15.9%
Income from Operations as a % of Net 5.9% 11.6% 9.8% 8.9% 8.2%
Sales
Net Income as a % of Net Sales 3.6% 7.3% 6.3% 4.9% 5.0%
Research and Development as a % of Net 2.8% 2.4% 2.1% 2.0% 2.0%
Sales
Effective Income Tax Rate 38.2% 38.5% 38.0% 37.0% 39.0%
Current Ratio 1.6 1.6 1.9 2.5 1.4
Long-Term Debt to Shareowners' Equity 14.2% 6.6% 10.2% 14.6% 32.9%
Outstanding Debt as a % of Total 14.4% 7.7% 10.9% 14.4% 27.6%
Capital Invested
Return on Average Shareowners' Equity 7.6% 17.4% 14.8% 13.2% 19.6%
Return on Average Total Capital Invested 6.7% 15.8% 12.9% 10.6% 11.9%
- ---------------------------------------------------------------------------------------------------------------------
Other Statistics
Capital Expenditures, Net $ 27,467 $ 29,374 $ 14,894 $ 11,444 $ 8,333
Cash Flow Before Financing Activities(4) (7,741) (5,339) (10,789) 4,677 11,060
Depreciation and Amortization 11,098 8,747 7,385 6,455 6,383
Sales per Employee 268 246 227 231 223
Weighted Average Number of Common and
Common Equivalent Shares Outstanding(3) 15,437 15,241 15,057 13,383 11,259
Shareowners of Record 1,012 1,110 796 891 750
Number of Employees 882 925 826 675 639
- ---------------------------------------------------------------------------------------------------------------------
</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 net
cash used in investing activities. The 1994 figure includes a cash outflow
of $14,504 for the investment in acquired facility.
(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 1996 1995 1994
- -------------------------- ---- ---- ----
Product Group: Dollars Percent Dollars Percent Dollars Percent
-------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Laminates and Composites $ 56,790 24% $ 57,722 25% $ 46,266 25%
Specialty Films 23,662 10% 19,134 8% 16,979 9%
Coil Coating 100,652 43% 101,206 45% 78,320 42%
Electrogalvanizing 55,046 23% 49,596 22% 46,136 24%
-------- --- -------- --- -------- ---
$236,150 100% $227,658 100% $187,701 100%
======== === ======== === ======== ===
For the fiscal years ended February 28 or 29,
Results of Operations 1996 (restated) 1995 1994
- -------------------------- -------------- ---- ----
Net Sales 100.0% 100.0% 100.0%
Cost of Sales 76.5 72.7 75.6
----- ---- -----
Gross Profit 23.5% 27.3% 24.4%
Selling, General and Administrative Expenses 15.9 15.7 14.6
Special Charge 1.7 -- --
----- ---- -----
Income from Operations 5.9% 11.6% 9.8%
Total Other (Income) and Expense, Net 0.1 (0.3) (0.3)
----- ---- -----
Income Before Income Taxes 5.8% 11.9% 10.1%
Income Taxes 2.2 4.6 3.8
----- ---- -----
Net Income 3.6% 7.3% 6.3%
===== ==== =====
</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.
18
<PAGE>
The Company's financial statements and the quarterly financial information for
fiscal 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. 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 $5,638 in fiscal 1996.
The Information in the Discussion Which Follows is Presented After Restatement
of the Financial Statements
Fiscal 1996 Compared with Fiscal 1995
Net Sales
Net sales in fiscal 1996 grew 3.7% over fiscal 1995. Sales of laminates and
composites and coil coating declined 1.6% and .5%, respectively. Specialty
films and electrogalvanizing grew 23.7% and 11.0%, respectively. Included in
the above are specialty films sales from the September 7, 1995 acquisition of
Solar Gard International, Inc. ("SGI").
Laminates and Composites
Fiscal 1996 net sales of laminates and composites declined 1.6% to $56,790 from
$57,722 in fiscal 1995. Sales of Polycore Composites(R) decreased due to lower
sales to Chrysler. Partially offsetting the shortfall in Polycore Composites(R)
was significant growth in non-automotive uses including 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 original equipment manufacturer ("OEM") sales during the
year. In the high-reflective lighting fixture market, Specular+(R) sales
decreased from fiscal 1995 due to increased competitive pressure and a decline
in OEM requirements.
Specialty Films
Specialty films net sales increased 23.7% to $23,662 in fiscal 1996 from $19,134
in fiscal 1995 due to 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. Subsequent to the acquisition, SGI
19
<PAGE>
expanded in California (two distribution centers) and Florida (South American
export center). SGI currently distributes product in over 50 countries.
During the first quarter of fiscal 1997, the Company entered into a
tentative agreement to purchase certain assets of a distributor of solar control
window film products in the Western U.S. and throughout the world. The Company
anticipates this transaction will be completed during the first quarter of
fiscal 1997.
Coil Coating
Coil coating net sales of $100,652 in fiscal 1996 were flat with fiscal 1995.
Coil coating sales were affected by lingering effects of customer inventory
adjustments related to a scheduled 52 day shutdown of MSC's Middletown, Ohio
facility occurring in the fourth quarter of fiscal 1995. In addition, price
competition in the industry was partially offset by an increase in the sales of
clutch plate materials that were sold as a package. Package sales include both
coating and metal components. Sales declines were experienced in the truck
trailer, swimming pool, and the heating and air conditioning areas. During the
fourth quarter of fiscal 1996, pricing stabilized and backlog increased from the
previous quarter.
New construction of a high-speed coil coating line in Elk Grove Village,
Illinois, is scheduled for completion in the fourth quarter of fiscal 1997.
This facility will increase MSC's capacity and ability to compete as a low cost
producer in current and new markets.
Electrogalvanizing
MSC participates in the electrogalvanizing market through Walbridge Coatings
(the "Partnership"), a partnership among subsidiaries of MSC, Bethlehem Steel
Corporation ("Bethlehem" or "BSC") and Inland Steel Industries, Inc. ("Inland").
MSC's net sales for electrogalvanizing consist of various fees charged to the
Partnership for operating the facility. Bethlehem and Inland are primarily
responsible for the sales and marketing activities of the Partnership. The
Company's primary financial benefits from the Partnership are the revenues
billed to Walbridge Coatings for operating the facility. These revenues
represent 23%, 22% and 24% of the Company's net sales in fiscal 1996, 1995 and
1994, respectively. The profitability for operating the facility is comparable
to the Company's overall operating results. Under the equity method of
accounting, the Company includes its portion of the Partnership net loss in
Equity in Results of Partnership shown in the Consolidated Statements of Income.
The amounts do not directly correlate to the Company's 50% ownership interest
due to contractual allocation requirements of the Partnership agreement.
MSC's electrogalvanizing sales increased 11.0% to $55,046 in fiscal 1996
from $49,596 in fiscal 1995, while electrogalvanizing volume increased 6.2% to
453,710 tons in fiscal 1996 from 427,133 tons in the prior fiscal year. The
increase in sales and volume over the previous fiscal year resulted from
increased sales efforts, pricing and improved yields.
The sales and marketing responsibilities of the Partnership are split
between Bethlehem and Inland at approximately 76% and 24%, respectively. During
fiscal 1996, Inland utilized only 10% of available production line time rather
than its 24% share. Bethlehem and other customers utilized this additional
available line time. In addition to
20
<PAGE>
Bethlehem's historic production, BSC transferred its in-house electrogalvanizing
production from its Burns Harbor facility to Walbridge Coatings. Inland is
reviewing its future involvement in the Partnership, and therefore, there is no
assurance that Inland will utilize its 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 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 includes costs
related to severance and other related expenses, and litigation expenses. The
savings associated with the restructuring will positively affect the Company's
gross margin, as well as operating expenses.
Total Other (Income) and Expense, Net and Income Taxes
Total other (income) and expense, net was $.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. MSC expects comparable benefits in fiscal 1997.
21
<PAGE>
Fiscal 1995 Compared with Fiscal 1994
Net Sales
Net sales in fiscal 1995 grew 21.3% over fiscal 1994. Sales of laminates and
composites grew 24.8%; specialty films 12.7%; coil coating 29.2%; and
electrogalvanizing 7.5%. Included in the above are coil coating sales from the
June 30, 1993, acquisition of the coil coating facility from AK Steel
Corporation in Middletown, Ohio.
Laminates and Composites
Fiscal 1995 net sales of laminates and composites grew 24.8% to $57,722 from
$46,266 in fiscal 1994. Sales of Polycore Composites(R) generated a significant
increase over the previous year, boosted by new product applications and market
expansion activities in both automotive and non-automotive end uses. In the
high-reflective lighting fixture market, Specular+(R) sales increased from
fiscal 1994 due to increased worldwide demand for energy-efficient lighting.
