-----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, UxQ2W3++rksQszUHUAO1y5LIeaK70PvcVOfQbtkv9y3IqHTmnBRoyBCP1zyBC01t rRX5TalfH3/pTbhKQ505cw== 0000950131-02-001848.txt : 20020508 0000950131-02-001848.hdr.sgml : 20020508 ACCESSION NUMBER: 0000950131-02-001848 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020228 FILED AS OF DATE: 20020508 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATERIAL SCIENCES CORP CENTRAL INDEX KEY: 0000755003 STANDARD INDUSTRIAL CLASSIFICATION: COATING, ENGRAVING & ALLIED SERVICES [3470] IRS NUMBER: 952673173 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08803 FILM NUMBER: 02638156 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, 2002 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 (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) 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 _ No _X_ ================================================================================ 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 $136,356,449 as of April 22, 2002 (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 22, 2002, the registrant had outstanding an aggregate of 14,749,656 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 Proxy Statement for the Annual Meeting of Shareowners to be held on June 20, 2002 Part III
2 PART I ITEM 1. BUSINESS Overview Material Sciences Corporation (unless otherwise indicated by the context, including its subsidiaries, "MSC" or "Company") designs, manufactures and markets materials-based solutions. The Company is organized under one business segment--MSC Engineered Materials and Solutions Group ("EMS"). The Company is re-evaluating the strategic position, growth and Economic Value Added ("EVA(R)") potential of portions of its business. Depending on available options, the Company may decide to invest or disinvest with the objective of creating additional value for shareowners. In fiscal year 2001, MSC operated under four segments: Coated Products and Services; Engineered Materials; Specialty Films; and Pinole Point Steel. The Specialty Films segment was sold on June 29, 2001, and the Company's Board of Directors approved a plan to sell Pinole Point Steel on September 18, 2001. Both of these segments have been reported as discontinued operations since August 31, 2001. In November 2001, the Company announced a reorganization and new operating structure whereby the previous business units and management structures were eliminated, resulting in one reportable segment, EMS. The Company's new operating structure has common functional departments such as sales, marketing, operations, accounting and human resources that report to EMS management. The Company focuses on providing materials-based solutions for electronic, acoustical/thermal and coated metal applications. The electronic materials-based solutions include coated and laminated noise reducing materials used in electronic applications to solve customer specific problems and enhance performance. The acoustical/thermal materials-based solutions include multilayer composites consisting of metals, polymeric coatings and other materials used to manage noise and thermal energy. The coated metal materials-based solutions include coil coated and electrogalvanized ("EG") protective and decorative coatings applied to coils of metal in a continuous, high-speed, roll-to-roll process. The Company's materials-based solutions are designed to meet specific customer requirements for the automotive, building and construction, electronics, lighting and appliance markets. The electronic and acoustical/thermal products are primarily manufactured and marketed as MSC's own products. With coated metal applications, MSC generally acts as a "toll coater" by processing its customers' metal for a fee, without taking ownership of the metal. On January 31, 2002, the Company expanded its electronic materials-based solutions by entering into an exclusive license agreement with TouchSensor Technologies, LLC ("TST"). This agreement provides for MSC to manufacture, use and sell TST's patented field-effect touchsensing technology for sensors, switches, displays and interface solutions in the consumer-electronics and transportation markets. There were no sales in fiscal 2002. Royalty payments to TST, per the license agreement, consist of a certain percentage of net sales of licensed products plus a certain percentage of sublicense profits subject to a minimum annual royalty amount (see Note 14 of the Notes to the Consolidated Financial Statements entitled "Contractual Commitment," on page 43). In general, the exclusive license period is at least four years ending on Feburary 28, 2006. The Pinole Point Steel business, which is reported as a discontinued operation, provides hot-dip galvanized and prepainted product primarily to the building and construction market. On April 30, 2002, the Company announced that it entered into a binding letter of intent with Grupo IMSA, S.A. de C.V. for the sale of substantially all of the assets and assumption of certain liabilities of the Pinole Point Steel business, subject to the satisfaction of closing conditions. Headquartered near Chicago, the Company, through Material Sciences Corporation, Engineered Materials and Solutions Group Inc., formerly known as MSC Pre Finish Metals Inc., ("EMS"), MSC Pinole Point Steel Inc. ("MSCPPS"), MSC Walbridge Coatings Inc. ("MSCWC") and MSC Laminates and Composites Inc. 3 ("MSCLC") subsidiaries, operates 9 manufacturing plants in the United States and Europe. EMS operates three facilities in Elk Grove Village, Illinois, one facility in Morrisville, Pennsylvania, one facility in Middletown, Ohio, one facility in Eisenach, Germany and MSCWC, a subsidiary of EMS, 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 LTV Corporation, Inc. ("LTV"). MSCPPS operates one coil coating and one galvanizing facility in Richmond, California. MSCLC also has a 50% interest in a facility in Brazil with Tekno S.A. ("Tekno"), a joint venture partnership formed in November 2000. Additional information concerning certain transactions and events is set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included under Item 7 below. 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. MSC Engineered Materials and Solutions Group EMS laminates, coats and electrogalvanizes various types of metal. EMS also manufactures composites typically consisting 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 (electronic and acoustical/thermal materials). These products consist of functionally engineered materials that are designed to meet specific customer requirements. Products 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 electronic, acoustical/thermal and coated metal materials to a variety of markets both in the United States and internationally. The majority of these materials are used in the automotive, building and construction, electronics, lighting and appliance markets. The major products included in the electronic materials-based solutions product group are computer hard disk drives, storage racks and electronic cabinets and boxes. The major products included in the acoustical/thermal materials-based solutions product group are disc brake noise dampers and Quiet Steel(R) for automotive body panels, oil pans, valve covers, front engine covers and heat shields. The major products included in the coated metal materials-based solutions product group are coil coated and electrogalvanized protective and decorative coatings for use as automotive body skins, metal building skins, appliance cabinets (refrigerators, freezers and other appliances), heating and ventilation applications, lighting fixtures and metal furniture. Electronic Materials-Based Solutions NRGDamp(TM) is MSC's proprietary laminated metal used to manufacture disk drive covers to reduce vibrational noise and improve performance. Although hard drives are best known for storing data in computers, they are quickly being adopted for a number of other products such as set-top boxes, home servers, television receivers, audio/video juke boxes and digital video recorders. The need for vibration damping in data-storage applications also extends to storage racks and brackets. Acoustical/Thermal Materials-Based Solutions 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 4 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 lawn mower engines, appliances and air conditioners. 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. Coated Metal Materials-Based Solutions 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, 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. 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. MSCWC, through its participation in the Partnership, primarily serves the automotive market by electrogalvanizing steel coils. EG is the primary corrosion-resistant steel product used to manufacture automobile 5 and light-truck body skins. Domestic demand for EG 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 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 complement of products. During fiscal 2001, laminating capability was added to the Partnership's facility in order to produce Quiet Steel for acoustical/thermal applications. 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% of the facility's available line time. 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. On December 29, 2000, LTV filed for protection under Chapter 11 of the U.S. Bankruptcy Code. On November 20, 2001, LTV announced its intention to cease operations and filed for liquidation under Chapter 7 of the U.S. Bankruptcy Code. As of February 28, 2002, the Partnership had no LTV pre-petition receivables outstanding and $0.7 million of LTV post-petition receivables outstanding. All LTV post-petition receivables were collected subsequent to fiscal year-end. As of February 28, 2002, MSC had $0.3 million of LTV pre-petition receivables outstanding that are fully reserved and no LTV post-petition receivables outstanding. On April 23, 2002, the Company entered into a purchase agreement with LTV for the acquisition of all the LTV interests in the Partnership ("LTV Transaction"). The purchase is subject to the completion of requirements under the order of the Bankruptcy Court dated March 21, 2001, as modified on November 7, 2001, relating to the sale of assets for proceeds. MSC expects to close the LTV Transaction in May 2002. Sales to LTV through the Partnership were $8.2 million in fiscal 2002. On October 15, 2001, BSC filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The Partnership is being treated as a critical vendor under BSC's proceedings. Sales to BSC through the Partnership were $32.7 million in fiscal 2002. As of February 28, 2002, the Partnership had no BSC pre-petition receivables outstanding and $4.5 million of BSC post-petition receivables outstanding. The BSC post-petition receivables are judged to be collectible in full, and therefore, no reserve was recorded as of February 28, 2002. BSC continues to participate in the Partnership and furnish EG to the automotive industry. The Company believes that the Partnership's processing services are valuable to the BSC estate, however, there can be no assurance that the BSC bankruptcy will not result in further disruption of the business of the Partnership. MSC has the right to utilize available line time to the extent BSC and LTV do not order Partnership services. In fiscal 2002, MSC utilized 18.3% of the available line time. On December 15, 2001, a major fire destroyed an electrogalvanizing facility owned by the Double Eagle Steel Coating Company ("DESCO"), a joint venture between U.S. Steel Corporation and Rouge Steel Company. Although DESCO has announced its intention to rebuild the facility, the Partnership is currently servicing both U.S. Steel Corporation and Rouge Steel Company, in addition to BSC, ISPAT Inland Inc. and other customers with EG and other services. MSC anticipates that the Partnership will operate at near capacity for the next six to twelve months. Due to uncertainty in the economy and bankruptcies experienced in the steel industry, however, no assurance can be made as to the Partnership's future production levels. 6 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, LTV and MSC for their respective customers, although the Partnership may also accept orders from outside third parties to the extent available capacity and production schedules permit. Sales to third parties were $6.5 million in fiscal 2002. The Partnership's pricing of services to BSC, LTV and MSC is contractually based, while pricing of services to other customers is market driven. MSC has production rights to 4% of the available line time at the Partnership's EG facility and will acquire an additional 33% of the available line time upon the closing of the LTV Transaction. MSC's net sales for electrogalvanizing consists of various fees charged to the Partnership for operating the facility. Net sales to the Partnership represented 21%, 20% and 24% of MSC's net sales in fiscal 2002, 2001 and 2000, 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. In addition, the Company shares in the benefits from the sale of EG and other coated metal products processed at the Partnership's EG facility to third party customers. Pinole Point Steel The Company's Board of Directors approved a plan to sell Pinole Point Steel on September 18, 2001 and, therefore, is disclosing it as a discontinued operation (see Note 12 of the Notes to the Consolidated Financial Statements entitled "Discontinued Operations," on page 43). On April 30, 2002, the Company announced that it entered into a binding letter of intent with Grupo IMSA, S.A. de C.V. for the sale of substantially all of the assets and assumption of certain liabilities of the Pinole Point Steel business, subject to the satisfaction of closing conditions. The Pinole Point Steel operation provides hot-dip galvanized ("HDG") and prepainted product primarily to the building and construction market. 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. On March 5, 2002, President George W. Bush announced the imposition of trade tariffs on certain steel imports to the U.S. MSC believes that these tariffs place significant restrictions on the availability and cost of steel to its Pinole Point Steel operation. The Company has filed for exclusion from these tariffs with the U.S. Department of Commerce. To the extent the tariffs cannot be avoided and the business is not sold, the Company will review the potential closure of all or a portion of the Pinole Point Steel operation due to the lack of availability of steel and increased costs of steel substrate, which could result in additional costs. Competition The market for electronic and acoustical/thermal materials-based solutions is competitive, both domestically and internationally. There are competitors in each product market served by the Company, some of which have greater resources than the Company. The Company believes, however, that its technology, product development capability, technical support and customer service place it in a strong competitive position in these markets. The coated metal materials-based solutions 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 coated metal (coil 7 coating) 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 believes it is one of the largest coil coaters, with approximately 10% of the total tons processed in the United States in calendar 2001. 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. 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 use of automotive quality hot-dip galvanized steel has been introduced by the steel industry and is beginning to make inroads into the EG market. The Company is unable to determine the effect, if any, on the market resulting from the existence of excess capacity, the entrance of additional capacity, improved galvanizing technology or the substitution of other materials. International The Company believes that significant opportunities exist internationally, particularly for the Company's computer hard disk drive materials, disc brake noise damper materials and Quiet Steel products. As a percentage of net sales, direct export sales represented 15%, 11% and 6% in fiscal 2002, 2001 and 2000, 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 computer hard disk drive materials, disc brake noise dampers, Quiet Steel 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 electronic, acoustical/thermal and coated metal products, services and technologies primarily through its in-house sales and marketing 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. In fiscal 2002, BSC and LTV were the primary marketing partners for EG steel. EMS currently markets products using the EMS production rights to 4% of the available line time at the Partnership's EG facility and will market an additional 33% of the available line time upon the closing of the LTV Transaction. All of the Company's selling activities are supported by technical service departments that aid the customer in the choice of available materials and their use in the customer's manufacturing process. The Company estimates that customers in the building products market were the end-users for approximately 22%, 22% and 21% of MSC's net sales in fiscal 2002, 2001 and 2000, respectively. The Company also estimates the original equipment and aftermarket segment of the transportation industry were the end-users for approximately 48%, 51% and 59% of MSC's net sales in fiscal 2002, 2001 and 2000, respectively. Due to concentration in the automotive industry, the Company believes that sales to individual automotive companies, including indirect sales, are significant. However, no individual customer accounts for more than 10% of the Company's consolidated revenues other than the Partnership. 8 The Company's backlog of orders as of February 28, 2002, was approximately $22.6 million, all of which is expected to be filled during the remainder of the current fiscal year. The Company's backlog was approximately $27.3 million as of February 28, 2001. For its continuing operations, 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 4 of the Notes to the Consolidated Financial Statements entitled "Contingencies," on pages 32 and 33 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" under Item 7 below. 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 $2.0 million in fiscal 2002, and has budgeted approximately $2.2 million for fiscal 2003, for maintenance or installation of environmental controls at its facilities. See Note 4 of the Notes to the Consolidated Financial Statements entitled "Contingencies," on pages 32 and 33. Research and Development Management estimates that it spent approximately $6.1 million in fiscal 2002, $6.3 million in fiscal 2001 and $5.3 million in fiscal 2000 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, 2002, the Company (excluding Pinole Point Steel) had 745 full-time employees. Of these, approximately 581 were engaged in manufacturing, 56 in marketing and sales, 80 in administrative and clerical positions and 28 in process and product development. The employees at the Walbridge, Ohio and the Eisenach, Germany 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 2007, November 2005 and May 2002, 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. 9 Executive Officers to the Registrant The executive officers of the Company as of April 22, 2002, are as follows:
Name Age Position(s) Held ---- --- ---------------- Gerald G. Nadig....... 56 Chairman, President and Chief Executive Officer, MSC since January 1998; previously President and Chief Executive Officer, MSC since January 1997. James J. Waclawik, Sr. 43 Vice President, Chief Financial Officer and Secretary, MSC since October 1996. Frank J. Lazowski, Jr. 62 Senior Vice President, Human Resources, MSC since March 1999; previously Vice President, Human Resources, MSC since July 1991. David J. DeNeve....... 33 Assistant Secretary, MSC and Vice President, Finance, EMS since November 2001; previously Vice President and Controller, MSC since March 2001; previously Controller, MSC since October 1996. Robert J. Mataya...... 59 Vice President, Business Planning and Development, MSC since July 1991. Edward J. Vydra....... 63 Vice President and Chief Technology Officer, MSC since November 1998; Vice President, Research and Development (various subsidiaries of the Company) since 1991. Ronald L. Millar...... 51 President, EMS since November 2001; previously Group Vice President and General Manager, MSCLC since November 1995. James W. Carlen....... 49 Vice President, Sales, EMS since November 2001; previously Vice President, Sales, MSCLC since December 1997; previously Vice President, Sales and Marketing, MSCLC since November 1995. John M. Klepper....... 55 Vice President, Human Resources, EMS since November 2001; previously Director of Corporate Human Resources, MSC since March 2000. Prior to joining the Company, Mr. Klepper was Vice President, Human Resources for Fluid Management, Inc. Clifford D. Nastas.... 39 Vice President, Marketing, EMS since November 2001; previously Vice President, Marketing, MSCLC since January 2001. Prior to joining the Company, Mr. Nastas was Global Automotive Business Director for Honeywell International Inc. Edward A. Williams.... 42 Executive Vice President, Operations, EMS since November 2001; previously Group Vice President and General Manager, MSCWC since May 1997.
10 ITEM 2. PROPERTIES For its continuing operations, the Company owns or leases facilities with an aggregate of approximately 1,362,000 square feet of space. In addition to the principal physical properties used by the Company in its continuing manufacturing operations as summarized in the table below, the Company leases insignificant sales and administrative offices pursuant to short-term leases. With respect to the Company's Pinole Point Steel business, which is reported as a discontinued operation, the Company owns two facilities with an aggregate of approximately 479,000 square feet of space. 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 Lease Area in Expiration Location Square Feet (or Ownership) -------- ----------- -------------- Elk Grove Village, Illinois Plant No. 1 58,000 Owner Elk Grove Village, Illinois Plant No. 2 223,000 Owner Elk Grove Village, Illinois Plant No. 3 312,000 Owner Morrisville, Pennsylvania.............. 121,000 Owner Middletown, Ohio....................... 170,000 Owner Walbridge, Ohio........................ 465,000 June 2003(1) Eisenach, Germany...................... 11,000 Owner
- -------- (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. ITEM 3. LEGAL PROCEEDINGS 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. In December 2001, the PRPs established and funded a trust that has contracted with a remediation contractor to undertake all foreseeable activities necessary to achieve cleanup of the site pursuant to the decree. The trust has purchased an annuity that will pay the remediation contractor the anticipated expenses and oversight costs, including the purchase of stop-loss insurance coverage to reimburse the trust in the event of unforeseen cleanup expenses. The Company contributed $2.0 million to the trust in December 2001, with no impact to income (loss) before income taxes, and expects that this payment will conclude its financial obligations with respect to the Kingsbury site. Upon the conclusion of litigation against a PRP that elected not to participate in the trust, the Company will be entitled to receive its pro rata share of any funds remaining in the site group litigation account and any periodic payments by the non-participating PRP equal to its share of the trust's ongoing remediation expenses. Moreover, should site closure be achieved ahead of schedule, the Company will be entitled to receive its pro rata share of the computed value of the annuity less a 25% early closure incentive bonus payable to the remediation contractor. 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 $1.1 million. This work has begun, and MSC has maintained a letter of credit for approximately $1.2 million to secure its obligation to pay its currently estimated share of the remediation expenses at this site. 11 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 $1.3 million to $1.7 million. The Company's environmental reserves were approximately $1.4 million as of February 28, 2002. On February 27, 2002, the Company received a notice of alleged violations of environmental laws, regulations or permits from the Illinois EPA related to air emissions. The Company has filed a response and is scheduling additional testing in conjunction with the Illinois EPA. 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, 2002. 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 a 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). 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 2002. 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 ---- ------- -------- ------- 2002. 1st $ 9.0000 $6.7000 2nd 10.9600 8.0800 3rd 10.2200 7.9000 4th 10.5000 9.4000
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
There were 926 shareowners of record of the Company's common stock at the close of business on April 22, 2002. 12 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 5 of the Notes to the Consolidated Financial Statements entitled "Indebtedness" on pages 33 and 34. ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year ---------------------------------------------- (In thousands, except per share data) 2002 2001 2000 1999 1998 - ------------------------------------- -------- -------- -------- -------- -------- Income Statement Data Net Sales................................ $250,506 $273,860 $278,669 $257,218 $246,709 Income (Loss) from Continuing Operations Before Income Taxes.................... (7,621) 10,415 21,380 19,716 9,265 Net Income (Loss)(1)(2).................. (25,083) (684) 16,715 7,947 6,459 Diluted Net Income (Loss) Per Share...... $ (1.79) $ (0.05) $ 1.10 $ 0.52 $ 0.42 Balance Sheet Data Total Assets............................. $299,474 $345,539 $350,564 $353,007 $380,648 Total Debt............................... 105,262 137,465 120,667 138,117 182,444 Shareowners' Equity...................... 128,624 149,736 158,982 149,338 140,918
