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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 28, 1998
[ ] 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
$67,470,936 on November 25, 1998, when the last sales price of the Registrant's
Common Stock, as reported in the Nasdaq National Market System, was $7.00.
As of November 25, 1998, the Company had outstanding 10,890,729 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE COMPANY'S DEFINITIVE PROXY STATEMENT FOR ITS ANNUAL MEETING TO
BE HELD JANUARY 13, 1999, ARE INCORPORATED BY REFERENCE IN PART III OF THIS FORM
10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
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-Registered Trademark-. From these materials, Sheldahl fabricates
high-value derivative products: single- and double-sided flexible
interconnects and assemblies under the trade names FLEXBASE-Registered
Trademark-, NOVAFLEX-Registered Trademark- HD and NOVAFLEX-Registered
Trademark- VHD and substrates for silicon chip carriers under the trade names
VIAARRAY-Registered Trademark- and VIATHIN-Registered Trademark-.
The Company's high performance products - VIAARRAY, VIATHIN and
NOVACLAD VHD - are based on the Company's patented NOVACLAD laminate. These
products provide substantial benefits compared to traditional flexible circuits,
including the capability for very fine circuit traces and very small holes, or
vias, thus utilizing both sides of the laminate for circuit routing reducing
size and cost per function. The Company has designed its NOVACLAD-based products
to be used as a base material for high performance printed circuits and IC
substrates. 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 substrate manufactured by the Company or
other circuitry manufacturers using the Company's NOVACLAD or VIAARRAY 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. NOVACLAD VHD utilizes many of the
product features of VIATHIN in applications other than IC packages.
Over the past four fiscal years, the Company has made significant
investments in its Longmont, Colorado facility. To date, operations from this
facility have resulted in significant losses, which are expected to continue
through fiscal 1999. The Company has financed its activities at Longmont
primarily through the issuance of common stock, preferred stock and debt
financing.
The capital expenditure plan for fiscal 1999 has been significantly
reduced from historical levels as sufficient manufacturing capacity is in place
to meet market demand. Reduced capital spending, along with anticipated
improving cash flow from operations, and funds available under its credit and
security agreement are expected to provide adequate funds to meet the needs of
the Company during fiscal 1999. However, the Company is in the process of
seeking additional equity capital to ensure sufficient funds are available to
support the ongoing operations of the Company, and to meet certain covenants
under its credit and security agreement. (See Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial
Condition). There can be no assurance that the Company will be successful in
its attempt to raise additional capital on terms acceptable to the Company.
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 1998, 1997, and 1996 the Company sold $25.2 million, $13.4
million, and $15.8 million, respectively, of NOVACLAD-based products, primarily
for harsh, under-the-hood automotive applications where NOVACLAD'S heat
tolerance and chemical resistance characteristics provide superior performance.
VIAARRAY. VIAARRAY is a higher-value-added form of NOVACLAD with
pre-drilled small holes, or vias, measuring down to 1 mil in diameter. VIAARRAY
is coated with copper and enables 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 denser
than current flexible circuitry technology. Because of its adhesiveless
character, VIAARRAY provides all of the benefits of NOVACLAD. The combination of
these characteristics allows circuit fabricators the opportunity to eliminate
several costly processing steps in the manufacture of printed circuits. The
Company believes this product provides 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 VIAARRAY based circuits as an interlayer in multilayer
circuit boards.
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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 its traces are very
smooth and its 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 density 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 VIAARRAY product. In fiscal 1998, sales of VIATHIN
substrates accounted for $1.3 million or 1% of the Company's total revenue.
NOVAFLEX VHD. The Company also uses VIAARRAY in the manufacture of
circuits that require the very fine features an application outside of IC
packages, such as direct chip attach circuitry for high-end disk drives such as
the Seagate 9LP Cheetah Drive and other such applications. NOVAFLEX VHD,
introduced in September 1998, utilizes similar processes of the Company's
ViaThin product in applications that require two layers of circuitry to provide
an increased number of interconnection in a relatively small physical space. The
Company is targeting this product to high-end disk drives, personal
communications devices and unique medical applications.
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 1998
and 1997, NOVACLAD-based interconnect products represented revenue of
approximately $23.5 million and $13.0 million, respectively.
All of the Company's flexible printed circuits are electrically
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
$87.4 million, or 75%, of the Company's total revenue for fiscal 1998.
MATERIALS. The Company's other materials products consist of
adhesive-based tapes and other flexible laminates used in a variety of
applications. Moisture barrier tape and flat cable is 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
1998, external sales of materials accounted for $28.6 million, or 24%, of the
Company's total revenue.
SALES AND CUSTOMER SUPPORT
The Company's sales and customer support efforts are directed by
product or market managers who are responsible for defining target markets
and customers, strategic product planning and new product introduction. These
product or market managers supervise a sales force of account managers, which
are supported by engineers, technicians and customer service 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
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cornerstone of the Company's sales and customer support strategy is to
provide superior customer service, from prompt and efficient technical
support to rapid 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. The Company's
technical design and sales office in Detroit, Michigan is currently staffed
with engineers, designers and sales personnel in order to provide automotive
customers with comprehensive support. In fiscal 1998, 15.4%, 10.2% and 10.3%
of the Company's net sales went to multiple sourcing locations of Motorola,
Inc., Ford Motor Company, and Siemens, respectively. The Company also
provides products, through first tier suppliers, to Chrysler and the U.S.
operations 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 1998, 1997 and 1996 were $24.5
million, $15.0 million and $12.0 million, respectively.
During fiscal 1998, the Company's exposure to foreign currency risk
declined as two large programs were converted to the United States Dollar. The
Company maintains a limited exposure to foreign currency risk with smaller sales
contracted in British Sterling, German Marks and French Francs. These contracts
and the exchange rate are reviewed periodically. As of August 28, 1998, the
Company has no material contracts in any currency not mentioned above. Beginning
January 1, 1999, the Euro, the new European currency, will be used commercially.
As of August 28, 1998, none of the Company's customers or suppliers have
suggested pricing any contracts in Euro. However, in order to remain
competitive, the Company anticipates pricing certain contracts in Euro and has
systems in place to support such contracts by converting foreign currency
transactions to six decimal places. When warranted by the size of foreign
currency contracts, the Company will use a variety of hedging techniques,
including financial derivatives, to prudently reduce, but not eliminate, its
exposure to foreign currency fluctuations. No such contracts existed as of
August 28, 1998.
MANUFACTURING
The Company manufactures and assembles its products in Northfield,
Minnesota; 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 QS9000/ISO9001 certification in
its Minnesota and South Dakota facilities. The Company also employs contract
manufacturing relationships for the assembly of products in Mexico and Canada.
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 circuitry and interconnect systems. The Company converts flexible laminates
into circuits by using either photo exposing or screen printing 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 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. These interconnect assembly
functions are performed at the Company's facilities in Britton, South Dakota, or
at Maquilladora Operations in Mexico and Canada.
To manufacture its emerging NOVACLAD products, the Company constructed
a 102,000 square foot building in Longmont, Colorado (the "Longmont Facility").
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 current
annual production capacity of the Longmont Facility is approximately 4 million
square feet of NOVACLAD and approximately 375,000 total square feet of VIAARRAY,
VIATHIN and NOVACLAD VHD. The Longmont Facility has been designed to allow for
expansion in increments of approximately 400,000 square feet of finished
product, consisting of varying amounts of VIAARRAY, VIATHIN AND NOVAFLEX VHD 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 $65.6 million.
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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 and provided 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. 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 fiscal 1999. After
manufacturing and sales have begun, the Company is to receive royalties based on
a percent of sales. The percentage used is a sliding scale based on the dollar
volume of sales and the royalty year as defined. The minimum royalty payment is
$100,000 per royalty year. The Company does not expect to earn royalties in
excess of $100,000 per royalty year until after fiscal year 2001. The agreements
also require that the Company purchase fixed amounts of the joint venture's
licensed product. This purchase commitment is estimated to be approximately
$450,000 per year for three years beginning in fiscal 2000.
RESEARCH AND DEVELOPMENT
Sheldahl's recent research and development efforts 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. Research and
development expenses in fiscal 1999 are anticipated to decline as these
opportunities are commercialized.
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. By 1997, the Company's Z-LINK adhesive was shown to be
ineffective in high-density multichip modules. The Company is not expected to
incur any future costs that will be reimbursed by ARPA, and the Company has
completed its obligations under the consortium agreement. In addition to the
ARPA Consortium, the Company also participated 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". The initial order
for the Company's NOVAFLEX VHD is a flip chip application.
In August 1994, Sheldahl acquired a minority ownership interest in
Joint Stock Company Sidrabe ("Sidrabe"), a 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. The Company is currently exploring certain
joint product development opportunities with Sidrabe. To date, no definitive
agreement has been reached.
MOLEX JOINT VENTURE
On July 28, 1998, the Company and Molex Incorporated ("Molex") formed a
joint venture to design, market and assemble modular interconnect systems to
replace wiring harnesses in primarily the automotive market. The new company was
named Modular Interconnect Systems, L.L.C. and it is a Delaware limited
liability company ("Origin"). Origin will utilize proprietary flexible products
developed by the Company and proprietary connectors developed by Molex in the
development of the new modular interconnect system as an alternative to
conventional automotive wiring harnesses and flex circuit assemblies. The
Company and Molex will supply their respective products to Origin pursuant to
long-term supply contracts. The Company owns 40% and Molex owns 60% of Origin.
Each party has a right of first refusal with respect to the other party's
ownership interest. Origin is being funded by contributions from the Company and
Molex. Certain development costs of those components to be designed and
developed by Sheldahl for the new systems will also be reimbursed by Molex and
other development costs may be funded by loans from Molex. Both the Company and
Molex granted Origin a non-exclusive license to certain of their intellectual
property for purposes of producing the new modular interconnect systems. Each
license takes effect and is contingent upon a change of control of the Company
or Molex and the purchase of such person's membership interest in Origin. The
documents relating to the joint venture were filed as exhibits to the Company's
Current Report on Form 8-K, filed August 28, 1998.
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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 of its supply base. Certain raw materials
used by the Company in the manufacture of its products are currently obtained
from single sources. The Company has not historically experienced significant
problems in the delivery of these raw materials. The Company currently depends
on one supplier for its polyimide supply, which serves as the base material for
the Company's NOVACLAD family of products. This supplier currently manufacturers
this polyimide film in the United States and Japan through multiple production
lines. There have been no interruptions of supply from this vendor over the last
three years. The Company continues to evaluate other sources of supply for
polyimide film as well as other single sourced raw materials. The Company
believes that other manufacturers' products are available, thus any interruption
in supply from these vendors would not have a material adverse effect on the
Company's operations.
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 produce 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
includes Rogers Corporation and GTS Flexible Materials, Ltd. (a U.K. company).
The Company's NOVACLAD, VIAARRAY and high-density substrates compete
with other 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. 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 28, 1998, and August 29, 1997, was approximately $23.5
million and $22.1 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.
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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 NOVACLAD-Registered Trademark-, VIAARRAY-Registered Trademark-,
VIATHIN-Registered Trademark-, FLEXBASE-Registered Trademark-,
NOVAFLEX-Registered Trademark-, NOVAFLEX HD-Registered Trademark- and
Z-LINK-Registered Trademark-. In November 1998, the Company was awarded a
patent for its SMARTHORN-Registered Trademark- horn switch technology. This
technology provides design and assembly features that are targeted to improve
the reliability of automotive horns and the amount of force required for horn
actuation. 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's primary NOVACLAD patents expire between years 2009 and 2015.
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 the 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 1998. Similarly, fiscal 1999 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. As of August 28, 1998, the Company was not involved in any
significant specific action, legal or regulatory, regarding environmental
regulations.
EMPLOYEES
As of October 30, 1998, the Company employed approximately 922 people
in the United States and Europe, including 738 in production, 96 in sales,
marketing, application engineering, and customer support, 32 in research and
development and 53 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 399) 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 1999. 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 2,500 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 it has subleased. The Company is in the
process of closing its Aberdeen, South Dakota facility and expects to vacate
this property by the end of calendar year 1998.
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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 general matters will not have a material adverse effect on the Company's
results of operations or financial condition.
On August 25, 1998, Sheldahl commenced suit against SDRC Operations,
Inc., which also does business as Metaphase and Structural Dynamics Research,
Inc., in the United States District Court for the District of Minnesota.
Sheldahl alleges that SDRC breached a contract to provide certain software to
Sheldahl, breached warranties in connection with the contract, and
misrepresented the nature of the software and number of licenses needed.
Sheldahl also alleges that it paid consulting fees to SDRC for preparation
and delivery of a software implementation plan but that SDRC failed to
deliver the plan. Sheldahl claims damages in excess of $100,000. SDRC has
demanded that Sheldahl make payment to it of approximately $750,000 for the
software at issue. The matter is in the pleadings stage.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 4A. EXECUTIVE OFFICERS
The executive officers of the Company, who are appointed annually to
serve one year terms, are as follows:
<TABLE>
<CAPTION>
Name Age Date First Appointed Position
---- --- -------------------- --------
<S> <C> <C> <C>
James S. Womack 70 1988 Chairman of the Board and Director
James E. Donaghy 64 1991 Chief Executive Officer and Director
Edward L. Lundstrom 48 1997 President and Board of Director nominee
Beverly M. Brumbaugh 63 1991 Vice President - Human Resources and Corporate Excellence
Gregory D. Closser 46 1991 Vice President - Interconnect
Michele C. Edwards 34 1997 Vice President - Supply Chain Operations
James L. Havener 55 1997 Vice President - Micro Products
John V. McManus 51 1991 Vice President - Finance and Assistant Secretary
Roger D. Quam 52 1991 Vice President - Materials
Sidney J. Roberts 52 1997 Vice President - Research and Development
Gerald E. Magnuson 67 1975 Secretary and Director
</TABLE>
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. and General Securities,
Inc. Mr. Womack will be retiring from the Company's Board of Directors effective
January 13, 1999.
JAMES E. DONAGHY joined the Company in 1988 as its President and Chief
Operating Officer and became President and Chief Executive Officer in 1991. In
September 1997, he passed 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. Mr. Donaghy will become the Company's
Chairman of the Board effective January 13, 1999.
8
<PAGE>
EDWARD L. LUNDSTROM was named President in September of 1997. 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, Corporate Controller, Vice
President-Interconnect, Vice President and Treasurer, 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 Incorporated. Mr. Lundstrom will become the Company's
President and Chief Executive Officer effective January 13, 1999. Mr.
Lundstrom has been nominated to the Board of Directors.
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. Mr. Brumbaugh will retire on February
28, 1999.
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.
JAMES L. HAVENER joined the Company in January of 1998 as Vice
President, Business Manager of Micro Products. He was previously Business
Manager, Strategic Planning and Advance Products Marketing for 3M Company's
Electronic Products Division.
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.
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 serving 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.
GERALD E. MAGNUSON has served as Secretary of the Company since 1962
and a director since 1975. Mr. Magnuson is a retired partner in the law firm
of Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota, and a director of
PremiumWear, Inc., Research, Incorporated, and Washington Scientific
Industries, Inc.
9
<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.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED AUGUST 28, 1998:
First Quarter 24 5/8 15 1/4
Second Quarter 18 12 15/16
Third Quarter 17 3/4 8 5/8
Fourth Quarter 10 1/8 4 15/16
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
</TABLE>
On November 18, 1998, the last reported sales price of the Common
Stock was $7 3/4. 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 and security 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.
RECENT SALES OF UNREGISTERED SECURITIES
PREFERRED STOCK. On July 2, 1998, the Board of Directors of the
Company authorized a private placement of its newly created Series D
Convertible Preferred Stock, $1.00 par value per share, and warrants (the
"Warrants") to purchase shares of the Company's common stock, $.25 par value
per share (the "Preferred Stock"), to a group of accredited investors (the
"Investors"). On July 25, 1998 the Board approved the pricing for the private
placement. The Board also authorized granting the Investors certain
registration rights with regard to the shares of Common Stock underlying the
Preferred Stock and the Warrants. The closing of the private placement
occurred on July 30, 1998. Based on the manner of sale and representations of
the Investors, the Company believes that pursuant to Rule 506 of Regulation
D, the private placement was a transaction not involving any public offering
within the meaning of section 4(2) of the Securities Act of 1933, as amended,
and was, therefore, exempt from the registration requirements thereof.
The Company sold an aggregate of 32,917 shares of the Preferred
Stock to the Investors for an aggregate purchase price of $32,917,000,
pursuant to a Convertible Preferred Stock Purchase Agreement among the
Company and the Investors (the "Agreement").
The Preferred Stock is entitled to 5% dividends, payable upon
conversion, in shares of Common Stock or cash, at the option of the Company.
The Preferred Stock is convertible into shares of the Company's Common Stock
at any time. Each holder of Preferred Stock is entitled to convert each share
of Preferred Stock into that number of shares of Common Stock that equals
$1,000 plus accrued dividends divided by the conversion price. The conversion
price is fixed at $6.15 per share. The conversion price is subject to
adjustment for certain dilution and market price events.
The Company may require holders of Preferred Stock to convert to
Common Stock provided that the Company's Common Stock trades at certain
pre-set price levels.
The Agreement between the Company and the Investors, and the
Certificate of Designation for the Preferred Stock, are incorporated herein
by reference as Exhibits 4.1 and 4.2 to the Company's current report on Form
8-K filed August 18, 1998.
10
<PAGE>
In connection with the sale of the Preferred Stock, on July 25,
1998, the Company's Board of Directors amended the Company's Rights Plan to
increase the threshold percentage from fifteen (15%) to twenty-two (22%),
subject to certain conditions with respect to one of the Investors, Molex
Incorporated ("Molex") and also approved Molex's acquisition under the
Minnesota Business Combination Act ("MBCA"). The MBCA precludes certain
business combinations with interested shareholders whose acquisition of
beneficial ownership of 10% or more is not approved by a committee of
disinterested directors.
WARRANTS. In connection with the issuance of the Preferred Stock,
the Company also granted to each Investor a Warrant to purchase shares of the
Company's Common Stock. The aggregate amount of shares of Common Stock the
Company is obligated to issue under the Warrants is 329,170 at an exercise
price of $7.6875 per share. The form of Warrant issued by the Company to the
Investors is incorporated herein by reference as Exhibit 4.3 to the Company's
Current Report on Form 8-K filed August 18, 1998.
REGISTRATION RIGHTS. The Company granted the Investors certain
registration rights. The registration rights cover all shares of Common Stock
issuable to the Investors upon conversion of the Preferred Stock and upon
exercise of the Warrants. The Company is obligated to file a shelf
Registration Statement on Form S-3 within twenty-five (25) days of July 30,
1998.
The Registration Rights Agreement between the Company and the
Investors specifying the terms of the registration rights is incorporated
herein by reference as Exhibit 4.4 to the Company's Current Report on Form
8-K filed August 18, 1998.
