UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended August 29, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to __________
Commission File Number: 0-45
SHELDAHL, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0758073
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1150 Sheldahl Road
Northfield, MN 55057
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (507) 663-8000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value of $0.25 per share
Preferred Stock Purchase Rights
(Title of Class)
____________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES: X NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
The aggregate market value of shares held by non-affiliates was approximately
$172,000,000 on November 6, 1997, when the last sales price of the
Registrant's Common Stock, as reported in the Nasdaq National Market System,
was $19.00.
As of November 6, 1997, the Company had outstanding 9,045,480 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive proxy statement for its annual meeting to
be held January 8, 1997, are incorporated by reference in Part III of this
Form 10-K.
<PAGE>
PART I
Item 1. Business
_________________
General
Sheldahl, Inc. (the "Company") creates thin flexible laminates and
their derivatives and markets these products worldwide. The Company's
laminates are of two types: adhesive based tapes and laminates and vacuum
deposited materials, including its patented adhesiveless copper laminate -
Novacladr. In addition to selling these materials globally, Sheldahl uses
these materials to fabricate high value derivative products such as single-
and double-sided flexible printed circuits and substrates for silicon dies.
The Company's products are genetically linked to it's core competencies;
vacuum deposition, laminating, via (hole) generation, imaging and plating.
Products are marketed through Sheldahl's three business units - Materials,
Interconnect, and Micro Products. The Company sells its products primarily to
the automotive and datacom (computer and telecommunication) markets.
The Company recently introduced three high performance products based on
proprietary vacuum deposition technology: Novacladr, ViaGridr and ViaThinr.
These emerging products provide substantial benefits compared to traditional
flexible circuits, including the capability for very fine circuit traces (down
to 1 mil, or .001 inch) as well as greater heat tolerance and dissipation.
The Company has designed its Novaclad and ViaGrid products to be used as a
base material for high performance printed circuits. The Company has
developed its ViaThin to enable integrated circuit ("IC") manufacturers to
package future generations of ICs economically by attaching the silicon die to
a ViaThin manufactured by the Company or other circuitry manufacturers using
the Company's Novaclad or ViaGrid products. As ICs are becoming increasingly
powerful, they produce more heat and require a greater number of connections
to attach the silicon die, placing substantially greater demands on IC
packaging materials.
Products
Novaclad. Novaclad is a thin and flexible adhesiveless copper laminate
used in the design and manufacture of flexible interconnects and high density
substrates. Novaclad consists of a polyimide film onto which copper has been
vacuum deposited on both sides. After the vacuum deposition process,
additional copper is plated onto the laminate to achieve a desired thickness
of copper ranging from 5 microns to 35 microns (a micron is one-millionth of a
meter). Novaclad provides a number of important benefits when compared to
traditional adhesive-based laminates, including the capability for finer
circuit traces (down to 1 mil, or .001 inch) and corresponding higher circuit
density, greater heat tolerance and dissipation, improved signal speed and
impedance control, increased dimensional stability, resistance to chemicals
and greater durability. Because of these characteristics, the Company
believes that Novaclad is a cost-effective, high-performance solution for a
broad range of interconnect systems, especially high density substrates for IC
packages and multi-chip modules. In fiscal 1997 and 1996, the Company sold
$13.0 million and $15.6 million, respectively, of Novaclad-based flexible
circuits, primarily for harsh, under-the-hood automotive applications where
Novaclad's heat tolerance and chemical resistance characteristics provide
superior performance.
ViaGrid/ViaArray. ViaGrid and ViaArray are higher-value-added forms of
Novaclad with pre-drilled small holes, or vias, measuring down to 1 mil in
diameter. ViaGrid is designed to be sold in rolls or sheets to printed
circuit manufacturers as a base material for the manufacture of high density
substrates. Both products are coated with copper and enable the transmission
of electrical currents between the two sides of the laminate. The combination
of thin copper traces and very small vias permits the design of circuits that
are up to six times more dense than current flexible circuitry technology.
Because of its adhesiveless character, ViaGrid and ViaArray provide all of the
benefits of Novaclad. The combination of these characteristics allow circuit
fabricators the opportunity to eliminate several costly processing steps in
the manufacture of printed circuits. The Company believes These products
provide solutions for a variety of applications, including high density
interconnects, IC packages and multi-chip modules. The Company believes there
is also an opportunity for rigid printed circuit manufacturers to use ViaGrid
or ViaArray based circuits as an interlayer in multilayer circuit boards.
ViaThin. The Company uses ViaArray in the manufacture of high density
substrates primarily for IC packages. Those high density substrates are
called ViaThin. The material properties of ViaArray allow for very dense
circuitry patterns which enable IC designers to improve the processing
capabilities of ICs by increasing the number of connections to the silicon
die, while reducing the cost per connection. ViaThin enhances signal speed
because it's traces are very smooth and it's dimensional stability is
maintained. These features allow the Company's ViaThin to be designed into
ball grid array, pin grid array, and other high density IC packages.
The Company's strategy is to target the high density segment of the
market for IC packaging and multichip module applications where circuit
densities requirements as small as 1 mil traces and vias can be met using
ViaThin. As the market for high density substrates develops, the Company will
consider licensing the manufacturing process of its high density substrates to
increase the demand for its ViaGrid product.
Materials. The Company's materials products consist of adhesive-based
tapes and other flexible laminates used in a variety of applications.
Moisture barrier tape and flat cable tape used in automobile air bag systems.
Splicing tape is used in the manufacture of commercial and industrial
sandpaper belts, and thermal insulating blankets are used primarily in the
aerospace/defense market for satellites. The Company produces its materials
using coating, laminating, and vacuum metalizing processes. Coating involves
applying chemicals or adhesives to a thin flexible material. Laminating
consists of combining two or more materials through applications of heat and
pressure. Vacuum metalizing typically involves placing a metal onto a thin
film, foil, or fabric by evaporation, sputtering, or pattern deposition. The
Company's flexible laminates provide extended flexibility, strength,
conductivity, durability and heat dissipation. The Company's materials
provide extended flexibility, strength, conductivity, durability, and heat
dissipation. The Company consumes approximately one-half of the material it
produces in the manufacture of flexible printed circuitry and interconnect
systems. In fiscal 1997, external sales of materials accounted for $27.9
million, or 27%, of the total Company revenue.
Flexible Interconnects. The Company manufactures flexible printed
circuitry and interconnect systems using traditional adhesive-based and
Novaclad laminates. The Company's flexible printed circuitry is typically
manufactured in a roll-to-roll process from polyester or polyimide film to
which copper is laminated. The laminate is processed through various imaging,
etching, and plating processes and then selectively protected with a
dielectric covering to produce a flexible printed circuit. Automated screen
printing and photo imaging processes produce single- and double-sided flexible
circuits with lines and spaces down to 5 mils (.005 inch) in width. The
Company uses its Novaclad laminate to produce high performance flexible
circuits primarily for demanding under-the-hood automotive applications which
require greater circuit density, enhanced heat and chemical resistance, and
dimensional stability. In fiscal 1997 and 1996, Novaclad-based products
represented sales of approximately $13.0 million and $15.6 million,
respectively.
All of the Company's flexible printed circuits are electronically tested
prior to shipping. Additionally, the Company offers value-added processing,
including surface mount assembly, wave soldering, connector and terminal
staking, custom folding, stiffening, application of pressure-sensitive
adhesive and hand soldering, in order to deliver a ready-to-use interconnect
system to the end customer. The Company's targets applications where
increased performance, reduced size and weight, ability to accommodate
packaging contours or a reduction in the number of assembly steps is desired
to reduce the customer's overall cost. Flexible printed circuitry and
interconnect systems, including Novaclad-based products, accounted for $71.0
million, or 73.2%, of the Company's net sales for fiscal 1997.
Sales and Customer Support
The Company's sales and customer support efforts are directed by product
managers who are responsible for defining target markets and customers,
strategic product planning and new product introduction. These product
managers supervise a sales force of 15 account managers and over 60 engineers,
technicians and customer support personnel. The Company employs a team
approach led by account managers who work extensively with the Company's
customers at the design stage, seeking to influence product designs and
applications, particularly in the automotive and emerging datacommunications
product areas. The Company believes that its close ties with customers at all
stages of a project distinguish it from many competitors who manufacture
products according to customer specifications without providing significant
design, technical or consulting services. Account managers also coordinate
appropriate design, research and development, engineering, order fulfillment
and other personnel to support customer needs. To supplement its direct sales
efforts, the Company uses domestic and international distributors. The
cornerstone of the Company's sales and customer support strategy is to provide
superior customer service, from prompt and efficient technical support to
rapid processing and delivery of prototype and production orders through its
electronic data interchange and just-in-time delivery capabilities.
Automotive Electronics. In the automotive electronics market, the
Company has enjoyed increasing sales through its strategy of working very
closely with its customers beginning at the design stage. In 1989, the
Company opened a technical design and sales office in Detroit, Michigan, which
is currently staffed with 17 engineers, designers and sales personnel in order
to provide automotive customers with comprehensive support. In fiscal 1997,
11.9%, 11.3% and 7.7% of the Company's net sales went to multiple sourcing
locations of Ford Motor Company, Motorola, Inc., and Molex Corporation,
respectively. The Company also provides products, through first tier
suppliers, to Chrysler and the U.S. operation of Honda and Toyota.
International. The Company works with European manufacturers and
suppliers and has had a sales presence in Europe since February 1992,
including its current sales office in Frankfurt, Germany. The Company
supplements its direct sales efforts with independent manufacturers'
representatives and distributors in Europe and Asia, principally for flexible
laminates. The Company's export sales during fiscal years 1995, 1996 and 1997
were $11.1 million, $12.0 million, and $15.0 million, respectively.
Manufacturing
The Company manufactures and assembles its products in Northfield,
Minnesota, Aberdeen and Britton, South Dakota, and Longmont, Colorado. The
Company focuses on quality in its manufacturing efforts, and believes that its
vertically-integrated manufacturing capabilities enhance its ability to
control product quality. The Company has been a qualified supplier to various
automotive manufacturers for many years and has received ISO 9001
certification in our Minnesota facilities and ISO 9002 certification in our
South Dakota facilities.
The Company uses a continuous roll-to-roll manufacturing process to
efficiently produce a large volume of high-quality flexible laminates using
coating, laminating, and vacuum metalizing techniques. The Company consumes
approximately one-half of the flexible laminates it produces for the
manufacture of printed circuitry and interconnect systems. The Company
converts flexible laminates into printed circuits by using either photo
exposing process or screen printing process to image the circuit patterns onto
flexible laminates. The laminates then go through various etching and plating
processes that result in copper patterns remaining on the laminate. The
circuits are then protected with a dielectric covering. The Company processes
certain of its flexible printed circuitry into interconnect systems. These
process capabilities include surface mount assembly, wave soldering, connector
and terminal staking, custom folding, stiffening, application of pressure-
sensitive adhesive, and hand soldering. Substantially all of these
interconnect assembly functions are performed at the Company's facilities in
Aberdeen and Britton, South Dakota.
To manufacture its emerging products, the Company constructed a 102,000
square foot building in Longmont, Colorado. Manufacturing at the Longmont
facility includes a series of integrated roll-to-roll processes including via
generation, metalization, plating, photoimaging, developing, selective
etching, and electrical testing. The initial annual production capacity of
the facility is expected to be approximately 2.0 million square feet of
Novaclad, approximately 250,000 square feet of ViaGrid, and approximately
500,000 square feet of ViaThin. The facility has been designed to allow for
expansion in increments of approximately 500,000 square feet of finished
product, consisting of varying amounts of ViaGrid and high density substrates.
The Company's investment to date in the Longmont facility, including the site,
building, and equipment purchased or leased by the Company, is approximately
$58 million.
In August 1995, the Company entered into various agreements to form a
joint venture in Jiujiang Jiangxi, China with Jiangxi Changjiang Chemical
Plant and Hong Kong Wah Hing (China) Development Co., Ltd. Under the
agreements, the Company licensed certain technology to the joint venture.
Providing certain technical support, the Company has received a 20% ownership
interest in the joint venture and received cash payments totaling $900,000
upon completion of certain milestones, and a royalty on products sold by the
joint venture. The joint venture is being established to manufacture flexible
adhesive-based laminates and associated cover film tapes in China. Under the
terms of the agreements, the joint venture will market these products in
China, Taiwan, Hong Kong and Macau and the Company will market the products
produced by the joint venture in all other markets. The Company expects
manufacturing under this joint venture to commence in late fiscal 1998.
Research and Development
Sheldahl's recent research and development efforts, through its 42-
person research and development team, have focused on opportunities presented
by the demand for higher density and thinner packaging for electronic devices.