- -------- (1) In 2002, the Company recorded a gain on the sale of Specialty Films of $38,787; a loss on the sale of Pinole Point Steel of $53,287 (including a provision of $12,278 for future operating losses); a pretax restructuring charge against income of $1,450; and a pretax special charge against income of $8,361 for the impairment of certain assets. (2) 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 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (In thousands) As a result of the sale of substantially all of the assets of Material Sciences Corporation's ("MSC" or "Company") Specialty Films segment, including MSC Specialty Films, Inc. ("MSC/SFI"), to Bekaert Corporation and its affiliates ("Bekaert") in the second quarter of fiscal 2002, and MSC's Board of Directors approval of a plan to sell its Pinole Point Steel business, both Specialty Films and Pinole Point Steel are reported as discontinued operations for all periods presented. On November 15, 2001, the Company announced it implemented a reorganization and cost reduction program which is expected to save approximately $4,000 annually before income taxes. The program involved the reorganization of the Company's three continuing operations into a single business unit which provides electronic, acoustical/thermal and coated metal materials-based solutions to a variety of markets. In addition, the reorganization provides for a new operating structure whereby the previous business units and management structures were eliminated, resulting in one reportable segment, MSC Engineered Materials and Solutions Group ("EMS"). The Company's new operating structure has common functional departments such as sales, marketing, operations, accounting and human resources that report to EMS management. The electronic materials-based solutions consist of coated and laminated noise reducing materials used in the electronics market. The acoustical/thermal materials-based solutions consist of layers of metal and other materials used to manage noise and thermal energy for the automotive, lighting and appliance markets. The coated metal materials-based solutions include coil coated and electrogalvanized ("EG") products primarily used in the automotive, building and construction, appliance and lighting markets. MSC believes that this more efficient structure will enable it to more effectively transfer skills, knowledge and technology throughout the Company. 13 The Company reports segment information based on how management disaggregates its businesses for evaluating performance and making operating decisions. As a result of the Company's restructuring program, MSC is reporting results for all periods on the basis of one segment, EMS. Performance for the Company is measured and resources allocated based on the results of EMS. Within EMS, sales are reported by three groups described above, however, income before interest and taxes is only reported for EMS as a whole. RESULTS OF OPERATIONS--Fiscal 2002 Compared with Fiscal 2001 Net Sales Net sales for continuing operations of MSC decreased 8.5% in fiscal 2002 to $250,506 from $273,860 in fiscal 2001. Sales of electronic-based materials grew 51.7% to $19,292 in fiscal 2002 from $12,719 in the prior year. The growth was due to increased sales of NRGDamp(TM) for computer disk drive covers. In fiscal 2002, acoustical/thermal materials sales declined 6.4% to $55,431 from $59,204 in fiscal 2001 due to lower sales to the automotive and lighting markets. Coated metal materials sales decreased 13.0% in fiscal 2002 to $175,783 from $201,937 recorded in the prior year. A decline in shipments of coated metal materials to the building and construction market due to poor domestic economic conditions was the main reason for the significant shortfall. Gross Profit MSC's gross profit margin was 18.1% in fiscal 2002 as compared with 19.7% in the prior year. The decrease in gross profit margin was primarily the result of an unfavorable product mix and lower capacity utilization due to sales shortfalls of coated metal products and higher operating costs. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses were 16.9% of net sales in fiscal 2002 compared to 15.3% of net sales in fiscal 2001. The higher SG&A percentage was due to the decrease in net sales and $1,270 of bad debt expense incurred due to several customers declaring bankruptcy. Asset Impairments and Restructuring Expenses The Company recorded special charges of $8,361 for asset impairments and $1,450 relating to the Company's restructuring program. The Company has reviewed its investment in its powder coating assets. MSC has determined that it will reevaluate efforts to commercialize its proprietary powder coating capabilities based on the availability of new paint chemistries and application cost versus traditional liquid coating methods. Based on the projected cash flows from powder coating assets, the Company has recorded a $5,929 charge to earnings in the fourth quarter of fiscal 2002. The Company has reviewed its investment in the capitalized intangible assets and equipment related to its license with Northwestern University to commercialize its Solid State Shear Pulverization ("SSSP") technology. The Company is completing research studies with potential licensees of the SSSP technology. At this time, no assurance can be made as to the success of these studies to commercialize the SSSP technology. Based on the projected cash flows from the SSSP assets, MSC has recorded a $2,001 charge to earnings in the fourth quarter of fiscal 2002. On November 15, 2001, the Company announced it implemented a reorganization and cost reduction program. The program involves the reorganization of the Company's three continuing operations into a single business unit which will provide electronic, acoustical/thermal and coated metal materials-based solutions to a variety of markets. In addition, the reorganization provides for a new operating structure whereby the previous 14 business units and management structures were eliminated, resulting in one reportable segment, EMS. The Company's new operating structure has common functional departments such as sales, marketing, operations, accounting and human resources that report to EMS management. MSC terminated 41 employees primarily in sales, general and administrative departments of the Company and recorded a restructuring charge of $1,450 in fiscal 2002. Of this amount, $1,110 pertained to severance expenses and $340 for other related costs. As of February 28, 2002, cash of $912 was paid in conjunction with the restructuring program. The restructuring reserve was $538 as of February 28, 2002. Total Other Expense, Net and Income Taxes Total other expense, net, was $708 in fiscal 2002 as compared to $1,695 in the prior year. The variance was partially due to higher interest income and lower interest expense as a result of the cash proceeds received from the sale of the Company's Specialty Films segment during the second quarter of fiscal 2002. In September 2000, the Company entered into a forward contract for 15 million DEM related to the acquisition of Goldbach Automobil Consulting ("GAC") in fiscal 2002. The forward contract was executed on January 26, 2001 and resulted in a gain of $514. Equity in Results of Joint Ventures was a net loss of $1,560 in fiscal 2002 as compared with a net loss of $1,194 in fiscal 2001. MSC's effective income tax rate was 41.1% (benefit) in fiscal 2002 due to the amount of loss before income taxes relative to tax credits and other permanent items versus 37.4% (provision) in fiscal 2001. General During August 2001, a subsidiary of the Company acquired the net assets of GAC, a European disc brake noise damper distributor and stamper. An initial payment of 1,525 Euros was made on September 26, 2001 and an additional payment of 4,490 Euros was made on October 5, 2001 (approximately $5,300 based on the foreign exchange rate as of August 31, 2001). In addition, contingent consideration may be paid based upon future earnings of the operation. As of February 28, 2002, the Company recorded its initial purchase price allocation, which included $4,637 for goodwill related to the acquisition. MSC, through its participation in Walbridge Coatings, An Illinois Partnership ("Partnership"), primarily serves the automotive market by electrogalvanizing steel coils. Bethlehem Steel Corporation ("BSC") owns a 33.5% interest in the Partnership, LTV Steel Company, Inc. ("LTV") owns a 16.5% interest and MSC owns the remaining 50% interest. BSC has production rights to 63% of the available line time at the Partnership's EG facility, LTV has rights to 33% of the line time and MSC has rights to 4% of the line time. On December 29, 2000, LTV filed for protection under Chapter 11 of the U.S. Bankruptcy Code. On November 20, 2001, LTV announced its intention to cease operations and filed for liquidation under Chapter 7 of the U.S. Bankruptcy Code. As of February 28, 2002, the Partnership had no LTV pre-petition receivables outstanding and $733 of LTV post-petition receivables outstanding. All LTV post-petition receivables were collected subsequent to fiscal year-end. As of February 28, 2002, MSC had $274 of LTV pre-petition receivables outstanding that are fully reserved and no LTV post-petition receivables outstanding. On April 23, 2002, the Company entered into a purchase agreement with LTV for the acquisition of all the LTV interests in the Partnership ("LTV Transaction"). The purchase is subject to the completion of requirements under the order of the Bankruptcy Court dated March 21, 2001, as modified on November 7, 2001, relating to the sale of assets for proceeds. MSC expects to close the LTV Transaction in May 2002 and pay approximately $3,100 for LTV's interests. Sales to LTV through the Partnership were $8,152 in fiscal 2002. On October 15, 2001, BSC filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The Partnership is being treated as a critical vendor under BSC's proceedings. As of February 28, 2002, the Partnership had no BSC pre-petition receivables outstanding and $4,479 of BSC post-petition receivables outstanding. The BSC post-petition receivables are judged to be collectible in full and, therefore, no reserve was recorded as of February 28, 2002. Sales to BSC through the Partnership were $32,711 in fiscal 2002. 15 BSC continues to participate in the Partnership and to furnish EG to the automotive industry. The Company believes that the Partnership's processing services are valuable to the BSC estate, however, there can be no assurance that the BSC bankruptcy will not result in further disruption of the business of the Partnership. MSC has the right to utilize available line time to the extent BSC and LTV do not order Partnership services. In fiscal 2002, MSC utilized 18.3% of the available line time. On December 15, 2001, a major fire destroyed an electrogalvanizing facility owned by the Double Eagle Steel Coating Company ("DESCO"), a joint venture between U.S. Steel Corporation and Rouge Steel Company. Although DESCO has announced its intention to rebuild the facility, the Partnership is currently servicing both U.S. Steel Corporation and Rouge Steel Company, in addition to BSC, ISPAT Inland Inc. and other customers with EG and other services. MSC anticipates that the Partnership will operate at near capacity for the next six to twelve months. Due to uncertainty in the economy and bankruptcies in the steel industry, however, no assurance can be made as to the Partnership's future production levels. On January 31, 2002, the Company expanded its electronic materials-based solutions by entering into an exclusive license agreement with TouchSensor Technologies, LLC ("TST"). This agreement provides for MSC to manufacture, use and sell TST's patented field-effect touchsensing technology for sensors, switches, displays and interface solutions in the consumer-electronics and transportation markets. There were no sales in fiscal 2002. Royalty payments to TST, per the license agreement, consist of a certain percentage of net sales of licensed products plus a certain percentage of sublicense profits subject to a minimum annual royalty amount (see Note 14 on page 43). In general, the exclusive license period is at least four years ending on February 28, 2006. RESULTS OF DISCONTINUED OPERATIONS--Fiscal 2002 Compared with Fiscal 2001 Specialty Films On June 29, 2001, the Company completed the sale of substantially all of the assets of its Specialty Films segment, including its interest in Innovative Specialty Films, LLC, to Bekaert pursuant to the terms of the Purchase Agreement by and among MSC, MSC/SFI, Bekaert and N.V. Bekaert S.A., dated June 10, 2001. The Company received cash of $121,982 and recorded an after-tax gain of $38,787 in the second quarter of fiscal 2002. Net proceeds after taxes and transaction costs were $90,537. Net sales of Specialty Films for the partial year of fiscal 2002 were $21,578 as compared to $58,306 in all of fiscal 2001. Income from discontinued operation, net of income taxes, was $1,469 for the partial year of fiscal 2002 versus $5,785 in all of fiscal 2001. Pinole Point Steel On September 18, 2001, MSC's Board of Directors approved a plan to sell Pinole Point Steel, the Company's West Coast hot-dip galvanizing and coil coating operation. The Consolidated Financial Statements have been reclassified to segregate the net assets and operating results of the business. In fiscal 2002, the Company recorded a provision for loss on discontinued operation, net of income taxes, of $53,287 which included the write-down of assets of $38,888 to their estimated net realizable value of $65,104 based on current information regarding the potential sale of Pinole Point Steel, an accrual of $12,278 for future operating losses during the nine-month period ending May 31, 2002 and disposition costs of $2,121. The loss on discontinued operation, net of income taxes, includes the allocation of consolidated interest expense of $5,391 to be incurred during the nine-month period ending May 31, 2002. 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. Net sales of Pinole Point Steel in fiscal 2002 decreased to $128,397, 14.3% lower than $149,810 last fiscal year. Pinole Point Steel's sales continue to be affected by an overall weak West Coast building and construction market. Loss from discontinued operation, net of income taxes, was $16,456 in fiscal 2002 as compared to 16 $12,992 in fiscal 2001. The decline was due to deteriorating selling prices that more than offset the decrease in the cost of steel purchased, as well as lower volume and higher utility costs. This was partially offset by lower depreciation expense of $5,567 due to changes made to the estimated useful lives of the galvanizing and coil coating lines during the first quarter of fiscal 2002, which reflects the service lives of the assets. The loss from discontinued operation, net of income taxes, includes the allocation of consolidated interest expense of $8,100 in fiscal 2002 versus $8,844 in the prior year. On March 5, 2002, President George W. Bush announced the imposition of trade tariffs on certain steel imports to the U.S. MSC believes that these tariffs place significant restrictions on the availability and cost of steel to its Pinole Point Steel operation. The Company has filed for exclusion from these tariffs with the U.S. Department of Commerce. To the extent the tariffs cannot be avoided and the business is not sold pursuant to the transaction described below or others, the Company will review the potential closure of all or a portion of the Pinole Point Steel operation due to the lack of availability of steel and increased cost of steel substrate, which could result in additional costs. On April 30, 2002, the Company announced that it entered into a binding letter of intent with Grupo IMSA, S.A. de C.V. for the sale of substantially all of the assets and assumption of certain liabilities of the Pinole Point Steel business, subject to the satisfaction of closing conditions. After tax benefits and transaction costs, MSC expects to realize approximately $65,000 from the sale. RESULTS OF OPERATIONS--Fiscal 2001 Compared with Fiscal 2000 Net Sales Net sales for continuing operations of MSC in fiscal 2001 decreased 1.7% to $273,860 from $278,669 in fiscal 2000. Sales of electronic-based materials grew to $12,719 in fiscal 2001 from $1,207 in the prior year. The growth was due to an increase in NRGDamp sales for computer disk drive covers. Acoustical/thermal materials sales declined 9.1% in fiscal 2001 to $59,204 as compared with $65,151 in fiscal 2000 due to lower sales of disc brake noise dampers, offset somewhat by shipments of Quiet Steel to the automotive market. In fiscal 2001, sales of coated metal materials decreased 4.9% to $201,937 from $212,311 in fiscal 2000. Higher sales of appliance and lighting products were more than offset by a decrease in EG demand for the automotive market. Gross Profit MSC's gross profit margin was 19.7% in fiscal 2001 as compared with 22.6% in the prior year. The decrease in gross profit margin was primarily the result of lower sales volume at the EG operation, as well as increased utility costs of $2,553. Selling, General and Administrative Expenses SG&A expenses were 15.3% of net sales in fiscal 2001 versus 14.0% 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, both domestically and internationally. 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. Total Other Expense, Net and Income Taxes Total other expense, net, was $1,695 in fiscal 2001 as compared with $2,416 in the prior year. Interest expense, net, increased $96 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 acquisition of GAC in fiscal 2002. The forward contract was executed on January 26, 2001 and resulted in a gain 17 of $514. Equity in Results of Joint Ventures was a net loss of $1,194 in fiscal 2001 as compared with a net loss of $1,272 in fiscal 2000. MSC's effective income tax rate was 37.4% in fiscal 2001 versus 33.3% in fiscal 2000. The change in the effective tax rate was primarily due to an income tax reserve adjustment in fiscal 2000. RESULTS OF DISCONTINUED OPERATIONS--Fiscal 2001 Compared with Fiscal 2000 Specialty Films Net sales of Specialty Films for fiscal 2001 were $58,306 as compared to $50,788 in fiscal 2000. Income from discontinued operation, net of income taxes, was $5,785 in fiscal 2001 versus $4,526 in the prior year. Pinole Point Steel Net sales of 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 from discontinued operation, net of income taxes, was $12,992 as compared to $2,071 in the prior year. 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 from discontinued operation, net of 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. LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations with funds generated from operating activities, sales of various businesses, issuances of shares in a public offering and borrowings under its credit facilities or long-term debt instruments. MSC utilized $25,510 of cash from operating activities in fiscal 2002, as compared with generating $12,450 in the prior fiscal year. This change was due mainly to income taxes payable related to the gain on the sale of Specialty Films, increased working capital as a result of higher levels of inventory and lower accounts payable and accrued expenses, and a decrease in net income. In fiscal 2002, MSC invested $5,289 in capital improvement projects versus $9,710 in fiscal 2001. Capital spending related to discontinued operations was $2,941 in fiscal 2002 and $3,495 in fiscal 2001. Investments in joint ventures were $893 in fiscal 2002 compared with $3,489 last fiscal year. Investments in joint ventures related to discontinued operations were $5,114 in fiscal 2002 and $270 in fiscal 2001. Fiscal 2003 capital expenditures are projected to be approximately $5,000. MSC's total debt decreased to $105,262 in fiscal 2002 from $137,465 as of February 28, 2001. On June 29, 2001, the Company utilized a portion of the proceeds of $90,537 from the sale of substantially all of the assets of the Specialty Films segment to pay off the total amount outstanding under its previous line of credit. The Company has invested the remaining proceeds from the sale in marketable securities and money market funds. The Company has principal debt payments of $13,421 and interest payments of $3,594 due May 31, 2002 related to the 1998 Senior Notes and the 1997 Senior Notes (see Note 5 on pages 33 and 34). The Company did not have any off-balance sheet debt as of February 28, 2002. The Company entered into a $20,000 committed line of credit on October 11, 2001. The agreement expires on October 11, 2004. No borrowings were outstanding under the line as of February 28, 2002. There were $5,315 in outstanding letters of credit at that date. A fee of .25% is charged for the unused portion of the line. At the Company's option, interest is at the bank's reference rate (4.75% as of February 28, 2002) or at LIBOR plus a 18 margin (2.25% until February 28, 2002). The financial covenants include a fixed charge coverage ratio of not less than 1.0 to 1.0 commencing February 28, 2002; a liquidity ratio of not less than 1.5 to 1.0 commencing November 30, 2001; a maximum leverage ratio (3.5 to 1.0 from February 28, 2002 through November 30, 2002, 3.0 to 1.0 from February 28, 2003 to November 30, 2003, and 2.5 to 1.0 thereafter); and minimum net worth of $140,000 plus 50% of cumulative consolidated net income accruing for fiscal years ending after November 30, 2001, and only for such periods that the Company's balance sheet leverage exceeds 2.0 to 1.0. However, compliance with the financial covenants is not required at times when the Company has cash collateralized its obligations under the line of credit. As of February 28, 2002, the outstanding letters of credit have been cash collateralized. A total of $5,315 was classified as Restricted Cash in the Consolidated Balance Sheets. Other than the aforementioned restricted cash balance, there are no other restrictions on the Company's use of its cash and cash equivalents at times when no borrowings are outstanding under the facility. The line of credit is secured by certain accounts receivable of the Company. In April 2002, one of the letters of credit ($3,200) was canceled and the related cash collateral was released to the Company. 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. On March 1, 2002, the Company purchased 13,593 of its shares from certain employees at $10.00 per share related to the vesting of the Company's 1999 Long-Term Incentive/Leverage Stock Awards Program. MSC had a capital lease obligation of $905 as of February 28, 2002 and $1,465 as of February 28, 2001, relating to a facility that the Company subleases to the Partnership. The Company has a contingent liability related to the license agreement with TST to pay minimum royalty fees of $1,167 in fiscal 2003 and an aggregate of $7,000 in fiscal 2004 to 2006. The Company believes that its cash on hand, marketable securities and cash to be received from the potential sale of Pinole Point Steel will be sufficient to fund its working capital needs, capital expenditures, acquisitions and debt payments. The Company has been named as a potentially responsible party at a Superfund site located in Kingsbury, Indiana. During fiscal 2002, the potentially responsible party ("PRP") committee of the Kingsbury, Indiana Superfund site accepted a buy-out proposal to complete the remaining cleanup at the Kingsbury site in exchange for an up-front payment. In early December 2001, the Company paid $2,047 for its portion of the buyout, which is approximately the amount reserved by the Company. The Company's outstanding letter of credit of approximately $3,200 was canceled in the first quarter of fiscal 2003. MSC continues to participate in the implementation of settlements with the government for the remediation of various other Superfund sites. The status of these Superfund sites and other environmental matters are described in the accompanying Notes to Consolidated Financial Statements (see Note 4 on pages 32 and 33). MSC believes its range of exposure for all known and quantifiable environmental exposures, based on allocations of liability among PRPs, the most recent estimate of remedial work and other information available, is $1,300 to $1,700 as of February 28, 2002. 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). 19 Inflation MSC believes that inflation has not had a significant impact on fiscal 2002, 2001 and 2000 results of operations. Accounting Pronouncements 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 $283 in fiscal 2001 and $121 in fiscal 2000 were reclassified from net sales to cost of sales. The Company accounts for shipping and handling costs in accordance with Issue 00-10. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001, be accounted for using the purchase method of accounting. With the adoption of SFAS No. 142 on March 1, 2002, goodwill will no longer be subject to amortization over its estimated useful life. Goodwill will be subject to at least an annual assessment of impairment by applying a fair-value based test, beginning on the date of adoption of the new accounting standard. MSC is assessing the potential impact, if any, which may be caused by the assessment of the impairment requirements of SFAS No. 142. MSC does not expect the new pronouncements to have a material effect on the financial position or results of operations of the Company. In August 2001, the FASB issued SFAS No. 144, "Impairment or Disposal of Long-Lived Assets" which will become effective for the Company on March 1, 2002. This statement further refines the rules for accounting for long-lived assets and long-lived assets to be disposed of. MSC is assessing the potential impact, if any, which may be caused by the assessment of the impairment requirements of SFAS No. 144. Critical Accounting Policies MSC's significant accounting policies are presented within the Notes to the Consolidated Financial Statements (see Note 1 on pages 29 and 30) included elsewhere in this Form 10-K. While all of the significant accounting policies impact the Company's Consolidated Financial Statements, some of the policies may be viewed to be critical. These policies are those that are both most important to the portrayal of the Company's financial condition and results of operations and require management's most difficult, subjective or complex judgments and estimates. Management bases its judgments and estimates on historical experience and various other factors that are believed to be reasonable under the circumstances. The results of judgments and estimates form the basis for making judgments about the Company's value of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its Consolidated Financial Statements. Revenue Recognition. The Company generally recognizes revenue upon shipment. In certain circumstances, dictated by written instruction from the customer, MSC recognizes revenue and holds the product until the receipt of shipping instructions. The Company's revenue recognition policies comply with the criteria set forth in Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." Long-Lived Assets. 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. 20 Concentrations of Credit Risks. Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of temporary and short-term 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 90 days or less. In fiscal 2002, the Company made investments in marketable securities. These marketable securities are available for sale and consist primarily of investments in U.S. agency and corporate notes. These investments are expected to be held less than twelve months and are classified as Marketable Securities in the Consolidated Balance Sheets. The Company records unrealized gains and losses on its investments in marketable securities to adjust the carrying value of these investments to fair value. Unrealized losses were $84 as of February 28, 2002. The unrealized losses are classified as a component of Accumulated Other Comprehensive Loss in Shareowners' Equity. The Company reviews the collectability of accounts receivable on a regular basis, taking into account the customer liquidity, payment history and industry condition. Approximately 35% of the Company's receivables are concentrated with customers in the automotive industry. Approximately 7% of the Company's receivables are concentrated with U.S. steel mills. The Partnership has an additional $7,012 of receivables concentrated with U.S. steel mills. 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. This Form 10-K contains forward-looking statements, which include, without limitation, those statements regarding our estimated loss and proceeds from the disposition of discontinued operations, that set out anticipated results based on management's plans and assumptions. MSC has 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 Form 10-K, including, among others: . The risk of the successful development and introduction of new products and technologies, including products based on the touch-sensory technology we have licensed from TST; . Competitive factors; . Changes in the business environment, including the automotive, building and construction, and durable goods industries; . The ability of the Company to successfully implement its reorganization plans and to achieve the benefits the Company expects from such plans; . The risk that any of the assumptions made in preparing the estimated loss and estimated proceeds from the disposition of discontinued operation may prove inaccurate and that the actual loss or proceeds may be materially greater or less than the estimated loss or proceeds; . Revenue and earnings expectations as a result of supplying a portion of DESCO's electrogalvanizing requirements; . Changes in laws, regulations, policies or other activities of governments, agencies and similar organizations (including the ruling under Section 201 of the Trade Act of 1974); . Continuation of the favorable environment to make acquisitions, including regulatory requirements and market values of candidates; 21 . 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 changes in the overall economy; . Environmental risks associated with the Company's past and present manufacturing operations; . The loss, or changes in the operations, financial condition or results of operation of one or more significant customers of the Company; . The ability to consummate the purchase of LTV's interest in the Partnership and risks associated with the termination of the Partnership in December 2004 or the termination of the joint venture partnership with Tekno in December 2003; . Increases in the prices of raw and other material inputs used by the Company; . Facility utilization at Walbridge Coatings; . The ability to consummate the sale of Pinole Point Steel; . Risks related to the Company's use of Arthur Andersen LLP as its independent auditors; . Acts of war or terrorism, including the uncertainties arising out of the unfortunate events of September 11, 2001; and . Other factors, risks and uncertainties detailed from time to time in the Company's filings with the Securities and Exchange Commission. MSC undertakes 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 business and financial condition. Other sections of this Form 10-K may include additional factors which could adversely effect the Company's business and financial performance. Moreover, the Company operates in a competitive environment. New risks emerge from time to time and it is not always possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company's business or to which any factor or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. 22 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, 2002, 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. The table below provides information about the Company's debt that is sensitive to changes in interest rates.