Sales of disc brake noise damper materials were up from the previous fiscal year
as a result of increased aftermarket demand, as well as a steady increase in
original equipment manufacturer ("OEM") sales during the year.
Specialty Films
Specialty films net sales increased 12.7% to $19,134 in fiscal 1995 from $16,979
in fiscal 1994 due primarily to increased domestic and international demand for
solar control window and safety film. Increased productivity and quality
improvements also contributed to the increase in sales over the prior fiscal
year, as MSC was better able to meet seasonable demand.
Coil Coating
Coil coating net sales grew 29.2% in fiscal 1995 to $101,206 from $78,320 in the
prior fiscal year. The broad increase in sales was due largely to expanded
market coverage and new product introductions. MSC benefited from a strong
economy but also out performed the economy due to the conversion of new
prepainted metals from post-manufacturing painting applications. The biggest
sales advances came from heating and air conditioning, truck trailer, fuel tank
and lighting areas.
A portion of this coil coating sales increase is attributable to MSC's June
1993 acquisition of the Middletown coil coating facility. Comparable sales in
this product group were up approximately 14.8% from the prior fiscal year.
During the fourth quarter of fiscal 1995, the Middletown facility was shut down
for 52 days for planned upgrading and expansion of that facility. The shutdown
decreased sales and earnings in the fourth quarter of fiscal 1995.
Electrogalvanizing
MSC's electrogalvanizing sales increased 7.5% to $49,596 in fiscal 1995 from
$46,136 in fiscal 1994, while electrogalvanizing volume increased 2.6% to
427,133 tons in fiscal 1995 from 416,214 tons in the prior fiscal year. The
increase in sales and volume over the previous fiscal year resulted from a
strong demand for new autos and trucks, plus a continuing shift to higher value-
added electrogalvanized and coil coated materials. These higher value-added
sales
22
<PAGE>
(principally zinc-nickel with a coil coated topcoat) represented 6.5% of
electrogalvanizing sales in fiscal 1995 up from 5.3% in fiscal 1994.
The sales and marketing responsibilities of the Partnership are split
between Bethlehem and Inland at 77% and 23%, respectively. During fiscal 1995,
Inland utilized only 17% of available production line time rather than its 23%
share. Bethlehem and other customers utilized this additional available line
time.
Gross Profit
MSC's gross profit percentage increased to 27.3% in fiscal 1995 from 24.4% in
fiscal 1994. This improvement was due to increasing higher value-added product
mix, pricing, higher line utilization and improving manufacturing efficiencies.
Significant capital expenditures have resulted in increased yields and line
speeds, as well as reductions in set-up time and unscheduled downtime.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to 15.7% of sales in
fiscal 1995 from 14.6% in fiscal 1994. This increase was primarily due to
increased expenditures for strategic purposes such as high-growth product
marketing, research and development, and international marketing efforts, as
well as some non-recurring increases in other administrative expenses.
Total Other Income, Net and Income Taxes
Total other income, net was income of $.7 million in fiscal 1995 and fiscal
1994. Decreased interest income, due to lower amounts of cash investments, was
more than offset by a reduction in interest expense (from lower debt levels),
equity in results of partnership and other, net. MSC's effective tax rate for
fiscal 1995 was approximately 38.5% compared with 38.0% in the prior year.
Liquidity and Capital Resources
MSC generated $19.5 million of cash from operating activities in fiscal 1996
compared with $25.0 million in the prior fiscal year. The decrease in cash
generation is mainly due to lower net income and higher receivables from an
increased level of sales in the fourth quarter of fiscal 1996 over fiscal 1995.
This was offset, in part, by a decrease in inventories and an increase in
accounts payable.
In fiscal 1996, MSC invested $27.5 million in capital improvement projects
compared with $29.4 million last year. Fiscal 1996's capital expenditures
included the construction in process of a new coil coating line in Elk Grove
Village, Illinois. Nearly all of fiscal 1996's capital expenditures were
directly related to increasing MSC's efficiency or expanding new product and
market opportunities.
During the third quarter of fiscal 1996, MSC acquired all of the
outstanding capital stock of SGI. Consideration for the purchase, including
transaction costs and net of cash acquired, was $8.0 million in subordinated
convertible notes and $.2 million in cash.
On June 30, 1993, a subsidiary of MSC purchased from AK Steel Corporation,
certain of the assets (including inventory) of its coil paint facility in
Middletown, Ohio, for approximately $14.5 million, including acquisition related
costs. Available cash was used to purchase the facility.
23
<PAGE>
The Company plans to increase its capital expenditures to $46.3 million in
fiscal 1997, including investments for completing the construction of the coil
coating line in Elk Grove Village and the last phase of the Middletown facility
upgrade.
MSC'S long-term debt, less current portion, increased at fiscal year-end
1996 to $16.8 million from $6.9 million in fiscal 1995, due to convertible debt
issued in conjunction with the SGI acquisition and borrowings under the
Company's line of credit. Long-term debt is expected to increase by
approximately $10.0 million in fiscal 1997 as MSC utilizes its unsecured line of
credit to finance a portion of its capital expenditure program.
In fiscal 1995, the Company entered into a new $25 million unsecured line
of credit that expires August 31, 1998. There was $4.8 million outstanding
under this line of credit at February 29, 1996. The Company has also executed
letters of credit totaling $4.9 million against the credit facility, leaving an
available line of credit of $15.3 million at February 29, 1996. In addition, in
fiscal 1996, MSC entered into a separate financing arrangement with a second
banking source for an additional $25 million unsecured line of credit. There
was no outstanding balance under this line of credit at February 29, 1996. In
fiscal 1997, the Company believes that its cash flow from operations, together
with available financing and cash on hand will be sufficient to fund its working
capital needs, capital expenditure program and debt amortization.
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 settling PRPs that are parties to the decree for the Kingsbury site are
engaged in litigation with several non-settling PRPs including three large
volume PRPs, to compel such non-settling PRPs to contribute to the clean-up
effort at this site. During fiscal 1994, the Company reached agreement with
various liability insurers for environmental-related costs. The agreements
included cash settlements of $4,275, of which $1,800 represented the
reimbursement of previously accrued costs. The balance of the settlements was
for future environmental costs and was included in the Company's environmental
accruals. The Company believes its range of exposure for all known sites, based
on allocations of liability among PRPs and the most recent estimate of remedial
work, is $4,300 to $5,100 at February 29, 1996. The timing of the Company's
cash payments for environmental matters is not known, and no assurance can be
given that the Company's environmental obligations will not increase (see Note 7
of the Notes to Consolidated Financial Statements which is included in Item 8).
24
<PAGE>
During the first quarter of fiscal 1997, the Company entered into a
tentative settlement agreement regarding a lawsuit with a former distributor of
solar control and safety window film. The settlement is expected to be
finalized in the first quarter of fiscal 1997, and the amount of the settlement
is within the range of previously established reserves.
The Company has a capital lease obligation, which was $6.9 million as of
February 29, 1996, relating to a facility that the Company subleases to the
Partnership. In addition, throughout the term of the Partnership, the Company
is contingently responsible for 50% of the Partnership's financing requirements,
including the Company's share (approximately $3.4 million) of $6.8 million in
partnership financing loans from third parties at February 29, 1996.
The Company's adoption of Statement of Financial Accounting Standard No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," at February 29, 1996, did not have a material effect
on the Consolidated Financial Statements.
Inflation
The Company believes that inflation has not had a significant impact on fiscal
1996, 1995 and 1994 results of operations in any of its product groups.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
(a) The Consolidated Statements of Income for the years ended February 29,
1996, February 28, 1995 and February 28, 1994, Consolidated Balance Sheets
as of February 29, 1996 and February 28, 1995, Consolidated Statements of
Cash Flows for the years ended February 29, 1996, February 28, 1995 and
February 28, 1994, Notes to Consolidated Financial Statements and the
Report of Independent Public Accountants are included on the following
pages.