The Company has also identified within its core technologies other
opportunities for participation in the trend towards miniaturization within
the electronics industry and has pursued these opportunities independently and
through various consortia.
In fiscal 1994, the ARPA Consortium was organized to develop a high-
density, low-cost multichip module utilizing Novaclad as the base material.
The ARPA Consortium is comprised of a vertically-integrated team of non-
competing companies, including four systems integrators (Silicon Graphics,
Inc., Wireless Access, Inc., Hughes Missile Systems Company and Delco
Electronics), a materials manufacturer (Sheldahl) and an assembly company
(Jabil Circuit, Inc.). The ARPA Consortium has achieved various milestones,
including validation of each of the essential processes for production of the
Company's high-density substrates as a base material for low-cost multichip
modules. In September 1995, ARPA agreed to extend its commitment to the
consortium for the expansion of development of this technology using the
Company's Z-Link adhesive or other multilayering technologies. In addition to
the ARPA Consortium, the Company also participates in various other consortia,
including consortia managed by National Semiconductor and formed to develop
(i) low-cost plastic packaging and (ii) an IC attachment technique for a
silicon die without using wires, known as a "flip chip".
In August 1994, Sheldahl acquired a minority ownership interest in
Sidrabe Joint Stock Company ("Sidrabe"), a newly privatized vacuum
deposition developmental company located in Riga, Latvia. Sidrabe
historically was a developmental agency for the former Soviet Union's military
and aerospace programs, specializing in the design and production of vacuum
deposition equipment. With the Company's ownership position in Sidrabe, the
Company received worldwide rights to some key elements of Sidrabe technology
and the Company has access to Sidrabe's scientific and technical personnel
with extensive product and process expertise. The Company has also purchased
certain manufacturing equipment from Sidrabe.
Suppliers
The Company qualifies strategic suppliers through a Vendor Certification
Program which limits the number of suppliers to those who provide the Company
with the best total value and quality. The Company closely monitors product
quality and delivery schedules. During the last five years, the Company has
not experienced significant shortages of raw materials. The Company currently
depends, however, on one supplier for the polyimide film which serves as a
base for the Company's Novaclad, ViaGrid and high density substrate products.
This supplier currently manufactures this polyimide film at a single
manufacturing facility. In addition, the Company has experienced delays in
delivery of certain laser via generation equipment currently available from
only one supplier. Certain other materials and plating processes used by the
Company in the manufacture of its products are currently obtained from single
sources.
Competition
The Company's business is highly competitive with principal competitive
factors being product quality, performance, price and service. The Company
believes its vertical integration, which allows it to control product quality
and manufacturing efficiencies better than many of its competitors, is a
competitive advantage. Sheldahl's competitors include materials suppliers,
flexible and rigid circuit manufacturers, as well as electronics manufacturers
who product their own materials and interconnect systems. Some of the
Company's competitors have substantially greater financial and other resources
than the Company. The Company's primary competitors with respect to its
flexible printed circuitry and interconnect systems include Pressac Limited (a
U.K. company) and Parlex Corp. in the automotive electronics market and Mektec
Corp., Fujikura Ltd. (a Japanese company) and ADFlex Solutions, Inc. in the
datacommunications market. The Company's primary competition for its flexible
laminate products include Rogers Corporation and GTS Flexible Materials, Ltd.
(a U.K. company).
The Company's Novaclad, ViaGrid and high density substrates compete with
substrates produced through several alternative processes. These competing
products include single-sided, polyimide-based, etched copper laminate
produced using various methods of production by Minnesota Mining and
Manufacturing, Inc., International Business Machines Corporation and several
Japanese companies. The Company believes the production processes required
for each of these competing substrates, which include copper sputtering,
manual drilling and traditional etching techniques, are inherently more
expensive than the Company's method of production and result in products that
are not as easily utilized as the Company's emerging products in the design
and production of higher-density IC packages. The Company's emerging products
also compete with ceramic packaging products produced by companies such as
Coors Electronic and Kyocera of Japan, although the Company believes these
products are more expensive than the Company's substrate products, and with
resin-based substrates supplied by companies such as produced by Amkor
Electronics and Tessera, which the Company believes are limited in their
ability to accommodate increased circuit densities beyond current levels. The
Company expects these and other competitors will continue to refine their
processes or develop new products that will compete on the basis of cost and
performance with the Company's emerging products.
Backlog
The Company's backlog consists of those orders for which the Company has
delivery dates. Automotive customers typically provide for four to six weeks
of committed shipments while datacommunications customers generally provide
for up to eight weeks of committed shipments. The Company's backlog of
unshipped orders as of August 29, 1997, and August 30, 1996, was approximately
$22.1 million and $26.1 million, respectively. Generally, most orders in
backlog are shipped during the following three months. Because of the
Company's quick turn of orders to work-in-process, the timing of orders,
delivery intervals, customer and product mix and the possibility of customer
changes in delivery schedules, the Company's backlog at any particular date
may not be representative of actual sales for any succeeding period.
Proprietary Technology
The Company owns three united States patents for Novaclad and the
processes for making Novaclad and five additional applications are pending.
Applications are pending for foreign patents on Novaclad in Japan, Canada and
the European Patent Office. In addition, the Company has one United States
patent and one Canadian patent relating to its Z-Link adhesive product and has
been informed that two additional United States patents relating to Z-Link
have been allowed. Federal trademark registrations have been obtained on
Novacladr, ViaGridr, ViaThinr, Flexbaser, Novaflexr, Novaflex HDrand Z-Linkr.
Sheldahl also relies on internal security and secrecy measures and on
confidentiality agreements for protection of trade secrets and proprietary
know-how. There can be no assurance that Sheldahl's efforts to protect its
intellectual property will be effective to prevent misappropriation or that
others may not independently develop similar technology. The Company believes
that it possesses adequate proprietary rights to the technology involved in
its products and that its products, trademarks and other intellectual property
rights do not infringe upon the proprietary rights of third parties.
The Company was named as a defendant in a patent infringement matter
regarding its Novaclad products which was dismissed for lack of jurisdiction
in January 1994 and which has not been commenced elsewhere. There can be no
assurance that this plaintiff or others will not bring other actions again the
Company. The Company is also aware of a patent which may cover certain plated
through holes of double-sided circuits made of the Company's Novaclad
materials. Although no claims have been made against the company under this
patent, the owner of the patent may attempt to construe the patent broadly
enough to cover certain Novaclad products manufactured currently or in the
future by the Company. The Company believes that prior commercial art and
conventional technology, including certain patents of the Company, exist which
would allow the Company to prevail in the event any such claim is made under
this patent. Any action commenced by or against the Company could be time
consuming and expensive and could result in requiring the Company to enter
into a license agreement or cease manufacture of any products ultimately
determined to infringe such patent.
Environmental Regulations
The Company is subject to various federal, state and local environmental
laws relating to the Company's operations. The Company's manufacturing and
assembly facilities are registered with the U.S. Environmental Protection
Agency and are licensed, where required, by state and local authorities. The
Company has agreements with licensed hazardous waste transportation and
disposal companies for transportation and disposal of its hazardous wastes
generated at its facilities. The Longmont facility has been specifically
designed to reduce water usage in the manufacturing process and employs a
sophisticated waste treatment system intended to substantially reduce
discharge streams. Compliance with federal and state environmental laws and
regulations did not have a material effect on the Company's capital
expenditures, earnings or competitive position during fiscal 1997. Similarly,
fiscal 1998 capital expenditures to comply with such laws and regulations are
not expected to be material. The Company believes it is in material
compliance with federal and state environmental laws and regulations.
Employees
As of October 1997, the Company employed approximately 1,129 people in
the United States and Europe, including 939 in production, 87 in sales,
marketing, application engineering, and customer support, 42 in research and
development and 61 in administration. The production staff consists
principally of full-time workers employed in the Company's four currently
operating manufacturing and assembly plants. In Northfield, Minnesota,
production workers (approximately 401) are represented by the Union of
Needletrade, Industrial and Textile Employees, which has been the bargaining
agent since 1963. The Company has a one-year collective bargaining agreement
with the Union which expires in November 1998. The Company has never
experienced a work stoppage and believes that its employee relations are good.
Item 2. Properties
___________________
The Company owns two manufacturing facilities totaling 305,000 square
feet and a 20,000 square foot administration and sales support office in
Northfield, Minnesota. The Company also owns the 102,000 square foot facility
in Longmont, Colorado. The Company leases a 30,000 square foot assembly
facility in Aberdeen, South Dakota and owns a 30,000 square foot assembly
facility in Britton, South Dakota. The Company also leases a 3,000 square
foot technical sales and design office in Detroit, Michigan. Management
believes that all facilities currently in use are generally in good condition,
well-maintained and adequate for their current operations. The Company also
leases a production facility in Irvine, California which is has subleased.
Item 3. Legal Proceedings
__________________________
The Company's operations expose it to the risk of certain legal and
environmental claims in the normal course of business. The Company believes
that these matters will not have a material adverse effect on the Company's
results of operations or financial condition.
Item 4. Submission of Matters to a Vote of Securities Holders
____________________________
None
Item 4A. Executive Officers
____________________________
The executive officers of the Company are as follows:
Name Age Position
James S. Womack 69 Chairman of the Board and Director
James E. Donaghy 63 Chief Executive Officer and Director
Edward L. Lundstrom 47 President
John V. McManus 50 Vice President - Finance and Assistant
Secretary
Beverly M. Brumbaugh 62 Vice President - Human Resources and
Corporate Excellence
Keith L. Casson 58 Vice President - Micro Products
Gregory D. Closser 45 Vice President - Interconnect
Michele C. Edwards 33 Vice President - Supply Chain Operations
William R. Miller 50 Vice President - Information Systems
Roger D. Quam 51 Vice President - Materials
Sidney J. Roberts 51 Vice President - Research and Development
Gerald E. Magnuson 66 Secretary and Director
James S. Womack joined the Company in 1956 and served as President of
the Company from 1971 to 1988 and as Chief Executive Officer from 1971 to
1991. He became a director of the Company in 1968 and was elected Chairman of
the Board in 1988. Mr. Womack is a director of Gemini, Inc.; General
Securities, Inc.; and Zytec Corp.
James E. Donaghy joined the Company in 1988 as its President and Chief
Executive Officer. In September 1997, he handed off the title of President to
Ed Lundstrom. He remains a director of the Company since 1988. Prior to that
time, he held various executive-level positions at DuPont Company in
Wilmington, Delaware. Mr. Donaghy is a director of Hutchinson Technology,
Inc.; William Mitchell College of Law; and the Institute of Printed Circuitry.
Edward L. Lundstrom was named President in September of this year.
Since joining the Company in 1976 as Corporate Tax Manager, he has held
various positions with the Company; Executive Vice President, Vice President-
Sales and Marketing, Vice President-Treasurer, and Corporate Controller; Vice
President-Interconnect; Vice President and Treasurer and President of the
Sheldahl subsidiary, Symbolic Displays, Inc. (SDI); and Vice President,
General Manager of the Northfield Circuit Division. Mr. Lundstrom is a
director of Research, Inc.
John V. McManus joined the Company in 1972 and has served as Vice
President - Finance and Assistant Secretary since 1991. From 1987 to 1991, he
served as Corporate Controller.
Beverly M. Brumbaugh joined the Company in 1961 and has served in
several capacities since that time, including Director of Human Resources and
Industrial Relations. He has been Vice President - Human Resources and
Corporate Excellence since 1989. Mr. Brumbaugh is the former chairman of the
American Electronics Association Minnesota Council for Quality. He is
currently a member of the Manufactures Alliance where he serves on both the
Human Resources and Quality Councils.
Keith L. Casson joined the Company in 1968 and has served as Vice
President - Micro Products since September 1996. He has served as Vice
President - Research and Development since September 1993, with responsibility
since September 1995 for deployment of the emerging products in the Longmont
facility. Prior to September 1993, he held various positions with the
Company, including Automotive/Consumer Market Manager, Director of Business
Development and Director of Interconnect Systems Research and Development.
Mr. Casson is a member of the Institute of Printed Circuitry, the
International Micro Electronic and Packaging Society, and the Society of
Automotive Engineers.
Gregory D. Closser joined the Company in 1978 and has served as Vice
President - Flexible Interconnects since September 1995. From 1983 to 1989,
he held the position of Quality Director. From 1989 to 1993, he was the
General Manager of Interconnect Manufacturing. From 1993 to 1995 he was Vice
President - Interconnect Operations.
Michele Edwards was named to the position of Vice President, Supply
Chain Operations in September 1997. She joined Sheldahl in 1989 as a
Manufacturing Engineer in the Materials Business.
