<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): December 15, 1997
Material Sciences Corporation
-----------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware
--------
(State or other Jurisdiction of Incorporation)
1-8803 95-2673173
------ ----------
(Commission File Number) IRS Employer Identification No.
2200 East Pratt Boulevard
Elk Grove Village, Illinois 60007
(Address of principal (Zip Code)
executive offices)
(847) 439-8270
--------------
Registrant's Telephone Number
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Item 1a. Explanatory Note 3
Item 2. Acquisition of Assets 3
Item 5. Other Events 3
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits 3
Signature 4
Pro Forma Financial Statements 55
Exhibit Index 61
</TABLE>
2
<PAGE>
Item 1a. Explanatory Note
This Amendment No. 1 on Form 8-K/A to the Current Report on Form 8-K for
December 15, 1997 of the Registrant is submitted in order to provide the audited
historical financial statements and pro forma financial information called for
under Item 7. Therefore, the Registrant hereby amends its Form 8-K in accordance
with Rule 12b-15 under the Securities Exchange Act of 1934.
Item 2. Acquisition of Assets
On December 30, 1997, the Registrant filed a Form 8-K which is amended by this
filing. The Acquisition of Assets is incorporated by reference under this Item
2.
Item 5. Other Events
On December 30, 1997, the Registrant filed a Form 8-K which is amended by this
filing. Other Events are incorporated by reference under this Item 5.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired
Unaudited Balance Sheet, Statement of Income, and Statement of
Cash Flows of Colorstrip, Inc. as of and for the nine month
period ending September 30, 1997
Audited Financial Statements of Pinole Point Steel Company as of
and for the years ending December 31, 1996 and December 31, 1995
Audited Financial Statements of Colorstrip, Inc. as of and for
the years ending December 31, 1996 and December 31, 1995
Audited Financial Statements of Pinole Point Steel Company as of
and for the years ending December 31, 1995 and December 31, 1994
Audited Financial Statements of Colorstrip, Inc. as of and for
the years ending December 31, 1995 and December 31, 1994
(b) Pro Forma Financial Information
Pro Forma Financial Statements
Notes to Pro Forma Financial Information
(c) Exhibits
See the exhibits listed in the Index to Exhibits
3
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MATERIAL SCIENCES CORPORATION
By: /s/ Gerald G. Nadig
----------------------------
Gerald G. Nadig
Chairman, President
and Chief Executive Officer
By: /s/ James J. Waclawik, Sr.
----------------------------
James J. Waclawik, Sr.
Vice President,
Chief Financial Officer
and Secretary
4
<PAGE>
<TABLE>
<CAPTION>
Balance Sheet (Unaudited)
Colorstrip, Inc.
Colorstrip,
September 30,
(In thousands) 1997
- -------------------------------------------------------- ------------
<S> <C>
Assets:
Current Assets
Cash and Cash Equivalents $ 4,068
Trade Receivables, Less Reserves of $318 17,602
Prepaid Expenses 1,477
Inventories 17,866
Due from Affiliate 4,497
Advances to Shareowners 100
---------
Total Current Assets $ 45,610
---------
Gross Property, Plant and Equipment $ 81,959
Accumulated Depreciation and Amortization (39,230)
---------
Net Property, Plant and Equipment $ 42,729
---------
Other Assets:
Restricted Cash $ 8,210
Due from Affiliate 3,289
Interest Receivable from Shareowners 536
---------
Total Other Assets $ 12,035
---------
Total Assets $100,374
=========
Liabilities:
Current Liabilities:
Borrowings Under Line of Credit $ 13,000
Current Portion of Long-Term Debt 5,950
Accounts Payable 19,747
Accrued Expenses 3,689
---------
Total Current Liabilities $ 42,386
---------
Long-Term Liabilities:
Deferred Income Taxes $ 51
Long-Term Debt, Less Current Portion 8,925
Due to Affiliate 3,010
Notes Payable to Shareowners 8,225
---------
Total Long-Term Liabilities $ 20,211
---------
Shareowners' Equity
Common Stock $ 2,715
Additional Paid-In Capital 20,951
Notes Receivable from Shareowners (750)
Retained Earnings 14,861
---------
Total Shareowners' Equity $ 37,777
---------
Total Liabilities and Shareowners' Equity $100,374
=========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
Statement of Income (Unaudited)
Colorstrip, Inc.
Nine Months
Ended
September 30,
(In thousands) 1997
- -------------------------------------------------------- ------------
<S> <C>
Net Sales $146,287
Cost of Sales 124,621
---------
Gross Profit $ 21,666
Selling, General and Administrative Expenses 13,240
---------
Income from Operations $ 8,426
---------
Other Expense:
Interest Expense $ 1,762
Other, Net 592
---------
Total Other Expense, Net $ 2,354
---------
Income Before Income Taxes $ 6,072
Income Taxes --
---------
Net Income $ 6,072
=========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Statement of Cash Flows (Unaudited)
Colorstrip, Inc.
Nine Months
Ended
September 30,
(In thousands) 1997
- ----------------------------------------------------------------- -------------
<S> <C>
Cash Flows From:
Operating Activities:
Net Income $ 6,072
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation and Amortization 3,369
Benefit for Deferred Income Taxes (12)
-------------
Operating Cash Flow Prior to Changes in Assets and Liabilities $ 9,429
-------------
Changes in Assets and Liabilities:
Receivables $ (2,290)
Prepaid Expenses (402)
Inventories 3,753
Accounts Payable (3,228)
Accrued Expenses 872
Interest Receivable from Shareowners (56)
-------------
Cash Flow from Changes in Assets and Liabilities (1,351)
-------------
Net Cash Provided by Operating Activities $ 8,078
-------------
Investing Activities:
Capital Expenditures, Net $ (590)
Net Due to/from Affiliates 3,762
-------------
Net Cash Provided by Investing Activities $ 3,172
-------------
Financing Activities:
Net Payments on Long-Term Debt $ (10,463)
Dividend to Shareowner (5,000)
-------------
Net Cash Used in Investing Activities $ (15,463)
-------------
Net Decrease in Cash $ (4,213)
Cash at Beginning of Period 8,281
-------------
Cash at End of Period $ 4,068
=============
</TABLE>
7
<PAGE>
- ----
KPMG
- ----
PINOLE POINT STEEL COMPANY
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
Mr. Marshall I. Wais and the
Board of Directors
Pinole Point Steel Company:
We have audited the accompanying balance sheets of Pinole Point Steel Company as
of December 31, 1996 and 1995, and the related statements of income,
stockholder's equity, and cash flows for the years then ended. 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
misstatement. 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 Pinole Point Steel Company as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
April 4, 1997
<PAGE>
PINOLE POINT STEEL COMPANY
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,449,341 851,285
Receivables, net 14,661,205 11,193,038
Inventories, net 19,836,744 16,842,315
Due from Marwais Steel Company 4,017,693 8,227,921
Prepaid expenses and other current assets 543,983 300,282
Current portion of note receivable from Colorstrip, Inc. 5,950,000 5,950,000
------------ -----------
Total current assets 52,458,966 43,364,841
Due from Colorstrip, Inc. 8,317,555 8,535,940
Note receivable from Colorstrip, Inc. 19,975,000 24,437,500
Notes receivable from Marwais LLC 5,105,417 5,000,000
Property, plant and equipment, net 21,482,776 19,965,988
------------ -----------
$107,339,714 101,304,269
============ ===========
Liabilities and Stockholder's Equity
------------------------------------
Current liabilities:
Borrowings under line of credit $ 19,000,000 13,000,000
Current portion of long-term debt 5,950,000 5,950,000
Accounts payable 21,844,175 15,679,814
Accrued expenses 2,324,044 1,850,113
------------ -----------
Total current liabilities 49,118,219 36,479,927
Long-term debt 13,387,500 17,850,000
------------ -----------
Total liabilities 62,505,719 54,329,927
------------ -----------
Stockholder's equity:
Common stock, $10 par value;
authorized 1,000,000 shares;
issued and outstanding 167,565 shares 1,675,650 1,675,650
Additional paid-in capital 20,950,794 20,950,794
Retained earnings 22,207,551 24,347,898
------------ -----------
Total stockholder's equity 44,833,995 46,974,342
============ ===========
$ 107,339,714 101,304,269
============ ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PINOLE POINT STEEL COMPANY
Statements of Income
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net sales $ 156,532,302 154,565,603
Cost of sales 141,854,767 138,784,297
----------- -----------
Gross profit 14,677,535 15,781,306
Selling, general and administrative expenses 13,445,486 13,672,659
----------- -----------
Operating income 1,232,049 2,108,647
----------- -----------
Other income (expense):
Interest income 2,474,910 2,801,614
Interest expense (3,127,732) (3,097,880)
Other 390,727 668,618
----------- -----------
(262,095) 372,352
----------- -----------
Income before income taxes 969,954 2,480,999
Income tax (benefit) expense (190,295) 49,000
----------- -----------
Net income $ 1,160,249 2,431,999
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PINOLE POINT STEEL COMPANY
Statements of Stockholder's Equity
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Additional Total
Common Paid-In Retained Stockholder's
Stock Capital Earnings Equity
----- ------- -------- ------
<S> <C> <C> <C> <C>
Balances at December 31, 1994 $ 1,675,650 20,950,794 23,521,495 46,147,939
Dividend to stockholder -- -- (1,605,596) (1,605,596)
Net income -- -- 2,431,999 2,431,999
----------- ---------- ---------- ----------
Balances at December 31, 1995 1,675,650 20,950,794 24,347,898 46,974,342
Dividend to stockholder -- -- (3,300,596) (3,300,596)
Net income -- -- 1,160,249 1,160,249
----------- ---------- ---------- ----------
Balances at December 31, 1996 $ 1,675,650 20,950,794 22,207,551 44,833,995
=========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PINOLE POINT STEEL COMPANY
Statements of Cash Flows
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $1,160,249 2,431,999
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 1,874,629 1,478,823
(Gain) loss on sale of assets (36,892) (380,924)
Allowance for doubtful accounts (50,000) --
Allowance for LIFO (1,479,526) 1,908,724
Changes in operating assets and liabilities:
Receivables (3,418,167) 1,169,957
Inventories (1,514,903) (2,058,328)
Prepaid expenses and other current assets (243,701) 170,098
Accounts payable 6,164,361 5,559,662
Accrued expenses 473,931 338,531
----------- -----------
Net cash provided by operating activities 2,929,981 10,618,542
----------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (3,406,725) (5,809,768)
Proceeds from sale of equipment 52,200 402,793
Loan to related party (105,417) (3,000,000)
Repayments on note receivable from Colorstrip, Inc. 4,462,500 5,950,000
Due from Colorstrip, Inc. 218,385 (4,082,765)
Due from Marwais Steel Company 4,210,228 (1,855,053)
----------- -----------
Net cash provided by (used in) investing activities 5,431,171 (8,394,793)
----------- -----------
Cash flows from financing activities:
Repayments of long-term debt (4,462,500) (5,950,000)
Borrowings under line of credit 30,000,000 14,500,000
Payments under line of credit (24,000,000) (14,571,949)
Dividend to stockholder (3,300,596) (1,605,596)
----------- -----------
Net cash used in financing activities (1,763,096) (7,627,545)
----------- -----------
Net increase (decrease) in cash and cash equivalents 6,598,056 (5,403,796)
Cash and cash equivalents at beginning of year 851,285 6,255,081
----------- -----------
Cash and cash equivalents at end of year $ 7,449,341 851,285
=========== ===========
Supplementary cash flow information:
Cash paid for interest $ 3,155,459 3,135,899
=========== ===========
Cash paid for income taxes $ 800 40,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PINOLE POINT STEEL COMPANY
Notes to Financial Statements
December 31, 1996 and 1995
(1) THE COMPANY
Pinole Point Steel Company (the Company) was incorporated under the laws of
the State of California on June 2, 1978. The Company produces galvanized
material on a continuous hot-dip galvanizing line for a wide range of
applications.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(a) Cash Equivalents
The Company considers all highly liquid investments with an original
maturity at date of purchase of three months or less to be cash
equivalents.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the last-in, first-out (LIFO) method.
(c) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Buildings are
depreciated using the straight-line method over thirty years.
Machinery and equipment, transportation equipment and furniture and
fixtures are depreciated using the straight-line method over estimated
useful lives, ranging from three to fifteen years.
During 1996, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 121, Accounting for the Impairment of Long Lived
Assets and Long Lived Assets to Be Disposed of. The adoption of SFAS
No. 121 did not have a material impact on the Company's financial
position.