25
<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) 1996 (restated) 1995 1994
- ------------------------------------------------- -------------------------------------------
<S> <C> <C> <C>
Net Sales $236,150 $227,658 $187,701
Cost of Sales 180,554 165,487 141,949
-------- -------- --------
Gross Profit $ 55,596 $ 62,171 $ 45,752
Selling, General and Administrative Expenses 37,549 35,679 27,409
Special Charge 4,200 - -
-------- -------- --------
Income from Operations $ 13,847 $ 26,492 $ 18,343
-------- -------- --------
Other (Income) and Expense:
Interest Income $ (343) $ (667) $ (1,057)
Interest Expense 217 64 112
Equity in Results of Partnership 931 485 589
Other, Net (717) (609) (333)
-------- -------- --------
Total Other (Income) and Expense, Net $ 88 $ (727) $ (689)
-------- -------- --------
Income Before Income Taxes $ 13,759 $ 27,219 $ 19,032
Income Taxes 5,262 10,479 7,230
-------- -------- --------
Net Income $ 8,497 $ 16,740 $ 11,802
======== ======== ========
Net Income Per Common and Common Equivalent Share $ 0.55 $ 1.10 $ 0.78
======== ======== ========
Weighted Average Number of Common
and Common Equivalent Shares Outstanding 15,437 15,241 15,057
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
Consolidated Balance Sheets
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
At February 28 or 29,
-----------------------------------
(In thousands, except share data) 1996 (restated) 1995
- ---------------------------------------------------------------- -----------------------------------
<S> <C> <C>
Assets
Current Assets:
Cash and Cash Equivalents $ 3,379 $ 5,816
Receivables:
Trade, Less Reserves of $4,407 in 1996 and $3,628 in 1995 25,836 24,518
Current Portion of Partnership Note 781 792
Income Taxes 2,156 2,319
Prepaid Expenses 3,069 2,343
Inventories:
Raw Materials 10,829 9,630
Finished Goods 17,573 14,135
Prepaid Taxes 3,074 2,246
-------- --------
Total Current Assets $ 66,697 $ 61,799
-------- --------
Property, Plant and Equipment:
Land and Building $ 30,891 $ 28,341
Machinery and Equipment 116,240 103,704
Leasehold Improvements 1,376 1,156
Capital Leases 17,233 17,233
Construction in Progress 19,713 7,695
-------- --------
$185,453 $158,129
Accumulated Depreciation and Amortization (74,571) (65,216)
-------- --------
Net Property, Plant and Equipment $110,882 $ 92,913
-------- --------
Other Assets:
Investment in Partnership $ 10,727 $ 10,917
Partnership Note Receivable, Less Current Portion 1,123 1,871
Intangible Assets, Net 9,556 3,193
Other 1,041 1,664
-------- --------
Total Other Assets $ 22,447 $ 17,645
-------- --------
Total Assets $200,026 $172,357
======== ========
</TABLE>
27
<PAGE>
Consolidated Balance Sheets
Material Sciences Corporation and Subsidiaries
<TABLE>
<CAPTION>
At February 28 or 29,
-----------------------------
(In thousands, except share data) 1996 (restated) 1995
- --------------------------------------------------------------------------- -----------------------------
<S> <C> <C>
Liabilities
Current Liabilities:
Current Portion of Long-Term Debt $ 3,014 $ 1,903
Accounts Payable 25,343 22,521
Accrued Payroll Related Expenses 8,036 9,274
Accrued Expenses 6,588 5,395
-------- --------
Total Current Liabilities $ 42,981 $ 39,093
-------- --------
Long-Term Liabilities:
Deferred Income Taxes $ 11,451 $ 10,750
Long-Term Debt, Less Current Portion 16,815 6,933
Accrued Superfund Liability 4,177 4,198
Other 6,376 5,979
-------- --------
Total Long-Term Liabilities $ 38,819 $ 27,860
-------- --------
- ---------------------------------------------------------------------------
Shareowners' Equity
Preferred Stock, $1.00 Par Value; 10,000,000 Shares Authorized;
7,500,000 Designated Series A Junior Participating Preferred; None Issued $ - $ -
Common Stock, $.02 Par Value; 20,000,000 Shares Authorized;
16,046,398 Shares Issued and 15,357,750 Shares Outstanding at
February 29, 1996, and 15,839,074 Shares Issued and 15,150,426
Outstanding at February 28, 1995 321 317
Additional Paid-In Capital 47,097 42,776
Treasury Stock at Cost, 688,648 Shares at February 29, 1996 and February 28, 1995 (3,380) (3,380)
Retained Earnings 74,188 65,691
-------- --------
Total Shareowners' Equity $118,226 $105,404
-------- --------
Total Liabilities and Shareowners' Equity $200,026 $172,357
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
28
<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: 1996 (restated) 1995 1994
- -------------------------------------------------------- ---------------------------------------------
Operating Activities:
<S> <C> <C> <C>
Net Income $ 8,497 $ 16,740 $ 11,802
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 11,098 8,747 7,385
Provision (Benefit) for Deferred Income Taxes 1,406 986 (1,069)
Compensatory Effect of Stock Plans 1,188 647 388
Other, Net 918 464 612
-------- -------- --------
Operating Cash Flow Prior to Changes in Assets
and Liabilities $ 23,107 $ 27,584 $ 19,118
-------- -------- --------
Changes in Assets and Liabilities:
Receivables $ (6,488) $ (1,597) $ (4,289)
Income Taxes Receivable 163 (2,319) 866
Prepaid Expenses (659) (1,101) (297)
Inventories 1,766 (4,187) (5,021)
Accounts Payable 2,581 3,860 4,293
Accrued Expenses (1,395) 1,866 4,228
Other, Net 467 914 (309)
-------- -------- --------
Cash Flow from Changes in Assets and Liabilities $ (3,565) $ (2,564) $ (529)
-------- -------- --------
Net Cash Provided by Operating Activities $ 19,542 $ 25,020 $ 18,589
-------- -------- --------
- -------------------------------------------------------
Investing Activities:
Capital Expenditures, Net $(27,467) $(29,374) $(14,894)
Acquisition, Net of Cash Acquired (213) - (12,300)
Investment in Partnership (741) (1,939) (1,091)
Distribution from Partnership 748 749 748
Other Long-Term Assets 390 205 (1,841)
-------- -------- --------
Net Cash Used in Investing Activities $(27,283) $(30,359) $(29,378)
-------- -------- --------
- -------------------------------------------------------
Financing Activities:
Proceeds of Debt $ 64,207 $ 150 $ 143
Payments to Settle Debt (61,376) (1,937) (1,891)
Sale of Common Stock 2,473 1,012 956
-------- -------- --------
Net Cash Provided by (Used in) Financing
Activities $ 5,304 $ (775) $ (792)
-------- -------- --------
Net Decrease in Cash $ (2,437) $ (6,114) $(11,581)
Cash and Cash Equivalents at Beginning of Year 5,816 11,930 23,511
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 3,379 $ 5,816 $ 11,930
======== ======== ========
Supplemental Cash Flow Disclosures:
Interest Paid $ 1,377 $ 981 $ 1,008
Income Taxes Paid 3,842 11,195 7,382
Subordinated Convertible Notes Issued for Acquisition $ 7,981 $ - $ -
Cash Portion of Acquisition and Related Costs 213 - -
-------- -------- --------
Total Consideration Paid for Acquisition $ 8,194 $ - $ -
======== ======== ========
</TABLE>
The Changes in Assets and Liabilities above for the year ended February 29,
1996, are net of assets and liabilities acquired.
The accompanying notes are an integral part of these statements.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
Material Sciences Corporation and Subsidiaries
For the three years ended February 29, 1996
Note 1: Summary of Significant Accounting Policies
The significant accounting policies of Material Sciences Corporation and its
wholly owned subsidiaries ("MSC" or "Company"), as summarized below, conform
with generally accepted accounting principles that, in management's opinion,
reflect practices appropriate to the business in which it operates. Certain
prior year amounts have been reclassified to conform with the 1996 presentation.
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
the comments on financial statements. Actual results could differ from those
estimates.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts for MSC
after all intercompany transactions have been eliminated. The Company maintains
a financial interest of 50% in Walbridge Coatings ("Partnership"). Under terms
of the Partnership agreement, significant actions require unanimous consent of
all partners and, therefore, the Company does not have a controlling interest.
Accordingly, the Company accounts for the Partnership under the equity method.
Inventories
Inventories are stated at the lower of cost or market, using either the specific
identification, average cost or first-in, first-out (FIFO) method of cost
valuation. Due to the continuous nature of the Company's operations, work in
process inventories are not material.
Property, Plant and Equipment
Property, Plant and Equipment are recorded at cost. Improvements and
replacements are capitalized, while expenditures for maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the straight-
line method over the assets' estimated useful lives.
Facilities and equipment leased through capital leases are recorded in
Property, Plant and Equipment, with their corresponding obligations recorded in
Current and Long-Term Liabilities. The amount capitalized is the lower of the
present value of minimum lease payments or the fair value of the leased
property. Amortization of capital lease assets is recorded on a straight-line
basis, over the lease term.
The Company capitalizes interest costs as a part of the cost of
constructing major facilities and equipment.
