ITEM 1. BUSINESS - ------ --------
Introduction - ------------
Material Sciences Corporation (unless otherwise indicated by the context, including its subsidiaries, "MSC" or the "Company") develops, manufactures, and markets continuously processed, coated, and laminated materials. These materials are divided into four product groups: laminates and composites; specialty films (the new name for metallizing and coating); coil coating; and electrogalvanizing. The Company's materials are used in motor vehicles, building products, appliances, office equipment, furniture, lighting products, packaging, and a wide range of other products. MSC develops proprietary value-added materials and processes to meet specific customer and market requirements and believes it has achieved product or technological leadership in each of its four product groups.
Customers generally benefit from the energy savings and environmental advantages of MSC's manufacturing processes and products. In the laminates and composites product group, and the specialty films product group, the Company is primarily a manufacturer and marketer of its own proprietary products. In the coil coating product group and electrogalvanizing product group, MSC generally acts as a "toll coater" by processing its customers' metal for a fee, without taking ownership of the metal.
Headquartered near Chicago, the Company, through its MSC Pre Finish Metals Inc., f/k/a Pre Finish Metals Incorporated ("PFM"), MSC Specialty Films Inc., f/k/a/ Deposition Technologies, Inc. ("MSCSF"), MSC Laminates and Composites Inc. ("MSCLC"), and MSC Walbridge Coatings Inc., f/k/a Pre Finish Metal (EG) Incorporated ("MSCWC") subsidiaries, operates seven manufacturing plants. PFM operates two facilities in Elk Grove Village, Illinois, one facility in Morrisville, Pennsylvania, and one facility in Middletown, Ohio. MSCWC, a subsidiary of PFM, operates a facility in Walbridge, Ohio on behalf of Walbridge Coatings, an Illinois Partnership (the "Partnership"), formed among MSCWC, Inland Steel Industries, Inc. ("Inland") and Bethlehem Steel Corporation ("Bethlehem" or "BSC"). MSCSF operates a thin film sputter-deposition metallizing, coating, and laminating facility in San Diego, California. MSCLC operates one facility in Elk Grove Village, Illinois, in conjunction with PFM.
Additional information concerning certain transactions and events is incorporated herein by reference to Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 1996 annual report, which is incorporated herein by reference.
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 2300 East Pratt Boulevard, Elk Grove Village, Illinois 60007, and its telephone number at that address is (847) 439-8270.
Laminates and Composites - ------------------------
Laminates and composites combine layers of steel or other metals with layers of polymers or other materials to achieve specific properties, such as noise and vibration reduction, thermal insulation or high reflectivity in lighting. These products consist of functionally engineered materials that are designed to meet specific customer requirements. Products in this group largely result from the Company's research and development efforts and the proprietary equipment and processes designed and implemented by its engineering and manufacturing organizations. The Company supplies its laminates and composites to a variety of markets both in the United States and internationally. The majority of these products are used in the automotive, lighting, and appliance industries. The major products in this product group are Polycore Composites(R), disc brake noise dampers, and Specular+(R).
Polycore Composites are multilayer composites consisting of various metals, adhesives, and other components, typically consisting of metal outer skins surrounding a thin viscoelastic core material. Polycore Composites are engineered to meet a variety of needs. The Company believes it is a leader in developing and manufacturing continuously processed coated materials that reduce noise and create thermal barriers. The automotive industry is the largest market for metal composites, which are being used to replace solid sheet metal parts, including oil pans, valve covers, front engine covers and heat shields. Polycore Composites are also being evaluated for use in dash panels, floor pans, and other internal components in order to help reduce road noise. Polycore Composites are also found in a number of other products, including lawn mower engines, air conditioners, computer disk drive covers, and appliances, and numerous other uses are under evaluation.
The disc brake noise damper market developed as manufacturers moved to asbestos-free brake linings. The increased brake noise these linings produce can be virtually eliminated by the composite materials pioneered by the Company. The Company believes it has a 50% share of the domestic disc brake noise dampers original equipment market. The Company also believes it is a significant supplier to the emerging domestic aftermarket, which it estimates will grow to be at least three times as large as the domestic original equipment market. Disc brake noise damper sales for the 1996 fiscal year set another record as a result of increased sales to General Motors Corporation ("General Motors"), Ford Motor
Company and Chrysler Corporation, and due to further penetration into the disc brake aftermarket.
Specular+, a laminate of silver-sputtered coated film and sheet metal, was developed by the Company for the growing high reflective fluorescent lighting market. Because pure silver offers unsurpassed reflectivity and precise light control, Specular+ produces virtually the same amount of light with only half the bulbs of a typical white painted fixture. The result is a significant reduction in the cost of electricity for lighting.
The market for laminate and composite materials is competitive, both domestically and internationally. There are competitors in each product market served by the Company, some of which have greater resources than the Company. The Company believes, however, that its technology, product development capability, technical support, and customer service place it in a strong competitive position in this market.
Specialty Films - ---------------
The Company uses sputter-deposition technology to metallize wide rolls of flexible substrates, generally consisting of thin polymeric films. In the sputter-deposition process, a target material is disintegrated, in a vacuum chamber by ion bombardment, into its component atoms or molecules, which are then deposited onto the surface of the base material to be coated. Such base material (commonly called the substrate or flexible web) can be polymeric film, foil, fabric, or paper.
Sputter-deposition permits the use of a wide range of target materials, singly or in combination (including metals, metal alloys and metal oxides), some of which cannot be applied in any other way. This flexibility allows formation of composites of metals, dielectrics, and semiconductors. Sputter-coated, flexible polymeric substrates may be designed to have specific properties, including energy reflectance, transmission, absorption and electrical conductance. After the sputtering process, these materials are often further enhanced with other coatings, adhesives, and films, resulting in a multilayer laminate.
