-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JfU04EWDXWuJQbOXoI+ELlPb2tpiS5S4gZp38GN8DQetSxyjCVM9dZ7SiAnhhXUG TNglh5somZkt0PPfqPzVKA== 0000950131-01-501636.txt : 20010528 0000950131-01-501636.hdr.sgml : 20010528 ACCESSION NUMBER: 0000950131-01-501636 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20010228 FILED AS OF DATE: 20010525 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATERIAL SCIENCES CORP CENTRAL INDEX KEY: 0000755003 STANDARD INDUSTRIAL CLASSIFICATION: COATING, ENGRAVING & ALLIED SERVICES [3470] IRS NUMBER: 952673173 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08803 FILM NUMBER: 1648081 BUSINESS ADDRESS: STREET 1: 2300 E PRATT BLVD CITY: ELK GROVE VILLAGE STATE: IL ZIP: 60007 BUSINESS PHONE: 8474398270 10-K 1 d10k.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended: February 28, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission file number: 1-8803 MATERIAL SCIENCES CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 95-2673173 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2200 EAST PRATT BOULEVARD ELK GROVE VILLAGE, ILLINOIS 60007 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 847-439-8270 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Common Stock, $.02 par value (including New York Stock Exchange Preferred Stock Purchase Rights) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[_] The aggregate market value of the voting stock of the registrant held by shareowners (not including any voting stock owned by directors or executive officers of the registrant (such exclusion shall not be deemed an admission that any such person is an affiliate of the registrant)) of the registrant was approximately $100,224,997 as of April 23, 2001 (based on the closing sale price on the New York Stock Exchange on such date, as reported by The Wall Street Journal Midwest Edition). As of April 23, 2001, the registrant had outstanding an aggregate of 14,704,253 shares of its Common Stock. Documents Incorporated by Reference Portions of the following documents are incorporated herein by reference into the indicated part of this Form 10-K: Part of Form 10-K Document into which incorporated -------- ----------------------- Registrant's fiscal 2001 Annual Report to Parts I, II, IV Shareowners Registrant's Proxy Statement for the Annual Part III Meeting of Shareowners to be held on June 21, 2001 2 PART I ITEM 1. BUSINESS - ------- -------- Introduction - ------------ Material Sciences Corporation (unless otherwise indicated by the context, including its subsidiaries, "MSC" or "Company") designs, manufactures and markets materials-based solutions. The Company's four segments are Engineered Materials, Specialty Films, Coated Products and Services and Pinole Point Steel. The Company is re-evaluating the strategic position, growth and Economic Value Added ("EVA(R)") potential of each of its businesses. Depending on available options, the Company may decide to invest or disinvest with the objective of creating additional value for shareowners. The Engineered Materials segment includes the laminates and composites product group. This segment combines layers of metal and other materials designed to meet specific customer requirements for the automotive, electronics, lighting and appliance markets. The Specialty Films segment provides solar control and safety window film, as well as industrial films used in a variety of products. The Coated Products and Services segment includes the coil coating and electrogalvanizing product groups. This segment provides galvanized and prepainted products and services primarily to the automotive, building and construction, appliance and lighting markets. The Pinole Point Steel segment includes the hot-dip galvanizing product group. This segment provides galvanized and prepainted product primarily to the building and construction market. For financial information by segment see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 11 of the Notes to the Consolidated Financial Statements under the caption "Business Segments" on pages 22 through 25 and page 40, respectively, of the Company's Annual Report to Shareowners, which is incorporated herein by reference to Exhibit 13 to this report. In the engineered materials, specialty films and hot-dip galvanizing portion of its business, the Company is primarily a manufacturer and marketer of its own products. In the coil coating and electrogalvanizing area, MSC generally acts as a "toll coater" by processing its customers' metal for a fee, without taking ownership of the metal. Headquartered near Chicago, the Company, through its MSC Pre Finish Metals Inc. ("PFM"), MSC Pinole Point Steel Inc. ("MSCPPS"), MSC Walbridge Coatings Inc. ("MSCWC"), MSC Laminates and Composites Inc. ("MSCLC") and MSC Specialty Films, Inc. ("MSCSF") subsidiaries, operates 12 manufacturing plants in the United States and Europe. PFM operates two facilities in Elk Grove Village, Illinois, one facility in Morrisville, Pennsylvania, and one facility in Middletown, Ohio. MSCPPS operates one coil coating and one galvanizing facility in Richmond, California. MSCWC, a subsidiary of PFM, operates a facility in Walbridge, Ohio, on behalf of Walbridge Coatings, an Illinois Partnership ("Partnership"), owned by MSCWC, Bethlehem Steel Corporation ("BSC") and a subsidiary of the LTV Corporation ("LTV"). MSCLC operates one facility in Elk Grove Village, Illinois. MSCSF operates one facility in San Diego, California. MSCSF also has a 50% interest in a facility in Research Triangle Park, North Carolina, Zulte, Belgium and Santa Rosa, California through Innovative Specialty Films, LLC ("ISF"), a joint venture formed on October 15, 1998, with Bekaert Corporation. 3 Additional information concerning certain transactions and events is set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareowners, which is incorporated herein by reference to Exhibit 13 to this report. MSC, a Delaware corporation, was founded in 1971 and has been a publicly traded company since 1984. The principal executive offices of the Company are located at 2200 East Pratt Boulevard, Elk Grove Village, Illinois 60007, and its telephone number is (847) 439-8270. Engineered Materials The Engineered Materials segment includes the laminates and composites product group. Laminates and composites typically consist of steel or other metals in combination with polymers or other materials to achieve specific properties, such as noise and vibration reduction and thermal insulation. These products consist of functionally engineered materials that are designed to meet specific customer requirements. Products in this segment largely result from the Company's research and development efforts and the proprietary equipment and processes designed and implemented by its engineering and manufacturing organizations. The Company supplies its laminates and composites to a variety of markets both in the United States and internationally. The majority of these materials are used in the automotive, electronics, lighting and appliance markets. The major products in this segment are disc brake noise dampers and Quiet Steel(R) for automotive body panels and electronics. The disc brake noise damper market developed as manufacturers moved to asbestos-free brake linings. The increased brake noise these linings produce can be virtually eliminated by the composite materials pioneered by the Company. The Company believes its material is used in over 50% of the domestic disc brake noise dampers manufactured for the original equipment market and the aftermarket. Quiet Steel is a multilayer composite consisting of various metals, coatings and other materials, typically consisting of metal outer skins surrounding a thin viscoelastic core material. Quiet Steel is engineered to meet a variety of needs. The Company believes it is a leader in developing and manufacturing continuously processed coated materials that reduce noise and vibration and create thermal barriers. The automotive industry is currently the largest market for metal composites, which are being used to replace solid sheet metal parts, including body panels, oil pans, valve covers, front engine covers and heat shields. Quiet Steel is also being evaluated for use in floor pans and other internal components to help reduce road noise. Quiet Steel is also found in a number of other products, including electronics (used for disk drive covers for desktop and set-top box markets), lawn mower engines, appliances and air conditioners, and other uses are under evaluation. The Company produces Quiet Steel at both its Elk Grove Village, Illinois location and at the Walbridge Coatings location in Ohio. The market for laminates and composites is competitive, both domestically and internationally. There are competitors in each product market served by the Company, some of which have greater resources than the Company. The Company believes, however, that its 4 technology, product development capability, technical support and customer service place it in a strong competitive position in this market. Specialty Films The Company's Specialty Films sales consist principally of solar control and safety window films for use in the automotive aftermarket and in the retrofitting of buildings. The Company sells these products through its own in-house distribution network and independent distributors. The Company believes there are significant growth opportunities in the building market, since there is currently low market penetration, and industrial, commercial and residential building owners are becoming more familiar with the benefits of solar control and safety window films. Solar control window films can lower energy bills year-round by reducing heat penetration in the summer and by retaining residual warmth in the winter. They also reject almost 100 percent of ultraviolet light, providing draperies and furnishings with significant protection from fading. In commercial environments, window film generally improves productivity by reducing glare and heat generation. Safety films, which are sold to the retrofit market and also to window manufacturers, offer security by making glass shatter-resistant. The Company (through MSCSF's investment in ISF) uses continuous, roll-to-roll sputter-deposition technology to apply metals, metal alloys and metal oxides to wide rolls of flexible substrates, generally consisting of thin polymeric films. In the sputter-deposition process, a target material is disintegrated inside a vacuum chamber by ion bombardment into its component atoms or molecules, which are then redeposited onto the surface of the base material to be coated. Such base material (commonly called the substrate or flexible web) can be polymeric film, foil, fabric or paper. Sputter-deposition permits the use of a wide range of target materials, singly or in combination (including metals, metal alloys and metal oxides), some of which cannot be applied in any other way. This flexibility allows formation of composites of metals, di-electrics and semi-conductors. Sputter-coated, flexible polymeric substrates may be designed to have specific properties, including energy reflectance, transmission, absorption and electrical conductance. After the sputtering process, these materials are often further enhanced with other coatings, adhesives and films on a coating and laminating line, resulting in a multilayer laminate. On October 15, 1998, MSCSF formed a 50:50 joint venture partnership with Bekaert Corporation ("Bekaert") called ISF. ISF combines the sputtering operations of both companies, which the Company believes makes it one of the leading sputtering companies in the world. MSC also believes this entity will not only enhance its window film development efforts, it will also provide the basis for a number of new products in electronic surveillance; high-grade packaging; conductive films for electroluminescent lamps, touch panels and flexible circuits; optical films; and pressure-sensitive tapes. ISF commenced operations on January 1, 1999. This segment also manufactures a number of specialty coated, laminated and adhesive films. These films are used in the electronic, printing, label and other industrial markets. The Company 5 believes that its unique capabilities, including its clean room facilities and West Coast location, provide significant competitive advantages in rapidly growing markets. MSC believes that there are four major domestic companies producing competitive specialty film materials in addition to the Company. Some of these competitors have greater resources than the Company, including patented technology. The Company competes on the basis of a number of factors, including product performance and quality, completeness of product offering, new product development capabilities, service and price. The Company believes that it is competitive in these areas. Coated Products and Services Coil Coating - ------------ The Company believes that coil coating is the most environmentally safe and energy-efficient method available for applying paint and other coatings to metal. This continuous, roll-to-roll, highly automated, high-speed process applies coatings to coiled metal of varying widths and thicknesses. In the process, sheet metal is unwound from a coil, cleaned, chemically treated, coated, oven-cured and rewound into coils for shipment to manufacturers that fabricate the coated metal into finished products that are sold into a variety of industrial and commercial markets. The coatings are designed to produce both protective and decorative finishes. Through techniques such as printing, embossing and striping, special finishing effects can also be created. The finished product (i.e., prepainted or coil coated metal) is a versatile material capable of being drawn, formed, bent, bolted, riveted, chemically bonded and welded. The Company generally acts as a "toll coater" by processing coils for steel mills or their customers, without taking ownership of the metal. The Company charges by weight or surface area processed. The Company's coil coated products are used by manufacturers in building products, appliances, heating and air conditioning, lighting, automotive and other products. The Company's strategy in coil coating has been to produce high-volume, competitively coated products at low cost, as well as to identify, develop and produce specialty niche products meeting specific customer requirements. Coil coating technology reduces the environmental impact of painting and reduces manufacturers' energy needs. In coil coating processes, over 95% of the coating material is applied, in contrast with the significant waste from "overspray" typical in post-fabrication painting. The energy required to cure coil coated metal is substantially less than that required by other coating methods. These savings are achieved because of high-speed material processing and because 90% to 95% of the coatings' volatile organic compounds are recycled back into the curing ovens and used as fuel. Manufacturers that use prepainted materials can eliminate or significantly reduce on-site post-fabrication paint lines and the associated costs of compliance with complex environmental and other regulations. Prepainted materials facilitate the adoption of just-in-time and continuous process manufacturing techniques that can result in improvements to work-in-process inventory, 6 plant utilization and productivity. Since prepainted metal is cleaned, treated and painted while flat, the result is a more uniform and higher quality finished part than can be achieved by even the best post-fabrication painting operation. There are no hidden areas where paint is difficult to reach and where corrosion can begin after the product has been marketed. As a result, companies using prepainted material generally benefit from lower manufacturing costs and improved product quality. Use of prepainted metal may, however, require product design or fabrication changes and more stringent handling procedures during manufacturing. The coil coating process competes with other methods of producing coated sheet metal, principally post-fabrication finishing methods such as spraying, dipping and brushing. The Company expects that, although there can be no assurance in this regard, the market penetration of coil coated metal will increase as a result of more stringent environmental regulation and the energy efficiency, quality and cost advantages provided by prepainted metal as compared to post-fabrication painting, particularly in high-volume manufacturing operations. The Company estimates that there are approximately 70 companies operating coil coating lines in North America. The Company believes it is one of the largest coil coaters, with approximately 10% of the total tons processed in the United States in calendar 2000. Competition in the coil coating industry is heavily influenced by geography, due to the high costs involved in transporting sheet metal coils. Within geographic areas, coil coaters compete on the basis of quality, price, customer service, technical support and product development capability. Coated steel continues to be a growing choice for various industrial and commercial needs because of its economy, versatility, attractiveness and long life. The volatility and generally rising prices of lumber also has made coated steel a growing alternative in the residential construction market, where durability, strength, fire-resistance, easy maintenance and environmental soundness have all contributed to its growth. Electrogalvanizing - ------------------ MSCWC, through its participation in the Partnership, serves the market for motor vehicles by producing electrogalvanized ("EG") steel. EG steel is the primary corrosion-resistant steel product used to manufacture automobile and light-truck bodies. Domestic demand for EG steel began in 1985, and the Company believes that it will continue as automobile manufacturers respond to consumer demands for longer warranty protection against rust and, to a lesser extent, due to increased applications for EG steel in the appliance and other non-automotive markets. Through the Partnership, MSCWC electrogalvanizes zinc and zinc-alloy coatings and applies organic coatings onto sheet metal in coil form. MSCWC offers a full complement of pure zinc and zinc-nickel plated products with or without organic coatings or top coats that offer corrosion, forming or cosmetic advantages over competitive products (such as plastic and hot-dip galvanized) to the automotive as well as other markets. Demand for coatings over the electrogalvanized plating has increased due to greater corrosion expectations of steel products and enhanced cosmetic requirements. The Partnership's facility is the only facility in North America capable of meeting, in a single pass through its line, the demand for this full 7 complement of products. During fiscal 2001, laminating capability was added to the Partnership's facility in order to produce Quiet Steel for the Engineered Materials segment. On July 23, 1999, a subsidiary of BSC sold a portion of its ownership interest in the Partnership to LTV. LTV purchased a 16.5% equity interest in the Partnership from BSC, providing LTV access to 33.0% of the facility's available line time. This change in ownership provided the Company with a more diversified customer base, as well as improved the likelihood of higher facility utilization. In conjunction with the sale, the Partnership term was extended from December 31, 2001 to December 31, 2004. The Company maintained its 50% ownership interest in the Partnership. The Partnership maintained its long-term toll processing agreement with ISPAT Inland Inc. (a former partner), which expires on December 31, 2001. On December 29, 2000, LTV filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Sales to LTV through the Partnership were $12,378,000 in fiscal 2001. Although the Company believes that LTV's participation in the Partnership and the Partnership's processing services for LTV are valuable to the LTV estate, there currently can be no assurance that the LTV bankruptcy will not result in a disruption of such relationships. As of February 28, 2001, the Partnership is continuing to make shipments to LTV under special credit arrangements. On March 21, 2001, the bankruptcy court approved debtor in possession financing for LTV. The Partnership has no pre-petition receivables outstanding and $420,000 of post-petition receivables outstanding as of February 28, 2001. MSC Pre Finish Metals Inc. has $274,000 of pre-petition receivables outstanding that are fully reserved and no post-petition receivables outstanding as of February 28, 2001. MSC's net sales for electrogalvanizing consists of various fees charged to the Partnership for operating the facility. Net sales to the Partnership represented 12%, 13% and 13% of MSC's net sales in fiscal 2001, 2000 and 1999, respectively. The fees consist of a variable portion, based on the production volumes and product mix, and a fixed portion, including taxes, rent, insurance and the fixed portion of electricity. The overall profitability depends on MSCWC's processing skill and efficiency. BSC, LTV and the other mills utilizing the Partnership's facility are major suppliers of sheet steel to the United States automobile industry. The orders for the Partnership's toll coating services are primarily and independently generated by BSC and LTV for their respective customers, although the Partnership may also accept orders from outside parties ("Third Party") to the extent available capacity and production schedules permit. On an annual basis, Third Party sales were not significant in fiscal 2001. Competition in the production and sale of EG steel for the automotive industry comes from other steel companies that, either directly or through joint ventures, produce EG steel on six manufacturing lines in the United States, including ISPAT Inland Inc.'s other facility. Limited quantities of EG steel also are imported into the United States from foreign steel suppliers. The Company believes that the Partnership's line is well positioned to serve the current and expected end-users of EG steel. The Company is unable to determine the effect, if any, on the market 8 resulting from the existence of excess capacity, the entrance of additional capacity, improved galvanizing technology or the substitution of other materials. Pinole Point Steel During fiscal 2001, the Company announced that it was exploring strategic alternatives for Pinole Point Steel and therefore, was evaluating and disclosing it as a separate segment (See Note 11 of the Notes to the Consolidated Financial Statements under the caption ""Business Segments" on page 40 of the Company's Annual Report to Shareowners, which is incorporated herein by reference to Exhibit 13 to this report). The Pinole Point Steel segment includes the hot-dip galvanizing ("HDG") product group. HDG is a continuous, high-speed roll-to-roll process for depositing zinc on steel. HDG deposits zinc onto steel by immersing the steel strip into a molten bath of zinc (hot-dip) making it corrosion resistant. Zinc, in the presence of a corrosive environment, will sacrifice itself to protect the steel. As such, zinc gives the maximum sacrificial protection to steel in the greatest number of applications. HDG steel may be used as is or can be painted, resulting in enhanced corrosion protection and versatility. MSCPPS's products are primarily used by the building and construction market where they are manufactured into such products as roofing, siding, doors, duct work, lighting fixtures and a wide variety of other structural components. MSCPPS generally takes ownership of the metal it processes. International The Company believes that significant opportunities exist internationally, particularly for the Company's disc brake noise damper products, Quiet Steel and solar control and safety window film. As a percentage of net sales, direct export sales represented 10%, 7% and 7% in fiscal 2001, 2000 and 1999, respectively. The Company has certain distribution agreements and licensing and royalty agreements with agents and companies in Europe, Latin America and the Far East that cover disc brake noise dampers, Quiet Steel, powder coating and lighting products. These agreements provide the Company with opportunities for market expansion in those geographic areas. The Company is pursuing a variety of other business relationships, including direct sales, distribution agreements, licensing, acquisitions and other forms of partnering to increase its international sales and expand its international presence. Marketing and Sales The Company markets its coil coating, HDG and laminates and composites' products, services and technologies primarily through its in-house sales organization and also through independent distributors, agents and licensees. The Company focuses its sales efforts on manufacturers, but also sells to steel mills and their intermediaries, metal service centers and metal brokers. BSC and LTV are the primary marketing partners for EG steel. The Company sells its specialty films' products primarily through its internal distribution network, as well as domestic and international distributors. All of the Company's selling activities are supported by technical service 9 departments that aid the customer in the choice of available materials and their use in the customer's manufacturing process. The Company estimates that customers in the building products market were the end-users for approximately 42%, 45% and 48% of MSC's net sales in fiscal 2001, 2000 and 1999, respectively. The Company also estimates the original equipment and aftermarket segment of the transportation industry were the end-users for approximately 29%, 32% and 32% of MSC's net sales in fiscal 2001, 2000 and 1999, respectively. Due to concentration in the automotive industry, the Company believes that sales to individual automotive companies, including indirect sales, are significant. The Company's backlog of orders as of February 28, 2001, was approximately $62.0 million, all of which is expected to be filled during the remainder of the current fiscal year. The Company's backlog was approximately $82.2 million as of February 29, 2000. MSC is generally not dependent on any one source for raw materials or purchased components essential to its business for which an alternative source is not readily available, and it is believed that such raw materials and components will be available in adequate quantities to meet anticipated production schedules. MSC believes that its business, in the aggregate, is not seasonal. Certain of its products, however, sell more heavily in some seasons than in others. Environmental Matters The Company is subject to federal, state and local environmental laws. As a result of these laws, the Company has incurred, and will continue to incur in the future, capital expenditures and operating costs and charges. The Company is involved in two Superfund sites located in Gary and Kingsbury, Indiana. Although the ultimate cost of the Company's share of necessary remediation expenses is not yet known, the Company believes that it has adequately reserved for environmental matters given the information currently available. See Note 3 of the Notes to the Consolidated Financial Statements entitled "Contingencies," on pages 31 and 32 of the Company's Annual Report to Shareowners, which is incorporated herein by reference to Exhibit 13 to this report. The Company cannot predict the impact of new or changed laws or regulations. The Company believes it operates its facilities and conducts its business, in all material respects, in accordance with all environmental laws presently applicable to its facilities. The Company spent approximately $2.3 million in fiscal 2001, and has budgeted approximately $3.3 million for fiscal 2002, for maintenance or installation of environmental controls at its facilities. See Note 3 of the Notes to the Consolidated Financial Statements entitled "Contingencies," on pages 31 and 32 of the Company's Annual Report to Shareowners, which is incorporated herein by reference to Exhibit 13 to this report. 10 Research and Development Management estimates that it spent approximately $8.2 million in fiscal 2001, $6.8 million in fiscal 2000 and $7.1 million in fiscal 1999 for product and process development activities. While the Company considers its various patents, licenses and trademarks to be important, it does not believe that the loss of any individual patent, license or trademark would have a material adverse effect upon its business. Employees As of February 28, 2001, the Company (excluding ISF) had 1,291 full-time employees. Of these, approximately 915 were engaged in manufacturing, 188 in marketing and sales, 137 in administrative and clerical positions and 51 in process and product development. The employees at the San Diego, California; Walbridge, Ohio; and the MSCSF distribution facilities are not represented by a union. Hourly manufacturing employees at Elk Grove Village, Illinois; Morrisville, Pennsylvania; and Middletown, Ohio are covered by separate union contracts expiring in February 2002, May 2002 and November 2005, respectively. Hourly manufacturing employees at Richmond, California are covered by two separate union contracts expiring in January 2003 and March 2005. The Company believes that its relations with its employees are good. Executive Officers to the Registrant The executive officers of the Company as of April 23, 2001, are as follows: Name Age Position(s) Held ---- --- ---------------- Gerald G. Nadig 55 Chairman, President and Chief Executive Officer, MSC since January 1998; previously President and Chief Executive Officer, MSC since January 1997; previously President and Chief Operating Officer, MSC since July 1991. James J. Waclawik, Sr. 42 Vice President, Chief Financial Officer and Secretary, MSC since October 1996; previously Vice President and Controller, MSC since July 1991. 11 Name Age Position(s) Held ---- --- ---------------- Frank J. Lazowski, Jr. 61 Senior Vice President, Human Resources, MSC since March 1999; previously Vice President, Human Resources, MSC since July 1991. David J. DeNeve 32 Vice President and Controller, MSC since March 2001; previously Controller, MSC since October 1996; previously Accounting and Tax Manager, MSC since November 1995. Robert J. Mataya 58 Vice President, Business Planning and Development, MSC since July 1991. Edward J. Vydra 62 Vice President and Chief Technology Officer, MSC since November 1998; Vice President, Research and Development (various subsidiaries of the Company) since 1991. David A. Catterlin 45 President, MSCPPS since June 1998. David A. Fletcher 47 President and Chief Operating Officer, MSCSF since September 1993. Ronald L. Millar 50 Group Vice President and General Manager, MSCLC since November 1995. Douglas M. Rose 52 President, PFM since December 1997. Edward A. Williams 41 Group Vice President and General Manager, MSCWC since May 1997; previously Plant Manager, MSCWC since 1993. Prior to joining the Company, Mr. Catterlin was Vice President, Commercial for California Steel Industries, Inc. and Mr. Rose was Executive Vice President, Toyoda Machinery USA. 12 ITEM 2. PROPERTIES - ------- ---------- The Company owns or leases facilities with an aggregate of approximately 2,074,000 square feet of space. In addition to the principal physical properties used by the Company in its manufacturing operations as summarized in the table below, the Company leases numerous sales and administrative offices pursuant to short-term leases. The Company considers all of its principal facilities to be in good operating condition and sufficient to meet the Company's near-term operating requirements.
