SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1999
Commission File Number 1-8803
MATERIAL SCIENCES CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-2673173
(State or other jurisdiction (IRS employer identification
of incorporation or organization) number)
2200 East Pratt Boulevard
Elk Grove Village, Illinois 60007
(Address of principal (Zip code)
executive offices)
Registrant's telephone number, including area code: (847) 439-8270
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of October 13, 1999, there were outstanding 15,604,850 shares of common
stock, $.02 par value.
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For The Quarter Ended August 31, 1999
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
(a) Financial statements of Material Sciences Corporation and Subsidiaries
2
Consolidated Statements of Income (Unaudited)
Material Sciences Corporation and Subsidiaries
Three Months Ended Six Months Ended
August 31, August 31,
(In thousands, except per share data) 1999 1998 1999 1998
- ---------------------------------------------------------------- -------- -------- -------- --------
Net Sales (1) $132,466 $119,157 $257,459 $232,040
Cost of Sales 105,681 98,460 206,438 192,233
-------- -------- -------- --------
Gross Profit $ 26,785 $ 20,697 $ 51,021 $ 39,807
Selling, General and Administrative
Expenses (9) 16,890 14,255 31,537 27,956
-------- -------- -------- --------
Income from Operations $ 9,895 $ 6,442 $ 19,484 $ 11,851
-------- -------- -------- --------
Other (Income) and Expense:
Interest Income $ (12) $ (333) $ (90) $ (404)
Interest Expense 2,389 3,085 4,884 6,375
Equity in Results of Joint Ventures 624 485 1,105 440
Other, Net 59 (65) 143 (493)
-------- -------- -------- --------
Total Other Expense, Net $ 3,060 $ 3,172 $ 6,042 $ 5,918
-------- -------- -------- --------
Income Before Income Taxes and Cumulative Effect of
Accounting Change $ 6,835 $ 3,270 $ 13,442 $ 5,933
Income Taxes 2,529 1,259 4,974 2,284
-------- -------- -------- --------
Income Before Cumulative Effect of Accounting Change $ 4,306 $ 2,011 $ 8,468 $ 3,649
Cumulative Effect of Accounting Change, Net (6) - - - 2,207
-------- -------- -------- --------
Net Income (7) $ 4,306 $ 2,011 $ 8,468 $ 1,442
======== ======== ======== ========
Basic Net Income Per Share:
Income Before Cumulative Effect of Accounting Change
Per Share $ 0.28 $ 0.13 $ 0.56 $ 0.24
Cumulative Effect of Accounting Change Per Share - - - 0.14
-------- -------- -------- --------
Basic Net Income Per Share $ 0.28 $ 0.13 $ 0.56 $ 0.10
======== ======== ======== ========
Diluted Net Income Per Share:
Income Before Cumulative Effect of Accounting Change
Per Share $ 0.28 $ 0.13 $ 0.55 $ 0.24
Cumulative Effect of Accounting Change Per Share - - - 0.14
-------- -------- -------- --------
Diluted Net Income Per Share $ 0.28 $ 0.13 $ 0.55 $ 0.10
======== ======== ======== ========
Weighted Average Number of Common Shares Outstanding
Used for Basic Net Income Per Share 15,124 15,330 15,188 15,311
Dilutive Common Stock Options 285 85 224 85
-------- -------- -------- --------
Weighted Average Number of Common Shares Outstanding
Plus Dilutive Common Stock Options 15,409 15,415 15,412 15,396
======== ======== ======== ========
Outstanding Common Stock Options Having No Dilutive Effect 1,263 1,434 1,309 1,434
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
3
Consolidated Balance Sheets
Material Sciences Corporation and Subsidiaries
August 31, February 28,
1999 1999
(In thousands) Unaudited Audited
- ------------------------------------------------------------------------ ----------- ------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 1,964 $ 1,227
Receivables:
Trade, Less Reserves of $5,541 and $5,233, Respectively (2) 55,525 52,029
Income Taxes - 968
Prepaid Expenses 3,476 2,180
Inventories 55,542 52,166
Prepaid Taxes 4,889 4,889
--------- ---------
Total Current Assets $ 121,396 $ 113,459
--------- ---------
Property, Plant and Equipment $ 368,685 $ 360,865