William R. Miller joined the Company in February 1996 as Corporate
Director of Information Technology. Prior to joining the Company, bill was
Vice President, Telecommunications Development for Norwest Technical Services
(Norwest Bank). He also held management posts in telecommunications at
Control Data Corporation and at the Chesapeake & Potomac Telephone Companies
of Maryland and Washington, DC. He was named to his current position, Vice
President of Information Technology, in January 1997.
Roger D. Quam joined the Company in 1969 and has served in several
capacities since that time, including Business Manager of Engineered Products
and Vice President of Engineered products. He has served as Vice President -
Composite Materials since September 1995, previously servicing as Vice
President - Materials Operations and Aviation Products beginning in 1988.
Sidney J. Roberts joined the Company in 1973 and has held various
positions with the Company, including Director of Manufacturing and
Engineering - Materials, Business Director - Novaclad, Manager of Research and
Development - Materials and Interfacial Engineering, and Technical Director -
Materials. He was named to his present position, Vice President of Research
and Development, in November 1996. Sid is active in the Institute for
Interconnecting and Packaging Circuits (IPC), the International Society for
Hybrid Microelectronics (ISHM), and the American Institute of Aeronautics and
Astronautics (AIAA), and is a member of the University of Minnesota's
Mechanical Engineering Advisory Council. He holds holds two patents and has a
patent pending for the production of pre-formed vias in multichip module
substrates.
Gerald E. Magnuson has served as Secretary of the Company since 1962 and
a director since 1975. Mr. Magnuson is Of Counsel to the law firm of
Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota, and a director of Premium
Wear, Inc.; Research, Inc.; and Washington Scientific Industries, Inc.
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
_____________________________________
The Common Stock is listed on the Nasdaq National Market under the
symbol "SHEL". The following table sets forth the high and low sales prices
of the Common Stock for the period indicated, as reported on the Nasdaq
National Market.
High Low
Fiscal Year Ended August 30, 1996:
First Quarter 21 1/4 14 3/4
Second Quarter 23 3/8 16 1/4
Third Quarter 31 1/8 18 1/8
Fourth Quarter 28 1/2 15 7/8
Fiscal Year Ended August 29, 1997:
First Quarter 19 1/4 14 7/8
Second Quarter 26 3/4 18
Third Quarter 24 3/4 18 1/2
Fourth Quarter 24 1/8 18
On November 6, 1997, the last reported sales price of the Common Stock
was $19. As of this date, there were approximately 2,000 record holders of
the Company's Common Stock and an estimated additional 3,000 shareholders who
held beneficial interests in shares of Common Stock registered in nominee
names of banks and brokerages houses.
Pursuant to its current credit agreement, the Company is restricted from
declaring or paying cash dividends without the consent of the Company's
lenders. The Company has never declared or paid any dividends on its Common
Stock. The Company currently intends to retain any earnings for use in its
operations and expansion of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future.
Item 6. Selected Financial Data
_________________________________
The following selected consolidated financial data should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto included elsewhere herein the "Management's Discussion and Analysis
of Financial condition and Results of Operations". The consolidated
statements of operations data presented below as of and for the fiscal years
ended September 1, 1995, August 30, 1996 and August 29, 1997, and the
consolidated balance sheet data as of August 30, 1996 and August 29, 1997,
have been derived from the Company's Consolidated Financial Statements
included elsewhere in this report, which have been audited by Arthur Andersen
LLP, independent public accountants. The statements of operations data set
forth below for the years ended August 27, 1993 and September 2, 1994 and the
balance sheet data set forth below at August 27, 1993, September 2, 1994, and
September 1, 1995, are derived from audited financial statements not included
herein.
Fiscal Years Ended
(in thousands, except per share data)
Aug. 27, Sep. 2, Sep. 1, Aug. 30, Aug. 29,
1993 1994 1995 1996 1997
______ ______ ______ ______ ______
Statements of Operations Data:
Net sales $82,102 $88,346 $95,216 $114,120 $105,266
Cost of sales 66,360 69,273 74,752 89,171 94,933
______ ______ ______ ______ ______
Gross profit 15,742 19,073 20,464 24,949 10,333
______ ______ ______ ______ ______
Expenses:
Sales and marketing 7,274 8,014 9,090 9,254 9,560
General and administrative 4,029 4,153 3,895 5,129 6,839
Research and development 1,929 2,366 2,270 2,755 4,705
Interest 1,023 946 875 539 1,298
______ ______ ______ ______ ______
Total expenses 14,255 15,479 16,130 17,677 22,402
______ ______ ______ ______ ______
Income (loss) from
continuing operations
before provision for
income taxes 1,487 3,594 4,334 7,272 (12,069)
Provision (benefit)
for income taxes 50 800 1,200 2,500 (4,100)
______ ______ ______ ______ ______
Income (loss) from
continuing operations $ 1,437 $ 2,794 $ 3,134 $ 4,772 $(7,969)
====== ====== ====== ====== ======
Net income (loss)
per common share $0.29 $0.52 $0.45 $0.55 $(0.89)
====== ====== ====== ====== ======
Weighted average common
shares and common
share equivalents
outstanding 4,950 5,418 6,925 8,686 8,967
====== ====== ====== ====== ======
Balance Sheet Data:
Working capital $11,314 $15,942 $16,332 $22,051 $23,216
Total assets 44,783 60,320 94,186 115,887 139,367
Long-term debt, excluding
current portion 11,433 7,963 33,864 21,858 40,869
Total shareholders'
investment 19,448 36,482 40,952 75,337 82,367
Supplemental Business Unit Data(1) -
Combined Materials and Interconnect:
Revenues $77,353 $84,793 $91,600 $113,955 $104,908
Gross profit 14,692 17,931 20,231 28,847 21,376
Pretax operating income 805 2,743 4,874 13,291 3,400
Income from core businesses 778 2,133 3,521 8,721 2,242
Micro Products:
Revenues $ - $ - $ - $ 165 $ 358
Gross profit(2) - 719 (214) (3,898) (11,043)
Pretax operating
income (loss) - 719 (731) (6,019) (15,469)
______ ______ ______ ______ ______
Income (loss)
from Micro Products - 559 (526) (3,949) (10,211)
====== ====== ====== ====== ======
____________________
(1) does not include aviation components
(2) net of ARPA funding
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
_________________________________________________________________
Profile -
Sheldahl creates and distributes thin, flexible laminates and their
derivatives to worldwide markets. The Company's laminates are of two types:
adhesive-based tapes and materials, and its patented adhesiveless material,
Novaclad. From these materials, Sheldahl fabricates high-value derivative
products: single- and double-sided flexible interconnects and assemblies, and
substrates for silicon chip carriers.
Background -
In 1989, the Company developed a business strategy focused on achieving
leadership in supplying the automotive electronics market with flexible
interconnects based on the Company's core materials technologies. Management
believed the automotive market provided growth opportunities due to increasing
electronic content of automobiles as manufacturers focused on enhancing
vehicle performance while reducing weight and overall vehicle costs. The
Company targets specific automotive customers that it has identified as
leaders in the drive to increase the electronic content of automobiles. While
1997 marked the first time in ten years that the Company's sales to automotive
customers declined, this strategy has been successful. Since 1989, automotive
market sales increased from $13.9 million to $71.0 million and represent 67%
of the Company's revenue.
Concurrent with the Company's strategic shift to focus on the automotive
electronics market in 1989, Sheldahl began to focus its research and
development expenditures on new opportunities. As a result, in 1992 the
Company patented its Novaclad high-performance adhesiveless flexible laminate.
The features of Novaclad allow circuitry designers to increase circuit density
for integrated circuit (IC) packaging and other interconnect solutions. The
Company also developed ViaGrid, a higher-value form of Novaclad with
predrilled small holes (vias) that allow printed circuit manufacturers to
produce flexible interconnects that are up to six times more dense than
current technology. The Company uses ViaGrid to manufacture chip-carrier
substrates (ViaThin) primarily for IC packages.
In fiscal 1994, a consortium was organized through the Advanced Research
Projects Agency (ARPA) of the U.S. Department of Commerce to develop a high-
density, low-cost multichip module utilizing Novaclad as the substrate
material. The ARPA consortium, comprised of a vertically integrated team of
non-competing companies, has achieved various milestones, including validation
of each of the essential processes for production of the Company's chip-
carrier substrates as the base material for low-cost multichip modules.
In June 1994, with the assistance of funding from ARPA, the Company
established a prototype production facility, and late in calendar year 1994,
began construction of its new manufacturing facility in Longmont, Colorado,
for the production of Novaclad-based products in commercial quantities. The
Company has experienced a variety of delays, including delays in equipment
delivery, product specification, full qualification, and in-place assembly
capacity. Volume production is expected to begin in fiscal 1998. During the
delay, the Company has been working with leading customers, including
Motorola, Texas Instruments, and ASAT, Inc., in design, manufacture, and
qualification of both chip-scale and ball-grid array packages.
The adverse financial impact of the production delay at the Micro
Products facility has been and will continue to be significant. In 1997, the
Micro Products operation resulted in a pretax loss of $15.5 million as
compared with a $6.0 million loss in 1996. These losses are expected to
continue until efficient volume production and related sales revenue are
achieved.
The Company expects to continue to make substantial investments in
production capabilities to support its strategy of increasing penetration of
the automotive electronics market and commercializing its Novaclad and chip-
carrier substrate production for the datacommunications market. During fiscal
years 1995, 1996, and 1997, the Company made capital expenditures of
approximately $29.7 million to increase the production capabilities of its
current operations. Through fiscal 1997, the Company made capital
expenditures exceeding $58.1 million in connection with the Company's Longmont
manufacturing facility.
On September 5, 1995, the Company sold its aviation lighting product
line to The B.F. Goodrich Company for approximately $2.6 million, enabling the
Company to focus on its emerging products, flexible interconnects, and
flexible laminates operations. The aviation lighting product line generated
sales of $3.6 million in fiscal year 1995 and was insignificant to the overall
operations of the Company.
During October 1997, the Company signed a memorandum of understanding
with longtime technical partner, Sumitomo Bakelite Co., Ltd., Tokyo, Japan.
This memorandum documents the intention of both parties to enter into a
cooperative development to produce and sell chip-scale integrated circuit
packages based on the Company's Novaclad substrates. If the market for chip-
scale packages develops as anticipated, the Company expects to sell
significant quantities of ViaThin material to Sumitomo in Japan. Eventually
after market demand increases, the Company and Sumitomo intend to form a joint
venture that will manufacture ViaThin material in Asia for sale to integrated
circuit manufacturers and assemblers.
Results of Operations -
Fiscal 1997 reflects two major situations - inventory adjustments and
strikes in the automotive sector throughout the year - as well as a longer-
than-anticipated qualification cycle in the Company's Micro Products
operation. Each event was responsible for about half of the decline in
earnings in 1997 from those of 1996.
The following table shows the percentage of net sales represented by
certain line items from the Company's consolidated statements of operations
for the periods indicated:
Fiscal Years Ended
August 29, August 30, September 1,
1997 1996 1995
Net sales 100.0% 100.0% 100.0%
Cost of sales 90.2% 78.1% 78.5%
______ ______ ______
Gross profit 9.8% 21.9% 21.5%
______ ______ ______
Expenses:
Sales and marketing 9.1% 8.1% 9.5%
General and administrative 6.5% 4.5% 4.1%
Research and development 4.5% 2.4% 2.4%
Interest 1.2% .5% .9%
______ ______ ______
Total expenses 21.3% 15.5% 16.9%
______ ______ ______
Income (loss) before income
taxes (11.5%) 6.4% 4.6%
Provision (benefit) for
income taxes (3.9%) 2.2% 1.3%
______ ______ ______
Net income (loss) (7.6%) 4.2% 3.3%
====== ====== ======
The table below shows, for the periods indicated, the Company's sales to
various markets (in thousands):
Fiscal Years Ended
Aug. 29, 1997 Aug. 30, 1996 Sep. 1, 1995
Amount % Amount % Amount %
______ ____ ______ ____ ______ _____
Automotive $71,026 67.5% $78,984 69.2% $51,919 54.5%
Datacom 12,529 11.9% 11,193 9.8% 16,860 17.7%
Aerospace/Defense 9,201 8.7% 10,585 9.3% 12,150 12.8%
Industrial 8,046 7.6% 8,843 7.7% 8,221 8.6%
Consumer 4,464 4.3% 4,515 4.0% 6,066 6.4%
______ ____ ______ ____ ______ ____
Net sales $105,266 100.0% $114,120 100.0% $95,216 100.0%
====== ==== ====== ==== ====== ====
The Company's net sales decreased $8.9 million, or 7.8%, in fiscal 1997.