Approximate Area in Lease Expiration Primary Business Location Square Feet (or Ownership) Segment Served -------- ----------- ------------------ ---------------- Elk Grove Village, Illinois 58,000 Owner Coated Products and Plant No. 1 Services Elk Grove Village, Illinois 223,000 Owner Engineered Materials Plant No. 2 Elk Grove Village, Illinois 312,000 Owner Coated Products and Plant No. 3 Services Morrisville, Pennsylvania 121,000 Owner Coated Products and Services Middletown, Ohio 170,000 Owner Coated Products and Services Richmond, California 276,000 Owner Pinole Point Steel Plant No. 1 Richmond, California 203,000 Owner Pinole Point Steel Plant No. 2 Walbridge, Ohio 465,000 June 2003/(1)/ Coated Products and Services San Diego, California 73,000 February 2007/(2)/ Specialty Films Research Triangle Park, December 2003/(3)/ North Carolina (ISF) 21,000 Specialty Films Santa Rosa, California (ISF) 21,000 May 2004/(4)/ Specialty Films Zulte, Belgium (ISF) 65,000 December 2004 Specialty Films
13 (1) The lease is renewable, at the Company's option, for additional periods totaling 25 years. Since April 1, 1986, this facility has been subleased to the Partnership, which initially expired on June 30, 1998. MSC and BSC have extended the sublease until December 31, 2004 (see Coated Products and Services - Electrogalvanizing). (2) The lease is renewable, at the Company's option, for additional periods totaling 5 years. A portion (20.2%) of this facility has been subleased to ISF, and the sublease expires the earlier of the termination of the ISF agreement (December 31, 2003, if not extended) or February 28, 2007. (3) The sublease expires the earlier of the termination of the ISF agreement (December 31, 2003, if not extended) or February 28, 2007. (4) The lease is renewable, at the Company's option, for an additional 5 years. ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- The information required to be furnished pursuant to this item is included in Note 3 of the Notes to Consolidated Financial Statements entitled "Contingencies," on pages 31 and 32 of the Company's Annual Report to Shareowners, which is incorporated herein by reference to Exhibit 13 to this report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY OWNERS - ------- -------------------------------------------------- There were no matters submitted to the Company's shareowners during the fourth quarter of fiscal 2001. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREOWNER - ------- ---------------------------------------------------------------- MATTERS ------- The Company's common stock, $.02 par value, is listed on the New York Stock Exchange under the symbol "MSC." The table below sets forth, by fiscal quarter, the high and low sales prices of the Company's common stock during its past two fiscal years. Fiscal Fiscal Year Quarter High Low ---- ------- ---- --- 2001 1st $14.3125 $ 9.6250 2nd 11.6875 9.5000 3rd 11.7500 9.7500 4th 10.3125 7.5000 14 Fiscal Fiscal Year Quarter High Low ---- ------- ---- --- 2000 1st $11.3750 $ 6.3750 2nd 15.7500 11.0625 3rd 15.0625 10.9375 4th 14.6875 10.1875 There were 929 shareowners of record of the Company's common stock at the close of business on April 23, 2001. MSC has not paid cash dividends other than a nominal amount in lieu of fractional shares in connection with stock dividends. Management currently anticipates that all earnings will be retained for development of the Company's business. If business circumstances should change, the Board of Directors may declare and instruct the Company to pay dividends. However, the Company's ability to pay dividends on its common stock is limited by certain covenants contained in the Company's credit agreement. See Note 4 of the Notes to the Consolidated Financial Statements entitled "Indebtedness" on pages 32 and 33 of the Company's Annual Report to Shareowners, which is incorporated herein by reference to Exhibit 13 to this report. ITEM 6. SELECTED FINANCIAL DATA - ------- ----------------------- The information required to be furnished pursuant to this item is included in "Selected Financial Data" on pages 42 and 43 of the Company's Annual Report to Shareowners, which is incorporated herein by reference to Exhibit 13 to this report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------- ----------------------------------------------------------------------- OF OPERATIONS ------------- The information required to be furnished pursuant to this item is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 22 through 25 of the Company's Annual Report to Shareowners, which is incorporated herein by reference to Exhibit 13 to this report. Certain statements in this Form 10-K, including the information incorporated by reference, and in future filings of the Company with the SEC and in the Company's written and oral statements made by or with the approval of an authorized officer of the Company contain, or will contain, various "forward- looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including assumptions concerning MSC's operations, future results and prospects, and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements are based on MSC's current expectations and are subject to risk and uncertainties which could cause actual results or events to differ materially from those set forth or implied. Forward-looking statements are identified by the use of such words and terms as "anticipates," "estimates," "expects," "projects," "intends," "plans," "believes" and 15 words and terms of similar substance in connection with the Company's future financial position, results of operations and cash flows (including future capital expenditures and anticipated debt levels and strategies for growth), plans and objectives. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Many factors could also cause actual results to be materially different from any future results that may be expressed or implied by the forward-looking statements contained in this Form 10-K, or incorporated herein by reference, including, among others, (i) successful development and market introduction of new products and technologies; (ii) competitive factors and competitor's responses to MSC's initiatives; (iii) changes in the current and future business environment, including the automotive, building and construction and durable goods industries; (iv) adverse changes in government laws and regulations applicable to the Company; (v) continuation of the favorable environment to make acquisitions, including regulatory requirements and market values of candidates; (vi) the stability of governments and business conditions inside and outside the United States which may affect successful penetration of the Company's products; (vii) the impact of the ongoing slowdown in the overall economy; (viii) environmental risks associated with the manufacturing operations of the Company; (ix) the loss of one or more significant customers of the Company; (x) risks associated with the termination of the Partnership in December 2004 or the termination of the joint venture partnership with ISF on December 2003, or earlier as agreed upon by the parties; (xi) increases in the price of raw and other material inputs used by the Company that cannot be passed on to its customers; (xii) facility utilization at MSCWC; and (xiii) the ability to identify and consummate strategic alternatives for Pinole Point Steel and for the Company's other businesses that do not fit its new operating model. The Company does not undertake any obligation to update or revise any forward- looking statement made by it or on its behalf, whether as the result of new information, future events or otherwise. This discussion of potential risks and uncertainties is by no means complete but is designed to highlight important factors that may impact the Company's outlook. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------- ---------------------------------------------------------- The Company operates internationally, and thus is subject to potentially adverse movements in foreign currency rate changes. As of February 28, 2001, foreign sales, operating income and assets each comprised less than 5% of consolidated amounts. Historically, the effect of movements in the exchange rates have not been material to the financial position or the results of operations of the Company. The Company uses steel as a raw material in many of its products. The Company has entered into certain vendor contracts, not exceeding a term of one year, which have established a fixed price for steel. The Company has entered into certain forward contracts that exceed the term of one year for other raw materials and resources such as zinc, gas and electricity. 16 The table below provides information about the Company's debt that is sensitive to changes in interest rates.
(Dollars in Thousands) Expected Maturity Date (Fiscal Year) -------------------------------------------------------------------------------------------- 2002 2003 2004 2005 2006 Thereafter Total Fair Value ------ ------- ------- ------- ------- ---------- -------- ----------- Total Debt: Fixed Rate: Principal Amount $8,315 $14,261 $18,701 $13,421 $13,421 $45,675 $113,793 $121,384 Average Interest Rate 7.2% 7.1% 6.9% 6.9% 6.9% 6.9% 6.9% Variable Rate: Principal Amount $ - $24,500 $ - $ - $ - $ - $ 24,500 $ 24,500 Average Interest Rate* N/A 6.6% N/A N/A N/A N/A 6.6%
* Average variable interest rates are based on fiscal 2001 year end rates. Actual rates may be higher or lower. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- ------------------------------------------- (a) The Report of Independent Public Accountants, Consolidated Statements of Income (Loss) for the years ended February 28 or 29, 2001, 2000 and 1999, Consolidated Balance Sheets as of February 28 or 29, 2001 and 2000, Consolidated Statements of Cash Flows for the years ended February 28 or 29, 2001, 2000 and 1999, Consolidated Statements of Changes in Shareowners' Equity for the years ended February 28 or 29, 2001, 2000 and 1999, Consolidated Statements of Comprehensive Income (Loss) for the years ended February 28 or 29, 2001, 2000 and 1999 and Notes to Consolidated Financial Statements, set forth on page 21 and pages 26 through 41 of the Company's Annual Report to Shareowners, are incorporated herein by reference to Exhibit 13 to this report. (b) The unaudited selected quarterly financial data is set forth in Note 12 of the Notes to Consolidated Financial Statements under the caption "Selected Quarterly Results of Operations (Unaudited)" on page 41 of the Company's Annual Report to Shareowners, which is incorporated herein by reference to Exhibit 13 to this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------ --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- -------------------------------------------------- Reference is made to the information found under the caption "Election of Directors" on pages 2 through 4 of the Company's Proxy Statement for the 2001 Annual Meeting of Shareowners dated May 17, 2001 ("Proxy Statement"), all of which is incorporated by reference herein, for information on the 17 directors of the Company. Reference is made to the information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" set forth on page 15 of the Proxy Statement, all of which is incorporated herein by reference. Reference is made to Part I of this report for information on the executive officers of the Company. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- Reference is made to the information under the captions "Compensation of Executive Officers", "Employment and Other Agreements" and "Employee and Other Plans" on pages 7 through 15 of the Proxy Statement, all of which is incorporated herein by reference, provided, however, that the "Compensation and Organization Committee Report," "Audit Committee Report" and "MSC Performance Graph" are not incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL HOLDERS AND MANAGEMENT - ------- --------------------------------------------------------------- Reference is made to the information under the captions "Security Ownership of Management of the Company" and "Information with Respect to Certain Shareowners" set forth on pages 5 and 6 of the Proxy Statement, respectively, all of which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- Reference is made to the information under the captions "Employment and Other Agreements" and "Employee and Other Plans" set forth on pages 14 and 15 of the Proxy Statement, respectively, all of which is incorporated herein by reference. 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- (A) FINANCIAL STATEMENTS AND SCHEDULE OF THE COMPANY I Financial Statements of the Company. The Financial Statements and ----------------------------------- Report of Independent Public Accountants are included in the Company's 2001 Annual Report to Shareowners, listed below and incorporated herein by reference to Exhibit 13 to this report: (i) Report of Independent Public Accountants (ii) Consolidated Statements of Income (Loss) for the years ended February 28 or 29, 2001, 2000 and 1999 (iii) Consolidated Balance Sheets - February 28 or 29, 2001 and 2000 (iv) Consolidated Statements of Cash Flows for the years ended February 28 or 29, 2001, 2000 and 1999 (v) Consolidated Statements of Changes in Shareowners' Equity for the years ended February 28 or 29, 2001, 2000 and 1999 (vi) Consolidated Statements of Comprehensive Income (Loss) for the years ended February 28 or 29, 2001, 2000 and 1999 (vii) Notes to Consolidated Financial Statements II Supplemental Schedule. This report and Schedule listed below appear --------------------- on pages 28 and 29 of this report. (i) Report of Independent Public Accountants with respect to Supplemental Schedule to the Financial Statements (ii) Schedule II - Reserve for Receivable Allowances All other schedules have been omitted, since the required information is not significant, is included in the financial statements or the notes thereto or is not applicable. (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the fourth quarter. 19 (C) EXHIBITS Exhibit Number Description of Exhibit ------ ---------------------- 2(a) Asset Purchase Agreement by and among Colorstrip, Inc., the Registrant, and MSC Pinole Point Steel Inc., dated as of November 14, 1997.(7) 3(a) Registrant's Restated Certificate of Incorporation.(6) 3(b) Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock.(2) 3(c) Registrant's By-laws, as amended.(9) 4(a) Credit Agreement, dated as of December 12, 1997, among Registrant, Bank of America National Trust and Savings Association, as Agent and Letter of Credit Issuing Bank, and other financial institutions party thereto.(7) 4(b) First Amendment dated as of April 30, 1998, among Registrant, Bank of America National Trust and Savings Association, as Agent and Letter of Credit Issuing Bank, and other financial institutions party thereto.(8) 4(c) Second Amendment dated as of October 15, 1998, among Registrant, Bank of America National Trust and Savings Association, as Agent and Letter of Credit Issuing Bank, and other financial institutions party thereto.* 4(d) Third Amendment dated as of January 13, 2000, among Registrant, Bank of America, N.A., as Agent and Letter of Credit Issuing Bank, and other financial institutions party thereto.* 4(e) Fourth Amendment and Waiver dated as of April 20, 2001, by and among Registrant, Bank of America, N.A., as Agent, and other financial institutions party thereto.* 4(f) Note Agreement dated as of February 15, 1997, by and among the Registrant and the purchasers described on Schedule I attached thereto.(5) 20 Exhibit Number Description of Exhibit - ------ ---------------------- 4(g) Note Agreement dated as of February 15, 1998, by and among the Registrant and the purchasers described on Schedule I attached thereto.(8) 4(h) First Amendment to Note Agreement dated as of January 23, 1998, among the Registrant, Principal Mutual Life Insurance Company, Great-West Life & Annuity Insurance Company, The Great-West Life Assurance Company, Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, and West Coast Life Insurance Company.(8) 4(i) Second Amendment to Note Agreement dated as of February 27, 1998, among the Registrant, Principal Mutual Life Insurance Company, Great-West Life & Annuity Insurance Company, The Great- West Life Assurance Company, Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, and West Coast Life Insurance Company.(8) 4(j) Option Agreement dated as of February 26, 1998, between the Registrant and Stern Stewart & Co.(8) 4(k) Rights Agreement dated as of June 20, 1996, between Material Sciences Corporation and Chase Mellon Shareholder Services, L.L.C., as Rights Agent.(2) 4(l) First Amendment to Rights Agreement dated as of June 17, 1998, between the Registrant and Chase Mellon Shareholder Services, L.L.C., as Rights Agent.(9) There are omitted certain instruments with respect to long-term debt, the total amount of securities authorized under each of which does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. A copy of each such instrument will be furnished to the Securities and Exchange Commission upon request. 10(a) Material Sciences Corporation Stock Purchase Plan.(1)+ 10(b) Material Sciences Corporation Supplemental Pension Plan.(1)+ 21 Exhibit Number Description of Exhibit - ----- ---------------------- 10(c) Material Sciences Corporation Employee Stock Purchase Plan.(10)+ 10(d) Material Sciences Corporation 1985 Stock Option Plan for Key Employees.(10)+ 10(e) Material Sciences Corporation 1985 Stock Option Plan for Directors.(10)+ 10(f) Material Sciences Corporation 1992 Omnibus Stock Awards Plan for Key Employees.(3)+ 10(g) Employment Agreement effective February 27, 1991, between Material Sciences Corporation and G. Robert Evans.(10)+ 10(h) Material Sciences Corporation 1991 Stock Option Plan for Directors.(10)+ 10(i) Material Sciences Corporation Directors Deferred Compensation Plan.(10)+ 10(j) Material Sciences Corporation 1996 Stock Option Plan for Non- Employee Directors.(4)+ 10(k) Deferred Compensation Plan of Material Sciences Corporation and Certain Participating Subsidiaries.(10)+ 10(l) Lease and Agreement dated as of December 1, 1980, between Line 6 Corp. and Pre Finish Metals Incorporated, relating to Walbridge, Ohio facility.(1) 10(m) First Amendment to Lease and Agreement dated as of May 30, 1986, between Corporate Property Associates and Corporate Property Associates 2 and Pre Finish Metals Incorporated.(10) 10(n) Sublease dated as of May 30, 1986, between Pre Finish Metals Incorporated and Walbridge Coatings, an Illinois Partnership.(10) 10(o) Lease Guaranty dated as of May 30, 1986, from Material Sciences Corporation to Corporate Property Associates and Corporate Property Associates 2.(10) 22 Exhibit Number Description of Exhibit - ------ ---------------------- 10(p) Agreement dated as of May 30, 1986, between Material Sciences Corporation and Corporate Property Associates and Corporate Property Associates 2.(10) 10(q) Form of Standstill Agreement dated as of January 29, 1986, among Material Sciences Corporation, Richard L. Burns and Joyce Burns.(10) 10(r) Form of Indemnification Agreement between Material Sciences Corporation and each of its officers and directors.(10) 10(s) Severance Benefits Agreement dated October 22, 1996, between Material Sciences Corporation and James J. Waclawik, Sr.(5)+ 10(t) Extension of Sublease Agreement dated as of December 7, 1998, between MSC Pre Finish Metals Inc. and Walbridge Coatings.(10) 10(u) Tolling Agreement dated as of June 30, 1998, between Walbridge Coatings and Inland Steel Company (certain confidential portions have been omitted pursuant to a confidential treatment request which has been separately filed).(10) 10(v) Form of Change in Control Agreement.(9)+ 10(w) Amendment to the Supplemental Employee Retirement Plan.(9)+ 10(x) Amended and Restated Partnership Agreement, dated as of July 23, 1999, among EGL Steel Inc., LTV-Walbridge, Inc. and MSC Walbridge Coatings Inc.(11) 10(y) Amended and Restated Operating Agreement, dated as of July 23, 1999, by and between MSC Walbridge Coatings Inc. and Walbridge Coatings, an Illinois Partnership.(11) 10(z) Coating Agreement, dated as of July 23, 1999, by and between LTV Steel Company, Inc. and Walbridge Coatings, an Illinois Partnership.(11) 23 Exhibit Number Description of Exhibit ------ ---------------------- 10(aa) Coating Agreement, dated as of July 23, 1999, by and between MSC Walbridge Coatings Inc. and Walbridge Coatings, an Illinois Partnership.(11) 10(bb) Amended and Restated Coating Agreement, dated as of July 23, 1999, by and between Bethlehem Steel Corporation and Walbridge Coatings, an Illinois Partnership.(11) 10(cc) Amended and Restated Parent Agreement, dated as of July 23, 1999, among Bethlehem Steel Corporation, The LTV Corporation, Material Sciences Corporation and MSC Pre Finish Metals Inc.(11) 13 Portions of the 2001 Annual Report to Shareowners, which have been incorporated herein by reference. Except for such portions, such Annual Report is not deemed to be "filed" herewith.* 21 Subsidiaries of the Registrant.* 23 Consent of Arthur Andersen LLP.* _______________________ * Filed herewith. + Management contract or compensatory plan. (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 2-93414), which was declared effective on November 27, 1984. (2) Incorporated by reference to the Registrant's Form 8-A filed on June 25, 1996 (File No. 1-8803). (3) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-15679) which was filed on November 6, 1996. (4) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-15677) which was filed on November 6, 1996. (5) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 1997 (File No. 1-8803). 24 (6) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report for the Quarter Ended August 31, 1997 (File No. 1-8803). (7) Incorporated by reference to the Registrant's Form 8-K filed on December 30, 1997 (File No. 1-8803). (8) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 1998 (File No. 1- 8803). (9) Incorporated by reference to the Registrant's Form 8-K filed on June 22, 1998 (File No. 1-8803). (10) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 1999 (File No. 1- 8803). (11) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report for the Quarter Ended August 31, 1999 (File No. 1-8803). [THIS SPACE INTENTIONALLY LEFT BLANK] 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MATERIAL SCIENCES CORPORATION By: /s/ Gerald G. Nadig --------------------- Gerald G. Nadig Chairman, President and Chief Executive Officer Date: May 25, 2001 Pursuant to the requirements of the Securities Act of 1934, this Report has been signed by the following persons in the capacities indicated on May 25, 2001.