ADDITIONAL AGREEMENTS. In connection with the transactions
contemplated by the Agreement, the Company granted Molex the right to select
one representative for nomination to the Board of Directors of the Company, a
right of first refusal to purchase the Company in the event that the Board of
Directors elects to sell the Company and certain preemptive rights with
respect to future equity or debt offerings.
NEW BANK AGREEMENT. In June 1998, in connection with executing its
new credit facility, the Company issued to its lenders five-year warrants to
purchase in the aggregate 100,000 shares of its Common Stock at a price of
$6.92 per share. Based on the representations of the lenders and their
accredited status, the issuance of these warrants, pursuant to Rule 506 of
Regulation D, was a transaction not involving any public offering within the
meaning of section 4(2) of the Securities Act of 1933, as amended, and was,
therefore, exempt from the registration requirements thereof.
USE OF PROCEEDS. The proceeds from the private placement were used
by the Company to repay a $19 million bridge facility and to improve the
Company's liquidity position. The Company will not receive any proceeds from
the resale of the shares of Common Stock issuable to the Investors upon
conversion of the Preferred Stock. If the warrants issued to the Investors
are exercised in full, the Company will receive approximately $2,530,494. If
the Warrants issued to the Company's lenders are exercised in full, the
Company will receive approximately $692,000. Such amounts are intended to be
used by the Company for working capital purposes. There can be no assurance,
however, that any of the warrants will be exercised.
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 August 30, 1996, August 29, 1997, and August 28, 1998, and the
consolidated balance sheet data as of August 29, 1997, and August 28, 1998,
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 September 2, 1994 and September 1, 1995, and
the balance sheet data set forth below at September 2, 1994, September 1,
1995, and August 30, 1996, are derived from audited financial statements not
included herein.
11
<PAGE>
Fiscal Years Ended
(in thousands, except per share data)
<TABLE>
<CAPTION>
September 2, September 1, August 30, August 29, August 28,
Statements of Operations Data: 1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 88,346 $ 95,216 $ 114,120 $ 105,266 $ 117,045
Cost of sales 69,273 74,752 89,171 94,933 109,143
------ ------ ------ ------ -------
Gross profit 19,073 20,464 24,949 10,333 7,902
------ ------ ------ ------ -------
Expenses:
Sales and marketing 8,014 9,090 9,254 9,560 9,861
General and administrative 4,153 3,895 5,129 6,839 8,152
Research and development 2,366 2,270 2,755 4,705 3,881
Restructuring costs - - - - 8,500
Impairment charges - - - - 3,300
Interest 946 875 539 1,298 2,547
------ ------ ------ ------ -------
Total expenses 15,479 16,130 17,677 22,402 36,241
------ ------ ------ ------ -------
Income (loss) before provision for
income taxes and cumulative effect
of change in method of accounting 3,594 4,334 7,272 (12,069) (28,339)
Provision (benefit) for income taxes 800 1,200 2,500 (4,100) 2,952
------ ------ ------ ------ -------
Net income (loss) before cumulative
effect of change in method of
accounting 2,794 3,134 4,772 (7,969) (31,291)
Cumulative effect of change in
method of accounting(4) - - - - (5,206)
------ ------ ------ ------ -------
Net income (loss) before convertible
preferred stock dividends 2,794 3,134 4,772 (7,969) (36,497)
Convertible preferred stock dividends - - - - (689)
------ ------ ------ ------ -------
Net income (loss) applicable to
common shareholders $ 2,794 $ 3,134 $ 4,772 $ (7,969) $ (37,186)
------ ------ ------ ------ -------
------ ------ ------ ------ -------
Net income (loss) per
common share - basic $ 0.54 $ 0.47 $ 0.57 $ (0.89) $ (3.97)
------ ------ ------ ------ -------
------ ------ ------ ------ -------
- diluted $ 0.52 $ 0.45 $ 0.55 $ (0.89) $ (3.97)
------ ------ ------ ------ -------
------ ------ ------ ------ -------
Weighted average common shares
outstanding - basic 5,155 6,692 8,414 8,967 9,364
------ ------ ------ ------ -------
------ ------ ------ ------ -------
- diluted 5,418 6,925 8,686 8,967 9,364
------ ------ ------ ------ -------
------ ------ ------ ------ -------
Balance Sheet Data:
Working capital, net $ 15,942 $ 16,332 $ 22,051 $ 22,943 $ 9,219
Total assets 60,320 94,186 115,887 139,367 136,306
Long-term debt, excluding
current portion 7,963 33,864 21,858 40,869 27,829
Total shareholders' investment 36,482 40,952 75,337 82,932 78,757
Supplemental Business Unit Data(1) -
Combined Materials and Interconnect:
Revenues $ 84,793 $ 91,600 $ 113,955 $ 104,908 $ 116,002
Gross profit 17,931 20,231 28,847 21,376 21,810
Pretax operating income(3) 2,743 4,874 13,291 3,400 2,838
Micro Products:
Revenues $ - $ - $ 165 $ 358 $ 1,043
Gross profit (loss)(2) 719 (214) (3,898) (11,043) (13,908)
Pretax operating income (loss)(3) 719 (731) (6,019) (15,469) (19,377)
</TABLE>
- --------------------
12
<PAGE>
(1) Does not include aviation components, a product line sold in 1995
(2) Net of ARPA funding in 1994, 1995 and 1996
(3) Fiscal 1998 does not include restructuring costs or impairment changes
(4) The Company adopted the provisions of SOP 98-5, "Reporting on the Costs of
Start-up Activities" effective August 30, 1997.
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
under the trade names FLEXBASE, NOVAFLEX HD and NOVAFLEX VHD and substrates
for silicon chip carriers under the trade names VIAARRAY and VIATHIN.
BACKGROUND
In 1989, the Company developed a business strategy focused on
achieving leadership in supplying the automotive electronics market with
flexible printed circuits 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. Since 1989, automotive market sales increased from $13.9 million
to $80.4 million and represent 69% of the Company's net sales in fiscal 1998.
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. Over the past four years, the Company has introduced high
performance products based on proprietary thin film laminate technology:
VIAARRAY and VIATHIN (high-density substrates). VIAARRAY, a higher-value form
of NOVACLAD, has predrilled small holes (vias) that allow printed circuit
manufacturers to produce interconnects to meet the changing need of the
market. The Company uses VIAARRAY to manufacture chip-carrier substrates
(VIATHIN) primarily for IC packages. These NOVACLAD-based 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 these
products to enable IC manufacturers to package future generations of ICs
economically by attaching the silicon die to VIATHIN or high-density
substrates manufactured by other circuitry manufacturers using the Company's
NOVACLAD or VIAARRAY 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. These products support the industry's drive for increasing
functional performance at a decreasing cost per function. Additionally,
NOVACLAD is used to manufacture the Company's NOVAFLEX VHD and NOVACLAD HD
product lines. NOVACLAD and NOVACLAD-based products accounted for $25.2
million or 21.5% of the Company's net sales in fiscal 1998.
Through August 28, 1998, the Company had invested approximately
$65.6 million in an advanced new production facility in Longmont, Colorado to
produce VIAARRAY and VIATHIN products in commercial volumes. As of November
1995, the Company anticipated investing approximately $38 million in the
Longmont Facility. Changes in the product characteristics of high density
substrates relating to precious metal plating, solder mask overcoat and
testing, plus the installation of assembly equipment not originally
anticipated, significantly increased the original investment to bring the
Longmont Facility on line. Recent purchases of land and equipment needed to
increase originally anticipated capacity also contributed to the total
investment in the Longmont Facility.
The Company originally expected to commence production in the
Longmont Facility in April 1996. However, the realization of full volume
production has been delayed, initially due to late deliveries of certain
production equipment as a result of financial difficulties of a supplier,
Micro Plating Systems, Inc., as well as a longer than anticipated
installation period and more recently due to a far more rigorous and lengthy
process qualification and product acceptance (validation) by the Company's
customers and their customers. During the last eighteen months, the Company
has identified additional equipment suppliers so that the design and delivery
of future key production equipment can be improved. As of the date hereof,
Texas Instruments and Vitesse Semiconductor have qualified VIATHIN substrates
for their operations. Shipments of small volume production orders have begun
and
13
<PAGE>
the Company expects that their initial orders will lead to larger orders from
these and other customers as demonstrated by new designs and prototype orders
currently in process from these and other customers. The adverse financial
impact with respect to developing the Micro Products business has been and
will continue to be significant. In 1998, the Micro Products business
resulted in a pretax loss prior to restructuring costs and impairment charges
of $19.4 million as compared with a $15.5 million and $6.0 million loss in
1997 and 1996, respectively. Such significant losses are expected to continue
until efficient volume production and related sales revenue is achieved. As
of October 30, 1998, the Longmont Facility is operating at less than 5% of
stated production capacity with projected breakeven at 45% of factory
utilization or some $24 million to $26 million of annual revenue of ViaThin
and ViaArray products. Breakeven volume at Longmont is not expected until the
fourth quarter of fiscal 1999 at the earliest, and the fourth quarter of
fiscal 2000 at the latest. During this lengthy qualification period, the
Company has been working with leading customers, including original equipment
manufacturers - Hewlett Packard, Texas Instruments, Motorola, and Vitesse
Semiconductor and IC package assemblers - ASAT, Hana, Amkor and Abpak in the
design, manufacture, assembly and qualification of both ball-grid array and
chip scale packages. The Company believes that the market drive for increased
electronic interconnections will continue and Sheldahl's product offering and
production capacity is well positioned to grow with this market.
RECENT DEVELOPMENTS
SERIES B PREFERRED CONVERSION AND REDEMPTION. On August 27, 1997,
the Company entered into an agreement with five accredited investors for the
issuance of $30 million of 5% cumulative convertible preferred stock. The $30
million 5% cumulative preferred stock private placement consisted of two
tranches of $15 million each. The first tranche, Series B, was closed August
29, 1997. The second tranche, Series C, was not funded. The Series B
Preferred Stock consisted of 15,000 shares at a stated value of $1,000 per
share. The conversion price of each share was at the lower of 110% of the
closing bid price ($25.34), on August 27, 1997, or 101% of the lowest
five-day average bid price on the Company's Common Stock in the 30 trading
days immediately prior to conversion. Proceeds of the Series B Preferred
Stock were applied principally towards the development of the Longmont
Facility for the Company's Micro Products business.
At August 28, 1998, 7,350 of the 15,000 Series B Preferred shares
and related accrued dividends had been converted into 575,149 shares of
common stock. The accrued dividends due at conversion were paid to the
holders in shares of Common Stock at the applicable conversion price. The
average conversion price through August 28, 1998 was $13.08 per share.
Subsequent to year-end and through October 30, 1998, the Company
received conversion notices representing 6,737 shares of Series B Preferred
Stock. These conversions were handled as follows: 5,762 Series B Preferred
shares plus accrued dividends were converted into 1,230,178 shares of the
Company's Common Stock; 623 preferred shares were redeemed with cash payments
totaling $837,000, including accrued dividends; and 352 Series B Preferred
shares require shareholder approval before the Company can issue the related
shares of Common Stock. This is due to certain Nasdaq rules stating that the
Company is not permitted to issue greater than 20% of the then outstanding
shares of the Company's Common Stock at the time of issuance of the Series B
Preferred without shareholder approval. The Company is seeking shareholder
approval at its annual meeting to convert these shares.
As of October 30, 1998, the Company has 10,890,792 shares of Common
Stock, 352 shares of Series B Preferred Stock awaiting shareholder approval
for conversion into related shares of Common Stock and 913 additional shares
of Series B Preferred Stock outstanding. The estimated redemption value as of
October 30, 1998 of the 913 Series B Shares outstanding is $2.0 million. The
Company will be seeking shareholder approval via its proxy statement at its
annual shareholder meeting on January 13, 1999 to allow it to issue
additional shares of Common Stock for future conversions of the outstanding
Series B shares.
MARKET ACTIVITY IN COMPANY STOCK. On September 21, 1998, a group of
investors comprised of Irwin L. Jacobs, Daniel T. Lindsay, Dennis M. Mathisen
and Marshall Financial Group, Inc. (the "Reporting Persons") filed with the
Securities and Exchange Commission a Schedule 13D reporting their beneficial
ownership of an aggregate of 780,100 shares of the Company's Common Stock,
292,683 shares of Common Stock issuable upon conversion of the Company's
Series D Preferred Stock and 18,000 shares of Common Stock issuable upon
exercise of warrants, in aggregate representing approximately 10.94% of the
outstanding shares of the Company's Common Stock. Item 4 of the Schedule 13D
states that the Reporting Persons acquired the Common Stock described above
in order to obtain an equity position in the Company. In addition, the
Schedule 13D states that the Reporting Persons intend to monitor the
Company's performance and may explore the feasibility of, and strategies for,
seeking control of the Company through various different means. Any activity
in the Company's Common Stock, such as that described above is subject to the
anti-takeover provisions in the Company's Articles of Incorporation and the
Minnesota Business Corporation Act as well as the Company's Rights Agreement.
On October 20, 1998, the Company announced that it had named Dennis Mathisen,
Chairman, President and CEO of Marshall Financial Group, to its Board of
Directors. Further, Mr. Mathisen and the members of the original 13D filing
group have now agreed to support the Company's management in the
implementation of its business plan and pursuit of business opportunities,
and have indicated they have no intent to pursue the control actions of the
September 13D filing. As a result of Mr. Mathisen's board appointment, Mr.
Jacobs and Mr. Lindsay have removed themselves from the 13D filing group by
amendment.
14
<PAGE>
EXECUTIVE MANAGEMENT RESTRUCTURING. On September 17, 1998, the
Company announced effective January 13, 1999, that the Board of Directors has
elected James E. Donaghy as Chairman and Edward L. Lundstrom, President, to
the additional position of Chief Executive Officer. Mr. Donaghy will replace
James S. Womack, who will leave the Board in accordance with the Company
retirement policy for directors. Mr. Lundstrom is also a nominee to the Board
of Directors.
INTRODUCTION OF NOVAFLEX VHD. On September 2, 1998, the Company
introduced its new NOVACLAD-based Novaflex VHD (very high density) product, a
new flexible circuit technology that allows product designs that accommodate
the electronics industry's drive toward miniaturization, which requires
circuitry with ever-smaller vias (holes) and spaces for the greatest possible
density and performance. Novaflex VHD, which is available in prototype and
production quantities, can be provided with industry standard soldermask
materials and surface finishes to accommodate all end products and assembly
needs. Novaflex VHD is leading-edge technology that meets the needs of
several market segments including computers, disc drives, LCDs,
telecommunications, and medical. Novaflex VHD will be manufactured in part at
the Company's Longmont, Colorado and Northfield, Minnesota facilities. On
October 6, 1998, the Company received its first volume order for Novaflex VHD
from Seagate Technology. The initial applications are utilized in Seagate's
award winning Cheetah disc drive, for which the Company has received a
long-term production contract which is expected to be worth $10 million per
year in revenue by fiscal 2000.
GENERAL MOTORS STRIKE. The strike and work stoppages by General
Motors workers during fiscal 1998 has had a material adverse effect generally
on the automotive industry and the suppliers thereto. The Company estimates
that the strike has reduced its fiscal 1998 fourth quarter revenue by
approximately $2.0 million.
SERIES D PREFERRED STOCK AGREEMENT. On July 30, 1998, the Company
issued 32,917 shares of Series D Convertible Preferred Stock with a total
stated value of $32,917,000. This Series D Preferred Stock carried a 5%
dividend rate and is convertible to approximately 5.4 million shares of
Common Stock at a fixed rate of $6.15. The holders of the Preferred Shares
were also issued 329,170 Warrants to purchase the Company's Common Stock at a
price of $7.6875 per share. These Warrants expire July 29, 2001. Net proceeds
from the Series D Preferred Stock were $32,409,000. The proceeds were used to
repay various debt obligations and provide needed liquidity.
NEW BANK AGREEMENT. In June 1998, the Company executed a new credit
agreement, which completely replaces the Company's prior credit facilities.
The new agreement provides three separate facilities: a revolver facility of
up to $25 million based on the Company's working capital; a term facility for
$16 million based on the appraised value of the Company's unencumbered
equipment; and a bridge facility for $19 million. The bridge facility was
repaid in full on July 31, 1998 with part of the net proceeds from the Series
D Preferred Stock. Interest on the revolver and the term facility is charged
at the base rate, which was 8.5% as of August 28, 1998. As of August 28,
1998, the amount available to borrow on the revolver was $10.5 million based
on a $16.6 million borrowing base on the working capital revolver. Under the
agreement, the Company issued 5-year warrants to purchase in the aggregate
100,000 shares at a price of $6.92 per share. The term loan calls for
interest only payments until January 1, 1999, when monthly principal payments
of $205,000 begin. All unamortized term facility amounts are due May 31,
2001. The revolving facility requires monthly interest payments and is due
May 31, 2001. The agreement contains certain covenants that restrict the
payments of cash dividends, capital expenditures, redemption of preferred
stock, maintenance of certain levels of net worth and net income, maintenance
of certain levels of cash flows from operations and requires the Company to
raise additional equity capital. The Company is required to raise additional
equity capital of $5 million by February 26, 1999 and another $5 million of
equity capital by August 27, 1999. In the event the Company is unable to
raise the capital, the Company would be in technical default under its credit
and security agreement enabling the Company's lenders to require immediate
repayment of the borrowings under the credit and security agreement.
SECURED REAL ESTATE MORTGAGE. As of November 25, 1998, the Company
amended the terms and conditions of its note payable loan to an insurance
company. The amended agreement requires principal payments of $500,000 due
December 1, 1998, $250,000 due January 1, 1999, $250,000 due February 1, 1999
and $60,000 each month beginning March 1, 1999. The interest rate charged on
this note will be 10% effective December 1, 1998 and will increase monthly to
15% effective May 1, 1999. The agreement requires certain covenants that
restrict the payment of cash dividends, total corporate debt, sales of
corporate assets, capital expenditures and requires the Company to maintain
certain levels of net worth and cash flows.
15
<PAGE>
RESULTS OF OPERATIONS
Fiscal 1998 was the most difficult year in the Company's history. The
Micro Products business has yet to achieve a sufficient market position to
effectively utilize the Company's Longmont Facility. Continued product
qualification issues with our customers delayed production at Longmont and
anticipated business, which did not come to fruition, combined with strikes in
the automotive industry, also hampered sales growth and performance of the
Company.