(d) Income Taxes
The Company has elected to be taxed as an S Corporation for federal
income tax purposes and state franchise tax purposes. Accordingly,
federal income taxes are the responsibility of the Company's
stockholder. However, the Company is subject to a 1.5% California
State franchise tax on taxable income.
<PAGE>
2
PINOLE POINT STEEL COMPANY
Notes to Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(e) Environmental Liabilities and Expenditures
Accruals for environmental matters, if any, are recorded in operating
expenses when it is probable that a liability has been incurred and
the amount of the liability can be reasonably estimated. Accrued
liabilities are exclusive of claims against third parties and are not
discounted.
In general, costs related to environmental remediation are charged to
expense. Environmental costs are capitalized if the costs increase the
value of the property and/or mitigate or prevent contamination from
future operations.
(3) RECEIVABLES
Receivables consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Customer accounts $ 14,113,767 10,691,938
Other 274,638 601,100
Due from employee-officer 322,800 --
------------ ----------
14,711,205 11,293,038
Less allowance for doubtful accounts 50,000 100,000
------------ ----------
$ 14,661,205 11,193,038
============ ==========
</TABLE>
(4) INVENTORIES
The cost of inventories consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials and supplies $ 12,364,116 11,742,512
Work in process 4,439,000 4,199,629
Finished goods 5,558,652 4,904,724
------------ ----------
22,361,768 20,846,865
Less allowance for LIFO 2,525,024 4,004,550
------------ ----------
$ 19,836,744 16,842,315
============ ==========
</TABLE>
(Continued)
<PAGE>
3
PINOLE POINT STEEL COMPANY
Notes to Financial Statements
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land and buildings $ 15,440,928 11,887,437
Machinery and equipment 19,499,837 19,976,335
Transportation equipment 6,484,784 6,431,025
Furniture and fixtures 2,063,013 1,916,838
Other 41,819 41,819
------------ -----------
43,530,381 40,253,454
Less accumulated depreciation 22,047,605 20,287,466
------------ -----------
$ 21,482,776 19,965,988
============ ===========
</TABLE>
(6) NOTES RECEIVABLE FROM MARWAIS LLC
The Company has two notes receivable including interest from Marwais LLC
totaling $5,105,417 and $5,000,000 at December 31, 1996 and 1995,
respectively. The notes bear interest at the prime rate, which was 8.25%
and 8.75% at December 31, 1996 and 1995, respectively. Interest is due
quarterly and principal of $2,000,000 and $3,000,000 is due April 1, 2004
and April 28, 2005, respectively.
(7) LINE OF CREDIT
The Company has available a revolving line of credit which provides up to
$20,000,000 through June 1, 1997. In November 1996, the line of credit was
converted from a supported facility to a borrowing base which represents
80% of acceptable receivables and up to 50% of acceptable inventory. The
outstanding balance on this line of credit was $19,000,000 and $13,000,000
at December 31, 1996 and 1995, respectively. Interest payable on
outstanding balances is at the LIBOR rate plus 1.50 percentage points,
which at December 31, 1996 was 7.22%. The Company is currently in the
process of renewing this line of credit.
(Continued)
<PAGE>
4
PINOLE POINT STEEL COMPANY
Notes to Financial Statements
(8) LONG-TERM DEBT
The Company has bank borrowings, which have been used to finance
Colorstrip, Inc.'s coating facility, in the amount of $19,337,500 and
$23,800,000 as of December 31, 1996 and 1995, respectively. The loan bears
interest at LIBOR rate plus 1.50 percentage points which was 7.22% and
7.20% at December 31, 1996 and 1995, respectively. The loan is secured by
substantially all assets of the Company and is also guaranteed by
Colorstrip, Inc. Interest is due monthly and principal is due in quarterly
installments of $1,487,500 beginning February 1, 1995, with the outstanding
loan balance due November 1, 1999. During the current year, one of the
quarterly installment payments was deferred until the end of the term loan.
Under the terms of the agreement the Company is required to meet certain
financial ratios and covenants.
The Company has a related loan agreement with Colorstrip, Inc. for the
purchase of equipment used in the Facility. The Company has an outstanding
balance due from Colorstrip, Inc. under this agreement in the amount of
$25,925,000 and $30,387,500 as of December 31,1996 and 1995, respectively.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of current assets and current liabilities approximates
fair value as of December 31, 1996 and 1995 due to the relatively short-
term maturity of these instruments.
The carrying amount of long-term assets and long-term liabilities
approximates fair value as of December 31, 1996 and 1995 as they are
variable rate instruments.
It is management's opinion that the carrying amounts of the notes
receivable from Colorstrip, Inc. and Marwais LLC approximate fair value as
of December 31, 1996 and 1995 as they are at prevailing market rates.
(10) PENSION AND PROFIT SHARING PLANS
The Company (with Colorstrip, Inc. and Marwais Steel Company (MSC))
participates in a non-contributory defined benefit/cash balance pension
plan for employees not covered by collective bargaining agreements.
Benefits are based on a formula which includes years of service and
compensation.
The Company's portion of the net periodic pension cost for the years ended
December 31, 1996 and 1995 included the following components:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Service cost - benefits earned during the period $ 121,000 110,000
Interest cost on projected benefit obligation 54,000 54,000
Actual return on plan assets (152,000) (208,000)
Net amortization and deferral 79,000 148,000
--------- --------
Net pension cost $ 102,000 104,000
========= ========
</TABLE>
(Continued)
<PAGE>
5
PINOLE POINT STEEL COMPANY
Notes to Financial Statements
(10) PENSION AND PROFIT SHARING PLANS, CONTINUED
Assets of the plans include marketable equity securities, money market
funds, U.S. government obligations, fixed income securities and other
investments.
The following table sets forth the Company's portion of funded status and
amounts recognized in the Company's balance sheets at December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefit obligation $ (803,000) (728,000)
Non-vested benefit obligation (48,000) (53,000)
---------- ----------
Accumulated benefit obligation (851,000) (781,000)
Effect of projected future compensation (45,000) (40,000)
---------- ----------
Projected benefit obligation (896,000) (821,000)
Plan assets at fair value 973,000 906,000
---------- ----------
Projected benefit obligation less than
plan assets 77,000 85,000
---------- ----------
Unrecognized net gain (242,000) (146,000)
Unrecognized net obligation at transition (41,000) (43,000)
---------- ----------
Accrued pension liability recognized in the
balance sheets $ (206,000) (104,000)
========== ==========
</TABLE>
Significant assumptions used in calculating the pension liability as of
December 31, 1996 and 1995 are listed below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Discount rates 7.25% 7.25%
Rates of compensation increase 5.00% 5.00%
Expected long-term rate of return on assets 8.00% 8.00%
</TABLE>
It is the Company's current policy to contribute at least the minimum
statutory amounts. There were no minimum contributions required to the
defined benefit plan for the years ended December 31, 1996 and 1995,
respectively.
The Company's collective bargaining agreements provide retirement benefits
for its union employees. The Company's contributions to the retirement
plan for the employees covered by collective bargaining agreements were
approximately $276,000 and $289,000 for the years ended December 31, 1996
and 1995, respectively.
(Continued)
<PAGE>
6
PINOLE POINT STEEL COMPANY
Notes to Financial Statements
(10) PENSION AND PROFIT SHARING PLANS, CONTINUED
The Company also provides a non-contributory defined contribution profit
sharing plan for employees not covered by collective bargaining agreements.
The Company's contributions to the Plan were approximately $319,000 and
$323,000 for the years ended December 31, 1996 and 1995, respectively.
The Company, as part of an agreement with the owner-officer, has agreed to
pay certain pension and benefit payments. As of December 31, 1996, the
accumulated benefit obligation is estimated to be $1,800,000 and is
expensed over the anticipated service period, however, if he retires early,
it would be much larger. As of December 31, 1996 the Company has recognized
$850,000 as a liability.
(11) INCOME TAXES
The provision for state franchise taxes consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current $ (136,295) 91,000
Deferred (benefit) (54,000) (42,000)
---------- --------
$ (190,295) 49,000
========== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability are presented below at December
31, 1996 and 1995:
<TABLE>
<S> <C> <C>
Deferred tax asset:
Accrued liability $ --- (48,000)
Manufacturing tax credit (102,000) ---
Deferred tax liabilities:
Involuntary conversion 89,000 89,000
---------- --------
Net deferred tax (asset) liability
included in prepaid assets $ (13,000) 41,000
========== ========
</TABLE>
(12) RENTAL INCOME
The Company leases plant and office space to Colorstrip, Inc. under a non-
cancelable operating lease expiring June 30, 2002. The lease contains
certain purchase and renewal options. For the year ended December 31, 1996,
the Company recorded rental income of approximately $574,000. Future
minimum lease receipts are $605,400 per annum.
(Continued)
<PAGE>
7
PINOLE POINT STEEL COMPANY
Notes to Financial Statements
(13) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in two class action suits regarding its
employment practices. One of the suits was settled and an amount of
$3,000,000 was accrued in 1995 to provide for estimated losses. With
respect to the second suit, extensive discovery has been conducted and a
trial set for early 1997 on some of the issues. The Company adamantly
denies the allegations and intends to vigorously defend the action. The
Company believes that the results of this litigation and any other pending
legal proceedings will not have a materially adverse effect on the
Company's financial condition.
Approximately sixty percent (60%) of the Company's employees are subject
to a collective bargaining agreement which expires in March 2000.
(14) TRANSACTIONS WITH MSC AND COLORSTRIP, INC.
a) Marshall I. Wais, Sr. is the 100% owner of MSC and PPSC.
b) Colorstrip, Inc. is a color coating facility which is 100% owned by
the children of Marshall I. Wais, Sr.
c) Marwais LLC is owned by Marshall I. Wais, Jr.
Following is a description of the current year transactions:
MSC, an affiliate entity, provides certain administrative services to
the Company. Such administrative expenses totaled $1,768,253 and
$1,417,500 for the years ended December 31, 1996 and 1995,
respectively. These fees are included in selling, general and
administrative expenses in the accompanying statements of income.
MSC provided steel processing services to the Company totaling
$416,000 and $2,311,000 for the years ended December 31, 1996 and
1995, respectively. Fees for these services are included in cost of
sales in the accompanying statements of income. These steel processing
activities were performed by Colorstrip, Inc. commencing March 1996.
Colorstrip, Inc. provided steel processing services to the Company
totaling $1,381,000 for the year ended December 31, 1996. Fees for
these services are included in cost of sales in the accompanying
statements of income.
The Company provides certain administrative services to Colorstrip,
Inc. and MSC. Income from such services totaled $1,103,000 and
$700,000 for the years ended December 31, 1996 and 1995, respectively,
and is included as a reduction of selling, general and administrative
expenses in the accompanying statements of income.
The Company sold steel to Colorstrip, Inc. in the amount of
$33,926,000 and $34,147,000 for the years ended December 31, 1996 and
1995, respectively.
(15) MAJOR CUSTOMERS
In addition to the sales to an affiliate as disclosed in note 14, one
customer accounted for 9.1% and 12.2% of the Company's net sales for the
years ended December 31, 1996 and 1995, respectively.
(16) EVENTS SUBSEQUENT TO DATE OF AUDIT REPORT (UNAUDITED)
On July 15, 1997, Pinole Point Steel Company and Colorstrip, Inc. merged
and was operated under the name Colorstrip, Inc. On December 15, 1997
certain assets and liabilities of Colorstrip, Inc. were acquired by
Material Sciences Corporation. The accompanying financial statements do
not reflect the effects of either the merger or the acquisition and are
the historical audited financial statements of the Company.
<PAGE>
- ----
KPMG
- ----
COLORSTRIP, INC.
Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Stockholders
Colorstrip, Inc.:
We have audited the accompanying balance sheets of Colorstrip, Inc. as of
December 31, 1996 and 1995, and the related statements of income and accumulated
deficit, and cash flows for the years then ended. 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
misstatement. 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 Colorstrip, Inc. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
April 4, 1997
<PAGE>
COLORSTRIP, INC.