Accumulated Depreciation and Amortization (140,454) (126,384)
--------- ---------
Net Property, Plant and Equipment $ 228,231 $ 234,481
--------- ---------
Other Assets:
Investment in Joint Ventures $ 19,924 $ 20,829
Intangible Assets, Net 23,475 24,411
Other 2,391 2,141
--------- ---------
Total Other Assets $ 45,790 $ 47,381
--------- ---------
Total Assets $ 395,417 $ 395,321
========= =========
Liabilities:
Current Liabilities:
Current Portion of Long-Term Debt $ 2,454 $ 2,429
Accounts Payable 54,431 47,920
Accrued Payroll Related Expenses 12,154 13,891
Accrued Expenses 9,009 8,660
--------- ---------
Total Current Liabilities $ 78,048 $ 72,900
--------- ---------
Long-Term Liabilities:
Deferred Income Taxes $ 19,855 $ 18,434
Long-Term Debt, Less Current Portion 127,807 140,000
Accrued Superfund Liability 3,037 3,087
Other 12,369 11,968
--------- ---------
Total Long-Term Liabilities $ 163,068 $ 173,489
--------- ---------
Shareowners' Equity:
Preferred Stock (3) $ - $ -
Common Stock (4) 344 336
Additional Paid-In Capital 57,051 54,663
Treasury Stock at Cost (5) (16,061) (10,491)
Retained Earnings 113,298 104,830
Accumulated Other Comprehensive Income (7) (331) (406)
--------- ---------
Total Shareowners' Equity $ 154,301 $ 148,932
--------- ---------
Total Liabilities and Shareowners' Equity $ 395,417 $ 395,321
========= =========
The accompanying notes are an integral part of these statements.
4
Consolidated Statements of Cash Flows (Unaudited)
Material Sciences Corporation and Subsidiaries
Three Months Ended Six Months Ended
August 31, August 31,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------ -------- -------- -------- --------
Cash Flows From:
Operating Activities:
Net Income $ 4,306 $ 2,011 $ 8,468 $ 1,442
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization 7,675 7,875 15,365 15,758
Provision for Deferred Income Taxes 700 128 1,421 256
Cumulative Effect of Accounting Change, Net - - - 2,207
Compensatory Effect of Stock Plans 1,180 (92) 1,357 4
Other, Net 631 485 1,107 315
-------- -------- -------- --------
Operating Cash Flow Prior to Changes in Assets and Liabilities $ 14,492 $ 10,407 $ 27,718 $ 19,982
-------- -------- -------- --------
Changes in Assets and Liabilities:
Receivables $ (1,946) $ (3,405) $ (3,405) $ 2,121
Income Taxes Receivable - 1,694 968 2,391
Prepaid Expenses 169 (230) (1,296) (1,038)
Inventories (3,402) 2,276 (3,376) 5,888
Accounts Payable 7,163 (1,589) 6,511 (489)
Accrued Expenses 861 1,797 (1,388) 1,010
Other, Net 165 3,492 426 3,239
-------- -------- -------- --------
Cash Flow from Changes in Assets and Liabilities $ 3,010 $ 4,035 $ (1,560) $ 13,122
-------- -------- -------- --------
Net Cash Provided by Operating Activities $ 17,502 $ 14,442 $ 26,158 $ 33,104
-------- -------- -------- --------
Investing Activities:
Capital Expenditures, Net $ (3,901) $ (4,160) $ (7,874) $ (7,384)
Investment in Joint Ventures (34) (883) (102) (1,235)
Distribution from Joint Ventures - 900 - 900
Other (38) (159) (746) (343)
-------- -------- -------- --------
Net Cash Used in Investing Activities $ (3,973) $ (4,302) $ (8,722) $ (8,062)
-------- -------- -------- --------
Financing Activities:
Net Proceeds (Payments) Under Lines of Credit $(11,000) $(12,200) $(11,600) $ 38,400
Payments of Debt (413) (1,234) (568) (66,163)
Purchase of Treasury Stock (3,229) - (5,570) -
Sale of Common Stock 248 157 1,039 668
-------- -------- -------- --------
Net Cash Used in Financing Activities $(14,394) $(13,277) $(16,699) $(27,095)
-------- -------- -------- --------
Net Increase (Decrease) in Cash $ (865) $ (3,137) $ 737 $ (2,053)
Cash and Cash Equivalents at Beginning of Period 2,829 4,709 1,227 3,625
-------- -------- -------- --------
Cash and Cash Equivalents at End of Period $ 1,964 $ 1,572 $ 1,964 $ 1,572
======== ======== ======== ========
The Changes in Assets and Liabilities for the three and six months ended August
31, 1999 and 1998, are net of assets and liabilities acquired.