30
<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 10 to 20
years. Accumulated amortization of intangible assets was $713 and $327 at
February 29, 1996 and February 28, 1995, respectively. The Company periodically
reviews whether subsequent events and circumstances have occurred that indicate
the remaining estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable. If events and
circumstances indicate that goodwill related to a particular business should be
reviewed for possible impairment, the Company uses projections to assess whether
future operating income on a non-discounted basis (before goodwill amortization)
of the unit is likely to exceed the goodwill amortization over the remaining
life of the goodwill, to determine whether a writedown of goodwill to
recoverable value is appropriate. This policy is consistent with Statement of
Financial Accounting Standard ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Fair Market Value of Financial Instruments
The Company believes that the carrying amounts of all financial instruments
approximate fair market value.
Revenue Recognition
The Company generally recognizes revenue upon shipment.
Research and Development
The Company expenses all research and development costs in the period incurred.
Research and development expenses were $6,653 in fiscal 1996, $5,404 in fiscal
1995 and $3,972 in fiscal 1994.
Net Income Per Share
Net income per common and common equivalent share is computed using the weighted
average number of common and common equivalent shares outstanding during the
periods. Common equivalent shares are determined by the treasury stock method.
Concentrations of Credit Risks
Certain financial instruments potentially subject the Company to concentrations
of credit risk. These financial instruments consist primarily of temporary cash
investments and trade receivables.
The Company places its temporary cash investments with high credit, quality
financial institutions and in investment grade securities with maturities less
than 90 days. Approximately 41% of the Company's receivables are concentrated
with customers in the motor vehicle industry.
31
<PAGE>
Stock Dividend
On June 16, 1994, the Board of Directors of the Company declared a stock
dividend of one-half share per share of the Company's common stock, which was
paid on July 28, 1994, to shareowners of record at the close of business on June
30, 1994. All share and per share data has been restated to retroactively
reflect this stock dividend.
Note 2: 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 $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 have been restated to
reflect the correction of the accounting irregularities. In addition, see Note
15 for restated interim financial information for 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: Subsequent Events (Unaudited)
During the first quarter of fiscal 1997, the Company entered into a tentative
agreement to purchase certain assets of a West Coast distributor. Consideration
for the purchase will be $1,500 in subordinated convertible notes and $2,400 in
cash. The subordinated convertible notes bear interest at a rate of 7% per
annum and are convertible into shares of the Company's common stock. The
conversion price will be determined based upon a 25% premium over the last 20
days average closing price prior to closing. The acquisition will be accounted
for under the purchase method of accounting.
32
<PAGE>
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 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.
Note 4: Special Charge
During the third quarter of fiscal 1996, the Company provided $4,200 primarily
for the restructuring of its four product groups. The special charge includes
projected costs related to severance and other related costs, and litigation
expenses. Cash related components represent approximately $3,900 with the
remainder related to a writedown to net realizable value for purchased computer
software as a result of the four product group structure. As of February 29,
1996, the remaining reserve of $2,317 is classified as a Current Liability and
is expected to be paid in fiscal 1997.
Note 5: Acquisitions
On September 7, 1995, the Company purchased all of the outstanding capital stock
of Solar Gard International, Inc. ("SGI"). Consideration for the purchase,
including transaction costs and net of cash acquired, was $7,981 in subordinated
convertible notes and $213 in cash. As a result of the SGI acquisition, net
tangible assets of $1,249 and goodwill and a non-compete agreement totaling
$6,945 were recorded in the Consolidated Balance Sheets. The acquisition has
been accounted for under the purchase method of accounting and is included in
the Consolidated Financial Statements of the Company since the date of
acquisition.
On June 30, 1993, the Company acquired the assets of a coil paint facility
owned by AK Steel Corporation ("AKS") in Middletown, Ohio. Consideration for the
purchase, including acquisition related costs, was $14,504 in cash and the
assumption of certain employee benefit liabilities as follows:
Property, Plant and Equipment $12,300
Non-Compete Agreement 700
Deferred Income Taxes 196
Other Intangible Assets 2,445
Employee Benefit Liabilities (1,137)
-------
Acquisition Cost $14,504
=======
33
<PAGE>
The Company also entered into a tolling agreement in which MSC agrees to provide
AKS with coil coating and other ancillary services from the facility of up to
approximately 75% of the facility's capacity for 10 years. The balance of
capacity is being marketed by the Company's existing sales force and shifting
production from other MSC plants that, at times, reach their capacity. AKS
represented 8%, 10% and 8% of MSC's net sales in fiscal 1996, 1995 and 1994,
respectively.
Note 6: Partnership
On August 31, 1984, the Company entered into a Partnership ("Walbridge
Coatings") with subsidiaries of Bethlehem Steel Corporation ("Bethlehem") and
Inland Steel Industries, Inc. ("Inland") to pursue the production and further
development of electroplated steel.
The Company acted as general contractor to expand and modify its Walbridge,
Ohio, facility and install electroplating equipment. The facility was
transferred to the Partnership in April 1986. The line is capable of
electroplating, coil coating, or performing both processes continuously to coils
of sheet metal. Bethlehem and Inland have rights to purchase all the facility's
production for the 12-year life of the Partnership. The Company's potential
alternatives upon expiration of the Partnership term in June 1998 include, among
other things, extension of the Partnership, purchase of the facility or sale of
the facility.
Summarized financial information for the Partnership is presented below.
<TABLE>
<CAPTION>
Summarized Financial Information For the years ended
of Walbridge Coatings February 28 or 29,
Earnings Information 1996 1995 1994
- -------------------- ---- ---- ----
<S> <C> <C> <C>
Net Revenues $64,941 $60,887 $57,696
Gross Profit 2,286 3,729 4,192
Income (Loss) from Operations (153) 1,333 1,951
Net Loss (1,852) (950) (1,018)
</TABLE>
<TABLE>
<CAPTION>
For the years ended
February 28 or 29,
Balance Sheet Information 1996 1995 1994
- ------------------------- ---- ---- ----
<S> <C> <C> <C>
Current Assets $ 9,375 $10,005 $ 9,083
Total Assets 36,458 42,824 46,132
Current Liabilities 7,653 8,590 8,611
Total Liabilities 15,059 21,433 27,391
Partners' Capital 21,399 21,391 18,741
</TABLE>
The Company's primary financial benefits from the Partnership are the revenues
billed to Walbridge Coatings for operating the facility. These revenues
represent 23%, 22% and 24% of the Company's net sales in fiscal years 1996, 1995
and 1994, respectively. MSC's electrogalvanizing revenues billed to Walbridge
Coatings exclude financing and other items that are included in Walbridge
Coatings' revenues billed to Bethlehem and Inland. The profitability for
operating the facility is comparable to the Company's overall operating results.
Under the equity method of accounting, the Company includes its portion of the
Partnership net loss summarized above in Equity in Results of Partnership shown
in the Consolidated Statements of
34
<PAGE>
Income. The amounts do not directly correlate to the Company's 50% ownership
interest due to contractual allocation requirements of the Partnership
agreement.
As of February 29, 1996, the Company holds a $1,871 note receivable from
the Partnership, requiring semi-annual interest and level principal repayments
over the life of the Partnership. Trade receivables include amounts due from the
Partnership of $1,752 at February 29, 1996 and $1,268 at February 28, 1995.
The Company has guaranteed 50% of the third party debt of the Partnership.
At February 29, 1996, the Partnership debt totaled $6,750. This debt is
scheduled to be retired ratably throughout the Partnership's life by revenues
paid to the Partnership by Bethlehem, Inland and, if production does not reach a
defined contractual volume, the Company.
Note 7: 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 their remediation
work at the Gary site. The estimated range of the Company's liability is $1,200
to $1,400 for this site. This work has commenced and the Company has maintained
a Letter of Credit for approximately $1,200 to secure its obligation to pay its
currently estimated share of the clean-up expenses at the Gary site.
The ultimate cost of remediation work at the Kingsbury and Gary sites and
the Company's final share thereof, net of contributions from the other PRPs, has
not yet been determined. Based on the allocations of liability among PRPs who
are parties to the decrees entered in these proceedings and the most recent
estimates of remedial costs prepared by the engineering consulting firms
retained to supervise the remedial work, the Company estimates that its share of
remedial costs and reimbursable past costs of the government will fall within
the amount reserved by the Company for such costs as of February 29, 1996. The
PRPs and the United States Environmental Protection Agency ("USEPA") are
discussing modifications regarding the scope of the work required under the
decree for the Kingsbury site. The remedial costs at this site could change
depending on the USEPA's position. The Company
35
<PAGE>
and other PRPs that are parties to the decree for the Kingsbury site are engaged
in litigation with several non-settling PRPs, including three large volume PRPs,
to compel such non-settling PRPs to contribute to the clean-up effort at this
site.
The Company is involved in other environmental matters that, on an
individual basis, are not material. MSC believes that the estimated range of
exposure on all environmental matters is between $4,300 and $5,100. The
Company's environmental reserves total approximately $4,900 at February 29,
1996.