The Company's specialty films sales consist principally of solar control and safety window films for use in the automotive aftermarket and building applications. The Company sells these products through SGI and four independent distributors. The Company believes there are significant growth opportunities in the building market, since there is currently low market penetration and industrial, commercial, and residential building owners are becoming more familiar with the benefits of solar control and safety window films. Solar control window films can lower energy bills year-round by reducing heat penetration in the summer and
retaining residual warmth in the winter. They also reject ultraviolet light, thereby eliminating the damage it causes. In commercial environments, window film generally improves productivity by reducing glare and heat generation. Safety films offer security by making glass shatter-resistant.
This product group includes the silver-sputtered, coated film used in Specular+, although intercompany sales of such film are excluded from this product group's sales. The Company has developed other products for the high reflective fluorescent lighting market. In addition, the Company participates in the microwaveable food packaging market with its Insceptor(R) film products that offer precise control of heating, browning and crisping of food during the cooking process. The Company has established agreements with rigid and flexible packaging companies to supply certain customers in the domestic market. This product group also includes security seals, which are used in tamper-evident packaging and anti-counterfeit measures.
In September 1995, MSC acquired all of the outstanding capital stock of Solar-Gard International, Inc. ("SGI"). Headquartered in Largo, Florida, SGI was the largest independent distributor of professionally installed solar control window film products in the world prior to the acquisition. It was also MSC's largest distributor, with a relationship going back to 1980. SGI had eight wholly owned distribution centers across the United States, one center in each of Canada and England, and a joint venture operation in Singapore at the time of acquisition and subsequent to the acquisition, SGI has expanded in California (two distribution centers) and Florida (Latin American export center). SGI currently distributes products in over sixty countries.
During the first quarter of fiscal 1997, the Company entered into an agreement to purchase certain assets of a distributor of solar control and safety window film products with operations primarily in the Western United States and throughout the world. The Company anticipates this transaction will be completed during the first quarter of fiscal 1997.
MSC believes that there are four major domestic companies producing competitive specialty film materials in addition to the Company. Some of these competitors have greater resources than the Company, including patented technology. The Company competes on the basis of a number of factors, including product performance and quality, completeness of product offering, new product development capabilities, service, and price. The Company believes that it is competitive in these areas.
Coil Coating - ------------
The Company believes that coil coating is the most environmentally safe and energy-efficient method available for applying paint and other coatings to metal. This continuous, highly automated, high-speed process applies coatings to wide coils of metal. In the process, sheet metal is unwound from a coil, cleaned, chemically treated, coated, oven-cured, and rewound into coils for shipment to manufacturers that fabricate the coated metal into finished products that are sold into a variety of industrial and commercial markets. The coatings are designed to produce both protective and decorative finishes. Through techniques such as printing, embossing and striping, special finishing effects can also be created. The finished product (i.e. prepainted or coil coated metal) is a versatile material capable of being drawn, formed, bent, bolted, riveted, chemically bonded and welded. The Company generally acts as a "toll coater" by processing coils for steel mills, or their customers, without taking ownership of the metal. The Company charges by weight or surface area processed.
The Company's coil coated products are used by manufacturers in building products, heating and air conditioning, fuel tanks, lighting, truck trailer, above-ground swimming pools, and other products. The Company's strategy in its coil coating business has been to produce high-volume competitive coated products at low cost, as well as to identify, develop and produce specialty niche products meeting specific customer requirements. The Company also offers proprietary products such as Weldrite(R), a weldable coating; Enduratex(R), an embossed plastisol coated material capable of being stained to simulate the look of wood; and ER6, a patented high temperature non-stick coating designed for bakeware and cookware products.
Coil coating technology reduces the environmental impact of painting and reduces manufacturers' energy needs. In coil coating processes, over 95% of the coating material is applied, in contrast with the significant waste from "overspray" typical in post-fabrication painting. The energy required to cure coil coated metal is substantially less than that required by other coating methods. These savings are achieved because of high-speed material processing and because 90% to 95% of the coatings' volatile organic compounds are recycled back into the curing ovens and used as fuel.
Manufacturers that use prepainted materials can eliminate or significantly reduce on-site post paint lines and the associated compliance with complex environmental and other regulations. Prepainted materials facilitate the adoption of just-in-time and continuous process manufacturing techniques which can result in improvements to work in process inventory, plant utilization, and productivity. Since prepainted metal is cleaned, treated and painted while flat, the result is a more uniform and higher quality
finished part than can be achieved by even the best post-fabrication painting operation. There are no hidden areas where paint is difficult to reach and where corrosion can begin after the product has been marketed. As a result, companies using prepainted material generally benefit from lower manufacturing costs and improved product quality. Use of prepainted metal may, however, require product design or fabrication changes and more stringent handling procedures during manufacturing.
The coil coating process competes with other methods of producing coated sheet metal, principally post-fabrication finishing methods such as spraying, dipping and brushing. The Company believes that coil coating accounts for approximately 10% of all the sheet metal now being coated. The Company expects that, although there can be no assurance in this regard, the market penetration of coil coated metal will increase as a result of more stringent environmental regulation and the energy efficiency, quality, and cost advantages provided by prepainted metal as compared to post-fabrication painting, particularly in high- volume manufacturing operations. The Company estimates that there are approximately 85 companies operating coil coating lines in North America. The Company believes it is one of the largest coil coaters, with approximately 14% of the total tons processed in the United States in calendar 1995. Competition in the coil coating industry is heavily influenced by geography, due to the high costs involved in transporting sheet metal coils. Within geographic areas, coil coaters compete on the basis of quality, price, customer service, technical support, and product development capability.