The decrease is reflected in automotive market sales, which were adversely
affected by inventory adjustments related to last fall's automotive industry
collective bargaining negotiations. The impact to the Company was realized by
above normal shipments in Quarter IV of fiscal 1996 and a sharp reduction in
shipments in late Quarter I and early Quarter II as inventory levels were
adjusted. Additionally, there have been numerous automotive industry work
stoppages that have impacted the Company's sales of automotive laminate and
flex circuitry products. The growth in the automotive market sales for fiscal
1996 and 1995 was due to the Company's efforts to penetrate the automotive
market through the use of creatively designed flexible interconnects and
laminate materials. The Company enjoys a favorable position in targeted
segments of the automotive market, including modular assembly, engineering
control, and instrumentation, and has increased sales revenue in that market
at an average annual compounded rate of over 22% since 1989. Automotive
market sales represented 67.5% of Company sales in 1997 compared to 69.2% in
1996.
Datacommunications market sales increased $1.3 million, or 12%, from
$11.2 million in fiscal 1996 to $12.5 million in fiscal 1997. This was due to
increased sales of laminate materials and flexible circuit products. In
recent years, the Company focused its attention on the automotive market as
the Company's adhesive based laminates were more suited to automotive
applications. However, interconnect systems made with high-density Novaflex,
originally sold for engine control units in the automotive market meet the
requirements for computer and telecommunication applications. Therefore, the
Company targets significant growth in datacom market from not only Micro
Products as the Longmont, Colorado, facility begins volume production, but
also Interconnect as high-density Novaflex is sold to meet the demands of this
market.
The Company's sales to the aerospace/defense market decreased $1.4
million, or 13%, from $10.6 million in fiscal 1996 to $9.2 million in fiscal
1997. Lower sales of insulation blankets for the NASA space station program
as well as reduced sales to commercial satellites account for this decline.
Increases in 1995 and 1996 were due to an increased demand for multilayer
insulation blankets for satellites. Annual fluctuations of demand in this
market are natural, since production cycles often extend more than one year.
The aerospace/defense sales reflect the use of the Company's core materials
technology in vacuum deposition and material handling.
Industrial and consumer market sales for 1997 declined slightly, from
$13.4 million in fiscal 1996 to $12.5 million in fiscal 1997. 1995 sales were
$14.3 million. Although Sheldahl has not specifically focused on these
markets, the Company's laminate materials and flexible interconnect products
have developed small, well-established market niches for specific
applications.
The table below shows, for period indicated, the Company's sales by
business units (in thousands):
Fiscal Years Ended
Aug. 29, 1997 Aug. 30, 1996 Sep. 1, 1995
Amount % Amount % Amount %
______ ____ ______ ____ ______ ____
Interconnects $77,004 73.2% $86,145 75.6% $64,398 67.6%
Materials 45,760 43.5% 47,185 41.3% 38,628 40.6%
Micro Products 358 .3% 165 .1% - -%
Aviation components - -% - -% 3,616 3.8%
Intercompany
eliminations (17,856) (17.0%) (19,375) (17.0%) (11,426) (12.0%)
______ ______ ______ ______ ______ ______
Net sales $105,266 100.0% $114,120 100.0% $95,216 100.0%
====== ====== ====== ====== ====== ======
Due to the decline in automotive market sales as previously discussed,
Interconnect sales declined $9.1 million, or 10.6%, from $86.1 million in
fiscal 1996 to $77.0 million in fiscal 1997. The Company's sales growth in
fiscal 1996 reflects a $21.7 million, or 34%, increase in Interconnect sales.
Materials sales declined $1.4 million, or 3%, from $47.1 million in fiscal
1996 to $45.7 million in 1997, reflecting a decline in shipments to the
Interconnect business. Micro Products sales totaled $358,000 in fiscal 1997
and $165,000 in fiscal 1996, reflecting sales of prequalification product.
Cost of Sales/Gross Profit. During fiscal 1997, the Company's gross
profit declined $14.6 million, or 59%, from $24.9 million in fiscal 1996 to
$10.3 million in fiscal 1997. The Company's Micro Products operation
accounted for $7.1 million of this decline and the Company's other businesses
accounted for $7.5 million. Increased factory expenses at the Longmont,
Colorado, facility accounted for $7.1 million of the decrease in gross profit.
Depreciation increased $2.8 million and salaries and other operating expenses
increased $4.3 million as the Micro Products business continued to improve its
production processes and make ready for full production. Gross margin for the
core businesses declined $7.5 million. Lower sales, unfavorable product mix,
and higher factory expenses accounted for the change. Depreciation and other
equipment-related costs account for the increase in expenses.
Funding received by the Company from the ARPA consortium is reflected as
a reduction to cost of sales and totaled $75,000, $1.8 million, and $3.8
million in fiscal years 1997, 1996, and 1995, respectively. The awarding of
these funds was based on the completion of various milestones, including
process validation for each essential process in the production of chip-
carrier substrates for IC packages using the Company's patented Novaclad
material. The Company is not expected to incur any future costs that will be
reimbursed by ARPA, and the Company had completed its obligations under the
consortium agreement.
Sales and Marketing Expenses. Sales and marketing expenses increased
$306,000, or 3%, in fiscal 1997 and $164,000, or 2%, in fiscal 1996. As a
percentage of net sales, sales and marketing expenses were 9% in fiscal 1997,
8% in fiscal 1996, and 10% in fiscal 1995. Staffing increases for the
interconnect business, as well as professional fees and travel costs
associated with the Company's joint ventures in China, account for the 1997
increase in expenses.
General and Administrative Expenses. Gross general and administrative
expenses increased $1.4 million, or 27%, to $6.8 million in fiscal 1997 and
$836,000, or 18%, to $5.4 million in fiscal 1996. ARPA credits applied to
general and administrative expenses were $265,000, and $663,000 in fiscal
years 1996 and 1995. In 1997, no ARPA credits were offset against general and
administrative expenses. This resulted in net general and administrative
expenses of $6.8 million, $5.1 million, and $3.9 million in fiscal years 1997,
1996, and 1995, respectively.
The table below shows, for the periods indicated, the Company's general
and administrative expenses (in thousands):
Fiscal Years Ended
August 29, August 30, September 1,
1997 1996 1995
____ ____ ____
Gross expense $6,839 $5,394 $4,558
ARPA funding - (265) (663)
______ ______ ______
Net expense $6,839 $5,129 $3,895
====== ====== ======
Percent of sales 6.5% 4.5% 4.1%
In 1997, an increase in general and administrative expenses was due to
unfavorable currency fluctuations, increased staffing, and related
expenditures working to enhance the Company's information technology. Fiscal
1996 expenses reflect increases in professional services, miscellaneous
employee benefits, and incentive compensation expense.
Increases in the Company's general and administrative expenses are
expected to continue for two more years. The Company has committed
significant resources to completely renewing its information technology
systems, converting from mainframe technologies to open-architecture
client/server technologies. This strategic change is being driven by
anticipated gains from information technology improvements needed to manage
the significant growth that lies just ahead. The Company is aware of computer
programming problems associated with the "Year 2000" and has selected to
install "Year 2000" compliant systems. Therefore the Company will not incur
any significant additional costs related to the "Year 2000" problem
associated with programming codes existing in obsolete computer systems.
Research and Development Expenses. Gross research and development
expenses increased $1.2 million, or 30%, in fiscal 1997 to $5.2 million. This
was on top of a $1.1 million, or 39%, increase in fiscal 1996. ARPA credits
applied to research and development expenses were $509,000, $1.3 million, and
$611,000 in fiscal years 1997, 1996, and 1995. This resulted in net research
and development expenses of $4.7 million, $2.8 million, and $2.3 million in
fiscal years 1997, 1996, and 1995, respectively.
The table below shows, for the periods indicated, the Company's research
and development expenses (in thousands):
Fiscal Years Ended
August 29, August 30, September 1,
1997 1996 1995
____ ____ ____
Gross expense $5,214 $4,010 $2,881
ARPA funding (509) (1,255) (611)
______ ______ ______
Net expense $4,705 $2,755 $2,270
====== ====== ======
Percent of sales 4.5% 2.4% 2.4%
The increase in gross research and development expenses in these periods
was due to additional staffing, material testing, travel, and consulting and
professional costs supporting the start-up of the Company's Micro Products
business and related ARPA consortium milestones. No additional ARPA funding
is expected because consortium objectives have been met. Also, the Company
does expect its research and development expenses to level off in fiscal 1998
since resources supporting Micro Products are now in place.
Interest Expense. Gross interest expense increased to $3.0 million in
fiscal 1997 from $2.4 million in fiscal 1996, and $2.1 million in fiscal 1995,
as the Company increased borrowings to support capital expenditures.
The following shows a breakdown of interest expense for the fiscal years
indicated (in thousands):
Fiscal Years Ended
August 29, August 30, September 1,
1997 1996 1995
____ ____ ____
Gross interest $3,033 $2,388 $2,090
Capitalized interest (1,735) (1,605) (1,215)
Investment income - (244) -
______ ______ ______
Net expense $1,298 $ 539 $ 875
====== ====== ======
Percent of sales 1.2% .5% .9%
Capitalized interest increased to $1.7 million in fiscal 1997 from $1.6
million in fiscal 1996 and $1.2 million in fiscal 1995. On November 21, 1995,
the Company completed a secondary public offering of common stock from which
it received net proceeds of $29.0 million. The net proceeds were used to
reduce outstanding indebtedness, with the remainder invested in high-grade,
short-term interest-bearing debt securities resulting in investment income of
$244,000 in fiscal 1996.
Income Taxes. The Company's effective tax rate was 34%, 34%, and 28%
for fiscal years 1997, 1996, and 1995, respectively. The increase in
effective tax rate resulted from the elimination of the research and
development tax credits from July 1995 through June 1996 and lower foreign
sales corporation (FSC) tax benefits. In 1995, these rates differed from the
federal statutory rate primarily because of state income taxes, benefits from
research and development credits, and FSC benefits.
Liquidity and Capital Resources -
Net working capital increased $892,000 in fiscal 1997, resulting in a
current ratio of 2.8. This compares with a current ratio of 2.6 in fiscal
1996. Net capital expenditures in fiscal 1997, 1996, and 1995 were $30.7
million, $24.9 million, and $32.2 million, respectively, of which $58 million
was for building and equipping the new Longmont manufacturing facility. The
remaining capital expenditures were used to expand manufacturing capacity in
the Company's laminate materials and flexible interconnect operations as well
as to improve corporate information systems. Over the past three fiscal
years, the Company has financed its capital expenditures through equity
proceeds of $32 million from public offerings of common stock and stock option
exercises, $14.3 million from preferred stock, debt financing of $5.5 million,
and cash flow from operations of $14.9 million. The Company expects capital
expenditures in fiscal 1998 to be approximately $30 million. The Company
believes that its cash flow from operations, funds available under its current
revolving credit agreement, and additional preferred stock proceeds will be
sufficient to meet its operating and investment needs through fiscal 1998.
During fiscal 1997, the Company had a $35.0 million revolving credit
agreement, secured by the Company's inventories, accounts receivable, real
estate, and equipment. Commitment fees are charged at 0.25% of the unused
portion of the line of credit. Interest accrues at rates based on the prime
or LIBOR rates. During fiscal 1997, the weighted average interest rate under
revolving credit agreements was 8.4%. As of August 29, 1997, borrowings were
$32.5 million at a weighted average interest rate of 8.42% and $2.5 million
was unused and available. The revolving credit agreement expires December 31,
1998.
During fiscal 1997, the Company obtained a separate revolving note for
up to $12.0 million from the Company's lenders. Except for expiring on
December 31, 1997, all terms and conditions of this "extended" facility are
the same as those of the primary revolving facility. No borrowings were
outstanding under this extended facility as of August 29, 1997, and $12.0
million was available. During fiscal 1997, maximum borrowings under both
notes were $44.0 million.
Preferred Stock -
On August 28, 1997, the Company entered into an agreement with five
qualified investors for the issuance of $30 million of 5% cumulative
convertible preferred stock. As of August 29, 1997, the Company had issued
15,000 shares of Series B cumulative convertible preferred stock with a stated
value of $1,000 per share for a total of $15 million. The Company has an
option to issue 15,000 additional shares of cumulative convertible preferred
stock (Series C) for an additional $15 million. Both series of preferred
stock are convertible to common stock and carry a 5% cumulative dividend,
payable upon conversion and payable in common stock or cash, at the Company's
option. The preferred stock conversion price is the lower of 110% of the
five-day average closing price of the Company's common stock preceding the
issuance of the preferred shares ($25.34), or the average of the lowest
consecutive five-day closing price on the common stock in the 30-day period
immediately prior to conversion. The maximum conversion price on the Series C
preferred stock will be computed at the closing of the second tranche.
Holders of the preferred stock may convert to common stock of the Company at
any time, subject to certain limitations. Under certain circumstances, the
Company may require the holders to convert to common stock. Under certain
circumstances, the Company may elect to redeem the preferred stock. Along
with the Series B preferred stock, the investors received warrants to purchase
67,812 additional common shares at $27.65 per share. These warrants expire on
August 27, 2000.