The accompanying notes are an integral part of these statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MATERIAL SCIENCES CORPORATION
The data for the three and six months ended August 31, 1999 and 1998 have not
been audited by independent public accountants but, in the opinion of the
Company, reflect all adjustments (consisting of only normal, recurring
adjustments) necessary for a fair presentation of the information at those dates
and for those periods. The financial information contained in this report should
be read in conjunction with the Company's 1999 Annual Report to Shareowners and
Annual Report on Form 10-K. Certain prior year amounts have been reclassified to
conform with the fiscal 2000 presentation.
(1) During the six months ended August 31, 1999 and 1998, the Company derived
approximately 12.8% and 11.4%, respectively, of its sales from fees billed
to the Partnership by a subsidiary of the Company for operating the
Walbridge, Ohio facility.
(2) Includes trade receivables due from the Partnership of $2,018 as of August
31, 1999 and $1,897 as of February 28, 1999. Trade receivables also include
amounts due from Innovative Specialty Films, LLC of $246 as of August 31,
1999 and $452 as of February 28, 1999.
(3) Preferred Stock, $1.00 Par Value; 10,000,000 Shares Authorized; 1,000,000
Designated Series B Junior Participating Preferred; None Issued.
(4) Common Stock, $.02 Par Value; 40,000,000 Shares Authorized; 17,211,122
Shares Issued and 15,522,474 Shares Outstanding as of August 31, 1999 and
16,783,084 Shares Issued and 15,571,336 Shares Outstanding as of February
28, 1999.
(5) Treasury Stock at Cost; 1,688,648 Shares as of August 31, 1999 and
1,211,748 Shares as of February 28, 1999. On December 20, 1996, the
Company's Board of Directors authorized the repurchase of up to one million
shares of the Company's common stock, of which 523,100 shares were
purchased through February 28, 1999. During the first six months of fiscal
2000, the Company completed this program by repurchasing the remaining
476,900 shares of the one million authorization at an average purchase
price of $11.68 per share.
On September 23, 1999, the Company's Board of Directors authorized a new
program to repurchase up to one million shares of the Company's common
stock. Repurchases will be made from time to time in the open market or
through privately negotiated purchases, as the Company may determine. As of
October 13, 1999, 32,700 shares have been repurchased at an average
purchase price of $14.01 under this new authorization.
(6) In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of
Start-Up Activities," which the Company adopted effective March 1, 1998.
The SOP requires costs of start-up activities and organization costs to be
expensed as incurred. The effect of the adoption of SOP 98-5 was to record
a non-cash charge of $2,207, net of taxes, for the cumulative
6
effect of a change in accounting principle to expense costs that had
previously been capitalized prior to March 1, 1998.