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash $ 831,805 900,480
Accounts receivable, net 650,874 534,355
Inventories 1,782,254 1,762,797
Prepaid expenses and other assets 531,054 353,200
Advances to stockholders 100,000 100,000
---------- ----------
Total current assets 3,895,987 3,650,832
Restricted cash 8,210,000 8,135,000
Due from affiliate 2,146,792 2,003,815
Interest receivable from stockholders 480,324 405,542
Property, plant and equipment, net 24,025,327 26,229,020
---------- ----------
$ 38,758,430 40,424,209
========== ==========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 1,130,969 1,351,041
Accrued expenses 495,049 457,429
Note payable to Pinole Point Steel Company 5,950,000 5,950,000
---------- ----------
Total current liabilities 7,576,018 7,758,470
Deferred taxes 63,000 34,000
Due to Pinole Point Steel Company 8,317,555 8,535,940
Due to Marwais Steel Company 2,731,726 1,984,432
Notes payable:
Pinole Point Steel Company 19,975,000 24,437,500
Stockholders 8,225,000 8,150,000
---------- ----------
Total liabilities 46,888,299 50,900,342
---------- ----------
Stockholders' deficit:
Common stock, without par value, Authorized
10,000 shares; issued and outstanding 1,000
shares 1,039,313 1,039,313
Notes receivable from stockholders (750,000) (750,000)
Accumulated deficit (8,419,182) (10,765,446)
---------- ----------
Total stockholders' deficit (8,129,869) (10,476,133)
---------- ----------
$ 38,758,430 40,424,209
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COLORSTRIP, INC.
Statements of Income and Accumulated Deficit
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net sales $ 64,478,703 61,148,685
Cost of sales 53,569,144 52,983,138
------------- -----------
Gross profit 10,909,559 8,165,547
Selling, general and administrative expenses 6,679,250 5,942,221
------------- -----------
Operating income 4,230,309 2,223,326
------------- -----------
Other income (expense):
Interest income 620,212 607,513
Interest expense (2,549,457) (2,926,857)
Rental income 75,000 300,000
------------- -----------
(1,854,245) (2,019,344)
------------- -----------
Income before income taxes 2,376,064 203,982
Income taxes 29,800 9,800
------------- ------------
Net income 2,346,264 194,182
Accumulated deficit, beginning of year (10,765,446) (10,959,628)
------------- -----------
Accumulated deficit, end of year $ (8,419,182) (10,765,446)
============= ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COLORSTRIP, INC.
Statements of Cash Flows
Years ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,346,264 194,182
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,811,280 2,679,293
Deferred taxes 29,000 9,000
Changes in operating assets and liabilities:
Accounts receivable (116,519) 42,477
Inventories (19,457) 93,403
Prepaid expenses and other assets (177,854) 171,645
Due from affiliate (142,977) (442,225)
Interest receivable from stockholders (74,782) (75,303)
Accounts payable (220,072) (254,516)
Accrued expenses 37,620 (387,624)
---------- ---------
Net cash provided by operating activities 4,472,503 2,030,332
---------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (607,587) (1,035,857)
Advances to stockholders -- (100,000)
---------- ---------
Net cash used in investing activities (607,587) (1,135,857)
---------- ---------
Cash flows from financing activities:
Repayment of notes payable to Pinole Point Steel Company (4,462,500) (5,950,000)
Advances from stockholders 75,000 475,000
Increase in restricted cash (75,000) (475,000)
Due to Pinole Point Steel Company (218,385) 4,082,765
Due to Marwais Steel Company 747,294 1,099,636
---------- ---------
Net cash used in financing activities (3,933,591) (767,599)
---------- ---------
Net (decrease) increase in cash (68,675) 126,876
Cash at beginning of year 900,480 773,604
---------- ---------
Cash at end of year $ 831,805 900,480
========== =========
Supplemental cash flow information:
Cash paid for taxes $ 800 800
========== =========
Cash paid for interest $ 2,549,457 2,926,857
========== =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COLORSTRIP, INC.
Notes to Financial Statements
December 31, 1996 and 1995
(1) ORGANIZATION
Colorstrip, Inc. (the Company) was incorporated on April 11, 1990. The
Company produces color coated steel coils on a continuous paint line (the
Facility) for a wide range of applications.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(a) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(b) Property, Plant and Equipment
Property, plant and equipment are stated at cost, Depreciation is
calculated on the straight-line method over useful lives ranging from
three to fifteen years.
During 1996, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 121, Accounting for the Impairment of Long Lived
Assets and Long Lived Assets to be Disposed of. The adoption of SFAS
No. 121 did not have a material impact on the Company's financial
position.
(c) Income Taxes
The Company has elected to be taxed as an S Corporation for federal
income tax purposes and state franchise tax purposes. Accordingly,
federal income taxes are the responsibility of the Company's
stockholders. However, the Company is subject to a 1.5% California
State franchise tax on taxable income.
(d) Environmental Liabilities and Expenditures
Accruals for environmental matters, if any, are recorded in operating
expenses when it is probable that a liability has been incurred and
the amount of the liability can be reasonably estimated. Accrued
liabilities are exclusive of claims against third parties and are not
discounted.
In general, costs related to environmental remediation are charged to
expense. Environmental costs are capitalized if the costs increase the
value of the property and/or mitigate or prevent contamination from
future operations.
(Continued)
<PAGE>
2
COLORSTRIP, INC.
Notes to Financial Statements
(3) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accounts receivable $ 670,874 559,355
Less allowance for doubtful accounts 20,000 25,000
--------- -------
$ 650,874 534,355
========= =======
</TABLE>
(4) INVENTORIES
The FIFO cost of inventories consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Raw materials and supplies $ 881,931 997,218
Finished goods 900,323 765,579
--------- ---------
$1,782,254 1,762,797
========= =========
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Land $ 188,110 188,110
Buildings 129,756 112,339
Machinery and equipment 37,133,820 36,682,682
Autos and trucks 69,665 69,665
Leasehold improvements 317,445 178,413
---------- ----------
37,838,796 37,231,209
Less accumulated depreciation 13,813,469 11,002,189
---------- ----------
$24,025,327 26,229,020
========== ==========
</TABLE>
(6) LEASE AGREEMENTS
During 1996, the Company assumed an operating lease agreement for certain
equipment, which expires in February 2000. Rental expense or $267,442 was
recorded for the year ended December 31, 1996. Future minimum obligations
under this non-cancelable operating lease are $332,544 annually through the
year 2000. In addition, the Company has certain lease commitments with
affiliates disclosed in Note 9.
(Continued)
<PAGE>
3
COLORSTRIP, INC.
Notes to Financial Statements
(7) PENSION AND PROFIT SHARING PLANS
The Company (with Pinole Point Steel Company (PPSC) and Marwais Steel
Company (MSC)) participates in a non-contributory defined benefit/cash
balance pension plan for employees not covered by collective bargaining
agreements. Benefits are based on a formula which includes years of service
and compensation.
The Company's portion of the net periodic pension cost for the years ended
December 31, 1996 and 1995 included the following components:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Service cost-benefits earned during the period $ 39,000 31,000
Interest cost on projected benefit obligation 15,000 12,000
Actual return on plan assets (35,000) (45,000)
Net amortization and deferral 19,000 32,000
------ ------
Net pension cost $ 38,000 30,000
====== ======
</TABLE>
Assets of the plans include marketable equity securities, money market
funds, U.S. government obligations, fixed income securities and other
investments.
The following table sets forth the Company's portion of funded status and
amounts recognized in the Company's balance sheets at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ (168,000) (132,000)
Non-vested benefit obligation (30,000) (25,000)
-------- --------
Accumulated benefit obligation (198,000) (157,000)
Effect of projected future compensation (53,000) (41,000)
-------- --------
Projected benefit obligation (251,000) (198,000)
Plan assets at fair value 231,000 200,000
-------- --------
Projected benefit obligation (in excess of)
less than plan assets (20,000) 2,000
Unrecognized net gain (40,000) (23,000)
Unrecognized net obligation at transition (8,000) (9,000)
-------- --------
Accrued pension liability recognized in
the balance sheets $ (68,000) (30,000)
======== ========
</TABLE>
(Continued)
<PAGE>
4
COLORSTRIP, INC.
Notes to Financial Statements
(7) PENSION AND PROFIT SHARING PLANS, CONTINUED
Significant assumptions used in calculating the pension liability as of
December 31, 1996 and 1995 are listed below:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Discount rates 7.25% 7.25%
Rates of compensation increase 5.00% 5.00%
Expected long-term rate of return on assets 8.00% 8.00%
</TABLE>
It is the Company's current policy to contribute at least the minimum
statutory amounts. There were no minimum contributions required to the
defined benefit plan for the years ended December 31, 1996 and 1995,
respectively.
The Company's collective bargaining agreements provide retirement benefits
for its union employees. The Company's contributions to the retirement plan
for the employees covered by collective bargaining agreements were
approximately $84,000 and $61,000 for the years ended December 31, 1996 and
1995, respectively.
The Company also provides a non-contributory defined contribution profit
sharing plan for employees not covered by collective bargaining agreements.
The Company's contributions to the Plan were approximately $145,000 and
$172,000 for the years ended December 31, 1996 and 1995, respectively.
(8) INCOME TAXES
The provision for state franchise taxes consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current $ 800 800
Deferred 29,000 9,000
------- -----
$29,800 9,800
======= =====
</TABLE>
(continued)
<PAGE>
5
COLORSTRIP, INC.
Notes to Financial Statements
(8) INCOME TAXES, CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability are presented below at December
31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax asset:
Net operating loss $ (158,200) (196,000)
Other, net (13,800) (1,000)
---------- --------
(172,000) (197,000)
Deferred tax liabilities:
Depreciation 235,000 231,000
---------- --------
Net deferred tax liabilities $ 63,000 34,000
========== ========
</TABLE>
At December 31, 1996, the Company has available for California State
Franchise tax return purposes net losses totaling approximately
$10,554,489, subject to certain limitations, which will expire between 1997
and 1998.
(9) TRANSACTIONS WITH PPSC, MSC AND MILIMAR
a) Marshall I. Wais, Sr. owns 100% of MSC and PPSC.
b) Pinole Point Steel Company produces galvanized materials and is 100%
owned by Marshall I. Wais, Sr.
c) Milimar is a company which is 100% owned by the children of Marshall
I. Wais, Sr.
Following is a description of the amounts and transactions between the
above companies.
(a) Notes Receivable from Stockholders
During 1990, the Company issued 200 shares of common stock to
stockholders in exchange for notes receivable in the amount of
$750,000 which has been reflected as a contra-equity account. The
notes receivable are due July 2000 and accrue interest at 9.1%, due
annually. At December 31, 1996 and 1995, outstanding interest
receivable was $480,324 and $405,542, respectively, and is recorded as
interest receivable from stockholders in the accompanying balance
sheets.
(b) Due from Affiliate
The Company has a receivable from Milimar in the amount of $2,146,792.
(continued)
<PAGE>
6
COLORSTRIP, INC.
Notes to Financial Statements
(9) TRANSACTIONS WITH PPSC, MSC AND MILIMAR, CONTINUED
(c) Note Payable--PPSC
The Company entered into a loan agreement with PPSC to borrow up to
$37,154,320 to purchase equipment to use in the Facility. The
agreement was modified effective November 1, 1994 and provides for a
term loan not to exceed $36,337,500. Interest is due monthly and
accrues at a variable rate, which equaled the LIBOR rate plus 1.50
percentage points, or 7.22% and 7.20% at December 31, 1996 and 1995,
respectively. Principal is due in quarterly installments of $1,487,500
beginning February 1, 1995 with the outstanding loan balance due
November 1, 1999. During the current year, one of the quarterly
installment payments was deferred until the end of the term loan. The
outstanding principal balance at December 31, 1996 and 1995 was
$25,925,000 and $30,387,500, respectively, and is recorded as a note
payable in the accompanying balance sheets.
(d) Notes Payable--Stockholders
During 1996 and 1995, respectively, the Company borrowed an additional
$75,000 and $475,000, respectively, from the stockholders of the
Company. The borrowings bear interest at a bank's adjusted prime rate
(as defined in each note agreement). The notes are due January 2,
1998. The adjusted prime rate as of December 31, 1996 ranged from 4.5%
to 5.85%. The note payable balance at December 31, 1996 and 1995 was
$8,225,000 and $8,150,000, respectively. Due to banking requirements,
the majority of the cash received have been classified as restricted
cash in the accompanying balance sheets.
(e) Rental Income
The Company has a cancelable operating lease with Milimar, an
affiliate, for certain office and warehouse space. During each of the
years ended December 31, 1996 and 1995, the Company recorded rental
income of $75,000 and $300,000, respectively. The lease was canceled
in March 1996.