Electrogalvanizing - ------------------
Electrogalvanized ("EG") steel is the primary corrosion resistant steel product used in automobile and light truck bodies. Significant domestic demand for EG steel started in 1985 and is estimated to have been 3.4 million tons in calendar 1995. The Company believes that demand will continue to grow as automobile manufacturers respond to consumer demands for longer warranty protection against rust and, to a lesser extent, due to increased applications for EG steel in the appliance and other non-automotive industries.
MSC participates in the electrogalvanizing market through its 50% financial interest in and role as operator of the Partnership. The term of the Partnership ends on June 30, 1998. Through the Partnership, MSC electrogalvanizes zinc and zinc-alloy coatings and applies organic coatings onto sheet metal. There is growing demand by the automotive industry for a full complement of products such as zinc-nickel, zinc-nickel with a thin organic coating, and other organic coated zinc-nickel products such as fuel tanks that offer additional protection against corrosion. As a result, a shift from
pure zinc to differentiated materials has commenced. These newer materials are particularly in demand by Japanese automakers in the United States -- currently among the end-use customers for the Partnership's services. The Partnership's facility is the only facility in North America capable of meeting, in a single pass through its line, the demand for this full complement of products.
Sales to the Partnership represented 23%, 22% and 24% of MSC's net sales in fiscal 1996, 1995 and 1994, respectively. MSC's net sales for electrogalvanizing consists of various fees charged to the Partnership for operating the facility. Such fees are the predominant financial return to MSC from its participation in the Partnership. There are both fixed fees (for selling, general and administrative expenses, a portion of the financing, taxes, and insurance) and variable fees based on production volumes (for the balance of the financing, operating expenses, and profit). The Company pays the actual costs of operating the facility, so the overall profitability of its participation in the Partnership depends on its skill and efficiency. The operating expense portion of the variable fee is based on standard costs, which may be adjusted to reflect matters beyond the Company's control, upon agreement of the partners or informal arbitration. The fees charged to Bethlehem and Inland by the Partnership for services fund the standard operating costs of the Partnership (including the Company's per ton profit allowance) and, at a defined contractual production volume, all of the Partnership's financing costs. At lesser levels of production, the Company is obligated to fund a portion (not to exceed 50%) of the Partnership's financing costs.
Bethlehem and Inland are two of the major suppliers of sheet steel to the U.S. automobile industry. The orders for the Partnership's toll coating services are primarily and independently generated by Bethlehem and Inland for their respective customers, although the Partnership may also accept orders from outside parties to the extent of available capacity and production schedules. Historically, third party sales have not been significant. The sales and marketing responsibilities of the Partnership are currently split between Bethlehem and Inland at 77% and 23%, respectively. In addition to Bethlehem's historic production at the facility, BSC transferred its in-house electrogalvanizing production from its Burns Harbor facility to the Partnership in fiscal 1996. During fiscal 1996, Inland utilized only 10% of available line time; Bethlehem and other customers utilized the balance of Inland's available line time. Inland is reviewing its future involvement in the Partnership, and therefore, there is no assurance that Inland will utilize its full 23% of available line time on a long-term basis. The Company believes that any short- term disruption in volume that might be caused by a continued reduction in Inland's line time requirements could be replaced by additional volume from Bethlehem and other customers.
Bethlehem and Inland have rights to purchase all the facility's production for the 12-year life of the Partnership. The Company's potential alternatives upon expiration of the Partnership term in June 1998, include, among other things, extension of the Partnership, purchase of the facility or sale of the facility.
Competition in the production and sale of electrogalvanized steel for the automotive industry comes from other steel companies that, either directly or through joint ventures, produce electrogalvanized steel on eight manufacturing lines in the United States, including Inland's other facility. Limited quantities of electrogalvanized steel also are imported from foreign steel suppliers. The Company believes the Partnership's line is well-positioned to serve the current and expected end-users of electrogalvanized steel. The Company is unable to determine the effect, if any, on the market resulting from the existence of excess capacity, the entrance of additional capacity, improved galvanizing technology or the substitution of other materials.
International - -------------
The Company believes that significant opportunities exist internationally, particularly for the Company's disc brake noise damper products, Polycore Composites, Specular+, and solar control and safety window film. As a percent of net sales, direct export sales represented 8%, 8% and 7% in fiscal 1996, 1995 and 1994, respectively.
The Company has certain distribution agreements and licensing and royalty agreements with agents and companies in Europe, Latin America, and the Far East that cover disc brake noise dampers, Polycore Composites, and lighting products. These agreements provide the Company with opportunities for market expansion in those geographic areas.
Approximately 38% of the specialty films' products are sold to export markets directly or through domestic distributors. The Company believes that export shipments will continue to grow with the acquisition of SGI and as emerging markets increasingly realize the energy saving and ultraviolet light blocking benefits this product provides.
The Company is pursuing a variety of other business relationships, including direct sales, distribution agreements, licensing, and other forms of partnering, to increase its international sales and expand its international presence.
Marketing and Sales - -------------------
The Company markets its laminates and composites and coil coating products, services and technologies primarily through its in-house sales organization and also through independent distributors, agents and licensees. The Company focuses its sales efforts on manufacturers, but also sells to steel mills and their intermediaries, metal service centers, and metal brokers. Bethlehem and Inland are the primary marketing partners for electrogalvanized steel. The Company sells its specialty films' products primarily through SGI and to other domestic and international distributors. All of the Company's selling activities are supported by technical service departments that aid the customer in the choice of available materials and their use in the customer's manufacturing process.