(7) Comprehensive Income:
Three Months Ended Six Months Ended
------------------ ----------------
August 31, August 31,
---------- ----------
1999 1998 1999 1998
---- ---- ---- ----
Net Income $4,306 $2,011 $8,468 $1,442
Other Comprehensive Income:
Foreign Currency Translation (4) (290) 75 (524)
Adjustments ------ ------ ------ ------
Comprehensive Income $4,302 $1,721 $8,543 $ 918
====== ====== ====== ======
(8) Business Segments:
The Company reports segment information based on how management
disaggregates its businesses for evaluating performance and making
operating decisions. The Company's three segments are: Coated Products and
Services, Engineered Materials and Specialty Films. Corporate represents
unallocated general corporate expenses. The net sales on a geographic basis
are not material. Information concerning the Company's business segments in
the second quarter and first six months of fiscal 2000 and 1999 was as
follows:
Three Months Ended Six Months Ended
------------------ ----------------
August 31, August 31,
---------- ----------
1999 1998 1999 1998
---- ---- ---- ----
Net Sales
---------
Coated Products and Services $ 97,900 $ 89,409 $192,018 $173,582
Engineered Materials 20,422 16,487 39,529 34,098
Specialty Films 14,941 13,808 27,061 25,499
Eliminations (797) (547) (1,149) (1,139)
-------- -------- -------- --------
$132,466 $119,157 $257,459 $232,040
======== ======== ======== ========
Income from Operations
----------------------
Coated Products and Services $ 7,358 $ 4,712 $ 14,425 $ 8,878
Engineered Materials 3,013 1,757 5,984 3,307
Specialty Films 2,499 1,823 4,513 2,808
Corporate and Eliminations (2,975) (1,850) (5,438) (3,142)
-------- -------- -------- --------
$ 9,895 $ 6,442 $ 19,484 $ 11,851
======== ======== ======== ========
(9) The Company recognized a pro rata portion of compensation expense totaling
approximately $1,300 during the second quarter of fiscal 2000 related to
the 1998 Long-Term Incentive/Leverage Stock Awards Program (see Note 11 in
the Company's 1999 Annual Report to Shareowners). Under generally accepted
accounting principles, the award price was fixed based on the closing price
on the measurement date (the date the price has traded at or above a
certain performance level which was set higher than the market price on the
date of grant). During the second quarter of fiscal 2000, the price reached
the performance level and expense was recorded.
7
(10) As reported in the Company's Form 10-K for the year ended February 28,
1997, on April 9, 1997, a plaintiff claiming to represent a class of
Material Sciences Corporation shareowners filed a complaint in the United
States District Court for the Northern District of Illinois. As reported in
the Company's Form 10-Q for the quarterly period ended on August 31, 1997,
on August 25, 1997, a parallel but separate complaint was filed in the
Circuit Court of Cook County, Illinois by another plaintiff seeking to
pursue similar claims on behalf of the same class. On August 10, 1999, the
Cook County Circuit Court dismissed the state action, upon the plaintiff's
motion, after the federal court's determination that the federal case
should proceed as a class action.
(11) On September 28, 1999, the Company reached a settlement agreement with the
Securities and Exchange Commission ("SEC") related to the SEC's
investigation of accounting irregularities announced in 1997. Under the
settlement agreement, MSC consents to a cease and desist order while
neither admitting nor denying the SEC's findings. The Company also agreed
to send certain personnel for continuing education.
8
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For The Quarter Ended August 31, 1999
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
- ---------------------
Net sales in the second quarter of fiscal 2000 increased to $132,466, 11.2%
higher than $119,157 in the prior year's second quarter. For the first six
months of fiscal 2000, net sales were $257,459 compared with $232,040, an 11.0%
increase. For both periods, all business segments contributed to the increase.
Gross profit margin for the second quarter was 20.2% as compared with 17.4% in
the same quarter last year. For the year-to-date period, gross profit margin was
19.8% in fiscal 2000 versus 17.2% in fiscal 1999. The increase in gross profit
margin was due to growth in sales volume, lower material costs, favorable
product mix, as well as improved manufacturing efficiencies. Selling, general
and administrative ("SG&A") expenses were 12.8% and 12.2% of net sales in the
second quarter and first six months of fiscal 2000, respectively, compared with
12.0% in both the second quarter and year-to-date periods last year. The
increase in SG&A percentage was due mainly to the pro rata portion of
compensation expense recognized in the second quarter, as described in the
following paragraph, offset by an increase in the sales volume. During the
second quarter, income from operations increased 53.6% to $9,895 as compared
with $6,442 last fiscal year. For the six months ended August 31, 1999, income
from operations improved 64.4% to $19,484 from $11,851 in the prior year period.
The Company recognized a pro rata portion of compensation expense totaling
approximately $1,300 during the second quarter of fiscal 2000 related to the
1998 Long-Term Incentive/Leverage Stock Awards Program (see Note 11 in the
Company's 1999 Annual Report to Shareowners). Under generally accepted
accounting principles, the award price was fixed based on the closing price on
the measurement date (the date the price has traded at or above a certain
performance level which was set higher than the market price on the date of
grant). During the second quarter of fiscal 2000, the price reached the
performance level and expense was recorded.