The Company currently believes that the ultimate outcome of these
proceedings, net of contributions from other PRPs, will not have a material
effect on the financial condition or the results of operations of the Company
given existing reserves recorded at February 29, 1996. However, no assurance can
be given that such information, including estimates of remedial expenses, will
not change.
During fiscal 1994, the Company reached agreement with various liability
insurers for environmental-related costs. The agreements included cash
settlements of $4,275, of which $1,800, that was previously charged to
operations, was included in gross profit in fiscal 1994. The balance of the
settlements was for future environmental costs and was included in the Company's
environmental accruals.
During the first quarter of fiscal 1997, the Company entered into a
tentative settlement agreement regarding a lawsuit with a former distributor of
solar control and safety window film. The settlement is expected to be finalized
in the first quarter of fiscal 1997, and the amount of the settlement is within
the range of previously established reserves.
36
<PAGE>
Note 8: 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 1996 1995
- -------------------------- ---- ----
<S> <C> <C>
Borrowings Under Unsecured Line of Credit $ 4,800 $ --
Subordinated Convertible Notes 7,981 436
Obligations Under Capital Leases
(Note 9) 6,932 8,400
Other 116 --
------- -------
$19,829 $ 8,836
Less Current Portion 3,014 1,903
------- -------
Long-Term Debt $16,815 $ 6,933
======= =======
</TABLE>
<TABLE>
<CAPTION>
Projected Maturities of Long-Term Debt At February 29, 1996
- --------------------------------------
<S> <C>
1997 $ 3,014
1998 3,456
1999 7,541
2000 2,133
2001 2,185
2002 and thereafter 1,500
-------
Total $19,829
=======
</TABLE>
The Company maintains a $25,000 unsecured line of credit. At the option of
the Company, interest is at the bank's reference rate (8.25% at February 29,
1996), or at LIBOR plus 1/2%, which generally is lower than the bank's reference
rate. This agreement expires on August 31, 1998, or earlier at the Company's
option. There was $4,800 outstanding under this line of credit at February 29,
1996. The Company has four irrevocable letters of credit totaling $4,940 against
this line leaving an available line of credit of $15,260 at February 29, 1996.
MSC pays a commitment fee of 3/8% per annum on the unused balance of the first
$10,000 of credit; 1/4% per annum on $15,000 of reserved credit; and is required
to maintain $500 in compensating balances. The agreement requires the Company to
adhere to certain covenants, some of which are adjusted quarterly. The most
significant of these covenants include restrictions relating to its current
ratio (1.2:1.0), liabilities to net worth (1.5:1.0), tangible net worth
($95,546) and interest coverage (2.0x). The Company was in compliance with all
covenants for the period ending February 29, 1996.
In addition, on December 19, 1995, the Company entered into a separate
financing arrangement with a second banking source for an additional $25,000
unsecured line of credit. The interest rate is based on a market rate to be
agreed upon by the parties at the time of borrowing. At February 29, 1996, the
rate would have been LIBOR plus 1/2%. There is no commitment fee for this
unsecured line of credit. There was no outstanding balance under this line of
credit at February 29, 1996.
37
<PAGE>
The subordinated convertible notes ("Notes") as of February 29, 1996, were
issued in consideration for the purchase of SGI. The Notes bear interest at a
rate of 7% per annum. The Notes are convertible into shares of the Company's
common stock at a conversion price of $24.27 per share. The Notes mature in
five equal installments with one series of notes becoming due annually beginning
on September 8, 1996. A maximum of 328,787 shares of common stock have been
reserved for the conversion option contained in the Notes. A portion of these
Notes ($1,766) were issued to certain individuals who are currently employed
with the Company.
The subordinated convertible notes outstanding as of February 28, 1995,
were convertible into shares of the Company's common stock at the rate of $10.22
per share. The final principal redemption payment of $436 was made in fiscal
1996.
Note 9: Leases
The Company leases one manufacturing facility and some machinery and equipment
under capital leases that include renewal options. Another manufacturing
facility, 10 distribution centers and other equipment are leased under non-
cancelable operating leases.
The Walbridge, Ohio, facility lease contains certain covenants with which
the Company is in compliance. The Company subleases its interest in this
facility to the Partnership. The sublease contains substantially the same terms
and conditions as the lease, with the monthly payment paid directly to the
lessor by the Partnership. The Company has assigned all of its rights under the
sublease to the lessor. The Company also has agreed to purchase the mortgage
loan on the facility in the event of default by the lessor.
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 Leases Income Leases
- -------- ------ ------ ------
<S> <C> <C> <C>
1997 $2,365 $2,363 $2,339
1998 2,373 2,373 1,669
1999 1,440 992 1,255
2000 768 --- 840
2001 768 --- 887
2002 and thereafter 1,729 --- 676
------ ------ ------
Total Minimum
Lease Payments $9,443 $5,728 $7,666
====== ======
Amount Representing
Interest 2,511
------
Present Value
of Minimum Lease Payments $6,932
======
</TABLE>
Amortization of leased property was $988 in fiscal 1996, $980 in fiscal
1995 and $971 in fiscal 1994.
Total rental expense under operating leases was $2,689 in fiscal 1996,
$2,511 in fiscal 1995 and $2,145 in fiscal 1994.
38
<PAGE>
Note 10: Retirement Plans
The Company has non-contributory defined benefit and defined contribution
pension plans that cover a majority of its employees. The Company funds amounts
required to meet ERISA funding requirements for the defined benefit plans. The
Company makes an annual contribution for the defined contribution plans after
the end of each calendar year for the amount earned by participating employees
during that preceding calendar year. In addition to the benefits previously
described, some Company officers participate in a non-contributory supplemental
pension plan.
Certain of the Company's defined benefit plans have been frozen. During
fiscal 1996, the Material Sciences Corporation Pension Plan for Salaried
Employees was terminated, and all assets were distributed to the plan
participants. These plans were replaced with defined contribution plans. The
discount rate used for the terminated and frozen plans is 8.0% in 1996, 7.5% to
8.0% in 1995 and 6.0% in 1994. For plans that have not been terminated, the
discount rate was 8.0% in all years presented. The following tables detail the
defined benefit and non-contributory supplemental pension plans.
<TABLE>
<CAPTION>
Components of Net Periodic For the years ended February 28 or 29,
Pension Cost 1996 1995 1994
- ------------ ---- ---- ----
<S> <C> <C> <C>
Service Cost Benefits Earned
During the Period $ 384 $ 353 $ 375
Interest Cost on Projected
Benefit Obligation 442 737 675
Actual Return on Assets (426) (612) (594)
Net Amortization
and Deferral 271 41 81
----- ----- -----
Net Periodic Pension Cost $ 671 $ 519 $ 537
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Assumptions Used in Determining For the years ended February 28 or 29,
the Plan's Funded Status 1996 1995 1994
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Expected Long-Term
Rate of Return on Assets 8.0% 8.0% 8.0%
Rate of Increase in
Compensation Levels 6.0% 6.0% 6.0%
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
February 28 or 29,
--------------------------------------
Plans Whose Plans Whose
Assets Exceed Accumulated
Accumulated Benefits Exceed
Pension Plans' Benefits Assets
Funded Status 1996 1995 1996 1995
- ------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
Plan Assets
at Fair Value $2,882 $5,643 $ --- $1,966
------ ------ ------ ------
Accumulated
Benefit Obligation
Vested $2,504 $3,977 $2,363 $3,853
Unvested 162 808 79 579
------ ------ ------ ------
Accumulated Benefit
Obligation $2,666 $4,785 $2,442 $4,432
Additional Benefits
Based on Projected Salary
and Service Levels 127 --- 1,111 914
------ ------ ------ ------
Projected Benefit
Obligation $2,793 $4,785 $3,553 $5,346
------ ------ ------ ------
Projected Benefit
Obligation in Excess of
(Less Than) Plan Assets $ (89) $ (858) $3,553 $3,380
Unrecognized (Loss) Gain 258 338 (64) (132)
Prior Service Cost (366) (112) (234) (369)
Unrecognized Net
Obligation on March 1 12 18 (40) (47)
Adjustment to Recognize
Minimum Liability --- --- --- 297
------ ------ ------ ------
Pension (Asset)
Liability
Recognized in
the Consolidated
Balance Sheets $ (185) $ (614) $3,215 $3,129
====== ====== ====== ======
</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 $1,360 in fiscal 1996,
$1,296 in fiscal 1995 and $958 in fiscal 1994.
40
<PAGE>
The Company provides its retired employees with certain post-retirement
health care benefits, which the Company may periodically amend or modify.