Signature Title --------- ----- /s/ Gerald G. Nadig Chairman, President and Chief Executive Officer and Director - -------------------------------------- Gerald G. Nadig (Principal Executive Officer) /s/ James J. Waclawik, Sr. Vice President, Chief Financial Officer and Secretary - -------------------------------------- James J. Waclawik, Sr. (Principal Financial Officer) /s/ David J. DeNeve Vice President and Controller - -------------------------------------- David J. DeNeve (Principal Accounting Officer) /s/ Michael J. Callahan Director - -------------------------------------- Michael J. Callahan /s/ Eugene W. Emmerich Director - -------------------------------------- Eugene W. Emmerich /s/ G. Robert Evans Director - -------------------------------------- G. Robert Evans /s/ E. F. Heizer, Jr. Director - -------------------------------------- E. F. Heizer, Jr. /s/ Ronald A. Mitsch Director - -------------------------------------- Ronald A. Mitsch /s/ Mary P. Quin Director - -------------------------------------- Mary P. Quin /s/ Howard B. Witt Director - -------------------------------------- Howard B. Witt
26 MATERIAL SCIENCES CORPORATION AND SUBSIDIARIES Supplemental Schedule 27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO SUPPLEMENTAL SCHEDULE TO THE FINANCIAL STATEMENTS To the Shareowners and Board of Directors of Material Sciences Corporation: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements included in the Material Sciences Corporation 2001 Annual Report to Shareowners incorporated by reference in this Form 10-K, and have issued our report thereon dated April 20, 2001. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplemental financial statement schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The supplemental financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Chicago, Illinois April 20, 2001 28 SCHEDULE II MATERIAL SCIENCES CORPORATION AND SUBSIDIARIES RESERVE FOR RECEIVABLE ALLOWANCES (in thousands)
Additions -------------------------------------------------- Balance at Charged to Charged Reclassifications Deductions Balance at beginning costs and to other and from end of of year expense accounts Acquisitions reserve year ----------- ------------- ------------ ------------------ ------------- ----------- Fiscal 1999 - --------------------- Receivable Allowances $ 4,785 $ 10,622 $ - $ - $ (10,174) $ 5,233 =========== ============= ============ ================== ============= =========== Fiscal 2000 - -------------------- Receivable Allowances $ 5,233 $ 8,179 $ - $ - $ (8,345) $ 5,067 =========== ============= ============ ================== ============= =========== Fiscal 2001 - -------------------- Receivable Allowances $ 5,067 $ 9,788 $ - $ - $ (9,672) $ 5,183 =========== ============= ============ ================== ============= ===========
The activity in the Receivable Allowances account includes the Company's bad debt, claim and scrap allowance. 29 MATERIAL SCIENCES CORPORATION ANNUAL REPORT ON FORM 10-K INDEX TO EXHIBITS Exhibit Number Description of Exhibit ------ ---------------------- 2(a) Asset Purchase Agreement by and among Colorstrip, Inc., the Registrant, and MSC Pinole Point Steel Inc., dated as of November 14, 1997.(7) 3(a) Registrant's Restated Certificate of Incorporation.(6) 3(b) Certificate of Designation, Preferences and Rights of Series B Junior Participating Preferred Stock.(2) 3(c) Registrant's By-laws, as amended.(9) 4(a) Credit Agreement, dated as of December 12, 1997, among Registrant, Bank of America National Trust and Savings Association, as Agent and Letter of Credit Issuing Bank, and other financial institutions party thereto.(7) 4(b) First Amendment dated as of April 30, 1998, among Registrant, Bank of America National Trust and Savings Association, as Agent and Letter of Credit Issuing Bank, and other financial institutions party thereto.(8) 4(c) Second Amendment dated as of October 15, 1998, among Registrant, Bank of America National Trust and Savings Association, as Agent and Letter of Credit Issuing Bank, and other financial institutions party thereto.* 4(d) Third Amendment dated as of January 13, 2000, among Registrant, Bank of America, N.A., as Agent and Letter of Credit Issuing Bank, and other financial institutions party thereto.* 4(e) Fourth Amendment and Waiver dated as of April 20, 2001, by and among Registrant, Bank of America, N.A., as Agent, and other financial institutions party thereto.* 30 Exhibit Number Description of Exhibit ------ ---------------------- 4(f) Note Agreement dated as of February 15, 1997, by and among the Registrant and the purchasers described on Schedule I attached thereto.(5) 4(g) Note Agreement dated as of February 15, 1998, by and among the Registrant and the purchasers described on Schedule I attached thereto.(8) 4(h) First Amendment to Note Agreement dated as of January 23, 1998, among the Registrant, Principal Mutual Life Insurance Company, Great-West Life & Annuity Insurance Company, The Great-West Life Assurance Company, Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, and West Coast Life Insurance Company.(8) 4(i) Second Amendment to Note Agreement dated as of February 27, 1998, among the Registrant, Principal Mutual Life Insurance Company, Great-West Life & Annuity Insurance Company, The Great-West Life Assurance Company, Nationwide Life Insurance Company, Nationwide Life and Annuity Insurance Company, and West Coast Life Insurance Company.(8) 4(j) Option Agreement dated as of February 26, 1998, between the Registrant and Stern Stewart & Co.(8) 4(k) Rights Agreement dated as of June 20, 1996, between Material Sciences Corporation and Chase Mellon Shareholder Services, L.L.C., as Rights Agent.(2) 4(l) First Amendment to Rights Agreement dated as of June 17, 1998, between the Registrant and Chase Mellon Shareholder Services, L.L.C., as Rights Agent.(9) There are omitted certain instruments with respect to long- term debt, the total amount of securities authorized under each of which does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. A copy of each such instrument will be furnished to the Commission upon request. 10(a) Material Sciences Corporation Stock Purchase Plan.(1)+ 31 Exhibit Number Description of Exhibit ------ ---------------------- 10(b) Material Sciences Corporation Supplemental Pension Plan.(1)+ 10(c) Material Sciences Corporation Employee Stock Purchase Plan.(10)+ 10(d) Material Sciences Corporation 1985 Stock Option Plan for Key Employees.(10)+ 10(e) Material Sciences Corporation 1985 Stock Option Plan for Directors.(10)+ 10(f) Material Sciences Corporation 1992 Omnibus Stock Awards Plan for Key Employees.(3)+ 10(g) Employment Agreement effective February 27, 1991, between Material Sciences Corporation and G. Robert Evans.(10)+ 10(h) Material Sciences Corporation 1991 Stock Option Plan for Directors.(10)+ 10(i) Material Sciences Corporation Directors Deferred Compensation Plan.(10)+ 10(j) Material Sciences Corporation 1996 Stock Option Plan for Non-Employee Directors.(4)+ 10(k) Deferred Compensation Plan of Material Sciences Corporation and Certain Participating Subsidiaries.(10)+ 10(l) Lease and Agreement dated as of December 1, 1980, between Line 6 Corp. and Pre Finish Metals Incorporated, relating to Walbridge, Ohio facility.(1) 10(m) First Amendment to Lease and Agreement dated as of May 30, 1986, between Corporate Property Associates and Corporate Property Associates 2 and Pre Finish Metals Incorporated.(10) 10(n) Sublease dated as of May 30, 1986, between Pre Finish Metals Incorporated and Walbridge Coatings, an Illinois Partnership.(10) 32 Exhibit Number Description of Exhibit ------ ---------------------- 10(o) Lease Guaranty dated as of May 30, 1986, from Material Sciences Corporation to Corporate Property Associates and Corporate Property Associates 2.(10) 10(p) Agreement dated as of May 30, 1986, between Material Sciences Corporation and Corporate Property Associates and Corporate Property Associates 2.(10) 10(q) Form of Standstill Agreement dated as of January 29, 1986, among Material Sciences Corporation, Richard L. Burns and Joyce Burns.(10) 10(r) Form of Indemnification Agreement between Material Sciences Corporation and each of its officers and directors.(10) 10(s) Severance Benefits Agreement, dated October 22, 1996, between Material Sciences Corporation and James J. Waclawik, Sr.(5)+ 10(t) Extension of Sublease Agreement dated as of December 7, 1998, between MSC Pre Finish Metals Inc. and Walbridge Coatings.(10) 10(u) Tolling Agreement dated as of June 30, 1998, between Walbridge Coatings and Inland Steel Company (certain confidential portions have been omitted pursuant to a confidential treatment request which has been separately filed).(10) 10(v) Form of Change in Control Agreement.(9)+ 10(w) Amendment to the Supplemental Employee Retirement Plan.(9)+ 10(x) Amended and Restated Partnership Agreement, dated as of July 23, 1999, among EGL Steel Inc., LTV-Walbridge, Inc. and MSC Walbridge Coatings Inc.(11) 10(y) Amended and Restated Operating Agreement, dated as of July 23, 1999, by and between MSC Walbridge Coatings Inc. and Walbridge Coatings, an Illinois Partnership.(11) 33 Exhibit Number Description of Exhibit ------ ---------------------- 10(z) Coating Agreement, dated as of July 23, 1999, by and between LTV Steel Company, Inc. and Walbridge Coatings, an Illinois Partnership.(11) 10(aa) Coating Agreement, dated as of July 23, 1999, by and between MSC Walbridge Coatings Inc. and Walbridge Coatings, an Illinois Partnership.(11) 10(bb) Amended and Restated Coating Agreement, dated as of July 23, 1999, by and between Bethlehem Steel Corporation and Walbridge Coatings, an Illinois Partnership.(11) 10(cc) Amended and Restated Parent Agreement, dated as of July 23, 1999, among Bethlehem Steel Corporation, The LTV Corporation, Material Sciences Corporation and MSC Pre Finish Metals Inc.(11) 13 Portions of the 2001 Annual Report to Shareowners, which have been incorporated herein by reference. Except for such portions, such Annual Report is not deemed to be "filed" herewith.* 21 Subsidiaries of the Registrant.* 23 Consent of Arthur Andersen LLP.* * Filed herewith. + Management contract or compensatory plan. (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 2-93414), which was declared effective on November 27, 1984. (2) Incorporated by reference to the Registrant's Form 8-A filed on June 25, 1996 (File No. 1-8803). (3) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-15679) which was filed on November 6, 1996. (4) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (Registration No. 333-15677) which was filed on November 6, 1996. (5) Incorporated by reference to the Registrant's Form 10-K Annual Report for 34 the Fiscal Year Ended February 28, 1997 (File No. 1-8803). (6) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report for the Quarter Ended August 31, 1997 (File No. 1-8803). (7) Incorporated by reference to the Registrant's Form 8-K filed on December 30, 1997 (File No. 1-8803). (8) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 1998 (File No. 1-8803). (9) Incorporated by reference to the Registrant's Form 8-K filed on June 22, 1998 (File No. 1-8803). (10) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 1999 (File No. 1-8803). (11) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report for the Quarter Ended August 31, 1999 (File No. 1-8803). [THIS SPACE INTENTIONALLY LEFT BLANK] ------------------------------------- 35 EX-4.(C) 2 dex4c.txt SECOND AMENDMENT DATED OCTOBER 15, 1998 EXHIBIT 4(c) SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT (this "Amendment") dated as of October 15, 1998 is entered into by and among Material Sciences Corporation, a Delaware corporation (the "Company"), the lenders who are party to the Credit Agreement referred to below (the "Banks"), and Bank of America National Trust and Savings Association, as letter of credit issuing bank and as Agent for the Banks (herein, in such latter capacity, the "Agent"). W I T N E S E T H: __________________ WHEREAS, the Company, the Banks and the Agent are parties to a certain Credit Agreement dated as of December 12, 1997, as amended April 30, 1998 (the "Credit Agreement"; terms used but not otherwise defined herein are used herein as defined in the Credit Agreement); WHEREAS, the Company desires to amend the Credit Agreement in certain respects in connection with a joint venture to be entered into between the Company and Bekaert Corporation; and WHEREAS, subject to the terms and conditions set forth herein the Agent and the Banks are willing to amend the Credit Agreement in certain respects; NOW, THEREFORE, in consideration of the premises, and intending to be legally bound hereby, the Company, the Agent and the Banks hereby agree as follows: Section 1. Amendment. In reliance on the Company's warranties set forth in Section 2 below, as of the date hereof the Credit Agreement is hereby amended as follows: (a) Section 8.8(f) of the Credit Agreement is amended to read in its entirety as follows: "(f) Contingent Obligations constituting Investments permitted by subsections 8.4(i) or incurred pursuant to a Joint Venture permitted by subsection 8.9(c); and" (b) Section 8.2(e) of the Credit Agreement is amended to read in its entirety as follows: "(e) transfers of equipment and licenses of patents, technology and know-how associated therewith to Joint Ventures permitted by Section 8.9; provided, that the fair market value of such equipment shall not exceed $8,000,000 during the term of this Agreement; and" (c) Schedule 8.9 is amended by inserting at the end of such schedule the following: "3. Contribution and Joint Venture Formation Agreement, dated as of October 14, 1998 between MSC Specialty Films, Inc. and Bekaert Corporation. 4. Limited Liability Company Agreement of Innovative Specialty Films, LLC." Section 2. Warranties. To induce the Agent and the Banks to enter into this Amendment, the Company warrants to the Agent and the Banks as of the date hereof that: (a) The representations and warranties contained in Article VI of the Credit Agreement and in the other Loan Documents are true and correct in all material respects on and as of the date hereof (except to the extent such representations and warranties expressly refer to an earlier date); and (b) No Default or Event of Default has occurred and is continuing. Section 3. GENERAL. (a) As hereby modified, the Credit Agreement shall remain in full force and effect and is hereby ratified, approved and confirmed in all respects. (b) The provisions of this Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Amendment without the prior written consent of the Agent and each Bank. (c) This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart, when so executed, shall be deemed to be an original, but all such counterparts shall together constitute one and the same Amendment. ****** - 2 - Delivered at Chicago, Illinois, as of the date and year first above written. MATERIAL SCIENCES CORPORATION By:_____________________________________ Title:__________________________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By:_____________________________________ Title:__________________________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Issuing Bank By:_____________________________________ Title:__________________________________ BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Bank By:_____________________________________ Title:__________________________________ THE NORTHERN TRUST COMPANY By:_____________________________________ Title:__________________________________ - 3 - The undersigned hereby acknowledge the foregoing and reaffirm their respective duties and obligations arising under the Loan Documents to which each is a party. MSC PRE FINISH METALS INC. By:_____________________________________ Title:__________________________________ MSC PRE FINISH METALS (EGV) INC. By:_____________________________________ Title:__________________________________ MSC PRE FINISH METALS (MV) INC. By:_____________________________________ Title:__________________________________ MSC PRE FINISH METALS (MT) INC. By:_____________________________________ Title:__________________________________ MSC LAMINATES AND COMPOSITES INC. By:_____________________________________ Title:__________________________________ MSC LAMINATES AND COMPOSITES (EGV) INC. By:_____________________________________ Title:__________________________________ MSC WALBRIDGE COATINGS INC. By:_____________________________________ Title:__________________________________ MSC SPECIALTY FILMS INC. By:_____________________________________ Title:__________________________________ MSC PINOLE POINT STEEL INC. - 4 - By:_____________________________________ Title:__________________________________ SOLAR-GARD INTERNATIONAL, INC. By:_____________________________________ Title:__________________________________ MSC PRE FINISH METALS (PP) INC. By:_____________________________________ Title:__________________________________ - 5 - EX-4.(D) 3 dex4d.txt THIRD AMENDMENT DATED JANUARY 13, 2000 EXHIBIT 4(d) THIRD AMENDMENT TO CREDIT AGREEMENT THIS THIRD AMENDMENT (this "Amendment") dated as of January 13, 2000 is entered into by and among Material Sciences Corporation, a Delaware corporation (the "Company"), the lenders who are party to the Credit Agreement referred to below (the "Banks"), and Bank of America, N.A. (formerly known as Bank of America National Trust and Savings Association), as letter of credit issuing bank and as Agent for the Banks (herein, in such latter capacity, the "Agent"). W I T N E S S E T H : WHEREAS, the Company, the Banks and the Agent are parties to certain Credit Agreement dated as of December 12, 1997, as amended April 30, 1998 and October 15, 1998 (the "Credit Agreement;" terms used but not otherwise defined herein are used herein as defined in the Credit Agreement); WHEREAS, the Company desires to amend the Credit Agreement in certain respects in connection with a guarantee to be issued by MSC Walbridge Coatings Inc.; and WHEREAS, subject to the terms and conditions set forth herein, the Agent and the Banks are willing to amend the Credit Agreement in certain respects; NOW, THEREFORE, in consideration of the premises, and intending to be legally bound hereby, the Company, the Agent and the Banks hereby agree as follows: Section 1. Amendment of Schedule 8.5. In reliance on the Company's warranties set forth in Section 2 below, as of the date hereof the Credit Agreement is hereby amended by replacing the current Schedule 8.5 attached to the Credit Agreement with the Schedule 8.5 attached hereto. Section 2. Warranties. To induce the Agent and the Banks to enter into this Amendment, the Company warrants to the Agent and the Banks as of the date hereof that: (a) The representations and warranties contained in Article VI of the Credit Agreement and in the other Loan Documents are true and correct in all material respects on and as of the date hereof (except to the extent such representations and warranties expressly refer to an earlier date); and (b) No Default or Event of Default has occurred and is continuing. Section 3. General. (a) As hereby modified, the Credit Agreement shall remain in full force and effect and is hereby ratified, approved and confirmed in all respects. (b) The provisions of this Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Amendment without the prior written consent of the Agent and each Bank. (c) This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, and each such counterpart, when so executed, shall be deemed to be an original, but all such counterparts shall together constitute one and the same Amendment. ****** Delivered at Chicago, Illinois, as of the date and year first above written. MATERIAL SCIENCES CORPORATION By: ________________________________ Title:_______________________________ BANK OF AMERICA, N.A., as Agent By: ________________________________ Title:_______________________________ BANK OF AMERICA, N.A., as Bank By: ________________________________ Title:_______________________________ THE NORTHERN TRUST COMPANY By: ________________________________ Title:_______________________________ SCHEDULE 8.5 ------------ PERMITTED INDEBTEDNESS ---------------------- 1. Subordinated Convertible Notes issued in connection with the acquisition of the Capital Stock of Solar-Gard International, Inc. in the aggregate principal amount of approximately $5,021,000.00 as of November 30, 1997: Subordinated Convertible Notes Due September 8, 1998 Subordinated Convertible Notes Due September 8, 1999 Subordinated Convertible Notes Due September 8, 2000 2. Subordinated Convertible Notes issued in connection with the acquisition of certain of the assets of Sun-Protective International Corporation in the aggregate principal amount of approximately $1,200,000.00 as of November 30, 1997: Subordinated Convertible Notes Due June 1, 1998 Subordinated Convertible Notes Due June 1, 1999 Subordinated Convertible Notes Due June 1, 2000 Subordinated Convertible Notes Due June 1, 2001 3. Note Agreement, dated as of February 15, 1997, among the Company and Nationwide Life Insurance Company, Nationwide Life & Annuity Insurance Company, Principal Mutual Life Insurance Company, Great-West Life & Annuity Insurance Company and The Great-West Life Assurance Company in the aggregate principal amount of approximately $50,000,000.00 as of November 30, 1997. 4. Subsidiary Guaranty, dated as of February 15, 1997, executed by each of the following subsidiaries: MSC Pre Finish Metals Inc., MSC Laminates and Composites (EGV) Inc., MSC Pre Finish Metals (EGV) Inc., MSC Pre Finish Metals (MV) Inc., MSC Pre Finish Metals (MT) Inc., MSC Laminates and Composites Inc., MSC Walbridge Coatings Inc., MSC Specialty Films Inc. and Solar-Gard International, Inc. 5. The MSC Guaranty dated as of July 24, 1986 by Material Sciences Corporation in favor of the lenders to Walbridge Coatings as amended by the Amendment and Consent Agreement dated as of April 23, 1992, among Walbridge Coatings, Bethlehem Steel Corporation, EGL Steel, Inc., Inland Steel Industries, Inc., Inland Steel Company, Inland Steel Electrogalvanizing Corporation, Material Sciences Corporation, MSC Pre Finish Metals Inc. (f/k/a Pre Finish Metals Incorporated), MSC Walbridge Coatings, Inc. (f/k/a Pre Finish Metals (EG) Incorporated), the banks under the Term Loan Agreement, and Creditanstalt-Bankverein. The PFM Guaranty dated as of July 24, 1986 by MSC Pre Finish Metals Inc. (f/k/a Pre Finish Metals Incorporated) in favor of the lenders to Walbridge Coatings as amended by the Amendment and Consent Agreement dated as of April 23, 1992, among Walbridge Coatings, Bethlehem Steel Corporation, EGL Steel, Inc., Inland Steel Industries, Inc., Inland Steel Company, Inland Steel Electrogalvanizing Corporation, Material Sciences Corporation, MSC Pre Finish Metals Inc. (f/k/a Pre Finish Metals Incorporated), MSC Walbridge Coatings, Inc. (f/k/a Pre Finish Metals (EG) Incorporated), the banks under the Term Loan Agreement, and Creditanstalt-Bankverein. Aggregate principal amount of the partnership debt totaled approximately $2,500,000.00 as of November 30, 1997. 6. Agreement dated as of May 30, 1986, among Material Sciences Corporation, Corporate Property Associates and Corporate Property Associates 2. 7. Lease and Agreement dated as of December 1, 1980, between Line 6 Corp. and MSC Pre Finish Metals Inc. (f/k/a Pre Finish Metals Incorporated), relating to Walbridge, Ohio facility, as amended by the First Amendment to Lease and Agreement dated as of May 30, 1986, between Corporate Property Associates and Corporate Property Associates 2 and MSC Pre Finish Metals Inc. (f/k/a Pre Finish Metals Incorporated). 8. Sublease and Lease dated as of March 31, 1986, between MSC Finish Metals Inc. (f/k/a Pre Finish Metals Incorporated) and Walbridge Coatings, an Illinois Partnership. 9. Lease Guaranty dated as of May 30, 1986, from Material Sciences Corporation to Corporate Property Associates and Corporate Property Associates 2. 10. Letters of Credit issued by Bank of America relating to Midco, Fisher Callo and the Ohio Worker's Compensation program. 11. Promissory Note, dated as of July 14, 1997, in favor of Solar Shield Pty Ltd., due July 19, 1998, in the aggregate amount of approximately $1,117,000 as of November 30, 1997. 12. Promissory Note to be issued to Colorstrip in connection with the Acquisition Agreement in the aggregate principal amount of $64,082,000. 13. Repayment Guarantee, dated as of January 18, 2000, by MSC Walbridge Coatings Inc. in favor of National City Bank. EX-4.