The Company's three principal business segments are Coated Products and
Services, Engineered Materials and Specialty Films. The Coated Products and
Services segment includes the coil coating, hot-dip galvanizing and
electrogalvanizing product groups. This segment provides galvanized and
prepainted products and services primarily to the building and construction,
automotive and appliance markets. The Engineered Materials segment includes the
laminates and composites product group. This segment combines layers of metal
and other materials designed to meet specific customer requirements for the
automotive, lighting,
9
appliance and computer disk drive markets. The Specialty Films segment provides
solar control and safety window film, as well as industrial films used in a
variety of products.
Coated Products and Services
Coated Products and Services' second quarter net sales increased 9.5% to $97,900
from $89,409 in the same quarter last year. Net sales for Coated Products and
Services in the first half of the fiscal year grew to $192,018, a 10.6% increase
from $173,582 last fiscal year. The increase for both periods is mainly due to
significantly higher shipments to the building and construction, automotive and
appliance markets. For the second quarter, income from operations for Coated
Products and Services increased to $7,358, a 56.2% improvement from $4,712 in
the prior year. An increase in sales volume, lower material costs and improved
operating efficiencies were the primary contributors to the increase, slightly
offset by the effects of electrical power curtailments. For the six months ended
August 31, 1999, income from operations increased 62.5% to $14,425 compared with
$8,878 last fiscal year. Higher volumes, including significant sales to ISPAT
Inland Inc. in the first quarter, lower material costs, favorable product mix
and improved operating efficiencies all contributed to the growth.
On July 23, 1999, a subsidiary of Bethlehem Steel Corporation ("BSC") sold a
portion of its ownership interest in Walbridge Coatings ("Partnership") to a
subsidiary of the LTV Corporation ("LTV"). LTV purchased a 16.5% equity interest
in the Partnership from BSC, providing LTV access to 33.0% of the facility's
available line time. This change in ownership will provide MSC with a more
diversified customer base, as well as improve the likelihood of full utilization
of the facility. In conjunction with the sale, the Partnership term was extended
from December 31, 2001 to December 31, 2004. The Company maintained its 50%
ownership interest in the Partnership. The Partnership also maintained its
long-term toll processing agreement with ISPAT Inland Inc. (a former partner)
which expires on December 31, 2001.
Engineered Materials
Sales of Engineered Materials increased 23.9% to $20,422 for the second quarter
of fiscal 2000 compared with $16,487 last fiscal year. For the year-to-date
period, Engineered Materials' net sales grew to $39,529, a 15.9% increase from
$34,098 last year. Significantly higher shipments of brake damper materials to
both the original equipment manufacturer ("OEM") and replacement markets
contributed to the growth. Income from operations was $3,013 for the second
quarter versus $1,757 in the prior year's second quarter, a 71.5% increase.
Income from operations improved 80.9% for the first six months of fiscal 2000 to
$5,984 compared with $3,307 last year. Improvements in income from operations
for both periods were mainly due to favorable product mix, material cost
reductions and improved operating efficiencies.
Specialty Films
Second quarter sales of Specialty Films materials increased 8.2% to $14,941 in
fiscal 2000 compared with $13,808 last year. Sales for the six months ended
August 31, 1999 were 6.1% higher at $27,061 compared with $25,499 in the prior
fiscal year. Higher shipments of window film materials for building and
automotive markets, along with increased sales of coated and laminated films
contributed to the gains. On October 15, 1998, a subsidiary of the Company
formed Innovative Specialty Films, LLC ("ISF") for the research and development,
manufacture
10
and sale of sputtered film. Comparable sales for the second quarter and first
half of the year, excluding sputtered film sales made through the ISF joint
venture, increased 19.6% and 17.8%, respectively, versus the prior year periods.
Income from operations for Specialty Films for the second quarter increased
37.1% to $2,499 as compared with $1,823 last year. For the first six months of
fiscal 2000, income from operations was $4,513, a 60.7% increase from $2,808
last fiscal year. For both periods, the increase was due to higher sales volume,
improved operating efficiencies, as well as royalty income as a result of the
ISF agreement.