Expected Maturity Date (Fiscal Year) ------------------------------------------------------------------------- Fair 2003 2004 2005 2006 2007 Thereafter Total Value ------- ------- ------- ------- ------- ---------- -------- ------- (Dollars in Thousands) Total Debt: Fixed Rate: Principal Amount......... $14,045 $18,701 $13,421 $13,421 $13,421 $32,253 $105,262 $99,459 Average Interest Rate........... 7.1% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9% Variable Rate: Principal Amount......... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- Average Interest Rate*.......... N/A N/A N/A N/A N/A N/A N/A
- -------- * Average variable interest rates are based on fiscal 2002 year end rates. Actual rates may be higher or lower. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MATERIAL SCIENCES CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS
Page No. ---- Report of Independent Public Accountants.............................................................. 24 Consolidated Statements of Income (Loss) for the years ended February 28 or 29, 2002, 2001 and 2000... 25 Consolidated Balance Sheets as of February 28, 2002 and 2001.......................................... 26 Consolidated Statements of Cash Flows for the years ended February 28 or 29, 2002, 2001 and 2000...... 27 Consolidated Statements of Changes in Shareowners' Equity for the years ended February 28 or 29, 2002, 2001 and 2000....................................................................................... 28 Consolidated Statements of Comprehensive Income (Loss) for the years ended February 28 or 29, 2002, 2001 and 2000....................................................................................... 28 Notes to Consolidated Financial Statements............................................................ 29
Note: All other financial statement schedules are omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. 23 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, 2002 and February 28, 2001, 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, 2002. 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 and its subsidiaries as of February 28, 2002 and February 28, 2001, and the results of its operations and its cash flows for each of the three fiscal years in the period ended February 28, 2002, in conformity with accounting principles generally accepted in the United States. /S/ ARTHUR ANDERSEN LLP Arthur Andersen LLP Chicago, Illinois April 29, 2002 24 Consolidated Statements of Income (Loss) Material Sciences Corporation and Subsidiaries
For the years ended February 28 or 29, ---------------------------- 2002 2001 2000 -------- -------- -------- (In thousands, except per share data) Net Sales......................................................................................... $250,506 $273,860 $278,669 Cost of Sales..................................................................................... 205,275 219,853 215,722 -------- -------- -------- Gross Profit...................................................................................... $ 45,231 $ 54,007 $ 62,947 Selling, General and Administrative Expenses...................................................... 42,333 41,897 39,151 Asset Impairments and Restructuring Expenses...................................................... 9,811 -- -- -------- -------- -------- Income (Loss) from Operations..................................................................... $ (6,913) $ 12,110 $ 23,796 -------- -------- -------- Other (Income) and Expense: Interest (Income) Expense, Net................................................................. $ (1,126) $ 826 $ 730 Equity in Results of Joint Ventures............................................................ 1,560 1,194 1,272 Other, Net..................................................................................... 274 (325) 414 -------- -------- -------- Total Other Expense, Net.................................................................... $ 708 $ 1,695 $ 2,416 -------- -------- -------- Income (Loss) from Continuing Operations Before Provision (Benefit) for Income Taxes.............. $ (7,621) $ 10,415 $ 21,380 Provision (Benefit) for Income Taxes.............................................................. (3,130) 3,892 7,120 -------- -------- -------- Income (Loss) from Continuing Operations.......................................................... $ (4,491) $ 6,523 $ 14,260 Discontinued Operations: Income from Discontinued Operation--Specialty Films (Net of Provision for Income Taxes of $1,009, $3,991 and $2,926, Respectively)...................................................... 1,469 5,785 4,526 Loss from Discontinued Operation--Pinole Point Steel (Net of Benefit for Income Taxes of $5,261, $9,035 and $1,419, Respectively)...................................................... (7,561) (12,992) (2,071) Gain on Sale of Discontinued Operation--Specialty Films (Net of Provision for Income Taxes of $31,445)................................................................................... 38,787 -- -- Loss on Discontinued Operation--Pinole Point Steel (Including Provision of $12,278 for Future Operating Losses, Net of Benefit for Income Taxes of $37,047)................................. (53,287) -- -- -------- -------- -------- Net Income (Loss)................................................................................. $(25,083) $ (684) $ 16,715 ======== ======== ======== Basic Net Income (Loss) Per Share: Income (Loss) from Continuing Operations.......................................................... $ (0.32) $ 0.47 $ 0.95 Income from Discontinued Operation--Specialty Films............................................... 0.10 0.41 0.30 Loss from Discontinued Operation--Pinole Point Steel.............................................. (0.54) (0.93) (0.14) Gain on Sale of Discontinued Operation--Specialty Films........................................... 2.77 -- -- Loss on Discontinued Operation--Pinole Point Steel................................................ (3.80) -- -- -------- -------- -------- Basic Net Income (Loss) Per Share................................................................. $ (1.79) $ (0.05) $ 1.11 ======== ======== ======== Diluted Net Income (Loss) Per Share: Income (Loss) from Continuing Operations.......................................................... $ (0.32) $ 0.46 $ 0.94 Income from Discontinued Operation--Specialty Films............................................... 0.10 0.41 0.30 Loss from Discontinued Operation--Pinole Point Steel.............................................. (0.54) (0.92) (0.14) Gain on Sale of Discontinued Operation--Specialty Films........................................... 2.77 -- -- Loss on Discontinued Operation--Pinole Point Steel................................................ (3.80) -- -- -------- -------- -------- Diluted Net Income (Loss) Per Share............................................................... $ (1.79) $ (0.05) $ 1.10 ======== ======== ======== Weighted Average Number of Common Shares Outstanding Used for Basic Net Income (Loss) Per Share............................................................................................ 14,007 14,027 15,070 Dilutive Shares................................................................................... -- 114 130 -------- -------- -------- Weighted Average Number of Common Shares Outstanding Plus Dilutive Shares............................................................................ 14,007 14,141 15,200 ======== ======== ======== Outstanding Common Stock Options Having No Dilutive Effect........................................ 912 1,560 1,219 ======== ======== ========
The accompanying notes are an integral part of these statements. 25 Consolidated Balance Sheets Material Sciences Corporation and Subsidiaries
February 28, -------------------- 2002 2001 --------- --------- (In thousands, except share data) Assets Current Assets: Cash and Cash Equivalents.............................................................................. $ 33,806 $ 2,419 Restricted Cash........................................................................................ 5,315 -- Marketable Securities.................................................................................. 13,121 -- Receivables, Less Reserves of $4,754 in 2002 and $3,121 in 2001........................................ 27,249 29,914 Income Taxes Receivable................................................................................ 4,325 1,637 Prepaid Expenses....................................................................................... 1,431 2,254 Inventories: Raw Materials....................................................................................... 10,211 9,314 Finished Goods...................................................................................... 14,645 16,841 Prepaid Taxes.......................................................................................... 2,451 2,232 Current Assets of Discontinued Operation, Net--Specialty Films......................................... -- 41,887 Current Assets of Discontinued Operation, Net--Pinole Point Steel...................................... 65,104 103,508 --------- --------- Total Current Assets................................................................................ $ 177,658 $ 210,006 --------- --------- Property, Plant and Equipment: Land and Building...................................................................................... $ 58,960 $ 56,942 Machinery and Equipment................................................................................ 167,284 173,150 Capital Leases......................................................................................... 17,195 17,195 Construction in Progress............................................................................... 1,270 4,642 --------- --------- $ 244,709 $ 251,929 Accumulated Depreciation and Amortization.............................................................. (141,794) (133,465) --------- --------- Net Property, Plant and Equipment................................................................... $ 102,915 $ 118,464 --------- --------- Other Assets: Investment in Joint Ventures........................................................................... $ 11,033 $ 11,700 Intangible Assets, Net................................................................................. 6,594 3,579 Other.................................................................................................. 1,274 1,790 --------- --------- Total Other Assets.................................................................................. $ 18,901 $ 17,069 --------- --------- Total Assets........................................................................................ $ 299,474 $ 345,539 ========= ========= Liabilities Current Liabilities: Current Portion of Long-Term Debt...................................................................... $ 14,045 $ 7,703 Accounts Payable....................................................................................... 23,518 22,493 Accrued Payroll Related Expenses....................................................................... 10,338 10,834 Accrued Expenses....................................................................................... 10,911 6,241 Accrued Future Operating Losses--Pinole Point Steel.................................................... 3,383 -- --------- --------- Total Current Liabilities........................................................................... $ 62,195 $ 47,271 --------- --------- Long-Term Liabilities: Deferred Income Taxes.................................................................................. $ 7,053 $ 5,665 Long-Term Debt, Less Current Portion................................................................... 91,217 129,762 Other.................................................................................................. 10,385 13,105 --------- --------- Total Long-Term Liabilities......................................................................... $ 108,655 $ 148,532 --------- --------- 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; 18,115,624 Shares Issued and 14,731,188 Shares Outstanding as of February 28, 2002 and 17,676,984 Shares Issued and 14,292,548 Shares Outstanding as of February 28, 2001........................................................................................ 363 354 Additional Paid-In Capital................................................................................ 67,441 63,334 Treasury Stock at Cost, 3,384,436 Shares as of February 28, 2002 and February 28, 2001.................... (34,813) (34,813) Retained Earnings......................................................................................... 95,802 120,861 Accumulated Other Comprehensive Loss...................................................................... (169) -- --------- --------- Total Shareowners' Equity........................................................................... $ 128,624 $ 149,736 --------- --------- Total Liabilities and Shareowners' Equity........................................................... $ 299,474 $ 345,539 ========= =========
The accompanying notes are an integral part of these statements. 26 Consolidated Statements of Cash Flows Material Sciences Corporation and Subsidiaries
For the years ended February 28 or 29, ------------------------------------- 2002 2001 2000 -------- -------- -------- (In thousands) Cash Flows From: Operating Activities: Net Income (Loss)................................................. $(25,083) $ (684) $ 16,715 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by (Used in) Operating Activities: Discontinued Operation, Net--Specialty Films.................. (2,597) (1,978) 2,175 Discontinued Operation, Net--Pinole Point Steel............... 1,096 7,014 5,846 Gain on Sale of Discontinued Operation--Specialty Films....... (38,787) -- -- Loss on Discontinued Operation--Pinole Point Steel............ 53,287 -- -- Depreciation and Amortization................................. 17,826 17,064 16,803 Asset Impairments............................................. 8,361 -- -- Provision (Benefit) for Deferred Income Taxes................. 779 (2,928) (809) Compensatory Effect of Stock Plans............................ 2,753 2,794 2,397 Other, Net.................................................... 1,984 1,100 1,336 Changes in Assets and Liabilities: Receivables................................................... 2,258 1,512 913 Income Taxes Receivable....................................... (2,688) (1,637) 968 Prepaid Expenses.............................................. 810 (356) (529) Inventories................................................... 271 (913) (5,130) Accounts Payable.............................................. (4,369) (3,105) 2,617 Accrued Expenses.............................................. (9,366) (3,629) 2,788 Income Taxes Payable.......................................... (31,445) -- -- Other, Net.................................................... (600) (1,804) 1,640 -------- -------- -------- Net Cash Provided by (Used in) Operating Activities........ $(25,510) $ 12,450 $ 47,730 -------- -------- -------- Investing Activities: Discontinued Operation, Net--Specialty Films...................... $ (6,508) $ (2,049) $ (2,155) Discontinued Operation, Net--Pinole Point Steel................... (1,583) (1,901) (3,427) Cash Received from Sale of Specialty Films, Net................... 121,982 -- -- Capital Expenditures, Net......................................... (5,289) (9,710) (9,763) Acquisitions, Net of Cash Acquired................................ (634) -- -- Investment in Joint Ventures...................................... (893) (3,489) (1,136) Distribution from Joint Ventures.................................. -- 169 -- Purchases of Marketable Securities................................ (30,701) -- -- Proceeds from Sale of Marketable Securities....................... 17,423 -- -- Other............................................................. (451) (448) (609) -------- -------- -------- Net Cash Provided by (Used in) Investing Activities........ $ 93,346 $(17,428) $(17,090) -------- -------- -------- Financing Activities: Discontinued Operation, Net--Specialty Films...................... $ (294) $ (2,189) $ (2,130) Net Proceeds (Payments) Under Lines of Credit..................... (24,500) 17,300 (17,000) Payments of Debt.................................................. (7,703) (502) (450) Purchase of Treasury Stock........................................ -- (12,739) (11,583) Issuance of Common Stock.......................................... 1,363 1,383 2,115 -------- -------- -------- Net Cash Provided by (Used in) Financing Activities........ $(31,134) $ 3,253 $(29,048) -------- -------- -------- Net Increase (Decrease) in Cash................................... $ 36,702 $ (1,725) $ 1,592 Cash and Cash Equivalents at Beginning of Year.................... 2,419 4,144 2,552 -------- -------- -------- Cash and Cash Equivalents at End of Year.......................... $ 39,121 $ 2,419 $ 4,144 ======== ======== ======== Supplemental Cash Flow Disclosures: Interest Paid................................................. $ 8,650 $ 9,931 $ 9,612 Income Taxes Paid............................................. 17,682 3,997 6,021 ======== ======== ======== Non-Cash Investing and Financing Activities: Accrued Future Operating Losses--Pinole Point Steel........... $ 3,383 $ -- $ -- Accrued Expenses Related to Pinole Point Steel Disposition.... 2,121 -- --
The Changes in Assets and Liabilities above for the year ended February 28, 2002 are net of assets and liabilities acquired and sold. The accompanying notes are an integral part of these statements. 27 Consolidated Statements of Changes in Shareowners' Equity Material Sciences Corporation and Subsidiaries
Common Stock Treasury Stock ----------------- -------------------- Additional Paid-In Retained Shares Amount Capital Earnings Shares Amount ---------- ------ ---------- -------- ---------- -------- (In thousands, except share data) 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) Net Loss.................................... -- -- -- (25,083) -- -- Issuance of Common Stock.................... 166,198 3 1,293 -- -- -- Compensatory Effect of Stock Plans.......... 272,442 6 2,741 -- -- -- Tax Benefit from Exercise of Stock Options.. -- -- 73 -- -- -- Conformity of Fiscal Years for Joint Venture -- -- -- 24 -- -- ---------- ---- ------- -------- ---------- -------- Balance as of February 28, 2002............. 18,115,624 $363 $67,441 $ 95,802 (3,384,436) $(34,813) ========== ==== ======= ======== ========== ========
Consolidated Statements of Comprehensive Income (Loss) Material Sciences Corporation and Subsidiaries
For the years ended February 28 or 29, -------------------------------------- 2002 2001 2000 -------- ----- ------- (In thousands) Net Income (Loss)........................... $(25,083) $(684) $16,715 Other Comprehensive Loss: Foreign Currency Translation Adjustments. (85) -- -- Unrealized Loss on Marketable Securities. (84) -- -- -------- ----- ------- Comprehensive Income (Loss)................. $(25,252) $(684) $16,715 ======== ===== =======
The accompanying notes are an integral part of these statements. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share data) Material Sciences Corporation and Subsidiaries For the three years ended February 28, 2002 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. The Company reports results for all periods on the basis of one segment. Certain prior-year amounts have been reclassified to conform with the fiscal 2002 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. Significant estimates include amounts for inventory and receivable exposures, customer claims, asset valuations, income taxes and contingencies. 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 voting interest no greater than 50% in both Walbridge Coatings, An Illinois Partnership ("Partnership") and Tekno S.A. ("Tekno"). Under the terms of both the Partnership and Tekno agreements, significant actions require unanimous consent of all parties and, as a result, MSC does not have a controlling interest in either the Partnership or Tekno. Accordingly, the Company accounts for the Partnership and Tekno 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, 1 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 were being amortized on a straight-line basis over periods of 10 to 20 years. Accumulated amortization of intangible assets was $1,940 as of February 28, 2002 and $2,975 as of February 28, 2001. 29 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, dictated by written instruction from the customer, MSC recognizes revenue and holds the product until the receipt of shipping instructions. The Company's revenue recognition policies comply with the criteria set forth in 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 $6,121 in fiscal 2002, $6,279 in fiscal 2001 and $5,343 in fiscal 2000 and are included in the 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 and short-term 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 90 days or less. In fiscal 2002, the Company made investments in marketable securities. These marketable securities are available for sale and consist primarily of investments in U.S. agency and corporate notes. These investments are expected to be held less than twelve months and are classified as Marketable Securities in the Consolidated Balance Sheets. The Company records unrealized gains and losses on its investments in marketable securities to adjust the carrying value of these investments to fair value. Unrealized losses were $84 as of February 28, 2002. The unrealized losses are classified as a component of Accumulated Other Comprehensive Loss in Shareowners' Equity. The Company reviews the collectability of accounts receivable on a regular basis, taking into account the customer liquidity, payment history and industry condition. Approximately 35% of the Company's receivables are concentrated with customers in the automotive industry. Approximately 7% of the Company's receivables are concentrated with U.S. steel mills. The Partnership has an additional $7,012 of receivables concentrated with U.S. steel mills. 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. Note 2: Acquisitions During August 2001, a subsidiary of the Company acquired the net assets of Goldbach Automobil Consulting ("GAC"), a European disc brake noise damper distributor and stamper. An initial payment of 1,525 Euros was made on September 26, 2001 and an additional payment of 4,490 Euros was made on October 5, 2001 (approximately $5,300 based on the foreign exchange rate as of August 31, 2001). In addition, contingent consideration may be paid based upon future earnings of the operation. As of February 28, 2002, the Company recorded its initial purchase price allocation, which included $4,637 for goodwill related to the acquisition. 30 Note 3: Joint Venture and Partnership MSC, through its participation in Walbridge Coatings, An Illinois Partnership, primarily serves the automotive market by electrogalvanizing steel coils ("EG"). Bethlehem Steel Corporation ("BSC") owns a 33.5% interest in the Partnership, LTV Steel Company, Inc. ("LTV") owns a 16.5% interest and MSC owns the remaining 50% interest. BSC has production rights to 63% of the available line time at the Partnership's EG facility, LTV has rights to 33% of the line time and MSC has rights to 4% of the line time. On December 29, 2000, LTV filed for protection under Chapter 11 of the U.S. Bankruptcy Code. On November 20, 2001, LTV announced its intention to cease operations and filed for liquidation under Chapter 7 of the U.S. Bankruptcy Code. On April 23, 2002, the Company entered into a purchase agreement with LTV for the acquisition of all the LTV interests in the Partnership ("LTV Transaction"). The purchase is subject to the completion of requirements under the order of the Bankruptcy Court dated March 21, 2001, as modified on November 7, 2001, relating to the sale of assets for proceeds. MSC expects to close the transaction in May 2002 and pay approximately $3,100 for LTV's interests. MSC had $274 of LTV pre-petition receivables outstanding that are fully reserved and no LTV post-petition receivables outstanding as of February 28, 2002. On October 15, 2001, BSC filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The Partnership is being treated as a critical vendor under BSC's proceedings. BSC continues to participate in the Partnership and furnish EG to the automotive industry. The Company believes that the Partnership's processing services are valuable to the BSC estate, however, there can be no assurance that the BSC bankruptcy will not result in further disruption of the business of the Partnership. MSC has no BSC receivables as of February 28, 2002. On December 15, 2001, a major fire destroyed an electrogalvanizing facility owned by the Double Eagle Steel Coating Company ("DESCO"), a joint venture between U.S. Steel Corporation and Rouge Steel Company. Although DESCO has announced its intention to rebuild the facility, the Partnership is currently servicing both U.S. Steel Corporation and Rouge Steel Company, in addition to BSC, ISPAT Inland, Inc. and other customers with EG and other services. Due to uncertainty in the economy and bankruptcies experienced in the steel industry, however, no assurance can be made as to the Partnership's future production levels. MSC's net sales for electrogalvanizing consists of various fees charged to the Partnership for operating the facility. MSC has production rights to 4% of the available line time at the Partnership's EG facility and will acquire an additional 33% of the available line time upon the closing of the LTV Transaction. 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 the Company's processing skill and efficiency. In addition, the Company shares in the benefits from the sale of EG and other coated metal products processed at the Partnership's EG facility to outside parties. MSC has the right to utilize available line time to the extent BSC and LTV do not order Partnership services. In fiscal 2002, MSC utilized 18.3% of the available line time. There was $1,621 due from the Partnership included in MSC's trade receivables as of February 28, 2002 and no amounts due as of February 28, 2001. Summarized financial information for the Partnership is presented below.
2002 2001 2000 Income Statement Information ------- ------- ------- Net Sales............... $51,714 $53,918 $67,512 Loss from Operations.... (3,146) (2,392) (2,534) Net Loss................ (3,101) (2,376) (2,534) 2002 2001 2000 Balance Sheet Information ------- ------- ------- Current Assets.......... $ 7,949 $ 6,880 $ 8,527 Total Assets............ 20,632 22,012 20,305 Total Liabilities....... 1,627 349 1,734 Partners' Capital....... 19,005 21,663 18,571
31 The orders for the Partnership's toll coating services are primarily and independently generated by BSC, LTV and MSC 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. The Partnership's Net Sales include amounts billed to BSC, LTV, MSC and other Third Party customers. Sales to BSC through the Partnership were $32,711 in fiscal 2002. Sales to LTV through the Partnership were $8,152 in fiscal 2002. Third Party sales were $6,482 in fiscal 2002. The Partnership's pricing of services to BSC, LTV and MSC is contractually based, while pricing of services to other customers is market driven. The Partnership's costs include fees paid to MSC for operating the facility, depreciation expense of the equipment (owned by the Partnership) and certain administrative expenses. The Loss from Operations is primarily related to the annual depreciation expense that is not included in the contractual pricing to the partners. The Partnership assets consist primarily of working capital and property, plant and equipment. The Partnership has $7,012 of receivables from U.S. steel mills as of February 28, 2002. As of February 28, 2002, the Partnership had no BSC pre-petition receivables outstanding and $4,479 of BSC post-petition receivables outstanding. The BSC post-petition receivables are judged to be collectible in full, and therefore, no reserve was recorded as of February 28, 2002. As of February 28, 2002, the Partnership had no LTV pre-petition receivables outstanding and $733 of LTV post-petition receivables outstanding. All LTV post-petition receivables were collected subsequent to fiscal year-end. Liabilities consist primarily of fees owed to MSC. The Company's share of Partners' Capital does not directly correlate to the Company's 50% ownership interest due to contractual allocation requirements of the Partnership agreements. In November 2000, a subsidiary of MSC formed a joint venture partnership with Tekno S.A. ("Tekno") for the manufacture and sale of Quiet Steel(R) and disc brake noise damper material for the South American market. Tekno's sales were $439 in fiscal 2002. The Equity in Results of Joint Venture was a net loss of $10 in fiscal 2002. Under the equity method, MSC includes its portion of the Partnership's and Tekno's results of operations in the Consolidated Statements of Income (Loss) under Equity in Results of Joint Ventures. The Equity in Results of Joint Ventures was a net loss of $1,560 in fiscal 2002, $1,194 in fiscal 2001 and $1,272 in fiscal 2000. Note 4: 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. In December 2001, the PRPs established and funded a trust that has contracted with a remediation contractor to undertake all foreseeable activities necessary to achieve cleanup of the site pursuant to the decree. The trust has purchased an annuity that will pay the remediation contractor the anticipated expenses and oversight costs, including the purchase of stop-loss insurance coverage to reimburse the trust in the event of unforeseen cleanup expenses. The Company contributed $2,047 to the trust in December 2001, with no impact to income (loss) before income taxes, and expects that this payment will conclude its financial obligations with respect to the Kingsbury site. Upon the conclusion of litigation against a PRP that elected not to participate in the trust, the Company will be entitled to receive its pro rata share of any funds remaining in the site group litigation account and any periodic payments by the non-participating PRP equal to its share of the trust's ongoing remediation expenses. Moreover, should site closure be achieved ahead of schedule, the Company will be entitled to receive its pro rata share of the computed value of the annuity less a 25% early closure incentive bonus payable to the remediation contractor. 32 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 the 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 $1,300 to $1,700. The Company's environmental reserves were approximately $1,400 as of February 28, 2002. On February 27, 2002, the Company received a notice of alleged violations of environmental laws, regulations or permits from the Illinois EPA related to air emissions. The Company has filed a response and is scheduling additional testing in conjunction with the Illinois EPA. 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, 2002. 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 a 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 5: Indebtedness Long-term debt, including a capital lease, 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.
2002 2001 Long-Term Debt Obligations -------- -------- Borrowings Under Lines of Credit........... $ -- $ 24,500 1998 Senior Notes.......................... 61,500 61,500 1997 Senior Notes.......................... 42,857 50,000 Obligations Under Capital Lease (Note 6)... 905 1,465 -------- -------- $105,262 $137,465 Less Current Portion....................... 14,045 7,703 -------- -------- Long-Term Debt............................. $ 91,217 $129,762 ======== ======== Projected Principal Payments of Long-Term Debt
2003............... $ 14,045 2004............... 18,701 2005............... 13,421 2006............... 13,421 2007............... 13,421 2008 and Thereafter 32,253 -------- Total.............. $105,262 ========
33 The Company entered into a $20,000 committed line of credit on October 11, 2001. The agreement expires on October 11, 2004. No borrowings were outstanding under the line as of February 28, 2002. There were $5,315 in outstanding letters of credit at that date. A fee of .25% is charged for the unused portion of the line. At the Company's option, interest is at the bank's reference rate (4.75% as of February 28, 2002) or at LIBOR plus a margin (2.25% until February 28, 2002). The financial covenants include a fixed charge coverage ratio of not less than 1.0 to 1.0 commencing February 28, 2002; a liquidity ratio of not less than 1.5 to 1.0 commencing November 30, 2001; a maximum leverage ratio (3.5 to 1.0 from February 28, 2002 through November 30, 2002, 3.0 to 1.0 from February 28, 2003 to November 30, 2003, and 2.5 to 1.0 thereafter); and minimum net worth of $140,000 plus 50% of cumulative consolidated net income accruing for fiscal years ending after November 30, 2001, and only for such periods that the Company's balance sheet leverage exceeds 2.0 to 1.0. However, compliance with the financial covenants is not required at times when the Company has cash collateralized its obligations under the line of credit. As of February 28, 2002, the outstanding letters of credit have been cash collateralized. A total of $5,315 was classified as Restricted Cash in the Consolidated Balance Sheets. Other than the aforementioned restricted cash balance, there are no other restrictions on the Company's use of its cash and cash equivalents at times when no borrowings are outstanding under the facility. The line of credit is secured by certain accounts receivable of the Company. In April 2002, one of the letters of credit ($3,200) was canceled and the related cash collateral was released to the Company. 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 less than the carrying value by $3,400 as of February 28, 2002. 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%. On May 31, 2001, the Company made a principal payment of $7,143 against the 1997 Senior Notes. The estimated fair value of the 1997 Senior Notes, based on discounted cash flows, was less than the carrying value by $2,403 as of February 28, 2002. 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 of $118,341, consolidated senior debt ratio (55.0% until agreement expiration), and total indebtedness ratio (60.0% until agreement expiration). 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, 2002. Note 6: Leases MSC leases one manufacturing facility under a capital lease that includes renewal options. Other equipment is 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, December 31, 2004. 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. 34
Capital Operating Lease Leases Minimum Lease Payments ------- --------- 2003................................... $692 $ 854 2004................................... 276 319 2005................................... -- 25 2006................................... -- 11 2007................................... -- 11 2008 and Thereafter.................... -- -- ---- ------ Total Minimum Lease Payments........... $968 $1,220 ====== Amount Representing Interest........... 63 ---- Present Value of Minimum Lease Payments $905 ====
Amortization of leased property was $809 in fiscal 2002, $813 in fiscal 2001 and $813 in fiscal 2000. Total rental expense under operating leases was $2,431 in fiscal 2002, $3,784 in fiscal 2001 and $3,271 in fiscal 2000. Note 7: 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 $1,691 in fiscal 2002, $1,771 in fiscal 2001 and $1,818 in fiscal 2000. 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. 35 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.
Postretirement Pension Benefits Benefits ---------------- ---------------- 2002 2001 2002 2001 ------- ------- ------- ------- Change in Benefit Obligation: Obligation, March 1 . . . . . . . . . . ...... $ 9,390 $ 9,104 $ 2,273 $ 1,795 Service Cost Benefits Earned During the Period 275 272 145 140 Interest Cost on Benefit Obligation .......... 653 648 172 154 Plan Amendments............................... -- 75 Actuarial (Gain) Loss......................... (11) (236) 82 312 Benefit Payments.............................. (461) (473) 1 (128) Curtailments.................................. (157) -- (161) -- ------- ------- ------- ------- Obligation, February 28....................... $ 9,689 $ 9,390 $ 2,512 $ 2,273 ======= ======= ======= ======= Change in Plan Assets: Plan Assets at Fair Value, March 1............ $ 5,318 $ 5,333 $ 59 $ 59 Actual Return on Plan Assets.................. (233) 39 7 -- Company Contributions......................... 382 419 (1) 128 Benefit Payments.............................. (461) (473) 1 (128) ------- ------- ------- ------- Plan Assets at Fair Value, February 28........ $ 5,006 $ 5,318 $ 66 $ 59 ======= ======= ======= ======= Funded Status: Funded Status . . . . . . . . . . . . . . .... $(4,683) $(4,072) $(2,446) $(2,214) Unrecognized Transition Obligation............ 11 14 -- -- Unrecognized Prior Service Cost............... 585 670 (810) (878) Unrecognized Gain............................. (158) (663) (237) (186) ------- ------- ------- ------- Net Amount Recognized......................... $(4,245) $(4,051) $(3,493) $(3,278) ======= ======= ======= =======
Pension Benefits Postretirement Benefits ------------------- ---------------------- 2002 2001 2000 2002 2001 2000 ----- ----- ----- ---- ---- ---- Components of Net Periodic Benefit Cost: Service Cost Benefits Earned During the Period $ 275 $ 272 $ 267 $145 $140 $134 Interest Cost on Benefit Obligation........... 653 648 641 172 154 147 Expected Return on Assets . . . . ............ (419) (377) (355) (4) (4) (4) Amortization of Transition Obligation......... 3 3 3 -- -- -- Amortization of Prior Service Cost ........... 85 85 82 (69) (69) (69) Amortization of Net (Gain) Loss............... (21) (58) 30 (30) (24) (25) ----- ----- ----- ---- ---- ---- Net Periodic Benefit Cost..................... $ 576 $ 573 $ 668 $214 $197 $183 ===== ===== ===== ==== ==== ====
2002 2001 2000 ---- ---- ---- Assumptions Used in Determining the Plans' Funded Status: Discount Rate.............................. 7.00% 7.50% 8.00% 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%
36 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 $76 and the health care component of the accumulated postretirement benefit obligation by $589 as of February 28, 2002. 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 $30 and the health care component of the accumulated postretirement benefit obligation by $477 as of February 28, 2002. Note 8: Interest (Income) Expense, Net The table presented below analyzes the components of interest (income) expense, net.
2002 2001 2000 Interest (Income) Expense, Net ------- ------- ------- Interest Expense................................ $ 8,322 $ 9,818 $ 9,358 Interest Income................................. (1,348) (148) (296) Interest Expense Allocated to Pinole Point Steel (8,100) (8,844) (8,332) ------- ------- ------- Interest (Income) Expense, Net.................. $(1,126) $ 826 $ 730 ======= ======= =======
The table above excludes interest expense of $127, $185 and $237 for fiscal years 2002, 2001 and 2000, 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). The loss from discontinued operation, net of income taxes of Pinole Point Steel, includes an allocation of consolidated interest expense as noted in the table above. 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. Note 9: 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 tax rate are summarized and presented below.