(f) Rental Expense
The Company has a non-cancelable operating lease with PPSC for plant
and office space expiring June 30, 2002. The lease contains certain
purchase and renewal options. For the year ended December 31, 1996,
the Company incurred rental expense of approximately $574,000. Future
minimum lease payments are $605,400 per annum.
(g) Transactions with PPSC and MSC
PPSC and MSC provided certain administrative services to the Company
totalling $1,351,000 and $840,000 for the years ended December 31,
1996 and 1995, respectively. Such expenses are included in selling,
general and administrative expenses in the accompanying statements of
income and accumulated deficit. In addition, Pinole Point Steel
Company provides financing for accounts receivable.
(Continued)
<PAGE>
7
COLORSTRIP, INC.
Notes to Financial Statements
(9) TRANSACTIONS WITH PPSC, MSC AND MILIMAR, CONTINUED
The Company purchased steel from PPSC in the amount of $33,926,000 and
$34,147,000 for the years ended December 31, 1996 and 1995,
respectively.
MSC provided steel processing services to the Company totaling
$225,000 and $911,000 for the years ended December 31, 1996 and 1995,
respectively. Fees for these services are included in cost of sales
in the accompanying statements of income and accumulated deficit.
During the current year, MSC sold its leased assets and slitting
operations to the Company at net book value.
The Company provided steel processing services to PPSC totaling
$1,381,000 for the year ended December 31, 1996. Revenues for these
services are included in the accompanying statements of income and
accumulated deficit.
(h) Commitments and Contingencies
The Company is the guarantor of a loan of PPSC. This loan had an
outstanding balance of $19,337,500 and $23,800,000 at December 31,
1996 and 1995, respectively.
Approximately 65% of the Company's employees are subject to a
collective bargaining agreement which expires in January of 1998.
(10) MAJOR CUSTOMERS
Sales to four customers amounted to approximately 35% and 45% of the
Company's net sales for the years ended December 31, 1996 and 1995,
respectively.
(11) EVENTS SUBSEQUENT TO DATE OF AUDIT REPORT (UNAUDITED)
On July 15, 1997, Pinole Point Steel Company and Colorstrip, Inc. merged
and was operated under the name Colorstrip, Inc. On December 15, 1997
certain assets and liabilities of Colorstrip, Inc. were acquired by
Material Sciences Corporation. The accompanying financial statements do not
reflect the effects of either the merger or the acquisition and are the
historical audited financial statements of the Company.
<PAGE>
- -----
KPMG
- -----
PINOLE POINT STEEL COMPANY
Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
[LOGO] [LETTERHEAD OF PEAT MARWICK LLP]
INDEPENDENT AUDITORS' REPORT
Mr. Marshall I. Wais and the
Board of Directors
Pinole Point Steel Company:
We have audited the accompanying balance sheets of Pinole Point Steel Company as
of December 31, 1995 and 1994, and the related statements of income,
stockholder's equity, and cash flows for the years then ended. 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
misstatement. 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 Pinole Point Steel Company as
of December 31, 1995 and 1994, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
May 3, 1996, except as to note 7
which is as of November 25, 1996
<PAGE>
PINOLE POINT STEEL COMPANY
Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 851,285 6,255,081
Receivables, net 11,193,038 12,362,995
Inventories, net 16,842,315 16,692,711
Due from Marwais Steel Company 8,227,921 6,372,868
Prepaid expenses and other current assets 300,282 470,380
Current portion of note receivable
from Colorstrip, Inc. 5,950,000 5,950,000
----------- -----------
Total current assets 43,364,841 48,104,035
Due from Colorstrip, Inc. 8,535,940 4,453,175
Note receivable from Colorstrip, Inc. 24,437,500 30,387,500
Notes receivable from Marwais LLC 5,000,000 2,000,000
Property, plant and equipment, net 19,965,988 15,656,912
----------- -----------
$ 101,304,269 100,601,622
=========== ===========
Liabilities and Stockholder's Equity
------------------------------------
Current liabilities:
Borrowings under line of credit $ 13,000,000 13,071,949
Current portion of long-term debt 5,950,000 5,950,000
Accounts payable 15,679,814 10,120,152
Accrued expenses 1,850,113 1,511,582
----------- -----------
Total current liabilities 36,479,927 30,653,683
Long-term debt 17,850,000 23,800,000
----------- -----------
Total liabilities 54,329,927 54,453,683
----------- -----------
Stockholder's equity:
Common stock, $10 par value;
authorized 1,000,000 shares;
issue and outstanding 167,565 shares 1,675,650 1,675,650
Additional paid-in capital 20,950,794 20,950,794
Retained earnings 24,347,898 23,521,495
----------- -----------
Total stockholder's equity 46,974,342 46,147,939
----------- -----------
$ 101,304,269 100,601,622
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PINOLE POINT STEEL COMPANY
Statements of Income
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net sales $ 154,565,603 126,443,734
Cost of sales 138,784,297 116,140,704
------------- -------------
Gross profit 15,781,306 10,303,030
Selling, general and administrative expenses 13,672,659 12,740,173
------------- -------------
Operating income (loss) 2,108,647 (2,437,143)
------------- -------------
Other income (expense):
Interest income 2,801,614 3,013,286
Interest expense (3,097,880) (4,076,924)
Business interruption claim, net of direct expenses -- 5,218,154
Gain on involuntary conversion of property, plant
and equipment -- 5,454,000
Other 668,618 189,076
------------- -------------
372,352 9,797,592
------------- -------------
Income before income taxes 2,480,999 7,360,449
Income taxes 49,000 111,000
------------- -------------
Net income $ 2,431,999 7,249,449
============= =============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PINOLE POINT STEEL COMPANY
Statements of Stockholder's Equity
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
STOCK CAPITAL EARNINGS EQUITY
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balances at December 31, 1993 $ 1,675,650 20,950,794 18,247,046 40,873,490
Dividend to stockholder -- -- (1,975,000) (1,975,000)
Net income -- -- 7,249,449 7,249,449
------------ ---------- ---------- ----------
Balances at December 31, 1994 1,675,650 20,950,794 23,521,495 46,147,939
Dividend to stockholder -- -- (1,605,596) (1,605,596)
Net income -- -- 2,431,999 2,431,999
------------ ---------- ---------- ----------
Balances at December 31, 1995 $ 1,675,650 20,950,794 24,347,898 46,974,342
============ ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PINOLE POINT STEEL COMPANY
Statements of Cash Flows
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operation activities:
Net income $ 2,431,999 7,249,449
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 1,478,823 921,398
Gain on involuntary conversion of property, plant and
equipment -- (5,454,000)
(Gain) loss on sale of assets (380,924) 12,439
Allowance for doubtful accounts -- 50,000
Allowance for LIFO 1,908,724 468,236
Changes in operating assets and liabilities:
Receivables 1,169,957 (2,145,674)
Inventories (2,058,328) (1,761,582)
Prepaid expenses and other current assets 170,098 (234,791)
Account payable 5,559,662 1,695,307
Accrued expenses 338,531 (182,674)
------------ ----------
Net cash provided by operating activities 10,618,542 618,108
------------ ----------
Cash flows from investing activities:
Additions to property, plant and equipment (5,809,768) (7,315,804)
Proceeds from insurance on involuntary conversion of
property, plant and equipment -- 5,454,000
Proceeds from sale of equipment 402,793 19,852
Loan to related party (3,000,000) (2,000,000)
Repayments on note receivable from affiliate 5,950,000 7,349,816
Due from Colorstrip, Inc. (4,082,765) (1,944,234)
Due from Marwais Steel Company (1,855,053) (880,000)
------------ ----------
Net cash (used in) provided by investing activities (8,394,793) 683,630
------------ ----------
Cash flows from financing activities:
Repayment of borrowings from affiliate -- (2,500,000)
Repayments of long-term debt (5,950,000) (4,250,000)
Borrowings under line of credit 14,500,000 21,071,949
Payments under line of credit (14,571,949) (13,000,000)
Dividend to stockholder (1,605,596) (1,975,000)
------------ ----------
Net cash used in financing activities (7,627,545) (653,051)
------------ ----------
Net (decrease) increase in cash and cash equivalents (5,403,796) 648,687
Cash and cash equivalents at beginning of year 6,255,081 5,606,394
------------ ----------
Cash and cash equivalents at end of year $ 851,285 6,255,081
============ ==========
Supplementary cash flow information:
Cash paid for interest $ 3,135,899 4,938,873
============ ==========
Cash paid for income taxes $ 40,000 80,600
============ ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PINOLE POINT STEEL COMPANY
Notes to Financial Statements
December 31, 1995 and 1994
(1) THE COMPANY
Pinole Point Steel Company (the Company) was incorporated under the laws of
the State of California on June 2, 1978. The Company produces galvanized
material on a continuous hot-dip galvanizing line for a wide range of
applications.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity at date of purchase of three months or less to be cash
equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Buildings are depreciated
using the straight-line method over thirty years. Machinery and equipment,
transportation equipment and furniture and fixtures are depreciated using
the straight-line method over estimated useful lives, ranging from three to
fifteen years.
INCOME TAXES
The Company has elected to be taxed as an S Corporation for federal income
tax purposes and state franchise tax purposes. Accordingly, federal income
taxes are the responsibility of the Company's stockholder. A provision for
state franchise taxes has been calculated at the state tax rate of 1.5% for
S Corporations on taxable income.
RECLASSIFICATIONS
Certain 1994 amounts have been reclassified to conform to the 1995
presentation.
(Continued)
<PAGE>
2
PINOLE POINT STEEL COMPANY
Notes to Financial Statements
(3) RECEIVABLES
Receivables consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Customer accounts $ 10,691,938 12,329,274
Taxes -- 30,800
other 601,100 102,921
----------- -----------
11,293,038 12,462,995
Less allowance for doubtful accounts 100,000 100,000
----------- -----------
$ 11,193,038 12,362,995
=========== ===========
</TABLE>
(4) INVENTORIES
The cost of inventories consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Raw materials and supplies $ 11,742,512 12,974,890
Work in process 4,199,629 2,516,239
Finished goods 4,904,724 3,297,408
----------- -----------
20,846,865 18,788,537
Less allowance for LIFO 4,004,550 2,095,826
----------- -----------
$ 16,842,315 $ 16,692,711
=========== ===========
</TABLE>
(Continued)
<PAGE>
3
PINOLE POINT STEEL COMPANY
Notes to Financial Statements
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land and buildings $ 11,887,437 10,683,430
Machinery and equipment 19,976,335 15,711,982
Transportation equipment 6,431,025 6,383,277
Furniture and fixtures 1,916,838 1,701,554
Other 41,819 44,939
------------ ----------
40,253,454 34,525,182
Less accumulated depreciation 20,287,466 18,868,270
------------ ----------
$ 19,965,988 15,656,912
============ ==========
</TABLE>
(6) RELATED PARTY NOTE RECEIVABLE
The Company has a note receivable from a related party in the amount of
$5,000,000 and $2,000,000 at December 31, 1995 and 1994, respectively. The
note bears interest at the prime rate, which was 8.75% and 8.50% at
December 31, 1995 and 1994, respectively. Interest is due quarterly and
principal is due April 1, 2004.
(7) LINE OF CREDIT
The Company has available a revolving line of credit which provides up to
$20,000,000 through December 31, 1996. In November 1996, the line of credit
was converted from a supported facility to a borrowing base which
represents 80% of acceptable receivables and up to 50% of acceptance
inventory. The outstanding balance on this line of credit was $13,000,000
and $13,071,949 at December 31, 1995 and 1994, respectively. Interest
payable on outstanding balances is at the LIBOR rate plus 1.50 percentage
points, which at December 31, 1995 was 7.2%. The Company is currently in
the process of renewing this line of credit.
(8) LONG-TERM DEBT
During 1994, the Company refinanced a loan, which was used to finance an
affiliate's coating facility (the Facility). The Company has an outstanding
balance, under this loan, in the amount of $23,800,000 and $29,750,000 as
of December 31, 1995 and 1994, respectively. The loan bears interest at a
variable rate which was 7.20% and 7.25% at December 31, 1995 and 1994,
respectively. The loan is secured by substantially all assets of the
Company and is also guaranteed by Colorstrip, Inc. Interest is due monthly
and principal is due in quarterly installments of $1,487,500 beginning
February 1, 1995, with the outstanding loan balance due November 1, 1999.
Under the terms of the agreement the Company is required to meet certain
financial ratios and covenants.