Total Other (Income) and Expense, Net and Income Taxes
Total other (income) and expense, net was expense of $3,060 in the second
quarter of fiscal 2000 compared with $3,172 of expense for the second quarter of
fiscal 1999. For the year-to-date period, total other (income) and expense, net
was expense of $6,042 in fiscal 2000 compared with $5,918 last year. Interest
expense decreased $696 and $1,491 for the second quarter and first six months,
respectively, due to significantly lower debt levels, and to a lesser extent,
favorable changes in variable interest rates. During the second quarter of
fiscal 1999, the Company recorded $318 of interest income related to amended tax
returns. In addition, Equity in Results of Joint Ventures was expense of $624
and $1,105 for the second quarter and first half of fiscal 2000, respectively,
and expense of $485 and $440 for the same periods last year, respectively. The
change is due to a decline in third party sales (other than ISPAT Inland Inc.)
by the Partnership, terminations of certain Partnership revenues from BSC and
ISPAT Inland Inc. after certain financing matured on June 30, 1998 and expenses
related to the ISF joint venture commencing operations in January 1999. MSC's
effective income tax rate was 37.0% in the second quarter and first six months
of fiscal 2000 compared with 38.5% in the same periods of fiscal 1999, primarily
due to the benefit of state income tax credits.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the second quarter of fiscal 2000, MSC generated $17,502 of cash from
operating activities compared with $14,442 in the second quarter last year. The
increase in cash generation is due mainly to higher income in the second quarter
of fiscal 2000. For the six months ended August 31, 1999, MSC generated $26,158
of cash from operating activities compared with $33,104 in the same period last
year. The decrease in cash generation is due mainly to the significant
improvements in working capital made in the prior year's first six months,
offset by higher income in the first half of fiscal 2000. Earnings before
interest, taxes, depreciation and amortization ("EBITDA") increased to $16,887
and $33,601 for the second quarter and first half of fiscal 2000, respectively,
compared with $13,897 and $27,662 for the same periods last year, respectively.
MSC's capital expenditures during the second quarter and first six months of
fiscal 2000 were $3,901 and $7,874, respectively, compared with $4,160 and
$7,384 in the same periods last fiscal year.
MSC's total debt decreased as of August 31, 1999, to $130,261 from $142,429 as
of fiscal 1999 year end. As of August 31, 1999, the Company maintains a
committed line of credit totaling $90,000. There was $12,000 outstanding under
this line of credit as of August 31, 1999, versus $14,200 as of February 28,
1999. The Company has executed letters of credit totaling $4,740 against these
lines, leaving available lines of credit of $73,260 as of August 31, 1999. The
Company also maintains a $10,000 uncommitted line of credit. There was $600
outstanding under this line of credit as of August 31, 1999 as compared with
$10,000 as of
11
fiscal year end. The Company believes that its cash flow from operations,
together with available financing and cash on hand will be sufficient to fund
its working capital needs, capital expenditures, stock repurchase program and
debt amortization.
On December 20, 1996, the Company's Board of Directors authorized the repurchase
of up to one million shares of the Company's common stock, of which 523,100
shares were purchased through February 28, 1999. During the first six months of
fiscal 2000, the Company completed this program by repurchasing the remaining
476,900 shares of the one million authorization at an average purchase price of
$11.68 per share.
On September 23, 1999, the Company's Board of Directors authorized a new program
to repurchase up to one million shares of the Company's common stock.
Repurchases will be made from time to time in the open market or through
privately negotiated purchases, as the Company may determine. As of October 13,
1999, 32,700 shares have been repurchased at an average purchase price of $14.01
under this new authorization.
The Company has a capital lease obligation, which was $2,199 as of August 31,
1999, relating to a facility that the Company subleases to the Partnership. In
addition, the Company is contingently responsible for 50% of ISF's financing
requirements. As of August 31, 1999, ISF's debt was $85 compared with $2,736 as
of February 28, 1999.