Substantially all employees may be eligible for these benefits if they reach
normal retirement age while employed by the Company. Payments for post-
retirement health care benefits were $59 in fiscal 1996, $95 in fiscal 1995 and
$112 in fiscal 1994.
The following table presents a reconciliation of the funded status of the
plan to the accrued benefit cost:
<TABLE>
<CAPTION>
Post-Retirement Plan February 28 or 29,
Funded Status 1996 1995
- ------------- ---- ----
<S> <C> <C>
Plan Assets at Fair Value $ 24 $ ---
------ ------
Retirees $ 893 $ 709
Other Fully Eligible Participants 322 266
Other Active Participants 601 468
------ ------
Accumulated Post-Retirement
Benefit Obligation $1,816 $1,443
------ ------
Projected Post-Retirement Benefit Obligation $1,792 $1,443
Unrecognized Net Gain and Prior Service Cost 1,414 1,683
------ ------
Accrued Post-Retirement
Benefit Cost $3,206 $3,126
====== ======
</TABLE>
<TABLE>
<CAPTION>
Net Periodic Post- For the years ended February 28 or 29,
Retirement Benefit Cost 1996 1995 1994
- ----------------------- ---- ---- ----
<S> <C> <C> <C>
Service Cost $ 79 $ 73 $ 49
Interest Cost on
Accumulated Benefit Obligation 132 104 132
Actual Return on Assets (1) --- ---
Net Amortization and Deferral (71) (79) (28)
----- ------ ------
Net Periodic
Post-Retirement Benefit Cost $ 139 $ 98 $ 153
===== ====== ======
</TABLE>
The discount rate used in determining the accumulated post-retirement
benefit obligation was 8% in 1996, 1995 and 1994.
The Company continues to review its post-retirement benefits, incorporating
actual and anticipated benefit changes. In determining the present value of the
accumulated post-retirement benefit obligation, of which only a minor amount has
been funded, and net cost, MSC used a 10% to 15% health care cost trend rate
decreasing until leveling off at 5% in Year 2010.
A 1% increase in the assumed health care cost trend rate would increase the
Accumulated Post-Retirement Benefit Obligation as of February 29, 1996 by
approximately $99 and the total of the service and interest cost components of
net post-retirement health care cost for the year then ended by approximately
$39.
41
<PAGE>
Note 11: 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, 1993 10,233,556 $205 $39,235 $37,258 (459,099) $(3,380)
Net Income - - - 11,802 - -
Sale of Common Stock 91,995 2 954 - - -
Compensatory Effect of Stock Plans 139,604 3 385 - - -
---------- ---- ------- ------- -------- -------
Balance 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)
========== ==== ======= ======= ======== =======
</TABLE>
42
<PAGE>
Note 12: Equity Plans
The Company maintains various director and employee stock plans. On February
29, 1996, the Company had either granted options, awarded restricted stock, or
sold stock totaling 3,274,199 shares out of a maximum of 4,200,000 authorized
for all plans. In June 1995, the shareowners of the Company approved the
authorization of an additional 600,000 shares under the 1992 Omnibus Plan.
Options granted under the 1985 plan have been for the purchase of shares of
common stock at 100% of the fair market value at the grant date. The options
expire after five or ten years from the date of grant and vest ratably over five
years.
Options granted under the 1992 Omnibus Plan have been for the purchase of
common stock at 100% of the fair market value at the grant date. The options
expire after 10 years from the date of grant and vest at the end of two or more
years from the date of grant.
A summary of transactions under the stock option plans is presented below.
<TABLE>
<CAPTION>
Stock Option Key Option
Activity Directors Employees Price Per Share
- -------- --------- --------- -----------------
<S> <C> <C> <C> <C> <C>
Outstanding at
February 28, 1993 67,500 989,550 $ 4.95 to $10.05
Granted 54,000 351,900 $11.42 to $15.00
Exercised (13,500) (67,500) $ 5.28 to $ 6.00
Canceled --- (90,150) $10.05 to $14.25
------- ---------
Outstanding at
February 28, 1994 108,000 1,183,800 $ 4.95 to $15.00
Granted --- 47,550 $14.67 to $17.33
Exercised (3,600) (37,000) $ 4.95 to $10.05
Canceled --- (7,500) $14.25
------- ---------
Outstanding at
February 28, 1995 104,400 1,186,850 $ 4.95 to $17.33
Granted --- 360,025 $13.88 to $18.75
Exercised --- (153,337) $10.05
Canceled --- (43,620) $14.25 to $18.75
------- ---------
Outstanding at
February 29, 1996 104,400 1,349,918 $ 4.95 to $18.75
======= ========= ====== == ======
Exercisable at
February 29, 1996 61,200 648,013 $ 4.95 to $10.05
======= ========= ====== == ======
</TABLE>
43
<PAGE>
Shares of restricted stock are awarded in the name of the employee, who has
all rights of a shareowner, subject to certain restrictions or forfeitures.
Shares issued prior to 1992 vested in 1993 or 1994 based on the achievement of
certain performance based criteria specified in the plan or upon the passage of
time. Restricted shares issued in 1994 and 1995 generally expire and vest over a
five to eight year period and are subject to accelerated vesting if the market
value of the Company's stock exceeds the levels specified in the plan. As an
incentive to participants to retain these shares upon vesting, the Company
granted a matching option at fair market value that vests two years after the
vesting of the restricted stock if that restricted stock is still owned by the
participant. The number of options and price per share are included in the stock
option activity table on the previous page. The market value of the restricted
shares is amortized to compensation expense over the period in which the shares
vest based upon the passage of time. In the event of vesting due to the
achievement of market value appreciation as defined by the plan, the recognition
of the unamortized expense would be accelerated.
A summary of transactions under the restricted stock plans is presented
below.
<TABLE>
<CAPTION>
Key
Restricted Stock Activity Employees
- ------------------------- ---------
<S> <C>
Unvested at February 28, 1993 231,300
Granted 231,750
Vested (216,756)
Canceled ( 22,344)
--------
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
========
</TABLE>
Compensation effects arising from the difference between market and
exercise prices at date of option grant or restricted stock issuance is $1,188
in 1996, $647 in 1995 and $388 in 1994, and have been charged against income and
recorded as Additional Paid-In Capital.
The Employee Stock Purchase Plan permits eligible employees to purchase
shares of common stock at 85% of the lower fair market value of the stock as of
two measurement dates six months apart. During fiscal years 1996, 1995 and
1994, 68,057, 53,382 and 56,993 shares, respectively, were sold to employees
under this plan.
On July 2, 1986, the Company issued a dividend of one right for each
outstanding common share to shareowners of record on that date. Each right
entitles the owner, upon the occurrence of certain events relating to changes in
ownership of the Company, to buy from the Company two-thirds of one share of
Series A junior participating preferred stock for $80.00 per share. If the
Company is involved in a business combination or other defined transaction, the
44
<PAGE>
rights owners will be entitled to buy certain stock of the acquiring company.
Alternatively, upon the occurrence of defined events, rights owned by certain
shareowners would become exercisable for a defined number of shares of common
stock of the Company. The Company is entitled to redeem the rights at $0.022
per right under certain circumstances. The rights expire on July 1, 1996.
Note 13: Interest Expense
The table presented below analyzes the components of interest expense.
<TABLE>
<CAPTION>
For the years ended February 28 or 29,
Interest Expense 1996 1995 1994
- ------------------- ------- ------ -----
<S> <C> <C> <C>
Other $ 589 $ 124 $ 112
Capitalized (372) (60) --
------ ----- -----
Total $ 217 $ 64 $ 112
====== ===== =====
</TABLE>
The table above excludes interest expense of $792, $869 and $888 for fiscal
years 1996, 1995 and 1994, respectively, relating to the Walbridge, Ohio,
facility. This facility is subleased to the Partnership. The interest expense
and amortization relating to this lease is reduced by sublease income received
from the Partnership, and the net result is included in Other, Net.