(Continued)
<PAGE>
4
PINOLE POINT STEEL COMPANY
Notes to Financial Statements
(8) LONG-TERM DEBT, CONTINUED
The Company has a related loan agreement with an affiliate for the purchase
of equipment used in the Facility. The Company has an outstanding balance
due from the affiliate under this agreement in the amount of $30,387,500
and $36,337,500 as of December 31, 1995 and 1994, respectively. The terms
of the loan with the affiliate are the same as the terms of the loan the
Company has with the bank.
(9) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of current assets and current liabilities approximates
fair value as of December 31, 1995 due to the relatively short-term
maturity of these instruments.
The carrying amount of long-term assets and long-term liabilities
approximates fair value as of December 31, 1995 as they are variable rate
instruments.
It is management's opinion that the carrying amount of the related party
balances approximates fair value as of December 31, 1995 as they are at
prevailing market rates.
(10) PENSION AND PROFIT SHARING PLANS
The Company's collective bargaining agreements provide retirement benefits
for its union employees. The Company's contributions to the retirement plan
for the employees covered by collective bargaining agreements are
approximately $289,000 and $295,000 for the years ended December 31, 1995
and 1994, respectively.
The Company (with certain affiliates) participates in a non-contributory
defined benefit/cash balance plan for employees not covered by collective
bargaining agreements. Benefits are based on a formula which includes years
of service and compensation. The Company's portion of net periodic pension
cost for the years ended December 31, 1995 and 1994 is approximately
$104,000 and $93,000, respectively. Assets of the plan include marketable
debt and equity securities, money market funds, U.S. Government obligations
and other investments. The weighted average discount rate was 7.25% and
8.00% for 1995 and 1994, respectively. The expected long-term rate of
return on assets and rate of increase in future compensation levels used in
determining the benefit obligation was 8.0% and 5.0%, respectively, for
both years.
The Company also provides a non-contributory defined contribution profit
sharing plan for employees not covered by collective bargaining agreements.
The Company's contributions to the plan are approximately $323,000 and
$382,000 for the years ended December 31, 1995 and 1994, respectively.
The Company, as part of an agreement with the owner-officer, has agreed to
pay certain pension and benefit payments. As of December 31, 1995 the
accumulated benefit obligation is estimated at $1,700,000 and is expensed
over the anticipated services period, however if he retires early it will
be much larger.
(Continued)
<PAGE>
5
PINOLE POINT STEEL COMPANY
Notes to Financial Statements
(11) INCOME TAXES
The provision for state franchise taxes consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current $ 91,000 28,000
Deferred (benefit) (42,000) 83,000
------ -------
$ 49,000 111,000
====== =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability are presented below at December
31, 1995 and 1994:
<TABLE>
<S> <C> <C>
Deferred tax asset:
Accrued liability $(48,000) (6,000)
Deferred tax liabilities:
Involuntary conversion 89,000 89,000
------ -------
Net deferred tax liability $ 41,000 83,000
====== =======
</TABLE>
(12) RENTAL INCOME
The Company leases plant and office space to an affiliate under a non-
cancelable operating lease expiring June 30, 2002. The lease contains
certain purchase and renewal options. For the year ended December 31, 1995,
the Company recorded rental income of $415,000. Future minimum lease
receipts are $415,000 per annum.
(13) FIRE LOSS
On July 15, 1994, a fire damaged the Company's galvanizing facility. The
loss was covered by insurance and proceeds received during 1994 totaled
$12,146,000. The Company incurred costs in the amount of $5,454,000 to
replace and repair capital assets damaged in the fire. Insurance proceeds
in excess of the net book value of the damaged assets are reflected as a
gain on involuntary conversion of property, plant and equipment in the
accompanying statement of income. Insurance proceeds received to offset the
loss resulting from the interruption of business are reflected as business
interruption claim, net of direct expenses in the accompanying statement of
income.
(Continued)
<PAGE>
6
PINOLE POINT STEEL COMPANY
Notes to Financial Statements
(14) COMMITMENTS AND CONTINGENCIES
The Company is a defendant in two class action suits regarding its
employment practices. One of the suits has been settled and an amount of
$3,000,000 has been accrued to provide for estimated losses. With respect
to the second suit, extensive discovery has been conducted and a trial set
for early 1997 on some of the issues. The Company adamantly denies the
allegations and intends to vigorously defend the action. The Company
believes that the results of this litigation and any other pending legal
proceedings will not have a materially adverse effect on the Company's
financial condition.
(15) TRANSACTIONS WITH AFFILIATES
Marwais Steel Company (MSC), a commonly owned entity, provides certain
administrative services to the Company. Such administrative expenses
totaled $1,417,500 and $2,089,000 for the years ended December 31, 1995 and
1994, respectively. These fees are included in selling, general and
administrative expenses in the accompanying statements of income.
MSC provided steel processing services to the Company totaling $2,311,000
and $2,381,000 for the years ended December 31, 1995 and 1994,
respectively. Fees for these services are included in cost of sales in the
accompanying statement of income.
The Company provides certain administrative services to affiliates. Income
from such services totaled $700,000 and $562,000 for the years ended
December 31, 1995 and 1994, respectively, and is included as a reduction of
selling, general and administrative expenses in the accompanying statements
of income.
The Company sold steel to an affiliate in the amount of $34,147,000 and
$27,560,000 for the years ended December 31, 1995 and 1994, respectively.
(16) MAJOR CUSTOMERS
In addition to the sales to an affiliate as disclosed in note 15, one
customer accounted for 12.2% of the Company's net sales for the year ended
December 31, 1995.
(17) EVENTS SUBSEQUENT TO DATE OF AUDIT REPORT (UNAUDITED)
On July 15, 1997, Pinole Point Steel Company and Colorstrip, Inc. merged
and was operated under the name Colorstrip, Inc. On December 15, 1997
certain assets and liabilities of Colorstrip, Inc. were acquired
by Material Sciences Corporation. The accompanying financial statements do
not reflect the effects of either the merger or the acquisition and are
the historical audited financial statements of the Company.
<PAGE>
- ----
KPMG
- ----
COLORSTRIP, INC.
Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
<PAGE>
[LETTERHEAD KPMG Peat Marwick LLP]
Independent Auditors' Report
----------------------------
The Stockholders
Colorstrip, Inc.:
We have audited the accompanying balance sheets of Colorstrip, Inc. as of
December 31, 1995 and 1994, and the related statements of income and accumulated
deficit, and cash flows for the years then ended. 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
misstatement. 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 Colorstrip, Inc. as of December
31, 1995 and 1994, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
May 3, 1996
<PAGE>
COLORSTRIP, INC.
Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
------ ---- ----
<S> <C> <C>
Current assets:
Cash:
Unrestricted $ 900,480 773,604
Restricted -- 7,660,000
Accounts receivable, net 534,355 576,832
Inventories 1,762,797 1,856,200
Prepaid expenses and other assets 353,200 524,845
Advances to stockholders 100,000 --
----------- -----------
Total current assets 3,650,832 11,391,481
Restricted cash 8,135,000 --
Due from affiliate 2,003,815 1,561,590
Interest receivable from stockholders 405,542 330,239
Property, plant and equipment, net 26,229,020 27,872,456
----------- -----------
$ 40,424,209 41,155,766
=========== ===========
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Accounts payable $ 1,351,041 1,605,557
Accrued expenses 457,429 845,053
Notes payable:
Pinole Point Steel Company 5,950,000 5,950,000
Stockholders -- 7,675,000
----------- -----------
Total current liabilities 7,758,470 16,075,610
Deferred taxes 34,000 25,000
Due to Pinole Point Steel Company 8,535,940 4,453,175
Due to Marwais Steel Company 1,984,432 884,796
Notes payable:
Pinole Point Steel Company 24,437,500 30,387,500
Stockholders 8,150,000 --
----------- -----------
Total liabilities 50,900,342 51,826,081
----------- -----------
Stockholders' deficit:
Common stock, no par value. Authorized
10,000 shares; issued and outstanding 1,000
shares 1,039,313 1,039,313
Notes receivable from stockholders (750,000) (750,000)
Accumulated deficit (10,765,446) (10,959,628)
----------- -----------
Total stockholders' deficit (10,476,133) (10,670,315)
----------- -----------
$ 40,424,209 41,155,766
=========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COLORSTRIP, INC.
Statements of Income and Accumulated Deficit
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net sales $ 61,148,685 54,985,283
Cost of sales 52,983,138 46,679,034
------------ ------------
Gross Profit 8,165,547 8,306,249
Selling, general and administrative expenses 5,942,221 5,573,947
------------ ------------
Operating income 2,223,326 2,732,302
------------ ------------
Other income (expense):
Interest income 607,513 347,964
Interest expense (2,926,857) (3,258,927)
Rental income 300,000 300,000
Insurance proceeds -- 1,004,218
------------ ------------
(2,019,344) (1,606,745)
------------ ------------
Income before income taxes 203,982 1,125,557
Income taxes 9,800 25,800
------------ ------------
Net income 194,182 1,099,757
Accumulated deficit, beginning of year (10,959,628) (12,059,385)
------------ ------------
Accumulated deficit, end of year $ (10,765,446) (10,959,628)
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COLORSTRIP, INC.
Statements of Cash Flows
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 194,182 1,099,757
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,679,293 2,640,955
Deferred taxes 9,000 25,000
Changes in operating assets and liabilities:
Accounts receivable 42,477 (138,935)
Inventories 93,403 (376,972)
Prepaid expenses and other assets 171,645 (202,390)
Due from affiliate (442,225) (388,011)
Interest receivable from stockholders (75,303) (75,302)
Accounts payable (254,516) 510,759
Accrued expenses (387,624) 575,277
--------- ---------
Net cash provided by operating activities 2,030,332 3,670,138
--------- ---------
Cash flows from investing activities:
Proceeds from the sale of property, plant
and equipment -- 11,773
Additions to property, plant and equipment (1,035,857) (26,547)
Advances to stockholders (100,000) --
--------- ---------
Net cash used in investing activities (1,135,857) (14,774)
--------- ---------
Cash flows from financing activities:
Repayment of notes payable to affiliate (5,950,000) (7,349,816)
Advances from stockholders 475,000 525,000
Increase in restricted cash (475,000) (540,000)
Due to Pinole Point Steel Company 4,082,765 3,311,393
Due to Marwais Steel Company 1,099,636 891,000
--------- ---------
Net cash used in financing activities (767,599) (3,162,423)
--------- ---------
Net increase in cash 126,876 492,941
Cash at beginning of year 773,604 280,663
--------- ---------
Cash at end of year $ 900,480 773,604
========= =========
Supplemental cash flow information:
Cash paid for taxes $ 800 800
========= =========
Cash paid for interest $ 2,926,857 3,258,927
========= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
COLORSTRIP, INC.
Notes to Financial Statements
December 31, 1995 and 1994
(1) ORGANIZATION
Colorstrip, Inc. (the Company) was incorporated on April 11, 1990. The
Company produces color coated steel coils on a continuous paint line (the
Facility) for a wide range of applications.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles.
This requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(a) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
(b) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
calculated on the straight-line method over useful lives ranging from
three to fifteen years.
(c) Income Taxes
The Company has elected to be taxed as an S Corporation for federal
income tax purposes and state franchise tax purposes. Accordingly,
federal income taxes are the responsibility of the Company's
stockholders. However, the Company is subject to a 1.5% California
State franchise tax on taxable income or a minimum of $800.
(3) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Accounts receivable $ 559,355 601,832
Less allowance for doubtful accounts 25,000 25,000
--------- -------
$ 534,355 576,832
========= =======
</TABLE>
(Continued)
<PAGE>
2
COLORSTRIP, INC.
Notes to Financial Statements
(4) INVENTORIES
The FIFO cost of inventories consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Raw materials and supplies $ 997,218 920,377
Finished goods 765,579 935,823
--------- ---------
$ 1,762,797 1,856,200
========= =========
</TABLE>
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Land $ 188,110 188,110
Buildings 112,339 112,339
Machinery and equipment 36,682,682 35,716,490
Autos and trucks 69,665 33,029
Leasehold improvements 178,413 178,413
---------- ----------
37,231,209 36,228,381
Less accumulated depreciation 11,002,189 8,355,925
---------- ----------
$ 26,229,020 27,872,456
========== ==========
</TABLE>
(6) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of current assets and current liabilities approximates
fair value as of December 31, 1995 due to the relatively short-term
maturity of these instruments.
It is management's opinion, that the carrying amount of the related party
balances approximates fair value as of December 31, 1995 as they are at
prevailing market rates.