As reported in the Company's Form 10-K for the year ended February 28, 1997, on
April 9, 1997, a plaintiff claiming to represent a class of Material Sciences
Corporation shareowners filed a complaint in the United States District Court
for the Northern District of Illinois. As reported in the Company's Form 10-Q
for the quarterly period ended on August 31, 1997, on August 25, 1997, a
parallel but separate complaint was filed in the Circuit Court of Cook County,
Illinois by another plaintiff seeking to pursue similar claims on behalf of the
same class. On August 10, 1999, the Cook County Circuit Court dismissed the
state action, upon the plaintiff's motion, after the federal court's
determination that the federal case should proceed as a class action.
On September 28, 1999, the Company reached a settlement agreement with the
Securities and Exchange Commission ("SEC") related to the SEC's investigation of
accounting irregularities announced in 1997. Under the settlement agreement, MSC
consents to a cease and desist order while neither admitting nor denying the
SEC's findings. The Company also agreed to send certain personnel for continuing
education.
MSC continues to participate in the implementation of settlements with the
government for the clean-up of various Superfund sites. For additional
information, refer to MSC's Form 10-K for the fiscal year ended February 28,
1999.
YEAR 2000
- ---------
The Year 2000 issue exists because many computer systems and applications,
including those embedded in equipment and facilities, use two-digit rather than
four-digit date fields to designate an applicable year. Any of the Company's
systems or applications that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000, which could result in a
system failure or miscalculations. Incomplete or untimely resolution of the Year
2000 issue by the Company or its critically important suppliers or customers
could have a materially adverse impact on the Company's business, operations or
financial condition.
12
To mitigate this risk, the Company has established a company-wide initiative to
identify, evaluate and address Year 2000 issues. Included within the scope of
this initiative are the operational and financial information technology
systems, embedded systems contained in machinery and equipment and other end-
user computing resources and building systems, such as security, elevator and
heating and cooling systems. In addition, the project includes a review of the
Year 2000 compliance efforts of key supplier and other principal business
partners.
Work is progressing in the following phases: inventory, assessment, remediation,
testing, deployment and monitoring. Although the pace of the work varies among
the segments and the phases often are conducted in parallel, the inventory,
assessment, remediation and testing phases have been substantially completed as
of August 31, 1999. The deployment and monitoring phases are in progress and are
expected to be completed during the third quarter of fiscal 2000. Under the
Company's Year 2000 plan, each of its segments has established target dates for
remediation and testing of critical systems and applications.
The Company cannot guarantee that third parties, on whom it depends for
essential supplies and services, will convert their critical systems and
processes in a timely manner. Failure or delay by any of these parties could
significantly disrupt the business. However, the Company has established a
supplier compliance letter program and is working with key suppliers and
partners to minimize such risks.
The total expected cost of Year 2000 compliance (including replacement of major
systems in the normal course of business) is estimated to range from $4,700 to
$5,100, of which approximately $4,400 has been incurred as of August 31, 1999.
The timing of the expenses may vary and are not, necessarily, indicative of the
readiness efforts or progress to date.
The Company believes the key risk factors associated with Year 2000 are those it
cannot directly control, primarily the readiness of its key suppliers,
distributors and partners. The Company has initiated on-going communications
with these third parties to determine their Year 2000 compliance status and
their progress toward Year 2000 readiness. The Company is in the process of
following up with those critical third parties that did not respond to the
supplier compliance letter.
The development and documentation of contingency plans are in progress and will
continue to be assessed throughout the remainder of the calendar year.
Contingency plans include sourcing alternatives for single source suppliers,
developing business resumption plans for all of the Company's segments and
evaluating alternative manual processes.
Forward-looking statements contained in this filing are qualified by the
cautionary language described in Part II, Item 7 of the Company's 1999 Annual
Report on Form 10-K, filed with the SEC pursuant to the Securities Exchange Act
of 1934, as amended.
13
MATERIAL SCIENCES CORPORATION
FORM 10-Q
For the Quarter Ended August 31, 1999
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
Paragraphs 4 and 5 on page 12 of this report are hereby incorporated by
reference.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
On June 17, 1999, the Company held its Annual Meeting of Shareowners.