The Company estimates that customers in the transportation industry were the end-users for approximately 53%, 52% and 52% of MSC's net sales in fiscal 1996, 1995 and 1994, respectively. The Company's direct sales to General Motors were in excess of 5% during each of the last three fiscal years. In addition, the Company believes that it has significant indirect sales to General Motors in its coil coating and electrogalvanizing product groups. Due to concentration in the automobile industry, the Company believes that sales to other individual automobile companies, including indirect sales, are significant.
On June 30, 1993, the Company acquired the assets of a coil paint facility owned by AK Steel Corporation ("AKS"), in Middletown, Ohio. The Company also entered into a tolling agreement in which MSC agrees to provide AKS with coil coating and other ancillary services from the facility of up to approximately 75% of the facility's capacity for 10 years. The balance of capacity is being marketed by the Company's sales force and shifting production from other MSC plants that, at times, reach their capacity. AKS represented 8%, 10% and 8% of MSC's net sales in fiscal 1996, 1995 and 1994, respectively.
The Company's backlog of orders as of February 29, 1996, was approximately $49.9 million, all of which is expected to be filled during the remainder of the current fiscal year. The Company's backlog was approximately $43.6 million as of February 28, 1995.
MSC is generally not dependant on any one source for raw materials or purchased components essential to its business, and it is believed that such raw materials and components will be available in adequate quantities to meet anticipated production schedules.
MSC believes that its business, in the aggregate, is not seasonal. Certain of its products, however, sell more heavily in some seasons than in others.
Environmental Matters - ---------------------
The Company is subject to federal, state and local environmental laws. As a result of these laws, the Company has incurred, and will continue to incur in the future, significant capital expenditures and operating costs and charges. The Company is involved in two Superfund sites located in Gary and Kingsbury, Indiana. Although the ultimate cost of the Company's share of necessary cleanup expenses is not yet known, the Company believes that it is adequately reserved for environmental matters given the information currently available. See Note 6 of the Notes to the Consolidated Financial Statements entitled "Environmental and Legal Matters," on pages 28 and 29 of the annual report, which is incorporated by reference herein. The Company cannot predict the impact of new or changed laws or regulations.
The Company believes it operates its facilities and conducts its business in all material respects in accordance with all environmental laws presently applicable to its facilities. The Company spent approximately $0.7 million in fiscal 1996, and has budgeted approximately $1.1 million during fiscal 1997, for maintenance or installation of environmental controls at the Elk Grove Village, Illinois; Walbridge, Ohio; Morrisville, Pennsylvania; Middletown, Ohio; and San Diego, California facilities. See Item 3 "Legal Proceedings" below.
Research and Development - ------------------------
Management estimates that it spent approximately $6.7 million in fiscal 1996, $5.4 million in fiscal 1995 and $4.0 million in fiscal 1994 for product and process development activities.
While it considers its various patents, licenses and trademarks to be important, it does not believe that the loss of any individual patent, license, or trademark would have a material adverse effect upon its business.
Employees - ---------
At February 29, 1996, the Company had 882 full-time employees. Of these, approximately 611 were engaged in manufacturing, 116 in marketing and sales, 103 in administrative and clerical positions, and 52 in process and product development.
The employees at the San Diego, California; Walbridge, Ohio; and SGI facilities are not represented by a union. Hourly manufacturing employees at Elk Grove Village, Illinois;
Morrisville, Pennsylvania; and Middletown, Ohio, are covered by separate union contracts expiring in February 2002, November 2000, and October 1997, respectively. The Company believes that its relations with its employees are good.
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EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of April 26, 1996 are as follows:
Position and Name Age Year First Elected ---- --- ------------------
G. Robert Evans...............64 Chairman and Chief Executive Officer, MSC since July 1991; previously Chairman, President, and Chief Executive Officer, MSC since February 1991.
Gerald G. Nadig...............51 President and Chief Operating Officer, MSC since July 1991; previously President and Chief Operating Officer, PFM since 1990; previously Executive Vice President, PFM since 1989.
William H. Vrba...............64 Senior Vice President, Chief Financial Officer, and Secretary, MSC since July 1991.
Frank D. Graziano.............63 Senior Vice President, Technology, MSC since July 1991; previously Senior Vice President, Research and Development, PFM since 1990; previously Senior Vice President, Marketing, Research and Development, PFM since 1988.
Anton F. Vitzthum.............61 Senior Vice President, Manufacturing, MSC since March, 1994; previously Senior Vice President, Operations, PFM since 1990; previously Vice President, Manufacturing, PFM since 1984.
Frank J. Lazowski, Jr. .......56 Vice President, Human Resources, MSC since July 1991; previously Vice President, Human Resources PFM since 1988.
Robert J. Mataya..............53 Vice President, Business Planning and Development, MSC since July 1991; previously
Vice President, Business Planning and Development, PFM since 1990; previously Vice President, Marketing, PFM since 1986.
James J. Waclawik, Sr. .......37 Vice President and Controller, MSC since July 1991; previously Vice President and Controller, PFM since 1989; previously Controller PFM since 1988.
David A. Fletcher.............42 President and Chief Operating Officer,MSCSF since September 1993; previously Vice President, Research and Development, MSCSF since 1989.
During the past five years, Messrs. Evans, Nadig, Vrba, Graziano, Vitzthum, Lazowski, Mataya, Waclawik, and Fletcher have been employed in management capacities by the Company.
Mr. Evans serves as a director of Consolidated Freightways, Inc., Fiberboard Corporation, and Swift Energy Company.
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ITEM 2.