2002 2001 2000 Tax Provision (Benefit) ------- ------- ------ Current: Federal............... $(4,251) $ 6,206 $6,786 State................. 342 845 1,252 ------- ------- ------ $(3,909) $ 7,051 $8,038 ------- ------- ------ Deferred: Federal............... $ 1,451 $(2,799) $ (661) State................. (672) (360) (257) ------- ------- ------ $ 779 $(3,159) $ (918) ------- ------- ------ Total Provision (Benefit) $(3,130) $ 3,892 $7,120 ======= ======= ======
37
2002 2001 2000 Tax Rate Reconciliation ---- ---- ---- Federal Statutory Rate........................... 35.0% 35.0% 35.0% State and Local Taxes, Net of Federal Tax Benefit 4.3 6.1 5.5 Research and Development Tax Credits............. -- -- (0.5) Foreign Sales Corp. Benefit...................... 5.4 (2.1) (0.8) State Tax Credits................................ -- (1.5) (0.8) Reserve Adjustment............................... -- -- (5.6) Other, Net....................................... (3.6) (0.1) 0.5 ---- ---- ---- Effective Income Tax Rate........................ 41.1% 37.4% 33.3% ==== ==== ====
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:
2002 2001 ------- ------- Property and Equipment............ $13,050 $17,213 Reserves Not Deductible Until Paid (2,574) (2,640) Employee Benefit Liabilities...... (5,669) (6,227) Deferred State Income Taxes, Net.. (114) 575 Tax Credit Carryforwards.......... (1,095) (6,261) Other............................. 1,004 773 ------- ------- Deferred Tax Liabilities, Net..... $ 4,602 $ 3,433 ======= =======
As of February 28, 2002, tax credit carryforwards of $944 were available with an unlimited expiration date, and the remaining $151 expires in varying amounts through fiscal 2022. Deferred Tax Liabilities, Net have been recorded on the Company's Consolidated Balance Sheets as follows:
2002 2001 ------- ------- Long-Term Liabilities-- Deferred Income Taxes..... $ 7,053 $ 5,665 Current Assets--Prepaid Taxes (2,451) (2,232) ------- ------- Deferred Tax Liabilities, Net $ 4,602 $ 3,433 ======= =======
Note 10: Significant Customers and Export Sales Net sales to the Partnership represented 21%, 20% and 24% of MSC's net sales in fiscal 2002, 2001 and 2000, respectively. Export sales represented 15% of the Company's net sales in fiscal 2002, 11% in fiscal 2001 and 6% in fiscal 2000. Note 11: 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 1992 Omnibus Awards Plan for Key Employees ("1992 Plan"); the Material Sciences Corporation Stock Option Plan for Non-Employee Directors 38 ("1996 Directors Plan"); and the Material Sciences Corporation 2001 Compensation Plan for Non-Employee Directors ("2001 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:
2002 2001 2000 -------- ------ ------- Net Income (Loss): As Reported...................... $(25,083) $ (684) $16,715 ======== ====== ======= Pro Forma........................ $(25,135) $ (884) $16,490 ======== ====== ======= Basic Net Income (Loss) Per Share: As Reported...................... $ (1.79) $(0.05) $ 1.11 ======== ====== ======= Pro Forma........................ $ (1.79) $(0.06) $ 1.09 ======== ====== ======= Diluted Net Income (Loss) Per Share: As Reported...................... $ (1.79) $(0.05) $ 1.10 ======== ====== ======= Pro Forma........................ $ (1.79) $(0.06) $ 1.08 ======== ====== =======
There are 2,512,500 shares authorized under the 1985 Plan to provide for the shares purchased by employees under the Material Sciences Corporation Employee Stock Purchase Program. 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 over 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 thereof. 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 140,485 shares were outstanding as of February 28, 2002. The 1996 Directors Plan was replaced with the 2001 Directors Plan that was approved by the shareowners in June 2000 and was effective March 1, 2001. 39 There are 150,000 shares authorized under the 2001 Directors Plan. This plan consists of grants that provide for all or a portion of each non-employee director's annual retainer, according to the non-employee director's election to receive the annual retainer either in cash, shares of common stock, deferred stock units (entitles the non-employee director to receive shares at a later date), or a combination thereof. The shares and deferred stock units vest in four equal installments on the date of grant and the three, six and nine-month anniversaries of the date of grant. Any portion which has not vested prior to the date the non-employee director ceases to be a non-employee director shall expire and be forfeited. The 2001 Directors Plan also consists of grants to provide for annual incentive stock options ("Incentive Options"). The Incentive Options vest one year from the date of grant and expire ten years after the date of grant. The exercise price of all options equals the market price of the Company's stock either on the date of grant or, in the case of the 1996 Directors Plan, on the day prior to the grant. 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. A summary of transactions under the stock option plans was as follows: Stock Option Activity
Options Outstanding Exercisable Options ----------------------------------- ------------------------ Weighted Weighted Key Average Average Directors Employees Exercise Price Shares Exercise Price --------- --------- -------------- --------- -------------- Stock Option Activity 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 $13.74 1,348,026 $13.75 Granted............................ 36,273 9,000 8.80 Exercised.......................... (14,400) (49,325) 8.32 Canceled........................... (9,174) (538,409) 12.81 -------- --------- ------ --------- ------ Outstanding as of February 28, 2002 216,358 724,500 $14.36 899,545 $14.51 ======== ========= ====== ========= ======
Options Outstanding Exercisable Options as of February 28, 2002 as of February 28, 2002 - ------------------------------------------------------------ ----------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Exercise Prices Shares Life (Years) Exercise Price Shares Exercise Price - ------------------------ ------- ------------ -------------- ------- -------------- $ 6.80-$ 8.70...... 82,100 5.44 $ 7.54 65,461 $ 7.63 $10.13-$12.38...... 83,101 3.92 10.95 63,467 11.19 $13.50-$14.88...... 391,607 3.31 14.39 391,067 14.39 $15.00-$18.75...... 384,050 4.14 16.49 379,550 16.48 ------- ---- ------ ------- ------ $ 4.95-$18.75...... 940,858 3.89 $14.36 899,545 $14.51 ======= ==== ====== ======= ======
40 The weighted average fair value of individual options granted in fiscal 2002, 2001 and 2000 is $8.78, $6.13 and $4.48, 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 2002, 2001 and 2000, respectively: risk-free interest rates of 5.18%, 6.21% and 5.44%; expected life of 10.0 years, 6.1 years and 6.4 years; and expected volatility of 39.44%, 42.28% and 41.50%. A summary of transactions under the restricted stock plans was as follows: Restricted Stock Activity 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 Granted......................... 378,440 Vested.......................... (367,742) Canceled........................ (105,998) -------- Unvested as of February 28, 2002 429,800 ========
Compensation effects arising from issuing restricted stock and stock options were $2,741 in fiscal 2002, $2,828 in fiscal 2001 and $2,704 in fiscal 2000, 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 102,473 in fiscal 2002, 119,254 in fiscal 2001 and 165,676 in fiscal 2000. 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 1/100/th 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. 41 Note 12: Discontinued Operations On June 29, 2001, the Company completed the sale of substantially all of the assets of its Specialty Films segment, including its interest in Innovative Specialty Films, LLC, to Bekaert pursuant to the terms of the Purchase Agreement by and among MSC, MSC/SFI, Bekaert and N.V. Bekaert S.A., dated June 10, 2001. The Company received cash of $121,982 and recorded an after-tax gain of $38,787 in the second quarter of fiscal 2002. Net proceeds after taxes and transaction costs were $90,537. As a result of the sale, Specialty Films has been reported as a discontinued operation for all periods presented. After reviewing various strategic alternatives for Pinole Point Steel, MSC's Board of Directors, on September 18, 2001, approved a plan to sell Pinole Point Steel, the Company's West Coast hot-dip galvanizing and coil coating operation. On April 30, 2002, the Company announced that it entered into a binding letter of intent with Grupo IMSA, S.A. de C.V. for the sale of substantially all of the assets and assumption of certain liabilities of the Pinole Point Steel business, subject to the satisfaction of closing conditions. After tax benefits and transaction costs, MSC expects to realize approximately $65,000 from the sale. Pinole Point Steel has been reported as a discontinued operation, and the Consolidated Financial Statements have been reclassified to segregate the net assets and operating results of the business. In fiscal 2002, the Company recorded a provision for loss on discontinued operation, net of income taxes, of $53,287 which included the write-down of assets of $38,888 to their estimated fair value of $65,104 based on current information regarding the potential sale of Pinole Point Steel, an accrual of $12,278 for future operating losses during the nine-month period ending May 31, 2002 and disposition costs of $2,121. The loss on discontinued operation, net of income taxes, includes the allocation of consolidated interest expense of $5,391 to be incurred during the nine-month period ending May 31, 2002. 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. Net sales and loss from discontinued operation of Pinole Point Steel were as follows:
For the Years Ended February 28, ------------------ 2002 2001 -------- -------- Net Sales............................................ $128,397 $149,810 Loss from Discontinued Operation, Net of Income Taxes (16,456) (12,992)
The loss from discontinued operation, net of income taxes, for fiscal 2002 and 2001 includes the allocation of consolidated interest expense of $8,100 and $8,844, respectively. The loss on discontinued operation, net of income taxes, includes the allocation of consolidated interest expense of $5,391 to be incurred during the nine-month period ending May 31, 2002. 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. Note 13: Asset Impairment and Restructuring On November 15, 2001, the Company announced it implemented a reorganization and cost reduction program. The program involves the reorganization of the Company's three continuing operations into a single business unit which will provide electronic, acoustical/thermal and coated metal materials-based solutions to a variety of markets. In addition, the reorganization provides for a new operating structure whereby the previous business units and management structures were eliminated, resulting in one reportable segment, MSC Engineered Materials and Solutions Group ("EMS"). The Company's new operating structure has common functional departments such as sales, marketing, operations, accounting and human resources that report to EMS management. MSC terminated 41 employees primarily in sales, general and administrative departments of the Company and recorded a restructuring charge of $1,450 in fiscal 2002. Of this amount, $1,110 pertained to severance expenses and $340 for other related costs. As of February 2002, cash of $912 was paid in conjunction with the restructuring program. The restructuring reserve was $538 as of February 28, 2002, as presented in the chart. 42
Severance Other Total --------- ----- ------ Restructuring Reserve $1,110 $ 340 $1,450 Activity............. (676) (276) (952) Adjustments.......... -- 40 40 ------ ----- ------ Total............. $ 434 $ 104 $ 538 ====== ===== ======
The Company has reviewed its investment in its powder coating assets. MSC has determined that it will reevaluate efforts to commercialize their proprietary powder coating capabilities based on the availability of new paint chemistries and application cost versus traditional liquid coating methods. Based on the projected cash flows from powder coating assets, the Company has recorded a $5,929 charge to earnings in the fourth quarter of fiscal 2002. The Company has reviewed its investment in the capitalized intangible assets and equipment related to its license with Northwestern University to commercialize its Solid State Shear Pulverization ("SSSP") technology. The Company is completing research studies with potential licensees of the SSSP technology. At this time, no assurance can be made as to the success of these studies to commercialize the SSSP technology. Based on the projected cash flows from the SSSP assets, MSC has recorded a $2,001 charge to earnings in the fourth quarter of fiscal 2002. The total impairment charge recorded was $8,361. Note 14: Contractual Commitment On January 31, 2002, the Company entered into an exclusive license agreement with TouchSensor Technologies, LLC ("TST"). This agreement provides for MSC to manufacture, use and sell TST's patented field-effect touchsensing technology for sensors, switches, displays and interface solutions in the consumer-electronics and transportation markets. There were no sales in fiscal 2002. Royalty payments to TST, per the license agreement, consist of a certain percentage of net sales of licensed products plus a certain percentage of sublicense profits subject to a minimum annual royalty amount which is shown in the chart below. Minimum Annual Royalties 2003.................... $1,167 2004.................... 1,500 2005.................... 2,750 2006.................... 2,750 ------ Total................ $8,167 ======
43 Note 15: Selected Quarterly Results of Operations (Unaudited) The table presented below is a summary of quarterly data for the years ended February 28, 2002 and February 28, 2001.
First Second Third Fourth Quarter Quarter Quarter Quarter ------- -------- ------- -------- 2002 Net Sales.............................................. $66,000 $ 67,361 $63,249 $ 53,896 Gross Profit........................................... 12,235 12,650 11,754 8,592 Income (Loss) from Continuing Operations............... 800 1,486 (319) (6,458) Income from Discontinued Operation--Specialty Films.... 1,243 226 -- -- Loss from Discontinued Operation--Pinole Point Steel... (3,694) (3,867) -- -- Gain on Sale of Discontinued Operation--Specialty Films -- 38,787 -- -- Loss on Discontinued Operation--Pinole Point Steel..... -- (42,248) -- (11,039) Net Loss............................................... (1,651) (5,616) (319) (17,497) Basic Net Income (Loss) Per Share: Income (Loss) from Continuing Operations............... $ 0.06 $ 0.11 $ (0.02) $ (0.46) Income from Discontinued Operation--Specialty Films.... 0.09 0.02 -- -- Loss from Discontinued Operation--Pinole Point Steel... (0.27) (0.28) -- -- Gain on Sale of Discontinued Operation--Specialty Films -- 2.78 -- -- Loss on Discontinued Operation--Pinole Point Steel..... -- (3.03) -- (0.78) ------- -------- ------- -------- Basic Net Loss Per Share............................... $ (0.12) $ (0.40) $ (0.02) $ (1.24) ======= ======== ======= ======== Diluted Net Income (Loss) Per Share: Income (Loss) from Continuing Operations............... $ 0.06 $ 0.11 $ (0.02) $ (0.46) Income from Discontinued Operation--Specialty Films.... 0.09 0.02 -- -- Loss from Discontinued Operation--Pinole Point Steel... (0.27) (0.28) -- -- Gain on Sale of Discontinued Operation--Specialty Films -- 2.75 -- -- Loss on Discontinued Operation--Pinole Point Steel..... -- (3.00) -- (0.78) ------- -------- ------- -------- Diluted Net Loss Per Share............................. $ (0.12) $ (0.40) $ (0.02) $ (1.24) ======= ======== ======= ======== First Second Third Fourth Quarter Quarter Quarter Quarter ------- -------- ------- -------- 2001 Net Sales.............................................. $68,790 $ 72,818 $70,281 $ 61,971 Gross Profit........................................... 14,395 15,176 14,331 10,105 Income (Loss) from Continuing Operations............... 2,087 2,681 1,992 (237) Income from Discontinued Operation--Specialty Films.... 1,812 1,755 1,182 1,036 Loss from Discontinued Operation--Pinole Point Steel... (1,251) (2,794) (3,652) (5,295) Net Income (Loss)...................................... 2,648 1,642 (478) (4,496) Basic Net Income (Loss) Per Share: Income (Loss) from Continuing Operations............... $ 0.14 $ 0.19 $ 0.15 $ (0.02) Income from Discontinued Operation--Specialty Films.... 0.13 0.13 0.08 0.08 Loss from Discontinued Operation--Pinole Point Steel... (0.09) (0.20) (0.27) (0.39) ------- -------- ------- -------- Basic Net Income (Loss) Per Share...................... $ 0.18 $ 0.12 $ (0.04) $ (0.33) ======= ======== ======= ======== Diluted Net Income (Loss) Per Share: Income (Loss) from Continuing Operations............... $ 0.14 $ 0.19 $ 0.14 $ (0.02) Income from Discontinued Operation--Specialty Films.... 0.12 0.13 0.09 0.08 Loss from Discontinued Operation--Pinole Point Steel... (0.08) (0.20) (0.26) (0.39) ------- -------- ------- -------- Diluted Net Income (Loss) Per Share.................... $ 0.18 $ 0.12 $ (0.03) $ (0.33) ======= ======== ======= ========
44 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" in the Company's Proxy Statement for the 2002 Annual Meeting of Shareowners ("Proxy Statement"), all of which is incorporated by reference herein, for information on the directors of the Company. Reference is made to the information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" set forth in 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" in 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 in 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 in the Proxy Statement, respectively, all of which is incorporated herein by reference. 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 listed in the Index to Consolidated Financial Statements are filed as part of this report. II Supplemental Schedule. The report and schedule listed below appear on pages 51 and 52 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. 45 (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the fourth quarter of fiscal 2002. (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) 2(b) Purchase Agreement by and among Material Sciences Corporation, MSC Specialty Films, Inc., Bekaert Corporation and N.V. Bekaert S.A., dated June 10, 2001.(14) 2(c) First Amendment to Purchase Agreement, dated June 29, 2001.(14) 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) Note Agreement dated as of February 15, 1997, by and among the Registrant and the purchasers described on Schedule I attached thereto.(5) 4(b) Note Agreement dated as of February 15, 1998, by and among the Registrant and the purchasers described on Schedule I attached thereto.(8) 4(c) 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(d) 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(e) Option Agreement dated as of February 26, 1998, between the Registrant and Stern Stewart & Co.(8) 4(f) 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(g) 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) 4(h) Loan and Security Agreement dated as of October 11, 2001 among Material Sciences Corporation and LaSalle Bank National Association, The Northern Trust Company and LaSalle Bank National Association, as Agent.(15) 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)+
46
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) 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)
47
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) 10(dd) Form of Change in Control Agreement (MSC Executive Officers).(13)+ 10(ee) Form of Change in Control Agreement (Subsidiary Executive Officers).(13)+ 10(ff) License Agreement, dated as of January 31, 2002, by and between Material Sciences Corporation and TouchSensor Technologies, L.L.C. (16)* 10(gg) Purchase Agreement, dated April 23, 2002, by and among Material Sciences Corporation, LTV Steel Company, Inc., LTV Walbridge, Inc. and MSC Walbridge Coatings Inc.* 21 Subsidiaries of the Registrant.* 23 Consent of Arthur Andersen LLP.* 99 Letter from Material Sciences Corporation to the Commission regarding representations to Material Sciences Corporation from 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). (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). (12) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 2001 (File No. 1-8803). 48 (13) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report for the Quarter Ended May 31, 2001 (File No. 1-8803). (14) Incorporated by reference to the Registrant's Form 8-K filed on June 29, 2001 (File No. 1-8803). (15) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report for the Quarter Ended August 31, 2001 (File No. 1-8803). (16) Certain information in this exhibit has been omitted and filed separately with Securities and Exchange Commission pursuant to a confidential treatment request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. [THIS SPACE INTENTIONALLY LEFT BLANK] 49 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 /S/ GERALD G. NADIG By: _______________________________ Gerald G. Nadig Chairman, President and Chief Executive Officer Date: May 8, 2002 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 8, 2002. Signature Title --------- ----- /S/ GERALD G. NADIG Chairman, President and Chief - --------------------------- Executive Officer and Gerald G. Nadig Director (Principal Executive Officer) /S/ JAMES J. WACLAWIK, SR. Vice President, Chief - --------------------------- Financial Officer and James J. Waclawik, Sr. Secretary (Principal Financial Officer) /S/ DAVID J. DENEVE Assistant Secretary - --------------------------- (Principal Accounting David J. DeNeve 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/ FRANK L. HOHMANN III Director - --------------------------- Frank L. Hohmann III /S/ RONALD A. MITSCH Director - --------------------------- Ronald A. Mitsch /S/ MARY P. QUIN Director - --------------------------- Mary P. Quin /S/ HOWARD B. WITT Director - --------------------------- Howard B. Witt 50 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 2002 Annual Report to Shareowners in this Form 10-K, and have issued our report thereon dated April 29, 2002. 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 29, 2002 51 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 2000 Receivable Allowances $3,772 $6,282 $-- $-- $(6,584) $3,470 ====== ====== === === ======= ====== Fiscal 2001 Receivable Allowances $3,470 $7,401 $-- $-- $(7,750) $3,121 ====== ====== === === ======= ====== Fiscal 2002 Receivable Allowances $3,121 $7,563 $-- $-- $(5,930) $4,754 ====== ====== === === ======= ======
The activity in the Receivable Allowances account includes the Company's bad debt, claim and scrap allowance. 52 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) 2(b) Purchase Agreement by and among Material Sciences Corporation, MSC Specialty Films, Inc., Bekaert Corporation and N.V. Bekaert S.A., dated June 10, 2001.(14) 2(c) First Amendment to Purchase Agreement, dated June 29, 2001.(14) 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) Note Agreement dated as of February 15, 1997, by and among the Registrant and the purchasers described on Schedule I attached thereto.(5) 4(b) Note Agreement dated as of February 15, 1998, by and among the Registrant and the purchasers described on Schedule I attached thereto.(8) 4(c) 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(d) 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(e) Option Agreement dated as of February 26, 1998, between the Registrant and Stern Stewart & Co.(8) 4(f) 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(g) 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. 4(h) Loan and Security Agreement dated as of October 11, 2001 among Material Sciences Corporation and LaSalle Bank National Association, The Northern Trust Company and LaSalle Bank National Association, as Agent.(15) 10(a) Material Sciences Corporation Stock Purchase Plan.(1)+ 10(b) Material Sciences Corporation Supplemental Pension Plan.(1)+ 10(c) Material Sciences Corporation Employee Stock Purchase Plan.(10)+ 10(d) Material Sciences Corporation 1985 Stock Option Plan for Key Employees.(10)+
53
Exhibit Number Description of Exhibit - ------ ---------------------- 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) 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) 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)
54
Exhibit Number Description of Exhibit - ------ ---------------------- 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) 10(dd) Form of Change in Control Agreement (MSC Executive Officers).(13)+ 10(ee) Form of Change in Control Agreement (Subsidiary Executive Officers).(13)+ 10(ff) License Agreement, dated as of January 31, 2002, by and between Material Sciences Corporation and TouchSensor Technologies, L.L.C. (16)* 10(gg) Purchase Agreement, dated April 23, 2002, by and among Material Sciences Corporation, LTV Steel Company, Inc., LTV Walbridge, Inc. and MSC Walbridge Coatings Inc.* 21 Subsidiaries of the Registrant.* 23 Consent of Arthur Andersen LLP.* 99 Letter from Material Sciences Corporation to the Commission regarding representations to Material Sciences Corporation from 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). (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). (12) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 2001 (File No. 1-8803). (13) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report for the Quarter Ended May 31, 2001 (File No. 1-8803). (14) Incorporated by reference to the Registrant's Form 8-K filed on June 29, 2001 (File No. 1-8803). (15) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report for the Quarter Ended August 31, 2001 (File No. 1-8803). (16) Certain information in this exhibit has been omitted and filed separately with Securities and Exchange Commission pursuant to a confidential treatment request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 55 EX-10.(FF) 3 dex10ff.txt LICENSE AGREEMENT Exhibit 10(ff) LICENSE AGREEMENT THIS AGREEMENT, effective as of January 31, 2002, is by and between Material Sciences Corporation, a corporation of Delaware, having its principal place of business at 2200 East Pratt Boulevard, Elk Grove Village, Illinois 60007-5995 (hereinafter referred to as "MSC"), and TouchSensor Technologies, LLC, a limited liability company of Delaware, having its principal place of business at 203 North Gables Boulevard, Wheaton, Illinois 60187 (hereinafter referred to as "TST"); W I T N E S S E T H: WHEREAS, TST has developed and is continuing to develop technology useful in the manufacture of touch sensors and touch pads usable in transportation and consumer electronics applications; WHEREAS, TST owns the Licensed Patents (as defined below); WHEREAS, MSC desires to obtain an exclusive license under the Licensed Patents in the Field (as defined below); WHEREAS, TST is willing to grant an exclusive license under the Licensed Patents, such license to be exclusive subject to the terms and conditions set forth in this Agreement; WHEREAS, it is the common vision of TST and MSC that touch-based switches and sensors can be incorporated into flexible substrates to meet customer needs for solutions enabling design flexibility, price reduction, and other improved features and benefits. TST and MSC believe customers are looking for solutions which can also include various forms of display technology, with the option to utilize a variety of flexible and rigid substrates, including, but not limited to, glass, plastic, PC board laminates, and flexible substrates, depending upon the end use application. TST is focusing its efforts on penetrating the appliance, commercial and industrial products, and medical device markets, and has selected MSC as a strategic partner to penetrate the consumer electronics and transportation markets. MSC intends to commercialize TST's touch-based switch technology in these markets, with emphasis on developing flexible substrate application solutions. It is the intent of both TST and MSC to work as a team, utilizing the competencies and intellectual property of each other, or jointly developed, to capitalize on identified customer needs in their respective markets; and WHEREAS, TST and MSC recognize the need to sell Chips and to grant Manufacturing Sublicenses (as defined below) to customers as a means to develop the target markets, and/or 1 Omitted portions are indicated by [***] Confidential information redacted and filed separately with the Commission. enhance relationships with target customers, with the goal of enhancing opportunities for MSC and TST, respectively, to sell interface panels, sensor assemblies, and products incorporating certain display technologies and flexible substrates. NOW, THEREFORE, in consideration of the premises and of the mutual promises and covenants herein contained, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I - DEFINITIONS When used in this Agreement, each of the following terms shall have the meaning set out in this Article. 1.1 "Affiliate" of, or an entity "Affiliated" with, MSC or TST, means an entity that directly or indirectly controls, is controlled by, or is under common control with MSC or TST, respectively. 1.2 "Assembled Flexible Substrates" shall mean thin gauge materials, including but not limited to polymer films, paper, or metal, whether or not laminated, metallized, coated, or processed in any manner to alter appearance, features or functionality, incorporated in or used as a substrate in conjunction with electronic materials and devices consisting of Touch Sensor Technology and/or [***], which may also include other electronic materials and devices for use in or as Interface Panels or Sensor Assemblies. 1.3 "Chips" shall mean integrated semiconductor circuits that are necessary or useful for implementation of the Touch Sensor Technology in Licensed Products. 1.4 "Combination Product" shall mean any product comprising a Licensed Product manufactured and sold in combination with one or more other products, none of which are Licensed Products. 1.5 A "Direct Competitor" of TST shall be any entity that sells and/or designs switches or sensors. Should TST be granted a patent in the United States including Valid Claims covering [***], then a Direct Competitor shall also include an entity that sells and/or designs displays. A Direct Competitor shall not include an entity that only assembles products or component assemblies, including switches, sensors, and/or displays supplied by others together with other components. 1.6 "Effective Date" shall mean the date first set forth above. 1.7 "Field" shall mean (1) the transportation market, and (2) the consumer electronics market as set forth on attached Schedule 1, including but not limited to the products and product lines identified in Schedules 1, A and 1B (to the extent that the products and product lines listed on Schedule 1B comprise consumer electronics products and are sold in the consumer electronics market) and excluding all other markets, including but not limited to the 2 Confidential information redacted and filed separately with the Commission. markets listed in Schedule 1C and the products and product lines listed in Schedule 1B (to the extent that the products and product lines listed in Schedule 1B do not comprise consumer electronics products and are not sold in the consumer electronics market). 