During the second and third quarters of fiscal 1998, as part of
implementing changes due to the culmination of a business process redesign, or
business re-engineering, and as an assessment of the Company's production
capacity, the Company recorded $8.5 million in restructuring charges: $4.0
million to eliminate over 73 salaried positions from the corporate workforce in
Northfield, Minnesota, and $4.5 million to reduce 76 production positions from
Northfield, Minnesota and 160 production positions from Aberdeen, South Dakota,
and to close the Company's Aberdeen, South Dakota assembly facility. Also during
the third quarter, the Company recorded $3.3 million of impairment charges
relating primarily to equipment at the Longmont Facility which is no longer
expected to contribute to the Company's future cash flows. The Company's income
statement also reflected the early adoption of Statement of Position 98-5,
"Reporting on the Costs of Start up Activities" resulting in a charge of $5.2
million. The Company also provided a $3.0 million allowance for the Company's
deferred tax assets.
The following table shows the percentage of net sales represented by
certain line items from the Company's consolidated statements of operations
excluding the aforementioned restructuring asset impairment, cumulative effect
of change in method of accounting and tax provision of a deferred tax valuation
allowance for the periods indicated:
<TABLE>
<CAPTION>
Fiscal Years Ended
August 28, August 29, August 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 93.2% 90.2% 78.1%
------ ------ ------
Gross profit 6.8% 9.8% 21.9%
------ ------ ------
Expenses:
Sales and marketing 8.4% 9.1% 8.1%
General and administrative 7.0% 6.5% 4.5%
Research and development 3.3% 4.5% 2.4%
Interest 2.2% 1.2% .5%
------ ------ ------
Total expenses 20.9% 21.3% 15.5%
------ ------ ------
Income (loss) before income taxes,
restructuring costs, impairment charges,
and cumulative effect of change in method
of accounting (14.1%) (11.5%) 6.4%
------- ------- ----
------- ------- ----
</TABLE>
The table below shows, for the periods indicated, the Company's sales
to various markets (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended
August 28, 1998 August 29, 1997 August 30, 1996
--------------- --------------- ---------------
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Automotive $80,365 68.7% $71,026 67.5% $78,984 69.2%
Datacom 15,463 13.2% 12,529 11.9% 11,193 9.8%
Aerospace/Defense 10,030 8.5% 9,201 8.7% 10,585 9.3%
Industrial 7,451 6.4% 8,046 7.6% 8,843 7.7%
Consumer 3,736 3.2% 4,464 4.3% 4,515 4.0%
------- ------ ------- ------ ------- ------
Net sales $117,045 100.0% $105,266 100.0% $114,120 100.0%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
</TABLE>
16
<PAGE>
The Company's net sales increased $11.8 million, or 11.2%, from $105.3
million in fiscal year 1997 to $117.0 million in fiscal year 1998. Sales to the
automotive market recovered from the 1997 decline but were impacted by the
General Motors strike. The Company estimates that lost sales due to the strike
was $2.0 million in the fourth quarter of fiscal 1998. Sales to the datacom
market increased $2.9 million, or 23%, from $12.5 million in fiscal 1997 to
$15.5 million in fiscal 1998. The increased sales was due to more HD NOVAFLEX
products being shipped to these customers from the Company's Northfield
circuit operation, as well as a $685,000, or 291%, increase in Micro Products
VIATHIN shipments.
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 the datacom market from not only its Micro
Products VIAARRAY and VIATHIN, but also its Interconnect products, high-density
NOVAFLEX HD and VHD, which is sold to meet the demands of this market. Fiscal
1998 marked the beginning of this marketing development. The recent announcement
of the Seagate Cheetah program for high-end disc drives supports this trend for
increased sales of these product lines into the datacom market.
The Company's other markets in total declined marginally from $21.7
million in fiscal 1997 to $21.2 million in fiscal 1998. The table below shows,
for period indicated, the Company's sales by business units (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended
August 28, 1998 August 29, 1997 August 30, 1996
--------------- --------------- ---------------
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Interconnects $87,407 74.7% $77,004 73.2% $86,146 75.6%
Materials 28,595 24.4% 27,904 26.5% 27,809 24.3%
Micro Products 1,043 .9% 358 .3% 165 .1%
------- ------ ------- ------ ------- ------
Net sales $117,045 100.0% $105,266 100.0% $114,120 100.0%
-------- ------ -------- ------ -------- ------
-------- ------ -------- ------ -------- ------
</TABLE>
Interconnect sales increased $10.4 million, or 13.5%, due to more
shipments of HD Novaflex products to the automotive and datacom markets. HD
NOVAFLEX products account for sales of $23.5 million, $13.0 million, and $13.3
million in fiscal years 1998, 1997, 1996, respectively. In fiscal 1998, Material
sales increased $691,000 over fiscal 1997 as shipments of vacuum deposited
materials improved. For 1998, Micro Products sales were $1 million, representing
small production shipments and sales of pre-qualification product of the
Company's VIATHIN IC substrate product.
COST OF SALES/GROSS PROFIT. During fiscal 1998, the Company's gross
profit declined $2.4 million, or 23%, from $10.3 million in fiscal 1997 to $7.9
million in fiscal 1998. Although sales increased $11 million, gross margin for
the Company's Northfield operations increased only $426,000, impacted by product
mix and higher factory expenses. Higher factory costs were incurred in
expectation of significant additional business. This additional expected
business did not materialize when Compaq Computer acquired Digital Equipment and
the Company's order was placed on hold. Offsetting these gains in gross margin
was a $2.9 million increase in Longmont's factory expenses. Depreciation and
other fixed costs accounted for this increase.
During fiscal 1997, 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 Micro Products 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, less favorable 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 $0, $75,000 and $1.8 million in
fiscal years 1998, 1997 and 1996, 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 has completed its obligations under the consortium agreement.
17
<PAGE>
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased
$301,000, or 3%, in fiscal 1998 and $306,000, or 3%, in fiscal 1997. As a
percentage of net sales, sales and marketing expenses were 8% in fiscal 1998, 9%
in fiscal 1997, and 8% in fiscal 1996. Staffing increases for the Micro Products
business, as well as professional fees and travel costs associated with the
Company's foreign marketing efforts and the establishment of a Hong Kong branch,
account for the 1998 increase in expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. Gross general and administrative
expenses increased $1.3 million, or 19%, to $8.2 million in fiscal 1998 and $1.4
million, or 27%, to $6.8 million in fiscal 1997. ARPA credits applied to general
and administrative expenses were $265,000 in fiscal year 1996. In 1997 and 1998,
no ARPA credits were offset against general and administrative expenses. This
resulted in net general and administrative expenses of $8.2 million, $6.8
million and $5.1 million in fiscal years 1998, 1997 and 1996, respectively.
In 1998, the increase in general and administrative expenses was due to
depreciation and maintenance expense of the computer network systems. In 1997,
the increase in general and administrative expenses was due to 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.
The Company's general and administrative expenses should increase in
fiscal 1999 reflecting the depreciation on the Company's new Enterprise Resource
Planning (ERP) system. 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 Company's expected sales growth
and, secondarily, to address Year 2000 compliance issues.
RESEARCH AND DEVELOPMENT EXPENSES. Gross research and development
expenses declined $1.1 million, or 21%, in fiscal 1998 to $4.1 million. ARPA
credits applied to research and development expenses were $227,000, $509,000 and
$1.3 million in fiscal years 1998, 1997 and 1996. This resulted in net research
and development expenses of $3.9 million, $4.7 million and $2.8 million in
fiscal years 1998, 1997 and 1996, respectively.
The table below shows, for the periods indicated, the Company's
research and development expenses (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended
August 28, August 29, August 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Gross expense $ 4,108 $ 5,214 $ 4,010
ARPA funding (227) (509) (1,255)
------- ------- -------
Net expense $ 3,881 $ 4,705 $ 2,755
------- ------- -------
------- ------- -------
Percent of sales 3.3% 4.5% 2.4%
</TABLE>
Fiscal 1998's decline in research and development expense was due to
completing the Company's research effort in support of the Company's VIAARRAY
and VIATHIN products. The 1997 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 decline
further in fiscal 1999.
INTEREST EXPENSE. Gross interest expense increased to $4.5 million in
fiscal 1998 from $3.0 million in fiscal 1997 and $2.4 million in fiscal 1996, as
the Company increased borrowings to support capital expenditures and to fund
operating losses.
18
<PAGE>
The following shows a breakdown of interest expense for the fiscal
years indicated (in thousands):
<TABLE>
<CAPTION>
Fiscal Years Ended
August 28, August 29, August 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Gross interest $ 4,450 $ 3,033 $ 2,388
Capitalized interest (1,903) (1,735) (1,605)
Investment income - - (244)
------- ------- -------
Net expense $ 2,547 $ 1,298 $ 539
------- ------- -------
------- ------- -------
Percent of sales 2.2% 1.2% .5%
</TABLE>
Capitalized interest increased to $1.9 million in fiscal 1998 from $1.7
million in fiscal 1997 and $1.6 million in fiscal 1996. The Company anticipates
lower capitalized interest in fiscal 1999 as it completes current capital
programs and reduces capital spending.
RESTRUCTURING COSTS. In February 1998, a restructuring charge of $4.0
million was recorded related to the culmination of the Company's business
process, or business re-engineering, initiative that began two years ago. Due to
significant productivity benefits resulting from the initiative, the Company is
reducing the size of its salaried workforce. The resulting workforce reduction
involves layoffs, early retirement offerings, reassignments and
reclassifications of positions. The restructuring costs provide for
approximately $2.5 million for severance and early retirement salary costs,
approximately $1.3 million for medical, dental and other benefits being provided
to the affected individuals, and approximately $0.2 million for outplacement and
other costs. Approximately 73 jobs will be affected.
In May 1998, an additional restructuring charge of $4.5 million was
recorded. This restructuring charge relates to the closing of the Company's
Aberdeen, South Dakota assembly facility and reducing its Northfield production
workforce. The restructuring costs provide for approximately $1.5 million for
severance costs, approximately $0.4 million for medical, dental and other
benefits being provided to the affected individuals and approximately $2.6
million for equipment disposal, losses related to the closure of the Aberdeen
facility, outplacement and other costs. Approximately 236 jobs will be affected.
Both restructuring charges were related to the Company's efforts to
decrease cost and increase throughput. As of August 28, 1998, approximately
$875,000 had been charged to the Company's restructuring reserves and by October
1, 1998, 270 employees have terminated employment with the Company.
IMPAIRMENT CHARGES. During May 1998, a non-cash impairment charge of
$3.3 million was recorded against the Company's statement of operations. This
charge relates to equipment, located principally at the Company's Longmont,
Colorado facility which, based upon analysis by management and anticipated
production processes, is not expected to contribute to the Company's future cash
flows.
INCOME TAXES. In May 1998, based upon recent restructuring, write-offs
and continued losses at the Company's Longmont, Colorado facility, management
provided a valuation allowance for its net deferred tax assets. This resulted in
a $3.0 million charge to income during fiscal 1998. As a result, the Company
will not reflect in immediate future periods any tax provision or benefit until
such net deferred tax assets are offset by reported pretax profits or that the
degree of certainty increases as to the future profit performance of the Company
to allow for the reversal of the valuation allowance.
CHANGE IN METHOD OF ACCOUNTING. In fiscal 1998, the Company adopted
Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires the expensing of these items as incurred, versus capitalizing and
expensing them over a period of time. Start-up activities are broadly defined
and include one-time activities related to opening a new facility, introducing a
new product or service, conducting business in a new territory, conducting
business with a new class of customer or beneficiary, initiating a new process
in an existing facility, commencing some new operation, and organizing a new
entity. The adoption of this statement resulted in a cumulative effect of a
change in method of accounting of approximately $5.2 million, primarily related
to costs capitalized by the Company from its Longmont, Colorado facility. The
adoption of this statement was applied retroactively to the beginning of fiscal
1998, and the Company's first and second quarters have been restated to reflect
this change in method of accounting, in accordance with the provisions of SOP
98-5 and APB 20. The Company's depreciation and amortization expense is reduced
by almost $0.5 million per quarter as a result of the adoption of reporting for
start-up costs and the related write down of certain capitalized items, which
was noted above.
19
<PAGE>
FINANCIAL CONDITION. On June 19, 1998, the Company executed a new
credit agreement, replacing the Company's prior credit facilities, with a group
of lenders lead by Norwest Bank, N.A. as agent. The new agreement provides three
separate facilities: a revolver facility of up to $25 million based on the
Company's working capital; a term facility for $16 million based on the
appraised value of the Company's unencumbered equipment; and a bridge facility
for $19 million. The bridge loan was paid in full on July 31, 1998 from the
proceeds of the Series D Preferred Stock Private Placement. Interest on the
revolver and the term facility will be charged at the base rate. The agreement
also calls for the issuance of 5-year warrants to purchase in the aggregate
100,000 shares of the Company's Common Stock at a price of $6.92 per share. The
agreement contains certain covenants that restrict the payments of cash
dividends, capital expenditures, maintain certain levels of net worth and net
income, and maintain certain levels of cash flows from operations as defined.
The Company is also required to raise additional equity capital of $5 million by
February 26, 1999 and another $5 million of equity capital by August 27, 1999.
In the event the Company is unable to raise the capital, the Company would be in
technical default under its credit and security agreement enabling the Company's
lenders to require immediate repayment of the borrowings under the credit and
security agreement. As of August 28, 1998, the interest rate on the credit
facility was 8.5% and the amount available to borrow was $10.5 million. As of
November 25, 1998, the interest rate on the credit facility was 8.25% and the
amount available to borrow was $5.3 million.
As of November 25, 1998, the Company amended the terms and conditions
of its note payable loan to an insurance company. The amended agreement requires
principal payments of $500,000 due December 1, 1998, $250,000 due January 1,
1999, $250,000 due February 1, 1999 and $60,000 each month beginning March 1,
1999. The interest rate charged on this note will be 10% effective December 1,
1998 and will increase monthly to 15% effective May 1, 1999. The agreement
requires certain covenants that restrict the payment of cash dividends, total
corporate debt, sales of corporate assets, capital expenditures and requires the
Company to maintain certain levels of net worth and cash flows.
On July 30, 1998, the Company issued 32,917 shares of Series D
Preferred Stock with a total stated value of $32,917,000. This Series D
Preferred Stock carries a 5% dividend rate and is convertible to nearly 5.4
million Common Shares at a fixed rate of $6.15. The holders of the Preferred
Shares were also issued 329,170 warrants to purchase the Company's Common Stock
at a price of $7.6875 per share. Net proceeds from the Series D Preferred Stock
were $32,409,000. The proceeds were used to repay the aforementioned $19 million
bridge facility and other debt obligations, while improving the overall
liquidity of the Company.
On August 29, 1997, the Company issued to a group of investors (the
"Investors") 15,000 shares of Series B Convertible Preferred Stock (the "Series
B Preferred Stock") resulting in gross proceeds to the Company of $15,000,000.
The Board of Directors authorized the sale of the Series B Preferred Stock in
order to raise proceeds which were applied principally towards the development
of the Longmont Facility for the Company's MicroProducts Business. The Series B
Preferred Stock may be converted into shares of common stock from time to time
at a conversion price equal to the lesser of (i) 110% of the average closing bid
price for the five consecutive trading days immediately preceding August 29,
1997 (which was $25.34) and (ii) 101% of the average of the lowest closing bid
prices for five consecutive trading days during the 30 consecutive trading days
immediately preceding the date of conversion of the Series B Preferred Stock. In
addition, the shares of Series B Preferred Stock accrue dividends at an annual
rate of 5% which, at the Company's option, may be paid either in cash or in
shares of common stock. As part of the investment, the investors also agreed to
purchase shares of the Company's Series C Preferred Stock at an aggregate price
of $15,000,000 such purchase to be made at the Company's option, provided the
Company's stock traded above $12.00 per share through August 28, 1998. This
option has expired without any shares of Series C Preferred Stock being
purchased. Copies of the relevant documents for the sale of the Series B
Preferred Stock were filed as exhibits to the Company's Report on Form 8-K on
September 10, 1997.
Rule 4460(i) of the Nasdaq Stock Market, Inc. (the "Nasdaq Rule")
requires shareholder approval of the sale or issuance by a company listed on the
Nasdaq National Market "of Common Stock (or securities convertible into or
exercisable for Common Stock) equal to 20% or more of the Common Stock or 20% or
more of the voting power outstanding before the issuance for less than the
greater of book or market value of the stock." On August 29, 1997, the date the
Series B Preferred Stock was issued (the "Closing Date"), there were 9,026,682
shares of the Company's Common Stock outstanding and one share less than 20% of
such number of shares is 1,805,335. On the Closing Date, the Series B Preferred
Stock was convertible into 651,155 shares of Common Stock, which was equal to
7.2% of the Company's then outstanding shares. Given the initial conversion
price of the Series B Preferred Stock and the then current trading price of the
Common Stock, the Company was not required to obtain shareholder approval for
the issuance of the Series B Preferred Stock. Because the conversion price was a
floating price, however, the conversion right of the Investors was structured so
that at any time a conversion would comply with the Nasdaq Rule.
20
<PAGE>
Accordingly, the Certificate of Designation (the "Certificate")
governing the rights and preferences of the Series B Preferred Stock prohibits
any conversion if the conversion price then in effect is such that the aggregate
number of shares of Common Stock that would then be issuable upon conversion of
all outstanding shares of the Series B Preferred Stock, not just those submitted
for conversion by an Investor, when aggregated with all prior or concurrent
conversions, would result in the issuance to all Investors of shares of Common
Stock equal to 20% or more of the shares of the Company's Common Stock
outstanding on the Closing Date. In other words, the Certificate requires the
Company to look at any conversion as if all remaining shares of the Series B
Preferred Stock are being converted and only then may the Company determine
whether shareholder approval under the Nasdaq Rule is required. For this reason,
one Investor could submit a conversion notice for a small number of shares and
yet still trigger the overall 20% limitation of the Nasdaq Rule. In such an
event, the terms of the Certificate provide that the Company may issue to any
Investor submitting a conversion notice only its pro rata portion of the shares
allowed to be issued pursuant to the Nasdaq Rule. With respect to any shares not
issuable to an Investor submitting a conversion notice, the terms of the
Certificate provide that the Company is obligated, at the option of the
Investors, to either (i) obtain shareholder approval for the remaining
unconverted shares of Series B Preferred Stock as contemplated by the Nasdaq
Rule or (ii) redeem for cash that portion of the Series B Preferred Stock that
could not be converted because of the limitation.
During February 1998, the Investors collectively converted 7,350 shares
of Series B Preferred Stock into 575,149 shares of Common Stock, including
dividends payable in Common Stock. These conversions left 1,230,186 shares of
Common Stock available for future conversions of the remaining 7,650 shares of
the Series B Preferred Stock in compliance with the Nasdaq Rule. During
September and October 1998, the Company received additional notices from all
four of the remaining Investors requesting conversion of 6,114 shares of the
Series B Preferred Stock in the aggregate. Because of substantial declines in
the market price of the Company's Common Stock, the applicable conversion price
for such conversions was reduced to approximately $4.91. Pursuant to the terms
of the Certificate described above, in order to determine whether it could
satisfy the conversions, the Company was required to calculate how many shares
were issuable upon conversion at the $4.91 conversion price of all of the
remaining 7,650 shares of the Series B Preferred Stock, not just of the 6,114
shares for which it received conversion notices. This calculation showed that
the Company would need to issue to the Investors 1,642,063 additional shares in
the aggregate to cover the remaining Series B conversions, including dividends
payable in Common Stock, which would exceed the 1,230,186 shares available.