ITEM 2. PROPERTIES - ------- ----------
The Company owns or leases facilities with an aggregate of approximately 1,126,000 square feet of space. The Company considers all of such facilities to be in good operating condition. In addition to the principal physical properties used by the Company in its manufacturing operations as summarized in the table below, the Company leases numerous sales and administrative offices pursuant to short term leases.
- -------------------
(1) The lease is renewable, at the Company's option, for additional periods totaling 25 years. Since April 1, 1986, this facility has been subleased to the Partnership and the sublease is scheduled to expire on June 30, 1998 (see "Electrogalvanizing").
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS - ------ -----------------
See Note 6 of the Notes to Consolidated Financial Statements entitled "Environmental and Legal Matters," on pages 28 and 29 of the annual report, which is incorporated by reference herein. In May 1996, the lawsuit with a former distributor of solar control and safety window film referenced in Note 6 was settled and the lawsuit was dismissed.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY OWNERS - ------ --------------------------------------------------
There were no matters submitted to the Company's security owners during the fourth quarter of fiscal 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY - ------ AND RELATED SHAREOWNER MATTERS -----------------------------------------
The Company's Common Stock, $.02 par value, is listed on the New York Stock Exchange under the symbol "MSC." The table below sets forth, by fiscal quarter, the high and low sales prices of the Company's Common Stock during its past two fiscal years. Sales prices for the first quarter of fiscal 1995 have been retroactively adjusted to give effect to the one-half share per share dividend declared and paid in the second quarter of fiscal 1995.
Fiscal Fiscal Year Quarter High Low ------ ------- ------ ------- 1996 1st 19 3/4 15 1/2 2nd 22 3/8 16 3/4 3rd 19 3/8 12 1/8 4th 15 12 5/8
Fiscal Fiscal Year Quarter High Low ------- ------- ------ ------
1995 1st 17 3/4 14 3/8 2nd 17 1/2 14 7/8 3rd 17 1/4 14 1/8 4th 17 1/8 13 3/4
There were 1,143 owners of record of the Company's Common Stock at the close of business on April 26, 1996. MSC has not paid cash dividends other than a nominal amount in lieu of fractional shares in connection with stock dividends. Management currently anticipates that all earnings will be retained for development of the Company's business. If business circumstances should change, the Board of Directors may declare, and instruct the Company to pay, cash dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA - ------ -----------------------
Reference is made to the information found under the caption "Selected Financial Data" on pages 34 and 35 of the annual report, which is incorporated by reference herein.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF - ------ FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------------------------------------------
Reference is made to the information found under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 20 through 23 of the annual report, which is incorporated by reference herein.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------ -------------------------------------------
(a) The Consolidated Statements of Income for the years ended February 29, 1996, February 28, 1995 and February 28, 1994, Consolidated Balance Sheets as of February 29, 1996 and February 28, 1995, Consolidated Statements of Cash Flows for the years ended February 29, 1996, February 28, 1995 and February 28, 1994, Notes to Consolidated Financial Statements and the Report of Independent Public Accountants, set forth on pages 24 through 33 and page 19 of the annual report, are incorporated by reference herein.
(b) The unaudited selected quarterly financial data which is referred to in Item 8(a) above and is set forth in Note 14 of the Notes to Consolidated Financial Statements under the caption "Summary of Quarterly Data (Unaudited)" on page 33 of the annual report is incorporated by reference herein.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON - ------ ACCOUNTING AND FINANCIAL DISCLOSURE ------------------------------------------------
Not Applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- --------------------------------------------------
Reference is made to the information found under the caption "Election of Directors" on pages 2 through 4 of the Company's proxy statement for the 1996 annual meeting of shareowners (the "proxy statement"), all of which is incorporated by reference herein, for information on the directors of the Company. Reference is made to Part I of this report for information on the executive officers of the Company.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION - -------- ----------------------
Reference is made to the information under the captions "Compensation of Executive Officers", "Compensation and Organization Committee Report", "MSC Performance Graph", "Employment and Other Agreements", and "Employee and Other Plans" on pages 7 through 14 of the proxy statement, all of which is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL - ------- HOLDERS AND MANAGEMENT ----------------------------------------
Reference is made to the information set forth on pages 5 and 6 of the proxy statement, all of which is incorporated by reference herein, except that the table on page 5 is hereby amended to reflect that as of April 26, 1996 (i) the number of shares beneficially owned by A.F. Vitzthum is 91,550 shares for a total of 113,475 and (ii) the number of shares beneficially owned by all officers and directors as a group is 699,648 shares for a total of 1,183,423, which represents 7.7% of the Common Stock.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ----------------------------------------------
There were no relationships or related transactions requiring disclosure in fiscal 1996.
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PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND - ------- REPORTS ON FORM 8-K --------------------------------------------
(A) FINANCIAL STATEMENTS AND SCHEDULES OF THE COMPANY
I Financial Statements of the Company. Incorporated herein by reference to pages 24 through 33 and page 19 of the Company's annual report.
(i) Consolidated Statements of Income for the years ended February 28 or 29, 1996, 1995 and 1994 (ii) Consolidated Balance Sheets - February 29, 1996 and February 28, 1995 (iii) Consolidated Statements of Cash Flows for the years ended February 28 or 29, 1996, 1995 and 1994 (iv) Notes to Consolidated Financial Statements (v) Report of Independent Public Accountants
II Supplemental Schedules ----------------------
(i) Report of Independent Public Accountants with respect to Supplemental Schedules to the Financial Statements (ii) Schedule II - Reserve for Receivable Allowances and Deferred Tax Asset Valuation Allowance
All other schedules have been omitted, since the required information is not significant, is included in the financial statements or the notes thereto, or is not applicable.