Financial Derivatives -
The Company has foreign currency risks from certain international sales.
Major contracts have "risk-sharing" arrangements with the customer, allowing
repricing in the event of long-term and/or significant foreign currency
fluctuations.
To deal with short-term fluctuations, the Company will use a variety of
hedging techniques, including financial derivatives, to prudently reduce, but
not eliminate, its exposure to foreign currency fluctuations. The Company
expects its foreign currency exposure to increase during fiscal 1998 and may
increase its hedging activities accordingly.
New Accounting Pronouncements -
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128). SFAS 128 changes the standards for computing and presenting
earnings per share (EPS) and supersedes Accounting Principles Board Opinion
No. 15, "Earnings per Share." SFAS 128 simplifies the standards for
computing earnings per share and replaces the presentation of primary EPS with
a presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim periods;
earlier application is not permitted. This statement requires restatement of
all prior-period EPS data presented. The Company will adopt SFAS 128
beginning in the second quarter of fiscal 1998.
Following is the pro forma effect of adoption of SFAS 128 on the
Company's earnings per share:
Fiscal Years Ended
August 29, August 30, September 1,
1997 1996 1995
____ ____ ____
Primary EPS $(.89) $ .55 $ .45
Effect of SFAS 128 - .02 .02
______ ______ ______
Basic EPS $(.89) $ .57 $ .47
====== ====== ======
Fully diluted EPS $(.89) $ .55 $ .45
Effect of SFAS 128 - - -
______ ______ ______
Diluted EPS $(.89) $ .55 $ .45
====== ====== ======
During 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which defines
a fair value based method of accounting for employee stock options and similar
equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it
also allows an entity to continue to measure compensation cost for those plans
using the method of accounting prescribed by Accounting Principles Board
Opinion No. 25 (APB 25). Entities electing to remain with the accounting in
APB 25 must make pro forma disclosures of net income and, if presented,
earnings per share, as if the fair value based method of accounting defined in
SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation
plans under APB 25 and the pro forma disclosures are contained in Footnote 5
to the financial statements.
Cautionary Statement -
Statements included in this management's discussion and analysis of
financial condition and results of operations, in the letter to shareholders,
elsewhere in this Form 10-K, in the Company's annual report, and in future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases, and oral statements made with the approval of an
authorized executive officer that are not historical, or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Certain risks and
uncertainties could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The following important
factors, among others, in some cases have affected and in the future could
affect the Company's actual financial performance and cause it to differ
materially from that expressed in any forward-looking statement: (i) the
Company's ability to begin volume production at its Micro Products facility is
dependent upon final qualification by the Company's customers and, in some
cases, their customers, of ViaThin as well as the ability of its production
equipment to produce sufficient quantities of product at acceptable quality
levels; (ii) delays in achieving full volume production at the Micro Products
facility will have a material adverse impact on the Company's results of
operations; (iii) a general downturn in the automotive market, the Company's
principal market, could have a material adverse effect on the demand for the
electronic components supplied by the Company to its customers; (iv) the
company's ability to continue to make significant capital expenditures for
equipment, expansion of operations, and research and development is dependent
upon funds generated from operations and the availability of capital from
other sources; and (v) the extremely competitive conditions that currently
exist in the automotive and datacommunications markets are expected to
continue, including development of new technologies, the introduction of new
products, and the reduction of prices. The foregoing list should not be
construed as exhaustive and the company disclaims any obligation subsequently
to revise any forward-looking statements to reflect the events or
circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
________________________________________________
No applicable.
Item 8. Financial Statements and Supplementary Data
_________________________________________________
The Consolidated Financial Statements are listed under Item 14 of this
report. Unaudited quarterly financial data for fiscal 1996 and 1997 is set
forth in Note 11 to the Consolidated Financial Statements included with this
report.
Item 9. Changes in and Disagreements with Accountants
_________________________________________________
None
<PAGE>
PART III
Pursuant to General Instruction G(3) Registrant omits Part III, Items 10
(Directors and Executive Officers of Registrant), 11 (Executive Compensation),
12 (Security Ownership of Certain Beneficial Owners and Management) and 13
(Certain Relationships and Related Transactions), except that portion of Item
10 relating to Executive Officers of the Registrant, which is set forth in
Part I of this report as a definitive proxy statement will be filed with the
Commission pursuant to Regulation 14(a) within 120 days after August 29, 1997,
and such information required by such items is incorporated herein by
reference from the proxy statement.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
____________________________________________________
(a) Documents filed as a part of the report:
Form 10-K
Page Reference
1. Consolidated Financial Statements
Index to Consolidated Financial Statements F-1
Report of Independent Public Accountans F-2
Consolidated Statements of Operations for the Fiscal
Years Ended August 29, 1997, August 30, 1996, and
September 1, 1995 F-3
Consolidated Balance Sheets as of August 29, 1997,
and August 30, 1996 F-4
Consolidated Statements of Changes in Shareholders'
Investment for the Fiscal Years August 29, 1997,
August 30, 1996, and September 1, 1995 F-5
Consolidated Statements of Cash Flows for the Fiscal
Years Ended August 30, 1996, September 1, 1995 and
September 2, 1994 F-6
Notes to Consolidated Financial Statements F-7
2. Consolidated Financial Statement Schedules
Form 10-K
Description Page Reference
Schedule II - Valuation and Qualifying Accounts S-1
(b) Reports on Form 8-K
Form 8-K filed September 10, 1997, reporting Item 5 (sale of
preferred stock).
(c) Exhibits and Exhibit Index
Exhibit No. Description
___________ ______________
3.1 Amended and Restated Articles of Incorporation, incorporated
by reference from exhibit 3.1 of the Registrant's Form 10-Q
for the quarter ended December 2, 1994.
3.2 Bylaws, as amended, incorporated by reference from Exhibit 3.2
of the Registrant's Registration Statement on form S-2 (File
No. 33-79266).
4.1 Stock Purchase Agreement Relating to Purchase of Sheldahl
Stock dated March 12, 1987 between the Registrant and Sumitomo
Bakelite Co., Ltd., as amended through January 9, 1991,
incorporated by reference from Exhibit C(4) of Registrant's
Form 8-K filed January 22, 1991.
4.2 Amendment No. 4 to Stock Purchase Agreement Relating to
Purchase of Sheldahl Stock dated January 3, 1994, incorporated
by reference from Exhibit 4.2 of the Registrant's Registration
Statement on Form S-2 (File No. 33-79266).
4.3 Rights Agreement dated as of June 16, 1996 between the Company
and Norwest Bank Minnesota, N.A., is incorporated by reference
to Exhibit 1 to the Company's Form 8-A dated June 20, 1996.
4.4 Convertible Preferred Stock Purchase Agreement dated August
27, 1997, among the Registrant and Southbrook International
investments, Ltd., HBK Cayman LP, HBK Offshore Fund Ltd., and
Brown Simpson Strategic Growth Fund LP, incorporated by
reference from Exhibit 4.1 of the Registrant's
Form 8-K filed September 10, 1997.
4.5 Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock dated August 27, 1997,
incorporated by reference from Exhibit 4.2 of the Registrant's
Form 8-K filed September 10, 1997.
4.6 Form of Warrant dated August 25, 1997, incorporated by
reference from Exhibit 4.3 of the Registrant's Form 8-K filed
September 10, 1997.
4.7 Registration Rights Agreement dated August 27, 1997, among the
Registrant and Southbrook International investments, Ltd., HBK
Cayman LP, HBK Offshore Fund Ltd., and Brown Simpson Strategic
Growth Fund LP, incorporated by reference from Exhibit 4.4 of
the Registrant's Form 8-K filed September 10, 1997.
10.1 1987 Stock Option Plan, incorporated by reference from Exhibit
10.1 of the Registrant's Form 10-K for the fiscal year ended
August 27, 1993.
10.2 1994 Stock Option Plan, as amended, incorporated by reference
from Exhibit 4.1 of the Registrant's Form S-8 dated September
9, 1997 (File No. 333-36267).
10.3 Consulting Agreement dated August 17, 1988 between James S.
Womack and Sheldahl, Inc. incorporated by reference from
Exhibit 10.2 of the Registrant's Form 10-K for the fiscal year
ended August 27, 1993.
10.4 Form of Employment (change of control) Agreement for Executive
Officers of the Registrant, incorporated by reference from
Exhibit 10.4 of the Registrant's Form 10-K for the fiscal year
ended August 30, 1996.
10.5 Employment (change of control) Agreement between James E.
Donaghy and the Registrant dated March 1, 1988, as amended
August 21, 1996, incorporated by reference from Exhibit 10.5
of the Registrant's Form 10-K for the fiscal year ended August
30, 1996.
10.6 Sales Agreement Relating to Japanese Sales dated March 12,
1987 between the Registrant and Sumitomo Bakelite Co., Ltd.,
incorporated by reference from Exhibit C(2) of the
registrant's Form 8-K filed March 25, 1987.
10.7 Sales Agreement Relating to United States Sales dated March
12, 1987 between the Registrant and Sumitomo Bakelite Co.,
Ltd., incorporated by reference from Exhibit C(3) of the
Registrant's Form 8-K filed March 25, 1987.
10.8 Amendment Number One to Sales Agreement Relating to Japanese
Sales dated January 9, 1991 between the Registrant and
Sumitomo Bakelite Co., Ltd., incorporated by reference from
Exhibit C(2) of the Registrant's Form 8-K filed January 22,
1991.
10.9 Amendment Number One to Sales Agreement Relating to United
States Sales dated January 9, 1991 between Sheldahl, Inc. and
Sumitomo Bakelite Co., Ltd., incorporated by reference from
Exhibit C(3) of the Registrant's Form 8-K filed January 22,
1991.
10.10 Amended and Restated Cross License Agreement dated November 1,
1993 between the Registrant and Sumitomo Bakelite Co., Ltd.
incorporated by reference from Exhibit 10.5 of the
Registrant's Form 10-K for the fiscal year ended September 2,
1994.
10.11 Lease dated June 15, 1989 between Aberdeen Development
Corporation and the Registrant, incorporated by reference from
Exhibit 10.13 of the Registrant's Form 10-K for the fiscal
year ended August 27, 1993.
10.13 Amended and Restated Credit and Security Agreement dated
November 24, 1993 among the Registrant, Norwest Bank
Minnesota, N.A., and Harris Trust and Savings Bank,
incorporated by reference from Exhibit 4.1 of the Registrant's
Form 10-K for the fiscal year ended August 27, 1993.
10.14 Second Amendment to Amended and Restated Credit and Security
Agreement dated May 12, 1994 among the Registrant, Norwest
Bank Minnesota, N.A., Harris Trust and Savings Bank,
incorporated by reference from Exhibit 10.1 of the
Registrant's Form 10-Q for the second quarter ended March 3,
1995.
10.15 Third Amendment to Amended and Restated Credit and Security
Agreement dated January 24, 1995 among the Registrant, Norwest
Bank Minnesota, N.A., Harris Trust and Savings Bank, and NBD
Bank, N.A., incorporated by reference from Exhibit 10.2 of the
Registrant's Form 10-Q for the quarter ended March 3, 1995.
10.16 Loan Authorization dated October 1, 1994 between South Dakota
Board of Economic Development Registrant, incorporated by
reference from Exhibit 10.1 of the Registrant's Form 10-Q for
the quarter ended February 25, 1994.
10.17 Agreement Relating to Employment dated October 1, 1994 between
the South Dakota Board of Economic Development and the
Registrant, incorporated by reference from Exhibit 10.2 of the
Registrant's Form 10-Q for the quarter ended February 25,
1994.
10.18 Promissory Note dated October 4, 1993 due to the South Dakota
Board of Economic Development, incorporated by reference from
Exhibit 10.3 of the Registrant's Form 10-Q for the quarter
ended February 25, 1994.
10.19 Note Purchase Agreement dated as of August 31, 1995 between
the Registrant and Northern Life Insurance Company,
incorporated by reference to Exhibit 10.19 to Registrant's
Form 10-K for the fiscal year ended September 1, 1995.
10.20 Agreement dated January 10, 1994 between the MCM-L Consortium
and the Advanced Projects Research Agency, incorporated by
reference from Exhibit 10.4 of the Registrant's Form 10-Q for
the quarter ended February 25, 1994.
10.21 Articles of Collaboration dated November 30, 1993 for the MCM-
L Consortium, incorporated by reference from Exhibit 10.5 of
the Registrant's Form 10-Q for the quarter ended February 25,
1994.
10.22 Joint Marketing Agreement dated June 14, 1995 between the
Registrant and Mentor Graphics Corporation incorporated by
reference from Exhibit 10.22 of the Registrant's Form 10-K for
the fiscal year ended September 1, 1995.