1.8 "Fiscal Quarter" shall mean the fiscal quarters of MSC ending on any May 31, August 31, November 30, and February 28/29. 1.9 "Fiscal Year" shall mean MSC's fiscal year which commences March 1 of each calendar year and ends the following February on the final day thereof. 1.10 "Full Sublicense" shall mean any Sublicense that is not a Manufacturing Sublicense. 1.11 "Full Sublicense Profits" shall mean MSC's profits from Full Sublicenses consisting of: [***]. 1.12 "GAAP" shall mean generally accepted accounting principles as recognized in the United States and applied on a consistent basis. 1.13 "Improvement" shall mean any invention or Know-How, whether or not patented or patentable, that is not claimed by any of the Licensed Patents and that relates to TST Touch Technology, [***], Assembled Flexible Substrates, Interface Panels, Sensor Assemblies or any inventions described or claimed in any of the Licensed Patents. 1.14 "Interface Panel" shall mean any article that facilitates either or both of: (i) the activation of switching or signaling functions or the input of information by a human being; or (ii) the activation of indicators or signaling functions or the output of information by a machine in human understandable form. Interface Panels may include Touch Sensor Technology, decorative fascia (plastic, glass or other organic or inorganic substrates), connectors, backlighting, indicator lighting, displays (including [***]), audio and video outputs, housing and/or mounting mechanisms for the Interface Panel, and Assembled Flexible Substrates. 1.15 "Know-How" shall mean any and all confidential or proprietary information, known as of the Effective Date or generated thereafter during the term of this Agreement, which is owned, developed, controlled by, or under which either TST or MSC may grant a license and which is necessary or useful in manufacturing, distributing or maintaining any Licensed Product or Improvement and includes, without limitation, manufacturing and quality assurance data, manufacturing tolerances, specifications, drawings and designs (including CAD files), and material and component cost and sourcing information. Notwithstanding the foregoing, the Know-How licensed by TST hereunder shall not include any information relating to or concerning the design or fabrication of TST's proprietary Chips. 1.16 "Licensed Patents" shall mean the patents and patent applications listed on Schedule 2 attached hereto and incorporated herein by reference and any foreign counterparts thereof, as well as all continuations, continuations-in-part, divisions and renewals thereof, all 3 Confidential information redacted and filed separately with the Commission. patents which may be granted thereon and all reissues, reexaminations, extensions, patents of addition and patents of importation thereof. Licensed Patents shall also include those patents and patent applications applied for or filed by or on behalf of TST on or prior to September 30, 2002, including, whenever filed, any foreign counterparts thereof, as well as all continuations, divisions and renewals thereof, all patents which may be granted thereon, all reissues, reexaminations, extensions, patents of addition, patents of importation thereof, and patents claiming the benefit of a Licensed Patent. 1.17 "Licensed Products" shall mean any product consisting of an Interface Panel or a Sensor Assembly, the manufacture, use, importation or sale of which would, if not licensed, infringe a Valid Claim of an issued patent included in the Licensed Patents. 1.18 "Manufacturing Sublicense" shall mean a Sublicense granted in conjunction with the sale of Chips by MSC authorizing a buyer to use Chips purchased from MSC in or with Touch Cell Circuitry designed by or for MSC to make a specified Licensed Product for use or sale within the Field. 1.19 "Manufacturing Sublicense Profits" shall mean MSC's profits from Manufacturing Sublicenses consisting of [***]. 1.20 "Net Sales" shall mean with respect to each sale, transfer for value or other disposition of a Licensed Product to an unaffiliated third party, the gross revenue earned, recognized or recorded by MSC or an Affiliate of MSC with respect to such Licensed Product, less the following amounts, provided that in each case such amounts are invoiced or booked as part of such gross revenue: (i) discounts, including cash discounts, or rebates actually allowed or granted, (ii) credits or allowances actually granted upon claims or returns, regardless of the party requesting the return, (iii) freight charges actually paid by MSC or an Affiliate of MSC for delivery, and (iv) taxes or other governmental charges levied on or measured by the invoiced amount, whether absorbed by the billing or the billed party. Net Sales shall be determined in accordance with GAAP. 1.21 "Sensor Assembly" shall mean an article comprising an electric field sensing device configured to sense the presence of a material (other than a human touch input). The Sensor Assembly may include Touch Sensor Technology, connectors, housing and/or mounting mechanisms for the Sensor Assembly, Assembled Flexible Substrates, and an output device, such as a display or other audio/visual indicator, if any. The output device may include [***]. In the case of a liquid sensor, the reservoir system that holds the liquid to be sensed may be included in the Sensor Assembly. 1.22 "Sublicense" shall mean any right or license granted by MSC to any third party under any of the Licensed Patents in accordance with the sublicensing provisions of Article II. 1.23 "Total Royalties" shall mean and include any and all Running Royalties and fees based upon Full Sublicense Profits and Manufacturing Sublicense Profits that are paid or payable to TST by MSC pursuant to Article III. 4 Confidential information redacted and filed separately with the Commission. 1.24 "Touch Cell Circuitry" shall mean circuitry for the implementation of Touch Sensor Technology consisting of a field effect switch that is used in combination with appropriate touchpad geometry and may include the following elements: (i) an active electrical component, (ii) sensitivity selection components, and (iii) properly designed electrode structures. 1.25 "Touch Sensor Technology" shall mean the inventions claimed in the Licensed Patents, together with relevant Know-How, relating to electric field sensing. 1.26 [***] 1.27 "Valid Claim" shall mean a claim in any unexpired patent comprising one of the Licensed Patents that has not been held invalid by a final non-appealed or unappealable decision by a court or other appropriate body of competent jurisdiction. ARTICLE II - GRANT 2.1 Subject to the terms, conditions, provisions, restrictions and limitations set forth elsewhere in this Agreement, TST hereby grants to MSC the following licenses: (a) an exclusive, worldwide right and license, under the Licensed Patents covering Touch Sensor Technology, with a right to grant one or more Sublicenses as herein provided, to make, have made, use, sell, have sold, import and otherwise dispose of Licensed Products within the Field; (b) an exclusive worldwide right and license under the Licensed Patents covering [***], with a right to grant one or more Sublicenses as herein provided, to make, have made, use, sell, have sold, import and otherwise dispose of Licensed Products within the Field; and (c) an irrevocable, worldwide right and license to use TST's Know-How in connection with the manufacture, use, sale, import or disposition of Licensed Products within the Field. 2.2 (a) Notwithstanding the foregoing, except for Chips acquired from TST or from TST's suppliers with TST's approval or developed jointly with TST and except as and to the extent otherwise provided in Article XIII below, MSC shall not have any right under the Licensed Patents or otherwise to make, have made, use, sell, have sold, import or otherwise dispose of Chips derived from or superseding TST's proprietary Chip designs. After February 28, 2006, nothing herein shall preclude or limit MSC's right to independently develop, manufacture, sell, dispose of, or otherwise produce integrated semiconductor circuits necessary or useful solely in manufacturing Licensed Products. (b) Further, notwithstanding any other provision of this Agreement, the rights and licenses granted in this Agreement shall not extend to any patent rights or other intellectual property rights acquired or licensed by TST from any third party unless and 5 Confidential information redacted and filed separately with the Commission. except to the extent that TST has acquired the right to grant such rights or licenses to MSC without incurring any incremental costs or liabilities, for royalties or otherwise. 2.3 MSC hereby accepts the rights and licenses granted herein. 2.4 Unless sooner terminated or revoked as elsewhere provided in this Agreement, the rights and licenses granted herein shall continue in effect until the last of the Licensed Patents expires or until no Valid Claim remains under any of the Licensed Patents, whichever comes first. 2.5 Notwithstanding the foregoing, MSC's right to grant Sublicenses hereunder shall be subject to the following restrictions and limitations: (a) Prior to granting any Sublicense pursuant to this Agreement, MSC shall provide TST with written notice identifying the name and address of the proposed sublicensee and setting forth the terms of the proposed Sublicense. MSC shall not grant a Sublicense to any sublicensee that does not have a QS 9000 or ISO 9001-based quality system. Prior to entering into any Sublicense, MSC shall conduct an investigation to determine whether the proposed sublicensee has a QS 9000 or ISO 9001-based quality system. MSC shall, upon request made prior to the granting of the Sublicense, provide TST with a copy of the results of its investigation of the proposed sublicensee. (b) In no event shall any Sublicense grant to the sublicensee the right to grant a further sublicense. Further, all Sublicenses shall be limited to the manufacture, use and sale of Licensed Products within the Field. (c) MSC shall give TST ten days (10) notice prior to entering into substantive negotiations relating to a Full Sublicense with any prospective sublicensee that is a Direct Competitor, and TST shall within said ten (10) days notify MSC of its consent or denial as to such Full Sublicense negotiations. Thereafter, before entering into any Full Sublicense with a Direct Competitor, MSC shall give TST written notice of all of the material terms of the proposed Full Sublicense and MSC shall not grant any Full Sublicense to a Direct Competitor without TST's prior written consent, which consent may be withheld, conditioned or delayed by TST in its sole discretion, provided that TST shall be deemed to have given its consent if TST shall fail to give MSC notice to the contrary within five (5) business days following TST's receipt of the notice of material terms. (d) Notwithstanding the foregoing, MSC shall be entitled to grant Sublicenses pursuant to Section 2.1 only if and so long as MSC is not in default with respect to any of its obligations to make payments of Total Royalties and Minimum Annual Royalties in accordance with Article III. (e) Notwithstanding the foregoing, immediately upon the licenses granted to MSC in Section 2.1 becoming non-exclusive, all exclusive Sublicenses theretofore 6 Confidential information redacted and filed separately with the Commission. granted shall become non-exclusive, and MSC's right to grant Full Sublicenses pursuant to Section 2.1 shall terminate. (f) Except as otherwise expressly provided below, each Sublicense shall, by its terms, terminate upon termination of this Agreement for any reason. A Sublicense in force at the time of termination of this Agreement may continue in effect thereafter if: (i) TST has either approved in writing all of the terms and conditions of such Sublicense in advance or has exercised an option, provided to it in such Sublicense, either to terminate or to continue such Sublicense, in which case TST shall succeed to all rights and ownership interests of MSC and shall assume all ongoing obligations and liabilities thereunder that accrue following termination of this Agreement and that would otherwise be the responsibility of MSC; or (ii) the terms and conditions of such Sublicense expressly provide that it will continue in effect following termination of this Agreement and TST has not either (a) approved such Sublicense in writing in advance, or (b) elected to continue under the Sublicense terms, in which case TST shall succeed to all of the rights and ownership interests of MSC under such Sublicense, but TST shall not succeed to any liabilities or obligations of MSC under such Sublicense and MSC shall continue to be solely responsible with respect to all of its liabilities and obligations thereunder. 2.6 On or prior to October 14, 2002, TST shall furnish to MSC a listing of all patents and patent applications issued or filed by or on behalf of TST on or prior to September 30, 2002, including with such listing a complete file of any and all pending patent applications. Such patents and patent applications shall be considered as part of the Licensed Patents and Schedule 2 attached hereto shall be updated accordingly. 2.7 On or prior to March 1, 2006 and each succeeding anniversary of such date thereafter so long as the licenses granted hereunder continue to be exclusive, MSC shall notify TST in writing if MSC desires that such licenses continue to be exclusive and agrees to continue to pay Minimum Annual Royalties pursuant to Section 3.5, which payment is a condition of continued exclusivity. If at any time MSC fails to give timely notice as set forth above or defaults with respect to payments of Minimum Annual Royalties in accordance with Section 3.5, upon three (3) business days prior written notice to MSC from TST, and MSC's failure to cure such delinquent notice or default within the three (3) business day period, TST in addition to all other remedies available to it hereunder may terminate the exclusivity provisions of this Agreement, after which MSC's licenses hereunder shall be non-exclusive. 2.8 Should the rights and licenses of MSC hereunder become non-exclusive for any reason, then the Manufacturing Sublicenses, if any, in effect at that time shall continue in effect 7 Confidential information redacted and filed separately with the Commission. and MSC shall be entitled to continue to grant new Manufacturing Sublicenses. In such event, TST shall be entitled to increase the price at which it will supply Chips for such new Manufacturing Sublicenses to TST's cost, as determined pursuant to Section 13.5, divided by [***]. TST shall continue to supply Chips for preexisting Manufacturing Sublicenses at its cost as determined pursuant to Article XIII. TST agrees that, so long as MSC continues to purchase Chips from TST for use by sublicensees under Manufacturing Sublicenses granted during the exclusivity period, TST will not sell or offer to sell Chips to such sublicensees for use in connection with such pre-existing Manufacturing Sublicenses, either directly or indirectly through some other licensee. MSC shall be responsible for providing support to all sublicensees under Manufacturing Sublicenses. 2.9 Should the rights and licenses of MSC hereunder become non-exclusive for any reason, then the Full Sublicenses in force at that time shall continue in effect and TST agrees that, so long as such Full Sublicenses remain in force during the term of this Agreement, TST shall not directly or indirectly through another licensee seek to license such pre-existing sublicensees with respect to all or any of the rights granted to them in such pre-existing Full Sublicenses. MSC shall be responsible for providing support to sublicensees under such preexisting Full Sublicenses. TST shall continue to supply Chips for preexisting Full Sublicenses at its cost as determined pursuant to Article XIII. ARTICLE III - ROYALTIES 3.1 MSC, as herein provided, shall pay Total Royalties to TST. Total Royalties shall consist of the following components: (a) Running Royalties based upon Net Sales of Licensed Products by MSC and its Affiliates (Section 3.2), and (b) Fees based upon Full Sublicense Profits (Section 3.3), and (c) Fees based upon Manufacturing Sublicense Profits (Section 3.3). 3.2 Royalties based on Net Sales of Licensed Products shall be defined as "Running Royalties" and shall be computed by multiplying Net Sales of Licensed Products times the Base Royalty Rate. Running Royalties shall be based upon (i.) each Licensed Product, any portion of which or the manufacture, sale, or use of which is covered by Licensed Patents in the country of manufacture; and (ii.) each Licensed Product, any portion of which and the manufacture, sale, or use of which is covered by Licensed Patents in the country of use or sale, unless royalties have been paid by MSC thereon pursuant to Article 3.2 (i.) hereof. "Base Royalty Rate" is defined, with respect to various levels of Net Sales in each Fiscal Year, as the applicable rate set forth in the following table: 8 Confidential information redacted and filed separately with the Commission. Base Royalty Rate Net Sales During Fiscal Year ----------------- ---------------------------- [***]. [***]. In the event that Licensed Products are sold in the form of Combination Products, Net Sales for the purpose of determining Running Royalties on such Combination Products shall be calculated by multiplying actual Net Sales of such Combination Products by the fraction A/(A+B) where "A" is the invoice price of the Licensed Products if sold separately by MSC, and "B" is the total invoice price of any other product or products in the combination, if sold separately by MSC or an Affiliate. If, on a country-by-country basis, the Licensed Products are not sold separately, "A" shall be the invoice price charged for similar products sold in the Field by MSC or an Affiliate and "B" shall be the invoice price of the other product or products sold in the Field by MSC or an Affiliate. If on a country-by-country basis the other product or products in the combination are not sold separately in said country by MSC or an Affiliate, Net Sales, for the purpose of determining Running Royalties on the Combination Products shall be calculated by multiplying actual Net Sales of such Combination Products by the fraction A/C, where "A" is the invoice price of the Licensed Products if sold separately by MSC or an Affiliate, and "C" is the invoice price of the Combination Product by MSC or an Affiliate. If on a country-by-country basis neither the Licensed Products nor the other product or products in the Combination Product is sold separately in said country by MSC or an Affiliate, Net Sales, for purposes of determining Royalties Royalties on the Combination Products, shall be calculated as if the Licensed Products and other product or products in the combination had been sold in the United States by MSC so that the fraction A/(A+B), as defined above, shall be multiplied by the actual Net Sales of the Combination Product in such country to determine Net Sales for calculation of the royalty. 3.3 MSC shall pay to TST fees equal to [***] of the Full Sublicense Profits and fees equal to [***] of the Manufacturing Sublicense Profits. 3.4 Total Royalties shall accrue to TST on the dates that Net Sales, Full Sublicense Profits and/or Manufacturing Sublicense Profits are recognized by MSC or its Affiliates in accordance with GAAP. 3.5 MSC agrees to pay to TST minimum annual royalties ("Minimum Annual Royalties") for each Fiscal Year as provided below. Minimum Annual Royalties shall be fully creditable against Total Royalties accruing during the Fiscal Year for which such Minimum 9 Confidential information redacted and filed separately with the Commission. Annual Royalties are paid. Minimum Annual Royalties shall be paid in lieu of any obligation of MSC to use best efforts or any standard of efforts to promote and sell Licensed Products. Minimum Annual Royalty Schedule -------------------------------- MSC Fiscal Year Ending Minimum Annual Royalty ---------------------- ---------------------- 2003 $1,000,000.00 2004 $1,500,000.00 2005 $2,750,000.00 2006 $2,750,000.00 [***] [***] In the event MSC elects to grant a Sublicense with respect to [***] in Licensed Products, the Minimum Annual Royalty set forth in the foregoing table shall be increased by an additional [***] for each Fiscal Year or portion thereof (on a prorated basis for the remainder of such Fiscal Year) during which such Sublicense is in effect. 3.6 All amounts due under this Agreement shall be paid in United States dollars by wire transfer to the account designated from time to time by TST for such purposes in written notice given in accordance with Section 8.9 and shall be deemed made at the office of the financial institution where such account is held. In the event that TST at any time fails to designate an active account for such purposes, such payments shall be made by check delivered to TST's offices. The United States dollar amounts due in payment of Total Royalties shall be determined by first converting any Net Sales, Manufacturing Sublicense Profits, and Full Sublicense Profits denominated in the currency of another country to equivalent United States dollars and then applying (1) the applicable Base Royalty Rate in Section 3.2 to the converted worldwide Net Sales, and (2) the applicable rates provided in Section 3.3 to the Manufacturing Sublicense Profits and the Full Sublicense Profits, respectively. The conversion rate used for each such currency conversion shall be the average rate of exchange quoted by the Wall Street Journal, New York Edition, for the relevant currency during the Fiscal Quarter in which the Net Sales or the revenues giving rise to Manufacturing Sublicense Profits and/or Full Sublicense Profits occurred. 3.7 Payments shall be made to TST as follows: (a) During the initial MSC exclusive license period (the four years ending February 28, 2006), MSC shall make quarterly payments to TST on June 1st, September 1st, December 1st and March 1st (or the first business day thereafter) equal to 25% of the Minimum Annual Royalty due for the applicable Fiscal Year pursuant to Section 3.5. By the 45th day after the end of each Fiscal Quarter, MSC shall provide to TST a report in accordance with the requirements of Section 3.8 that shall 10 Confidential information redacted and filed separately with the Commission. reflect the Total Royalties accrued during the Fiscal Quarter and the Fiscal Year to date period. If Total Royalties accrued exceed Minimum Annual Royalties paid for Fiscal Years ending February 28/29, 2003, 2004, 2005 or 2006, then such additional Total Royalties shall be paid to TST by the 45th day following the last day of the Fiscal Year then ended. (b) While MSC's license is exclusive for Fiscal Years ending after February 28, 2006, MSC shall make quarterly payments to TST on June 1st, September 1st, December 1st and March 1st (or the first business day thereafter) equal to 25% of the Minimum Annual Royalty due for the applicable Fiscal Year pursuant to Section 3.5. By the 45th day after the end of each Fiscal Quarter ending after February 28, 2006, MSC shall provide to TST a report in accordance with the requirements of Section 3.8 that shall reflect the Total Royalties accrued during the Fiscal Quarter and the Fiscal Year to date period. With such report each quarter, MSC shall pay to TST an amount equal to the greater of (i) the then unpaid balance of the Total Royalties accrued for the Fiscal Year to date period or (ii) the then unpaid balance of the Minimum Annual Royalty amounts accrued for the Fiscal Year to date period. (c) In the event that MSC's license is non-exclusive, by the 45th day after the end of each Fiscal Quarter, MSC shall provide to TST a report in accordance with the requirements of Section 3.8 that shall reflect the Total Royalties accrued during the Fiscal Quarter and the Fiscal Year to date period. With such report each quarter, MSC shall pay to TST the Total Royalties accrued during the Fiscal Quarter. 3.8 Within 45 days following the end of each Fiscal Quarter, MSC shall provide TST with a report written in English and certified by the Chief Financial Officer of MSC, setting forth the Total Royalties due and payable during the Fiscal Quarter and the Fiscal Year to date period as of the end of such Fiscal Quarter. Such report shall be in sufficient detail as mutually agreed by MSC and TST, and shall include breakdowns of Net Sales of Licensed Products, Manufacturing Sublicense Profits (by sublicensee), and Full Sublicense Profits (by sublicensee) between the transportation and consumer electronics markets. 3.9 The timely payment of Total Royalties and of Minimum Annual Royalties is a material obligation. If MSC fails to make such payments when due, TST shall have the right to terminate this Agreement pursuant to Section 10.4(a). 3.10 Notwithstanding the foregoing, the first payment of Total Royalties due under this Agreement shall not occur until June 1, 2002 and the period from the Effective Date to the last 11 Confidential information redacted and filed separately with the Commission. day of the Fiscal Quarter ending immediately prior to the foregoing date shall be deemed the first reporting period for purposes of Section 3.7 (a). 3.11 MSC shall accrue in favor of TST as of February 28, 2002, $166,666.66 for the period January 1, 2002 through February 28, 2002, such accrual to be paid to TST with the payment due June 1, 2002. ARTICLE IV - RECORDKEEPING 4.1 MSC shall keep accurate records that are sufficiently detailed and complete to permit an examination by TST pursuant to Section 4.2 for purposes of verifying all information required to be reported or determined pursuant to Articles III and XV hereof. Such records for each Fiscal Year shall be maintained for at least three (3) full years following MSC's filing of its corresponding Annual Report on Form 10-K with the Securities and Exchange Commission, provided that, for purposes of Article XV MSC may not claim losses for periods in which records are no longer maintained as a part of the cumulative losses unless MSC has theretofore provided TST with detailed reports of such losses and afforded TST an opportunity to examine the relevant records at MSC's expense. 4.2 TST shall have the right, at its sole discretion and expense, upon written notice given within sixty (60) days following the later of (i) its receipt of the report for fourth Fiscal Quarter of each Fiscal Year or (ii) April 30 following the end of such Reporting Period to nominate an independent accountant reasonably acceptable to and approved by MSC, such acceptance and approval not to be unreasonably withheld, conditioned or delayed, who shall have access to MSC's records (after executing a confidentiality agreement reasonably acceptable to MSC) during reasonable business hours for the purpose of inspecting and examining such records and verifying the amounts payable by MSC as required under this Agreement for the immediately preceding Fiscal Year, such examination to be completed no later than August 31 of the respective calendar year. The accountant shall disclose to TST only information relating solely to the accuracy and completeness of the reports and the correct amounts paid and payable under this Agreement. A copy of the Accountant's examination report shall be delivered to MSC. Should MSC fail to file its Form 10-K report with the Securities and Exchange Commission by May 31 of any year, and then the date by which TST shall give notice of its intent to examination will be extended for a period equal to the number of business days that such filing is delayed. In addition, if an examination reveals a deficiency in MSC payments that equals or exceeds the criteria set forth in Section 4.4, then TST may elect to have the approved accountant inspect and examine records relating to any of the last three preceding Fiscal Years as to which no previous examination has been conducted. 4.3 If TST's examination or inspection determines that the amounts due from MSC hereunder were greater than the amounts reported and paid by MSC, TST shall promptly furnish to MSC a copy of the accountant's examination report setting forth the amount of the deficiency, and showing, in reasonable detail, the basis upon which the deficiency was determined. Subject to Article IX, MSC shall remit to TST a sum equal to the deficiency plus compound interest 12 Confidential information redacted and filed separately with the Commission. thereon computed at the prime rate as reported in the New York Edition of the Wall Street Journal for the last business day of the Reporting Period plus two percent (2%) within thirty-days (30) from the date of delivery of the examination report. Should the examination report disclose that MSC has made an overpayment, then, within thirty (30) days thereof, TST shall return to MSC the amount of the overpayment plus compound interest thereon computed at the prime rate as reported in the New York Edition of the Wall Street Journal for the last business day of the Reporting Period plus two percent (2%). 4.4 All costs of any independent examination shall be borne by TST. However, MSC shall reimburse TST for all actual out-of-pocket costs of the independent examination if the independent examination reveals underpayments in excess of (i) five percent (5%) of the amount originally reported by MSC to be due for the examined Reporting Periods and (ii) one hundred thousand dollars ($100,000.00), whichever is greater. 4.5 Any tax required to be withheld on monies payable to TST under the laws of any country shall be deducted from the amounts paid to TST by MSC and shall be promptly paid by MSC for and on behalf of TST to the appropriate governmental authority, and MSC shall furnish TST with proof of payment of such tax. ARTICLE V - PATENTS AND IMPROVEMENTS 5.1 In the event TST decides to abandon or discontinue prosecution or maintenance of any patent or patent application listed on Schedule 2, TST shall exert commercially reasonable efforts to provide MSC with sufficient notice to allow MSC to continue prosecution or to maintain the affected patent application or patent, provided that any continued prosecution of a pending patent application does not result in the disclosure of information maintained by TST as a trade secret. 