Jerome B. Cohen, Eugene W. Emmerich, G. Robert Evans, E. F. Heizer, Jr.,
Gerald G. Nadig and Howard B. Witt, being six nominees named in the Company's
Proxy Statement, dated May 12, 1999, were elected at the Annual Meeting to serve
as the Board of Directors by a majority vote of shareowners. On June 8, 1999,
subsequent to the proxy solicitation for the election of the Board of Directors
and prior to the Annual Meeting, Mr. Irwin P. Pochter passed away. No votes were
cast for any other person. The details of the vote were as follows:
Name For Withheld Authority
---- --- ------------------
Jerome B. Cohen 12,441,987 1,905,017
Eugene W. Emmerich 12,442,287 1,904,717
G. Robert Evans 12,916,798 1,430,206
E. F. Heizer 12,438,044 1,908,960
Gerald G. Nadig 12,933,638 1,413,366
Howard B. Witt 12,934,334 1,412,670
Approved by a majority vote of shareowners was the proposal to amend the 1992
Omnibus Stock Awards Plan for Key Employees to increase the number of shares of
common stock issuable thereunder by 400,000 shares. The Plan provides incentives
to the key employees of the Company through rewards linked to performance of the
Company's common stock. The details of the vote were as follows:
For Against Abstain
--- ------- -------
9,733,026 4,579,715 34,263
14
Not approved by a majority vote of shareowners was the shareowner proposal to
request the Board of Directors to redeem the shareowner rights previously
issued.
For Against Abstain No Vote
--- ------- ------- -------
5,267,994 6,258,461 66,745 2,753,804
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
(a) 10.1 See the exhibits listed in the Index to Exhibits.
10.2 See the exhibits listed in the Index to Exhibits.
10.3 See the exhibits listed in the Index to Exhibits.
10.4 See the exhibits listed in the Index to Exhibits.
10.5 See the exhibits listed in the Index to Exhibits.
10.6 See the exhibits listed in the Index to Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter for which
this report is filed.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Elk Grove Village, State of Illinois,
on the 13th day of October, 1999.
MATERIAL SCIENCES CORPORATION
By: /s/ Gerald G. Nadig
-----------------------------------
Gerald G. Nadig
Chairman, President
and Chief Executive Officer
By: /s/ James J. Waclawik, Sr.
-----------------------------------
James J. Waclawik, Sr.
Vice President,
Chief Financial Officer
and Secretary
16
MATERIAL SCIENCES CORPORATION
Quarterly Report on Form 10-Q
Index to Exhibits
Sequentially
Exhibit Number Description of Exhibit Numbered Page
- -------------- ---------------------- -------------
10.1 Amended and Restated Partnership Agreement, dated as of July
23, 1999, among EGL Steel Inc., LTV-Walbridge, Inc. and MSC
Walbridge Coatings Inc., (certain confidential portions have
been omitted pursuant to a confidential treatment request
which has been separately filed). (1)
10.2 Amended and Restated Operating Agreement, dated as of July
23, 1999, by and between MSC Walbridge Coatings Inc. and
Walbridge Coatings, an Illinois Partnership (certain
confidential portions have been omitted pursuant to a
confidential treatment request which has been separately
filed). (1)
10.3 Coatings Agreement, dated as of July 23, 1999, by and between
LTV Steel Company, Inc. and Walbridge Coatings, an Illinois
Partnership (certain confidential portions have been omitted
pursuant to a confidential treatment request which has been
separately filed). (1)
10.4 Coatings Agreement, dated as of July 23, 1999, by and between
MSC Walbridge Coatings Inc. and Walbridge Coatings, an
Illinois Partnership (certain confidential portions have been
omitted pursuant to a confidential request which has been
separately filed). (1)
10.5 Amended and Restated Coating Agreement, dated as of July 23,
1999, by and between Bethlehem Steel Corporation and
Walbridge Coatings, and Illinois Partnership (certain
confidential portions have been omitted pursuant to a
confidential treatment request which has been separately
filed). (1)
10.6 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.
(certain confidential portions have been omitted pursuant to
a confidential treatment request which has been separately
filed). (1)
27 Financial Data Schedule (1)
(1) Appears only in the electronic filing of this report with the Securities and
Exchange Commission.