Because of the limits of the Nasdaq Rule, the Company issued to the Investors
only a portion of the shares for which they requested conversion. Three of the
four investors have requested that the Company seek and obtain shareholder
approval to issue the additional shares issuable from their conversion notices
as well as for future conversions. In the event that the shareholders do not
approve the issuance of such shares, the Company will be obligated to redeem
such shares and pay interest on the redemption amount at an annual rate of 12%,
dating back to the dates of the original conversion notices. The fourth Investor
decided on October 20, 1998 to force the Company to redeem its 623 inconvertible
shares of the Series B Preferred Stock resulting in a cash payment by the
Company to such Investor of $836,997 on October 29, 1998.
The redemption price for any inconvertible shares of the Series B
Preferred Stock is a cash amount equal to (i) the highest average closing bid
price for any five consecutive trading days during the period commencing on the
date of conversion and ending on the date of payment by the Company of the full
redemption price, multiplied by (ii) the ratio of the stated value of any shares
of Series B Preferred Stock, including dividends accrued thereon, to the
conversion price on the date notice of conversion is given. In the event that
the Company fails for any reason to pay the redemption price on the conversion
date, the Company will pay interest on such amount at an annual rate of 12%.
Because the redemption price depends on the date on which the Company pays the
redemption amount in full and such date is not known, the Company cannot
determine at this time the amount it may have to pay to redeem any inconvertible
shares of the Series B Preferred Stock. Under the redemption price calculation,
however, any redemptions will be at a premium to the prevailing market price of
the Company's Common Stock. Were it to use any of its available liquidity to
redeem the inconvertible shares of the Series B Preferred Stock, the Company
would not only take cash away from Company operations, but would also violate a
covenant under the terms of the agreements the Company has with its lenders.
Such violation of this covenant would result in a technical default enabling the
Company's lenders to require immediate repayment of the borrowings under the
credit and security agreement. In the event shareholder approval is not
received, the Company will be required to redeem all of the outstanding
preferred shares plus those shares converted but for which Common Stock has not
been issued. The estimated redemption value as of October 30, 1998 is $2.0
million.
The Company is requesting shareholder approval to issue the additional
shares needed for the current and future conversions of the Series B Preferred
Stock at its next annual meeting to be held on January 13, 1999.
21
<PAGE>
CAPITAL RESERVES. Since fiscal 1995, the Company has invested
significantly in new plant and equipment providing manufacturing capacity to
deliver its patented NOVACLAD-Registered Trademark-based line of products to
both existing and new customers. This included building and equipping a
state-of-the-art facility in Longmont, Colorado, to manufacture substrates
for integrated circuit (IC) packages. This capital expenditure was funded by
a series of equity offerings commencing in June 1994 through August 1998,
raising $92 million. The greater than expected period of time to achieve full
product and market acceptance has generated greater losses from an
under-utilized manufacturing facility and its supporting workforce. At the
Longmont Facility, the Company manufactures VIAARRAY-Registered Trademark-
and VIATHIN-Registered Trademark - both NOVACLAD-based substrates for IC
packages, plus the Company's NOVAFLEX-Registered Trademark- VHD product
targeted at the high-end disc drive market. Sheldahl received its initial
volume order for the VHD product line from Seagate in October 1998. The
Company expects the sales volume from NOVAFLEX-Registered Trademark- VHD, of
which Seagate is a major customer, to exceed $5 million in fiscal 1999.
As of October 30, 1998, the Longmont Facility is operating at less than
5% of stated production capacity with projected breakeven at 45% of factory
utilization or some $24 million to $26 million of annual revenue of VIATHIN and
VIAARRAY products. Breakeven volume at Longmont is not expected until the fourth
quarter of fiscal 1999, at the earliest and the fourth quarter of fiscal 2000 at
the latest. Overall, the Longmont manufacturing operation is estimated to have a
$3.5 million negative impact on operating cash flow in fiscal 1999.
Capital expenditures for the Company in fiscal 1999 are planned at $7
million, significantly reduced from past levels as production capacity is in
place to meet customer and market demand. These expenditures will be principally
for capital projects initiated late in fiscal 1997 including additional
via-generation equipment, plating capacity and information system upgrades.
Cash flow requirements to fund restructuring charges taken during
fiscal 1998 are expected to be approximately $5.5 million in fiscal 1999 as
employee severance and plant shut down costs are paid. Therefore, the overall
cash flow from operations is expected to be minimal or negative over the first
half of fiscal 1999 with borrowing levels increasing under the existing credit
facility to fund both operations and the reduced levels of capital expenditures.
During the second half of fiscal 1999, sales levels are projected to increase as
greater production volume is generated at the Longmont facility covering an
increasing portion of fixed costs and increasing cash flow thus reducing the
growth in debt financing. There can be no assurance that the projected sales
level during the second half of fiscal 1999 will be achieved.
The new three-year credit agreement with a group of lenders lead by
Norwest Bank, N.A., as agent, consists of a working capital revolver of $25
million based on levels of working capital and a term facility of $16 million
based on the Company's fixed assets. As of August 28, 1998, the amount
available to borrow on the revolver was $10.5 million based on a $16.6
million borrowing base on the working capital revolver. This borrowing base
is expected to increase with sales growth and working capital expansion. The
term facility of $16 million is fully borrowed as of the end of the fiscal
year with monthly repayments of $205,000 starting January 1999. The interest
rate on this facility was 8.5% at year-end. As of November 25, 1998, the
interest rate on the credit facility was 8.25% and the amount available to
borrow was $5.3 million.
The impact of improving performance from the Company's Northfield
operations along with reduced capital spending, a strengthened balance sheet
from the new credit facility, and the proceeds from the Series D Preferred Stock
should provide adequate liquidity to fund operations over the next nine to
twelve months. Liquidity would significantly deteriorate if the anticipated
improvement in the Company's Northfield operations is not realized or the ramp
up of revenue from Micro Products extends beyond the third quarter of fiscal
1999. Management believes with planned operating improvements that the Company
has adequate liquidity to provide uninterrupted support for its business
operations during fiscal 1999. Nevertheless, the Company is in the process of
seeking additional debt or equity capital to ensure the necessary capital to
support the ongoing operations of the Company. This is based on the uncertainty
of achieving expected improved operating results, including realizing
significant sales growth in fiscal 1999 from the Company's Micro Products
business, and is necessary to meet the covenants under the Company's credit and
security agreement. The Company is required to raise additional equity capital
of $5 million by February 26, 1999 and another $5 million of equity capital by
August 27, 1999. In the event the Company is unable to raise the capital, the
Company would be in technical default under its credit and security agreement
enabling the Company's lenders to require immediate repayment of the borrowings
under the credit and security agreement. If the Company does not achieve its
projected operating results and/or it does not have borrowings available under
its current credit and security agreement, management believes that it has
options available to obtain necessary additional new capital, including the
issuance of additional new debt or additional new equity financing. There can be
no assurance that the Company will be successful in its attempt to issue
additional debt or to raise additional capital on terms acceptable to the
Company.
Net working capital declined to $9.2 million in 1998 from $22.9 million
in 1997. A decrease in the Company's cash holdings, combined with accruals for
restructuring charges, and increased current maturities of long-term debt
account for this decline.
22
<PAGE>
Net capital expenditures for 1998, 1997 and 1996 were $23.3 million,
$30.7 million and $24.9 million, respectively. During the three years, the
Company invested approximately $34.4 million in Longmont's production equipment
and facilities; $25.7 million in core business equipment and facilities; and
$18.8 million in new technology systems benefiting all business groups.
FOREIGN CURRENCY RISK. During fiscal 1998, the Company's exposure to
foreign currency risk declined as two large programs were converted to the
United States Dollar. The Company maintains a limited exposure to foreign
currency risk with smaller programs contracted in British Sterling, German Marks
and French Francs. These contracts and the exchange rate are reviewed
periodically. As of August 28, 1998, the Company has no material contracts in
any currency not mentioned above.
Beginning January 1, 1999, the Euro, the new European currency, will be
used commercially. As of August 28, 1998, none of the Company's customers or
suppliers have suggested pricing any contracts in Euro. However, in order to
remain competitive, the Company anticipates pricing certain contracts in Euro
and has systems in place to support such contracts by converting foreign
currency transactions to six decimal places. When warranted by the size of
foreign currency contracts, the Company will use a variety of hedging
techniques, including financial derivatives, to prudently reduce, but not
eliminate, its exposure to foreign currency fluctuations. No such contracts
existed as of August 28, 1998.
NEW ACCOUNTING PRONOUNCEMENTS. During June 1997, the Financial
Accounting Standards Board released SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," effective for fiscal years beginning
after December 15, 1997. SFAS No. 131 requires disclosure of business and
geographic segments in the consolidated financial statements of the Company. The
Company will adopt SFAS No. 131 in fiscal 1999 and is currently analyzing the
impact it will have on the disclosures in its financial statements.
During February 1998, the Financial Accounting Standards Board issued
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," effective for fiscal years beginning after December 31, 1997. SFAS
No. 132 revises certain of the disclosure requirements, but does not change the
measurement or recognition of those plans. The adoption of SFAS No. 132 will
result in revised and additional disclosures, but will have no effect on the
financial position, results of operations, or liquidity of the Company. The
Company will adopt SFAS No. 132 in fiscal 1999 and is currently analyzing the
impact it will have on the disclosures in its financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and hedging Activities," effective
for years beginning after June 15, 1999. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge criteria are met. Special accounting
for qualifying hedges allow a derivative's gains or losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. The Company has not yet quantified the impacts of
adopting SFAS No. 133 and has not yet determined the timing or method of
adoption.
YEAR 2000 DISCLOSURE. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. The Company's computer equipment, software, devices and
products with imbedded technology that are time-sensitive may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a shut down in the Company's manufacturing operations, a
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
STATE OF READINESS. The Company has undertaken various initiatives to
evaluate the Year 2000 readiness of the products sold by the Company
("Products"), the information technology systems used in the Company's
operations ("IT Systems"), its non-IT systems, such as power to its facilities,
HVAC systems, building security, voicemail and other systems, as well as the
readiness of its customers and suppliers. The Company has identified eleven Year
2000 target areas that cover the entire scope of the Company's business and has
internally established teams committed to completing an 8-step Compliance
Validation Process ("CVP") for each target area. Each team is expected to fully
complete this process on or before September 1, 1999. The table below identifies
the Company's target areas as well as the 8-step CVP with its expected timeline.
Although some Phase 2 remediation activities have been started or completed,
most team activity is currently focused towards the process of completing
Phase 1.
23
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
YEAR 2000 TARGET AREAS COMPLIANCE VALIDATION PROCESS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Business Computer Systems PHASE 1
2. Technical Infrastructure -------
3. End-User Computing 1. Team Formation Expected Completion:
4. Manufacturing Equipment 2. Inventory Assessment
5. Test Lab 3. Compliance Assessment End of Q2 Fiscal 1999
6. Telecommunications 4. Risk Assessment
7. Research & Development
8. Logistics
9. Facilities
10. Customers
11. Suppliers/Key Service Providers
-------------------------------------------------------------------
PHASE 2
-------
5. Resolution/Remediation Expected Completion:
6. Validation
7. Contingency Plan End of Q4 Fiscal 1999
8. Sign-Off Acceptance
- -------------------------------------------------------------------------------------------------------------
</TABLE>
With respect to the Company's relationships with third parties, the
Company relies both domestically and internationally upon various vendors,
governmental agencies, utility companies, telecommunications service companies,
delivery service companies and other service providers. Although these service
providers are outside the Company's control, the Company has mailed letters to
those with whom it believes its relationships are material and has verbally
communicated with some of its strategic customers to determine the extent to
which interfaces with such entities are vulnerable to Year 2000 issues and
whether products and services purchased from or by such entities are Year 2000
ready. The Company is currently evaluating the sufficiency of the responses
received from these third parties. The Company intends to complete follow-up
activities, including but not limited to site surveys, phone surveys and
mailings, with significant vendors and service providers as part of the Phase 2
validation.
COSTS TO ADDRESS YEAR 2000 ISSUES. To date, the Company has not
incurred any material expenditures in connection with identifying or evaluating
Year 2000 compliance issues. The Company has incurred the majority of its costs
from the recent installation of a business computer system consisting primarily
of the Enterprise Requirements Planning (ERP) System as well as the opportunity
cost of time spent by employees of the Company evaluating Year 2000 compliance
matters generally. Because the Company did not accelerate the installation of
the ERP System, it does not consider the costs related thereto to be charges for
Year 2000 compliance. Presently, the Company does not have specific estimates
for the cost of other upgrades and enhancements to its IT Systems but will
provide such by the completion of Phase 1 when they are expected to be
available. The Company does anticipate that these estimates will be reasonable
and presently expects such to be within the Company's fiscal 1999 budget. At
this time, the Company does not possess information necessary to estimate the
potential financial impact of Year 2000 compliance issues relating to its non-IT
Systems, Products, vendors, customers and other third parties. Such impact,
including the effect of a Year 2000 business disruption, could have a material
adverse impact on the Company's financial condition and results of operations.
RISKS OF YEAR 2000 ISSUES. Because the Company is still in the
discovery and evaluation phase of assessing its overall Year 2000 exposure, it
cannot at this time state with certainty that the Year 2000 issues will not have
a material adverse impact on its financial condition, results of operations and
liquidity. Although the Company considers them unlikely, the Company believes
that the following several situations, not in any particular order, make up the
Company's "most reasonably likely worst case Year 2000 scenarios":
1. DISRUPTION OF A SIGNIFICANT CUSTOMER'S ABILITY TO ACCEPT PRODUCTS
OR PAY INVOICES.
The Company's significant customers are large, well-informed customers,
mostly in the automotive field, who are disclosing information to their
vendors that indicates they are well along the path toward Year 2000
compliance. These customers have demonstrated their awareness of the
Year 2000 issue by issuing requirements of their suppliers and
indicating the stages of identification and remediation which they
consider adequate for progressive calendar quarters leading up to the
century mark. The Company's significant customers, moreover, are
substantial companies that the Company believes would be able to make
adjustments in their processes as required to cause timely payment of
invoices. Because of lengthy lead times in the industry, disruption of
orders from the Company is not likely a problem. Any deliveries
occurring in the first half of 2000 will be those resulting from orders
placed in 1999, while any disruptions of the order process early in
2000 will concern deliveries made many months later, with adequate
opportunity for correction (or manual handling) of the order process
before the timing becomes critical.
24
<PAGE>
2. DISRUPTION OF SUPPLY MATERIALS.
Several months ago, the Company began an ongoing process of surveying
its vendors with regard to their Year 2000 readiness and is now in the
process of assessing and cataloging the first responses to the survey.
Having revised its methods of inquiry in recent weeks, the Company is
hopeful of receiving adequate responses from critical vendors and many
non-critical vendors within the first two quarters of fiscal 1999. The
Company expects to work with vendors that show a need for assistance or
that provide inadequate responses, and in many cases expects that
survey results will be refined significantly by such work. Where
ultimate survey results show that the need arises, the Company will
arrange for back-up vendors before the changeover date.
3. DISRUPTION OF THE COMPANY'S IT SYSTEMS.
The Company is proceeding with a scheduled upgrade of its current
hardware and software IT systems to state-of-the-art systems and such
process has required Year 2000 compliance in the various invitations
for proposals. Year 2000 testing is occurring as upgrades proceed and,
in addition, will occur after all upgrades are complete, sometime
during fiscal 1999. For this reason, the Company considers that
disruption of its IT Systems is unlikely.
4. DISRUPTION OF THE COMPANY'S NON-IT SYSTEMS.
The Company is currently conducting a comprehensive assessment of all
non-IT systems, including among other things its manufacturing systems
and operations, with respect to both embedded processors and obvious
computer control. For some systems, upgrades are already scheduled and
it is expected that the Phase 1 assessments will highlight by the end
of the second quarter of fiscal 1999 any further remediation needs.
Considering the nature of the equipment and systems involved, the
Company expects that the timing of assessment to be such that it will
be able to complete any remediation efforts on a reasonably short
schedule, and in any case before arrival of the Year 2000. The Company
also believes that, after such assessment and remediation, if any
disruptions do occur, such will be dealt with promptly and will be no
more severe with respect to correction or impact than would be an
unexpected breakdown of well-maintained equipment.
5. DE-LISTING OF COMPANY AS A VENDOR TO CERTAIN CUSTOMERS.
Several of the Company's principal customers, through the intermediary
of an automotive industry information agency, have required updated
reports in the form of answers to an extensive multiple-choice survey
on the Company's Year 2000 compliance efforts. According to these
customers, failure to reply to the readiness survey would have led to
de-listing as a supplier at the present time, resulting in possible
current inability to bid on procurements requiring deliveries two years
or more in the future. Although the Company did respond to these
reports on a timely basis, the substance of the Company's answers to
the readiness surveys have placed it in a "red" or "danger" zone with
respect to those customers' guidelines. One of the Company's two
largest customers involved in the efforts of the independent audit
agency had also already presented a survey directly to the Company, and
as a result had arranged at its own expense for an independent audit of
the Company's Year 2000 readiness. The independent audit agency had
reported, in the third quarter of fiscal 1998, that although the
Company's level of readiness placed it in the "red" or "danger"
category, the Company (i) was proceeding rapidly with its evaluation
and remediation efforts, (ii) was expected to reach the ultimate
compliance goals of the survey in adequate time, and (iii) should not
be considered a risk to the customer's sources of supply. As a result,
the Company has not been de-listed as a supplier to that customer.
Rather, the customer has merely scheduled monitoring meetings in the
first and second quarters of fiscal 1999. The Company expects but
cannot guarantee that responses from other customers will be similar.
In addition, the Company does not know whether other customers'
expectations will or will not be as stringent as those referred to
above and whether the Company's current schedule will meet or exceed
such expectations.
CONTINGENCY PLANS. While the Company recognizes the need for
contingency planning, it has not yet developed any specific contingency plans
for potential Year 2000 disruptions. The aforementioned 8-step Compliance
Validation Process, however, does include contingency planning by each team and
such plans, as developed, will be carefully reviewed by the Company. The Company
does anticipate developing contingency plans for its most critical areas, but
details of such plans will depend on the Company's final assessment of the
problem as well as the evaluation and success of its remediation efforts. Future
disclosures will include contingency plans as they become available.