(7) PENSION AND PROFIT SHARING PLANS
The Company's collective bargaining agreements provide retirement benefits
for its union employees. The Company's contributions to the retirement plan
for the employees covered by collective bargaining agreements were
approximately $61,000 and $63,000 for the years ended December 31, 1995 and
1994, respectively.
(Continued)
<PAGE>
3
COLORSTRIP, INC
Notes to Financial Statements
(7) PENSION AND PROFIT SHARING PLANS, CONTINUED
The Company (with certain affiliates) participates in a non-contributory
defined benefit/cash balance plan for employees not covered by collective
bargaining agreements. Benefits are based on a formula which includes years
of service and compensation. The Company's portion of the net periodic
pension cost for the years ended December 31, 1995 and 1994 is
approximately $30,000 and $27,000, respectively. Assets of the plan include
marketable debt and equity securities, money market funds, U.S. Government
obligations and other investments. The weighted average discount rate was
7.25% and 8.00% for 1995 and 1994, respectively. The expected long-term
rate of return on assets and rate of increase in future compensation levels
used in determining the benefit obligation was 8.0% and 5.0%, respectively,
for both years.
The Company also provides a non-contributory defined contribution profit
sharing plan for employees not covered by collective bargaining agreements.
The Company's contributions to the plan were approximately $172,000 and
$107,000 for the years ended December 31, 1995 and 1994, respectively.
(8) PROCEEDS FROM BUSINESS INTERRUPTION
On July 15, 1994 a fire damaged the galvanizing line of Pinole Point Steel
Company (PPSC), an affiliate and the Company's primary supplier of steel.
As a result, the Company's steel supplies were impacted for several months.
The loss from the resulting business interruption was insured. Insurance
proceeds totaling $1,004,218 for the year ended December 31, 1994 are
included in the accompanying statement of income and accumulated deficit.
(9) INCOME TAXES
The provision for state franchise taxes consists of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Current $ 800 800
Deferred 9,000 25,000
------ ------
$ 9,800 25,800
====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liability are presented below at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Deferred tax asset: $ (196,000) (190,000)
Net operating loss (1,000) (1,000)
Other, net -------- --------
(197,000) (191,000)
Deferred tax liabilities: 231,000 216,000
Depreciation -------- --------
Net deferred tax liabilities $ 34,000 25,000
======== ========
</TABLE>
<PAGE>
4
COLORSTRIP, INC.
Notes to Financial Statements
(9) INCOME TAXES, CONTINUED
At December 31, 1995, the Company has available for California State
Franchise tax return purposes net losses totaling approximately
$13,020,000, subject to certain limitations, which will expire between 1997
and 1998.
(10) RELATED PARTY TRANSACTIONS
(a) Notes Receivable from Stockholders
During 1990, the Company issued 200 shares of common stock to
stockholders in exchange for notes receivable in the amount of
$750,000. The notes receivable are due July 2000 and accrue interest
at 9.1%, due annually. At December 31, 1995 and 1994, outstanding
interest receivable was $405,542 and $330,239, respectively, and is
recorded as interest receivable from stockholders in the accompanying
balance sheets.
(b) Note Payable-Affiliate
The Company entered into a loan agreement with Pinole Point Steel
Company (PPSC), an affiliate, to borrow up to $37,154,320 to construct
the Facility. The agreement was modified effective November 1, 1994
and provides for a term loan not to exceed $36,337,500. Interest is
due monthly and accrues at a variable rate, which equaled the LIBOR
rate plus 1.25 percentage points, or 7.21% and 7.25%, at December 31,
1995 and 1994, respectively. Principal is due in quarterly
installments of $1,487,500 beginning February 1, 1995 with the
outstanding loan balance due November 1, 1999. The outstanding
principal balance at December 31, 1995 is $30,387,500 and is recorded
as a note payable to affiliate in the accompanying balance sheets.
(c) Notes Payable-Stockholders
During 1995 and 1994, respectively, the Company borrowed an additional
$475,000 and $525,000 from the stockholders of the Company. The
borrowings bear interest at a bank's adjusted prime rate (as defined
in each note agreement). During 1995, the notes were extended through
January 2, 1998. The adjusted prime rate as of December 31, 1995
ranged from 5.63% to 7.24%. The note payable balance at December 31,
1995 and 1994 was $8,150,000 and $7,675,000, respectively. Due to
banking requirements, the majority of such borrowings have been
classified as restricted cash in the accompanying balance sheets.
(d) Rental Income
The Company has a cancelable operating lease with an affiliate for
certain office and warehouse space. During each of the years ended
December 31, 1995 and 1994, the Company recorded rental income of
$300,000. The lease was canceled in March 1996.
(Continued)
<PAGE>
5
COLORSTRIP, INC.
Notes to Financial Statements
(10) RELATED PARTY TRANSACTIONS, CONTINUED
(e) Rental Expense
The Company has a non-cancelable operating lease with an affiliate for
plant and office space expiring June 30, 2002. The lease contains
certain purchase and renewal options. For the year ended December 31,
1995, the Company incurred rental expense of $415,000. Future minimum
lease payments are $415,000 per annum.
(f) Transactions with Affiliates
Affiliates provided certain administrative services to the Company
totaling $840,206 and $752,000 for the years ended December 31, 1995
and 1994, respectively. Such expenses are included in selling, general
and administrative expenses in the accompanying statements of income
and accumulated deficit.
The Company purchased steel from PPSC in the amount of $34,147,000 and
$27,560,000 for the years ended December 31, 1995 and 1994,
respectively.
Marwais Steel Company, an affiliate, provided steel processing
services to the Company totaling $911,000 and $687,000 for the years
ended December 31, 1995 and 1994, respectively. Fees for these
services are included in cost of sales in the accompanying statements
of income and accumulated deficit. In addition, Pinole Point Steel
Company provides financing for accounts receivable.
(g) Commitments and Contingencies
The Company is the guarantor of a loan of an affiliate. This loan had
an outstanding balance of $23,800,000 and $29,750,000 at December 31,
1995 and 1994, respectively.
(11) MAJOR CUSTOMERS
Sales to four customers amounts to approximately 45% of the Company's net
sales for the year ended December 31, 1995.
(12) EVENTS SUBSEQUENT TO DATE OF AUDIT REPORT (UNAUDITED)
On July 15, 1997, Pinole Point Steel Company and Colorstrip, Inc. merged
and was operated under the name Colorstrip, Inc. On December 15, 1997
certain assets and liabilities of Colorstrip, Inc. were acquired by
Material Sciences Corporation. The accompanying financial statements do not
reflect the effects of either the merger or the acquisition and are the
historical audited financial statements of the Company.
<PAGE>
MATERIAL SCIENCES CORPORATION
PRO FORMA FINANCIAL STATEMENTS
The following pro forma balance sheet as of November 30, 1997 and the pro forma
statements of income of Material Sciences Corporation (MSC or the Company) and
Colorstrip, Inc. (Colorstrip, which is the company resulting from the recent
merger of Pinole Point Steel Company and Colorstrip, Inc.) for the year ended
February 28, 1997 and the nine months ended November 30, 1997 have been prepared
to illustrate the effect of the consummation of the acquisition, the closing and
initial borrowings under the new line of credit, certain repayments of
indebtedness of both the Company and Colorstrip and the payment of related fees
and expenses. The acquisition is being accounted for as a purchase and is
treated as if it had occurred on November 30, 1997 in the pro forma balance
sheet and as of March 1, 1996 in the pro forma statements of income.
Colorstrip's historical financial statements are for fiscal years ended December
31, and accordingly, the pro forma statement of income for the year ended
February 28, 1997 includes the results of Colorstrip for its fiscal year ended
December 31, 1996.
The pro forma financial statements are presented for illustrative purposes only
and are not necessarily indicative of the consolidated financial position or
consolidated results of operation of the Company that would have been reported
had the transaction occurred on the dates indicated, nor do they represent a
forecast of the consolidated financial position of the Company at any future
date or the consolidated results of operations of the Company for any future
period. Furthermore, no effect has been given in the pro forma statements of
income for synergies or costs, if any, that may be realized through the
combination of the Company and Colorstrip. Amounts allocated to the Company's
assets and liabilities will be based on estimated fair values at the completion
of the transaction. A preliminary allocation of the acquisition costs has been
made to Colorstrip's major categories of assets and liabilities in the pro forma
financial statements based on estimates. The final allocations may be different
from the amounts reflected herein, however, management is of the opinion that
differences, if any, would not be material. The pro forma financial statements,
including the notes thereto, should be read in conjunction with the financial
statements of Colorstrip included herein.
55
<PAGE>
Pro Forma Statement of Income (Unaudited)
Material Sciences Corporation and Subsidiaries and Colorstrip, Inc. Combined
<TABLE>
<CAPTION>
Pro Forma
MSC Colorstrip Combined
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
February 28, December 31, Pro Forma February 28,
(In thousands, except per share data) 1997 1996 Adjustments 1997
- ------------------------------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Net Sales $ 278,017 $ 185,704 $ (711)(a) $ 463,010
Cost of Sales 203,809 159,587 9,089 (b) 372,485
----------- ----------- --------- -----------
Gross Profit $ 74,208 $ 26,117 $ (9,800) $ 90,525
Selling, General and Administrative Expenses 47,340 20,080 (11,051)(c) 56,369
----------- ----------- --------- -----------
Income from Operations $ 26,868 $ 6,037 $ 1,251 $ 34,156
----------- ----------- --------- -----------
Other (Income) and Expense:
Interest Income $ (227) $ (620) $ 620 (d) $ (227)
Interest Expense 420 3,202 5,148 (e) 8,770
Equity in Results of Partnership 1,272 - - 1,272
Other, Net (997) 108 - (889)
----------- ----------- --------- -----------
Total Other Expense, Net $ 468 $ 2,690 $ 5,768 $ 8,926
----------- ----------- --------- -----------
Income Before Income Taxes $ 26,400 $ 3,347 $ (4,517) $ 25,230
Income Taxes 10,164 (160) (290)(f) 9,714
----------- ----------- --------- -----------
Net Income $ 16,236 $ 3,507 $ (4,227) $ 15,516
=========== =========== ========= ===========
Net Income Per Common and Common
Equivalent Share $ 1.04 $ - $ - $ 0.99
=========== =========== ========= ===========
Weighted Average Number of Common and
Common Equivalent Shares Outstanding 15,605 - - 15,605
=========== =========== ========= ===========
</TABLE>
(See Notes to Pro Forma Financial Statements)
56
<PAGE>
Pro Forma Statement of Income (Unaudited)
Material Sciences Corporation and Subsidiaries and Colorstrip, Inc. Combined
<TABLE>
<CAPTION>
Pro Forma
MSC Colorstrip Combined
Nine Months Nine Months Nine Months
Ended Ended Ended
November 30, September 30, Pro Forma November 30,
(In thousands, except per share data) 1997 1997 Adjustments 1997
- ------------------------------------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Net Sales $218,744 $146,287 $ (615)(a) $364,416
Cost of Sales 166,788 124,621 6,659 (b) 298,068
-------- -------- ------- --------
Gross Profit $ 51,956 $ 21,666 $(7,274) $ 66,348
Selling, General and Administrative Expenses 39,020 13,240 (6,079)(c) 46,181
-------- -------- ------- --------
Income from Operations $ 12,936 $ 8,426 $(1,195) $ 20,167
-------- -------- ------- --------
Other (Income) and Expense:
Interest Income $ (105) $ -- $ -- $ (105)
Interest Expense 3,131 1,762 4,138 (e) 9,031
Equity in Results of Partnership 211 -- -- 211
Other, Net (776) 592 -- (184)
-------- -------- ------- --------
Total Other Expenses, Net $ 2,461 $ 2,354 $ 4,138 $ 8,953
-------- -------- ------- --------
Income Before Income Taxes $ 10,475 $ 6,072 $(5,333) $ 11,214
Income Taxes 4,034 -- 283 (f) 4,317
-------- -------- ------- --------
Net Income $ 6,441 $ 6,072 $(5,616) $ 6,897
======== ======== ======= ========
Net Income Per Common and Common
Equivalent Share $ 0.42 $ -- $ -- $ 0.45
======== ======== ======= ========
Weighted Average Number of Common and
Common Equivalent Shares Outstanding 15,471 -- -- 15,471
======== ======== ======= ========
</TABLE>