(E) 4 dex4e.txt FOURTH AMENDMENT & WAIVER DATED APRIL 20, 1997 EXHIBIT 4(e) FOURTH AMENDMENT DATED AS OF APRIL 20, 2001 TO CREDIT AGREEMENT DATED AS OF DECEMBER 12, 1997 This Fourth Amendment and Waiver (this "Amendment"), dated as of April 20, 2001, is made by and among MATERIAL SCIENCES CORPORATION, a Delaware corporation (the "Company"), the financial institutions party hereto (the "Banks"), and Bank of America, N.A., as agent for the Banks (in such capacity, the "Agent"). Unless otherwise defined, terms defined in the Credit Agreement shall have the same respective meanings when used herein. W I T N E S S E T H: ------------------- WHEREAS, the Company, the Banks and the Agent are parties to that certain Credit Agreement, dated as of December 12, 1997 (as amended or modified and in effect on the date hereof, the "Credit Agreement"); WHEREAS, the Company has requested that the Banks and the Agent agree to amend or modify the Credit Agreement as set forth herein; and WHEREAS, the Banks and the Agent are willing to amend or modify the Credit Agreement on the terms and conditions contained herein. NOW, THEREFORE, in consideration of the premises, the mutual covenants herein contained and other good and valuable consideration (the receipt, adequacy and sufficiency of which is hereby acknowledged), the parties hereto, intending legally to be bound, hereby agree as follows: ARTICLE I AMENDMENTS ---------- The Credit Agreement is amended as follows: (a) Article I of the Credit Agreement is hereby amended so as to add the following definitions: "Bekaert" means Bekaert Corporation, a Delaware corporation (or N.V. ------- Bekaert, S.A., a Belgium corporation, or a subsidiary thereof). "ISF" means Innovative Specialty Films, LLC, a Delaware limited --- liability company comprising the joint venture structured pursuant to the ISF Joint Venture Agreement. "ISF Closing" means the date the ISF Transaction is consummated. ----------- "ISF Joint Venture Agreement" means the Contribution and Joint Venture --------------------------- Formation Agreement dated as of October 15, 1998 between MSC/SFI and Bekaert. "ISF Letter of Intent" means a Letter of Intent among the Company, -------------------- Bekaert, MSC/SFI and ISF relating to the ISF Transaction (The ISF Letter of Intent may be entered into after the date of the Fourth Amendment, it being understood that upon execution thereof, the Company shall promptly furnish a copy thereof to the Banks.) "ISF Transaction Agreement" means the definitive agreement(s) ------------------------- evidencing the ISF Transaction. "ISF Net Cash Proceeds" means the cash proceeds received by the --------------------- Company from the ISF Closing, net of taxes, expenses and other amounts. "ISF Transaction" means the transaction pursuant to which the MSC/SFI --------------- Net Assets shall be combined with ISF or its business, resulting in the ISF Net Cash Proceeds. "MSC/SFI" means MSC Specialty Films, Inc., a Subsidiary of the ------- Company. "MSC/SFI Net Assets" means the assets of MSC/SFI, together with ------------------ related liabilities consisting of third party debt and ordinary course payables and accruals, as represented by the financial statements of MSC/SFI dated February 28, 2001 (a copy of which the Company warrants have been furnished to the Banks). (b) Article I of the Credit Agreement is further amended so that the definition of "Adjusted EBITDA" shall read in its entirety as follows: "Adjusted EBITDA" means, for any period, the Adjusted Net Income --------------- for such period, plus ---- (A) the aggregate amount deducted in determining such Adjusted Net Income in respect of (i) interest expense, (ii) income taxes, (iii) depreciation, (iv) amortization, (v) losses of Joint Ventures, as reflected in the consolidated income statement of the Company for such period, and (vi) any extraordinary items of loss under GAAP for such period and other non-recurring items of loss for such period, less ---- (B) the aggregate amount added in determining such Adjusted Net Income in respect of (i) income of Joint Ventures, as reflected in the consolidated income statement of the Company for such period, and (ii) any extraordinary items of gain under GAAP for such period and other non-recurring items of gain for such period. Adjusted EBITDA shall be determined so as to include cash dividends and other cash distributions received by the Company or its Subsidiaries from Joint Ventures during such period. Interest expense shall include, without limitation, the portion of any obligation under capital leases allocable to interest expense in accordance with GAAP, and the portion of any debt discount that shall be amortized in such period. With respect to any period during which an Acquisition was consummated, the Adjusted EBITDA shall be determined as if -2- such Acquisition had occurred at the beginning of such period. After the ISF Closing (if it occurs), Adjusted EBITDA shall exclude 50% of the Adjusted EBITDA attributable to the MSC/SFI Net Assets for the portion of any such period which occurs before the ISF Closing. (c) Article I of the Credit Agreement is further amended so that the definition of "Applicable Margin" shall read in its entirety as follows: "Applicable Margin" as to any Offshore Rate Loan, Base Rate ----------------- Loan or Commitment Fee, means a margin per annum based on the Consolidated Debt to Adjusted EBITDA Ratio, as follows: ====================================================================== Consolidated Debt to Margin for Margin for Adjusted EBITDA Offshore Rate Margin for Base Commitment Ratio (R) Loan Rate Loan Fee ====================================================================== 3.5:1*R 3.000% 1.500% 0.500% ---------------------------------------------------------------------- 3.0:1*R*3.5:1 2.500% 1.000% 0.375% ---------------------------------------------------------------------- 2.50:1*R*3.0:1 2.250% 0.750% 0.375% ---------------------------------------------------------------------- 2.00:1*R*2.50:1 2.000% 0.500% 0.250% ---------------------------------------------------------------------- R*2.00:1 1.750% 0.250% 0.250% ====================================================================== * equals to less than For purposes of the foregoing table, "R" means the "Consolidated Debt to Adjusted EBITDA Ratio." The Applicable Margin will be adjusted, based on the Consolidated Debt to Adjusted EBITDA Ratio as of the last day of each fiscal quarter, as reflected in the Compliance Certificate furnished pursuant to subsection 7.2(b), such adjustment to occur on the first day of the calendar month immediately succeeding the calendar month in which the Compliance Certificate is received; provided, that if the Company fails to deliver a Compliance Certificate by the date required pursuant to subsection 7.2(b), the margin in the top row shall apply until such Compliance Certificate is delivered. Notwithstanding the foregoing, for the period from April 20, 2001 to the date the Agent shall have received the Compliance Certificate for the quarter ending August 31, 2001, the Applicable Margin for Base Rate Loans shall be 1.75% per annum, the Applicable Margin for Offshore Rate Loans shall be 3.25% per annum, and the Applicable Margin for the Commitment Fee shall be 0.50% per annum. (d) Article I of the Credit Agreement is further amended so that the definition of "Combined Commitment" shall read in its entirety as follows: "Combined Commitment" means $50,000,000 as such amount may be ------------------- from time to time reduced under Sections 2.5 or 2.7 of this Agreement or pursuant to the Fourth Amendment to this Agreement. -3- (e) Article I of the Credit Agreement is further amended so that the definition of "Commitment" shall read in its entirety as follows: "Commitment" means, with respect to (i) The Northern Trust ---------- Company, $13,888,888.88 and (ii) Bank of America, $36,111,111.12, in each case as the same may be reduced pursuant to Sections 2.5 or 2.7 or as a result of one or more assignments under Section 12.8, or pursuant to the Fourth Amendment to this Agreement. (f) Article I of the Credit Agreement is further amended so that the definition of "Consolidated Debt" shall read as follows: "Consolidated Debt" means, at any time, all Indebtedness of the ----------------- Company and its Subsidiaries on a consolidated basis. (g) Article I of the Credit Agreement is further amended by adding thereto a definition of "Consolidated Debt to Adjusted EBITDA Ratio" as follows: "Consolidated Debt to Adjusted EBITDA Ratio" means as of any ------------------------------------------ date of determination, the ratio of (i) total consolidated Indebtedness of the Company on such date to (ii) Adjusted EBITDA for the most recent period of four consecutive fiscal quarters then ended. (h) Article I of the Credit Agreement is further amended so as to add thereto a definition of "Fixed Charge Coverage Ratio", as follows: "Fixed Charge Coverage Ratio" means for any period the ratio of: --------------------------- (A)(i) Adjusted EBITDA plus consolidated operating lease payments of the Company, less consolidated capital expenditures of the ---- Company for such period, less consolidated net cash income taxes paid ---- in cash during such period, to (B)(i) consolidated operating lease payments of the Company during such period, plus (ii) consolidated net interest expense ---- (including rent allocable to interest expense under capital leases and amortization of debt discount) of the Company paid in cash during such period, plus (iii) principal payments during such period on consolidated long-term Indebtedness of the Company (including the current portion thereof). After the ISF Closing (if it occurs), the Fixed Charge Coverage Ratio shall be determined so as to exclude fixed charges attributable to the MSC/SFI Net Assets for any portion of such period which occurs before the ISF Closing, such fixed charges so attributable to the MSC/SFI Net Assets to consist of operating lease payments, capital expenditures, net cash income taxes, interest paid by the Company during such period on up to $20,000,000 of principal of the Revolving Loans (but only to the extent such principal was outstanding, as -4- calculated by the Company, with the concurrence of the Agent), interest expense with respect to Indebtedness (other than the Revolving Loans), and principal payments on long-term Indebtedness (including the current portion thereof). For any period during which an Acquisition shall have been consummated, the Fixed Charge Coverage Ratio shall be determined as if such Acquisition were consummated at the beginning of such period. (i) Article I of the Credit Agreement is further amended so that the definition of "L/C Commitment" shall read in its entirety as follows: "L/C Commitment" means the commitment of the Issuing Bank -------------- to Issue, and the commitment of the Banks severally to participate in, Letters of Credit (including any Time Drafts which have been accepted) from time to time Issued or outstanding under Article III, in an aggregate amount not to exceed the amount of $10,000,000, as the same shall be reduced as a result of a reduction in the L/C Commitment pursuant to Section 2.5; provided that the L/C Commitment is a part of the Combined Commitment, rather than a separate, independent commitment. (j) Section 2.5 of the Credit Agreement is hereby amended so that the third sentence shall read in its entirety as follows: Any reduction of the Combined Commitment shall be applied to each Bank according to its Pro Rata Share. (k) Section 6.11 of the Credit Agreement is hereby amended to read in its entirety as follows: 6.11 Financial Condition. (a) The audited consolidated ------------------- financial statements of the Company and its Subsidiaries dated February 28, 2001, and the related consolidated statements of income or operations, shareholders' equity and cash flows for the fiscal year ended on that date: (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby; and (ii) fairly present the financial condition of the Company and its Subsidiaries as of the respective dates thereof and results of operations for the period covered thereby; and (b) since February 28, 2001, there has been no Material Adverse Effect. (l) Section 7.1 of the Credit Agreement is hereby amended so as to add subsections (d), (e) and (f) as follows: (d) so long as the Consolidated Debt to Adjusted EBITDA Ratio exceeds 2.75:1.0, not later than 45 days after the end of each month (commencing with the month of April, 2001), a copy of an unaudited consolidated and consolidating balance sheet of the Company and its Subsidiaries as at the end of such month and the related consolidated and consolidating statements of income and cash flows for such month, certified by -5- a Responsible Officer as having been developed and used in connection with the preparation of the financial statements referred to in subsection 7.1(a); (e) commencing with the fiscal year ended December 31, 2000, as soon as available, but not later than 90 days after the end of each fiscal year of ISF (or 150 days in the case of its fiscal year ended December 31, 2000), a copy of the audited consolidated balance sheet of ISF and its Subsidiaries as at the end of such year and the related consolidated statements of income or operations, shareholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of an Independent Auditor, which report shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years. Such opinion shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of the ISF's or any Subsidiary's records; and (f) within 45 days after the end of each of the first three fiscal quarters of each fiscal year (commencing with the fiscal quarter ended March 31, 2001), a copy of the unaudited consolidated balance sheets of ISF and its Subsidiaries, and the related consolidated statements of income, shareholders' equity and cash flows for such quarter, all certified by a Responsible Officer as having been developed and used in connection with the preparation of the financial statements referred to in subsection 7.1(e). (m) Section 7.2(b) of the Credit Agreement is hereby amended to read in its entirety as follows: (b) concurrently with the delivery of the financial statements referred to in subsections 7.1(a) and (b), a Compliance Certificate executed by a Responsible Officer (it being understood that such Compliance Certificate shall be revised to reflect the Fourth Amendment); (n) Section 8.4 of the Credit Agreement is hereby amended by adding the following at the end of such Section: Notwithstanding the foregoing, on and after April 20, 2001, the Company shall not, and shall not permit any Subsidiary to, make any Investment pursuant to subsections 8.4(d), (e) or (k), except for the following: (i) the ISF Transaction, (ii) Investments in Joint Ventures entered into before such date (the "Existing JV's") in an aggregate amount not exceeding $3,500,000 for all such Existing JV's, (iii) Investments in a Joint Venture in Asia to be entered into after such date ("Asian JV") in an aggregate amount not exceeding $500,000 for the Asian JV, (iv) an Investment in ISF of up to $3,500,000 to permit ISF to acquire NeoVac (the "NeoVac Investment"), and (v) the Acquisition of GAC for cash consideration not exceeding $7,000,000; provided, however, that after the ISF Closing, the Investments of the --------- ------- Company -6- and its Subsidiaries made after April 20, 2001 in Joint Ventures (whether the Existing JV's, or the Asian JV, or the Joint Venture resulting from the ISF Transaction) may be increased up to (but not in excess of) $8,000,000 for all such Joint Ventures (in addition to the NeoVac Investment). (o) Section 8.5 of the Credit Agreement is hereby amended by adding the following at the end of such Section: Notwithstanding the foregoing, on and after April 20, 2001, the Company shall not, and shall not permit any Subsidiary to, incur any Indebtedness pursuant to subsections 8.5(d), (e) and (f), except for Indebtedness of up to $500,000 in connection with capital leases entered into after such date. (p) Section 8.9 of the Credit Agreement is hereby amended by adding the following at the end of such Section: Notwithstanding the foregoing, on and after April 20, 2001, the Company shall not, and shall not permit any Subsidiary to, enter into any Joint Venture (other than the ISF Transaction and the Asian JV). (q) Section 8.10(b) of the Credit Agreement is amended by substituting "$7,000,000" for "$10,000,000". (r) Section 8.11 of the Credit Agreement is hereby amended to read in its entirety as follows: 8.11 Restricted Payments. After April 20, 2001, the Company ------------------- shall not declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any shares of any class of its capital stock, or purchase, redeem or otherwise acquire for value any shares of its capital stock or any warrants, rights or options to acquire such shares, now or hereafter outstanding, except that the Company may declare and make dividend payments or other distributions payable solely in its common stock. (s) Article VIII of the Credit Agreement is hereby amended by adding thereto Section 8.16 as follows: 8.16 ISF. Notwithstanding any provisions herein to the --- contrary, the Company shall not incur or permit any Subsidiary to incur any Guaranty Obligation with respect to any Indebtedness of ISF. (t) Article VIII of the Credit Agreement is amended by adding thereto Section 8.17 as follows: -7- 8.17 Minimum Cash Balance. After the ISF Closing until -------------------- compliance by the Company with the financial tests in Sections 9.1, 9.2 and 9.3 hereof for the fiscal quarter ending February 28, 2002 (as evidenced by a Compliance Certificate received by the Agent for such quarter), the Company shall not at any time permit the balance of readily available cash on deposit with one or more of the Banks, to be less than $10,000,000. (u) Section 9.1 of the Credit Agreement is hereby amended to read in its entirety as follows: 9.1 Minimum Net Worth. The Company shall not permit at any ----------------- time the consolidated net worth of the Company and its Subsidiaries to be less than the sum of (i) $145,000,000 plus (ii) 40% of cumulative consolidated net earnings (but without giving effect to any consolidated net losses) of the Company and its Subsidiaries accruing after February 28, 2001. (v) Section 9.2 of the Credit Agreement is hereby amended to read in its entirety as follows: 9.2 Consolidated Debt to Adjusted EBITDA Ratio. The Company ------------------------------------------ shall not permit, as of the last day of any period consisting of four consecutive fiscal quarters, its Consolidated Debt to Adjusted EBITDA Ratio to be greater than the ratio applicable to such period, as follows: ====================================================================== Ratio Period Ending ---------------=====------------------============-------------------- 4.25:1 May 31, 2001 ---------------------------------------------------------------------- 4.00:1 August 31, 2001 ---------------------------------------------------------------------- 3.25:1 November 30, 2001 ---------------------------------------------------------------------- 2.75:1 February 28, 2002 and thereafter ====================================================================== (w) Section 9.3 of the Credit Agreement is hereby amended to read in its entirety as follows: 9.3 Fixed Charge Coverage Ratio. The Company shall not permit, --------------------------- as of the last day of any period consisting of four consecutive fiscal quarters, its Fixed Charge Coverage Ratio to be less than the ratio applicable to such period, as follows: -8- ====================================================================== Ratio Period Ending --------------=====-------------------------------=============------- 0.95:1 May 31, 2001 ---------------------------------------------------------------------- 1.05:1 August 31, 2001 ---------------------------------------------------------------------- 1.25:1 November 30, 2001 ---------------------------------------------------------------------- 1.50:1 February 28, 2002 and thereafter ====================================================================== (x) Section 10.1 of the Credit Agreement is hereby amended by adding subsection (m) as follows: (m) ISF. At any time after the ISF Closing, (i) the Company's --- equity or voting interest in ISF shall be less than 50% (subject to casting votes reasonably acceptable to the Agent), or ISF shall have any Indebtedness other than up to $10,000,000 of revolving Indebtedness to Bekaert. (y) The Credit Agreement (together with each of the related exhibits, schedules and other Loan Documents) is further amended by substituting "Bank of America, N.A." for "Bank of America National Trust and Savings Association" wherever such words appear, and by substituting "Bank of America" for "BofA" wherever such term appears. (z) The Credit Agreement is further amended by deleting "$115,000,000" opposite the name of Bank of America on the signature pages thereof and by deleting "$25,000,000" opposite the name of The Northern Trust Company on the signature pages thereof. ARTICLE II WAIVER AND CONSENT ------------------ (a) Waiver. The Banks hereby waive any Default or Event of Default ------ arising from noncompliance by the Company as of February 28, 2001 with the provisions of Section 9.2 (Debt to Cash Flow Ratio) and 9.3 (Fixed Charge Coverage Ratio) of the Credit Agreement (as in effect before giving effect to this Amendment); it being understood that the foregoing waiver is specific in time and in intent and does not constitute, nor shall it be construed as, a waiver of any other right, power or privilege under the Credit Agreement, or under any agreement, contract, indenture, document or other instrument mentioned in the Credit Agreement; nor does the foregoing waiver preclude other or further exercise of any other right, power or privilege, nor shall the waiver of any right, power, privilege or default hereunder, or under any agreement, contract, indenture, document, or instrument mentioned in the Credit Agreement, constitute a waiver of any other default of any other term or provision. (b) Consent. Notwithstanding the provisions of Article VIII of the ------- Credit Agreement, the Banks hereby consent to the ISF Transaction, provided, however that -------- ------- -9- (i) prior to the ISF Closing, the Company shall have furnished to the Banks a certified copy of the ISF Transaction Agreement and related documents, (ii) the ISF Closing is on or before June 1, 2001, (iii) concurrent with the ISF Closing, the Company shall receive ISF Net Cash Proceeds in immediately available funds of not less than $35,000,000, (iv) the Company shall immediately apply all of such ISF Net Cash Proceeds to the payment of the Revolving Loans, (v) concurrent with the ISF Closing, the Combined Commitment shall automatically reduce to $20,000,000 (such reduction to be pro rata among the Banks according to their respective Commitments), (vi) after giving effect to the ISF Closing, the Company's equity and voting interest in ISF shall not be less than 50% (subject to casting votes reasonably acceptable to the Agent), and (vi) after giving effect to the ISF Closing, ISF shall have no Indebtedness except as permitted in Section 10.1(m) of the Credit Agreement as herein amended. (c) Release. The Banks further agree that to the extent that the stock ------- of MSC/SFI and/or Solar-Guard International, Inc., is transferred as part of the ISF Transaction, the Guaranties of such Persons pursuant to the Credit Agreement shall be deemed to have been released. ARTICLE III REPRESENTATION AND WARRANTIES ----------------------------- The Company hereby represents and warrants to the Banks and the Agent that: (a) Authorization, etc. The execution, delivery and performance of ------------------- this Amendment are within the Company's corporate authority, have been duly authorized by all necessary corporate action, have received all necessary consents and approvals (if any shall be required), and do not and will not contravene or conflict with any provision of law or of the Certificate of Incorporation or By-laws of the Company or its Subsidiaries, or of any other agreement binding upon the Company or its Subsidiaries or their respective property. (b) Validity. This Amendment constitutes the legal, valid, and binding -------- obligations of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. (c) No Default. Except for any Default or Event of Default which will ---------- be cured by this Amendment becoming effective, no Event of Default has occurred and is continuing or will result from this Amendment. (d) ISF Transaction. (i) The Company has furnished to the Banks a true --------------- and correct copy of the ISF Joint Venture Agreement and financial statements representing the MSC/SFI Net Assets, and (ii) if the ISF Closing occurs, the ISF Net Cash Proceeds shall not be less than $35,000,000. -10- ARTICLE IV CONDITIONS PRECEDENT -------------------- This Amendment shall become effective as of April 20, 2001 (the "Effective Date"), subject, however, to the receipt by the Agent of the following in form and substance satisfactory to the Agent: (a) counterparts of this Amendment (or an executed facsimile copy hereof), executed by the Company and the Banks; (b) evidence of the payment to the Agent in immediately available funds of (i) an amendment fee for the account of each Bank equal to 25 basis points times such Bank's Commitment (based on a Combined Commitment of $50,000,000), (ii) an arrangement fee for the account of the Agent equal to the arrangement fee set forth in a fee letter between the Company and the Agent, and (iii) all legal fees and expenses of the Agent to the extent theretofore invoiced; (c) a certificate of the Secretary or the Assistant