25
<PAGE>
CHANGES IN PERSONNEL. A vice president of the Company who was
responsible for the Company's Year 2000 compliance efforts, among other matters,
left the Company in the fourth quarter of fiscal 1998. With respect to covering
the Company's Year 2000 issues, the Company has replaced this former employee
with a senior-level manager with an engineering background who is familiar with
the technological issues and challenges involved with the Year 2000 and who has
accepted both responsibility and authority for all aspects of the Company's
compliance. Regarding the Year 2000, the Company's new Director of Information
Technology, who serves as the Company's Year 2000 Compliance Manger, reports
directly to the Company's Chief Financial Officer and works closely with legal
and, where needed, technical advisors.
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 full 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 and liquidity position; (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; (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; (vi) the Company's
ability to raise additional equity capital of $5 million by February 26, 1999
and another $5 million of equity capital by August 27, 1999 as required by its
lenders; and (vii) interruptions in the Company's operations or those of any of
its suppliers or major customers as such may be caused by problems arising from
the Year 2000. 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
The Company's Credit and Security Agreement described in Footnote 3 to
the financial statements as well as in the Management Discussion and Analysis
carries interest rate risk. Amounts borrowed under this Agreement are subject to
interest charges at a rate equal to the lender's base rate. This is generally
the prime rate. Should the lenders base rate change, the Company's interest
expense will increase or decrease accordingly. As of August 28, 1998, the
Company had borrowed approximately $22 million subject to interest rate risk. On
this amount, a 1% increase in the interest rate would cost the Company $220,000
in additional gross interest cost on an annual basis.
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 1998 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
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
28, 1998, and such information required by such items is incorporated herein by
reference from the proxy statement.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of the report:
<TABLE>
<CAPTION>
Form 10-K
Page Reference
--------------
<S> <C>
1. Consolidated Financial Statements
Index to Consolidated Financial Statements F-1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of August 28, 1998 and
August 29, 1997 F-3
Consolidated Statements of Operations for the Fiscal Years Ended
August 28, 1998, August 29, 1997, and August 30, 1996 F-4
Consolidated Statements of Changes in Shareholders' Investment for the
Fiscal Years Ended August 28, 1998, August 29, 1997, and August 30, 1996 F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended
August 28, 1998, August 29, 1997, and August 30, 1996 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
</TABLE>
(b) Reports on Form 8-K
The following documents or portions of documents heretofore filed by
the Company with the Securities and Exchange Commission (the "Commission") under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are
incorporated herein by reference: (1) Current Report on Form 8-K filed on August
18, 1998 and (2) Current Report on Form 8-K Filed on August 28, 1998.
(c) Exhibits and Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<C> <S>
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.
4.3 Rights Agreement dated as of June 16, 1996 and amended July 25, 1998
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
and Amendment No. 1 thereto dated July 30, 1998.
4.4 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock, incorporated by reference from Exhibit 1
of Registrant's Form 8-A dated June 20, 1996.
27
<PAGE>
4.5 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.
4.6 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.
4.7 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.
4.8 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.
4.9 Convertible Preferred Stock Purchase Agreement among the Company and
the Purchasers listed in Exhibit A thereto, incorporated by reference
from Exhibit 4.1 of the Registrant's Form 8-K filed August 18, 1998.
4.10 Certificate of Designation, Preferences and Rights of Series D
Convertible Preferred Stock, incorporated by reference from Exhibit 4.2
of the Registrant's Form 8-K filed August 18, 1998.
4.11 Form of Warrant issued to the Purchasers, incorporated by reference
from Exhibit 4.3 of Registrant's Form 8-K filed August 18, 1998.
4.12 Registration Rights Agreement among the Company and the Purchasers
listed in Exhibit A thereto, incorporated by reference from Exhibit 4.4
of Registrant's Form 8-K filed August 18, 1998.
4.13 Agreement Relating to Sheldahl between Molex Incorporated and the
Registrant dated November 18, 1998.
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 March 2, 1998 (File No.
333-47183).
10.3 Employee Stock Purchase Plan, incorporated by reference from Exhibit
4.1 of the Registrant's Form S-8 filed November 21, 1997 (File No.
333-40719).
10.4 Credit and Security Agreement dated June 19, 1998, among the
Registrant, Norwest Bank Minnesota, N.A., Harris Trust and Savings
Bank, NBD Bank, N.A., and The CIT Group/Equipment Financings, Inc.,
incorporated by reference from Exhibit 10.1 of the Registrant's Form
S-3 dated July 1, 1998 (File No. 333-58307).
10.4.1 First Amendment to Credit and Security Agreement dated November 25,
1998, among the Registrant, Norwest Bank Minnesota, N.A., Harris Trust
and Savings Bank, NBD Bank, N.A., and the CIT Group/Equipment
Financing, Inc.
10.5 Form of Warrant issued in connection with Credit and Security Agreement
dated June 19, 1998, among the Registrant, Norwest Bank Minnesota,
N.A., Harris Trust and Savings Bank, NBD Bank, N.A., and The CIT
Group/Equipment Financings, Inc., incorporated by reference from
Exhibit 10.2 of the Registrant's Form S-3 dated July 1, 1998 (File No.
333-58307).
10.6(*) Limited Liability Company Agreement of Modular Interconnect Systems,
L.L.C., dated July 28, 1998, without exhibits, incorporated by
reference from Exhibit 10.1 of the Registrant's Form 8-K filed August
28, 1998.
10.7 Loan Agreement, dated February 26, 1998, between the Company and
Relational Funding Corporation, incorporated by reference from Exhibit
10.1 of the Company's Report on Form 10-Q filed April 13, 1998.
10.8 Promissory Note dated February 26, 1998, between the Company and
Relational Funding Corporation, incorporated by reference from Exhibit
10.2 of the Company's Report on Form 10-Q filed April 13, 1998.
28
<PAGE>
10.9 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.
10.10 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.
10.10.1 Form of Amendment No. 1 to Employment (change of control) Agreement for
Executive Officers of the Registrant.
10.11 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.
10.12 Supplementary Executive Retirement Plan Agreement between the
Registrant and James E. Donaghy dated November 5, 1996.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
10.17 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.
10.17.1 Waiver and Amendment with Addendum to the Note Purchase Agreement
between the Registrant and Northern Life Insurance Company dated
November 25, 1998.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24 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.
29
<PAGE>
10.25 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.
10.26 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.
10.27 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.
10.28 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.
10.28.1 Amendment No. 1 to License Agreement dated June 20, 1994 between
Sidrabe and the Registrant.
11 Statement Regarding Computation of Per Share Earnings.
22 Subsidiary of Registrant.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule
(*) Certain portions of this Exhibit have been deleted and filed separately
with the Commission pursuant to a request for confidential treatment
under Rule 24b-2. Spaces corresponding to the deleted portions are
represented by brackets with asterisks.
</TABLE>
30
<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.
<TABLE>
<S> <C>
Dated: November 25, 1998 SHELDAHL, INC.
By: /s/ James E. Donaghy
-----------------------------------------
James E. Donaghy, Chief Executive Officer
By: /s/ Edward L. Lundstrom
-----------------------------------------
Edward L. Lundstrom, President
</TABLE>
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 25, 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.
<TABLE>
<S> <C>
By /s/ James S. Womack Chairman of the Board and Director
------------------------------
James S. Womack
By /s/ James E. Donaghy Chief Executive Officer and Director
------------------------------ (principal executive officer)
James E. Donaghy
By /s/ Edward L. Lundstrom President
------------------------------
Edward L. Lundstrom
By /s/ John V. McManus Vice President - Finance
------------------------------ (principal financial and accounting officer)
John V. McManus
By /s/ John G. Kassakian Director
------------------------------
John G. Kassakian
By /s/ Gerald E. Magnuson Director
------------------------------
Gerald E. Magnuson
By /s/ Dennis M. Mathisen Director
------------------------------
Dennis M. Mathisen
By /s/ William B. Miller Director
------------------------------
William B. Miller
By /s/ Kenneth J. Roering Director
------------------------------
Kenneth J. Roering
By /s/ Raymond C. Wieser Director
------------------------------
Raymond C. Wieser
By /s/ Beekman Winthrop Director
------------------------------
Beekman Winthrop
</TABLE>
31
<PAGE>
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Report of Independent Public Accountants...................................................F-2
Consolidated Balance Sheets as of August 28, 1998, and August 29, 1997.....................F-3
Consolidated Statements of Operations for the Fiscal Years Ended August 28, 1998,
August 29, 1997, and August 30, 1996..................................................F-4
Consolidated Statements of Changes in Shareholders' Investment for the Fiscal
Years Ended August 28, 1998, August 29, 1997, and August 30, 1996.....................F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended August 28, 1998,
August 29, 1997, and August 30, 1996..................................................F-6
Notes to Consolidated Financial Statements.................................................F-7
Schedule II: Valuation and Qualifying Accounts............................................S-1
</TABLE>
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 28,
1998, and August 29, 1997, 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 28, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with 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 28, 1998, and August 29, 1997, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended August 28, 1998, 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.
As discussed in Note 2 to the financial statements, effective August
30, 1997, the Company changed its method of accounting for start-up costs.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
October 12, 1998
F-2
<PAGE>
Sheldahl, Inc. and Subsidiary
Consolidated Balance Sheets
(in thousands, except share and per share data)
Assets
<TABLE>
<CAPTION>
August 28, August 29,
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,005 $ 5,567
Accounts receivable, net of allowances of $225 15,727 15,880
Inventories 15,488 13,078
Deferred taxes - 765
Prepaid expenses and other current assets 627 406
--------- ---------
Total current assets 32,847 35,696
--------- ---------
Plant and equipment:
Land and buildings 28,255 26,467
Machinery and equipment 113,642 112,071
Construction in progress 26,682 19,303
Accumulated depreciation (66,322) (57,036)
--------- ---------
Net plant and equipment 102,257 100,805
--------- ---------
Other assets 1,202 2,866
--------- ---------
$ 136,306 $ 139,367
--------- ---------
--------- ---------
Liabilities and Shareholders' Investment
Current liabilities:
Current maturities of long-term debt $ 4,296 $ 818
Accounts payable 7,766 7,309
Accrued salaries 1,554 1,606
Other accrued liabilities 4,518 3,020
Restructuring reserves 5,494 -
--------- ---------
Total current liabilities 23,628 12,753
--------- ---------
Long-term debt, less current maturities 27,829 40,869
Restructuring reserves 2,131 -
Other non-current liabilities 3,961 2,813
--------- ---------
Commitments and contingencies (Notes 3, 4, 5, 6, 7, 9 and 11) - -
Shareholders' investment:
Preferred stock, $1 par value, 500,000 shares authorized; Series B and D
5% cumulative convertible preferred,
40,567 and 15,000 shares issued and outstanding 41 15
Common stock, $.25 par value, 20,000,000 shares authorized;
9,660,614 and 9,031,371 shares issued and outstanding 2,415 2,258
Additional paid-in capital 99,751 66,923
Retained earnings (deficit) (23,450) 13,736
--------- ---------
Total shareholders' investment 78,757 82,932
--------- ---------
$ 136,306 $ 139,367
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
Sheldahl, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(in thousands, except per share data) For The Fiscal Years Ended
August 28, August 29, August 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales $ 117,045 $ 105,266 $ 114,120
Cost of sales 109,143 94,933 89,171
--------- --------- ---------
Gross profit 7,902 10,333 24,949
--------- --------- ---------
Expenses:
Sales and marketing 9,861 9,560 9,254
General and administrative 8,152 6,839 5,129
Research and development 3,881 4,705 2,755
Restructuring costs 8,500 - -
Impairment charges 3,300 - -
Interest 2,547 1,298 539
--------- --------- ---------
Total expenses 36,241 22,402 17,677
--------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in method of accounting (28,339) (12,069) 7,272
Provision (benefit) for income taxes 2,952 (4,100) 2,500
--------- --------- ---------
Net income (loss) before cumulative effect
of change in method of accounting (31,291) (7,969) 4,772
Cumulative effect of change in method of accounting (5,206) - -
--------- --------- ---------
Net income (loss) before convertible preferred
stock dividends (36,497) (7,969) 4,772
Convertible preferred stock dividends (689) - -
--------- --------- ---------
Net income (loss) applicable to common
shareholders $ (37,186) $ (7,969) $ 4,772
--------- --------- ---------
Net income (loss) per common share:
Basic -
Net income (loss) before cumulative effect of
change in method of accounting and after
convertible preferred stock dividends $ (3.41) $ (0.89) $ 0.57
Cumulative effect of change in method
of accounting (0.56) - -
--------- --------- ---------
Net income (loss) per common share $ (3.97) $ (0.89) $ 0.57
--------- --------- ---------
Diluted -
Net income (loss) before cumulative effect of
change in method of accounting and after
convertible preferred stock dividends $ (3.41) $ (0.89) $ 0.55
Cumulative effect of change in method
of accounting (0.56) - -
--------- --------- ---------
Net income (loss) per common share $ (3.97) $ (0.89) $ 0.55
--------- --------- ---------
--------- --------- ---------
Number of shares outstanding - basic 9,364 8,967 8,414
Number of shares outstanding - diluted 9,364 8,967 8,686
</TABLE>
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
<TABLE>
<CAPTION>
For The Fiscal Years Ended
(in thousands) August 28, August 29, August 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Series B convertible preferred stock:
Balance at beginning of period $ 15 $ - $ -
Proceeds from stock issuance - 15 -
Conversion to common stock (7) - -
-------- -------- -------
Balance at end of period $ 8 $ 15 $ -
-------- -------- -------
-------- -------- -------
Series D convertible preferred stock:
Balance at beginning of period $ - $ - $ -
Proceeds from stock issuance 33 - -
-------- -------- -------
Balance at end of period $ 33 $ - $ -
-------- -------- -------
-------- -------- -------
Common stock:
Balance at beginning of period $ 2,258 $2,228 $ 1,708
Conversion of series B preferred stock 144 - -
Proceeds from issuance of
common stock, net - - 503
Proceeds from stock purchase
plan transactions 5 - -
Proceeds from stock options exercised 8 30 17
-------- -------- -------
Balance at end of period $ 2,415 $2,258 $ 2,228
-------- -------- -------
-------- -------- -------
Additional paid-in capital:
Balance at beginning of period $ 66,923 $ 51,404 $22,311
Issuance (cost) of series B
convertible preferred stock (316) 14,285 -
Conversion of series B preferred stock 38 - -
Proceeds from issuance of
common stock, net - - 28,494
Fair value of warrants issued with
credit and security agreement 377 - -
Proceeds from stock purchase
plan transactions 135 - -
Proceeds from stock options exercised 218 1,234 599
Proceeds from series D convertible
preferred stock issuance, net 32,376 - -
-------- -------- -------
Balance at end of period $ 99,751 $ 66,923 $51,404
-------- -------- -------
-------- -------- -------
Retained earnings (deficit):
Balance at beginning of period $ 13,736 $ 21,705 $16,933
Net income (loss) (37,186) (7,969) 4,772
-------- -------- -------
Balance at end of period $(23,450) $ 13,736 $21,705
--------- -------- -------
--------- -------- -------
</TABLE>
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)
<TABLE>
<CAPTION>
For The Fiscal Years Ended
August 28, August 29, August 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net income (loss) $(37,186) $ (7,969) $ 4,772
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 14,382 10,650 6,783
Deferred income taxes 2,952 (4,196) 1,846
Restructuring costs 8,500 - -
Impairment charges 3,300 - -
Accounting method change 5,206 - -
Net change in other operating activities:
Accounts receivable 153 5,211 (3,454)
Inventories (2,410) (1,553) 984
Prepaid expenses and other current assets (221) (16) 342
Other assets (523) 146 734
Accounts payable and accrued liabilities 1,903 (1,118) (708)
Restructuring reserves (875) - -
Other non-current liabilities 251 544 (414)
-------- -------- --------
Net cash provided by (used in) operating activities (4,568) 1,699 10,885
-------- -------- --------
Investing activities:
Capital expenditures, net (23,268) (30,729) (24,920)
-------- -------- --------
Financing activities:
Net borrowings (repayments) under revolving
credit and bridge facilities (26,456) 17,275 (15,290)
Proceeds from term facility and warrants, net 16,000 - -
Proceeds from other long-term debt 2,335 1,452 -
Repayments of long-term debt (1,064) (598) (429)
Issuance of preferred stock, net 32,093 14,300 -
Issuance of common stock - - 28,997
Stock options exercised 366 1,264 616
-------- -------- --------
Net cash provided by financing activities 23,274 33,693 13,894
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (4,562) 4,663 (141)
-------- -------- --------
Cash and cash equivalents at beginning of period 5,567 904 1,045
-------- -------- --------
Cash and cash equivalents at end of period $ 1,005 $ 5,567 $ 904
-------- -------- --------
-------- -------- --------
Supplemental cash flow information:
Interest paid $ 4,423 $ 3,078 $ 2,221
-------- -------- --------
-------- -------- --------
Income taxes paid (refunded) $ 36 $ (68) $ 131
-------- -------- --------
-------- -------- --------
</TABLE>
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
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-Registered Trademark-. From these materials, Sheldahl fabricates
high-value derivative products: single- and double-sided flexible
interconnects and assemblies under the trade names FLEXBASE-Registered
Trademark-, NOVAFLEX-Registered Trademark- HD and NOVAFLEX-Registered
Trademark- VHD and substrates for silicon chip carriers under the trade name
VIAARRAY-Registered Trademark- and VIATHIN-Registered Trademark-.
During the two year period ended August 28, 1998, the Company has
incurred cumulative net losses totaling approximately $45.2 million,
including restructuring and other charges of $17.0 million. As a result of
these losses and the investment the Company has made in its Longmont,
Colorado facility and in other capital assets, the Company has used cash of
approximately $54.0 million supporting capital expenditures and $2.9 million
supporting operating losses in the two-year period ended August 28, 1998. The
Company has financed these transactions principally through debt and equity
financing.
During 1999, the Company anticipates reducing capital expenditures
to approximately $7 million. Operating results are expected to improve in
fiscal 1999 as a result of the recent restructuring initiatives undertaken by
the Company and increased production at the Company's Longmont, Colorado
facility; however, operating losses are expected to continue, but at a lower
level than fiscal 1998. The Company anticipates financing the capital
expenditures and operating activities from borrowings under its current
credit and security agreement. Management believes with planned operating
improvements that the Company has adequate liquidity to provide uninterrupted
support for its business operations during fiscal 1999. Nevertheless, the
Company is in the process of seeking additional debt or equity capital to
further ensure the ongoing operations of the Company. This is based on the
uncertainty of achieving expected improved operating results, including
realizing significant sales growth in fiscal 1999 from the Company's Micro
Products business, and to meet the covenants under the Company's credit and
security agreement. The Company is required to raise additional equity
capital of $5 million by February 26, 1999 and another $5 million of equity
capital by August 27, 1999. In the event the Company is unable to raise the
capital, the Company would be in technical default under its credit and
security agreement enabling the Company's lenders to require immediate
repayment of the borrowings under the credit and security agreement. If the
Company does not achieve its projected operating results and/or it does not
have borrowings available under its current credit and security agreement,
management believes that it has options available to obtain necessary
additional new capital, including the issuance of additional new debt or
additional new equity financing. There can be no assurance that the Company
will be successful in its attempt to issue additional debt or to raise
additional capital on terms acceptable to the Company.