5.2 Pursuant to paragraph 5.1, MSC shall have the option, exercisable upon written notification to TST, to assume full responsibility for the prosecution or maintenance of the affected patent(s) or patent application(s), in which event all such affected patent(s) and patent application(s) shall be promptly assigned by TST to MSC, who thereafter for all purposes shall be deemed the owner of all right, title, and interest in such patent(s) or patent application(s) subject only to a perpetual, paid-up, worldwide license thereunder in favor of TST and to any other pre-existing licenses theretofore granted by TST to third parties, in each case for activities outside the Field. In no event shall MSC be liable for or subject to any obligations of TST under any such third party licenses. Should MSC exercise the option herein granted, then TST shall assist MSC in effecting the assignment (including signing all such papers as MSC shall reasonably deem necessary) at no additional costs to MSC other than reimbursement of TST's reasonable out-of-pocket expenses incurred in connection therewith. 5.3 During the period commencing October 1, 2002 and, unless earlier terminated as provided below, continuing during the term of this Agreement (the "Joint Development Period"), MSC and TST will cooperate in developing and commercializing Improvements. All 13 Confidential information redacted and filed separately with the Commission. Improvements invented, conceived or acquired by or on behalf of either or both MSC and TST, either independently or jointly, during the Joint Development Period shall be jointly and equally owned by MSC and TST, subject only to the restrictions and limitations set forth in this Section 5.3. Either MSC or TST may elect to terminate the Joint Development Period at any time after September 30, 2005 upon eighteen (18) months prior written notice, which notice may be given at any time on or after March 1, 2004. The Joint Development Period may be terminated at any time upon mutual consent. Notwithstanding their joint ownership of any patent rights covering any Improvements, MSC and TST hereby irrevocably agree that MSC shall have the exclusive rights to commercialize and license such patent rights with respect to Licensed Products in the Field and that TST shall have exclusive rights to commercialize and license such patent rights with respect to Licensed Products outside of the Field. Except with respect to the foregoing exclusive rights, neither MSC nor TST shall owe the other any accounting or other obligation with respect to any jointly owned patent rights, nor shall MSC be obligated to pay Running Royalties to TST on account of products covered only by a patent solely owned by MSC or jointly owned with TST. Subject to the provisions of Article XII, each of MSC and TST shall promptly inform the other in writing with respect to all Improvements invented, conceived or created by it during the Joint Development Period. [***]. 5.4 The parties shall confer with respect to the preparation of patent applications covering any jointly owned Improvements. If the parties direct that a patent application or application for other intellectual property protection shall be filed on any jointly owned Improvement, then they shall determine which party shall have responsibility for preparing and prosecuting the application. The other party shall assist in preparing, filing, and prosecuting such United States and foreign applications in their joint names with respect to jointly owned Improvements. The parties shall jointly and equally bear all costs incurred in connection with such preparation, filing, prosecution, and maintenance of such United States and foreign application(s). MSC and TST shall cooperate with each other to assure that such application(s) will cover, to the best of their knowledge, all items of commercial interest and importance to them. The party prosecuting the patent application shall keep the other party advised as to all developments with respect to such application(s) and shall promptly supply to the other party copies of all papers, documents and correspondence received or filed in connection with the prosecution thereof. Should the parties be unable to agree upon the preparation or prosecution of a patent application covering jointly owned Improvements where the Improvement was invented solely by one or more employees or contractors of one party, then that party shall control preparation and prosecution of the patent application. Should they be unable to agree upon preparation and/or prosecution of a patent application covering a jointly owned Improvement where the Improvement was invented jointly by employees or contractors of both parties, the parties shall refer the matter to dispute resolution pursuant to Article IX. 5.5 During the Joint Development Period, the parties may determine that research and development work related to Improvements will be contracted to third parties at the cost and expense of the parties, apportioned as they may agree. During the Joint Development Period, neither party shall engage any third party to conduct research or development work with regard to Licensed Products or Improvements without first advising the other party and seeking its consent 14 Confidential information redacted and filed separately with the Commission. and an apportionment of the costs therefor. Except as otherwise agreed by the parties, no such third party research or development shall be undertaken without first ensuring that the parties shall acquire the right to exploit the results of such research and development pursuant to this Agreement. On or prior to October 14, 2002, each of TST and MSC shall provide the other with a schedule identifying all third party research and development activities related to possible Improvements to which it is a party. 5.6 During the term of this Agreement, either party may acquire proprietary information, technology or other rights ("Proprietary Rights") from third parties that enhance the manufacture or use of the Licensed Products. To the greatest extent commercially practicable, all such acquired Proprietary Rights shall be subject to the terms of this Agreement, and shall be licensed to TST or MSC, as appropriate, without further charge or expense to the licensed party. ARTICLE VI - REPRESENTATIONS AND WARRANTIES 6.1 TST expressly warrants and represents that it owns all of the rights, title and interest in and to the Licensed Patents, except for U.S. Patent No. 5,856,646 which it jointly owns with Allen-Bradley Company, LLC. 6.2 TST expressly warrants and represents that it has no outstanding encumbrances or agreements, written, oral, or implied, involving the Licensed Patents that would conflict with the rights granted hereunder. MSC represents and warrants that it is not a party to any agreement that conflicts with its obligations under this Agreement. 6.3 MSC makes no representation or warranty that it will market the Licensed Products covered by this Agreement or, if MSC does market the Licensed Products, that such Licensed Products shall be the exclusive means by which MSC will participate in the Field. Furthermore, all business decisions, including without limitation the design, manufacture, sale, price and promotion of Licensed Products covered under this Agreement and the decision whether to sell a particular product, shall be within the sole discretion of MSC. TST acknowledges that MSC, without use of the Licensed Patents, may now or in the future develop or acquire products that generally provide the same functionality as the Licensed Products. 6.4 TST warrants that it is aware of no patents, patent applications, know-how or other intellectual property owned by a third party which would be infringed by reason of the manufacture or sale or use or importation of products covered by the Licensed Patents, and has received no notice of assertion or claim of infringement by any third party with respect to products TST has produced under any of the Licensed Patents. 6.5 TST represents and warrants that it has entered into employment agreements with each of [***] and [***] which are currently in effect, true and correct copies of which have been provided to MSC. 15 Confidential information redacted and filed separately with the Commission. 6.6 Each of the parties represents and warrants that it is authorized to enter into this Agreement, and that it has secured such authorizations and approvals from its board of directors or as otherwise appropriate in furtherance of entering into this Agreement. 6.7 TST represents and warrants that to its knowledge the claims included in the Licensed Patents are valid and enforceable and that TST has received no notice or claim from any third party to the contrary, other than rejections in office actions by patent examiners. 6.8 TST represents and warrants that it is not presently aware of any technology or development that would or is likely to render obsolete the Licensed Patents or render Licensed Products commercially impractical. ARTICLE VII - THIRD PARTY INFRINGEMENT 7.1 In the event that there is alleged infringement by a third party of any of the Licensed Patents or any patents that are jointly owned by MSC and TST pursuant to Article V with respect to Licensed Products in the Field, MSC shall notify TST in writing to that effect, including with said written notice evidence establishing a prima facie case of such infringement by such third party. The prima facie determination of infringement, contributory infringement, or inducement to infringe shall be confirmed or refuted within ninety (90) days of notice by an independent patent attorney ("IPA"), satisfactory to the parties, and the parties shall equally contribute to the costs of the IPA. Should the IPA confirm the alleged infringement, TST shall have ninety (90) days from the date of the IPA's decision to obtain a discontinuance of such infringement or bring suit against the third party infringer. 7.2 If, after the expiration of said ninety (90) days from the date of said decision, TST has not obtained a discontinuance of such infringement, or brought suit against the third party infringer, MSC shall have the right, but not the obligation, to bring suit against such infringer and join TST as a party plaintiff, provided that MSC shall bear all the expenses of such suit. TST will cooperate with MSC in any suit for infringement of a Licensed Patent brought by MSC against a third party, and shall have the right to consult with MSC and to participate in and be represented by independent counsel in such litigation at its own expense. MSC shall incur no liability to TST as a consequence of such litigation or any unfavorable decision resulting therefrom, including any decision holding any of the Licensed Patents invalid or unenforceable. 7.3 Any and all damages or other monies received in settlement or judgment of such suit brought by MSC shall be applied first by MSC and TST in satisfaction of their respective litigation expenses, with any remainder thereafter paid to MSC. In the event the damages or other monies awarded or received in settlement are insufficient to reimburse such expenses, such damages and monies shall be allocated pro rata between the parties based on their percentage of expenses when compared to total expenses. 7.4 If TST elects to bring suit against such alleged third party infringer, then TST shall bear all the expenses of such suit. MSC, at TST's expense, will cooperate with TST in any 16 Confidential information redacted and filed separately with the Commission. suit for infringement of any patent included in the Licensed Patents brought by TST against a third party, and shall have the right to consult with TST and to participate in and be represented by independent counsel in such litigation at MSC's own expense. 7.5 Any and all damages or other monies received in settlement or judgment of such suit brought by TST shall be applied first by MSC and TST in satisfaction of their respective litigation expenses, with any remainder thereafter paid to TST. In the event the damages or other monies awarded or received in settlement are insufficient to reimburse such expenses, such damages and monies shall be allocated pro rata between the parties based on their percentage of expenses when compared to total expenses. TST shall not without MSC's prior written approval settle any such suit in a manner allowing the alleged infringer to sell Licensed Products within the Field. 7.6 Should any person bring an action seeking a declaratory judgment of non-infringement and/or invalidity of any patent included in the Licensed Patents, then TST shall have the right, but not the obligation, to litigate, control, and settle, at its sole discretion, the action. TST shall notify MSC as soon as reasonably possible of its intention to litigate and control the action. Should TST determine in its sole discretion that it will not litigate and control the action, then MSC may elect to do so. Should the party litigating the action bring a counterclaim for infringement of a Licensed Patent and/or of a Jointly Owned Improvement, then the provisions of Sections 7.3 and 7.5 shall control the disposition of any recovery attributable to such action. MSC and TST agree to cooperate in any such action. TST shall not without MSC's prior written approval settle any such suit in a manner allowing the alleged infringer to sell Licensed Products within the Field. 7.7 MSC shall not advise any third party that it is infringing any patent included in the Licensed Patents without the prior written consent of TST. ARTICLE VIII - FURTHER PROVISIONS 8.1 This Agreement or any interest herein shall not be assigned or transferred, in whole or in part, by either party hereto without the prior written consent of the other party hereto, such consent not to be unreasonably withheld, conditioned or delayed. However, without securing such prior written consent, either party may, after 30 days written notice to the other, assign this Agreement to an Affiliate or a successor to all or substantially all of its business to which this Agreement relates, provided that no such assignment shall be binding and valid until and unless the assignee shall have assumed, in a writing delivered to the non-assigning party, all of the duties and obligations of the assignor, and, provided further, that the assignor shall remain liable and responsible to the non-assigning party hereto for the performance and observance of all such duties and obligations. 8.2 A waiver of any provision of this Agreement or of any breach or default hereunder may be affected only by a writing signed by the party against whom such waiver is to be enforced. The waiver by either party of any provisions of this Agreement, or of any breach or 17 Confidential information redacted and filed separately with the Commission. default of the other party, shall not be construed to be a continuing waiver of such provision or of any succeeding breach or default or a waiver of any other provisions of this Agreement. 8.3 All matters affecting the interpretation, validity, and performance of this Agreement shall be governed by the internal laws of the State of Illinois without regard to its conflict of law principles. 8.4 Should any part or provision of this Agreement be held unenforceable or in conflict with the law of any jurisdiction, the validity of the remaining part or provisions shall not be affected by such holdings. 8.5 Any provision hereof which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. 8.6 Except as otherwise provided in Section 10.4(c), any delays in or failures of performance by either party of any obligations other than timely payment of monies due under this Agreement shall not be considered a breach of this Agreement if and to the extent caused by occurrences beyond the reasonable control of the party affected, including but not limited to: acts of God; acts, regulations or laws of any government; strikes or other concerted acts of workers; fires; floods; explosions; riots; wars; rebellions; and sabotage; and any time for performance hereunder shall be extended by the actual time of delay caused by such occurrence. 8.7 It is the mutual desire and intent of the parties to provide certainty as to their future rights and remedies against each other by defining the extent of their mutual undertakings as provided herein. The parties have, in this Agreement, incorporated all representations, warranties, covenants, commitments and understandings on which they have relied in entering into this Agreement, and, except as expressly provided herein, the parties make no covenant or other commitment to the other concerning its future action. Accordingly, this Agreement together with all Schedules, exhibits and attachments referred to herein: (i) constitutes the entire agreement and understanding between the parties and there are no promises, representations, conditions, provisions or terms related thereto other than those set forth in such Agreements and (ii) supersedes all previous understandings, agreements and representations between the parties, written or oral. 8.8 This Agreement may be amended only by a writing signed by both of the parties hereto. 8.9 All communications, reports, and notices required or permitted to be given by one party to the other under this Agreement shall be addressed to the parties at their respective addresses set forth below or to such other address as requested by either party by notice in writing to the other given in accordance herewith. 18 Confidential information redacted and filed separately with the Commission. If to TST: TouchSensor Technologies, LLC 203 N. Gables Boulevard Wheaton, Illinois 60187 Attn: Thomas M. Schreiber Fax: 630-221-0737 With a copy to: Sachnoff & Weaver, Ltd. 30 S. Wacker Drive, 29th Floor Chicago, Illinois 60606 Attn: Stewart Dolin Fax: 312-207-6406 If to MSC: Material Sciences Corporation 2200 E. Pratt Boulevard Elk Grove Village, Illinois 60007-5995 Attention: Chief Financial Officer Fax: 847-718-8643 All such notices, reports and communications shall be sent by Certified or Registered U.S. mail, postage prepaid and return receipt requested, or by facsimile, and shall be considered given as of the date of receipt. 8.10 MSC agrees to mark every Licensed Product manufactured and/or sold by it or its Affiliates under this Agreement in accordance with the statutes of the United States and statutes in such foreign countries where patent coverage is obtained, relating to the marking of patented articles. TST agrees to mark every product manufactured and/or sold by it or its Affiliates and Licensees covered by Jointly Owned Improvements in accordance with the statutes of the United States and statutes in such foreign countries where patent coverage is obtained, relating to the marking of patented articles. 8.11 Except with the approval of the TST Board of Directors, through April 26, 2005, MSC shall not employ or seek to employ [***] or [***], while they are employees of TST. Further, so long as the licenses granted herein remain exclusive, unless an employee (other than [***] and [***]) shall have been terminated from TST for at least one (1) year or TST's management shall have approved such action, MSC shall not initiate contact with or solicit any such person for purposes of employing or inducing him or her to leave the employment of TST. Similarly, so long as the licenses granted herein remain exclusive, unless an employee shall have been terminated from MSC for at least one (1) year or MSC's management shall have approved such action, TST shall not initiate contact with or solicit any such person for purposes of employing or inducing him or her to leave the employment of MSC. 8.12 Should either [***] or [***] terminate his employment with TST and compete or attempt to compete with MSC, MSC's Affiliates, or MSC's sublicensees, in each case with respect to Licensed Products in the Field, at any time prior to April 26, 2005, then, unless TST 19 Confidential information redacted and filed separately with the Commission. shall have procured compliance or brought suit to enforce the non-compete provisions of the applicable employment agreement within sixty (60) days following notice from MSC, MSC shall have the right but not the obligation to enforce at MSC's sole cost on behalf of TST the employment agreement, and to name TST as a party to any such suit. TST and MSC shall cooperate fully with one another in any such suit. TST shall have the right to be represented at its sole cost by counsel of its choice in any suit brought by MSC pursuant hereto. During the period from the Effective Date until the date on which [***] or [***], as the case may be, ceases to be an employee of TST, upon MSC's written request and subject to MSC's undertaking to pay all premiums and other out-of-pocket costs, TST will exert commercially reasonable efforts to obtain and maintain key person life insurance covering the lives of either or both of the foregoing individuals with death benefits as requested by MSC of up to two million dollars ($2,000,000) for [***] and one million dollars ($1,000,000) for [***] payable to MSC. If for any reason MSC cannot be a direct beneficiary of any such policy, then TST will collect the death benefit and promptly thereafter remit any equal amount to MSC. 8.13 Neither party without the approval of the other shall originate any publicity, news release or public announcement, written or oral, whether to the public or press, public stockholders or otherwise, relating to this Agreement, performance under it or any of its terms, any amendment hereto or performance thereunder save only such announcements as in the opinion of counsel for the party making such announcement is required by law to be made or pursuant to the agreement of the parties, such agreement to be given reasonably. Notwithstanding the foregoing, either party may disclose to actual or potential customers the existence of this Agreement and the general subject matter to which it relates. 8.14 With respect to product types indicated on Schedule 1B as potentially being marketed both within and outside of the Field and in other circumstances in which either MSC or TST raises a question with regard to whether a particular product or a particular proposed transaction or series of transactions will be within the Field, the parties agree to confer and negotiate in good faith to reach agreement on a case-by-case basis. In the event the parties fail to reach agreement, the issue shall be referred for resolution as provided in Article IX. Further, in dealing with such products and with customers operating both within and outside the Field, the parties intend to cooperate in a manner that will best serve such customers and best utilize the parties' respective resources, skills and competitive advantages in such areas as product design, manufacturing, marketing and customer support. The parties will negotiate in good faith to arrive at mutually agreeable arrangements directed toward such ends on a case-by-case and/or customer-by-customer basis. 8.15 Should MSC become aware of an opportunity for commercialization of the Licensed Patents outside of the Field and outside of the fields of business then being pursued directly by TST and its Affiliates (which latter fields include but are not limited to the fields of appliances, commercial products, medical products and exercise equipment), then it may notify TST of the opportunity and request that the definition of the Field in this Agreement be expanded to cover that opportunity. TST under no circumstances shall be obligated to agree to expand the 20 Confidential information redacted and filed separately with the Commission. definition of the Field hereunder, or to refrain from pursuing such opportunity for itself and its Affiliates, but shall in good faith negotiate with MSC with regard to any such opportunity. If TST and MSC do not agree to such an expanded definition of the Field, unless TST had previously been pursuing the opportunity identified by MSC, [***]. 8.16 The parties shall from time to time, not less frequently than once in each calendar quarter, meet in order to review MSC's exploitation of the rights and licenses herein granted, and to review TST's efforts to develop Improvements. 8.17 This Agreement is only between MSC and TST, and does not create any rights on behalf of any parties other than MSC and TST and, to the extent expressly set forth herein, their respective Affiliates. 8.18 If TST shall have an involuntary petition filed against it or shall file a voluntary petition under the bankruptcy laws of the United States, the parties intend that MSC shall be protected in the continued enjoyment of its rights hereunder to the maximum feasible extent, including, without limitation, if MSC so elects, the protection conferred upon MSC under Section 365(n) of Title 11 of the United States Code (the "Bankruptcy Code"), or any similar provision of any applicable law. The Licensed Patents and Know-How, for the purposes of Section 365(n) of the Bankruptcy Code, are deemed to be "intellectual property" as that term is defined in Section 101(35A) of the Bankruptcy Code. All materials required to be delivered by TST to MSC hereunder, and all materials relating to the Licensed Patents, Licensed Products, and Know-How which, in the course of dealing between the parties under this Agreement, are customarily delivered, are considered to be "embodiments" of such intellectual property and intellectual property rights for purposes of said Section 365(n). All written agreements entered into in connection with the parties' performance hereunder from time to time are considered agreements "supplementary" to this Agreement for purposes of Section 365(n) of the Bankruptcy Code. At the request of MSC and at its cost, TST shall grant a security interest in Licensed Patents and Know-How in favor of MSC, which security interest may be recorded by MSC as it deems appropriate. Such security interest, if granted, shall be solely to secure the continued enjoyment by MSC of its rights hereunder and shall expire immediately at such time as the license granted hereunder ceases to be exclusive. MSC may at its discretion record pertinent portions of this Agreement with the United States Patent and Trademark Office, but prior to doing so, MSC will exert all commercially reasonable efforts to notify and confer with TST regarding the specific portions it intends to record. ARTICLE IX - DISPUTE RESOLUTION 9.1 Should the parties at any time be unable to reach agreement as to any matter entrusted to their joint determination, then they shall refer the matter for resolution to their respective senior management who shall receive such information as the parties deem desirable and who shall meet forthwith in an attempt to amicably resolve matters. 21 Confidential information redacted and filed separately with the Commission. 9.2 Should senior management be unable to resolve a dispute as provided in Section 9.1 within 45 days following such referral, then any and all disputes between the parties relating in any way to entering into of this Agreement and/or the validity, construction, meaning, enforceability, or performance of this Agreement or any of its provisions, or the intent of the parties in entering into this Agreement, or any of its provisions shall be settled by arbitration. Such arbitration shall be conducted at Chicago, Illinois, in accordance with the rules then pertaining to the American Arbitration Association with a panel of three (3) arbitrators. The panel of arbitrators shall be selected by agreement of the parties, but if the parties cannot agree on the panel within thirty (30) days, each party shall select one arbitrator and the two arbitrators so selected shall select the third arbitrator. The arbitrators shall be selected from the National Panel of Arbitrators of the American Arbitration Association. Reasonable discovery as determined by the Arbitrators shall apply to the arbitration proceeding. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The prevailing party in such arbitration, in addition to all other relief provided, may be awarded its reasonable costs and expenses including attorney costs, in each case as determined by the arbitrators in their sole discretion. Notwithstanding the foregoing, either party may initiate or continue a proceeding in a court of competent jurisdiction in order to obtain injunctive relief in order to preserve the status quo ante or to protect and preserve its intellectual property rights, at any time, including but not limited to any period in which an arbitration proceeding is pending hereunder. ARTICLE X - TERM AND TERMINATION 10.1 The term of this Agreement shall be for a term commencing on the Effective Date and, unless sooner terminated, extending until expiration of the last to expire of all patents included in the Licensed Patents or until there remains no Valid Claim under the Licensed patents, whichever occurs earlier. 10.2 MSC may in its discretion terminate this Agreement and the licenses and rights granted herein: (a) if TST shall at any time commit a material default or be in material breach under any term or condition of this Agreement and fails to reasonably cure such default or breach within forty-five (45) days after receipt of written notice from MSC reasonably specifying the default or breach; or (b) without cause at any time after March 1, 2006 upon one hundred twenty (120) days prior written notice to TST; or (c) if at any time prior to April 26, 2005 either or both of [***] or [***] ceases to be employed by TST or is determined to be permanently disabled as set forth in their respective employment agreements described in Section 6.5 of this Agreement. Notwithstanding the foregoing, MSC's right to terminate pursuant to subsection (c) above may only be exercised upon thirty (30) days advanced written notice given to TST within ninety (90) 22 Confidential information redacted and filed separately with the Commission. days following the date on which MSC receives notice that either or both of the named individuals has ceased to be employed by TST and then only if such individuals are not employed or have not agreed to become employed by MSC or its Affiliates. Further, MSC shall have no right to terminate pursuant to subsection (c) above in the event either or both of the named individuals has ceased to be employed by reason of his death, provided that MSC is either the beneficiary of a key person life insurance policy covering such individual as provided in Section 8.12 or TST pays to MSC an amount equal to the amount of the benefits payable under such a policy or, if no such policy is then in force, an amount equal to One Million Dollars ($1,000,000) in the event of the death of [***] or Two Million Dollars ($2,000,000) in the event of the death of [***]. 10.3 In the event MSC is entitled to terminate this Agreement and its rights and licenses hereunder pursuant to the provisions of Section 10.2, it may instead in its sole discretion elect, by written notice to TST, to continue to be licensed under this Agreement on a non-exclusive basis. 