Secretary of the Company as to resolutions, and the signatures and incumbency of officers authorized to sign this Amendment; (d) an opinion of Kirkland & Ellis, counsel to the Company, as to the due authorization execution and delivery by the Company of this Amendment; and (e) a certified copy of the ISF Joint Venture Agreement and the financial statements representing the MSC/SFI Net Assets. ARTICLE V MISCELLANEOUS ------------- (a) Restatement (including SwingLine Facility). Promptly following the ----------------------------------------- effectiveness of this Amendment, the parties agree to amend and restate the Credit Agreement so as to (i) provide for a $5 million swingline facility by Bank of America (it being understood that such swingline facility shall be a part of the Combined Commitment rather than a separate, independent commitment), (ii) update schedules, and (iii) reflect the Credit Agreement as amended hereby. (b) Documents Remain in Effect. Except as amended or modified by this -------------------------- Amendment, the Credit Agreement remains in full force and effect and the Company confirms that its representations, warranties, agreements and covenants contained in, and obligations and liabilities under, the Credit Agreement and each of the other Loan Documents are true and correct in all material respects as if made on the date hereof, except where such representation, warranty, agreement or covenant speaks as of a specified date. References to the Credit Agreement in any other document shall be deemed to include a reference to the Credit Agreement as amended or modified hereby, whether or not reference is made to this Amendment. -11- (c) Expenses. The Company covenants to pay to or reimburse the Agent, upon -------- demand, for all reasonable costs and expenses (including legal expenses) in connection with the development, preparation, negotiation, execution and delivery of this Amendment and the Loan Documents. (d) Headings. Section headings used in this Amendment are for convenience -------- of reference only, and shall not affect the construction of this Amendment. (e) Governing Law. This Amendment shall be a contract made under and ------------- governed by the internal laws of the State of Illinois, without giving effect to principles of conflicts of laws. (f) Cumulative Rights. All obligations of the Company and rights of the ----------------- Banks and the Agent, that are expressed herein, shall be in addition to and not in limitation of those provided by applicable law. (g) Severability. Whenever possible, each provision of this Amendment ------------ shall be interpreted in such manner as to be effective and valid under applicable law; but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment. (h) No Forbearance. The Company acknowledges and agrees that the execution -------------- and delivery by the Agent and the Banks of this Amendment shall not be deemed (i) to create a course of dealing or otherwise obligate the Agent or the Banks to forbear or execute similar amendments under the same or similar circumstances in the future, or (ii) to amend, relinquish or impair any right of the Agent or the Banks to receive any indemnity or similar payment from any Person or entity as a result of any matter arising from or relating to this Amendment. (i) Successors and Assigns. This Amendment shall be binding upon and inure ---------------------- to the benefit of the parties and thereto and their respective successors and assigns. No third party beneficiaries are intended in connection with this Amendment. (j) Counterparts. This Amendment may be executed in any number of ------------ counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Each of the parties hereto understands and agrees that this document (and any other document required herein) may be delivered by any party thereto either in the form of an executed original or an executed original sent by facsimile transmission to be followed promptly by mailing of a hard copy original, and that receipt by the Agent of a facsimile transmitted document purportedly bearing the signature of a Bank or the Company shall bind such Bank or the Company, respectively, with the same force and effect as the delivery of a hard copy original. Any failure by the Agent to receive the hard copy executed original of such document shall not diminish the binding effect of receipt of the facsimile transmitted executed original of such document of the party whose hard copy page was not received by the Agent. (k) Entire Agreement. This Amendment, together with the Credit Agreement, ---------------- contains the entire and exclusive agreement of the parties hereto with reference to the matters -12- discussed herein and therein. This Amendment supercedes all prior drafts and communications with respect thereto. This Amendment may not be amended except in accordance with the provisions of Section 12.1 of the Credit Agreement. * * * -13- IN WITNESS WHEREOF, the parties hereto have caused the execution and delivery hereof by their respective representatives thereunto duly authorized as of the date first herein appearing. MATERIAL SCIENCES CORPORATION By: /s/ James J. Waclawik, Sr. ---------------------------------- Name: James J. Waclawik, Sr. ---------------------------------- Title: CFO ---------------------------------- BANK OF AMERICA, as Agent By: /s/ Kristine D. Hyde ---------------------------------- Name: Kristine D. Hyde ---------------------------------- Title: Vice President ---------------------------------- BANK OF AMERICA, N.A., in its individual corporate capacity By: /s/ Chris D. Buckner ---------------------------------- Name: Chris D. Buckner ---------------------------------- Title: Vice President ---------------------------------- THE NORTHERN TRUST COMPANY By: /s/ Fredric McClendon ---------------------------------- Name: Fredric McClendon ---------------------------------- Title: Vice President ---------------------------------- -14- GUARANTOR ACKNOWLEDGMENT ------------------------ The undersigned, each a guarantor or third party pledgor with respect to the Company's obligations to the Agent and the Banks under the Credit Agreement, each hereby (i) acknowledge and consent to the execution, delivery and performance by the Company of the foregoing Fourth Amendment to the Credit Agreement ("Amendment"), and (ii) reaffirm and agree that the respective --------- guaranty, third party pledge or security agreement to which the undersigned is party and all other documents and agreements executed and delivered by the undersigned to the Agent and the Banks in connection with the Credit Agreement are in full force and effect, without defense, offset or counterclaim. (Capitalized terms used herein have the meanings specified in the Amendment.) GUARANTORS ---------- MSC Pre Finish Metals Inc. MSC Pre Finish Metals (EGV) Inc. MSC Pre Finish Metals (MV) Inc. MSC Pre Finish Metals (MT) Inc. MSC Laminates and Composites Inc. MSC Laminates and Composites (EGV) Inc. MSC Walbridge Coatings Inc. MSC Specialty Films, Inc. MSC Pinole Point Steel Inc. Solar-Gard International, Inc. MSC Pre Finish Metals (PP) Inc. Dated: April 20, 2001 By: /s/ James J. Waclawik, Sr. -------------------------------- Title: CFO -------------------------------- -15- EX-13 5 dex13.txt PORTIONS OF THE 2001 ANNUAL REPORT EXHIBIT 13 Portions of the 2001 Annual Report to Shareowners Incorporated by Reference in Parts I, II and IV ------------------------------------------------- Report of Independent Public Accountants To the Shareowners and Board of Directors of Material Sciences Corporation: We have audited the accompanying consolidated balance sheets of Material Sciences Corporation (a Delaware Corporation) and subsidiaries as of February 28, 2001 and February 29, 2000, and the related consolidated statements of income (loss), cash flows, shareowners' equity and comprehensive income (loss) for each of the three fiscal years in the period ended February 28, 2001. 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 auditing standards generally accepted in the United States. 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 Material Sciences Corporation as of February 28, 2001 and February 29, 2000, and the results of its operations and its cash flows for each of the three fiscal years in the period ended February 28, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Arthur Andersen LLP Chicago, Illinois April 20, 2001 21 Management's Discussion and Analysis of Financial Condition and Results of Operations --------------------------------------------- Material Sciences Corporation and Subsidiaries (In thousands) [PIE CHART APPEARS HERE] MSC Sales by Industry for fiscal 2001 Energy Conservation 13% Appliance and Other 16% Transportation Aftermarket and Other 10% Automotive OEM 19% Building and Construction 42% RESULTS OF OPERATIONS Fiscal 2001 Compared with Fiscal 2000 Net sales for MSC in fiscal 2001 decreased 4.9% to $481,976 from $507,014 in fiscal 2000 due to lower sales at the galvanizing operations. MSC's gross profit margin was 15.8% in fiscal 2001 as compared with 19.4% in the prior year. The decrease in gross profit margin was primarily the result of continued higher steel costs at Pinole Point Steel than could be recovered through price increases to customers, lower sales volume at the galvanizing operations, as well as increased utility costs of $4,224 for all segments. Selling, general and administrative ("SG&A") expenses were 14.2% of net sales in fiscal 2001 versus 12.3% of net sales in fiscal 2000. The higher SG&A percentage was due mainly to continued higher research and development and marketing spending to support new product and market initiatives for the Engineered Materials and Specialty Films segments. Fiscal 2000 included a pro rata portion of compensation expense totaling approximately $1,300 associated with the Company's 1998 Long-Term Incentive/Leverage Stock Awards Program. Fiscal 2001 income (loss) before income taxes was a loss of $1,836 versus income of $25,342 in fiscal 2000. Management is currently exploring strategic alternatives for its hot-dip galvanizing operation ("Pinole Point Steel"), formerly included in the Coated Products and Services segment, and therefore is evaluating and disclosing Pinole Point Steel as a separate segment. The Company's four principal business segments are Engineered Materials, Specialty Films, Coated Products and Services and Pinole Point Steel (see Note 11). The Engineered Materials segment includes the laminates and composites product group. This segment combines layers of metal and other materials designed to meet specific customer requirements for the automotive, electronics, lighting and appliance markets. The Specialty Films segment provides solar control and safety window film, as well as industrial films used in a variety of products. The Coated Products and Services segment includes the coil coating and electrogalvanizing product groups. This segment provides galvanized and prepainted products and services primarily to the automotive, building and construction, appliance and lighting markets. The Pinole Point Steel segment includes the hot-dip galvanizing product group. This segment provides galvanized and prepainted product primarily to the building and construction market. [PIE CHART APPEARS HERE] MSC International Sales by Location for fiscal 2001 Latin America 12% Canada 34% Asia-Pacific 33% Europe 14% Australia 7% Sales outside the United States accounted for 10% of total revenue in fiscal 2001. Engineered Materials Net sales of Engineered Materials in fiscal 2001 increased 9.4% to $87,044 as compared with $79,576 in fiscal 2000. Higher shipments of Quiet Steel to the automotive and electronics markets were the main contributors to the growth, offset, in part, by lower shipments of disc brake noise damper material. For fiscal 2001, income before income taxes was $9,372, a 21.6% decline from $11,959 in fiscal 2000. The decrease was due mainly to an unfavorable product mix, inefficiencies associated with the program launch of Quiet Steel for automotive body panels, and planned higher research and development and marketing spending to expand product development and market penetration, both domestically and internationally. During September 2000, a subsidiary of the Company signed a letter of intent to acquire Goldbach Automobil Consulting ("GAC"), a European disc brake noise damper distributor and stamper. The transaction is expected to close in the second quarter of fiscal 2002, subject to completion of due diligence and negotiation of definitive agreements. The acquisition has been structured with an initial payment of $6,000 (payable in Euros) at closing and contingent consideration based upon future earnings of the operation. During November 2000, a subsidiary of the Company signed a definitive agreement with Tekno S.A., the leading coil coating operator in Brazil, to retrofit their existing line with laminating technology for the purpose of manufacturing constrained layer composites. This line will produce Quiet Steel and disc brake noise damper material for sale and distribution to the South American market. The installation of the equipment for this line was completed in March 2001. Specialty Films Sales of Specialty Films' materials for fiscal 2001 grew 14.8% to $58,306 from $50,788 in fiscal 2000. Higher shipments of solar control window film in the U.S. and internationally, as well as greater sales of industrial products, contributed to the increase. Income before income taxes for Specialty Films increased 31.2% to $9,776 this fiscal year as compared with $7,452 in fiscal 2000. The growth was due to higher sales volume, improved performance at Innovative Specialty Films, LLC ("ISF"), the Company's joint venture with Bekaert Corporation, a fiscal 2001 third quarter litigation settlement, offset slightly by higher spending in research and development and marketing. 22 Coated Products and Services During fiscal 2001, net sales of Coated Products and Services decreased 5.2% to $191,103 from $201,635 last fiscal year. Higher sales of appliance and lighting products were offset by a decrease in electrogalvanizing demand for the automotive market. Income before income taxes in fiscal 2001 decreased 38.2% to $12,895 from $20,851 last fiscal year. The decrease in demand for electrogalvanizing material and higher utility costs of $2,056 were the main contributors to the decrease. Electrogalvanizing capacity utilization decreased to 71% in fiscal 2001 versus 92% last year, while coil coating capacity utilization in fiscal 2001 was 82% compared with 84% in fiscal 2000. On July 23, 1999, a subsidiary of Bethlehem Steel Corporation ("BSC") sold a portion of its ownership interest in Walbridge Coatings ("Partnership") to a subsidiary of the LTV Corporation ("LTV"). LTV purchased a 16.5% equity interest in the Partnership from BSC, providing LTV access to 33.0% of the facility's available line time. This change in ownership provided MSC with a more diversified customer base, as well as improved the likelihood of higher facility utilization. In conjunction with the sale, the Partnership term was extended from December 31, 2001 to December 31, 2004. The Company maintained its 50% ownership interest in the Partnership. The Partnership also maintained its long-term toll processing agreement with ISPAT Inland Inc. (a former partner), which expires on December 31, 2001. On December 29, 2000, LTV filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Sales to LTV through the Partnership were $12,378 in fiscal 2001. Although the Company believes that LTV's participation in the Partnership and the Partnership's processing services for LTV are valuable to the LTV estate, there currently can be no assurance that the LTV bankruptcy will not result in a disruption of such relationships. As of February 28, 2001, the Partnership is continuing to make shipments to LTV under special credit arrangements. On March 21, 2001, the bankruptcy court approved debtor in possession financing for LTV. The Partnership has no pre-petition receivables outstanding and $420 of post-petition receivables outstanding as of February 28, 2001. MSC Pre Finish Metals Inc. has $274 of pre-petition receivables outstanding that are fully reserved and no post-petition receivables outstanding as of February 28, 2001. Pinole Point Steel Net sales for Pinole Point Steel in fiscal 2001 decreased to $149,810, 15.6% lower than $177,557 last fiscal year. The decrease in sales was due to an overall weak West Coast building and construction market, inadequate steel deliveries from suppliers in early fiscal 2001 and higher customer inventory levels. Loss before income taxes for the year was $22,027 versus $3,490 in fiscal 2000. The decrease was mainly due to lower shipments of galvanized material, gross margin degradation as a result of higher material costs than could be recovered through customer price increases, as well as higher utility costs of $939. Loss before income taxes included an allocation of consolidated interest expense totaling $8,844 in fiscal 2001 and $8,332 in fiscal 2000. The allocations were based on the debt associated with the original purchase of Pinole Point Steel in December 1997 and Pinole Point Steel's subsequent cash flow. In fiscal 2002, margins are expected to improve due to the decrease in the cost of substrate, partially attributable to the Company's procurement strategy to qualify additional suppliers. Total Other (Income) and Expense, Net and Income Taxes Total other (income) and expense, net, was an expense of $9,733 in fiscal 2001 as compared with $11,058 in the prior year. Interest expense, net, increased $602 between fiscal years due to higher debt levels and a slight increase in variable interest rates. In September 2000, the Company entered into a forward contract for 15 million DEM related to the potential acquisition of GAC that was not consummated in fiscal 2001. The forward contract was executed on January 26, 2001 and resulted in a gain of $514. Equity in Results of Joint Ventures, including ISF and the Partnership, was a net loss of $405 in fiscal 2001 as compared with a net loss of $1,629 in fiscal 2000. Equity in Results of ISF in fiscal 2001 was income of $789 as compared with a loss of $357 in fiscal 2000. Equity in Results of the Partnership in fiscal 2001 was a loss of $1,194 versus a loss of $1,272 last year. MSC's effective income tax rate in fiscal 2001 was 62.7% (benefit) due to the amount of loss before income taxes relative to tax credits and other permanent items versus 34.0% (provision) in fiscal 2000. Fiscal 2000 Compared with Fiscal 1999 Net sales in fiscal 2000 grew 7.5% to $507,014 from $471,651 in fiscal 1999, with all business segments contributing to the year-over-year increase. MSC's gross profit margin was 19.4% in fiscal 2000 as compared with 17.9% in the prior year. This gross profit margin improvement primarily resulted from lower material costs and a favorable product mix. SG&A expenses were 12.3% of net sales in fiscal 2000 versus 11.9% of net sales in fiscal 1999. The higher SG&A percentage was due mainly to an increase in variable compensation expense related to the Company's fiscal 2000 performance. This included $1,300 related to the initial grant of the 1998 Long-Term Incentive/Leverage Stock Awards Program, as the required stock performance level was met in the second quarter of fiscal 2000. Fiscal 2000 income before income taxes increased 57.2% to $25,342 from $16,117 in fiscal 1999. Engineered Materials During fiscal 2000, net sales of Engineered Materials increased 12.0% to $79,576 as compared with $71,034 in fiscal 1999. Significantly higher shipments of disc brake noise damper material to both the original equipment manufacturer ("OEM") and the 23 Management's Discussion and Analysis of Financial Condition and Results of Operations ------------------------------------------- Material Sciences Corporation and Subsidiaries (In thousands) replacement markets, along with increased sales of Quiet Steel to the automotive, electronics and appliance markets contributed to the year- over-year increase. Income before income taxes was $11,959, a 45.2% increase from $8,235 in fiscal 1999. Higher sales, a favorable product mix and material cost reductions were the main drivers of income growth. Specialty Films Sales of Specialty Films' materials for fiscal 2000 grew 7.5% to $50,788 from $47,234 in fiscal 1999. The increase was due mainly to higher shipments of window film to both domestic and international markets, as well as greater sales of industrial products. On October 15, 1998, a subsidiary of MSC and Bekaert Corporation formed a joint venture, ISF, for the research, development, manufacture and sale of sputtered film. Comparable sales for fiscal 2000, excluding sputtered film sales made through the ISF joint venture, increased 18.0% over the prior year. Income before income taxes for Specialty Films increased 43.1% to $7,452 in fiscal 2000 as compared with $5,209 in fiscal 1999. This gain was due to higher volumes and royalty income received from the ISF joint venture. Coated Products and Services Net sales of Coated Products and Services increased 7.1% to $201,635 in fiscal 2000 from $188,284 in fiscal 1999. Higher sales of appliance and automotive materials contributed to the increase. Income before income taxes in fiscal 2000 of $20,851 was flat with fiscal 1999 primarily due to a change in product mix. Capacity utilization for Coated Products and Services for fiscal 2000 was approximately 85% as compared with 84% in fiscal 1999. Pinole Point Steel Pinole Point Steel net sales in fiscal 2000 increased to $177,557, 6.2% higher than $167,199 in fiscal 1999. The increase was primarily due to greater sales of painted products. Loss before income taxes in fiscal 2000 was $3,490 versus $8,693 in fiscal 1999. Higher sales volume and lower material costs were the main contributors to the growth. Loss before income taxes included an allocation of consolidated interest expense totaling $8,332 in fiscal 2000 and $9,199 in fiscal 1999. The allocations were based on the debt associated with the original purchase of Pinole Point Steel in December 1997 and Pinole Point Steel's subsequent cash flow. Total Other (Income) and Expense, Net and Income Taxes Total other (income) and expense, net, was an expense of $11,058 in fiscal 2000 as compared with expense of $12,248 in the prior year. Interest expense, net, decreased $2,296 between fiscal years due to lower debt levels, and to a lesser extent, favorable changes in variable interest rates. Equity in Results of Joint Ventures was a net loss of $1,629 in fiscal 2000 as compared with a net loss of $1,313 in fiscal 1999. The increase in the loss was mainly due to royalty payments made by the ISF joint venture (which began operating in January 1999) to MSC and Bekaert Corporation. During fiscal 2000, the Internal Revenue Service completed its review of fiscal years 1993 and 1994. In addition, the Company's three-year statute of limitations expired for fiscal 1995 and 1996 for federal income tax purposes. The Company analyzed its income tax reserve position based on these two events and reduced its previously provided income tax reserves by $750 in the fourth quarter of fiscal 2000. MSC's effective income tax rate was 34.0% in fiscal 2000 and 37.0% in fiscal 1999. The decrease in the effective income tax rate was due to the previously mentioned income tax reserve reduction. Liquidity and Capital Resources MSC generated $12,607 of cash from operating activities in fiscal 2001 as compared with $49,134 in the prior fiscal year. The decrease in cash generation was due mainly to increased working capital as a result of higher levels of inventory and lower accounts payable and accrued expenses, as well as a decrease in net income. Earnings before interest, taxes, depreciation and amortization ("EBITDA") decreased to $38,160 in fiscal 2001 as compared with $64,034 in fiscal 2000. In fiscal 2001, MSC invested $13,205 in capital improvement projects versus $13,864 in fiscal 2000. In addition, the Company invested $3,759 in joint ventures in fiscal 2001 compared with $1,253 last fiscal year. The increase was due to the addition of a slitting line at the Partnership. Fiscal 2002 capital expenditures are projected to be approximately $15,000. MSC's total debt increased by $14,709 to $138,293 in fiscal 2001 as a result of lower income, higher working capital and purchases of the Company's stock. As of February 28, 2001, the Company maintained a $90,000 committed line of credit, which expires December 20, 2002, or earlier, at MSC's option. There was $19,000 outstanding under this committed line of credit as of February 28, 2001. The Company also had outstanding letters of credit totaling $4,740 against this line, leaving an available line of credit of $66,260 as of February 28, 2001, subject to certain loan covenants. In addition, MSC maintained a $10,000 uncommitted line of credit, which expires March 14, 2002. There was $5,500 outstanding under the uncommitted credit line as of February 28, 2001. The Company was not in compliance with two financial covenants as of February 28, 2001. The banks waived the default and have amended the