(See Notes to Pro Forma Financial Statements)
57
<PAGE>
Pro Forma Balance sheet (Unaudited)
Material Sciences Corporation and Subsidiaries and Colorstrip, Inc. Combined
<TABLE>
<CAPTION>
Pro Forma
MSC Colorstrip Combined
November 30, September 30, Pro Forma November 30,
(In thousands) 1997 1997 Adjustments 1997
- ----------------------------------------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C>
Assets
Current Assets
Cash and Cash Equivalents $ 3,164 $ 4,068 $ (4,068)(g) $ 3,164
Restricted Cash 5,000 -- -- 5,000
Receivables:
Trade, Less Reserves of $2,962 34,087 17,602 (205)(g) 51,484
Current Portion of Partnership Note 780 -- -- 780
Income Taxes 660 -- -- 660
Prepaid Expenses 4,112 1,477 (437)(g) 5,152
Inventories 35,622 17,866 2,511 (h) 55,999
Prepaid Taxes 1,186 -- -- 1,186
Due from Affiliate -- 4,497 (4,497)(g) --
Advances to Shareowners -- 100 (100)(g) --
--------- -------- -------- ---------
Total Current Assets $ 84,611 $ 45,610 $ (6,796) $ 123,425
--------- -------- -------- ---------
Gross Property, Plant and Equipment $ 257,494 $ 81,959 $ 18,452 (i) $ 357,905
Accumulated Depreciation and Amortization (100,922) (39,230) 39,230 (i) (100,922)
--------- -------- -------- ---------
Net Property, Plant and Equipment $ 156,572 $ 42,729 $ 57,682 $ 256,983
--------- -------- -------- ---------
Other Assets:
Investment in Partnership $ 11,166 $ -- $ -- $ 11,166
Intangible Assets, Net 14,043 -- 11,472 (j) 25,515
Restricted Cash -- 8,210 (8,210)(g) --
Due from Affiliate -- 3,289 (3,289)(g) --
Interest Receivable from Shareowners -- 536 (536)(g) --
Other 482 -- -- 482
--------- -------- -------- ---------
Total Other Assets $ 25,691 $ 12,035 $ (563) $ 37,163
--------- -------- -------- ---------
Total Assets $ 266,874 $100,374 $ 50,323 $ 417,571
========= ======== ======== =========
Liabilities
Current Liabilities
Current Portion of Long-Term Debt $ 3,774 $ 18,950 $(18,950)(g) $ 3,774
Accounts Payable 23,325 19,747 -- 43,072
Accrued Payroll Related Expenses 8,553 -- -- 8,553
Accrued Expenses 5,672 3,689 (1,640)(g) 7,721
--------- -------- -------- ---------
Total Current Liabilities $ 41,324 $ 42,386 $(20,590) $ 63,120
--------- -------- -------- ---------
Long-Term Liabilities
Deferred Income Taxes $ 11,288 51 $ (51)(g) $ 11,288
Long-Term Debt, Less Current Portion 62,968 8,925 119,976 (k) 191,869
Accrued Superfund Liability 3,968 -- -- 3,968
Due to Affiliate -- 3,010 (3,010)(g) --
Notes Payable to Shareowners -- 8,225 (8,225)(g) --
Other 7,016 -- -- 7,016
--------- -------- -------- ---------
Total Long-Term Liabilities $ 85,240 $ 20,211 $108,690 $ 214,141
--------- -------- -------- ---------
Shareowners' Equity
Preferred Stock $ -- $ -- $ -- $ --
Common Stock 327 2,715 (2,715)(l) 327
Additional Paid-In Capital 51,663 20,951 (20,951)(l) 51,663
Treasury Stock at Cost (8,545) -- -- (8,545)
Notes Receivable from Shareowners -- (750) 750 (l) --
Retained Earnings 96,865 14,861 (14,861)(l) 96,865
--------- -------- -------- ---------
Total Shareowners' Equity $ 140,310 $ 37,777 $(37,777) $ 140,310
--------- -------- -------- ---------
Total Liabilities and Shareowners' Equity $ 266,874 $100,374 $ 50,323 $ 417,571
========= ======== ======== =========
</TABLE>
(See Notes to Pro Forma Financial Statements)
58
<PAGE>
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(In thousands)
The pro forma financial statements and related notes give effect to the
acquisition of Colorstrip accounted for as a purchase. The pro forma balance
sheet assumes that the transaction was completed as of November 30, 1997 and the
pro forma statements of income assume that the transaction was completed on
March 1, 1996. Colorstrip's historical financial statements are for the fiscal
years ended December 31, and accordingly, the pro forma statement of income for
the year ended February 28, 1997 includes the results of Colorstrip for its
fiscal year ended December 31, 1996. Likewise, Colorstrip's income for its three
quarters ending September 30, 1997 are included in the consolidated statement of
income for the three quarters ending November 30, 1997.
All interim financial data used to develop the pro forma balance sheet and
statements of income are unaudited, but in the opinion of management, reflect
all adjustments necessary (consisting only of normal recurring entries) for a
fair presentation in all material respects.
The unaudited pro forma statements of income are not necessarily indicative of
operating results which would have been achieved had the transaction been
consummated as of March 1, 1996 and should not be construed as representative of
future earnings.
Under purchase accounting, the total estimated acquisition cost will be
allocated to Colorstrip's assets and liabilities based on their relative fair
values. The purchase price and allocations are subject to valuations subsequent
to the date of the closing of the acquisition which are not yet completed.
Accordingly, the final allocations may be different from the amounts reflected
herein.
For purposes of the pro forma financial statements, the preliminary allocation
of the purchase price, including transaction costs, is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Purchase Price $128,901
Estimated Net Assets Acquired
Current Assets $ 38,814
Net Property, Plant and Equipment 100,411
---------
Tangible Assets Acquired 139,225
Current Liabilities ( 21,796) 117,429
--------- --------
Estimated Intangible Assets $ 11,472
========
</TABLE>
The pro forma net income per share is based on the weighted average number of
common and common equivalent shares outstanding of the Company during the
periods ended February 28, 1997 and November 30, 1997.
The following adjustments were recorded in the pro forma financial statements:
(a) This adjustment reflects the reclassification of returns and allowances of
Colorstrip from Cost of Sales to Net Sales for a consistent presentation
with the Company.
(b) This adjustment reflects: (1) the depreciation expense of $8,991 and $6,743
for the year ended February 28, 1997 and the nine month period ending
November 30, 1997, respectively, to reflect the basis of the fixed assets
recorded at fair value (depreciation expense for Colorstrip was recorded in
Selling, General and Administrative Expenses rather than Cost of Sales),
(2) the reclassification of returns and allowances from Cost of Sales to
Net Sales of $711 and $615 for the year ended February 28, 1997 and the
nine
59
<PAGE>
month period ending November 30, 1997, respectively, for a consistent
presentation with the Company, and (3) the reclassification of property
taxes and insurance from Selling, General and Administrative Expenses to
Cost of Sales of $809 and $531 for the year ended February 28, 1997 and
nine month period ending November 30, 1997, respectively, for a consistent
presentation with the Company.
(c) This adjustment reflects: (1) the Selling, General and Administrative
Expenses incurred by the prior owners in business not related to the
acquired operations of $6,229 for the year ending February 28, 1997 and
$2,666 for the nine month period ending November 30, 1997, (2) the net
decrease in depreciation expense being recorded as Selling, General and
Administrative Expenses of $4,013 and $2,882 for the year ending February
28, 1997 and the nine month period ending November 30, 1997, respectively,
and (3) the reclassification of property taxes and insurance from Selling,
General and Administrative Expenses to Cost of Sales of $809 and $531 for
the year ended February 28, 1997 and nine month period ending November 30,
1997, respectively, for a consistent presentation with the Company.
(d) Reflects the interest income on notes receivable of Colorstrip which were
not included in the purchased assets.
(e) Reflects the interest expense on the debt incurred with the purchase of the
acquisition of $8,350 and $5,900 for the year ended February 28, 1997 and
the nine month period ending November 30, 1997, respectively. For the
twelve month period ending February 28, 1997 and the nine month period
ending November 30, 1997, interest expense on non-assumed debt of $3,202
and $1,762, respectively, was eliminated arriving at a net interest expense
adjustment of $5,148 and $4,138, respectively.
(f) Reflects the adjustment to income taxes to arrive at a 38.5% effective
income tax rate which represents the Company's effective income tax rate.
(g) This adjustment reflects certain assets and liabilities Colorstrip not
purchased or assumed as a result of the acquisition.
(h) This adjustment reflects the increase in Colorstrip's inventory from their
historical cost to fair market value.
(i) This adjustment reflects the increase in Colorstrip's fixed assets from
their historical cost to fair market value, as well as the reversal of
accumulated depreciation of Colorstrip from periods prior to the
acquisition.
(j) This adjustment reflects the recording of goodwill based on the purchase
price of $128,901 exceeding the fair market value of net assets acquired of
$117,429.
(k) This adjustment reflects the incremental debt of $128,901 needed to finance
the acquisition offset by debt of Colorstrip of $8,925 not assumed in the
acquisition.
(l) This adjustment reflects the elimination of shareowners' equity of
Colorstrip not assumed in the acquisition.
60
<PAGE>
INDEX TO EXHIBITS
2.1 Asset Purchase Agreement by and among Colorstrip, Inc., the Registrant and
MSC Pinole Point Steel Inc. dated as of November 14, 1997 (without
schedules and exhibits which will be furnished to the Securities and
Exchange Commission upon request). (1)
10.1 Credit Agreement, dated as of December 12, 1997, among the Registrant, Bank
of America National Trust and Savings Association, as Agent and Letter of
Credit Issuing Bank, and the other financial institutions party thereto
(without schedules and exhibits which will be furnished to the Securities
and Exchange Commission upon request). (1)
23.1 Consent of KPMG Peat Marwick, LLP, dated as of February 27, 1998
99.1 Press releases of the Registrant issued on December 19, 1997.
61
<PAGE>
Exhibit 23.1
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
The Board of Directors
Colorstrip, Inc.
Pinole Point Steel Company
We consent to the inclusion of our reports dated April 4, 1997 and May 3, 1996
with respect to the balance sheets of Colorstrip, Inc. and Pinole Point Steel
Company as of December 31, 1996, and 1995 respectively, and the related
statements of earnings, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996, which reports appear in
the Form 8-K/A of Material Sciences Corporation dated February 27, 1998.
/s/ KPMG Peat Marwick LLP
February 27, 1998
<PAGE>
[LETTERHEAD OF MATERIAL SCIENCES CORPORATION]
NEWS RELEASE
Material Sciences Corporation
Names Gerald G. Nadig Chairman;
Evans Remains a Director
ELK GROVE VILLAGE, IL, December 19, 1997 -- The broad of directors of Material
Sciences Corporation (NYSE:MSC), today announced that Gerald G. Nadig, 52,
president and chief executive officer, has been elected chairman of the board
effective January 1, 1998. Nadig succeeds G. Robert Evans, who retired but will
continue to serve as a director. Nadig will retain his current position as
president and chief executive officer.
"Gerry Nadig's election as chairman is well deserved and results from his solid
leadership since joining the company in 1989. Furthermore, the board is
confident that Gerry can successfully guide MSC to a sustained period of growth
and prosperity," said Evans.
Nadig began his career with the company as executive vice president of its MSC
Pre Finish Metals Inc. subsidiary in July 1989, and was appointed president and
chief operating officer in January 1990. In June 1991, Nadig was promoted to
president and chief operating officer of MSC. He was named to MSC's board of
directors in April 1996, and to his current position as president and chief
executive officer in January 1997.
Material Sciences Corporation is a technology-based manufacturer of continuously
processed specialty coated materials and services. The company's four principal
product groups are Laminates and Composites, Specialty Films, Coil Coating, and
Electrogalvanizing. Its materials are sold to a variety of manufacturers and
distributors and used across a broad spectrum of industries and products.
Founded in 1971 and headquartered near Chicago, MSC operates nine manufacturing
plants in the U.S. and sells its products around the world.
For further information on Material Sciences by Fax, dial 1-800-PRO-INFO, ext.
MSC. Information about Material Sciences through the Internet is available at:
http://www.matsci.com/
<PAGE>
[LETTERHEAD OF MATERIAL SCIENCES CORPORATION]
NEWS RELEASE
Material Sciences Corporation
Reports Higher Sales, Lower Earnings
for Third Quarter, Nine Months
Previously Announced Acquistion Completed
ELK GROVE VILLAGE, IL, December 19, 1997 -- Material Sciences Corporation
(NYSE:MSC), today announced higher sales and lower earnings for its third
quarter ended November 30, 1997.