(c) EXHIBITS
Exhibit Number Description of Exhibit - ------- ----------------------
2(a) Parent Agreement dated as of October 15, 1984, by and among Bethlehem Steel Corporation, Inland Steel Company, Pre Finish Metals Incorporated and Material Sciences Corporation.(1)
2(b) Partnership Agreement dated as of August 30, 1984, by and among EGL Steel Inc., Inland Steel Electrogalvanizing Corporation and Pre Finish Metals (EG) Incorporated.(1)
2(c) Amendment No. 1 to the Partnership Agreement dated as of August 30, 1984.(2)
2(d) Amendment No. 2 to the Partnership Agreement dated as of August 30, 1984.(2)
2(e) Operating Agreement dated as of October 15, 1984, by and between Pre Finish Metals (EG) Incorporated and Walbridge Coatings, An Illinois Partnership.(1)
2(f) Coating Agreement dated as of October 15, 1984, by and between Bethlehem Steel Corporation and Walbridge Coatings, An Illinois Partnership.(1)
2(g) Coating Agreement dated as of October 15, 1984, by and between Inland Steel Company and Walbridge Coatings, An Illinois Partnership.(1)
2(h) Amendments to Definitive Agreements dated as of March 31, 1986, among EGL Steel Inc., Inland Steel Electrogalvanizing Corporation, Pre Finish Metals (EG) Incorporated, Bethlehem Steel Corporation, Inland Steel Company, Pre Finish Metals Incorporated and Material Sciences Corporation.(6)
2(i) Further Amendments to Definitive Agreements dated as of July 24, 1986, among EGL Steel Inc., Inland Steel Electrogalvanizing Corporation, Pre Finish Metals (EG) Incorporated, Bethlehem Steel Corporation, Inland Steel Company, Inland Steel Industries, Inc., Pre Finish Metals Incorporated and Material Sciences Corporation.(3)
Exhibit Number Description of Exhibit - ------- ----------------------
2(j) Further Amendments to Definitive Agreements dated as of April 23, 1992, among EGL Steel Inc., Inland Steel Electrogalvanizing Corporation, Pre Finish Metals (EG) Incorporated, Bethlehem Steel Corporation, Inland Steel Company, Inland Steel Industries, Inc., Pre Finish Metals Incorporated and Material Sciences Corporation.(7)
3(a) Registrant's Certificate of Incorporation, as amended.(1)
3(b) Amendment to Registrant's Certificate of Incorporation.(2)
3(c) Amendment to Registrant's Certificate of Incorporation.(4)
3(d) Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock.(4)
3(e) Registrant's By-laws, as amended.(6)
4(a) Credit Agreement dated as of September 1, 1994, between Material Sciences Corporation and Bank of America Illinois.(5)
4(b) First Amendment to Rights Agreement dated as of April 21, 1994 by and between Material Sciences Corporation and Mellon Securities Trust Company.(9)
4(c) First Amendment to Credit Agreement dated as of September 5, 1995, by and between Material Sciences Corporation and Bank of America Illinois.
4(d) Money Market Demand Note (Fixed and Floating Rate Corporation) dated December 20, 1995 executed by Material Sciences Corporation in favor of The Northern Trust Company in the aggregate principal amount of $25,000,000.
Exhibit Number Description of Exhibit - ------- ----------------------
There are omitted certain instruments with respect to long-term debt, the total amount of securities authorized under each of which does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. A copy of each such instrument will be furnished to the Commission upon request.
10(a) Material Sciences Corporation Stock Purchase Plan. (1)
10(b) Material Sciences Corporation Supplemental Pension Plan.(1)
10(c) Material Sciences Corporation Employee Stock Purchase Plan.(6)
10(d) Material Sciences Corporation 1985 Stock Option Plan for Key Employees.(6)
10(e) Material Sciences Corporation 1985 Stock Option Plan for Directors.(6)
10(f) Material Sciences Corporation 1992 Omnibus Stock Awards Plan for Key Employees.(7)
10(g) Employment Agreement effective February 27, 1991, between Material Sciences Corporation and G. Robert Evans.(6)
10(h) Material Sciences Corporation 1991 Stock Option Plan for Directors.(6)
10(i) Material Sciences Corporation Directors Deferred Compensation Plan.(6)
10(j) Material Sciences Corporation 1996 Stock Option Plan for Non-Employee Directors.