line of credit agreement effective April 20, 2001. The amendment provides for one $50,000 committed line of credit, eliminating the $90,000 committed line of credit and the $10,000 uncommitted line. At the Company's option, interest is at the bank's reference rate (9.50% as of February 28, 2001), or at IBOR, 24 plus a margin (3.25% as of April 20, 2001). The financial covenants have been amended to include maintaining a minimum net worth ($145,000, plus 40% of cumulative consolidated net income accruing after February 28, 2001); consolidated debt to cash flow (4.25 as of May 31, 2001, 4.00 as of August 31, 2001, 3.25 as of November 30, 2001 and 2.75 as of February 28, 2002 and thereafter); and a fixed charge coverage ratio (0.95 as of May 31, 2001, 1.05 as of August 31, 2001, 1.25 as of November 30, 2001, and 1.50 as of February 28, 2002 and thereafter). In addition, the amendment prohibits the Company from paying dividends and repurchasing its stock and places certain limitations on the Company's ability to make acquisitions and investments. On September 23, 1999, MSC's Board of Directors authorized the repurchase of up to one million shares of the Company's common stock, of which 468,900 shares were purchased through February 29, 2000. During the first six months of fiscal 2001, the Company purchased the remaining 531,100 shares at an average purchase price of $10.30 per share. On June 22, 2000, MSC's Board of Directors authorized a new program to repurchase up to one million shares of the Company's common stock. As of February 28, 2001, 695,788 shares were purchased under this new authorization at an average purchase price of $10.45 per share. MSC had a capital lease obligation of $1,465 as of February 28, 2001 and $1,968 as of February 29, 2000, relating to a facility that the Company subleases to the Partnership. In addition, MSC is contingently responsible for 50% of ISF's financing requirements. As of February 28, 2001, ISF debt was $295 as compared with $183 as of February 29, 2000. In fiscal 2002, the Company believes that its cash flow from operations, plus available financing, potential divestitures and cash on hand, will be sufficient to fund its working capital needs, capital expenditures, acquisitions and debt payments. MSC continues to participate in the implementation of settlements with the government for the remediation of various Superfund sites. The status of the Superfund sites are described in the accompanying Notes to Consolidated Financial Statements (see Note 3). MSC believes its range of exposure for all known sites, based on allocations of liability among PRPs and the most recent estimate of remedial work, is $2,300 to $3,600 as of February 28, 2001. On May 26, 2000, a settlement agreement was executed regarding the class action lawsuit related to accounting irregularities announced in April 1997. The plaintiff claimed that the Company and certain of its current and former officers violated the federal securities laws and were aware of, or recklessly disregarded, material misstatements that were made in MSC's publicly filed financial reports. The Court entered an order preliminarily approving the agreement on May 31, 2000 and ordered that the class be advised of the proposed settlement. On August 1, 2000, the class members were afforded the opportunity to present any objections at a fairness hearing, at which time the settlement was approved with no objections, and the case was dismissed. The costs of the settlement and related legal fees were covered under the Company's insurance policies, net of retention (expensed in fiscal 1998). New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires the recognition of the fair value of derivatives as either assets or liabilities. This statement is effective for fiscal years beginning after June 15, 2000. Adoption of the provisions of this statement are not expected to have a material effect on the financial position or the results of operations of the Company. In July 2000, the Emerging Issues Task Force reached a consensus on Issue 00-10 "Accounting for Shipping and Handling Fees and Costs." Issue 00-10 indicates that shipping and handling costs billed to customers be recorded as cost of sales and not as a reduction of net sales. Shipping and handling costs of $3,522 in fiscal 2001, $4,149 in fiscal 2000 and $2,515 in fiscal 1999 were reclassified from net sales to cost of sales. The Company accounts for shipping and handling costs in accordance with Issue 00-10. The Company generally recognizes revenue upon shipment. In certain circumstances, MSC recognizes revenue prior to shipment in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." Inflation MSC believes that inflation has not had a significant impact on fiscal 2001, 2000 and 1999 results of operations in any of its segments. Stock Prices The high, low and closing prices for a share of MSC common stock as reported by the New York Stock Exchange for each quarter of fiscal years 2001 and 2000 were as follows: High Low Close - ---------------------------------------------------- Fiscal 2001 - ---------------------------------------------------- First Quarter 14.3125 9.6250 10.7500 Second Quarter 11.6875 9.5000 10.5000 Third Quarter 11.7500 9.7500 9.7500 Fourth Quarter 10.3125 7.5000 8.8000 Fiscal 2000 - ---------------------------------------------------- First Quarter 11.3750 6.3750 11.1250 Second Quarter 15.7500 11.0625 13.3750 Third Quarter 15.0625 10.9375 10.9375 Fourth Quarter 14.6875 10.1875 14.4375 25 Consolidated Statements of Income (Loss) ---------------------------------------- Material Sciences Corporation and Subsidiaries (In thousands, except per share data)
For the years ended February 28 or 29, 2001 2000 1999 - ----------------------------------------------------------------------------------------------- Net Sales $ 481,976 $ 507,014 $ 471,651 Cost of Sales 405,797 408,406 387,192 - ----------------------------------------------------------------------------------------------- Gross Profit $ 76,179 $ 98,608 $ 84,459 Selling, General and Administrative Expenses 68,282 62,208 56,094 - ----------------------------------------------------------------------------------------------- Income from Operations $ 7,897 $ 36,400 $ 28,365 - ----------------------------------------------------------------------------------------------- Other (Income) and Expense: Interest Expense, Net $ 9,662 $ 9,060 $ 11,356 Equity in Results of Joint Ventures 405 1,629 1,313 Other, Net (334) 369 (421) - ----------------------------------------------------------------------------------------------- Total Other Expense, Net $ 9,733 $ 11,058 $ 12,248 - ----------------------------------------------------------------------------------------------- Income (Loss) Before Provision (Benefit) for Income Taxes and Cumulative Effect of Accounting Change $ (1,836) $ 25,342 $ 16,117 Provision (Benefit) for Income Taxes (1,152) 8,627 5,963 - ----------------------------------------------------------------------------------------------- Income (Loss) Before Cumulative Effect of Accounting Change $ (684) $ 16,715 $ 10,154 Cumulative Effect of Accounting Change, Net -- -- 2,207 - ----------------------------------------------------------------------------------------------- Net Income (Loss) $ (684) $ 16,715 $ 7,947 - ----------------------------------------------------------------------------------------------- Basic Net Income (Loss) Per Share: Income (Loss) Before Cumulative Effect of Accounting Change Per Share $ (0.05) $ 1.11 $ 0.66 Cumulative Effect of Accounting Change Per Share -- -- 0.14 - ----------------------------------------------------------------------------------------------- Basic Net Income (Loss) Per Share $ (0.05) $ 1.11 $ 0.52 - ----------------------------------------------------------------------------------------------- Diluted Net Income (Loss) Per Share: Income (Loss) Before Cumulative Effect of Accounting Change Per Share $ (0.05) $ 1.10 $ 0.66 Cumulative Effect of Accounting Change Per Share -- -- 0.14 - ----------------------------------------------------------------------------------------------- Diluted Net Income (Loss) Per Share $ (0.05) $ 1.10 $ 0.52 - ----------------------------------------------------------------------------------------------- Weighted Average Number of Common Shares Outstanding Used for Basic Net Income (Loss) Per Share 14,027 15,070 15,353 Dilutive Shares -- 130 11 - ----------------------------------------------------------------------------------------------- Weighted Average Number of Common Shares Outstanding Plus Dilutive Shares 14,027 15,200 15,364 - ----------------------------------------------------------------------------------------------- Outstanding Common Stock Options Having No Dilutive Effect 1,560 1,219 1,719 - -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 26 Consolidated Balance Sheets --------------------------- Material Sciences Corporation and Subsidiaries (In thousands, except share data)
February 28 or 29, 2001 2000 - ---------------------------------------------------------------------------------------------------------- Assets Current Assets: Cash and Cash Equivalents $ 2,655 $ 4,223 Receivables, Less Reserves of $5,183 in 2001 and $5,067 in 2000 52,827 58,331 Income Taxes Receivable 1,637 -- Prepaid Expenses 3,049 2,418 Inventories: Raw Materials 22,564 20,960 Finished Goods 44,611 39,291 Prepaid Taxes 3,004 4,209 - ---------------------------------------------------------------------------------------------------------- Total Current Assets $ 130,347 $ 129,432 - ---------------------------------------------------------------------------------------------------------- Property, Plant and Equipment: Land and Building $ 75,404 $ 74,431 Leasehold Improvements 1,556 1,339 Machinery and Equipment 287,053 276,126 Capital Leases 17,252 17,256 Construction in Progress 5,032 4,367 - ---------------------------------------------------------------------------------------------------------- $ 386,297 $ 373,519 Accumulated Depreciation and Amortization (179,490) (152,417) - ---------------------------------------------------------------------------------------------------------- Net Property, Plant and Equipment $ 206,807 $ 221,102 - ---------------------------------------------------------------------------------------------------------- Other Assets: Investment in Joint Ventures $ 23,491 $ 20,306 Intangible Assets, Net 22,062 23,980 Other 2,236 2,475 - ---------------------------------------------------------------------------------------------------------- Total Other Assets $ 47,789 $ 46,761 - ---------------------------------------------------------------------------------------------------------- Total Assets $ 384,943 $ 397,295 - ---------------------------------------------------------------------------------------------------------- Liabilities Current Liabilities: Current Portion of Long-Term Debt $ 8,315 $ 2,688 Accounts Payable 42,233 50,667 Accrued Payroll Related Expenses 15,164 18,023 Accrued Expenses 8,373 9,429 - ---------------------------------------------------------------------------------------------------------- Total Current Liabilities $ 74,085 $ 80,807 - ---------------------------------------------------------------------------------------------------------- Long-Term Liabilities: Deferred Income Taxes $ 18,019 $ 21,486 Long-Term Debt, Less Current Portion 129,978 120,896 Other 14,249 15,707 - ---------------------------------------------------------------------------------------------------------- Total Long-Term Liabilities $ 162,246 $ 158,089 - ---------------------------------------------------------------------------------------------------------- Shareowners' Equity Preferred Stock,$1.00 Par Value; 10,000,000 Shares Authorized; 1,000,000 Designated Series B Junior Participating Preferred; None Issued $ -- $ -- Common Stock, $.02 Par Value; 40,000,000 Shares Authorized; 17,676,984 Shares Issued and 14,292,548 Shares Outstanding as of February 28, 2001 and 17,343,858 Shares Issued and 15,186,310 Shares Outstanding as of February 29, 2000 354 347 Additional Paid-In Capital 63,334 59,164 Treasury Stock at Cost, 3,384,436 Shares as of February 28, 2001 and 2,157,548 Shares as of February 29, 2000 (34,813) (22,074) Retained Earnings 120,861 121,545 Accumulated Other Comprehensive Loss (1,124) (583) - ---------------------------------------------------------------------------------------------------------- Total Shareowners' Equity $ 148,612 $ 158,399 - ---------------------------------------------------------------------------------------------------------- Total Liabilities and Shareowners' Equity $ 384,943 $ 397,295 - ----------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements. 27 Consolidated Statements of Cash Flows ------------------------------------- Material Sciences Corporation and Subsidiaries (In thousands)
For the years ended February 28 or 29, 2001 2000 1999 - --------------------------------------------------------------------------------------------- Cash Flows From: Operating Activities: Net Income (Loss) $ (684) $ 16,715 $ 7,947 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Depreciation and Amortization 30,334 29,632 30,666 Provision (Benefit) for Deferred Income Taxes (1,906) 2,620 2,913 Cumulative Effect of Accounting Change, Net -- -- 2,207 Compensatory Effect of Stock Plans 2,794 2,397 582 Other, Net 311 1,693 1,167 - --------------------------------------------------------------------------------------------- Operating Cash Flow Prior to Changes in Assets and Liabilities $ 30,849 $ 53,057 $ 45,482 - --------------------------------------------------------------------------------------------- Changes in Assets and Liabilities: Receivables $ 5,504 $ (5,953) $ 643 Income Taxes Receivable (1,637) 968 1,423 Prepaid Expenses (631) (291) 900 Inventories (6,924) (7,390) 7,339 Accounts Payable (8,434) 2,451 3,402 Accrued Expenses (3,915) 4,799 3,616 Other, Net (2,205) 1,493 3,873 - --------------------------------------------------------------------------------------------- Cash Flow from Changes in Assets and Liabilities $(18,242) $ (3,923) $ 21,196 - --------------------------------------------------------------------------------------------- Net Cash Provided by Operating Activities $ 12,607 $ 49,134 $ 66,678 - --------------------------------------------------------------------------------------------- Investing Activities: Capital Expenditures, Net $(13,205) $(13,864) $(14,346) Acquisitions and Joint Ventures, Net of Cash Acquired (176) (1,016) (4,626) Investment in Joint Ventures (3,759) (1,253) (1,480) Distribution from Joint Ventures 169 -- 900 Other (457) (957) (1,026) - --------------------------------------------------------------------------------------------- Net Cash Used in Investing Activities $(17,428) $(17,090) $(20,578) - --------------------------------------------------------------------------------------------- Financing Activities: Net Proceeds (Payments) Under Lines of Credit $ 17,300 $(17,000) $ 19,700 Payments of Debt (2,591) (1,980) (68,056) Notes Issued for Acquisitions (100) (600) -- Purchase of Treasury Stock (12,739) (11,583) (1,946) Issuance of Common Stock 1,383 2,115 1,804 - --------------------------------------------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities $ 3,253 $(29,048) $(48,498) - --------------------------------------------------------------------------------------------- Net Increase (Decrease) in Cash $ (1,568) $ 2,996 $ (2,398) Cash and Cash Equivalents at Beginning of Year 4,223 1,227 3,625 - --------------------------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 2,655 $ 4,223 $ 1,227 - --------------------------------------------------------------------------------------------- Supplemental Cash Flow Disclosures: Interest Paid $ 9,969 $ 9,615 $ 12,003 Income Taxes Paid 3,997 6,021 2,537 - --------------------------------------------------------------------------------------------- Notes Issued for Acquisitions $ 100 $ 600 $ -- Cash Portion of Acquisitions and Joint Ventures and Related Costs 176 1,016 4,626 - --------------------------------------------------------------------------------------------- Total Consideration Paid for Acquisitions and Joint Ventures $ 276 $ 1,616 $ 4,626 - ---------------------------------------------------------------------------------------------
The Changes in Assets and Liabilities above for the years ended February 28, 2001, February 29, 2000 and February 28, 1999, are net of assets and liabilities acquired. The accompanying notes are an integral part of these statements. 28 Consolidated Statements of Changes in Shareowners' Equity ------------------------------ Material Sciences Corporation and Subsidiaries (In thousands, except share data)
Additional Common Stock Paid-In Retained Treasury Stock Shares Amount Capital Earnings Shares Amount - -------------------------------------------------------------------------------------------------------------------- Balance as of February 28, 1998 16,336,694 $ 327 $ 52,253 $ 96,883 (979,648) $ (8,545) Net Income -- -- -- 7,947 -- -- Issuance of Common Stock 279,770 6 1,796 -- -- -- Purchase of Treasury Stock -- -- -- -- (232,100) (1,946) Compensatory Effect of Stock Plans 166,620 3 581 -- -- -- Tax Benefit from Exercise of Stock Options -- -- 33 -- -- -- - -------------------------------------------------------------------------------------------------------------------- Balance as of February 28, 1999 16,783,084 $ 336 $ 54,663 $ 104,830 (1,211,748) $ (10,491) Net Income -- -- -- 16,715 -- -- Issuance of Common Stock 237,690 5 1,737 -- -- -- Purchase of Treasury Stock -- -- -- -- (945,800) (11,583) Compensatory Effect of Stock Plans 323,084 6 2,704 -- -- -- Tax Benefit from Exercise of Stock Options -- -- 60 -- -- -- - -------------------------------------------------------------------------------------------------------------------- Balance as of February 29, 2000 17,343,858 $ 347 $ 59,164 $ 121,545 $(2,157,548) $ (22,074) Net Loss -- -- -- (684) -- -- Issuance of Common Stock 141,428 3 1,301 -- -- -- Purchase of Treasury Stock -- -- -- -- (1,226,888) (12,739) Compensatory Effect of Stock Plans 191,698 4 2,828 -- -- -- Tax Benefit from Exercise of Stock Options -- -- 41 -- -- -- - -------------------------------------------------------------------------------------------------------------------- Balance as of February 28, 2001 17,676,984 $ 354 $ 63,334 $ 120,861 (3,384,436) $ (34,813) - --------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income (Loss) --------------------------- Material Sciences Corporation and Subsidiaries (In thousands) For the years ended February 28 or 29, 2001 2000 1999 - -------------------------------------------------------------------------------- Net Income (Loss) $ (684) $ 16,715 $ 7,947 Other Comprehensive Loss: Foreign Currency Translation Adjustments (541) (177) (372) - -------------------------------------------------------------------------------- Comprehensive Income (Loss) $ (1,225) $ 16,538 $ 7,575 - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. 29 Notes to Consolidated Financial Statements ------------------------------------------ Material Sciences Corporation and Subsidiaries (In thousands, except share data) For the three years ended February 28, 2001 Note 1: Summary of Significant Accounting Policies The significant accounting policies of Material Sciences Corporation and its wholly-owned subsidiaries ("MSC" or "Company"), as summarized below, conform with generally accepted accounting principles that, in management's opinion, reflect practices appropriate to its business in which it operates. Certain prior-year amounts have been reclassified to conform with the fiscal 2001 presentation. The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and the disclosures in the financial statements. Actual results could differ from those estimates. Principles of Consolidation The accompanying Consolidated Financial Statements include the accounts for MSC after all significant intercompany transactions have been eliminated. The Company maintains a financial interest of 50% in Walbridge Coatings ("Partnership") and a financial interest of 50% in Innovative Specialty Films, LLC ("ISF"). Under the terms of the Partnership and ISF agreements, significant actions require unanimous consent of all parties, therefore MSC does not have a controlling interest. Accordingly, the Company accounts for the Partnership and ISF under the equity method. Inventories Inventories are stated at the lower of cost or market, using either the specific identification, average cost, or first-in, first-out (FIFO) method of cost valuation. Due to the continuous nature of the Company's operations, work-in-process inventories are not material. Long-Lived Assets Property, Plant and Equipment are recorded at cost. Improvements and replacements are capitalized, while expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the assets' estimated useful lives as follows: buildings, 10 to 25 years; leasehold improvements, 2 to 20 years; and machinery and equipment, 2 to 20 years. Facilities and equipment on capital leases are recorded in Property, Plant and Equipment, with their corresponding obligations recorded in Current and Long-Term Liabilities. The amount capitalized is the lower of the present value of minimum lease payments or the fair value of the leased property. Amortization of capital lease assets is recorded on a straight-line basis over the lease term. Intangible assets consist principally of the excess of cost over the fair market value of net assets acquired ("goodwill") and non-compete agreements. These assets are being amortized on a straight-line basis over periods of 2 to 20 years. Accumulated amortization of intangible assets was $10,621 as of February 28, 2001 and $7,945 as of February 29, 2000. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable based on projections of cash flows on a non-discounted basis. If the fair value is less than the carrying amount of the asset, a loss is recognized for the difference. Fair value is determined based on market quotes, if available, or is based on valuation techniques. Revenue Recognition The Company generally recognizes revenue upon shipment. In certain circumstances, MSC recognizes revenue prior to shipment in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." Research and Development The Company expenses all research and development costs in the period incurred. Research and development expenses were $8,226 in fiscal 2001, $6,784 in fiscal 2000 and $7,069 in fiscal 1999 and are included in Selling, General and Administrative Expenses on the Consolidated Statements of Income (Loss). Concentrations of Credit Risks Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of temporary cash investments and trade receivables. The Company places its temporary cash investments with high credit, quality financial institutions and in investment grade securities with maturities less than 90 days. Approximately 26% of the Company's receivables are concentrated with customers in the automotive industry. Foreign Currency The Company's international operations are translated into U.S. dollars using current exchange rates at the balance sheet date for assets and liabilities. A weighted average exchange rate is used to translate sales, expenses, gains and losses. The currency translation adjustments are reflected in Accumulated Other Comprehensive Loss in Shareowners' Equity. Costs of Start-Up Activities In April 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," which MSC adopted on March 1, 1998. The SOP requires costs of start-up activities and organization costs to be expensed as incurred. The effect of adopting SOP 98-5 was to record a non-cash charge of $2,207, net of taxes, for the cumulative effect of a change in accounting principle to expense costs that had previously been capitalized prior to March 1, 1998. 