(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
transactions have been eliminated.
USE OF ESTIMATES -
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 sales and expenses during the
reporting period. Ultimate results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS -
The carrying amounts reported in the balance sheet for accounts
receivable and accounts payable approximate fair value because of the
immediate or short-term maturity of these financial instruments. The carrying
amount for long-term debt approximates its fair value because of the variable
rate feature and because the related interest rates are comparable to rates
currently available to the Company for debt with similar terms.
F - 7
<PAGE>
SIGNIFICANT CUSTOMERS -
The Company's three largest customers accounted for sales of
$18,100,000, $12,100,000, and $11,700,000 in 1998. The Company's two largest
customers accounted for sales of $12,052,000 and $11,143,000 in 1997 and
$15,549,000 and $13,944,000 in 1996. No other customers accounted for more
than 10% of net sales.
EXPORT SALES -
The Company had export sales of $24,501,000 in 1998; $15,040,000 in
1997; and $11,968,000 in 1996.
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 includes the cost
of materials, direct labor, and applicable manufacturing overhead.
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
August 28, August 29,
1998 1997
---- ----
<S> <C> <C>
Raw material $ 4,964 $ 3,069
Work-in-process 4,742 6,484
Finished goods 5,782 3,525
-------- --------
Total $ 15,488 $ 13,078
-------- --------
-------- --------
</TABLE>
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 $1,903,000 in 1998,
$1,735,000 in 1997, and $1,605,000 in 1996. 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. During fiscal 1998, a valuation
allowance was provided for the Company's net deferred tax assets (see note 8).
F - 8
<PAGE>
EARNINGS PER SHARE -
The Company follows the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (SFAS 128). Basic earnings
per share is computed using the weighted average number of shares of common
stock outstanding for the period. Diluted earnings per share is computed
using the weighted average number of shares of common stock, the dilutive
common equivalent shares related to stock options outstanding during the
period and the equivalent common shares of convertible preferred stock, if
those equivalent shares are dilutive. During fiscal 1998 and 1997, stock
options and convertible preferred stock equivalents are anti-dilutive and,
therefore, are not included in the computation of diluted earnings per share.
NEW ACCOUNTING PRONOUNCEMENTS -
During June 1997, the Financial Accounting Standards Board released
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," effective for fiscal years beginning after December 15, 1997.
SFAS No. 131 requires disclosure of business and geographic segments in the
consolidated financial statements of the Company. The Company will adopt SFAS
No. 131 in 1998 and is currently analyzing the impact it will have on the
disclosures in its financial statements.
During February 1998, the Financial Accounting Standards Board
issued SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," effective for fiscal years beginning after December
31, 1997. SFAS No. 132 revises certain of the disclosure requirements, but
does not change the measurement or recognition of those plans. The adoption
of SFAS No. 132 will result in revised and additional disclosures, but will
have no effect on the financial position, results of operations, or liquidity
of the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and hedging Activities,"
effective for years beginning after June 15, 1999. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge criteria are met. Special accounting for qualifying hedges allow a
derivative's gains or losses to offset related results on the hedged item in
the income statement and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting. The Company has not yet quantified the impacts of adopting SFAS
No. 133 and has not yet determined the timing or method of adoption.
START-UP COSTS -
In fiscal 1998, the Company adopted Statement of Position No. 98-5,
"Reporting on the Costs of Start-Up Activities," which requires the expensing
of these items as incurred, versus capitalizing and expensing them over a
period of time. Start-up activities are broadly defined and include one-time
activities related to opening a new facility, introducing a new product or
service, conducting business in a new territory, conducting business with a
new class of customer or beneficiary, initiating a new process in an existing
facility, commencing some new operation, and organizing a new entity. The
adoption of this statement resulted in a cumulative effect of a change in
method of accounting of approximately $5.2 million, primarily related to
costs capitalized by the Company from its Longmont, Colorado facility. The
adoption of this statement was applied retro-actively to the beginning of
fiscal 1998, and the Company's first and second quarters have been restated
to reflect this change in method of accounting, in accordance with the
provisions of SOP 98-5 and APB 20.
(3) Restructuring Costs
During fiscal 1998, the Company recorded liabilities of $8.5 million
relating to the voluntary and involuntary termination of certain employees as
well as exiting activities at the Company's Aberdeen, South Dakota assembly
facility. All such liabilities were charged to restructuring costs on the
Company's statement of operations. In total, 309 employees have been affected
and consisted of Northfield salaried, Northfield production and Aberdeen
production staff. The Company has provided $5.7 million of termination
benefits for these 309 employees of which $735,000 was paid on or before
August 28, 1998. As of October 1, 1998, 270 of the 309 affected employees
have terminated employment with the Company.
F - 9
<PAGE>
Exit costs of $2.8 million have been recorded for the Aberdeen
facility and consist primarily of equipment disposal costs, certain rental
and other obligations. As of August 28, 1988, the Company has paid $140,000
of such exit costs.
(4) Financing
<TABLE>
<CAPTION>
Long-term debt consisted of the following (in thousands): August 28, August 29,
1998 1997
---- ----
<S> <C> <C>
Revolving facility $ 6,062 $32,519
Term facility, net 15,623 -
Note payable to insurance company, secured by real estate
mortgage. Varying interest rates and principal payments
through September 1, 2002 5,195 5,383
Capitalized lease obligations 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 1,534 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 572 690
Installment note due a finance company secured by computer
hardware and software, interest at 9.69% with monthly
payments of $49, including principal and interest, due
January 2003 2,099 -
Note payable to Economic Development Agency, secured
by $550 standby letter of credit, interest at 2.0% with
monthly payments of $9, including principal and interest,
remaining balance paid October 1998 533 624
Other 507 601
------- -------
32,125 41,687
Less-current maturities (4,296) (818)
------- -------
$27,829 $40,869
------- -------
------- -------
</TABLE>
In fiscal 1998, the Company executed a new credit agreement, which
completely replaces the Company's prior credit facilities. The new agreement
provides three separate facilities: a revolver facility of up to $25 million
based on the Company's working capital; a term facility for $16 million based
on the appraised value of the Company's unencumbered equipment; and a bridge
facility for $19 million. The bridge facility was repaid in full on July 31,
1998 with part of the net proceeds from the Series D Preferred Stock.
Interest on the revolver and the term facility is charged at the base rate,
which was 8.5% as of August 28, 1998. As of August 28, 1998, the amount
available to borrow on the revolver was $10.5 million based on a $16.6
million borrowing base on the working capital revolver. Under the agreement,
the Company issued 5-year warrants to purchase in the aggregate 100,000
shares of common stock at a price of $6.92 per share (101.5% of the Company's
common stock price at date of issuance), exercisable anytime through July
2003. The fair value of the warrants of approximately $377,000 was determined
on their date of issuance using the Black-Scholes methodology, has been
recorded as a reduction of the term facility in the accompanying financial
statements, and will be accreted as interest expense over the term of the
associated credit and security agreement. The agreement requires certain
covenants that restrict the payments of cash dividends, capital expenditures,
redemption of preferred stock, and require the Company to maintain certain
levels of net worth and net income, maintain certain levels of cash flows
from operations, and requires the Company to raise additional equity capital
of $5 million by February 26, 1999 and another $5 million of equity
F - 10
<PAGE>
capital by August 27, 1999, as defined (see Note 1). All borrowings under the
agreement are secured by the Company's tangible and intangible assets. The
term facility requires monthly repayments of $205,000 beginning January 1999.
The revolving credit facility is due on May 31, 2001. As of August 28, 1998,
the Company has complied with or has obtained waivers for all debt covenants.
Subsequent to year end, the Company amended the terms and conditions
of its note payable to an insurance company. The amended agreement requires
principal payments of $500,000 due December 1, 1998, $250,000 due January 1,
1999, $250,000 due February 1, 1999 and $60,000 due each month thereafter
beginning March 1, 1999. The interest rate charged will be 10% effective
December 1, 1998 and will increase monthly to 15% effective May 1, 1999. The
agreement requires certain covenants that restrict the payment of cash
dividends, total corporate debt, sales of corporate assets, capital
expenditures and maintain certain levels of net worth and cash flows. The
table below reflects the changes required by the amended credit agreement.
Future maturities of debt are as follows (in thousands):
<TABLE>
<S> <C>
Fiscal 1999 $ 4,296
Fiscal 2000 4,239
Fiscal 2001 19,627
Fiscal 2002 1,816
Fiscal 2003 2,157
Thereafter 367
-------
$32,502
-------
-------
</TABLE>
(5) Preferred Stock
On July 30, 1998, the Company issued 32,917 shares of Series D
convertible preferred stock with a total stated value of $32,917,000. This
Series D preferred stock carried a 5% dividend rate and is convertible to
nearly 5.4 million shares at a fixed rate of $6.15 per share. The holders of
the Series D preferred stock were also issued 329,170 warrants to purchase
the Company's common stock at a price of $7.6875 per share. These warrants
expire July 29, 2001. Net proceeds from the Series D preferred stock were
$32,409,000.
On August 27, 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. Series B
preferred stock is convertible to common stock and carries a 5% cumulative
dividend, payable upon conversion and payable in common stock or cash, at the
Company's option. The Series B 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 101% of the
lowest consecutive five-day average closing price of the common stock in the
30-day period immediately prior to conversion. Holders of the Series B
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 be required 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.
During February of 1998, the Company received a conversion notice
for $7,350,000 in stated value of Series B preferred stock. In accordance
with the agreement, the Company issued 575,149 shares of common stock
(including accrued dividends) at a conversion price of approximately $13 per
share (see note 12).
(6) 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 25,000
target grant replacement stock options to each non-employee director of the
Company on the date that each such director is first elected to the Board of
Directors, and expire, to the extent not already expired, one year after
termination of service as a Director. As of August 28, 1998, the Plans
authorize the future granting of options to purchase up to 176,000 shares of
common stock.
F - 11
<PAGE>
Stock option transactions during 1996, 1997, and 1998 are summarized
as follows:
<TABLE>
<CAPTION>
Shares Price per Share
------ ---------------
<S> <C> <C>
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
Granted 425,723 $5.250 to $20.375
Exercised (54,678) $5.000 to $16.875
Lapsed (87,012) $11.500 to $22.125
---------
Outstanding at August 28, 1998 1,472,813 $5.00 to $22.125
---------
</TABLE>
Options exercisable were 946,710 as of August 28, 1998, 669,562 as
of August 29, 1997, and 569,660 as of August 30, 1996.
The options outstanding as of August 28, 1998, expire five or ten
years after the grant date as follows:
<TABLE>
<CAPTION>
Number of Options
Fiscal Years That Expire
------------ -----------
<S> <C>
1999 66,855
2000 25,413
2001 48,718
2002 100,000
2003 34,454
2004 92,604
2005 53,645
2006 313,750
2007 401,606
2008 335,768
</TABLE>
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 stock options granted using the
Black-Scholes option pricing model as prescribed by SFAS 123, using the
following weighted average assumptions:
F - 12
<PAGE>
<TABLE>
<CAPTION>
Fiscal Years Ended
August 28, August 29, August 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5.07 - 6.18% 6.21 - 6.63% 5.50 - 6.61%
Expected lives 7 years 7 years 4.5 to 7 years
Expected volatility 49.17 - 70.46% 48.75 - 65.44% 45.45 - 51.46%
</TABLE>
Using the Black-Scholes option pricing model, the total value of
stock options granted during 1998, 1997 and 1996 was $2,645,000, $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 1998,
1997 and 1996 was $6.86 per share, $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:
<TABLE>
<CAPTION>
Fiscal Years Ended
August 28, 1998 August 29, 1997 August 30, 1996
(in thousands, --------------- --------------- ---------------
except per share data) As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(37,186) $(41,134) $(7,969) $(9,887) $4,772 $4,224
Earnings (loss) per share-basic $(3.97) $(4.39) $(0.89) $(1.10) $0.57 $0.50
Earnings (loss) per share-diluted $(3.97) $(4.39) $(0.89) $(1.10) $0.55 $0.49
</TABLE>
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.
(7) 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 2004. Minimum rent commitments under operating leases are $2,658,000
in 1999, $1,662,000 in 2000, $843,000 in 2001, $293,000 in 2002, $271,000 in
2003, and $94,000 in 2004. 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 $2,816,000 in
1998, $2,721,000 in 1997, and $2,353,000 in 1996.
The Company has 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 1998. The following is a schedule by year of
future gross minimum capital lease payments (in thousands):
<TABLE>
<S> <C>
Fiscal 1999 $ 653
Fiscal 2000 653
Fiscal 2001 653
Fiscal 2002 653
Fiscal 2003 24
-------
$ 2,636
Less amount representing interest (530)
-------
Present value of net minimum capital lease payments $ 2,106
-------
-------
</TABLE>
F - 13
<PAGE>
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 exposes 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, based upon the advice and consultations with its legal counsel,
that final disposition of these matters will not have a material adverse
effect on the Company's operating results or financial condition.
(8) Income Taxes
The provision (benefit) for income taxes consisted of the following
(in thousands):
<TABLE>
<CAPTION>
August 28, August 29, August 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Currently payable $ - $ 96 $ 654
Deferred 2,952 (4,196) 1,846
------ -------- ------
Provision (benefit) for income taxes $2,952 $(4,100) $2,500
------ -------- ------
------ -------- ------
</TABLE>
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):
<TABLE>
<CAPTION>
August 28, August 29, August 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory rates $(11,404) $(4,100) $ 2,472
Research and experimentation tax credits (356) - -
Tax benefit of foreign sales corporation - - (182)
State income taxes, net of federal benefit (908) 96 90
Change in valuation allowance 15,389 - -
Other 231 (96) 120
-------- -------- -------
$ 2,952 $(4,100) $ 2,500
-------- -------- -------
-------- -------- -------
</TABLE>
As of August 28, 1998, the Company had federal net operating loss
carryforwards of $40.5 million and federal income tax credit carry forwards
of approximately $1.3 million that expire through 2012. Future use of these
federal tax benefits are dependent upon profitability of the Company. The
future use of federal tax benefits may be subject to limitation under
Internal Revenue Code Section 382, in the event a change in control occurs.
F - 14
<PAGE>
Temporary differences and carryforwards which result in net deferred
income tax assets as of August 28, 1998, and August 29, 1997, were as follows
(in thousands):
<TABLE>
<CAPTION>
August 28, August 29,
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 14,045 $ 6,819
Restructuring reserves 2,942 -
Income tax credit carryforwards 1,333 977
Postretirement benefits 752 644
Deferred compensation 580 630
Inventories 508 178
Medical reserves 239 247
Vacation reserve 186 155
Bad debt reserve 83 83
Other 117 130
-------- --------
Deferred tax assets 20,785 9,863
Deferred tax liabilities:
Depreciation (5,191) (6,706)
Valuation allowance (15,594) (205)
-------- --------
Net deferred taxes $ - $ 2,952
-------- --------
-------- --------
</TABLE>
A valuation allowance is provided when it is more likely than not
that some portion of the deferred tax assets will not be realized. During
1998, the Company established a full valuation allowance for its net deferred
tax assets due to the uncertainty related to their ultimate realization. The
Company arrived at such a decision considering several factors, including but
not limited to, historical cumulative losses incurred by the Company and
anticipated continued operating losses. The Company will continue to evaluate
the need for the valuation allowance, and at such time it is determined that
it is more likely than not that such deferred tax assets will be realized,
the valuation allowance, or a portion thereof, will be reversed.
(9) 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):
<TABLE>
<CAPTION>
August 28, August 29, August 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ 200 $ 177 $ 184
Interest cost on projected benefit obligation 382 350 337
Return on plan assets (1,069) (862) (606)
Net amortization and deferral 659 556 385
------- ------ ------
Net periodic pension cost $ 172 $ 221 $ 300
------- ------ ------
------- ------ ------
</TABLE>
F - 15
<PAGE>
Funding information with respect to the Northfield Plan is as
follows (in thousands):
<TABLE>
<CAPTION>
August 28, August 29,
1998 1997
---- ----
<S> <C> <C>
Actuarial present value of -
Vested benefit obligation $6,376 $4,764
------ ------
------ ------
Accumulated benefit obligation $6,491 $4,847
------ ------
------ ------
Projected benefit obligation $6,491 $4,847
------ ------
------ ------
Plan assets at fair value $6,234 $5,317
------ ------
------ ------
Projected benefit obligation in excess
of (less than) plan assets $ 257 $(470)
Unrecognized transition amount - (50)
Unrecognized prior service cost - (659)
Unrecognized net gain - 1,400
------ ------
Net pension liability $ 257 $ 221
------ ------
------ ------
</TABLE>
The accumulated benefit obligation is the actuarial present value of
all vested and non-vested benefits for employee service before July 1, 1998.
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 7% in 1998 and 8% in 1997. The assumed long-term rate of return for assets
is 8% in both 1998 and 1997. 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% of each participant's
salary. The Company's expense related to the employee savings plan was
$448,000 in 1998, $475,000 in 1997, and $1,014,000 in 1996.
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):
<TABLE>
<CAPTION>
August 28, August 29, August 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost $ 36 $ 35 $ 33
Interest cost on accumulated
benefit obligation 64 71 66
----- ----- -----
----- -----
Net periodic postretirement
benefit cost $ 100 $ 106 $ 99
----- ----- -----
----- ----- -----
</TABLE>
F - 16
<PAGE>
Funding information related to the Company's plan is as follows (in
thousands):
<TABLE>
<CAPTION>
August 28, August 29, August 30,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Accumulated benefit obligation $ 2,050 $ 1,756 $ 1,347
Plan assets at fair value - - -
------- ------- -------
Projected benefit obligation in
excess of plan assets 2,050 1,756 1,347
Unrecognized net gain - - -
------- ------- -------
Accrued postretirement benefits $ 2,050 $ 1,756 $ 1,347
------- ------- -------
------- ------- -------
</TABLE>
A 10.5% annual rate of increase in the health care cost trend rate
was assumed with rates decreasing gradually to 5.5% 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 the accumulated
postretirement benefit obligation by $63,000 and the net periodic
postretirement benefit cost by $2,000 each year. The discount rate used in
determining the accumulated postretirement benefit obligation was 7% for 1998
and 8% for 1997.