10.23 Agreement relating to Joint Venture dated August 1, 1995
between Registrant, Jiangxi Changjiang Chemical Plant, Hong
Kong Wah Hing (China) Development Co., Ltd. and Jiujiang Flex
Co., Ltd. incorporated by reference from Exhibit 10.23 of the
Registrant's Form 10-K for the fiscal year ended September 1,
1995.
10.24 Agreement relating to payments dated August 1, 1995 between
Registrant and Jiangxi Changjiang Chemical Plant, Hong Kong
Wah Hing (China) Development Co., Ltd. and Jiujiang Flex Co.,
Ltd. incorporated by reference from Exhibit 10.24 of the
Registrant's Form 10-K for the fiscal year ended September 1,
1995.
10.25 Manufacturing Agreement dated August 1, 1995 between
Registrant and Jiujiang Flex Co., Ltd. incorporated by
reference from Exhibit 10.25 of the Registrant's Form 10-K for
the fiscal year ended September 1, 1995.
10.26 Marketing and License Agreement dated August 1, 1995 between
Registrant and Jiujiang Flex Co., Ltd. incorporated by
reference from Exhibit 10.26 of the Registrant's Form 10-K for
the fiscal year ended September 1, 1995.
10.27 Technology Development Agreement dated August 15, 1995 between
Low Cost Flip Chip Consortium and the Advanced Projects
Research Agency incorporated by reference from Exhibit 10.27
of the Registrant's Form 10-K for the fiscal year ended
September 1, 1995.
10.28 Articles of Collaboration dated July 10, 1995 for the Low Cost
Flip Chip Consortium incorporated by reference from Exhibit
10.28 of the Registrant's Form 10-K for the fiscal year ended
September 1, 1995.
10.29 Technology Development Agreement dated March 23, 1995 between
Plastic Packaging Consortium and the Advanced Projects
Research Agency incorporated by reference from Exhibit 10.29
of the Registrant's Form 10-K for the fiscal year ended
September 1, 1995.
10.30 Articles of Collaboration dated March 17, 1995 for the Plastic
Packaging Consortium incorporated by reference from Exhibit
10.30 of the Registrant's Form 10-K for the fiscal year ended
September 1, 1995.
10.31 License Agreement dated June 20, 1994 between Sidrabe and
Registrant incorporated by reference from Exhibit 10.31 of the
Registrant's Form 10-K for the fiscal year ended September 1,
1995.
10.32 Amendment One to License Agreement dated September 14, 1994
between Sidrabe and Registrant incorporated by reference from
Exhibit 10.32 of the Registrant's Form 10-K for the fiscal
year ended September 1, 1995.
10.33 Fourth Amendment to Amended and Restated Credit and Security
Agreement dated January 29, 1996, among the Registrant,
Norwest Bank Minnesota, N.A., Harris Trust and Savings Bank,
and NBD Bank, N.A., incorporated by reference from Exhibit
10.2 of the Registrant's Form 10-Q for the quarter ended March
3, 1995.
10.34 Fifth Amendment to Amended and Restated Credit and Security
Agreement dated March 1, 1996, among the Registrant, Norwest
Bank Minnesota, N.A., Harris Trust and Savings Bank, and NBD
Bank, N.A., incorporated by reference from Exhibit 10.2 of the
Registrant's Form 10-Q for the quarter ended March 3, 1995.
10.35 Sixth Amendment to Amended and Restated Credit and Security
Agreement dated November 1, 1996, among the Registrant,
Norwest Bank Minnesota, N.A., Harris Trust and Savings Bank,
and NBD Bank, N.A., incorporated by reference from Exhibit
10.2 of the Registrant's Form 10-Q for the quarter ended March
3, 1995.
10.36 Seventh Amendment to Amended and Restated Credit and Security
Agreement dated April 4, 1997, among the Registrant, Norwest
Bank Minnesota, N.A., Harris Trust and Savings Bank, and NBD
Bank, N.A., incorporated by reference from Exhibit 10.2 of the
Registrant's Form 10-Q for the quarter ended March 3, 1995.
11 Statement Regarding Computation of Per Share Earnings.
22 Subsidiary of Registrant.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule
<PAGE>
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.
Dated: November 10, 1997 SHELDAHL, INC.
By:/s/James E. Donaghy
James E. Donaghy
Chief Executive Officer
By:/s/Edward L. Lundstrom
Edward L. Lundstrom
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant on November 5, 1996 and in the capacities indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints James
E. Donaghy and John V. McManus as such person's true and lawful attorneys-in-
fact and agents, each acting alone, with full power of substitution and
resubmission, for such person and in such person's name, place and stead, in
any and all capacities, to sign any of all amendments to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as such person might or could do in person, hereby ratifying and
confirming all said attorneys-in-fact an agents, each acting alone, or such
person's substitute or substitutes may lawfully do or cause to be done by
virtue thereof.
By /s/James S. Womack Chairman of the Board and Director
James S. Womack
By /s/James E. Donaghy Chief Executive Officer and
James E. Donaghy Director
(principal executive officer)
By /s/Edward L. Lundstrom President
Edward L. Lundstrom
By /s/John V. McManus Vice President - Finance
John V. McManus (principal financial and
accounting officer)
By /s/John G. Kassakian Director
John G. Kassakian
By /s/Gerald E. Magnuson Director
Gerald E. Magnuson
By /s/William B. Miller Director
William B. Miller
By /s/Kenneth J. Roering Director
Kenneth J. Roering
By /s/Richard S. Wilcox Director
Richard S. Wilcox
By /s/Beekman Winthrop Director
Beekman Winthrop
<PAGE>
Index to Consolidated Financial Statements
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of August 29, 1997, and
August 30, 1996 F-3
Consolidated Statements of Operations for the Fiscal Years
Ended August 29, 1997, August 30, 1996, and September 1, 1995 F-4
Consolidated Statements of Changes in Shareholders' Investment
for the Fiscal Years Ended August 29, 1997, August 30, 1996,
and September 1, 1995 F-5
Consolidated Statements of Cash Flows for the Fiscal Years
Ended August 29, 1997, August 30, 1996, and September 1, 1995 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Sheldahl, Inc.:
We have audited the accompanying consolidated balance sheets of
Sheldahl, Inc. (a Minnesota corporation) and Subsidiary as of August 29, 1997,
and August 30, 1996, and the related consolidated statements of operations,
changes in shareholders' investment and cash flows for each of the three
fiscal years in the period ended August 29, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Sheldahl, Inc. and
Subsidiary as of August 29, 1997, and August 30, 1996, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended August 29, 1997, in conformity with generally accepted
accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in
the index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic 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 financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
November 19, 1997
F-2
<PAGE>
Sheldahl, Inc. and Subsidiary
Consolidated Balance Sheets
(in thousands, except share and per share data)
Assets
August 29, August 30,
1997 1996
Current assets:
Cash and cash equivalents $ 5,567 $ 904
Accounts receivable, net of allowances
of $225 in 1997 and $244 in 1996 15,880 21,091
Inventories 13,078 11,525
Deferred taxes 765 1,660
Prepaid expenses and other current assets 406 390
______ ______
Total current assets 35,696 35,570
______ ______
Plant and equipment:
Land and buildings 26,467 24,718
Machinery and equipment 112,071 64,754
Construction in progress 19,303 37,650
Accumulated depreciation (57,036) (47,630)
______ ______
Net plant and equipment 100,805 79,492
______ ______
Deferred taxes 2,187 -
______ ______
Other assets 679 825
______ ______
$139,367 $115,887
====== ======
Liabilities and Shareholders' Investment
Current liabilities:
Current maturities of long-term debt $ 818 $ 466
Accounts payable 7,309 9,824
Accrued salaries 1,606 1,390
Other accrued liabilities 3,020 1,839
______ ______
Total current liabilities 12,753 13,519
______ ______
Long-term debt 40,869 21,858
______ ______
Other non-current liabilities 2,813 2,269
______ ______
Deferred taxes - 2,904
______ ______
Commitments and contingencies
(Notes 4, 5, 6 and 8) - -
Shareholders' investment:
Preferred stock, $1 par value, 500,000
shares authorized; Series B convertible
preferred, 15,000 shares issued and
outstanding(stated value $15 million) 15 -
Common stock, $.25 par value, 20,000,000
shares authorized; 9,031,371 and
8,912,695 shares outstanding 2,258 2,228
Additional paid-in capital 66,923 51,404
Retained earnings 13,736 21,705
______ ______
Total shareholders' investment 82,932 75,337
______ ______
$139,367 $115,887
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets
F-3
<PAGE>
Sheldahl, Inc. and Subsidiary
Consolidated Statements of Operations
(in thousands, except per share data)
For The Fiscal Years Ended
August 29, August 30, September 1,
1997 1996 1995
Net sales $105,266 $114,120 $95,216
Cost of sales 94,933 89,171 74,752
______ ______ ______
Gross profit 10,333 24,949 20,464
______ ______ ______
Expenses:
Sales and marketing 9,560 9,254 9,090
General and administrative 6,839 5,129 3,895
Research and development 4,705 2,755 2,270
Interest 1,298 539 875
______ ______ ______
Total expenses 22,402 17,677 16,130
______ ______ ______
Income (loss) before income taxes (12,069) 7,272 4,334
Provision (benefit) for income
taxes (4,100) 2,500 1,200
______ ______ ______
Net income (loss) $(7,969) $ 4,772 $ 3,134
======= ======= =======
Net income (loss) per common
share $ (.89) $ .55 $ .45
======= ======= =======
Weighted average common shares and
common share equivalents
outstanding 8,967 8,686 6,925
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
Sheldahl, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Investment
For The Fiscal Years Ended
(in thousands, except share data) August 29, August 30, September 1,
1997 1996 1995
Series B Convertible Preferred Stock:
Balance at beginning of period $ - $ - $ -
Proceeds from stock issuance 15 - -
______ ______ ______
Balance at end of period 15 - -
Common Stock:
Balance at beginning of period 2,228 1,708 1,648
Exercise of stock options 30 17 60
Proceeds from stock issuance - 503 -
______ ______ ______
Balance at end of period 2,258 2,228 1,708
Additional Paid-In Capital:
Balance at beginning of period 51,404 22,311 21,035
Exercise of stock options 1,234 599 1,276
Net proceeds from stock issuance 14,285 28,494 -
______ ______ ______
Balance at end of period 66,923 51,404 22,311
Retained Earnings:
Balance at beginning of period 21,705 16,933 13,799
Net income (loss) (7,969) 4,772 3,134
______ ______ ______
Balance at end of period 13,736 21,705 16,933
______ ______ ______
Total Shareholders' Investment $82,932 $75,337 $40,952
====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
Sheldahl, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(in thousands)
For The Fiscal Years Ended
August 29, August 30, September 1,
1997 1996 1995
Operating activities:
Net income (loss) $ (7,969) $ 4,772 $ 3,134
Adjustments to reconcile net
income to Net cash provided
by operating activities:
Depreciation and amortization 10,650 6,783 4,845
Deferred income taxes (4,196) 1,846 1,008
Net change in other operating
activities:
Accounts receivable 5,211 (3,454) (3,174)
Inventories (1,553) 984 (1,941)
Prepaid expenses and other
current assets (16) 342 (254)
Other assets 146 734 (635)
Accounts payable and
accrued liabilities (1,118) (708) (481)
Other non-current
liabilities 544 (414) (188)
______ ______ ______
Net cash provided by operating
activities 1,699 10,885 2,314
______ ______ ______
Investing activities:
Capital expenditures, net (30,729) (24,920) (32,182)
Net cash flow used in
discontinued operation - - (489)
______ ______ ______
Net cash used in investing
activities (30,729) (24,920) (32,671)
______ ______ ______
Financing activities:
Net borrowings (repayments)
under revolving credit
facility 17,275 (15,290) 10,533
Proceeds from long-term debt 1,452 - 23,466
Repayments of long-term debt (598) (429) (5,941)
Net proceeds from common stock - 28,997 -
Net proceeds from convertible
preferred stock 14,300 - -
Net proceeds from stock option
exercises 1,264 616 1,336
______ ______ ______
Net cash provided by
financing activities 33,693 13,894 29,394
______ ______ ______
Net increase (decrease) in cash
and cash equivalents 4,663 (141) (963)
______ ______ ______
Cash and cash equivalents at
beginning of period 904 1,045 2,008
______ ______ ______
Cash and cash equivalents at
end of period $5,567 $ 904 $1,045
====== ====== ======
Supplemental cash flow information:
Interest paid $3,078 $2,221 $2,204
====== ====== ======
Income taxes paid (refunded) $ (68) $ 131 $ 114
====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
Sheldahl, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(1) Business Description and Fiscal Year:
Sheldahl, Inc. (the Company) creates thin, flexible laminates and
markets these products worldwide. The Company's laminates are of two types,
adhesive-based tapes and materials, and its patented adhesiveless material,
Novaclad. From these materials, Sheldahl also fabricates high-value
derivative products: single- and double-sided interconnect and semiconductor
substrates.