30 Note 2: Joint Venture and Partnership On October 15, 1998, an MSC subsidiary formed ISF with Bekaert Corporation ("Bekaert") for the research and development, manufacture and sale of sputtered film. The Company contributed $6,711 in assets (accounts receivable, inventory and equipment) and $4,009 in cash (which excludes transaction related costs of $314). MSC and Bekaert each own a 50% interest in ISF. ISF reports its results on a calendar year basis. There was no substantive business activity until contributions were made and operations began on January 1, 1999. Operating results for ISF are included in the Specialty Films segment. MSC is contingently responsible for 50% of ISF's financing requirements. As of February 28, 2001, ISF debt was $295 as compared with $183 as of February 29, 2000. Trade receivables included amounts due from ISF of $97 as of February 28, 2001 and $4 as of February 29, 2000. On July 23, 1999, a subsidiary of Bethlehem Steel Corporation ("BSC") sold a portion of its ownership interest in the Partnership to a subsidiary of the LTV Corporation ("LTV"). LTV purchased a 16.5% equity interest in the Partnership from BSC, providing LTV access to 33.0% of the facility's available line time. This change in ownership provided MSC with a more diversified customer base, as well as improved the likelihood of higher facility utilization. In conjunction with the sale, the Partnership term was extended from December 31, 2001 to December 31, 2004. The Company maintained its 50% ownership interest in the Partnership. The Partnership also maintained its long-term toll processing agreement with ISPAT Inland Inc. (a former partner), which expires on December 31, 2001. On December 29, 2000, LTV filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Sales to LTV through the Partnership were $12,378 in fiscal 2001. Although the Company believes that LTV's participation in the Partnership and the Partnership's processing services for LTV are valuable to the LTV estate, there currently can be no assurance that the LTV bankruptcy will not result in a disruption of such relationships. As of February 28, 2001, the Partnership is continuing to make shipments to LTV under special credit arrangements. On March 21, 2001, the bankruptcy court approved debtor in possession financing for LTV. The Partnership has no pre-petition receivables outstanding and $420 of post-petition receivables outstanding as of February 28, 2001. MSC Pre Finish Metals Inc. has $274 of pre-petition receivables outstanding that are fully reserved and no post-petition receivables outstanding as of February 28, 2001. The Company records revenues upon shipment (billed to the Partnership) and operating income primarily for operating the facility. The operating results are included in the Coated Products and Services segment. There were no amounts due from the Partnership included in trade receivables as of February 28, 2001 and $1,686 as of February 29, 2000. Under the equity method, MSC includes its portion of ISF and the Partnership's results of operations in Equity in Results of Joint Ventures, shown in the Consolidated Statements of Income (Loss). The Equity in Results of Joint Ventures was a net loss of $405 in fiscal 2001, $1,629 in fiscal 2000 and $1,313 in fiscal 1999. The amounts for the Partnership do not directly correlate to the Company's 50% ownership interest due to contractual allocation requirements of the Partnership agreements. Note 3: Contingencies MSC is a party to various legal proceedings in connection with the remediation of certain environmental matters. The most significant proceedings relate to the Company's involvement in Superfund sites in Kingsbury and Gary, Indiana. MSC has been named as a potentially responsible party ("PRP") for the surface, soil and ground water contamination at these sites. The United States District Court for the Northern District of Indiana has entered a Consent Decree between the government and certain PRPs on the scope of its remediation work at the Kingsbury site. The participating PRPs account for approximately 75% of the waste volume sent to this site. The estimated range of the Company's liability for this site is $1,100 to $2,200. Certain expenditures included in the estimated range have been discounted approximately $1,000 at a 5% discount rate and are expected to be paid over 30 years. MSC maintains a letter of credit for approximately $3,200 to secure its obligation to pay its currently estimated share of the remediation expenses at this site. The PRPs and the United States Environmental Protection Agency have discussed modifications on the scope of the work required under the decree for this site. These remedial costs at this site could change if the agreed-upon modifications do not achieve expected results. 31 Notes to Consolidated Financial Statements ------------------------------------------ Material Sciences Corporation and Subsidiaries (In thousands, except share data) The United States District Court for the Northern District of Indiana also has entered a Consent Decree between the government and certain PRPs on the scope of the remediation work at the Gary site. The estimate of the Company's liability for this site is $1,100. This work has begun, and MSC has maintained a letter of credit for approximately $1,200 to secure its obligation to pay its currently estimated share of these remediation expenses at this site. MSC believes its range of exposure for all known sites, based on allocations of liability among PRPs and the most recent estimate of remedial work, is $2,300 to $3,600. The Company's environmental reserves total approximately $3,300 as of February 28, 2001. The Company believes that the ultimate outcome of its environmental legal proceedings, net of contributions from other PRPs, will not have a material effect on the Company's financial condition or results of operations, given the reserves recorded as of February 28, 2001. However, no assurance can be given that this information, including estimates of remedial expenses, will not change. On May 26, 2000, a settlement agreement was executed regarding the class action lawsuit related to accounting irregularities announced in April 1997. The plaintiff claimed that the Company and certain of its current and former officers violated the federal securities laws and were aware of, or recklessly disregarded, material misstatements that were made in MSC's publicly filed financial reports. The Court entered an order preliminarily approving the agreement on May 31, 2000 and ordered that the class be advised of the proposed settlement. On August 1, 2000, the class members were afforded the opportunity to present any objections at a fairness hearing, at which time the settlement was approved with no objections, and the case was dismissed. The costs of the settlement and related legal fees were covered under the Company's insurance policies, net of retention (expensed in fiscal 1998). Note 4: Indebtedness Long-term debt, including capital leases, consists of the obligations presented in the chart below. Projected principal payments of long-term debt, assuming no conversion or redemption, also are presented in this chart. Long-Term Debt Obligations 2001 2000 - ------------------------------------------------ Borrowings Under Lines of Credit $ 24,500 $ 7,200 1998 Senior Notes 61,500 61,500 1997 Senior Notes 50,000 50,000 Subordinated Convertible Notes 300 2,273 Obligations Under Capital Leases (Note 5) 1,493 2,011 Other 500 600 - ------------------------------------------------ $138,293 $123,584 Less Current Portion 8,315 2,688 - ------------------------------------------------ Long-Term Debt $129,978 $120,896 - ------------------------------------------------ Projected Principal Payments of Long-Term Debt - ------------------------------------- 2002 $ 8,315 2003 38,761 2004 18,701 2005 13,421 2006 13,421 2007 and Thereafter 45,674 - ------------------------------------- Total $ 138,293 - ------------------------------------- As of February, 28, 2001, MSC maintained a $90,000 committed line of credit. The agreement expires on December 20, 2002, or earlier, at MSC's option. There was $19,000 outstanding under this line of credit as of February 28, 2001. The Company has three irrevocable letters of credit totaling $4,740 against this line, leaving an available line of credit of $66,260 as of February 28, 2001, subject to certain loan covenants. MSC paid a commitment fee of .325% per annum on the daily average of the unused amount during the period. The agreement required the Company to adhere to certain covenants, some of which were adjusted quarterly. The most significant of these covenants included maintaining a minimum net worth ($117,000, plus 40.0% of cumulative consolidated net income accruing after August 31, 1997), total debt to cash flow (3.00 until agreement expiration), and a fixed charge coverage ratio (1.50). 32 As of February 28, 2001, MSC also maintained a $10,000 uncommitted line of credit. The agreement expires on March 14, 2002, or earlier, at the Company's option. The interest rate (6.63% as of February 28, 2001) was based on a market rate agreed upon by the parties at the time of the borrowing. There was $5,500 outstanding under this uncommitted line of credit as of February 28, 2001. The Company was not in compliance with two financial covenants as of February 28, 2001. The banks waived the default and have amended the line of credit agreement effective April 20, 2001. The amendment provides for one $50,000 committed line of credit, eliminating the $90,000 committed line of credit and the $10,000 uncommitted line. At the Company's option, interest is at the bank's reference rate (9.50% as of February 28, 2001), or at IBOR, plus a margin (3.25% as of April 20, 2001) based on indebtedness to adjusted earnings before interest, taxes, depreciation and amortization ("EBITDA"), which is generally lower than the bank's reference rate. The financial covenants have been amended to include maintaining a minimum net worth ($145,000, plus 40% of cumulative consolidated net income accruing after February 28, 2001); consolidated debt to cash flow (4.25 as of May 31, 2001, 4.00 as of August 31, 2001, 3.25 as of November 30, 2001 and 2.75 as of February 28, 2002 and thereafter); and a fixed charge coverage ratio (0.95 as of May 31, 2001, 1.05 as of August 31, 2001, 1.25 as of November 30, 2001 and 1.50 as of February 28, 2002 and thereafter). In addition, the amendment prohibits the Company from paying dividends and repurchasing its stock and places certain limitations on the Company's ability to make acquisitions and investments. On February 27, 1998, MSC authorized the issuance and sale of $61,500 Senior Notes ("1998 Senior Notes") in two series. The interest rate on the Series A Note ($5,000) is 6.49%, and the Note matures on May 31, 2003. The interest rate on the Series B Notes ($56,500) is 6.80%, and the Notes mature on May 31, 2010. The 1998 Senior Notes were issued and funded on February 27, 1998. The estimated fair value of the 1998 Senior Notes, based on discounted cash flows, was more than the carrying value by $4,362 as of February 28, 2001. On February 15, 1997, the Company authorized the issuance and sale of $50,000 Senior Notes ("1997 Senior Notes"). As of February 28, 1997, $30,000 of the 1997 Senior Notes was issued and funded. The remaining $20,000 was issued and funded on May 5, 1997. The interest rate on the 1997 Senior Notes is 7.05%. The estimated fair value of the 1997 Senior Notes, based on discounted cash flows, was more than the carrying value by $3,229 as of February 28, 2001. The note agreements for both the 1998 Senior Notes and the 1997 Senior Notes are comparable. Interest payments are due semi-annually on May 31 and November 30 of each year. The agreements require the Company to adhere to certain covenants. The most significant of these covenants include maintenance of consolidated cumulative adjusted net worth ($105,000, plus, until the percentage of total indebtedness to consolidated adjusted total capitalization is less than 45.0% for two consecutive quarters, 40.0% of consolidated adjusted net income accruing after August 31, 1997), consolidated senior debt ratio (55.0% until agreement expiration), and a fixed charge coverage ratio (2.0, until such time the percentage of total indebtedness to consolidated adjusted total capitalization is lower than 45.0% for two consecutive quarters). MSC was in compliance with the financial covenants related to the 1998 Senior Notes and the 1997 Senior Notes for the period ended February 28, 2001. In addition, the Company has subordinated convertible notes ("Subordinated Convertible Notes") as of February 28, 2001, which were issued in consideration for purchasing a West Coast distributor in fiscal 1997. The Subordinated Convertible Notes bear interest at a rate of 7.0%. The Subordinated Convertible Notes are convertible into shares of the Company's common stock at a conversion price of $20.80 per share. The Subordinated Convertible Notes mature in five equal installments and became due annually beginning on May 31, 1997. A maximum of 14,423 shares of common stock are reserved for the conversion option contained in the Subordinated Convertible Notes. 33 Notes to Consolidated Financial Statements ------------------------------------------ Material Sciences Corporation and Subsidiaries (In thousands, except share data) Note 5: Leases MSC leases one manufacturing facility and equipment under capital leases that include renewal options. Another manufacturing facility, 12 distribution centers and other equipment are leased under non-cancelable operating leases. The Walbridge, Ohio facility lease contains certain covenants with which the Company was in compliance. MSC subleases its interest in this facility to the Partnership through the end of the Partnership term. The sublease contains substantially the same terms and conditions as the lease. The Company has assigned all of its rights under the sublease to the Partnership. The lease is renewable, at the Company's option, for additional periods totaling 25 years. Some leases also contain escalation provisions based upon specified inflation indices. The table below presents future minimum lease payments and sublease income. Minimum Lease Capital Sublease Operating Payments Leases Income Leases - -------------------------------------------------- 2002 $ 704 $ 690 $ 2,808 2003 708 -- 1,993 2004 276 -- 1,180 2005 -- -- 776 2006 -- -- 777 2007 and Thereafter -- -- 788 - -------------------------------------------------- Total Minimum Lease Payments $1,688 $ 690 $ 8,322 - -------------------------------------------------- Amount Representing Interest 195 - --------------------------- Present Value of Minimum Lease Payments $1,493 - --------------------------- Amortization of leased property was $825 in fiscal 2001, $829 in fiscal 2000 and $817 in fiscal 1999. Total rental expense under operating leases was $5,358 in fiscal 2001, $5,012 in fiscal 2000 and $4,847 in fiscal 1999. Note 6: Retirement Plans MSC has non-contributory defined benefit and defined contribution pension plans that cover a majority of its employees. The Company funds amounts required to meet ERISA funding requirements for the defined benefit plans. The Company makes an annual contribution to the defined contribution plan for the amount earned by participating employees after the end of each calendar year. The cost of this plan was $2,212 in fiscal 2001, $2,222 in fiscal 2000 and $1,967 in fiscal 1999. In addition to the benefits previously described, some MSC officers participate in a non-contributory supplemental pension plan. The Company provides its retired employees with certain postretirement health care benefits, which MSC may periodically amend or modify. Substantially all employees may be eligible for these benefits if they reach normal retirement age while employed by the Company. The following tables present: a reconciliation of the change in benefit obligation, a reconciliation of the change in plan assets, a statement of the funded status of the plans, the components of net periodic benefit cost and the assumptions used in determining the plans' funded status. Pension Postretirement Change in Benefits Benefits Benefit Obligation: 2001 2000 2001 2000 - ---------------------------------------------------------------------- Obligation, March 1 $ 9,272 $ 9,869 $ 2,035 $ 2,578 Service Cost Benefits Earned During the Period 304 296 168 172 Interest Cost on Benefit Obligation 660 654 173 164 Plan Amendments 74 -- -- 121 Acturial (Gain) Loss (288) (879) 299 (920) Benefit Payments (473) (668) (128) (80) - ---------------------------------------------------------------------- Obligation, February 28 or 29 $ 9,549 $ 9,272 $ 2,547 $ 2,035 - ---------------------------------------------------------------------- Change in Plan Assets: - ---------------------------------------------------------------------- Plan Assets at Fair Value, March 1 $ 5,333 $ 4,457 $ 59 $ 55 Actual Return on Plan Assets 39 913 -- 4 Company Contributions 419 631 128 80 Benefit Payments (473) (668) (128) (80) - ---------------------------------------------------------------------- Plan Assets at Fair Value, February 28 or 29 $ 5,318 $ 5,333 $ 59 $ 59 - ---------------------------------------------------------------------- Funded Status: - ---------------------------------------------------------------------- Funded Status $(4,232) $(3,939) $(2,488) $(1,976) Unrecognized Transition Obligation 14 16 -- -- Unrecognized Prior Service Cost 671 682 (781) (837) Unrecognized Gain (684) (789) (395) (726) - ---------------------------------------------------------------------- Net Amount Recognized $(4,231) $(4,030) $(3,664) $(3,539) - ---------------------------------------------------------------------- 34 Components of Net Pension Benefits Periodic Benefit Cost: 2001 2000 1999 - ---------------------------------------------------------- Service Cost Benefits Earned During the Period $ 304 $ 296 $ 285 Interest Cost on Benefit Obligation 660 654 624 Expected Return on Assets (377) (355) (321) Amortization of Transition Obligation 3 3 3 Amortization of Prior Service Cost 85 85 85 Amortization of Net (Gain) Loss (55) 31 26 - ---------------------------------------------------------- Net Periodic Benefit Cost $ 620 $ 714 $ 702 - ---------------------------------------------------------- Postretirement Benefits 2001 2000 1999 - ---------------------------------------------------------- Service Cost Benefits Earned During the Period $ 168 $ 172 $ 107 Interest Cost on Benefit Obligation 173 164 159 Expected Return on Assets (4) (4) (4) Amortization of Prior Service Cost (57) (56) (68) Amortization of Net Gain (27) -- -- - ---------------------------------------------------------- Net Periodic Benefit Cost $ 253 $ 276 $ 194 - ---------------------------------------------------------- Assumptions Used in Determining the Plans' Funded Status: 2001 2000 1999 - ---------------------------------------------------------- Discount Rate 7.50% 8.00% 6.75% Expected Long-Term Rate of Return on Assets 8.00% 8.00% 8.00% Rate of Increase in Compensation Levels 6.00% 6.00% 6.00% - ---------------------------------------------------------- MSC continues to review its postretirement benefits, incorporating actual and anticipated benefit changes. In determining the present value of the accumulated postretirement benefit obligation, of which only a minor amount has been funded, and net cost, MSC used a 10% health care cost trend rate decreasing until leveling off at 5% in calendar 2010. A 1% increase in assumed health care cost trend rates will raise the total of the service and interest cost components of net periodic postretirement benefit cost by $422 and the health care component of the accumulated postretirement benefit obligation by $597 as of February 28, 2001. A 1% decrease in assumed health care cost trend rates will lower the total of the service and interest cost components of net periodic postretirement benefit cost by $306 and the health care component of the accumulated postretirement benefit obligation by $484 as of February 28, 2001. Note 7: Interest Expense, Net The table presented below analyzes the components of interest expense, net. Interest Expense, Net 2001 2000 1999 - -------------------------------------------------------- Interest Expense $ 9,818 $ 9,360 $ 11,790 Interest Income (156) (300) (434) - -------------------------------------------------------- Interest Expense, Net $ 9,662 $ 9,060 $ 11,356 - -------------------------------------------------------- The table above excludes interest expense of $185, $237 and $295 for fiscal years 2001, 2000 and 1999, respectively, related to the Walbridge, Ohio facility. This facility is subleased to the Partnership. The interest expense and amortization relating to this lease was reduced by sublease income received from the Partnership, and the net result was included in Other, Net, shown in the Consolidated Statements of Income (Loss). 35 Notes to Consolidated Financial Statements ------------------------------------------ Material Sciences Corporation and Subsidiaries (In thousands, except share data) Note 8: Income Taxes Deferred income taxes result from recognizing revenues and expenses in different periods for tax and financial reporting purposes. The components of the provision (benefit) for income taxes and a reconciliation between the statutory rate for federal income taxes and the effective income tax rate are summarized and presented below. Tax Provision (Benefit) 2001 2000 1999 - -------------------------------------------------------- Current: Federal $ 891 $ 5,051 $ 3,176 State (137) 956 (126) - -------------------------------------------------------- $ 754 $ 6,007 $ 3,050 - -------------------------------------------------------- Deferred: Federal $(1,781) $ 2,347 $ 2,160 State (125) 273 753 - -------------------------------------------------------- $(1,906) $ 2,620 $ 2,913 - -------------------------------------------------------- Total Provision (Benefit) $(1,152) $ 8,627 $ 5,963 - -------------------------------------------------------- Tax Rate Reconciliation 2001 2000 1999 - -------------------------------------------------------- Federal Statutory Rate 35.0% 35.0% 35.0% State and Local Taxes, Net of Federal Tax Benefit 5.6 5.6 5.6 Research and Development Tax Credits -- (0.6) (0.3) Foreign Sales Corp. Benefit 21.3 (1.6) (2.5) State Tax Credits 8.7 (0.7) (1.7) Reserve Adjustment -- (3.0) -- Other, Net (7.9) (0.7) 0.9 - -------------------------------------------------------- Effective Income Tax Rate 62.7% 34.0% 37.0% - -------------------------------------------------------- During fiscal 2000, the Internal Revenue Service completed its review of fiscal years 1993 and 1994. In addition, the Company's three-year statute of limitations expired for fiscal 1995 and 1996 for federal income tax purposes. The Company analyzed its income tax reserve position based on these two events and reduced its previously provided income tax reserves by $750 in the fourth quarter of fiscal 2000. Temporary differences that give rise to deferred tax (assets) and liabilities were as follows: 2001 2000 - -------------------------------------------------------- Property and Equipment $ 28,628 $ 30,181 Reserves Not Deductible Until Paid (3,248) (2,994) Employee Benefit Liabilities (6,497) (5,356) Deferred State Income Taxes, Net 2,411 2,589 Tax Credit Carryforwards (7,052) (5,530) Other 773 (1,613) - -------------------------------------------------------- Deferred Tax Liabilities, Net $ 15,015 $ 17,277 - -------------------------------------------------------- As of February 28, 2001, tax credit carryforwards of $5,982 were available with an unlimited expiration date, and the remaining $1,070 expires in varying amounts through fiscal 2021. Deferred Tax Liabilities, Net have been recorded on the Company's Consolidated Balance Sheets as follows: 2001 2000 - -------------------------------------------------------- Long-Term Liabilities - Deferred Income Taxes $ 18,019 $ 21,486 Current Assets - Prepaid Taxes (3,004) (4,209) - -------------------------------------------------------- Deferred Tax Liabilities, Net $ 15,015 $ 17,277 - -------------------------------------------------------- 36 Note 9: Significant Customers and Export Sales Net sales to the Partnership represented 12%, 13% and 13% of MSC's net sales in fiscal 2001, 2000 and 1999, respectively. Export sales represented 10% of the Company's net sales in fiscal 2001 and 7% in fiscal 2000 and 1999. Note 10: Equity and Compensation Plans The Company has four stock option plans: the Material Sciences Corporation 1985 Stock Option Plan for Key Employees ("1985 Plan"); the Material Sciences Corporation 1991 Stock Option Plan for Directors ("1991 Directors Plan"); the Material Sciences Corporation 1992 Omnibus Awards Plan for Key Employees ("1992 Plan"); and the Material Sciences Corporation Stock Option Plan for Non-Employee Directors ("1996 Directors Plan"). MSC accounts for all plans in accordance with APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for stock options awarded under the plans been determined using the fair market value-based accounting method, the Company's net income (loss) and basic and diluted net income (loss) per share would have been as shown in the following pro forma amounts: 2001 2000 1999 - ------------------------------------------------------- Net Income (Loss): As Reported $ (684) $ 16,715 $ 7,947 - ------------------------------------------------------- Pro Forma $ (884) $ 16,490 $ 7,873 - ------------------------------------------------------- Basic Net Income (Loss) Per Share: As Reported $ (0.05) $ 1.11 $ 0.52 - ------------------------------------------------------- Pro Forma $ (0.06) $ 1.09 $ 0.51 - ------------------------------------------------------- Diluted Net Income (Loss) Per Share: As Reported $ (0.05) $ 1.10 $ 0.52 - ------------------------------------------------------- Pro Forma $ (0.06) $ 1.08 $ 0.51 - ------------------------------------------------------- There are 2,512,500 shares authorized under the 1985 Plan to provide for the options granted under the 1991 Directors Plan and the shares purchased under the Material Sciences Corporation Employee Stock Purchase Program. The 1991 Directors Plan vests ratably over the first five anniversary dates of the date of grant and expires 10 years after the date of grant. There are 3,262,500 shares authorized under the 1992 Plan to provide stock options and restricted stock under various programs. Non-qualified stock options generally vest over three years from the date of grant and expire 10 years from the date of grant. Incentive stock options ("ISOs") were issued in fiscal 1994 at fair market value at the date of grant and expire 10 years from the date of grant. These ISOs were issued in tandem with a restricted stock grant and vest two years after the vesting of the restricted stock, if the corresponding restricted stock is still owned by the participant. Under the 1992 Plan, restricted stock and cash awards generally vest in three to five years from the date of grant. Certain of these awards require a cash contribution from the employee. Shares of restricted stock are awarded in the name of the employee, who has all the rights of a shareowner, subject to certain restrictions or forfeitures. Restricted stock and cash awards have been issued with restrictions based upon time, stock price performance or a combination. The market value of the restricted stock at the date of grant is amortized to compensation expense over the period in which the shares vest (time based awards). In the event of accelerated vesting due to the achievement of market value appreciation as defined by the plan, the recognition of the unamortized expense would be accelerated. For awards based on both time and performance (performance based awards), the Company determines the compensation cost to be recorded on the date the performance levels are achieved. On that date, compensation expense representing a pro rata portion of the total cost is recognized. The remaining compensation expense is recorded ratably over the remaining vesting period. If the specified stock performance levels are not achieved by the end of the five-year period from the date of grant, the employee contribution, elected restricted stock and the cash award are forfeited. There are 250,000 shares authorized under the 1996 Directors Plan. This plan consisted of grants that provided for 50% of each non-employee director's annual retainer ("Retainer Options") and annual incentive stock options ("Incentive Options"). The Retainer Options vested on the date of grant and expire five years after that date. The Incentive Options vest one year from the date of grant and expire five years after the date of grant. No further shares will be issued under this plan, and 149,659 shares were outstanding as of February 28, 2001. The 1996 Directors Plan was replaced with the 2001 Compensation Plan for Non-Employee Directors that was approved by the shareowners in June 2000 and was effective March 1, 2001. The exercise price of all options equals the market price of the Company's stock either on the date of grant or, in the case of the 1996 Directors Plan, on the day prior to the grant. In fiscal 1998, the Company issued 52,941 stock options to a consultant for partial payment of services performed. The options were issued at fair market value as of February 28, 1998 and expire five years from the date of grant. 37 Notes to Consolidated Financial Statements ------------------------------------------ Material Sciences Corporation and Subsidiaries (In thousands, except share data) A summary of transactions under the stock option plans was as follows:
Options Outstanding Exercisable Options - ------------------------------------------------------------------------------------------------- Weighted Weighted Average Average Key Exercise Exercise Stock Option Activity Directors Employees Price Shares Price - ------------------------------------------------------------------------------------------------- Outstanding as of February 28,1998 121,415 1,863,291 $ 13.41 1,114,252 $ 11.78 Reclassified 274,200 (274,200) 9.91 Granted 84,527 5,000 12.26 Exercised (160,200) -- 5.24 Canceled (57,920) (144,135) 14.73 - ------------------------------------------------------------------------------------------------- Outstanding as of February 28,1999 262,022 1,449,956 $ 13.96 1,223,802 $ 13.56 Granted 69,147 31,500 8.76 Exercised (19,124) (52,890) 10.33 Canceled (32,527) (109,230) 14.90 - ------------------------------------------------------------------------------------------------- Outstanding as of February 29,2000 279,518 1,319,336 $ 13.74 1,342,439 $ 13.55 Granted 52,542 15,300 11.93 Exercised (22,174) -- 5.37 Canceled (106,227) (31,402) 14.48 - ------------------------------------------------------------------------------------------------- Outstanding as of February 28,2001 203,659 1,303,234 $ 13.71 1,348,026 $ 13.75 - -------------------------------------------------------------------------------------------------
Options Outstanding Exercisable Options as of February 28, 2001 as of February 28, 2001 - ------------------------------------------------------------------------------------- Weighted Weighted Weighted Range of Average Average Average Exercise Remaining Exercise Exercise Prices Shares Life (Years) Price Shares Price - ------------------------------------------------------------------------------------- $ 4.95 -- $ 7.69 68,657 4.92 $ 6.76 62,453 $ 6.67 8.38 -- 10.94 342,342 1.41 10.00 316,823 10.05 11.13 -- 13.88 49,412 4.33 12.48 46,412 12.51 14.00 -- 14.88 515,256 4.20 14.39 397,175 14.43 15.00 -- 16.38 479,625 5.15 16.25 478,063 16.25 17.33 -- 18.75 51,601 4.99 18.06 47,100 18.13 - ------------------------------------------------------------------------------------- $ 4.95 -- $18.75 1,506,893 3.93 $ 13.71 1,348,026 $ 13.75 - -------------------------------------------------------------------------------------
38 The weighted average fair value of individual options granted in fiscal 2001, 2000 and 1999 is $6.13, $4.48 and $3.40, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used for the option grants in fiscal 2001, 2000 and 1999, respectively: risk-free interest rates of 6.21%, 5.44% and 5.04%; expected life of 6.1 years, 6.4 years and 5.6 years; and expected volatility of 42.28%, 41.50% and 34.31%. A summary of transactions under the restricted stock plans was as follows: Restricted Stock Activity - ------------------------------------------------ Unvested as of February 28,1998 128,050 Granted 180,100 Vested (8,200) Canceled (13,480) - ------------------------------------------------ Unvested as of February 28,1999 286,470 Granted 342,700 Vested (113,454) Canceled (19,616) - ------------------------------------------------ Unvested as of February 29,2000 496,100 Granted 205,900 Vested (162,698) Canceled (14,202) - ------------------------------------------------ Unvested as of February 28,2001 525,100 - ------------------------------------------------ Compensation effects arising from issuing restricted stock and stock options were $2,828 in fiscal 2001, $2,704 in fiscal 2000 and $581 in fiscal 1999, and have been charged against income and recorded as Additional Paid-In Capital in the Consolidated Balance Sheets. The Employee Stock Purchase Plan permits eligible employees to purchase shares of common stock at 85% of the lower fair market value of the stock as of two measurement dates six months apart. Common stock sold to employees under this plan was 119,254 in fiscal 2001, 165,676 in fiscal 2000 and 119,570 in fiscal 1999. On June 20, 1996, the Company issued a dividend to shareowners of record on July 2, 1996, of one right ("Right") for each outstanding share of MSC's common stock. Each Right entitles the shareowners to buy 1/100th of a share of Series B Junior Participating Preferred Stock at an initial exercise price of $70.00. As amended on June 22, 1998, the Rights will be exercisable only if a person or group acquires, or announces a tender offer, for 15% or more of MSC's common stock. If 15% or more of MSC's common stock is acquired by a person or group, the Rights (other than those held by that person or group) convert into the right to buy the number of shares of MSC's common stock valued at two-times the exercise price of the Rights. In addition, if MSC enters into a merger or other business combination with a person or group owning 15% or more of MSC's outstanding common stock, the Rights (other than those held by that person or group) then convert into the right to buy that number of shares of common stock of the acquiring company valued at two-times the exercise price of the Rights. MSC may exchange the Rights for its common stock on a one-for-one basis at any time after a person or group has acquired 15% or more of its outstanding common stock. MSC will be entitled to redeem the Rights at one cent per Right (payable in common stock of the Company, cash or other consideration, at MSC's option) at any time before public disclosure that a 15% position has been acquired. The Rights will expire on July 1, 2006, unless previously redeemed or exercised. In fiscal 1999, the Company introduced its Economic Value Added ("EVA") Improvement Incentive Plan, which rewards employees for the creation of share-owner value. The annual variable compensation target for an employee is calculated as a percentage of the salary for the employee based on their level of responsibility, market competitiveness and impact on value creation. The EVA program for certain levels of management includes a banking component to account for overachievement and underachievement of the annual target. If a business unit overachieves their target, a portion (one-third) is distributed and the remainder is recorded to the bank. If a business unit underachieves their target, the negative amount is first deducted from the bank before any distribution is made to the employee. Therefore, the incentive pay is at risk, but encourages sustained economic performance. The total EVA bank for the Company as of February 28, 2001 is $1,056. No amounts have been provided in the Consolidated Financial Statements for the EVA bank. 39 Notes to Consolidated Financial Statements ------------------------------------------ Material Sciences Corporation and Subsidiaries (In thousands, except share data) Note 11: Business Segments Management is currently exploring strategic alternatives for its hot-dip galvanizing operation ("Pinole Point Steel"), formerly included in the Coated Products and Services segment, and therefore is evaluating and disclosing Pinole Point Steel as a separate segment. MSC reports segment information based on how management views its businesses for evaluating performance and making operating decisions. The Company's four segments are Engineered Materials, Specialty Films, Coated Products and Services and Pinole Point Steel. The Engineered Materials segment combines layers of metal and other materials designed to meet specific customer requirements for the automotive, electronics, lighting and appliance markets. The Specialty Films segment provides solar control and safety window film, as well as industrial films used in a variety of products. The Coated Products and Services segment provides coil coated and electrogalvanized products and services primarily to the automotive, building and construction, appliance and lighting markets. The Pinole Point Steel segment includes the hot- dip galvanizing product group. This segment provides galvanized and prepainted product primarily to the building and construction market. Pinole Point Steel's loss before income taxes included an allocation of consolidated interest expense totaling $8,844 in fiscal 2001, $8,332 in fiscal 2000 and $9,199 in fiscal 1999. The allocations were based on the debt associated with the original purchase of Pinole Point Steel in December 1997 and Pinole Point Steel's subsequent cash flow. Corporate represents certain machinery and equipment, prepaid taxes, intangible assets and unallocated general corporate expenses. Sales between segments are recorded at market rates, and the related intercompany profit is eliminated in consolidation. The net sales and long-lived assets on a geographic basis are not material. Information concerning the Company's business segments in fiscal years 2001, 2000 and 1999 was as follows: Net Sales 2001 2000 1999 - ---------------------------------------------------------------- Coated Products and Services $ 191,103 $ 201,635 $ 188,284 Engineered Materials 87,044 79,576 71,034 Specialty Films 58,306 50,788 47,234 Eliminations (4,287) (2,542) (2,100) - ---------------------------------------------------------------- Subtotal $ 332,166 $ 329,457 $ 304,452 Pinole Point Steel 149,810 177,557 167,199 - ---------------------------------------------------------------- Total $ 481,976 $ 507,014 $ 471,651 - ---------------------------------------------------------------- Depreciation and Amortization - ---------------------------------------------------------------- Coated Products and Services $ 11,471 $ 11,774 $ 12,023 Engineered Materials 4,025 3,578 3,579 Specialty Films 2,929 2,830 3,851 Corporate 1,568 1,450 1,464 - ---------------------------------------------------------------- Subtotal $ 19,993 $ 19,632 $ 20,917 Pinole Point Steel 10,341 10,000 9,749 - ---------------------------------------------------------------- Total $ 30,334 $ 29,632 $ 30,666 - ---------------------------------------------------------------- Income (Loss) Before Income Taxes - ---------------------------------------------------------------- Coated Products and Services $ 12,895 $ 20,851 $ 20,307 Engineered Materials 9,372 11,959 8,235 Specialty Films 9,776 7,452 5,209 Corporate and Eliminations (11,852) (11,430) (8,941) - ---------------------------------------------------------------- Subtotal $ 20,191 $ 28,832 $ 24,810 Pinole Point Steel (22,027) (3,490) (8,693) - ---------------------------------------------------------------- Total $ (1,836) $ 25,342 $ 16,117 - ---------------------------------------------------------------- Total Assets - ---------------------------------------------------------------- Coated Products and Services $ 142,134 $ 144,150 $ 149,193 Engineered Materials 43,551 46,185 42,063 Specialty Films 50,437 47,628 45,240 Corporate and Eliminations 14,825 16,663 17,721 - ---------------------------------------------------------------- Subtotal $ 250,947 $ 254,626 $ 254,217 Pinole Point Steel 133,996 142,669 141,104 - ---------------------------------------------------------------- Total $ 384,943 $ 397,295 $ 395,321 - ---------------------------------------------------------------- Capital Expenditures, Net - --------------------------------------------------------------- Coated Products and Services $ 6,596 $ 6,567 $ 7,875 Engineered Materials 2,278 3,129 2,915 Specialty Films 1,568 681 628 Corporate 836 67 812 - ---------------------------------------------------------------- Subtotal $ 11,278 $ 10,444 $ 12,230 Pinole Point Steel 1,927 3,420 2,116 - ---------------------------------------------------------------- Total $ 13,205 $ 13,864 $ 14,346 - ---------------------------------------------------------------- 40 Note 12: Selected Quarterly Results of Operations (Unaudited) The table presented below is a summary of quarterly data for the years ended February 28, 2001 and February 29, 2000. First Second Third Fourth 2001 Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------- Net Sales $ 127,022 $ 130,209 $ 121,263 $ 103,482 Gross Profit 23,953 22,237 18,082 11,907 Net Income (Loss) 2,648 1,642 (478) (4,496) Net Income (Loss) Per Share: Basic $ 0.18 $ 0.12 $ (0.04) $ (0.33) Diluted $ 0.18 $ 0.12 $ (0.04) $ (0.33) First Second Third Fourth 2000 Quarter Quarter Quarter Quarter - ----------------------------------------------------------------------------- Net Sales $ 125,723 $ 133,506 $ 126,316 $ 121,469 Gross Profit 24,236 26,785 25,770 21,817 Net Income 4,162 4,306 4,564 3,683 Net Income Per Share: Basic $ 0.27 $ 0.28 $ 0.30 $ 0.25 Diluted $ 0.27 $ 0.28 $ 0.30 $ 0.25 Cautionary Statement Concerning Forward-Looking Statements ------------------------------------ The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. In this annual report, we have made forward-looking statements that set out anticipated results based on management's plans and assumptions. We have tried, wherever possible, to identify such statements by using words such as "anticipates," "estimates," "expects," "projects," "intends," "plans," "believes," and words and terms of similar substance in connection with any discussion of future operating or financial performance. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Many factors could also cause actual results to be materially different from any future results that may be expressed or implied by the forward-looking statements contained in this annual report, including, among others, . successful development and introduction of new products and technologies; . competitive factors; . changes in the business environment, including the automotive, building and construction, and durable goods industries; . adverse changes in government laws and regulations; . continuation of the favorable environment to make acquisitions, including regulatory requirements and market values of candidates; . the stability of governments and business conditions inside and outside the U.S., which may affect a successful penetration of the Company's products; . impact of the ongoing slowdown in the overall economy; . environmental risks; . the loss of one or more significant customers of the Company; . risks associated with the termination of the Partnership in December 2004 or the termination of the joint venture partnership with ISF in December 2003; . increases in the prices of raw and other material inputs used by the Company; . facility utilization at Walbridge Coatings; and . the ability to identify and consummate strategic alternatives for Pinole Point Steel. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. This discussion of potential risks and uncertainties is by no means complete but is designed to highlight important factors that may impact the Company's outlook. 41 Selected Financial Data ----------------------- Material Sciences Corporation and Subsidiaries (Dollars and number of shares in thousands, except per share data)
Fiscal 2001 2000 1999 1998 - ----------------------------------------------------------------------------------------------------- Income Statement Data Net Sales $ 481,976 $ 507,014 $ 471,651 $ 320,787 Income (Loss) Before Income Taxes (1,836) 25,342 16,117 10,503 Net Income (Loss)/(1)//(2)//(3)/ (684) 16,715 7,947 6,459 Diluted Net Income (Loss) Per Share/(4)/ $ (0.05) $ 1.10 $ 0.52 $ 0.42 - ----------------------------------------------------------------------------------------------------- Balance Sheet Data Working Capital $ 56,262 $ 48,625 $ 40,559 $ 60,330 Net Property, Plant and Equipment 206,807 221,102 234,481 256,599 Total Assets 384,943 397,295 395,321 418,074 Total Debt 138,293 123,584 142,429 190,973 Shareowners' Equity 148,612 158,399 148,932 140,884 Average Capital Employed 284,444 286,672 311,609 261,871 - ----------------------------------------------------------------------------------------------------- Cash Flow Data Depreciation and Amortization $ 30,334 $ 29,632 $ 30,666 $ 20,380 EBITDA 38,160 64,034 58,139 36,782 Net Cash Provided by Operating Activities 12,607 49,134 66,678 19,712 Capital Expenditures, Net 13,205 13,864 14,346 19,108 Free Cash Flow/(5)/ (598) 35,270 52,332 604 - ----------------------------------------------------------------------------------------------------- Financial Ratios Gross Profit as a % of Net Sales 15.8% 19.4% 17.9% 21.4% SG&A Expenses as a % of Net Sales 14.2% 12.3% 11.9% 16.4% Income (Loss) Before Income Taxes as a % of Net (0.4%) 5.0% 3.4% 3.3% Sales Net Income (Loss) as a % of Net Sales (0.1%) 3.3% 1.7% 2.0% Research and Development as a % of Net Sales 1.7% 1.3% 1.5% 1.9% Effective Income Tax Rate 62.7% 34.0% 37.0% 38.5% Return on Average Shareowners' Equity (0.4%) 10.9% 5.5% 4.7% Return on Average Capital Employed (0.2%) 5.8% 2.6% 2.5% Total Debt to Total Capital Employed 48.2% 43.8% 48.9% 57.5% - ----------------------------------------------------------------------------------------------------- Other Data Economic Value Added/(6)/ $ (21,637) $ (3,397) $ (11,438) $ (13,449) Per Share Information:/(4)/ Net Cash Provided by Operating Activities $ 0.90 $ 3.23 $ 4.34 $ 1.28 Free Cash Flow $ (0.04) $ 2.32 $ 3.41 $ 0.04 Book Value $ 10.59 $ 10.42 $ 9.69 $ 9.12 Market Price: High $ 14.31 $ 15.75 $ 13.13 $ 17.50 Low $ 7.50 $ 6.38 $ 6.75 $ 10.31 Close $ 8.80 $ 14.44 $ 7.19 $ 12.19 P/E (High) NM 14.3x 25.3x 41.7x P/E (Low) NM 5.8x 13.0x 24.5x Weighted Average Number of Common Shares Outstanding Plus Dilutive Shares(4) 14,027 15,200 15,364 15,449 Shareowners of Record 929 950 1,042 1,039 Number of Employees 1,291 1,250 1,206 1,269 - -----------------------------------------------------------------------------------------------------
(1) In 1999, MSC recorded the cumulative effect of adopting SOP 98-5, which reduced net income by $2,207, net of income taxes, or $0.14 per share. (2) In 1996, the Company recorded a pretax special charge against income of $4,200 for the restructuring of the Company. MSC recorded a pretax special charge against income of $2,000 in 1991 to provide for a management reorganization. (3) In 1993, MSC recorded the cumulative effect of adopting SFAS No. 106 and No. 109, which reduced net income by $1,283, net of income taxes, or $0.10 per share. (4) The above data has been restated to reflect two separate one-half share per share dividends to shareowners of record on March 16, 1992 and June 30, 1994. (5) This figure represents net cash provided by operating activities less capital expenditures, net. (6) This figure represents net operating profit after taxes less a charge for the cost of capital. NM: Not meaningful. 42
1997 1996 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------ $ 278,017 $ 236,150 $ 227,658 $ 187,701 $ 156,230 $ 142,599 $ 139,459 26,400 13,759 27,219 19,032 14,135 11,707 7,812 16,236 8,497 16,740 11,802 7,617 7,141 4,688 $ 1.04 $ 0.55 $ 1.10 $ 0.78 $ 0.56 $ 0.63 $ 0.42 - ------------------------------------------------------------------------------------------ $ 31,154 $ 23,716 $ 22,706 $ 29,026 $ 37,749 $ 9,709 $ 17,369 154,386 110,882 92,913 72,048 52,151 47,163 46,019 254,089 200,026 172,357 151,592 128,711 100,967 104,233 58,511 19,829 8,836 10,623 12,371 16,037 31,169 133,373 118,226 105,404 86,464 73,318 41,995 30,949 164,970 126,148 105,664 91,388 71,861 60,075 66,095 - ------------------------------------------------------------------------------------------ $ 14,323 $ 11,098 $ 8,747 $ 7,385 $ 6,455 $ 6,383 $ 5,673 40,916 24,731 35,363 25,472 19,954 18,539 15,121 22,886 19,542 25,020 18,589 12,827 19,387 16,270 55,599 27,467 29,374 14,894 11,444 8,333 7,558 (32,713) (7,925) (4,354) 3,695 1,383 11,054 8,712 - ------------------------------------------------------------------------------------------ 26.7% 23.5% 27.3% 24.4% 24.9% 24.1% 24.0% 17.0% 15.9% 15.7% 14.6% 16.0% 15.9% 16.2% 9.5% 5.8% 12.0% 10.1% 9.0% 8.2% 5.6% 5.8% 3.6% 7.3% 6.3% 4.9% 5.0% 3.4% 2.4% 2.8% 2.4% 2.1% 2.0% 2.0% 1.8% 38.5% 38.2% 38.5% 38.0% 37.0% 39.0% 40.0% 12.9% 7.6% 17.4% 14.8% 13.2% 19.6% 16.6% 9.8% 6.7% 15.8% 12.9% 10.6% 11.9% 7.1% 30.5% 14.4% 7.7% 10.9% 14.4% 27.6% 50.2% - ------------------------------------------------------------------------------------------ $ (3,293) $ (3,704) $ 4,543 $ 3,281 NM NM NM $ 1.47 $ 1.27 $ 1.64 $ 1.23 $ 0.96 $ 1.72 $ 1.46 $ (2.10) $ (0.51) $ (0.29) $ 0.25 $ 0.10 $ 0.98 $ 0.78 $ 8.55 $ 7.66 $ 6.92 $ 5.74 $ 5.48 $ 3.73 $ 2.79 $ 21.00 $ 22.38 $ 17.75 $ 17.63 $ 12.00 $ 10.38 $ 7.63 $ 14.50 $ 12.13 $ 13.75 $ 10.63 $ 7.88 $ 4.88 $ 4.13 $ 16.38 $ 14.38 $ 15.88 $ 17.63 $ 11.00 $ 10.38 $ 5.25 20.2x 40.7x 16.1x 22.6x 21.4x 16.5x 18.2x 13.9x 22.1x 12.5x 13.6x 14.1x 7.7x 9.8x 15,605 15,437 15,241 15,057 13,383 11,259 11,106 999 1,012 1,110 796 891 750 856 988 882 925 826 675 639 657 - ------------------------------------------------------------------------------------------
43 EX-21 6 dex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 Subsidiaries of the Registrant State or Jurisdiction of Name of Subsidiary Incorporation ------------------ ------------- MSC Pre Finish Metals Inc. Illinois MSC Pre Finish Metals (EGV) Inc. Delaware MSC Pre Finish Metals (MV) Inc. Delaware MSC Pre Finish Metals (MT) Inc. Delaware MSC Walbridge Coatings Inc. Delaware MSC Specialty Films, Inc. California MSC Laminates and Composites Inc. Delaware MSC Laminates and Composites (EGV) Inc. Delaware Material Sciences Foreign Sales Corporation U. S. Virgin Islands Solar-Gard International, Inc. Florida MSC Specialty Films (UK) Limited United Kingdom MSC Specialty Films (Canada) Inc. Canada MSC Specialty Films (Australasia) Pty. Limited Australia Solar-Gard (SEA) Pte., Ltd. Singapore Pro Marketing, Inc. Nebraska MSC Specialty Films de Mexico, S.A. de C.V. Mexico Specialty Films Services Company, S.A. de C.V. Mexico MSC Pinole Point Steel Inc. Delaware MSC Pre Finish Metals (PP) Inc. Delaware 36 EX-23 7 dex23.txt CONSENT OF ARTHUR ANDERSEN LLP. EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated April 20, 2001, included in or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (No. 33-00067, 33-40610, 33-41310, 33-57648, 33-81064, 333-15679, 333-15677, 333-33885, 333-33897 and 333-88387). /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Chicago, Illinois May 25, 2001 -----END PRIVACY-ENHANCED MESSAGE-----