10(k) Deferred Compensation Plan of Material Sciences Corporation and Certain Participating Subsidiaries.(6)
Exhibit Number Description of Exhibit - ------- ----------------------
10(l) Lease and Agreement dated as of December 1, 1980, between Line 6 Corp. and Pre Finish Metals Incorporated, relating to Walbridge, Ohio facility.(1)
10(m) First Amendment to Lease and Agreement dated as of May 30, 1986, between Corporate Property Associates and Corporate Property Associates 2 and Pre Finish Metals Incorporated.(3)
10(n) Sublease dated as of May 30, 1986, between Pre Finish Metals Incorporated and Walbridge Coatings, An Illinois Partnership.(3)
10(o) Lease Guaranty dated as of May 30, 1986, from Material Sciences Corporation to Corporate Property Associates and Corporate Property Associates 2.(3)
10(p) Note Purchase Agreement dated as of May 30, 1986, between Material Sciences Corporation and Creditanstalt-Bankverein (New York Branch).(3)
10(q) Agreement dated as of May 30, 1986, between Material Sciences Corporation and Corporate Property Associates and Corporate Property Associates 2.(3)
10(r) Term Loan Agreement dated as of July 23, 1986, among Walbridge Coatings, An Illinois Partnership, Creditanstalt-Bankverein (New York Branch) and The Toledo Trust Company, including the related guaranties by Material Sciences Corporation and Pre Finish Metals Incorporated.(3)
10(s) Amendment No. 1 to Term Loan Agreement dated as of March 31, 1987, among Walbridge Coatings, An Illinois Partnership, Creditanstalt- Bankverein (New York Branch) and The Toledo Trust Company.(3)
Exhibit Number Description of Exhibit - ------- ----------------------
10(t) Amended and Restated Credit Facility Agreement dated as of July 23, 1986, between Walbridge Coatings, An Illinois Partnership, and Creditanstalt-Bankverein, including the related guaranties by Material Sciences Corporation and Pre Finish Metals Incorporated.(3)
10(u) Amendment and Consent Agreement dated as of April 23, 1992, among Walbridge Coatings, An Illinois Partnership, Bethlehem Steel Corporation, EGL Steel, Inc., Inland Steel Industries, Inc., Inland Steel Company, Inland Steel Electrogalvanizing Corporation, Material Sciences Corporation, Pre Finish Metals Incorporated, Pre Finish Metals (EG) Incorporated, and Creditanstalt-Bankverein, amending the Term Loan Agreement dated as of July 23, 1986, as amended on March 31, 1987, and amending the Amended and Restated Credit Facility Agreement dated as of July 23, 1986, including the related guaranties by Material Sciences Corporation and Pre Finish Metals Incorporated.(7)
10(v) Form of Standstill Agreement dated as of January 29, 1986, among Material Sciences Corporation, Richard L. Burns and Joyce Burns.(6)
10(w) Rights Agreement dated as of June 17, 1986, between Material Sciences Corporation and Continental Illinois National Bank and Trust Company of Chicago.(6)
10(x) Form of Indemnification Agreement between Material Sciences Corporation and each of its officers and directors.(7)
10(y) Supplemental Retirement Agreement dated as of December 28, 1992 between Material Sciences Corporation and William H. Vrba.(8)
10(aa) Letter Agreement dated as of May 8, 1991 between Material Sciences Corporation and William H. Vrba. (8)
Exhibit Number Description of Exhibit - ------- ----------------------
11 Computation of net income per share.
13 Annual Report to Shareowners. (Except as specifically incorporated herein by reference, this document shall not be deemed "filed" as a part of this Form 10-K Annual Report.)
21 Subsidiaries of the Registrant.
23 Consent of Arthur Andersen LLP.
27 Financial Data Schedule.(10)
_______________
(1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 2-93414), which was declared effective on November 27, 1984.
(2) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-00828), which was filed on October 11, 1985.
(3) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 1989 (File No. 1-8803).
(4) Incorporated by reference to the Registrant's Form 8-A dated June 17, 1986 (File No. 1-8803).
(5) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report for the Quarter Ended August 31, 1994 (File No. 1-8803).
(6) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 1991 (File No. 1-8803).
(7) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 29, 1992 (File No. 1-8803).
(8) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 1993 (File No. 1-8803).
(9) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 1994 (File No. 1-8803).
(10) Appears only in the electronic filing of this report with the Securities and Exchange Commission.
(d) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter.
[THIS SPACE INTENTIONALLY LEFT BLANK.] -----------------------------------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MATERIAL SCIENCES CORPORATION
By: /s/ G. Robert Evans ----------------------------------------- G. Robert Evans Chairman and Chief Executive Officer
Date: May 28, 1996
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 28, 1996.
Signature Title --------- -----
/s/ G. Robert Evans Chairman and Chief Executive - -------------------------- Officer, and Director (Principal G. Robert Evans Executive Officer)
/s/ William H. Vrba Senior Vice President, Chief - -------------------------- Financial Officer, and Secretary William H. Vrba (Principal Financial Officer)
/s/ James J. Waclawik, Sr. Vice President and Controller - -------------------------- (Principal Accounting Officer) James J. Waclawik, Sr.
/s/ Jerome B. Cohen Director - -------------------------- Jerome B. Cohen
/s/ Roxanne J. Decyk Director - -------------------------- Roxanne J. Decyk
/s/ Eugene W. Emmerich Director - -------------------------- Eugene W. Emmerich
/s/ E. F. Heizer, Jr. Director - -------------------------- E. F. Heizer, Jr.
/s/ J. Frank Leach Director - -------------------------- J. Frank Leach
/s/ Gerald G. Nadig Director - -------------------------- Gerald G. Nadig
/s/ Irwin P. Pochter Director - -------------------------- Irwin P. Pochter
EXHIBIT INDEX
MATERIAL SCIENCES CORPORATION
ANNUAL REPORT ON FORM 10-K
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND ------- REPORTS ON FORM 8-K --------------------------------------------
(a) FINANCIAL STATEMENTS AND SCHEDULES OF THE COMPANY
I Financial Statements of the Company. Incorporated herein by reference to pages 24 through 33 and page 19 of the Company's annual report.
(i) Consolidated Statements of Income for the years ended February 28 or 29, 1996, 1995 and 1994
(ii) Consolidated Balance Sheets -February 29, 1996 and February 28, 1995
(iii) Consolidated Statements of Cash Flows for the years ended February 28 or 29, 1996, 1995 and 1994
(iv) Notes to Consolidated Financial Statements
(v) Report of Independent Public Accountants
II Supplemental Schedules
(i) Report of Independent Public Accountants with respect to Supplemental Schedules to the Financial Statements
(ii) Schedule II - Reserve for Receivable Allowances and Deferred Tax Asset Valuation Allowance
All other schedules have been omitted, since the required information is not significant, is included in the financial statements or the notes thereto, or is not applicable.