(2) Summary of Significant Accounting Policies:
Basis of Presentation -
The consolidated financial statements have been prepared in accordance
with Generally Accepted Accounting Principles and include the accounts of the
Company and its subsidiary. All significant intercompany accounts have been
eliminated. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Ultimate results could differ from those estimates.
Significant Customers -
The Company's two largest customer accounted for sales of $12,052,000
and $11,143,000 in 1997, $15,549,000 and $13,944,000 in 1996 and $15,053,000
and $6,167,000 in 1995. No other customers accounted for more than 10% of net
sales.
Export Sales -
The Company had export sales of $15,040,000 in 1997, $11,968,000 in
1996, and $11,100,000 in 1995.
Revenue Recognition -
The Company recognizes revenue principally as products are shipped. In
addition, the Company grants credit to customers and generally does not
require collateral or any other security to support amounts due.
Inventories -
Inventories are stated at the lower of cost or market, with cost
determined on the first-in, first-out (FIFO) method. Cost include the cost of
materials, direct labor, and applicable manufacturing overhead. During the
fourth quarter of fiscal 1996, the Company changed its method of accounting
for inventories from the last-in, first-out (LIFO) method to the FIFO method.
Management believes that the change in accounting for inventories is
preferable because it will more accurately measure operating results by
reflecting the effect of productivity improvements in cost of sales. The
impact of the change was not material to the Company.
The components of inventories are as follows (in thousands):
August 29, August 30,
1997 1996
____ ____
Raw material $ 3,069 $ 2,599
Work-in-process 6,484 5,572
Finished goods 3,525 3,354
______ ______
Total $13,078 $11,525
====== ======
Plant and Equipment -
Plant and equipment are stated at cost and include expenditures that
increase the useful lives of existing plant and equipment. The cost of major
plant and equipment additions includes interest capitalized during the
acquisition period. Interest capitalized totaled $1,735,000 in 1997,
$1,605,000 in 1996, and $1,215,000 in 1995. Maintenance, repairs and minor
renewals are charged to operations as incurred. When plant and equipment are
disposed of, the related cost and accumulated depreciation are removed from
the respective accounts and any gain or loss is reflected in the results of
operations.
For financial reporting purposes, plant and equipment are depreciated
principally on a straight-line basis over the estimated useful lives of 20 to
40 years for buildings and 3 to 15 years for machinery and equipment. For
income tax reporting purposes, straight-line and accelerated depreciation
methods are used.
Income Taxes -
Deferred income taxes are provided for temporary differences between the
financial reporting basis and tax basis of the Company's assets and
liabilities at currently enacted tax rates.
Earnings Per Share -
Earnings per share is computed based on the weighted average number of
common and equivalent shares outstanding during each period presented, as
applicable.
New Accounting Pronouncement -
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128). SFAS 128 changes the standards for computing and presenting
earnings per share (EPS) and supersedes Accounting Principles Board Opinion
No. 15, "Earnings per Share." SFAS 128 simplifies the standards for
computing earnings per share and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods; earlier
application is not permitted. SFAS 128 requires restatement of all prior-
period EPS data presented. The Company will adopt SFAS 128 beginning in the
second quarter of fiscal 1998.
Following is the pro forma effect of adoption of SFAS 128 on the
Company's earnings per share:
Fiscal Years Ended
August 29, August 30, September 1,
1997 1996 1995
____ ____ ____
Primary EPS as reported $ (.89) $ .55 $ .45
Effect of SFAS 128 - .02 .02
______ ______ ______
Basic EPS $ (.89) $ .57 $ .47
====== ====== ======
Fully diluted EPS $ (.89) $ .55 $ .45
Effect of SFAS 128 - - -
______ ______ ______
Diluted EPS $ (.89) $ .55 $ .45
====== ====== ======
Reclassifications -
Reclassifications of certain prior period balances have been made to
conform with the current method of presentation.
(3) Financing:
Long-term debt consisted of the
following (in thousands):
August 29, August 30,
1997 1996
____ ____
Revolving credit agreement $32,519 $15,243
Note payable to insurance company, secured
by real estate mortgage. Interest at 8.3%
with monthly payments of $52, Including
principal and interest remaining balance due
September 1, 2002 5,383 5,555
Capitalized lease obligation payable to an
investment company secured by computer
equipment and software. Interest at 10.17%
with monthly payments of $40, including principal
and interest through July 2002 1,870 -
Capitalized lease obligation payable to a bank,
secured by computer, communications equipment
and related software. interest at 7.8% with
monthly payments of $14, including principal
and interest through October 2003 690 -
Note payable to Economic Development Agency,
secured by $825 standby letter of credit,
interest at 2.0% with monthly payments of
$9, including principal and interest,
remaining balance due October 1998 624 728
Other 601 798
______ ______
41,687 22,324
Less-current maturities (818) (466)
______ _______
$40,869 $21,858
====== ======
The Company has a $35.0 million revolving credit agreement, secured by
the Company's inventories, accounts receivable, real estate, and equipment.
Commitment fees are charged at 0.25% of the unused portion of the line of
credit. Interest rates are based on the prime or LIBOR rates. During fiscal
1997, the weighted average interest rate under this agreement was 8.4%. As of
August 29, 1997, borrowings were $32.5 million at a weighted average interest
rate of 8.42% and $2.5 million was unused and available. The revolving credit
agreement expires December 31, 1998.
During fiscal 1997, the Company obtained a separate revolving note for
up to $12.0 million from the Company's lenders. Except for expiring on
December 31, 1997, all terms and conditions of this "extended" facility are
the same as those of the primary revolving facility. No borrowings were
outstanding under this extended facility as of August 29, 1997, and $12.0
million was available. During fiscal 1997, the maximum borrowings under both
notes were $44.0 million.
The Company's debt agreements contain various restrictive covenants
which, among other things, require the Company to maintain defined
consolidated net worth levels, financial ratios and minimum coverage ratios,
and call for the pledging of certain assets. These agreements also restrict
additional indebtedness, capital expenditures and cash dividends. The Company
was in compliance with these covenants for the fiscal year ended August 29,
1997.
Future maturities of debt are as follows (in thousands):
Fiscal 1998 $ 818
Fiscal 1999 33,761
Fiscal 2000 737
Fiscal 2001 807
Fiscal 2002 853
Thereafter 4,711
_______
$41,687
=======
(4) Preferred Stock:
On August 28, 1997, the Company entered into an agreement with five
qualified investors for the issuance of $30 million of 5% cumulative
convertible preferred stock. As of August 29, 1997, the Company had issued
15,000 shares of Series B cumulative convertible preferred stock with a stated
value of $1,000 per share for a total of $15 million. The Company has an
option to issue 15,000 additional shares of cumulative convertible preferred
stock (Series C) for an additional $15 million. Both series of preferred
stock are convertible to common stock and carry a 5% cumulative dividend,
payable upon conversion and payable in common stock or cash, at the Company's
option. The preferred stock conversion price is the lower of 110% of the
five-day average closing price of the Company's common stock preceding the
issuance of the preferred shares ($25.34), or the average of the lowest
consecutive five-day closing price on the common stock in the 30-day period
immediately prior to conversion. The maximum conversion price on the Series C
preferred stock will be computed at the closing of the second tranche.
Holders of the preferred stock may convert to common stock of the Company at
any time, subject to certain limitations. Under certain circumstances, the
Company may require the holders to convert to common stock. Under certain
circumstances, the Company may elect to redeem the preferred stock. Along
with the Series B preferred stock, the investors received warrants to purchase
67,812 additional common shares at $27.65 per share. These warrants expires
on August 27, 2000.
(5) Stock Based Compensation:
The shareholders of the Company have approved stock option plans (the
Plans) for officers, other full-time key salaried employees, and non-employee
directors of the Company to reward outstanding performance and enable the
Company to attract and retain key personnel. Under the Plans, options are
granted at an exercise price equal to the fair market value of the Company's
common stock at the date of grant and are generally exercisable for five or
ten years. The Plans also provide for automatic grants of 2,000 non-qualified
stock options to each non-employee director of the Company on the date that
each such director is elected or re-elected to the Board of Directors, and
expire, to the extent not already exercised, thirty days after termination of
service as a Director. As of August 29, 1997, the Plans authorize the future
granting of options to purchase up to 176,000 shares of common stock.
Stock option transactions during 1995, 1996 and 1997 are summarized as
follows:
Shares Price per Share
______ _______________
Outstanding at September 2, 1994 755,977 $4.875 to $12.000
Granted 84,777 $13.000 to $16.500
Exercised (271,046) $5.000 to $12.000
________
Outstanding at September 1, 1995 569,708 $4.875 to $16.500
Granted 475,090 $16.500 to $22.125
Exercised (68,888) $4.875 to $16.500
Lapsed (5,000) $18.375
________
Outstanding at August 30, 1996 970,910 $5.000 to $22.125
Granted 424,049 $15.375 to $22.000
Exercised (119,103) $5.00 to $22.125
Lapsed (87,076) $15.375 to $22.125
________
Outstanding at August 29, 1997 1,188,780 $5.000 to $22.125
========
Options exercisable were 669,562 as of August 29, 1997, 569,660 as of
August 30, 1996, and 391,931 as of September 1, 1995.
The options outstanding as of August 29, 1997, expire five or ten years
after the grant date as follows:
Number of Options
Fiscal Years That Expire
____________ ______________
1998 8,729
1999 22,000
2000 27,412
2001 49,718
2002 100,000
2003 56,524
2004 107,488
2005 58,474
2006 345,000
2007 413,435
During 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) which defines
a fair value based method of accounting for employee stock options and similar
equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it
also allows an entity to continue to measure compensation cost for those plans
using the method of accounting prescribed by Accounting Principles Board
Opinion No. 25 (APB 25). Entities electing to remain with the accounting in
APB 25 must make pro forma disclosures of net income and, if presented,
earnings per share, as if the fair value based method of accounting defined in
SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation
plans under APB 25; however, the Company has computed, for pro forma
disclosure purposes, the value of all stock options granted during 1997 and
1996 using the Black-Scholes option pricing model as prescribed by SFAS 123,
using the following weighted average assumptions:
Fiscal Years Ended
August 29, August 30,
1997 1996
____ ____
Risk-free interest rate 6.21 - 6.63% 5.50 - 6.61%
Expected lives 7 years 4.5 - 7 years
Expected volatility 48.75 - 65.44% 45.45 - 51.46%
Using the Black-Scholes methodology, the total value of stock options
granted during 1997 and 1996 was $4,958,000 and $5,608,000, respectively,
which would be amortized on a pro forma basis over the vesting period of the
options (typically ranging from six months to four years). The weighted
average fair value of options granted during 1997 and 1996 was $11.96 per
share and $11.93 per share, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income (loss) and earnings (loss)
per share would have been as follows:
Fiscal Years Ended
August 29, 1997 August 30, 1996
(in thousands,
except per share data) As Reported Pro Forma As Reported Pro Forma
___________ _________ ___________ _________
Net income (loss) $ (7,969) $ (9,887) $ 4,772 $ 4,224
Earnings (loss) per share $ (.89) $ (1.10) $ .55 $ .49
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to
September 1, 1995, and additional awards are anticipated to be granted in
future years.
(6) Commitments and Contingencies:
Lease Commitments -
The Company has non-cancelable operating lease commitments for certain
manufacturing facilities and equipment which expire at various dates through
2002. Minimum rent commitments under operating leases are $2,497,000 in 1998
and 1999, $1,351,000 in 2000, $369,000 in 2001, and $13,000 in 2002. In
accordance with the terms of the lease agreements, the Company is required to
pay maintenance and property taxes related to the leased property. Operating
lease expense was $2,721,000 in 1997, $2,353,000 in 1996, and $2,394,000 in
1995.
During 1997, the Company entered into various capital lease arrangements
for the purchase of certain communication and computer equipment and related
software totaling $2.7 million. Amortization expense relating to these
capital leases was $140,000 in 1997. The following is a schedule by year of
future gross minimum capital lease payments (in thousands):
Fiscal 1998 $ 653
Fiscal 1999 653
Fiscal 2000 653
Fiscal 2001 653
Fiscal 2002 653
Thereafter 24
$3,289
Less amount representing interest (729)
______
Present value of net minimum
capital lease payments $2,560
======
Employment Agreements -
The Company has employment and consulting agreements with various
officers which are renewable in successive one-year terms after August 21,
1999, requiring minimum severance benefits following a change in control of
the Company, as defined.