10.4 TST may in its discretion terminate this Agreement and the licenses and rights granted herein: (a) if MSC shall at any time be in default with respect to any payment due hereunder and fail to cure such default within fifteen (15) days after receipt of written notice from TST; or (b) if MSC shall at any time commit any other material default or be in material breach under any term or condition of this Agreement and fails to reasonably cure such default or breach within forty-five (45) days after receipt of written notice from TST reasonably specifying the default or breach; or (c) upon written notice from TST if MSC shall, for any reason, suspend or cease conducting all of its business related to Licensed Products for a period of one hundred twenty (120) consecutive days or for periods totaling one hundred eighty (180) days in any calendar year. 10.5 In the event TST is entitled to terminate this Agreement and MSC's rights and licenses hereunder pursuant to the provisions of Section 10.4, it may instead, in its sole discretion, elect, by written notice to MSC, to terminate only the exclusivity of any or all of the licenses granted to MSC hereunder. Notwithstanding any other provision of this Agreement, in the event that this Agreement and the licenses and rights granted hereunder or exclusivity with respect thereto is terminated by TST pursuant to Section 10.4 at any time prior to March 1, 2006, MSC shall nevertheless continue to be obligated to pay Minimum Annual Royalties for all periods through February 28, 2006, and in the case of termination of this Agreement, all such amounts shall become immediately due and payable on the termination date. 23 Confidential information redacted and filed separately with the Commission. 10.6 In the event of termination of this Agreement or the licenses and rights granted hereunder by MSC pursuant to Section 10.2 above, then MSC shall be entitled to continue to manufacture and sell Licensed Products and TST shall have an obligation to support MSC customers and sublicensees for a period of up to one hundred eighty (180) days solely in order to dispose of inventory on hand at the time of termination and fulfill customer orders received and accepted prior to the time of termination, subject in each case to continuing payment of royalties with respect to such sales. 10.7 The terms, conditions and provisions of the following sections shall survive the expiration or termination of this Agreement: Article I, Section 2.5(f), Article III, Article IV, Sections 5.3, 5.4, 7.2 through 7.6 (as to litigation pending prior to termination), 8.1 through 8.11, 8.13, 8.17, Article IX, Sections 10.5, 10.6, 10.7 and Articles XI and XII. ARTICLE XI - WARRANTY LIMITATIONS 11.1 Nothing in this Agreement shall be construed as: (a) a warranty or representation by TST as to the scope of any patent included in Licensed Patents; or (b) a requirement that TST shall file any patent application, secure any patent, or maintain any patent in force; or (c) an obligation to bring or prosecute actions or suits against third parties for infringement. ARTICLE XII-CONFIDENTIALITY 12.1 "Confidential Information" as used herein shall mean all non-public information, documentation, software (including listings thereof and documentation related thereto), blueprints, drawings, sketches, trade secrets, Know-How and other confidential research, development or manufacturing data regardless of the media in which the foregoing may be stored that concerns or relates to the business, prospects, processes, operations, employees, contractors, suppliers, customers, strategic, operating marketing and sales plans, financial and tax accounting data of a party or with respect to which a party is obligated to maintain confidentiality. In order for information to be considered confidential hereunder, it shall be stamped, marked, or otherwise so indicated by TST or MSC by applying to the information the notation "Confidential Information". Notwithstanding anything to the contrary herein and without any marking requirement, the substantive terms and conditions of this Agreement other than the existence and general scope of licenses and rights granted hereunder with respect to the Licensed Patents, shall be deemed Confidential Information of both parties, with each owing a duty of confidentiality to the other. 24 Confidential information redacted and filed separately with the Commission. This Agreement shall not be construed to prevent a party from making use of or disclosing information which: A. was lawfully in its possession subject to no obligations of confidentiality prior to the production of such information by the disclosing party; or B. appears in any issued patent, printed publication, or other published or circulated material available to the general public; or C. was or is hereafter obtained from a source or sources not under an obligation of secrecy to the disclosing party; or D. is exempted from the operation of this Agreement by written consent of the disclosing party. Further this Agreement shall not be construed to prevent a receiving party from disclosing Confidential Information of a disclosing party to the extent such disclosure is compelled by a court or other governmental authority or otherwise required under applicable law, provided that such receiving party shall exert reasonable efforts to notify the disclosing party of such impending disclosure and shall cooperate in seeking an appropriate protective order or other action to prevent or restrict disclosure. 12.2 Each party acknowledges and agrees that Confidential Information is proprietary to the disclosing party and that any unauthorized disclosure or unauthorized use thereof by the receiving party will cause irreparable harm and loss to the disclosing party. In the event of actual or threatened breach of this Agreement by a receiving party or one of its employees to whom Confidential Information of the other party has been disclosed, the disclosing party shall be entitled to secure an immediate preliminary injunction prohibiting disclosure of its Confidential Information, which action shall not restrict or limit any other remedies, legal or equitable, that the disclosing party might determine to seek. 12.3 In consideration of the disclosure to the receiving party of Confidential Information, the receiving party agrees to treat Confidential Information of the disclosing party in confidence and to undertake the following additional obligations with respect thereto: (a) to use such Confidential Information for the sole purpose of performing its obligations and exercising its rights under this Agreement including but not limited to developing Improvements; (b) not to copy, in whole or in part, such Confidential Information except as may be necessary or useful in connection with the purposes described in Section 12.3(a); (c) not to disclose such Confidential Information to any third parties other than professional and financial advisors, consultants and contractors as and to the extent 25 Confidential information redacted and filed separately with the Commission. necessary or useful in connection with the purposes described in Section 12.3(a) and then only if such third parties are legally bound to maintain such Confidential Information in confidence; (d) to limit dissemination of such Confidential Information to only those of receiving party's employees, officers, directors, contractors, professional advisors, bankers and investors who have a need to know for the purposes described in Section 12.3(a) above and who are subject to binding obligations to hold the Confidential Information disclosed to them in confidence; and (e) to return or destroy all materials containing such Confidential Information, other than jointly owned Confidential Information including all copies and records thereof, upon any termination or expiration of this Agreement and certify in a writing signed by an officer that the same has been accomplished. 12.4 The restrictions and obligations of Article XII of this Agreement shall survive any expiration, termination or cancellation of this Agreement and shall continue to bind the receiving party, its successors, heirs and assigns. 12.5 During the term hereof, MSC shall not reverse engineer Chips designed by or for TST. 12.6 MSC shall give TST notice prior to executing any non-disclosure agreement relating to Licensed Products with any third party. TST shall have five (5) business days from receipt of such notice to withhold or condition its approval. Should TST fail to withhold or condition its approval within such five (5) business days, then its consent to MSC entering into the non-disclosure agreement will be presumed. 26 Confidential information redacted and filed separately with the Commission. ARTICLE XIII- COMPONENTS 13.1 During the term of this Agreement, subject to the ability of TST or its contract manufacturers to supply Chips that meet MSC's quality standards and requirements for quantity, delivery and service as MSC in its sole discretion shall determine, all of the respective requirements of MSC, its Affiliates and its sublicensees for TST's proprietary Chips for use in manufacturing Licensed Products shall be purchased from TST at prices equal to TST's cost, as defined in Section 13.5 below, subject to adjustment pursuant to Section 2.8 (providing that TST may increase the price of such Chips purchased for sale to sublicensees under new Manufacturing Sublicenses to its cost divided by [***] in the event that MSC's license and rights hereunder become non-exclusive) and pursuant to Section 13.6 (providing for prices greater than actual cost in certain circumstances). Nothing in this Section 13.1 shall obligate TST to make any changes or modifications to the designs of any Chips, but TST will consider requests for such changes or modifications. (a) For purposes of this Section 13.1, TST's cost shall mean TST's costs and expenses as set forth in Section 13.5. (b) Should TST be unable or unwilling to satisfy the requirements of MSC, its Affiliates and/or its sublicensees for Chips pursuant to this Section 13.1, MSC shall have the right to make the Chips or have them made to supply its requirements and the requirements of its Affiliates and sublicensees. MSC will be responsible for any breach of its obligations under this Agreement by its Affiliates and Sublicensees, even if the breach was actually committed by a contract manufacturer. MSC shall undertake to utilize a contract manufacturer for Chips only where such contract manufacturer is held to standards no less stringent than those applied to TST Should MSC undertake to make Chips or have them made for use in Licensed Products pursuant to this Article XIII, TST shall not be responsible for any costs or expenses associated with any such manufacture, including, without limitation, direct labor and material costs. The manufacturing rights provided in this Section 13.1(b) shall be MSC's sole and exclusive remedy for any breach by TST of any obligation hereunder to supply Chips. Subject to Article XII of this Agreement, TST agrees to provide MSC with the documents, information, masks, mask works, and Know-How necessary or useful in manufacturing the Chips, including, without limitation, manufacturing specifications and tolerances, technical drawings, and schematics, as necessary or useful to enable MSC to exercise its manufacturing rights in accordance with this Section 13.1(b). The parties further agree that MSC and its Affiliates and sublicensees shall comply with all applicable laws and regulations, including consumer protection and safety legislation, in manufacturing the Chips. (c) At any time at which MSC is unable to compete effectively in any relevant market within the Field because the cost of Chips supplied by TST hereunder is not competitive with the cost of comparable Chips available to MSC from other sources, MSC shall so notify TST in writing and the parties shall cooperate and jointly exert commercially reasonable efforts to reduce such costs to levels that would reasonably be expected to enable MSC to be competitive, such efforts to include, but not be limited to, 27 Confidential information redacted and filed separately with the Commission. seeking alternative sourcing for Chip fabrication. Should the parties fail to agree on cost reduction actions to be taken pursuant to this Section 13.1(c) resolution of any such disagreement or dispute shall be pursued in accordance with Article IX. 13.2 During the term of this Agreement, TST and its Affiliates shall have the right but not the obligation to purchase from MSC Assembled Flexible Substrates for use in furtherance of the manufacture of Licensed Products, such Assembled Flexible Substrates to be made available by MSC to TST and its Affiliates based upon MSC's cost (materials and direct labor, determined by reference to MSC's books and records regularly kept in accordance with GAAP), divided by [***]. MSC shall be the preferred vendor of TST and its Affiliates, respectively, for the Assembled Flexible Substrates, provided that MSC's price, quality, delivery, and service are reasonably satisfactory to TST and its Affiliates, respectively. Nothing herein shall grant TST and its Affiliates any right to sell Licensed Products in the Field during any period in which MSC's rights and license hereunder with respect thereto are exclusive. 13.3 During the term of this Agreement, MSC and its Affiliates shall have the right but not the obligation to purchase from TST assembled glass substrates and printed circuit boards ("PCBs") for use in furtherance of the manufacture of Licensed Products, such assembled glass substrates and PCBs to be made available by TST to MSC and its Affiliates, based upon TST's cost (materials and direct labor, determined by reference to TST's books and records regularly kept in acceptance with GAAP), divided by [***]. TST shall be the preferred vendor of MSC and its Affiliates for the assembled glass substrates and PCBs, provided that TST's price, quality, delivery, and service are reasonably satisfactory to MSC and its Affiliates, respectively. 13.4 Each of the parties shall keep complete and accurate records of its costs to manufacture/acquire the components called for by this Article XIII in accordance with GAAP. Each of the parties shall have the right, at its sole discretion and expense, to nominate an independent accountant reasonably acceptable to and approved by the other party, acceptance and approval not to be unreasonably withheld, conditioned or delayed, who shall have access to the other party's records, after executing a Confidentiality Agreement acceptable to the other party, during reasonable business hours for the purpose of verifying the costs specified in this Article XIII for the two preceding Fiscal Years, but this right may not be exercised more than once in any Fiscal Year, and the accountant shall disclose to the party only information relating solely to the accuracy of the costs and the correct amounts paid and payable by the other parties pursuant to this Article XIII. 13.5 [***]. 13.6 In connection with the supply of Chips by TST pursuant to Section 13.1, TST may from time to time propose to engage in capital investment programs intended to reduce the cost of the Chips. TST may request that MSC participate in such proposed programs. MSC shall have no obligation to so participate, but if it does not, then notwithstanding the provisions of Section 13.1, MSC shall not benefit from the actual Chip cost reduction, if any, resulting solely 28 Confidential information redacted and filed separately with the Commission. from such capital investment by TST and the price paid by MSC for Chips supplied under Section 13.1 shall thereafter be adjusted accordingly. 13.7 Whenever a party supplying any articles pursuant to this Article XIII anticipates or determines that its costs will increase in a manner that would reasonably be expected to result in a substantial increase in the price of such articles, the supplying party will exert commercially reasonable efforts to notify the purchasing party of its best estimate of such increase and the anticipated basis therefor at least thirty (30) days in advance. ARTICLE XIV-SUPPORT 14.1 TST shall assign sufficient skilled engineering staff throughout the term of this Agreement to enable timely communication to MSC of the intellectual property being licensed under this Agreement, including but not limited to communication of all hereafter developed Know-How and Improvements. In addition, TST shall employ sufficient engineers to communicate on a timely basis technical information and provide support reasonably requested by MSC to facilitate MSC's development of Licensed Products. For the period through February 28, 2003, however, TST shall not be obligated to provided such support in excess of [***] hours. For Fiscal Years ending after February 28, 2003, TST shall not be obligated to provided such support in excess of [***] hours in any Fiscal Year. Unless otherwise agreed by the parties, the obligations of TST under this Section 14.1 shall cease at any time when MSC ceases to be subject to Minimum Annual Royalty payment obligations. 14.2 MSC shall employ reasonably skilled engineers, at least one of whom is an electronics engineer, and technicians to timely receive from TST the technical information, Know-How, and intellectual property being licensed pursuant to this Agreement. ARTICLE XV - SALE OF LICENSES 15.1 MSC may determine that it desires to sell and transfer all of its rights and obligations under this Agreement with respect to the transportation market and/or the consumer electronics market as defined and included in the Field (the "Transferred Field") to another party (a "Buyer") in a transaction under which the Buyer would become a licensee entitled to exercise all rights and privileges under this Agreement and under Sublicenses with respect to Licensed Products in the Transferred Field, would be deemed a successor in interest of MSC with respect thereto and would assume a portion of MSC's obligations, including but not limited to the payment of Total Royalties related to Transferred Field (a "Sale Transaction"). 15.2 In the event MSC proposes a Sale Transaction pursuant to this Article XV, MSC shall first notify TST and afford it the opportunity to re-acquire rights with respect to the Transferred Field upon mutually agreeable terms and conditions negotiated in good faith. If MSC and TST should fail to negotiate and execute a mutually agreeable Sale Transaction within sixty (60) days following TST's receipt of such notice, then MSC shall be free to negotiate a Sale Transaction with a third party Buyer on terms not less favorable than those offered by TST, if any. Prior to entering into any such Sale Transaction, MSC shall provide TST with a written 29 Confidential information redacted and filed separately with the Commission. notice identifying the name and address of the proposed Buyer and setting forth in detail all of the material terms of the proposed Sale Transaction. MSC shall not enter into any such Sale Transaction without the prior approval of TST, which approval shall not be unreasonably withheld, conditioned or delayed. If TST fails to give MSC written notice to the contrary within thirty (30) days following TST's receipt of the foregoing notice of the identity of the proposed Buyer and the terms of the proposed Sale Transaction, then TST shall be deemed to have approved such Sale Transaction. 15.3 In the event that MSC effects a Sale Transaction, it shall pay to TST a portion of the Adjusted Net Proceeds (as defined below) of such Sale Transaction as set forth below: (a) Such payment shall be made on the date on which the Sale Transaction is consummated and shall be accompanied by a written closing statement showing the calculation for determining the amount of such payment in accordance herewith. Such statement shall be delivered even if no amount is payable to TST pursuant hereto. (b) For Sales Transactions as to which a notice is given prior to March 1, 2004 and which are consummated prior to March 1, 2005, MSC shall pay TST [***] of the Adjusted Net Proceeds (as defined below), if any, plus [***] of Other Valuable Consideration (as defined below), if any. (c) For all other Sales Transactions, MSC shall pay TST [***] of the Adjusted Net Proceeds, if any, plus [***] of Other Valuable Consideration, if any. (d) For purposes of this Section 15.3: (i) "Adjusted Net Proceeds" shall mean the Gross Proceeds (as defined below), net of the reasonable out-of-pocket expenses incurred by MSC in connection with effecting such Sale Transaction. (ii) "Gross Proceeds" shall mean the total consideration paid or payable by the Buyer to MSC and its Affiliates in the Sale Transaction, whether paid in cash, securities or property, or by assumption of indebtedness for borrowed money. Consideration other than cash and cash equivalents shall be valued at fair market value and any deferred payments shall be discounted to net present value using a discount rate equal to [***] per annum. (iii) "Other Valuable Consideration" shall mean the portion of the ongoing Minimum Annual Royalty obligations of MSC assumed by the Buyer during the Fiscal Years ending prior to March 1, 2006, discounted to net present value using a discount rate equal to [***] per annum. To the extent that Minimum Annual Royalties assumed by the Buyer for which MSC has paid Other Valuable 30 Confidential information redacted and filed separately with the Commission. Consideration in connection with the Sales Transaction (Other Valuable Consideration) are ultimately paid by the Buyer to TST, Other Valuable Consideration shall be proportionately reduced retroactively. Within forty-five (45) days following the last day of each Fiscal Year ending prior to March 1, 2006, TST shall pay to MSC an amount equal to the Minimum Annual Royalties received from the Buyer during such Fiscal Year with respect to which MSC has previously paid Other Valuable Consideration, or credit such amount against the next required Minimum Annual Royalty payment by MSC. Each such payment or notice of such credit shall be accompanied by a report setting forth the calculation of the amounts to be paid or credited and the basis therefor. 15.4 All calculations of Adjusted Net Proceeds, Other Valuable Consideration and Minimum Annual Royalties paid by the Buyer for purposes of this Article XV shall be based upon accounts and records maintained in accordance with GAAP, and MSC and TST, respectively, shall keep accurate records that are sufficiently detailed and complete to permit an examination for purposes of verifying the accuracy of the foregoing calculations, of the amounts of Adjusted Net Proceeds and Other Valuable Consideration paid or payable by MSC to TST pursuant to this Article XV, and of the amounts of Minimum Annual Royalties paid by the Buyer to TST and the amounts paid or payable by TST to MSC pursuant to Section 15.3(d)(iii). TST shall have the right, at its sole discretion and expense, upon written notice given within ninety (90) days following TST's receipt of the statement of the calculation of the amount payable to TST with respect to each Sale Transaction pursuant to this Article XV, and MSC shall have the right, at its sole discretion and expense, upon written notice given within ninety (90) days following MSC's receipt of each report pursuant to Section 15.3(d)(iii), to nominate an independent accountant reasonably acceptable to and approved by MSC or TST, as the case may be, such acceptance and approval not to be unreasonably withheld, conditioned or delayed. Such accountant shall have access to MSC's or TST's records, as the case may be (after executing a confidentiality agreement reasonably acceptable to MSC or TST, as the case may be), during reasonable business hours for the purpose of inspecting and examining such records and verifying the amounts paid or payable to TST or MSC, as the case may be, under this Article XV. 15.5 [***]. 15.6 [***]. 15.7 [***]. ARTICLE XVI - SIGNATURE AND DELIVERY 16.1 This Agreement, and any amendments, waivers, consents or supplements hereto or in connection herewith, may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be 31 Confidential information redacted and filed separately with the Commission. deemed an original, but all such counterparts together shall constitute but one and the same instrument. Signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document. This Agreement shall become effective upon the execution of a counterpart hereof by each of the parties hereto and the delivery thereof to the other party. 16.2 This Agreement may be executed by signature transmitted via facsimile machine ("Fax"), and shall be treated in all manner and respects as an original document with the same binding legal effect as an original document. The signature of any party by Fax shall be considered for these purposes as an original signature. At the request of any party, any Fax signature shall be re-executed by the parties in an original form. [This Space Intentionally Left Blank] 32 Confidential information redacted and filed separately with the Commission. IN WITNESS WHEREOF, the parties hereto have duly executed this agreement on the dates indicated below to be effective as of the Effective Date. Material Sciences Corporation By: --------------------------------------- Edward J. Vydra, Vice President and Chief Technology Officer Date: ------------------------------------- TouchSensor Technologies, LLC By: --------------------------------------- Douglas Roberts, Chairman Date: ------------------------------------- 33 Confidential information redacted and filed separately with the Commission. EX-10.(GG) 4 dex10gg.txt PURCHASE AGREEMENT Exhibit 10(gg) ================================================================================ PURCHASE AGREEMENT Among LTV Steel Company, Inc. LTV-Walbridge, Inc. MSC Walbridge Coatings Inc. and Material Sciences Corporation Dated as of April 23, 2002 ================================================================================ TABLE OF CONTENTS ARTICLE I Definitions .................................................................. 2 ARTICLE II The Purchase ................................................................. 4 SECTION 2.01. Closing Date .......................................... 4 SECTION 2.02. The Transactions ...................................... 4 SECTION 2.03. Payment Mechanics ..................................... 5 SECTION 2.04. Excluded Liabilities .................................. 5 ARTICLE III Representations and Warranties ............................................... 6 SECTION 3.01. Representations and Warranties of LTV Steel ........... 6 SECTION 3.02. Representations and Warranties of MSC ................. 7 ARTICLE IV Covenants .................................................................... 7 SECTION 4.01. Cooperation and Commercially Reasonable Efforts ....... 7 SECTION 4.02. Notice of Certain Events .............................. 8 SECTION 4.03. Confidentiality ....................................... 8 SECTION 4.04. Expirations of Representations and Warranties ......... 9 ARTICLE V Closing Conditions ........................................................... 9 SECTION 5.01. LTV Steel's and LTV-W's Conditions .................... 9 SECTION 5.02. MSC's and MSCWC's Conditions ..........................10 ARTICLE VI Termination ..................................................................11 SECTION 6.01. Termination ...........................................11 SECTION 6.02. Effect of Termination .................................11 ARTICLE VII Miscellaneous ................................................................12 SECTION 7.01. Expenses ..............................................12 SECTION 7.02. Notices ...............................................12 SECTION 7.03. Third Parties .........................................13 SECTION 7.04. Successors and Assigns ................................13 SECTION 7.05. Headings ..............................................13 SECTION 7.06. Governing Law; Entire Agreement .......................13 SECTION 7.07. Incorporation of Exhibits .............................13 SECTION 7.08. Amendments and Waivers. ...............................13 SECTION 7.09. Counterparts ..........................................14 Exhibits: A. MSC Undertaking B. Mutual Release C. Sale Notice D. Assignment of GP Interest E. Assignment of LTV Steel Coating Agreement F. Certificate of Executive Officer 2 PURCHASE AGREEMENT PURCHASE AGREEMENT dated as of April 23, 2002 (this "Purchase Agreement") among LTV-WALBRIDGE, INC., a Delaware corporation ("LTV-W") and a subsidiary of The LTV Corporation, a Delaware corporation ("LTV"); LTV STEEL COMPANY, INC., a New Jersey corporation ("LTV Steel") and a subsidiary of LTV; MSC WALBRIDGE COATINGS INC., a Delaware corporation (formerly known as Pre Finish Metals ((EG) Incorporated) ("MSCWC") and a subsidiary of MSC Pre Finish Metals Inc., an Illinois corporation (formerly known as Pre Finish Metals Incorporated ("MSCPFM")) and a subsidiary of MATERIAL SCIENCES CORPORATION, a Delaware corporation ("MSC"); and MSC. W I T N E S S E T H : WHEREAS, in 1984 EGL Steel Inc., a Delaware corporation ("EGL"), Inland Steel Electrogalvanizing Corporation, a Delaware corporation ("Inland EG"), and MSCWC organized a general partnership named Walbridge Coatings, An Illinois Partnership (the "Partnership") under the laws of the State of Illinois for the purpose of owning and operating a facility designed primarily to coat sheet steel with zinc or zinc alloys by an electroplating process and also capable of coating sheet steel with Zincrometal (R) or other materials (the "Walbridge Facility"); and WHEREAS, pursuant to the Initial Transfer Agreement (as defined herein) and the 1998 Transfer Agreement (as defined herein), EGL purchased Inland EG's Partner's Interest (as that term is defined in Appendix A) in the Partnership; and WHEREAS, pursuant to the 1999 Transfer Agreement (as defined herein), LTV-W purchased the GP Interest (as defined herein) from EGL and LTV Steel purchased the Line Time Access (as defined herein); and WHEREAS, LTV-W and LTV Steel have each commenced a case under the Bankruptcy Code (as defined herein) before the Bankruptcy Court (as defined herein); and WHEREAS, LTV-W desires to sell to MSCWC all of its interests in the Partnership, including without limitation the GP Interest, and LTV Steel desires to sell to MSCWC all of its interests in the Partnership, including without limitation the Line Time Access, and MSCWC desires to buy the same from LTV-W and LTV Steel, in each case on the terms and conditions contained herein; and WHEREAS, MSC desires to enter into this Purchase Agreement in order to induce LTV-W and LTV Steel to enter into this Purchase Agreement; NOW, THEREFORE, the parties hereto agree as follows: ARTICLE I Definitions ----------- (a) As used herein, the following terms shall have the following meanings: "1998 Transfer Agreement" means the transfer agreement dated as of June 30, 1998, among Inland, BSC, Inland EG, Ispat and EGL. "1999 Transfer Agreement" means the Purchase Agreement dated as of July 23, 1999, among EGL, BSC, LTV, LTV Steel, LTV-W, MSCWC, MSCPFM and MSC. "Accounting Representatives" shall mean, in the case of LTV Steel and LTV-W, Mr. John Delmore and in the case of MSCWC, Mr. James J. Waclawik, Sr. "Affiliate" means, with respect to any person, any other Person directly or indirectly controlling, controlled by or under common control with such Person. "Amended BSC Coating Agreement" means the Amended and Restated Coating Agreement dated as of July 23, 1999 between BSC and the Partnership. "Amended Operating Agreement" means the Amended and Restated Operating Agreement dated as of July 23, 1999 between MSCWC and the Partnership. "Amended Parent Agreement" means the Amended and Restated Parent Agreement dated as of July 23, 1999 among BSC, LTV, MSCPFM and MSC. "Amended Partnership Agreement" means the Amended and Restated Partnership Agreement of the Partnership dated as of July 23, 1999 among EGL, LTV-W and MSCWC. "Appendix A" means Appendix A to the Definitive Agreements. "Bankruptcy Code" means 11 U.S.C.ss.ss.101-1330. "Bankruptcy Court" means the United States Bankruptcy Court, Northern District of Ohio, Eastern Division. "BSC" means Bethlehem Steel Corporation, a Delaware corporation and the parent of EGL. "Definitive Agreements" means the Amended Parent Agreement, the Amended Partnership Agreement, the Amended BSC Coating Agreement, the LTV Steel Coating Agreement, the MSCWC Coating Agreement, the Amended Operating Agreement, together in each case with any and all changes therein or additions thereto evidenced by letter agreements dated on or after July 23, 1999 or the minutes of the Management Committee of the Partnership between July 23, 1999 and the date hereof. 