MATERIAL SCIENCES CORPORATION
ANNUAL REPORT ON FORM 10-K
INDEX TO EXHIBITS
============================================================= Sequentially Exhibit Numbered Number Description of Exhibit Page* - ------ ---------------------- ---- - ------------------------------------------------------------- There are omitted certain instruments with respect to long- term debt, the total amount of securities authorized under each of which does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. A copy of each such instrument will be furnished to the Commission upon request. - ------------------------------------------------------------- 10(a) Material Sciences Corporation Stock Purchase Plan. (1) - ------------------------------------------------------------- 10(b) Material Sciences Corporation Supplemental Pension Plan.(1) - ------------------------------------------------------------- 10(c) Material Sciences Corporation Employee Stock Purchase Plan.(6) - ------------------------------------------------------------- 10(d) Material Sciences Corporation 1985 Stock Option Plan for Key Employees.(6) - ------------------------------------------------------------- 10(e) Material Sciences Corporation 1985 Stock Option Plan for Directors.(6) - ------------------------------------------------------------- 10(f) Material Sciences Corporation 1992 Omnibus Stock Awards Plan for Key Employees(7). - ------------------------------------------------------------- 10(g) Employment Agreement effective February 27, 1991, between Material Sciences Corporation and G. Robert Evans.(6) - ------------------------------------------------------------- 10(h) Material Sciences Corporation 1991 Stock Option Plan for Directors.(6) - ------------------------------------------------------------- 10(i) Material Sciences Corporation Directors Deferred Compensation Plan.(6) - ------------------------------------------------------------- 10(j) Material Sciences Corporation 1996 Stock Option Plan for Non-Employee Directors. - ------------------------------------------------------------- 10(k) Deferred Compensation Plan of Material Sciences Corporation and Certain Participating Subsidiaries.(6) - -------------------------------------------------------------
============================================================= Sequentially Exhibit Numbered Number Description of Exhibit Page* - ------ ---------------------- ---- - ------------------------------------------------------------- 10(l) Lease and Agreement dated as of December 1, 1980, between Line 6 Corp. and Pre Finish Metals Incorporated, relating to Walbridge, Ohio facility.(1) - ------------------------------------------------------------- 10(m) First Amendment to Lease and Agreement dated as of May 30, 1986, between Corporate Property Associates and Corporate Property Associates 2 and Pre Finish Metals Incorporated.(3) - ------------------------------------------------------------- 10(n) Sublease dated as of May 30, 1986, between Pre Finish Metals Incorporated and Walbridge Coatings, An Illinois Partnership.(3) - ------------------------------------------------------------- 10(o) Lease Guaranty dated as of May 30, 1986, from Material Sciences Corporation to Corporate Property Associates and Corporate Property Associates 2.(3) - ------------------------------------------------------------- 10(p) Note Purchase Agreement dated as of May 30, 1986, between Material Sciences Corporation and Creditanstalt-Bankverein (New York Branch).(3) - ------------------------------------------------------------- 10(q) Agreement dated as of May 30, 1986, between Material Sciences Corporation and Corporate Property Associates and Corporate Property Associates 2.(3) - ------------------------------------------------------------- 10(r) Term Loan Agreement dated as of July 23, 1986, among Walbridge Coatings, An Illinois Partnership, Creditanstalt-Bankverein (New York Branch) and The Toledo Trust Company, including the related guaranties by Material Sciences Corporation and Pre Finish Metals Incorporated.(3) - ------------------------------------------------------------- 10(s) Amendment No. 1 to Term Loan Agreement dated as of March 31, 1987, among Walbridge Coatings, An Illinois Partnership, Creditanstalt-Bankverein (New York Branch) and The Toledo Trust Company.(3) - ------------------------------------------------------------- 10(t) Amended and Restated Credit Facility Agreement dated as of July 23, 1986, between Walbridge Coatings, An Illinois Partnership, and Creditanstalt-Bankverein, including the related guaranties by Material Sciences Corporation and Pre Finish Metals Incorporated.(3) - -------------------------------------------------------------
- --------------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 2-93414), which was declared effective on November 27, 1984.
(2) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 33-00828), which was filed on October 11, 1985.
(3) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 1989 (File No. 1-8803).
(4) Incorporated by reference to the Registrant's Form 8-A dated June 17, 1986 (File No. 1-8803).
(5) Incorporated by reference to the Registrant's Form 10-Q Quarterly Report for the Quarter Ended August 31, 1994 (File No. 1-8803).
(6) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 1991 (File No. 1-8803).
(7) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 29, 1992 (File No. 1-8803).
(8) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 1993 (File No. 1-8803).
(9) Incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended February 28, 1994 (File No. 1-8803).
(10) Appears only in the electronic filing of this report with the Securities and Exchange Commission.
MATERIAL SCIENCES CORPORATION
Supplemental Schedules
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO SUPPLEMENTAL SCHEDULES TO THE FINANCIAL STATEMENTS
To Material Sciences Corporation:
We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in the Material Sciences Corporation 1996 Annual Report to Shareowners incorporated by reference in this Form 10-K, and have issued our report thereon dated April 17, 1996. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplemental financial statement schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. The supplemental financial statement schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Chicago, Illinois, April 17, 1996
SCHEDULE II -----------
MATERIAL SCIENCES CORPORATION AND SUBSIDIARIES
RESERVE FOR RECEIVABLE ALLOWANCES AND DEFERRED TAX ASSET VALUATION ALLOWANCE (in thousands)
The activity in the Receivable Allowances account includes the Company's bad debt, claim and scrap allowances.