(10) 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 received
approximately $12.2 million in funding through August of 1998 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 $257,000 in 1998, $584,000 in fiscal 1997, and $3,235,000 in
1996 in costs related to this project. As of August 28, 1998, the consortium
has reimbursed substantially all of these costs and the Company will no
longer incur costs that will be reimbursed by ARPA.
(11) Joint Ventures
On July 28, 1998, the Company and Molex Incorporated ("Molex")
formed a joint venture to design, market and assemble modular interconnect
systems to replace wiring harnesses in primarily the automotive market. The
new company was named Modular Interconnect Systems, L.L.C. and it is a
Delaware limited liability company ("Origin"). Origin will utilize
proprietary flexible products developed by the Company and proprietary
connectors developed by Molex in the development of the new modular
interconnect system as an alternative to conventional automotive wiring
harnesses and flex circuit assemblies. The Company and Molex will supply
their respective products to Origin pursuant to long-term supply contracts.
The Company owns 40% and Molex owns 60% of Origin. Each party has a right of
first refusal with respect to the other party's ownership interest. Origin is
being funded by contributions from the Company and Molex. Certain development
costs of those components to be designed and developed by Sheldahl for the
new systems will also be reimbursed by Molex and other development costs may
be funded by loans from Molex. Both the Company and Molex granted Origin a
non-exclusive license to certain of their intellectual property for purposes
of producing the new modular interconnect systems. Each license takes effect
and is contingent upon a change of control of the Company or Molex and the
purchase of such person's membership interest in Origin. As of August 28,
1998, the Company's investment in and the impact of accounting for its
investment in Origin under the equity method has not been material.
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. The
percentage used is a sliding scale based on the dollar volume of sales and
the royalty year as defined. The minimum royalty payment is $100,000 per
royalty year. The agreements also require that the Company purchase fixed
amounts of the joint venture's licensed product. This purchase
F - 17
<PAGE>
commitment is estimated to be approximately $450,000 per year for three years
beginning in fiscal 2000. The joint venture was 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
accounts for its investment in this joint venture under the cost method, and
the impact thereof has not been material.
(12) Events Subsequent to the Date of Report of Independent Public
Accountants (Unaudited)
Subsequent to year-end and through October 30, 1998, the Company
received conversion notices representing 6,737 shares of Series B Preferred
Stock. These conversions were handled as follows: 5,762 preferred shares plus
accrued dividends were converted into 1,230,178 shares of the Company's
common stock; 623 preferred shares were redeemed with cash payments totaling
$837,000, including accrued dividends; 352 preferred shares require
shareholder approval before the Company can issue the related common shares.
As of October 30, 1998, the Company has 10,890,792 shares of common
stock, 352 shares of Series B Preferred Stock awaiting shareholder approval
for conversion, and 913 additional shares of Series B Preferred Stock
outstanding.
(13) Quarterly Results of Operations (Unaudited)
The consolidated results of operations for the four quarters of 1998
and 1997 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Fiscal 1998
-----------
First(1) Second(1) Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales $28,992 $ 27,751 $ 31,891 $ 28,411
Cost of sales and other expenses 32,547 33,470 35,321 32,246
Restructuring costs - 4,000 4,500 -
Impairment charges - - 3,300 -
-------- -------- --------- --------
Pretax operating loss (3,555) (9,719) (11,230) (3,835)
Income taxes 1,375 3,465 (7,792) -
Change in method of accounting (5,206) - - -
Preferred dividends (187) (172) (96) (234)
-------- -------- --------- --------
Net loss to common shareholders $(7,573) $(6,426) $(19,118) $(4,069)
-------- -------- --------- --------
-------- -------- --------- --------
Net loss per common share - basic and diluted $ (0.84) $ (0.70) $ (1.98) $ (0.42)
-------- -------- --------- --------
-------- -------- --------- --------
Weighted average common shares
Outstanding - basic and diluted 9,038 9,131 9,634 9,653
-------- -------- --------- --------
-------- -------- --------- --------
</TABLE>
(1) First and second quarters of fiscal 1998 have been restated for
retroactive adoption of SOP 98-5 during the third quarter of fiscal
1998.
<TABLE>
<CAPTION>
Fiscal 1997
-----------
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales $ 24,301 $ 26,379 $ 27,593 $ 26,993
Cost of sales and other expenses 26,934 28,685 30,184 31,532
-------- -------- -------- --------
Pretax operating loss (2,633) (2,306) (2,591) (4,539)
Income taxes (900) (780) (880) (1,540)
-------- -------- -------- --------
Net loss $(1,733) $(1,526) $(1,711) $(2,999)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss per common share - basic and diluted $ (0.19) $ (0.17) $ (0.19) $ (0.33)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average common shares
Outstanding - basic and diluted 8,913 8,956 8,989 9,011
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
F - 18
<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 August 28, 1998, August 29, 1997, and August 30, 1996, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $224,704 $243,472 $267,412
Recoveries (accounts charged off), net 296 (18,768) (23,940)
-------- -------- --------
Balance, end of year $225,000 $224,704 $243,472
-------- -------- --------
-------- -------- --------
</TABLE>
RESTRUCTURING RESERVES:
The transactions in the restructuring reserves for the fiscal years ending
August 28, 1998, August 29, 1997 and August 30, 1996 were as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ - $ - $ -
Amounts charged to operations 8,500 - -
Cash payments made (875) - -
-------- ------ ------
Balance, end of year $ 7,625 $ - $ -
-------- ------ ------
-------- ------ ------
</TABLE>
S - 1
<PAGE>
BYLAWS
OF
SHELDAHL, INC.
----------
ARTICLE I
SHAREHOLDERS
SECTION 1. The Annual Meeting of the Shareholders of this corporation
shall be held on the second Wednesday in January of each year, at such time and
place as may be designated therefor by the Board of Directors. A notice setting
out the time and place of the annual meeting shall be mailed, postage prepaid,
to each shareholder of record at his address as it appears on the records of the
corporation, or if no such address appears, at his last known address, at least
ten days prior to the annual meeting, but any shareholder may waive such notice
either before, at, or after such meeting by a signed waiver in writing.
SECTION 2. At the annual meeting, the shareholders shall elect directors
of the corporation and shall transact such other business as may properly come
before them. To be properly brought before the meeting, business must be of a
nature that is appropriate for consideration at an annual meeting and must be
(i) specified in the notice of meeting (or any supplement thereto) given by or
at the direction of the Board of Directors, (ii) otherwise properly brought
before the meeting by or at the direction of the Board of Directors, or (iii)
otherwise properly brought before the meeting by a shareholder. In addition to
any other applicable requirements, for business to be properly brought before
the annual meeting by a shareholder, the shareholder must have given timely
notice thereof in writing to the secretary of the corporation. To be timely,
each such notice must be given, either by personal delivery or by United States
mail, postage prepaid, to the secretary of the corporation, not less than 45
days nor more than 60 days prior to a meeting date corresponding to the previous
year's annual meeting. Each such notice to the secretary shall set forth as to
each matter the shareholder proposes to bring before the annual meeting (w) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (x)
the name and address of record of the shareholders proposing such business, (y)
the class or series (if any) and number of shares of the corporation which are
owned by the shareholder, and (z) any material interest of the shareholder in
such business. Notwithstanding anything in these Bylaws to the contrary, no
business shall be transacted at the annual meeting except in accordance with the
procedures set forth in this Article; provided, however, that nothing in this
Article shall be deemed to preclude discussion by any shareholder of any
business properly brought before the annual meeting, in accordance with these
Bylaws.
SECTION 3. A special meeting of the shareholders may be called at any time
by the chief executive officer or chief financial officer of the corporation,
and shall be called by the president or the secretary upon the request in
writing, or by vote of, two or more directors or upon the request in writing of
shareholders of record owning one-tenth of the outstanding shares of common
stock. Such meeting shall be called by mailing a notice thereof as above
provided in
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the case of the annual meeting of shareholders, which notice shall state the
purpose or purposes of the meeting.
SECTION 4. At any shareholders meeting, each shareholder shall be entitled
to one vote for each share of stock standing in his name on the books of the
corporation as of the date of the meeting. Any shareholder may vote either in
person or by proxy. The presence in person or by proxy of the holders of a
majority of the shares of stock entitled to vote at any shareholders meeting
shall constitute a quorum for the transaction of business. If no quorum be
present at any meeting, the shareholders present in person or by proxy may
adjourn the meeting to such future time as they shall agree upon without further
notice other than by announcement at the meeting at which such adjournment is
taken.
ARTICLE II
DIRECTORS
SECTION 1. The Board of Directors shall have the general management and
control of all business and affairs of the corporation and shall exercise all
the powers that may be exercised or performed by the corporation under the
statutes, its Articles of Incorporation, and its Bylaws.
SECTION 2. The Board of Directors of this corporation shall consist of
nine (9) directors and a majority of the directors then holding office shall
constitute a quorum.
SECTION 3. Each Director elected at the Annual Meeting of Shareholders
shall be elected for a term of one year, and shall hold office for that term and
until his successor is elected and qualified. If a vacancy in the Board occurs
by reason of death, resignation, or otherwise, then the vacancy may be filled
for the unexpired portion of the term in which it occurs by a majority vote of
the remaining Directors.
Each Director elected by the Board of Directors to fill a newly created
directorship resulting from an increase in the authorized number of Directors by
action of the Board of Directors shall hold office until his successor is
elected by the shareholders. The shareholders may make such election at their
next Annual Meeting or at a special meeting duly called for that purpose. Each
newly created directorship shall be filled by a vote of two-thirds of the
Directors serving on the Board at the time the Bylaws are amended by action of
the Board of Directors to increase the number of directorships.
SECTION 4. The Board of Directors may meet regularly at such time and
place as it shall fix by resolution and no notice of regular meetings shall be
required. Special meetings of the Board of Directors may be called by the
Chairman of the Board, the President or any two Directors by giving at least
three days notice to each of the other Directors by mail, telephone, telegraph,
or in person, provided that such notice may be waived either before, at, or
after a meeting by any Director by a signed waiver in writing.
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SECTION 5. Any action which might have been taken at a meeting of the
Board of Directors may be taken without a meeting if done in writing, signed by
all of the Directors, and any such action shall be as valid and effective in all
respects as if taken by the Board at a regular meeting.
SECTION 6. The Board of Directors shall fix and change as it may from time
to time determine by a majority vote the compensation to be paid the officers of
the corporation, and, if deemed appropriate, the members of the Board of
Directors.
SECTION 7. Subject to the provisions of applicable laws and its Articles
of Incorporation, the Board of Directors shall have full power to determine
whether any, and if any, what part of any, funds legally available for the
payment of dividends shall be declared in dividends and paid to the
shareholders; the division of the whole or any part of such funds of this
corporation shall rest wholly within the discretion of the Board of Directors,
and it shall not be required at any time, against such discretion, to divide or
pay any part of such funds among or to the stockholders as dividends or
otherwise.
SECTION 8. Except as otherwise provided in Article III of these Bylaws,
the Board of Directors may, in its discretion, by the affirmative vote of a
majority of the Directors, appoint committees which shall have and may exercise
such powers as may be conferred or authorized by the resolutions appointing
them. A majority of any such committee, if the committee be composed of more
than two members, may determine its action and fix the time and place of its
meetings, unless the Board of Directors shall otherwise provide. The Board of
Directors shall have power at any time to fill vacancies in, to change the
membership of, or to discharge any such committee.
SECTION 9. Subject to the rights of holders of any class or series of
stock having a preference over the common shares as to dividends or upon
liquidation, nominations for the election of directors may be made by the Board
of Directors or a committee appointed by the Board of Directors or by any
shareholder entitled to vote generally in the election of directors. However,
any shareholder entitled to vote generally in the election of directors may
nominate one or more persons for election as directors at a meeting only if
written notice of such shareholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid, to the secretary of the corporation not less than 45 days
nor more than 60 days prior to a meeting date corresponding to the previous
year's annual meeting. Each such notice to the secretary shall set forth: (i)
the name and address of record of the shareholder who intends to make the
nomination; (ii) a representation that the shareholder is a holder of record of
shares of the corporation entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (iii) the name, age, business and residence addresses, and
principal occupation or employment of such nominee; (iv) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the shareholder; (v) such other
information regarding each nominee proposed by such
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shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission; and
(vi) the consent of each nominee to serve as a director of the corporation is
so elected. The corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the corporation to
determine the eligibility of such proposed nominee to serve as a director of
the corporation. The presiding officer of the meeting may, if the facts
warrant, determine that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to
the meeting and the defective nomination shall be disregarded.
ARTICLE III
EXECUTIVE COMMITTEE
The Board of Directors may by unanimous affirmative action of the entire
Board designate two or more of their number to constitute an Executive Committee
which, to the extent determined by unanimous affirmative action of the Board,
shall have and exercise the authority of the Board in the management of the
business of the corporation. Such Executive Committee shall act only in the
interval between meetings of the Board and shall be subject at all times to the
control and direction of the Board.
ARTICLE IV
OFFICERS
SECTION 1. The officers of this corporation shall be a Chairman of the
Board, a President, one or more Vice Presidents (any one of which may be
designated as Executive Vice President or Senior Vice President in the
discretion of the Directors), a Treasurer, a Secretary, a Controller, one or
more Assistant Secretaries, one or more Assistant Treasurers, and such other and
further officers as may be deemed necessary from time to time by the Board of
Directors, each of whom shall be elected by the Board of Directors.
SECTION 2. The Chairman of the Board shall preside at all meetings of the
Board of Directors and of the shareholders, shall be responsible for the
functions and activities of the Board of Directors subject to the control of the
Board of Directors, shall make such reports to the Board of Directors and the
shareholders as may from time to time be required, and shall have such other
powers and shall perform such other duties as may be from time to time assigned
to him by the Board of Directors.
SECTION 3. The duties and responsibilities of the Chairman of the Board
set forth in Article IV, Section 2 of these Bylaws shall be performed, in the
absence of the Chairman of the Board, by the President.
SECTION 4. The President shall make such reports to the Board of
Directors, as may from time to time be required, and shall have such powers and
shall perform such other duties as may be from time to time assigned to him by
the Board of Directors.
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SECTION 5. The Vice Presidents of the Corporation shall each have such
powers and duties as generally pertain to their respective offices, as well as
such powers and duties as from time to time may be conferred by the Board of
Directors. In case of the death, resignation or disability of the President,
the Vice President designated as Executive Vice President, or if none, the Vice
President designated as Senior Vice President, or if neither, the Vice President
who has held that office for the longest continuous period of time, shall assume
the duties and responsibilities of the President until further action by the
Board of Directors.
SECTION 6. The Secretary shall keep a record of the meetings and
proceedings of the Directors and shareholders, have custody of the corporate
seal and of other corporate records not specifically entrusted to some other
official by these Bylaws or by direction of the Board of Directors, and shall
give notice of such meetings as are required by these Bylaws or by the
Directors.
SECTION 7. The Treasurer shall keep accounts of all monies and assets of
the corporation received or disbursed, shall deposit all funds in the name of
and to the credit of the corporation in such banks or depositories or with such
custodians as may be authorized to receive the same by these Bylaws or the Board
of Directors, and shall render such accounts thereof as may be required by the
Board of Directors, the President, or the shareholders.
SECTION 8. All other officers of the corporation elected or appointed by
the Board of Directors shall have such powers and duties as generally pertain to
their respective offices, as well as such powers and duties as from time to time
may be conferred upon them by the Board of Directors.
ARTICLE V
FISCAL YEAR
The fiscal year of this corporation shall end each year on the Friday
closest to August 31.
ARTICLE VI
OFFICE
The principal office of this corporation shall be at Northfield, Minnesota.
The corporation may also have an office or offices at such other places and in
such other states as the Board of Directors may from time to time authorize and
establish.
ARTICLE VII
SEAL
The corporation shall have a corporate seal which shall bear the name of
the corporation and the name of the state of incorporation and the words
"corporate seal." It shall be in such form and bear such other inscription as
the Board of Directors may determine or approve.
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ARTICLE VIII
GENERAL PROVISIONS
SECTION 1. Shares of stock in this corporation not exceeding the
authorized number thereof as specified in the Articles of Incorporation may be
issued, and certificates therefor shall be authenticated by the Chairman of the
Board, President or any Vice President and the Secretary or Treasurer upon
authorization by the Board of Directors and receipt by the corporation of such
consideration for such shares as shall be specified by the Board of Directors.
In the event that a bank, trust company or other similarly qualified corporation
is designated and agrees to act as the registrar and/or transfer agent for the
corporation, then the signatures of the officers specified above and the seal of
the corporation may be imprinted upon the stock certificates by facsimile and
said certificates may be authenticated by signature of an authorized agent of
the said registrar and/or transfer agent. The officers of the corporation may
delegate to such transfer agent and/or registrar such of the duties relating to
the recording and maintenance of records relating to the shares of stock and
shareholders of the corporation as may be deemed expedient and convenient and as
are assumed by said registrar and/or transfer agent.
SECTION 2. The Board of Directors may establish reasonable regulations for
recording of transfers of shares of stock in this corporation, and may establish
a date, not earlier than 60 days prior to any shareholders meeting, as of which
the shareholders entitled to vote and participate in any shareholders meeting
shall be determined.
SECTION 3. From time to time as it may deem appropriate and advantageous
to the best interests of this corporation, the Board of Directors may establish
such bonus, pension, profit sharing, stock bonus, stock purchase, stock option,
or other employee incentive plans, as and for the benefit of such of the
corporation's employees as it in its sole discretion shall determine.
SECTION 4. No certificate for shares of stock in this corporation, or any
other security issued by this corporation shall be issued in place of any
certificate alleged to have been lost, destroyed or stolen, except on production
of such evidence of such loss, destruction, or theft and on delivery to the
corporation, if the Board of Directors shall so require, of a bond of indemnity
in such amount (not exceeding twice the value of the shares represented by such
certificate), upon such terms and secured by such surety as the Board of
Directors may in its discretion require.
SECTION 5. Any person who at any time shall serve, or shall have served,
as a director, officer, or employee of this corporation, or of any other
enterprise at the request of this corporation, and the heirs, executors and
administrators of such person, shall be indemnified by this corporation in
accordance with, and to the fullest extent provided by, the provisions of the
Minnesota Business Corporation Act as it may from time to time be amended.
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ARTICLE IX
ADOPTION AND AMENDMENT
SECTION 1. These Bylaws shall become and remain effective until amended or
superseded as hereinafter provided when they shall have been adopted by the
Board of Directors named in the Articles of Incorporation, or in the absence of
such adoption, by the shareholders.
SECTION 2. The Board of Directors may alter or may amend these Bylaws and
may make or adopt additional Bylaws, subject to the power of the shareholders to
change or repeal the Bylaws, except that the Board of Directors shall not make
or alter any Bylaw relating to the qualifications or terms of office of the
Directors. The Board of Directors may make, adopt, alter or amend any Bylaw to
increase, but not to decrease, the number of Directors.