Note 14: 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 or 29,
Tax Provision 1996 (restated) 1995 1994
- ------------- --------------- ---- ----
<S> <C> <C> <C>
Current:
Federal $3,291 $ 8,130 $ 7,053
State 565 1,363 1,246
------ ------- -------
$3,856 $ 9,493 $ 8,299
Deferred:
Federal 1,215 852 (907)
State 191 134 (162)
------ ------- -------
$1,406 $ 986 $(1,069)
------ ------- -------
Total Provision $5,262 $10,479 $ 7,230
====== ======= =======
</TABLE>
45
<PAGE>
<TABLE>
For the years ended February 28 or 29,
Tax Rate Reconciliation 1996 (restated) 1995 1994
- ----------------------- --------------- ---- ----
<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 5.7
Research and Development
Tax Credits (1.6) (0.7) (1.2)
Foreign Sales Corp. Benefit (0.7) -- --
Tax Exempt Interest Income -- (0.4) (0.6)
Other, Net -- (0.9) (0.9)
------ ------- -------
Effective Income Tax Rate 38.2% 38.5% 38.0%
====== ======= =======
</TABLE>
Temporary differences that give rise to deferred tax (assets) and liabilities
are as follows:
<TABLE>
February 28 or 29,
<S> <C> <C>
1996 1995
---- ----
Property and Equipment $15,539 $13,821
Reserves not Deductible Until Paid (4,220) (3,668)
Employee Benefit Liabilities (4,013) (2,945)
Deferred State Income Taxes, Net 1,140 1,155
Other (69) 141
------- -------
Deferred Tax Liabilities, Net $ 8,377 $ 8,504
======= =======
</TABLE>
Deferred Tax Liabilities, Net, have been recorded on the Company's balance
sheet as follows:
<TABLE>
February 28 or 29,
<S> <C> <C>
1996 1995
---- ----
Long-Term Liabilities -
Deferred Income Taxes $11,451 $10,750
Current Assets - Prepaid Taxes (3,074) (2,246)
------- -------
$ 8,377 $ 8,504
======= =======
</TABLE>
46
<PAGE>
Note 15: Summary of Quarterly Data (Unaudited)
The table presented below is a summary of quarterly data for the years ended
February 29, 1996 and February 28, 1995.
<TABLE>
<CAPTION>
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
--------------------------------------------------------------------------------------------------------
Previously Restated Previously Restated Previously Restated Previously Restated
Reported Reported Reported Reported
<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>
<TABLE>
<CAPTION>
First Second Third Fourth
1995 Quarter Quarter Quarter Quarter
-----------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales $58,822 $59,415 $56,798 $52,623
Gross Profit 15,050 15,589 16,776 14,756
Net Income 4,081 4,463 4,600 3,596
Net Income
Per Share $ 0.27 $ 0.29 $ 0.30 $ 0.24
</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 4).
The unaudited quarterly information for fiscal 1996 has been restated due
to the accounting irregularities discovered at one of the Company's operating
units (See Note 2).
47
<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
29, 1996 (as restated - see Note 2), and February 28, 1995 and the related
consolidated statements of income and cash flows for each of the three fiscal
years in the period ended February 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Material Sciences Corporation
as of February 29, 1996, and February 28, 1995, and the results of its
operations and its cash flows for each of the three fiscal years in the period
ended February 29, 1996, in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 17, 1996
(except with respect to the matter
discussed in Note 2, as to which
the date is April 29, 1997)
48
<PAGE>
(b) The unaudited selected quarterly financial data which is referred to in
Item 8(a) above and is set forth in Note 15 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 4 of the Company's proxy statement for the 1996
annual meeting of shareowners (the "proxy statement"), all of which is
incorporated by reference herein, for information on the directors of the
Company. Reference is made to Part I of this report for information on the
executive officers of the Company.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Reference is made to the information under the captions "Compensation of
Executive Officers", "Compensation and Organization Committee Report", "MSC
Performance Graph", "Employment and Other Agreements", and "Employee and Other
Plans" on pages 7 through 14 of the proxy statement, all of which is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
- --------------------------------------------------
HOLDERS AND MANAGEMENT
----------------------
Reference is made to the information set forth on pages 5 and 6 of the proxy
statement, all of which is incorporated by reference herein, except that the
table on page 5 is hereby amended to reflect that as of April 26, 1996 (i) the
number of shares beneficially owned by A. F. Vitzthum is 91,550 shares for a
total of 113,475 and (ii) the number of shares beneficially owned by all
officers and directors as a group is 699,648 shares for a total of 1,183,423,
which represents 7.7% of the Common Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
There were no relationships or related transactions requiring disclosure in
fiscal 1996.
49
<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, 1996, 1995 and 1994
(ii) Consolidated Balance Sheets - February 29, 1996 and February
28, 1995
(iii) Consolidated Statements of Cash Flows for the years ended
February 28 or 29, 1996, 1995 and 1994
(iv) Notes to Consolidated Financial Statements
(v) Report of Independent Public Accountants
II Supplemental Schedules
----------------------
(i) Report of Independent Public Accountants with respect to
Supplemental Schedules to the Financial Statements(10)
(ii) Schedule II - Reserve for Receivable Allowances and Deferred
Tax Asset Valuation Allowance(10)
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.
50
<PAGE>
<TABLE>
<CAPTION>
(c) EXHIBITS
<S> <C>
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)
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- --------------------------------------------------------------------
<S> <C>
2(j) Further Amendments to Definitive Agreements dated as of April 23,
1992, among EGL Steel Inc., Inland Steel Electrogalvanizing
Corporation, Pre Finish Metals (EG) Incorporated, Bethlehem Steel
Corporation, Inland Steel Company, Inland Steel Industries, Inc., Pre
Finish Metals Incorporated and Material Sciences Corporation.(7)
3(a) Registrant's Certificate of Incorporation, as amended.(1)
3(b) Amendment to Registrant's Certificate of Incorporation.(2)
3(c) Amendment to Registrant's Certificate of Incorporation.(4)
3(d) Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock.(4)
3(e) Registrant's By-laws, as amended.(6)
4(a) Credit Agreement dated as of September 1, 1994, between Material
Sciences Corporation and Bank of America Illinois.(5)
4(b) First Amendment to Rights Agreement dated as of April 21, 1994 by and
between Material Sciences Corporation and Mellon Securities Trust
Company.(9)
4(c) First Amendment to Credit Agreement dated as of September 5, 1995, by
and between Material Sciences Corporation and Bank of America
Illinois.(10)
4(d) Money Market Demand Note (Fixed and Floating Rate Corporation) dated
December 20, 1995 executed by Material Sciences Corporation in favor
of The Northern Trust Company in the aggregate principal amount of
$25,000,000.(10)
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.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- --------------------------------------------------------------------
<S> <C>
10(a) Material Sciences Corporation Stock Purchase Plan. (1)
10(b) Material Sciences Corporation Supplemental Pension Plan.(1)
10(c) Material Sciences Corporation Employee Stock Purchase Plan.(6)
10(d) Material Sciences Corporation 1985 Stock Option Plan for Key
Employees.(6)
10(e) Material Sciences Corporation 1985 Stock Option Plan for
Directors.(6)
10(f) Material Sciences Corporation 1992 Omnibus Stock Awards Plan for Key
Employees.(7)
10(g) Employment Agreement effective February 27, 1991, between Material
Sciences Corporation and G. Robert Evans.(6)
10(h) Material Sciences Corporation 1991 Stock Option Plan for
Directors.(6)
10(i) Material Sciences Corporation Directors Deferred Compensation
Plan.(6)
10(j) Material Sciences Corporation 1996 Stock Option Plan for Non-Employee
Directors.(10)
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)
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- --------------------------------------------------------------------
<S> <C>
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)
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ---------------------------------------------------------------------
<S> <C>
10(u) Amendment and Consent Agreement dated as of April 23, 1992, among
Walbridge Coatings, An Illinois Partnership, Bethlehem Steel
Corporation, EGL Steel, Inc., Inland Steel Industries, Inc., Inland
Steel Company, Inland Steel Electrogalvanizing Corporation, Material
Sciences Corporation, Pre Finish Metals Incorporated, Pre Finish
Metals (EG) Incorporated, and Creditanstalt-Bankverein, amending the
Term Loan Agreement dated as of July 23, 1986, as amended on March
31, 1987, and amending the Amended and Restated Credit Facility
Agreement dated as of July 23, 1986, including the related guaranties
by Material Sciences Corporation and Pre Finish Metals
Incorporated.(7)
10(v) Form of Standstill Agreement dated as of January 29, 1986, among
Material Sciences Corporation, Richard L. Burns and Joyce Burns.(6)
10(w) Rights Agreement dated as of June 17, 1986, between Material Sciences
Corporation and Continental Illinois National Bank and Trust Company
of Chicago.(6)
10(x) Form of Indemnification Agreement between Material Sciences
Corporation and each of its officers and directors.(7)
10(y) Supplemental Retirement Agreement dated as of December 28, 1992
between Material Sciences Corporation and William H. Vrba.(8)
10(aa) Letter Agreement dated as of May 8, 1991 between Material Sciences
Corporation and William H. Vrba. (8)
11 Computation of net income per share.
21 Subsidiaries of the Registrant.(10)
23 Consent of Arthur Andersen LLP.
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------- ---------------------------------------------------------------------
<S> <C>
27 Financial Data Schedule.(11)
- -----------
(1) Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (Registration No. 2-93414), which was declared effective
on November 27, 1984.
(2) Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (Registration No. 33-00828), which was filed on October
11, 1985.