2 "Initial Transfer Agreement" means the Transfer Agreement dated as of May 29, 1991, among Ispat, Inland, Inland EG, BSC and EGL, as amended April 23, 1992, and June 5, 1992. "Inland" means Inland Steel Company, a Delaware corporation (which has been merged into Ispat). "Interest" means the GP Interest together with the Line Time Access. "Ispat" means Ispat Inland Inc. (formerly known as Inland Steel Industries, Inc.), a Delaware corporation. "LTV Steel Coating Agreement" means the Coating Agreement dated as of July 23, 1999 between LTV Steel and the Partnership. "LTV Steel Transaction Documents" means this Purchase Agreement and each of the Exhibits hereto to which LTV Steel and/or LTV-W is or is to be a party. "MSCWC Coating Agreement" means the Coating Agreement dated as of July 23, 1999 between MSC and the Partnership. "MSC Transaction Documents" means this Purchase Agreement and each of the Exhibits hereto to which MSC and/or MSCWC is or is to be a party. "Order" means, collectively, the order of the Bankruptcy Court dated March 21, 2001, as amended by a stipulation and order entered on November 26, 2001, which relates to sales of assets for consideration not greater than $7 million. "Person" means any natural person, firm, trust, partnership, joint venture, unincorporated association, corporation, limited liability company, government or governmental agency. "Purchase Price" means the payment from MSCWC to LTV-W and LTV Steel pursuant to Section 2.02(a). "Purchase Price Adjustment" means the amount determined in accordance with Section 2.02(b) used in the calculation of the Purchase Price. "Scheduled Closing Date" means May 15, 2002. "Settlement Payment" means the payment from LTV Steel to the Partnership pursuant to Section 2.02(b). "Transactions" means all transactions contemplated by this Purchase Agreement. (b) Each of the following terms is defined in the Section set forth opposite such term: 3 Term Section ---- ------- Closing 2.01 Closing Date 2.01 Confidential Information 4.03 EGL Recitals GP Interest 2.02(a) Inland EG Recitals Liabilities 4.05(a) Line Time Access 2.02(a) LTV Caption LTV Steel Caption LTV Steel Indemnified Persons 4.05(b) MSC Undertaking 2.02(a) LTV-W Caption MSC Caption MSC Indemnified Persons 4.05(a) MSCPFM Caption MSCWC Caption Partnership Recitals Walbridge Facility Recitals ARTICLE II The Purchase ------------ SECTION 2.01. Closing Date. The Transactions shall, subject to the satisfaction or waiver of the conditions set forth in Article V hereof, be consummated (the "Closing") at the offices of Sidley Austin Brown & Wood, 10 South Dearborn Street, Bank One Plaza, Chicago, Illinois on the Scheduled Closing Date or at such other place or time as shall be agreed to by the parties (the "Closing Date"), effective as of the opening of business, Chicago time, on the Closing Date. SECTION 2.02. The Transactions. Simultaneously on the Closing Date: (a) MSCWC shall purchase from LTV-W and LTV-W shall sell to MSCWC all of LTV-W's interests in the Partnership, including without limitation a 16.5% general partner interest in the Partnership (including all rights with respect thereto except as expressly otherwise provided herein (the "GP Interest")), which GP Interest shall include a 16.5% Voting Interest (as defined in Appendix A) and a 16.5% Financial Interest (as defined in Appendix A), and (ii) LTV Steel shall assign to MSCWC, and MSCWC shall acquire from LTV Steel all of LTV Steel's interests in the Partnership, including without limitation all of LTV Steel's interest in the LTV Steel Coating Agreement (LTV Steel's interest therein being referred to herein as the "Line Time Access"). In consideration therefor, MSCWC shall pay to LTV Steel, on behalf of LTV Steel and LTV-W, in the aggregate, $3,137,252.00 less the amount of the Purchase Price Adjustment provided for in Section 2.02(b), on the Closing Date and MSC shall assume and agree to pay or otherwise perform, or to cause one of its Affiliates to pay or 4 otherwise perform, and indemnify LTV Steel and/or LTV-W against, (i) the liabilities and obligations described in Section 2.02(b) to the extent that they are taken into account in determining the Purchase Price Adjustment, and (ii) any and all liabilities, obligations, and commitments of LTV Steel and/or LTV-W under the Definitive Agreements that arise or accrue with respect to any period beginning on or after the Closing Date or arise out of events or circumstances occurring on or after the Closing Date, whether absolute, contingent, known or unknown, disclosed or undisclosed in this Purchase Agreement or otherwise (the "MSC Undertaking"). The form of the MSC Undertaking is set forth in Exhibit A hereto. (b) The "Purchase Price Adjustment" shall be equal to the sum of $3,100 for each day in the period from and including April 1, 2002 to but excluding the Closing Date, equal to the parties' estimate of the "Allocated Fixed Costs" due during such period under Section 5.02 of the LTV Steel Coating Agreement. LTV Steel does not intend to purchase any coating services from the Partnership after the date hereof. The exact amount of the Purchase Price Adjustment shall be determined by the Accounting Representatives of the parties in good faith not less than two business days prior to the Closing. (c) (i) LTV Steel and LTV-W and (ii) the Partnership shall exchange mutual releases with respect to their respective obligations under the Definitive Agreements in the form of Exhibit B hereto. SECTION 2.03. Payment Mechanics. The payments referred to in Section 2.02 shall be paid in cash (in United States dollars) by MSCWC and LTV Steel by wire transfer of immediately available funds to an account specified by LTV Steel or the Partnership, as the case may be, in a written notice to the particular payor delivered not less than five business days prior to the Closing. SECTION 2.04. Excluded Liabilities. Except as otherwise provided in this Purchase Agreement or the Amended Partnership Agreement, MSCWC does not assume or undertake to pay, perform, satisfy or discharge any liabilities, obligations, agreements or commitments (i) of LTV, LTV Steel, LTV-W, EGL, BSC, the Partnership, or any of their respective Affiliates or (ii) relating to the operation of the Partnership, the use of the Line Time Access or to the ownership of the GP Interest and arising or accrued with respect to the period before the Closing Date or arising out of events or circumstances occurring or existing prior to the Closing Date, whether due or to become due or whether accrued, absolute, contingent, known or unknown, disclosed or undisclosed in this Purchase Agreement or otherwise; it being understood, however, that the "Purchase Price Adjustment" provided for in Section 2.02(b) hereof shall satisfy and discharge all such liabilities, obligations and commitments of LTV Steel and LTV-W and any of their Affiliates to the Partnership, MSCWC, MSC and any of their Affiliates arising or accrued with respect to the period before the Closing Date or arising out of events or circumstances occurring or existing prior to the Closing Date in each case under the Definitive Agreements. 5 ARTICLE III Representations and Warranties ------------------------------ SECTION 3.01. Representations and Warranties of LTV Steel. LTV Steel represents and warrants to MSC and MSCWC that: (a) Corporate Existence and Power. Each of LTV Steel and LTV-W is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to execute and deliver each of the LTV Steel Transaction Documents to which it is or will be a party and, subject to compliance with the provisions of the Order that are applicable to the Transactions, to perform its obligations thereunder. (b) Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by each of LTV, LTV Steel and LTV-W of this Purchase Agreement are within the corporate powers of LTV Steel and/or LTV-W, as the case may be, have been duly authorized by all necessary corporate action by LTV Steel and LTV-W, require no action by or in respect of, or filing with, any governmental body, agency or official (except for such actions or filings (i) which are required to comply with the provisions of the Order that are applicable to the Transactions, (ii) which are required to effect the assumption and assignment of the Amended Partnership Agreement and the LTV Steel Coating Agreement, including all amendments thereto, and (iii) which, at the time of execution of this Purchase Agreement, have already been taken or made or such actions or filings the failure of which to take or make would not in the aggregate have a material adverse effect on the transactions contemplated hereby and thereby) and do not or will not, as the case may be, contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of LTV Steel or LTV-W, as applicable, or of any material agreement, judgment, injunction, order, decree or other instrument binding upon LTV Steel or LTV-W, as applicable, including, without limitation, any loan agreement for debtor-in-possession financing for LTV Steel or LTV-W. (c) Title to Interest. LTV-W has valid title to the GP Interest being sold to MSCWC pursuant to this Purchase Agreement, and LTV Steel has valid title to the LTV Steel Coating Agreement being assigned to MSCWC pursuant to this Purchase Agreement. Upon compliance with the procedures specified in the Order that are applicable to the Transactions, the assumption of the Amended Partnership Agreement by LTV-W and the LTV Steel Coating Agreement by LTV Steel, including in each case all amendments thereto, LTV Steel and LTV-W will have the right to transfer and assign all of their respective interests in the Partnership, including without limitation the GP Interest and Line Time Access, to MSCWC, in each case free and clear of all liens, charges and encumbrances. (d) Binding Effect. Subject to compliance with the provisions of the Order applicable to the Transactions, each of the LTV Transaction Documents, when duly and validly executed by each of the other parties thereto, as applicable, shall constitute a valid and binding agreement of LTV Steel and/or LTV-W, as applicable. 6 (e) Order in Effect. The Order has not been amended or modified and it remains in full force and effect. (f) Limitation. LTV Steel acknowledges that MSC makes no representation or warranty with respect to the assets, liabilities, business, operations, condition (financial or otherwise) or prospects of the Partnership. SECTION 3.02. Representations and Warranties of MSC. MSC represents and warrants to LTV Steel and LTV-W that: (a) Corporate Existence and Power. Each of MSCWC and MSC is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to execute and deliver each of the MSC Transaction Documents to which it is or is to be a party and to perform its obligations thereunder. (b) Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by each of MSCWC and MSC of each of the MSC Transaction Documents to which it is or is to be a party are within the corporate powers of MSCWC and/or MSC, as the case may be, have been duly authorized by all necessary corporate action of MSCWC, require no action by or in respect of, or filing with, any governmental body, agency or official (except for such actions or filings which, at the time of execution of this Partnership Agreement, have already been taken or made or such actions or filings the failure of which to take or make would not in the aggregate have a material adverse effect on the transactions contemplated hereby and thereby) and do not or will not, as the case may be, contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws (or other similar documents) of MSCWC or MSC, as applicable, or of any material agreement, judgment, injunction, order, decree or other instrument binding upon MSCWC or MSC, as applicable. (c) Binding Effect. Each of the MSC Transaction Documents, when duly and validly executed by each of the other parties thereto, shall constitute a valid and binding agreement of MSCWC and/or MSC, as applicable. (d) Limitation. MSC acknowledges that neither LTV Steel nor LTV-W makes any representation or warranty with respect to the GP Interest (except as provided in Section 3.01 hereof), their compliance or non-compliance with any of the Definitive Agreements or the assets, liabilities, business, operations, condition (financial or otherwise) or prospects of the Partnership. ARTICLE IV Covenants --------- SECTION 4.01. Cooperation and Commercially Reasonable Efforts. Subject to the terms and conditions of this Purchase Agreement, each of MSC, MSCWC, LTV Steel and LTV-W shall cooperate with one another in timely giving all notices, making all 7 filings, seeking all regulatory clearances and obtaining all consents of third parties, if any, necessary to consummate the Transactions, including without limitation compliance by LTV Steel and LTV-W with all of the provisions of the Order that are applicable to the Transactions, and agrees to execute and deliver such other documents, certificates, agreements and other writings and shall use commercially reasonable efforts to take, or cause to be taken, such other actions and to do, or cause to be done, all things necessary or desirable in order to satisfy the conditions set forth in Article V hereof and to consummate the Transactions as soon as reasonably practicable, and in any event not later than the Scheduled Closing Date. Without limiting the generality of the foregoing, LTV Steel and LTV-W shall cause a "Sale Notice", as such term is defined in the Order, relating to the Transactions in the form attached hereto as Exhibit C to be sent by overnight delivery or telecopier to each of the "Interested Parties", as such term is defined in the Order, promptly after the execution and delivery of this Purchase Agreement. No other form of Sale Notice with respect to the Transactions shall be used without the prior written consent of MSC. Notwithstanding anything herein to the contrary, nothing contained herein shall require any party to waive any of the conditions set forth in Article V hereof. SECTION 4.02. Notice of Certain Events. Each of the parties hereto shall promptly notify the other parties hereto of: (a) any notice or other communication from any Person, including without limitation any "Interested Party", as defined in the Order, alleging that the consent of such Person is or may be required in connection with the consummation of any of the Transactions or otherwise asserting any objection to any of the Transactions pursuant to the Order or otherwise; (b) any notice or other communication from any governmental or regulatory agency or authority in connection with the consummation of the Transactions; (c) any notice of any breach or inaccuracy of any of the representations and warranties made in this Purchase Agreement by any of the parties hereto; or (d) any actions, suits, claims, investigations or proceedings commenced or, to its knowledge, threatened against, relating to or otherwise affecting any party hereto that relate to the consummation of the Transactions. SECTION 4.03. Confidentiality. From and after the date hereof, each of LTV Steel and LTV-W and its Affiliates will hold, and will cause their respective officers, directors, employees, accountants, counsel, consultants, advisors and agents to hold, in confidence, unless compelled to disclose by judicial or administrative process or by other requirements of law, all confidential documents and information concerning the Partnership except to the extent that such information can be shown to have been (i) in the public domain through no fault of LTV Steel or LTV-W, as the case may be, or their respective Affiliates or (ii) later lawfully acquired on a nonconfidential basis by LTV Steel or LTV-W, as the case may be, or their respective Affiliates. The obligation of LTV Steel and LTV-W and their respective Affiliates to hold any such information in confidence shall be satisfied if they exercise the same 8 care with respect to such information as they would take to preserve the confidentiality of their own similar information. SECTION 4.04. Expirations of Representations and Warranties. All of the respective representations and warranties of MSC and of LTV Steel set forth in Article III hereof shall expire upon the completion of the Closing; provided, however, that the representations of LTV Steel made pursuant to the certificate required by Section 5.02(i) shall survive until the second anniversary of the Closing Date. ARTICLE V Closing Conditions ------------------ SECTION 5.01. LTV Steel's and LTV-W's Conditions. Each of LTV Steel's and LTV-W's obligations to take the actions contemplated by this Purchase Agreement to be taken on the Closing Date are subject to the fulfillment, on or prior to the Closing Date, of each of the following conditions, any or all of which may be waived in whole or in part on or prior to the Closing Date by LTV Steel: (a) Representations and Warranties. The representations and warranties of MSC contained in this Purchase Agreement shall be true in all material respects on and as of the Closing Date as though such representations and warranties were made on and as of such date. (b) Covenants. Each of MSC and MSCWC shall have performed in all material respects all of its obligations hereunder required to be performed by it prior to or on the Closing Date. (c) Receipt of Purchase Price. LTV Steel shall have received the full amount of the Purchase Price in accordance with Sections 2.02(a) and 2.03. (d) MSC Undertaking. MSC shall have executed and delivered to LTV Steel the MSC Undertaking. The form of the MSC Undertaking is set forth in Exhibit A hereto. (e) Release. The Partnership shall have executed and delivered to LTV Steel and to LTV-W a Mutual Release in the form of Exhibit B hereto. (f) Governmental and Other Clearances. Either no objection to the Transactions shall have been raised by any "Interested Person", as such term is defined in the Order, or all such objections shall have been overruled by the Bankruptcy Court, and to the extent required to permit the Consummation of the Transactions, any and all other material regulatory clearances shall have been obtained. (g) Injunctions. No provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit or restrain the consummation of the Transactions. 9 (h) Receipt of Officer's Certificate. LTV Steel shall have received a certificate from MSC and MSCWC, signed by the Accounting Representative of MSC and MSCWC, certifying to the best of his actual knowledge as to those matters addressed in paragraphs (a) and (b) of this Section 5.01; provided, however, that such certificate may expressly refer to the expiration of, and other limitations on, the representations and warranties of MSC provided for in Sections 4.04 and 3.01(f) hereof. SECTION 5.02. MSC's and MSCWC's Conditions. Each of MSC's and MSCWC's obligations to take the actions contemplated by this Purchase Agreement to be taken on the Closing Date are subject to the fulfillment, on or prior to the Closing Date, of each of the following conditions, any or all of which may be waived in whole or in part on or prior to the Closing Date by MSC: (a) Representations and Warranties. The representations and warranties of LTV Steel in this Purchase Agreement shall be true in all material respects on and as of the Closing Date as though such representations and warranties were made on and as of such date. (b) Covenants. Each of LTV Steel and LTV-W shall have performed in all material respects all of its obligations hereunder required to be performed by it prior to or on the Closing Date. (c) Release. LTV Steel and LTV-W shall have executed and delivered to the Partnership a Release in the form of Exhibit B hereto. (d) Assignment by LTV-W. LTV-W shall have assigned to MSCWC all of its GP Interest in accordance with Section 2.02(a)(i). The form of such assignment is set forth in Exhibit D hereto. (e) Assignment by LTV Steel. LTV Steel shall have assigned to MSCWC all of its interest in the Line Time Access in accordance with Section 2.02(a)(ii). The form of such assignment is set forth in Exhibit E hereto. (f) Government Clearances. To the extent required by applicable law or government regulations, all material regulatory clearances shall have been obtained. (g) Injunctions. No provision of any applicable law or regulation and no judgment, injunction, order or decree shall prohibit or restrain the consummation of the Transactions. (h) Receipt of Officer's Certificate. MSC shall have received a certificate from LTV Steel and LTV-W, signed by the Accounting Representative of LTV Steel and LTV-W, certifying to the best of his actual knowledge as to those matters addressed in paragraphs (a) and (b) of this Section 5.02; provided, however, that such certificate may expressly refer to the expiration of, and other limitations on, the representations and warranties of LTV Steel provided for in Sections 4.04 and 3.02(d) hereof. 10 (i) Compliance with Order. MSC shall have received a certificate from LTV Steel, signed by an executive officer of LTV Steel and dated the Closing Date, in the form set forth in Exhibit F hereto, that (i) the Order has not been amended or modified and it remains in full force and effect; (ii) LTV Steel and LTV-W have complied with all provisions of the Order that are applicable to the Transactions, including, without limitation, the requirements of the Order with respect to giving a Sale Notice to all Interested Parties; (iii) either no objection to the Transactions has been filed by any Interested Party or all objections that have been filed have been withdrawn or overruled by the Bankruptcy Court (and to the best of his or her actual knowledge, no appeal has been filed from any overruled objection); and (iv) no other order of the Bankruptcy Court precludes the sale of the GP Interest and the Line Time Access pursuant to the Order to MSCWC in accordance with the terms of this Purchase Agreement. ARTICLE VI Termination ----------- SECTION 6.01. Termination. This Purchase Agreement may be terminated prior to the Closing Date: (a) by the written agreement of all of the parties hereto; (b) by any party if the Transactions shall not have been consummated on or before the Scheduled Closing Date; provided that no party may terminate this Purchase Agreement pursuant to this Section 6.01(b) if the Transactions shall have been delayed due in whole or in material part to the intentional, willful or grossly negligent breach in a material respect by such party of any of its representations or warranties or the intentional, willful or grossly negligent failure of such party to fulfill a condition to the performance of the obligations of any other party or to perform a covenant of this Purchase Agreement; or (c) by any party if there shall be any law or regulation that makes the consummation of the Transactions illegal or otherwise prohibited (other than the Bankruptcy Code), or materially alters the Transactions, or if consummation of the Transactions would violate any nonappealable final judgment, injunction, order or decree of any court or governmental body having competent jurisdiction. The party or parties desiring to terminate this Purchase Agreement pursuant to clauses (b) or (c) of this Section 6.01 shall give notice of such desire to terminate to the other parties hereto. SECTION 6.02. Effect of Termination. If this Purchase Agreement is terminated as permitted by Section 6.01, such termination shall be without liability of any party (or any shareholder, director, officer, employee, agent, consultant or representative of such party) to any other party to this Purchase Agreement. The provisions of Section 4.03 and Section 7.01 shall survive any termination of this Purchase Agreement pursuant to Section 6.01 hereof. 11 ARTICLE VII Miscellaneous ------------- SECTION 7.01. Expenses. Each of the parties hereto shall pay its own expenses (including legal and accounting fees) incurred in connection with the negotiation and execution of this Purchase Agreement and the documents to be executed on the Closing Date and the consummation of the Transactions. SECTION 7.02. Notices. All notices hereunder shall be in writing and shall be personally delivered or sent via reputable overnight courier or facsimile. Such notices shall be addressed respectively: if to MSC or MSCWC, to: Material Sciences Corporation 2200 Pratt Boulevard Elk Grove Village, IL 60007 Attention of Chief Financial Officer Telecopier: 847-718-8643 with a copy to: Sidley Austin Brown & Wood 10 South Dearborn Street Bank One Plaza Chicago, IL 60603 Attention of Jon M. Gregg Telecopier: 312-853-7036 if to LTV Steel or LTV-W, to: LTV Steel Company, Inc. 6801 Brecksville Road Independence, OH 44131 Attention of General Counsel Telecopier: 216-622-5688 with a copy to: Jones, Day Reavis & Pogue LLP North Point 901 Lakeside Avenue Cleveland, OH 44114 12 Attention of David G. Heiman Telecopier: 216-586-7175 or to such other address or telecopier number as such party may hereafter specify for the purpose of providing notice to the other parties. Each such notice, request or other communication shall be effective (i) if given by facsimile, when such facsimile is transmitted to the telecopier number specified in this Section 7.03 and the transmission of the appropriate number of pages is confirmed or (ii) if given by any other means, when delivered at the address specified in this Section. SECTION 7.03. Third Parties. Nothing in this Purchase Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Purchase Agreement on any persons other than the parties hereto and their respective successors and permitted assigns. SECTION 7.04. Successors and Assigns. This Purchase Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted assigns; provided that in no event shall any party hereto be permitted to assign any of its obligations under this Purchase Agreement to any other Person without the written consent of each other party hereto. SECTION 7.05. Headings. Headings are for ease of reference only and shall not form a part of this Purchase Agreement. SECTION 7.06. Governing Law; Entire Agreement. (a) This Purchase Agreement shall be construed in accordance with and governed by the law of the State of Illinois without giving effect to the principles of conflicts of laws thereof which might cause the laws of any other jurisdiction to govern this Purchase Agreement. (b) This Purchase Agreement, the Exhibits hereto and the documents referred to herein to be executed contemporaneously herewith on or before the Closing embody the entire agreement of the parties hereto with respect to the subject matter hereof and supersede all prior agreements (including the letter of intent between MSC and LTV dated January 10, 2002) with respect thereto. SECTION 7.07. Incorporation of Exhibits. The Exhibits identified in this Purchase Agreement are incorporated herein by reference and made a part hereof. SECTION 7.08. Amendments and Waivers. (a) Any provision of this Purchase Agreement may be amended or waived if, but only if, such amendment or waiver is in writing and is signed, in the case of an amendment, by each party to this Purchase Agreement, or in the case of a waiver, by the party against whom the waiver is to be effective. 13 (b) No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 7.09. Counterparts. This Purchase Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which taken together shall constitute a single agreement. This Purchase Agreement shall become a binding agreement when each party hereto shall have received a counterpart hereof signed by each of the other parties hereto. 14 IN WITNESS WHEREOF, the parties hereto have caused this Purchase Agreement to be duly executed as of the day and year first above written. LTV STEEL COMPANY, INC. by --------------------------- Name: Title: LTV-WALBRIDGE, INC. by --------------------------- Name: Title: MSC WALBRIDGE COATINGS INC. by ---------------------------- Name: Title: MATERIAL SCIENCES CORPORATION by ---------------------------- Name: Title: 15 EX-21 5 dex21.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
State or Jurisdiction Name of Subsidiary of Incorporation ------------------ ---------------- Material Sciences Corporation, Engineered Materials and Solutions Group Inc. (formerly known as 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 San Diego Holding Company Inc. (formerly known as 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 MSC Pinole Point Steel Inc. Delaware MSC Pre Finish Metals (PP) Inc. Delaware MSC/GAC Laminates and Composites Holding GmbH Germany MSC/GAC Laminates and Composites GmbH & Co. KG Germany MSC/GAC Beteiligungs GmbH Germany MSC/TENKO Laminates and Composites LTDA Brazil
EX-23 6 dex23.txt CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF ARTHUR ANDERSEN LLP As independent public accountants, we hereby consent to the incorporation by reference of our reports dated April 29, 2002, included 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 8, 2002 EX-99 7 dex99.txt LETTER TO COMMISSION Exhibit 99 [LETTERHEAD OF MATERIAL SCIENCES CORPORATION] May 3, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Ladies and Gentlemen: Material Sciences Corporation, a Delaware corporation (the "Company"), has received a representation letter from Arthur Andersen LLP ("Andersen"), the Company's independent public accountants, in connection with the issuance of Andersen's audit report included within this filing on Form 10-K. In its letter, Andersen has represented to us that its audits of the financial position of the Company and its consolidated subsidiaries as of February 28, 2002 and February 28, 2001, and the related statements of income (loss), cash flows, changes in shareowners' equity and comprehensive income (loss) for each of the three years ended February 28, 2002, were subject to Andersen's quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagements were conducted in compliance with professional standards, that there was appropriate continuity of Andersen personnel working on the audits, availability of national office consultation and availability of personnel at foreign affiliates of Andersen to conduct relevant portions of the audits. Very truly yours, /s/ James J. Waclawik, Sr. James J. Waclawik, Sr. Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----