Net sales in the third quarter were $75.1 million, 7.8 percent higher than the
$69.7 million in the same period last year. Net income for the latest quarter
was $2.2 million, or 14 cents per share, compared with last year's quarterly net
income of $4.2 million, or 27 cents per share.
For the nine months ended November 30, 1997, net sales were $218.7 million, up
4.7 percent from last year's $209.0 million. Net income was $6.4 million, or 42
cents per share, compared with last year's nine-month net income of $12.5
million, or 80 cents per share.
Mixed Performance at Operating Groups
Coil Coating sales in the third quarter were $31.8 million, up 5.5 percent from
the $30.2 million reported last year. The major contributor was the continued
adoption by car makers of the company's proprietary high-gloss coating system
for exterior trim parts.
Laminates and Composites sales in the third quarter were $17.3 million compared
with $17.2 million last year, but 17.2 percent above this year's second quarter.
This rebound was led by disc brake noise dampers, which had 22.8 percent higher
sales than the second quarter.
<PAGE>
News Release
December 19, 1997
Page 2
Electrogalvanizing sales in the third quarter were $16.6 million, up 16.2
percent compared with $14.3 million a year ago. Shipments reached 124,300 tons,
7.7 percent higher than the 115,426 tons reported last year.
Specialty Films sales were $9.4 million, up 17.1 percent form the $8.0 million
in the third quarter last year. Major reasons for the increase were strong sales
of industrial film products, such as sputtered films for digital imaging
printing plates, and high-performance solar control window films for the
automotive aftermarket and building applications.
Commenting on the third quarter and outlook, President and Chief Executive
Officer Gerald G. Nadig said, "Although third quarter results showed an
improvement over this year's second quarter, as previously announced, they fell
short of our expectations in some areas. Sales continue to be affected by new
product adoption delays at key prospects in our Laminates and Composites group,
as well as lower shipments and a temporary shift to a lower value product mix in
our Coil Coating group. These factors, plus higher year-to-year depreciation
and financing costs, resulted in our earnings shortfall. Looking at the balance
of fiscal 1998, we expect earnings in the last half of the year to be slightly
below our first six months' performance."
New Coil Coating President
On December 2, 1997, Douglas M. Rose was named president of the MSC Pre Finish
Metals Inc. subsidiary. "Doug's experience and extensive operating background
while at Toyoda Machinery USA Corporation, Bendix Corporation, and Ford Motor
Company, make him an ideal candidate to direct the future growth of our coil
coating business," said Nadig.
Acquisition Completed
MSC also indicated it completed the previously announced acquistion of certain
assets and the assumption of certain liabilities of a west coast hot-dipped
galvanizing and coil coating business. The purchase price was approximately
$127.0 million, which was financed through a new bank line of credit, and a
short term seller note that MSC intends to refinance
<PAGE>
News Release
December 19, 1997
Page 3
by the end of this fiscal year. The operation consists of a 300,000-ton capacity
hot-dipped galvanizing line and a coil coating line capable of producing 150,000
tons of prepainted metal. These two facilities will continue to operate, but as
MSC subsidiaries. This California business serves the building and construction
markets across the western United States. It had annual sales of approximately
$95.0 million in calendar 1997. The transaction is expected to add to earnings
in the next fiscal year, beginning March 1, 1998.
EVA Rollout Underway
"I am pleased to report that the introduction of Economic Value Added (EVA(R))
is well underway at MSC. The EVA reporting system, capital appropriation model
and training manual are all in the final phase of preparation. A comprehensive
employee communication program also is being developed, with rollout scheduled
for early February. An incentive compensation program tied to EVA improvement
will be in place when the program is introduced," Nadig concluded.
Material Sciences Corporation is a technology-based manufacturer of continuously
processed specialty coated materials and services. The company's four principal
product groups are Laminates and Composites, Specialty Films, Coil Coating, and
Electrogalvanizing. Its materials are sold to a variety of manufacturers and
distributors and used across a broad spectrum of industries and products.
Founded in 1971 and headquartered near Chicago, MSC operates nine manufacturing
plants in the U.S. and sells its products around the world.
Forward-looking statements contained in this press release are qualified by the
cautionary language described in Part II, Item 7 of the company's 1997 annual
report on Form 10-K filed with the Securities and Exchange Commission pursuant
to the Securities Exchange Act of 1934, as amended.
For further information on Material Sciences by Fax, dial 1-800-PRO-INFO, ext.
MSC. Information about Material Sciences through the Internet is available at:
http://www.matsci.com/
<PAGE>
MATERIAL SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Unaudited Unaudited
------------------------------- ------------------------------
Three Months Ended November 30, Nine Months Ended November 30,
------------------------------- ------------------------------
Percent Percent
1997 1996 Change 1997 1996 Change
-------- -------- -------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Sales $ 75,107 $ 69,658 7.8% $ 218,744 $ 208,962 4.7%
Cost of Sales 57,526 50,920 13.0% 166,788 153,432 8.7%
-------- -------- --------- ---------
Gross Profit $ 17,581 18,738 -6.2% $ 51,956 $ 55,530 -6.4%
Selling, General and Administrative Expenses 12,881 11,629 10.8% 39,020 35,027 11.4%
-------- -------- --------- ---------
Income from Operations $ 4,700 $ 7,109 -33.9% $ 12,936 $ 20,503 -36.9%
-------- -------- --------- ---------
Other (Income) and Expense:
Interest Income $ (30) $ (54) -44.4% $ (105) $ (189) -44.4%
Interest Expense 1,073 178 NM 3,131 320 NM
Equity in Results of Partnership 369 350 5.4% 211 831 -74.6%
Other, Net (249) (265) -6.0% (776) (721) 7.6%
-------- -------- --------- ---------
Total Other Expense, Net $ 1,163 $ 209 NM $ 2,461 $ 241 NM
-------- -------- --------- ---------
Income Before Income Taxes $ 3,537 $ 6,900 -48.7% $ 10,476 $ 20,262 -48.3%
Income Taxes 1,362 2,657 -48.7% 4,034 7,802 -48.3%
-------- -------- --------- ---------
Net Income $ 2,175 $ 4,243 -48.7% $ 6,441 $ 12,460 -48.3%
======== ======== ========= =========
Net Income Per Common and Common Equivalent Share $ 0.14 $ 0.27 -48.1% $ 0.42 $ 0.80 -47.5%
======== ======== ========= =========
Weighted Average Number of Common and Common
Equivalent Shares Outstanding 15,499 15,645 -0.9% 15,471 15,594 -0.8%
======== ======== ========= =========
</TABLE>
NM - Not Meaningful
<PAGE>
MATERIAL SCIENCES CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
November 30, February 28,
1997 1997
Unaudited Audited
------------ ------------
<S> <C> <C>
Assets:
Current Assets:
Cash and Cash Equivalents $ 3,184 $ 2,118
Restricted Cash 5,000 -
Receivables:
Trade, Less Reserves 34,087 35,944
Current Portion of Partnership Note Receivable 780 767
Income Taxes 660 1,249
Prepaid Expenses 4,112 2,791
Inventories 35,622 30,952
Prepaid Taxes 1,186 1,186
--------- ---------
Total Current Assets $ 84,611 $ 75,005
--------- ---------
Gross Property, Plant and Equipment $ 257,494 $ 242,340
Accumulated Depreciation and Amortization (100,922) (87,954)
--------- ---------
Net Property, Plant and Equipment $ 156,572 $ 154,386
--------- ---------
Other Assets:
Investment in Partnership $ 11,166 $ 10,759
Partnership Note Receivable, Less Current
Portion - 374
Intangible Assets, Net 14,043 12,837
Other 482 728
--------- ---------
Total Other Assets $ 25,691 $ 24,698
--------- ---------
Total Assets $ 266,874 $ 254,089
========= =========
Liabilities:
Current Liabilities:
Current Portion of Long-Term Debt $ 3,774 $ 3,750
Accounts Payable 23,325 24,092
Accrued Payroll Related Expenses 8,563 9,838
Accrued Expenses 5,672 6,171
--------- ---------
Total Current Liabilities $ 41,324 $ 43,651
--------- ---------
Long-Term Liabilities:
Deferred Income Taxes $ 11,288 $ 11,392
Long-Term Debt, Less Current Portion 62,968 54,761
Accrued Superfund Liability 3,968 4,071
Other 7,016 6,641
--------- ---------
Total Long-term Liabilities $ 86,240 $ 76,865
--------- ---------
Shareowners' Equity:
Preferred Stock $ - $ -
Common Stock 327 325
Additional Paid-In Capital 51,663 50,142
Treasury Stock at Cost (8,545) (7,518)
Retained Earnings 98,865 90,424
--------- ---------
Total Shareowners' Equity $ 140,310 $ 133,373
--------- ---------
Total Liabilities and Shareowners' Equity $ 266,874 $ 254,089
========= =========
</TABLE>
<PAGE>
MATERIAL SCIENCES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Unaudited Unaudited
------------------------------- ------------------------------
Three Months Ended November 30, Nine Months Ended November 30,
------------------------------- ------------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash Flows From:
Operating Activities:
Net Income $ 2,175 $ 4,243 $ 8,441 $ 12,460
Adjustments to Reconcile Net Income to Net Cash Used in
Operating Activities:
Depreciation and Amortization 4,661 3,642 14,029 11,106
Benefit for Deferred Income Taxes (35) (79) (104) (227)
Compensatory Effect of Stock Plans 98 57 129 337
Other, Net 403 338 243 819
-------- -------- -------- --------
Operating Cash Flow Prior to Changes in Assets
and Liabilities $ 7,302 $ 8,201 $ 20,738 $ 24,495
-------- -------- -------- --------
Changes in Assets and Liabilities:
Receivables $ 981 $ 1,882 $ 761 $ (4,164)
Income Taxes Receivable 463 1,035 689 1,760
Prepaid Expenses (134) 154 (1,280) 60
Inventories (374) 142 (2,976) (1,983)
Accounts Payable 1,025 1,286 (841) (29)
Accrued Expenses (127) 1,490 (1,878) (645)
Other, Net (340) (146) (238) (210)
-------- -------- -------- --------
Cash Flow from Changes in Assets and Liabilities $ 1,494 $ 5,843 $ (5,863) $ (5,211)
-------- -------- -------- --------
Net Cash Provided by Operating Activities $ 3,798 $ 14,044 $ 14,878 $ 19,284
-------- -------- -------- --------
Investing Activities:
Capital Expenditures, Net $ (2,136) $(15,690) $(15,057) $(42,182)
Acquisitions, Net of Cash Acquired (75) - (1,204) (2,489)
Escrow for Acquisition 5,000 - 5,000 -
Investment in Partnership (614) (454) (1,618) (1,331)
Distribution from Partnership - - 1,374 375
Other Long-Term Assets - (117) 197 172
-------- -------- -------- --------
Net Cash Provided by (Used in) Investing Activities $ 2,175 $(16,261) $(11,308) $(45,455)
-------- -------- -------- --------
Financing Activities:
Net Proceeds (Payments) Under Lines of Credit $ (3,300) $ 600 $(14,600) $ 24,300
Proceeds from Senior Notes - - 20,000 -
Payments to Settle Debt (2,094) (748) (3,286) (1,592)
Purchase of Treasury Stock - - (1,027) -
Sale of Common Stock 641 679 1,394 1,355
-------- -------- -------- --------
Net Cash Provided by (Used in) Financing Activities $ (4,753) $ 531 $ 2,481 $ 24,063
-------- -------- -------- --------
Net Increase (Decrease) in Cash $ 6,218 $ (1,686) $ 6,048 $ (2,106)
Cash and Cash Equivalents at Beginning of Period 1,946 2,957 2,116 3,379
-------- -------- -------- --------
Cash and Cash Equivalents at End of Period $ 8,164 $ 1,271 $ 8,164 $ 1,271
======== ======== ======== ========
Supplemental Cash Flow Disclosures:
Subordinated Notes Issued for Acquisitions $ - $ - $ 1,117 $ 1,500
Cash Portion of Acquisitions and Related Costs 75 - 1,204 2,489
-------- -------- -------- --------
Total Consideration Paid for Acquisitions $ 75 $ - $ 2,321 $ 3,989
======== ======== ======== ========
</TABLE>
The Changes in Assets and Liabilities above for the three months and nine
months ended November 30, 1997, are net of assets and liabilities acquired.