(3) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 28, 1989 (File No. 1-8803).
(4) Incorporated by reference to the Registrant's Form 8-A dated June 17,
1986 (File No. 1-8803).
(5) Incorporated by reference to the Registrant's Form 10-Q Quarterly
Report for the Quarter Ended August 31, 1994 (File No. 1-8803).
(6) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 28, 1991 (File No. 1-8803).
(7) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 29, 1992 (File No. 1-8803).
(8) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 28, 1993 (File No. 1-8803).
(9) Incorporated by reference to the Registrant's Form 10-K Annual Report
for the Fiscal Year Ended February 28, 1994 (File No. 1-8803).
(10) Filed with the Registrant's Form 10-K for the fiscal year ended
February 29, 1996.
(11) Appears only in the electronic filing of this report with the
Securities and Exchange Commission.
(d) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter.
</TABLE>
56
<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
57
<PAGE>
EXHIBIT INDEX
MATERIAL SCIENCES CORPORATION
ANNUAL REPORT ON FORM 10-K/A
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, 1996, 1995 and 1994
(ii) Consolidated Balance Sheets - February 29, 1996 and
February 28, 1995
(iii) Consolidated Statements of Cash Flows for the years ended
February 28 or 29, 1996, 1995 and 1994
(iv) Notes to Consolidated Financial Statements
(v) Report of Independent Public Accountants
II Supplemental Schedules
----------------------
(i) Report of Independent Public Accountants with respect to
Supplemental Schedules to the Financial Statements(10)
(ii) Schedule II - Reserve for Receivable Allowances and Deferred
Tax Asset Valuation Allowance(10)
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.
58
<PAGE>
MATERIAL SCIENCES CORPORATION
ANNUAL REPORT ON FORM 10-K/A
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------ ---------------------- -----
<S> <C> <C>
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)
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------ ---------------------- -----
<S> <C> <C>
2(i) Further Amendments to Definitive
Agreements dated as of July 24,
1986, among EGL Steel Inc., Inland
Steel Electrogalvanizing
Corporation, Pre Finish Metals (EG)
Incorporated, Bethlehem Steel
Corporation, Inland Steel Company,
Inland Steel Industries, Inc., Pre
Finish Metals Incorporated and
Material Sciences Corporation.(3)
2(j) Further Amendments to Definitive
Agreements dated as of April 23,
1992, among EGL Steel Inc., Inland
Steel Electrogalvanizing
Corporation, Pre Finish Metals (EG)
Incorporated, Bethlehem Steel
Corporation, Inland Steel Company,
Inland Steel Industries, Inc., Pre
Finish Metals Incorporated and
Material Sciences Corporation.(7)
3(a) Registrant's Certificate of
Incorporation, as amended.(1)
3(b) Amendment to Registrant's
Certificate of Incorporation.(2)
3(c) Amendment to Registrant's
Certificate of Incorporation.(4)
3(d) Certificate of Designation,
Preferences and Rights of Series A
Junior Participating Preferred
Stock.(4)
3(e) Registrant's By-laws, as amended.(6)
4(a) Credit Agreement dated as of
September 1, 1994 between Material
Sciences Corporation and Bank of
America Illinois.(5)
4(b) First Amendment to Rights Agreement
dated as of April 21, 1994 by and
between Material Sciences
Corporation and Mellon Securities
Trust Company.(9)
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------ ---------------------- -----
<S> <C> <C>
4(c) First Amendment to Credit Agreement
dated as of September 25, 1995 by
and between Material Sciences
Corporation and Bank of America
Illinois.(10)
4(d) Money Market Demand Note (Fixed and
Floating Rate Corporation) dated
December 20, 1995 executed by
Material Sciences Corporation in
favor of The Northern Trust Company
in the aggregate principal amount of
$25,000,000.(10)
There are omitted certain
instruments with respect to
long-term debt, the total amount of
securities authorized under each of
which does not exceed 10% of the
total assets of the registrant and
its subsidiaries on a consolidated
basis. A copy of each such
instrument will be furnished to the
Commission upon request.
10(a) Material Sciences Corporation Stock
Purchase Plan. (1)
10(b) Material Sciences Corporation
Supplemental Pension Plan.(1)
10(c) Material Sciences Corporation
Employee Stock Purchase Plan.(6)
10(d) Material Sciences Corporation 1985
Stock Option Plan for Key
Employees.(6)
10(e) Material Sciences Corporation 1985
Stock Option Plan for Directors.(6)
10(f) Material Sciences Corporation 1992
Omnibus Stock Awards Plan for Key
Employees. (7)
10(g) Employment Agreement effective
February 27, 1991, between Material
Sciences Corporation and
G. Robert Evans.(6)
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------ ---------------------- -----
<C> <S> <C>
10(h) Material Sciences Corporation 1991
Stock Option Plan for Directors.(6)
10(i) Material Sciences Corporation
Directors Deferred Compensation
Plan.(6)
10(j) Material Sciences Corporation 1996
Stock Option Plan for Non-Employee
Directors.(10)
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)
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)
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------ ---------------------- -----
<S> <C> <C>
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)
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)
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description of Exhibit Page*
------ ---------------------- -----
<S> <C> <C>
10(w) Rights Agreement dated as of June
17, 1986, between Material Sciences
Corporation and Continental Illinois
National Bank and Trust Company of
Chicago.(6)
10(x) Form of Indemnification Agreement
between the Company and each of its
officers and directors.(7)
10(y) Supplemental Retirement Agreement
dated as of December 28, 1992
between Material Sciences
Corporation and William H. Vrba.(8)
10(aa) Letter Agreement dated as of May 8,
1991 between Material Sciences
Corporation and William H. Vrba.(8)
11 Computation of net income per share.
21 Subsidiaries of the Registrant.(10)
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.(11)
</TABLE>
- --------------------------------
(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).
64
<PAGE>
(5) Incorporated by reference to the Registrant's Form 10-Q
Quarterly Report for the Quarter Ended August 31, 1994 (File
No. 1-8803).
(6) Incorporated by reference to the Registrant's Form 10-K Annual
Report for the Fiscal Year Ended February 28, 1991 (File No. 1-
8803).
(7) Incorporated by reference to the Registrant's Form 10-K Annual
Report for the Fiscal Year Ended February 29, 1992 (File No. 1-
8803).
(8) Incorporated by reference to the Registrant's Form 10-K Annual
Report for the Fiscal Year Ended February 28, 1993 (File No. 1-
8803).
(9) Incorporated by reference to the Registrant's Form 10-K Annual
Report for the Fiscal Year Ended February 28, 1994 (File No. 1-
8803).
(10) Filed with the Registrant's Form 10-K for the fiscal year ended
February 29, 1996.
(11) Appears only in the electronic filing of this report with the
Securities and Exchange Commission.
65
<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>
1996 (restated) 1995 1994 1993 1992
---------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Income $ 8,497 $ 16,740 $ 11,802 $ 7,617 $ 7,141
================ =========== =========== =========== ===========
Weighted average shares
outstanding during the
year 15,087,000 14,851,000 14,742,600 13,177,470 11,215,125
Net addition to shares
outstanding under the
treasury stock method
due to stock options
and restricted stock 350,054 389,898 315,021 206,130 43,407
---------------- ----------- ----------- ----------- -----------
Shares outstanding used
in computing net income
per share 15,437,054 15,240,898 15,057,621 13,383,600 11,258,532
================ =========== =========== =========== ===========
Net income per share $ 0.55 $ 1.10 $ 0.78 $ 0.56 $ 0.63
================ =========== =========== =========== ===========
</TABLE>
66
<PAGE>
EXHIBIT 23
Consent of Arthur Andersen LLP
67
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our reports dated April 17, 1996 (except with respect to the matter
discussed in Note 2, as to which the date is April 29, 1997), included in or
incorporated by reference in this Form 10-K/A, 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
68
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Statements of Income and Consolidated Balance Sheet and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 3,379
<SECURITIES> 0
<RECEIVABLES> 30,243
<ALLOWANCES> 4,407
<INVENTORY> 28,402
<CURRENT-ASSETS> 66,697
<PP&E> 185,453
<DEPRECIATION> 74,571
<TOTAL-ASSETS> 200,026
<CURRENT-LIABILITIES> 42,981
<BONDS> 16,815
<COMMON> 321
0
0
<OTHER-SE> 117,905
<TOTAL-LIABILITY-AND-EQUITY> 200,026
<SALES> 236,150
<TOTAL-REVENUES> 236,150
<CGS> 180,554
<TOTAL-COSTS> 170,554
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 217
<INCOME-PRETAX> 13,759
<INCOME-TAX> 5,262
<INCOME-CONTINUING> 8,497
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,497
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
</TABLE>