Litigation -
The nature of the Company's operations expose it to the risk of certain
legal and environmental claims in the normal course of business. Although the
outcome of these matters cannot be determined, management believes that final
disposition of these matters will not have a material adverse effect on the
Company's operating results or financial condition.
(7) Income Taxes:
The Company recognizes deferred income tax assets and liabilities based
on differences between financial and income tax reporting bases of assets and
liabilities based on enacted tax rates and laws.
The provision (benefit) for income taxes consisted of the following (in
thousands):
August 29, August 30, September 1,
1997 1996 1995
____ ____ ____
Currently payable $ 96 $ 654 $ 192
Deferred (4,196) 1,846 1,008
_______ _______ _______
Provision (benefit)
for income taxes $(4,100) $2,500 $1,200
======= ======= =======
A reconciliation from the provision (benefit) for income taxes using the
statutory federal income tax rate to the provision (benefit) for income taxes
is as follows (in thousands):
August 29, August 30, September 1,
1997 1996 1995
____ ____ ____
Federal statutory rates $(4,100) $ 2,472 $1,474
Tax benefit of foreign
sales corporation - (182) (222)
Research and development
tax credits - - (200)
State income taxes, net
of federal benefit 96 90 37
Other (96) 120 111
_______ _______ _______
$(4,100) $ 2,500 $1,200
======= ======= =======
As of August 29, 1997, the Company had net operating loss carryforwards
of $23.2 million and income tax credit carry forwards of approximately $1.0
million that expire through 2012.
Temporary differences and carryforwards which result in net deferred
income tax assets as of August 29, 1997, and August 30, 1996, were as follows
(in thousands):
August 29, August 20,
1997 1996
____ ____
Deferred tax assets:
Net operating loss carryforwards $6,819 $ 102
Income tax credit carryforwards 977 1,309
Postretirement benefits 644 499
Deferred compensation 630 411
Medical reserves 247 170
Inventories 178 436
Vacation reserve 155 126
Bad debt reserve 83 100
Other 130 302
_______ _______
Deferred tax assets 9,863 3,455
_______ _______
Deferred tax liabilities:
Depreciation (6,706) (4,494)
_______ _______
Valuation allowance (205) (205)
_______ _______
Net deferred taxes $2,952 $(1,244)
======= =======
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. The Company has
established a valuation allowance for a portion of the net operating loss and
income tax credit carryforwards and other items due to the uncertainty related
to their ultimate realization.
(8) Pension and Postretirement Benefits:
Defined Benefit Plan -
The Company sponsors a defined benefit pension plan covering
substantially all hourly employees of the Company's Northfield, Minnesota,
facility (the Northfield Plan). Pension costs are funded in compliance with
the Employee Retirement Income Security Act of 1974. Net periodic pension cost
is as follows (in thousands):
August 29, August 30, September 1,
1997 1996 1995
____ ____ ____
Service cost $ 177 $ 184 $ 164
Interest cost on projected
benefit obligation 350 337 286
Return on plan assets (341) (282) (232)
Net amortization and deferral 35 61 45
______ ______ ______
Net periodic pension cost $ 221 $ 300 $ 263
====== ====== ======
Funding information with respect to the Northfield Plan is as follows (in
thousands):
August 29, August 30,
1997 1996
____ ____
Actuarial present value of -
Vested benefit obligation $4,764 $4,217
====== ======
Accumulated benefit obligation $4,847 $4,282
====== ======
Projected benefit obligation $4,847 $4,451
====== ======
Plan assets at fair value $5,317 $4,291
====== ======
Projected benefit obligation in excess
of (less than) plan assets $ (470) $ 160
Unrecognized transition amount (50) (60)
Unrecognized prior service cost (659) (715)
Unrecognized net gain 1,400 915
______ ______
Net pension liability $ 221 $ 300
====== ======
The accumulated benefit obligation is the actuarial present value of all
vested and non-vested benefits for employee service before July 1, 1997. The
projected benefit obligation is the accumulated benefit obligation increased
to include expected increases in the plan's flat dollar benefit. The projected
benefit obligation is determined using an assumed discount rate of 8% in both
1997 and 1996. The assumed long-term rate of return for assets is 8% in both
1997 and 1996. Plan assets consist principally of cash equivalents, bonds, and
common stock.
Employee Savings Plan -
The Company has an employee savings plan covering all employees who meet
certain age and service requirements and who are not participants in the
Northfield Plan.
The Company's contribution to the employee savings plan equals 2% of the
participant's salary. The Company also matches participants' voluntary
contributions to the plan. This matching contribution is subject to Company
earnings on a quarterly basis and is limited to 4.0% of each participant's
salary. The Company's expense related to the employee savings plan was
$475,000 in 1997, $1,014,000 in 1996, and $900,000 in 1995.
Postretirement Benefits -
The Company recognizes expense for the expected cost of providing post
retirement benefits other than pensions to its employees. The expected cost
of providing these benefits is charged to expense during the years that the
employees renders service.
The Company's plan, which is unfunded, provides medical and life
insurance benefits for select employees. These employees, who retire after age
40 with 20 years or more service, have access to the same medical plan as
active employees.
Net periodic postretirement benefit cost is as follows (in thousands):
August 29, August 30,
1997 1996
____ ____
Service cost $ 35 $ 33
Interest cost on accumulated
benefit obligation 71 66
_____ _____
Net periodic postretirement
benefit cost $ 106 $ 99
===== =====
Funding information related to the Company's plan is as follows (in
thousands):
August 29, August 30,
1997 1996
____ ____
Accumulated benefit obligation $ 1,756 $ 1,347
Plan assets at fair value - -
______ ______
Projected benefit obligation in
excess of plan assets 1,756 1,347
Unrecognized net gain - -
______ ______
Accrued postretirement benefits $ 1,756 $ 1,347
====== ======
An 11.5% annual rate of increase in the health care cost trend rate was
assumed with rates decreasing gradually to 6.0% by 2007, and remaining at that
level thereafter. The health care cost trend rate assumption has an effect on
the amounts reported. Increasing the assumed health care cost trend rate
assumption by one percentage point would increase accumulated postretirement
benefit obligation by 3.1% and the net periodic postretirement benefit cost by
2.1% each year. The discount rate used in determining the accumulated
postretirement benefit obligation was 8% for both 1997 and 1996.
(9) Consortium for the Development of Multichip Modules:
On January 10, 1994, the Company entered into a consortium agreement
sponsored by the Advanced Projects Research Agency (ARPA), a United States
Government Agency. The purpose of the consortium is to accelerate the
development and commercialization of the Company's chip-carrier substrates for
multi-chip modules (MCMs). As a consortium member, the Company expects to
receive approximately $12.2 million in funding through August of 1997 from
ARPA to further test, design, and develop the manufacturing processes for the
Company's Novaclad-based substrates, which are used in constructing MCMs. The
Company incurred $584,000 in fiscal 1997, $3,235,000 in 1996, and $5,030,000
in 1995 in costs related to this project. As of August 29, 1997,
substantially all of these costs have been reimbursed by the consortium and
the Company will no longer incur costs that will be reimbursed by ARPA.
(10) Joint Venture:
In August 1995, the Company entered into various agreements to form a
joint venture in Juijiang Jiangxi China with Jiangxi Changjiang Chemical Plant
and Hong Kong Wah Hing (China) Development Co., Ltd. Under the agreements,
the Company has licensed certain technology to the joint venture and is
providing certain technical support. In return, the Company received a 20%
ownership interest in the joint venture, $900,000 in cash over a three-year
period, subject to completion of certain milestones; and royalties, based upon
a percentage of products sold by the joint venture, as defined. The joint
venture is being established to manufacture flexible adhesive-based copperclad
laminates (Flexbase) and associated cover film tapes in China. Under the
terms of the agreements, the joint venture will market these products in
China, Taiwan, Hong Kong and Macau. The Company has received $765,000 in cash
from the joint venture since its inception.
(11) Quarterly Results of Operations (Unaudited):
The consolidated results of operations for the four quarters of 1997 and
1996 are as follows (in thousands, except per share data):
Fiscal 1997
First Second Third Fourth
_____ _____ _____ _____
Net sales $24,301 $26,379 $27,593 $26,993
Cost of sales and expenses 26,934 28,685 30,184 31,532
Loss before income taxes (2,633) (2,306) (2,591) (4,539)
Benefit for income taxes (900) (780) (880) (1,540)
_______ _______ _______ _______
Net loss $(1,733) $(1,526) $(1,711) $(2,999)
_______ _______ _______ _______
Net loss per share $ (0.19) $ (0.17) $ (0.19) $ (0.33)
======= ======= ======= =======
Weighted average common shares
outstanding 8,913 8,956 8,989 9,011
======= ======= ======= =======
Fiscal 1996
First Second Third Fourth
_____ _____ _____ _____
Net sales $26,097 $28,954 $29,690 $29,379
Cost of sales and expenses 24,874 26,630 27,589 27,755
Income before income taxes 1,223 2,324 2,101 1,624
Provision for income taxes 365 700 630 805
_______ _______ _______ _______
Net income $ 858 $ 1,624 $ 1,471 $ 819
======= ======= ======= =======
Net income per share $ .12 $ .18 $ .16 $ .09
======= ======= ======= =======
Weighted average common shares
outstanding 7,257 9,119 9,199 9,184
======= ======= ======= =======
<PAGE>
Sheldahl, Inc. and Subsidiary
Schedule II: Valuation and Qualifying Accounts
Allowance for Doubtful Accounts:
The transactions in the allowance for doubtful accounts for the fiscal years
ending September 1, 1995, August 30, 1996, and August 29, 1997 were as
follows:
1995 1996 1997
____ ____ ____
Balance, beginning of year $200,000 $267,412 $243,472
Recoveries (accounts charged
off), net 67,412 (23,940) (18,768)
_______ _______ _______
Balance, end of year $267,412 $243,472 $224,704
======= ======= =======
S-1
<PAGE>
Exhibit 11
Sheldahl, Inc. and Subsidiary
Statement Regarding Computation of Earnings Per Share
(in thousands, except per share data)
For the Fiscal Years Ended
September 1, August 30, August 29,
1995 1996 1997
____ ____ ____
Primary Earnings Per Share:
Weighted average number of issued
shares outstanding 6,692 8,414 8,967
Effect of exercise of stock
options under the treasury
stock method 233 272 -
______ ______ ______
Weighted average shares
outstanding used to compute
primary earnings per share 6,925 8,686 8,967
====== ====== ======
Net income (loss) $3,134 $4,772 $(7,969)
====== ====== ======
New income (loss) per share $ 0.45 $ 0.55 $ (0.89)
====== ====== ======
Fully Diluted Earnings Per Share:
Weighted average number of issued
shares outstanding 6,692 8,414 8,967
Effect of exercise of stock
options under the treasury
stock method 279 223 -
______ ______ ______
Weighted average shares
outstanding used to compute
primary earnings per share 6,971 8,637 8,967
====== ====== ======
Net income (loss) $3,134 $4,772 $(7,969)
====== ====== ======
New income (loss) per share $ 0.45 $ 0.55 $ (0.89)
====== ====== ======
<PAGE>
Exhibit 22
SUBSIDIARY OF REGISTRANT
Sheldahl International Sales, Inc.
a corporation organized under the laws
of the Virgin Islands
(Wholly-owned subsidiary of Sheldahl, Inc.)
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K into the Company's previously filed
Registration Statement Nos. 33-58549, 333-36153 and 333-36267.
Arthur Andersen LLP
Minneapolis, Minnesota
November 19, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the August
29, 1997, financial statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> AUG-29-1997 AUG-30-1996
<PERIOD-END> AUG-29-1997 AUG-30-1996
<CASH> 5567 904
<SECURITIES> 0 0
<RECEIVABLES> 15880 21091
<ALLOWANCES> 0 0
<INVENTORY> 13078 11525
<CURRENT-ASSETS> 35696 35570
<PP&E> 157841 127122
<DEPRECIATION> 57036 47630
<TOTAL-ASSETS> 139367 115887
<CURRENT-LIABILITIES> 12753 13519
<BONDS> 0 0
0 0
15 0
<COMMON> 2258 2228
<OTHER-SE> 66923 51404
<TOTAL-LIABILITY-AND-EQUITY> 139367 115887
<SALES> 105266 114120
<TOTAL-REVENUES> 105266 114120
<CGS> 94933 89171
<TOTAL-COSTS> 21104 17138
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1298 539
<INCOME-PRETAX> 12069 7272
<INCOME-TAX> 4100 2500
<INCOME-CONTINUING> 7969 4772
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 7969 4772
<EPS-PRIMARY> .89 .55
<EPS-DILUTED> .89 .55
</TABLE>