SECTION 3. The shareholders may alter or amend these Bylaws and may make
or adopt additional Bylaws by a majority vote at any annual meeting of the
shareholders or at any special meeting called for that purpose.
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AGREEMENT RELATING TO SHELDAHL
This Agreement Relating to Sheldahl (the "Agreement") is made as of this
18th day of November, 1998 between Sheldahl, Inc., a Minnesota corporation
("Sheldahl") and Molex Incorporated, a Delaware corporation ("Molex").
A. The parties have executed and delivered a Convertible Preferred Stock
Purchase Agreement (the "Purchase Agreement") pursuant to which Molex will
acquire shares of Series D Convertible Preferred Stock of Sheldahl.
B. The parties have executed a Limited Liability Company Agreement to
form Modular Interconnect Systems, L.L.C. (the "Joint Venture").
C. In connection with Molex's purchase of the Preferred Shares and
participation in the Joint Venture, the parties have agreed to certain matters
relating to Sheldahl as set forth in this Agreement.
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1
RIGHT OF FIRST REFUSAL
1.1 "ACQUISITION" shall mean (i) a transaction including a merger,
consolidation, tender offer or exchange offer involving Sheldahl (other than
transactions solely between Sheldahl and its subsidiaries or between Sheldahl
and Molex) following which any person (as such term is used in Rule 13d-5 of the
Securities and Exchange Commission under the Securities Exchange Act of 1934
(the "1934 Act") or group (as such term is defined in Section 13(d) of the 1934
Act) becomes or would become the "Beneficial Owner" (as such term is defined in
Rule 13d-3 of the 1934 Act) of (x) a majority of the common stock, or (y)
securities representing a majority of the combined voting power of all Voting
Securities of Sheldahl, or following which persons who were Beneficial Owners of
the common stock and Voting Securities of Sheldahl immediately before such
transaction do not, after such transaction, beneficially own, directly or
indirectly, a majority of the common stock and combined voting power of the
Voting Securities of Sheldahl; or (ii) the disposition, by sale, exchange or
otherwise, of substantially all of the assets of Sheldahl. "VOTING SECURITIES"
shall mean securities of Sheldahl that are entitled to vote in the election of
directors of Sheldahl.
1.2 In the event the Board of Directors of Sheldahl receives a bona fide
offer (which the Board of Directors of Sheldahl is willing to accept) from a
third party for an Acquisition, Sheldahl will advise Molex in writing of the
terms and conditions of such offer (the "NOTICE").
1.3 Molex shall, within thirty (30) days following its receipt of the
Notice, advise Sheldahl in writing whether it is willing to consummate the
Acquisition with Sheldahl upon
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substantially the same terms and conditions described in the Notice (but in
any event on terms not less favorable to Sheldahl than those described in the
Notice), and shall provide Sheldahl evidence of its ability to finance the
Acquisition.
1.4 If Molex advises Sheldahl that it is willing to consummate the
Acquisition with Sheldahl upon substantially the same terms and conditions
described in the Notice (but in any event on terms not less favorable than those
described in the Notice), Sheldahl and Molex shall, subject to the fiduciary
duties of the Board of Directors of Sheldahl determined in consultation with
Sheldahl's counsel, proceed in good faith to consummate the Acquisition within
ninety (90) days of the date on which Molex advised Sheldahl that it was willing
to consummate the Acquisition upon substantially the same terms and conditions
described in the Notice.
1.5 If Molex advises Sheldahl that it is not willing to consummate the
Acquisition with Sheldahl upon substantially the same terms and conditions
described in the Notice, or fails to advise Sheldahl of its intentions within
the 30-day period referred to in Section 1.3 above, or Molex fails to proceed in
good faith to consummate the Acquisition within the 90-day period referred to in
Section 1.4 above, Sheldahl shall be free to consummate an Acquisition with any
third party upon terms and conditions that are not more favorable to the third
party than those described in the Notice.
1.6 If Sheldahl wishes to solicit interests for an Acquisition, Sheldahl
shall advise Molex in writing of the terms and conditions upon which it is
willing to consummate the Acquisition ("SHELDAHL NOTICE").
1.7 Molex shall, within thirty (30) days following its receipt of the
Sheldahl Notice, advise Sheldahl in writing whether it is willing to consummate
the Acquisition with Sheldahl upon substantially the same terms and conditions
described in the Sheldahl Notice (but in any event on terms not less favorable
to Sheldahl than those described in the Sheldahl Notice) and shall provide
Sheldahl with evidence of its ability to finance the Acquisition.
1.8 If Molex advises Sheldahl that it is willing to consummate the
Acquisition with Sheldahl upon substantially the same terms and conditions
described in the Sheldahl Notice (but in any event on terms not less favorable
to Sheldahl than those described in the Sheldahl Notice), Sheldahl and Molex
shall, subject to the fiduciary duties of the Board of Directors of Sheldahl
determined in consultation with Sheldahl's counsel, proceed in good faith to
consummate the Acquisition within ninety (90) days of the date on which Molex
advised Sheldahl that it was willing to consummate the Acquisition upon
substantially the same terms and conditions described in the Sheldahl Notice.
1.9 Notwithstanding the terms of Sections 1.2, 1.3, 1.4 and 1.5, if Molex
advises Sheldahl that it is not willing to consummate the Acquisition with
Sheldahl upon substantially the same terms and conditions described in the
Sheldahl Notice, or fails to advise Sheldahl of its intentions within the 30-day
period referred to in Section 1.7 above, or Molex fails to proceed in
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good faith to consummate the Acquisition within the 90-day period referred to
in Section 1.8 above, Sheldahl shall be free to solicit for and consummate
the Acquisition with a third party upon terms and conditions that are not
more favorable to the third party than those described in the Sheldahl
Notice, subject to the terms of Section 1.11.
1.10 In the event any third party advises Sheldahl, after the date of a
Notice or a Sheldahl Notice pursuant to which Molex has advised Sheldahl that it
is willing to consummate an Acquisition with Sheldahl, that the third party is
willing to enter into an Acquisition with Sheldahl on terms and conditions more
favorable to Sheldahl than those described in the Notice or the Sheldahl Notice
(the "SECOND OFFER"), Sheldahl shall advise Molex in writing of the terms and
conditions of such Second Offer (the "SECOND NOTICE"). Molex shall, within five
(5) business days following its receipt of the Second Notice, advise Sheldahl in
writing whether it is willing to consummate the Acquisition with Sheldahl upon
substantially the same terms and conditions described in the Second Notice (but
in any event on terms not less favorable to Sheldahl than those described in the
Second Notice) and shall provide Sheldahl with evidence of its ability to
finance the Acquisition. If Molex advises Sheldahl that it is willing to
consummate the Acquisition with Sheldahl upon substantially the same terms and
conditions described in the Second Notice (but in any event on terms not less
favorable to Sheldahl than those described in the Second Notice), Sheldahl and
Molex shall, subject to the fiduciary duties of the Board of Directors of
Sheldahl determined in consultation with Sheldahl's counsel, proceed in good
faith to consummate the Acquisition within ninety (90) days of the date on which
Molex advised Sheldahl that it was willing to consummate the Acquisition upon
substantially the same terms and conditions of the Second Notice. If Molex
advises Sheldahl that it is not willing to consummate the Acquisition upon
substantially the same terms and conditions of the Second Notice, or fails to
advise Sheldahl of its intentions within the five business day period referred
to in this section, or Molex fails to proceed in good faith to consummate the
Acquisition within ninety (90) days, Sheldahl shall be free to consummate an
Acquisition with any third party upon terms and conditions that are not more
favorable to the third party than those described in the Second Notice.
1.11 If Sheldahl shall receive offers from (i) any third party as provided
in Section 1.9; or (ii) any third party subsequent to the date of the Second
Offer that are more favorable to Sheldahl or its shareholders than the Second
Offer, Sheldahl shall advise Molex in writing of the terms and conditions of
such additional offers prior to accepting any such further offer and, with
respect to clause (i) above, Molex shall receive such notice at least five
business days prior to Sheldahl accepting any such offer. However, in light of
the fiduciary duties of the Board of Directors of Sheldahl in such a situation,
Sheldahl shall be free to accept that offer which the Board of Directors of
Sheldahl determines is most favorable to Sheldahl or its shareholders.
Sheldahl's decision as to which party's terms are most favorable shall be final
and binding.
1.12 If the Acquisition contemplates payment of consideration (including
any tax deferral benefits and other non-cash items) to Sheldahl or its
shareholders other than cash, and Molex is not able to pay or deliver to
Sheldahl or its shareholders the same form of non-cash
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consideration, Molex shall, in its notice to Sheldahl to express its
intention to consummate an Acquisition, set forth in detail the form of
consideration Molex is offering in the Acquisition (the "SUBSTITUTE
CONSIDERATION"). Such Substitute Consideration shall be substantially
equivalent in value from a financial point of view to Sheldahl or its
shareholders when compared to the original consideration offered to Sheldahl
by a third party or solicited by Sheldahl from a third party, as the case may
be. If Molex and Sheldahl disagree whether the Substitute Consideration
offered by Molex is "substantially equivalent in value from a financial point
of view," the final determination shall be made by a reputable investment
bank mutually acceptable to Sheldahl and Molex which has not performed
services for either Sheldahl or Molex in the past twelve (12) months, which
determination shall be binding upon Molex and Sheldahl; provided, however,
that the Board of Directors of Sheldahl, after consultation with its counsel,
shall be satisfied in good faith that it has fulfilled its fiduciary duties
by accepting the determination of the investment bank. In the event it is
determined that Molex's Substitute Consideration is not "substantially
equivalent in value from a financial point of view," Sheldahl shall provide
written notice to Molex reasonably describing such deficiency (the
"DEFICIENCY NOTICE"), in which event Molex may provide a modified offer
providing Substitute Consideration which is "substantially equivalent in
value from a financial point of view" in writing within five (5) business
days of Sheldahl's Deficiency Notice. In the event Molex does not provide
the modified offer as provided above within the time period provided above,
Sheldahl shall be entitled to accept the third party offer free of any rights
of Molex under this Agreement.
SECTION 2
PREEMPTIVE RIGHTS
2.1 Except for (i) grants of options to acquire Sheldahl Common Stock
under Sheldahl's employee and consultant benefit plans adopted by Sheldahl and
except for Sheldahl Common Stock issued upon exercise of such options granted
pursuant to such plans; (ii) shares of Sheldahl Common Stock issued upon
conversion of the 15,000 shares of Series B Convertible Preferred Stock of
Sheldahl and upon payment of dividends with respect to such shares; (iii) shares
of preferred stock, Common Stock or rights of Sheldahl issued pursuant to
Sheldahl's Rights Agreement dated June 16, 1996 with Norwest Bank Minnesota,
N.A., as amended, (the "RIGHTS AGREEMENT"); (iv) shares of Series D Convertible
Preferred Stock of Sheldahl and shares of Sheldahl Common Stock issued upon
conversion thereof and upon payment of dividends with respect to such preferred
stock; and (v) shares issued upon exercise of warrants outstanding on the date
of this Agreement (including all warrants issued or to be issued with respect to
the Series D Convertible Preferred Stock), Sheldahl will give Molex written
notice of its intention to issue additional Sheldahl Common Stock or securities
or debt convertible into, or exercisable or exchangeable for, shares of Sheldahl
Common Stock, including options and warrants (the "CONVERTIBLE SECURITIES"), in
a private or public equity or debt offering. If such notice is given by
Sheldahl, Molex shall have the right to purchase a portion of such Sheldahl
Common Stock or Convertible Securities in such number which, when combined with
the Sheldahl Common Stock owned beneficially by Molex, will equal the percentage
of the issued and outstanding Sheldahl Common Stock after such purchase which
Molex beneficially owned immediately prior to the
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issuance of such additional Sheldahl Common Stock or Convertible Securities
(and including solely for the purpose of determining the number of shares
Molex beneficially owned immediately prior to such issuance the number of
shares issued by Sheldahl during the term of this Agreement in transactions
described in Section 2.4 below which Molex would have been entitled to
purchase as a result of such transaction (and which were not purchased under
the second or fifth sentence of Section 2.4) if the rights in this Section
2.1 would have applied to such issuance); in no event, however, shall (i)
Molex's ownership following any purchase under this Section 2.1 exceed 15% of
the issued and outstanding Sheldahl Common Stock (as determined pursuant to
Section 4.1); or (ii) Molex's Beneficial Ownership (as defined in the Rights
Agreement) following such purchase result in Molex being an "Acquiring
Person" (as defined in the Rights Agreement).
2.2 EXERCISE OF PREEMPTIVE RIGHTS. In order to exercise its purchase
rights hereunder, Molex must within ten business days after receipt of written
notice from Sheldahl describing in reasonable detail the stock or securities
being offered, the purchase price thereof, the payment and other terms and
conditions thereof and Molex's percentage allotment, deliver a written notice to
Sheldahl describing its election hereunder.
2.3 EXPIRATION OF OFFERING PERIOD. Upon the expiration of the ten-day
period described above, Sheldahl shall be entitled to sell such Sheldahl Common
Stock or Convertible Securities which Molex has not elected to purchase for a
period of 90 days following such expiration on substantially the same terms and
conditions as those offered to Molex.
2.4 NO RIGHTS IN CERTAIN TRANSACTIONS. Notwithstanding the foregoing,
Molex shall not be entitled to the preemptive rights set forth in Section 2.1
above in connection with an issuance by Sheldahl of its Common Stock or
Convertible Securities in an acquisition of assets or the business of a third
party where Sheldahl is the continuing or surviving entity, but where such
transaction is not an Acquisition. For a period of two years from the date
hereof, in the event Sheldahl issues shares of Common Stock or Convertible
Securities in a transaction described in this Section 2.4, it shall offer Molex
the right to purchase a number of shares of Sheldahl Common Stock necessary to
allow Molex to beneficially own, after giving effect to such transaction
described in this Section 2.4, the lesser of (i) the percentage of issued and
outstanding Sheldahl Common Stock which Molex beneficially owned on the date
immediately prior to such transaction; or (ii) 15% of the issued and outstanding
Sheldahl Common Stock (as determined pursuant to Section 4.1). The purchase
price for such shares shall be at a price equivalent to the value of the
Sheldahl Common Stock received by the third party or shareholders of the third
party to such transaction. Molex shall exercise this right within ten business
days after receipt of written notice from Sheldahl and, notwithstanding clause
(ii) in the first sentence of Section 4.1, this Agreement shall not terminate in
the event Molex has exercised such right prior to the termination of such ten
business day period. Notwithstanding clause (ii) in the first sentence of
Section 4.1, after the two-year period described above, this Agreement shall not
terminate in the event an issuance of Common Stock or Convertible Securities
resulting from an event described in this Section 2.4 causes Molex to
beneficially own less than 5% of the
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<PAGE>
issued and outstanding Sheldahl Common Stock (a "Termination Event") if
either (i) Sheldahl provides Molex with the right to purchase shares of
Sheldahl's Common Stock or Convertible Securities in an amount necessary to
allow Molex to beneficially own 5% of the issued and outstanding Sheldahl
Common Stock after such issuance and Molex exercises such purchase rights
within ten business days after receipt of written notice from Sheldahl
describing the stock or securities to be offered and the purchase price
thereof; or (ii) Molex purchases shares in the market to increase its
beneficial ownership of Sheldahl Common Stock to 5% or more within 90 days of
the Termination Event.
SECTION 3
BOARD REPRESENTATION
3.1 BOARD REPRESENTATION. At least fifteen (15) days prior to the meeting
of the Board of Directors of Sheldahl establishing the slate of directors for
the next scheduled Annual Meeting of Shareholders of Sheldahl, Sheldahl shall
provide Molex with a notice of such meeting. Prior to the date of such
directors' meeting, Molex shall give the nominating committee of Sheldahl's
Board of Directors, in writing, the names of two director candidates selected
from Molex's executive management team. Sheldahl will nominate and solicit
proxies for the election of one such candidate submitted by Molex as a member of
the Board of Directors of Sheldahl at that Annual Meeting of Shareholders and at
each succeeding Annual Meeting of Shareholders of Sheldahl; provided, however,
that after termination of this Agreement pursuant to Section 4, Sheldahl shall
no longer be obligated to nominate and solicit proxies for the election of such
designee of Molex as a director of Sheldahl and such nominee shall, if requested
by the Board of Directors of Sheldahl, resign from the Sheldahl Board of
Directors. At the first meeting of the Board of Directors after the date of
this Agreement, Molex's designee (as described above) shall be appointed by the
Board of Directors as a Board member.
SECTION 4
MISCELLANEOUS
4.1 TERM AND TERMINATION. This Agreement shall terminate and Molex shall
have no further rights under this Agreement on the earliest to occur of the
following: (i) when Molex first ceases to beneficially own at least 75% of the
number of shares of Sheldahl Common Stock owned beneficially by Molex as of the
date of this Agreement, as indicated on Exhibit A; (ii) subject to Section 2.4,
when Molex first ceases to beneficially own at least 5% of the issued and
outstanding Sheldahl Common Stock; or (iii) completion of an Acquisition. For
purposes of this Agreement, when determining the issued and outstanding Sheldahl
Common Stock or the Sheldahl Common Stock owned beneficially by Molex, (i) all
issued and outstanding shares of Series B Convertible Preferred Stock and
Series D Convertible Preferred Stock shall be deemed converted to Common Stock;
(ii) all warrants to purchase Common Stock outstanding on the date of this
Agreement (and not subsequently exercised) shall be deemed issued and
outstanding until they terminate; and (iii) all subsequently issued and
outstanding Convertible Securities (other than options granted to employees or
directors and Convertible Securities that are out of
6
<PAGE>
the money) shall be deemed converted to Common Stock. With respect to (i)
and (iii) immediately above, the number of shares of Sheldahl Common Stock to
be issued upon conversion shall be determined as of the date a determination
is to be made pursuant to this Agreement. A determination of the issued and
outstanding Sheldahl Common Stock as of July 30, 1998 is set forth on Exhibit A.
4.2 GOVERNING LAW. This Agreement shall be governed in all respects by
the laws of the State of Minnesota as applied to contracts entered into solely
between residents of, and to be performed entirely within, such state.
4.3 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns. This Agreement may not be assigned by a party without the prior
written consent of the other party.
4.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subject matter hereof and
thereof and supersedes all prior agreements and understandings among the parties
relating to the subject matter hereof. Neither this Agreement nor any term
hereof may be amended, waived, discharged or terminated other than by a written
instrument signed by the party against which enforcement of any such amendment,
waiver, discharge or termination is sought.
4.5 NOTICES AND DATES. Any notice or other communication given under this
Agreement shall be sufficient if in writing and sent by registered or certified
mail, return receipt requested, postage prepaid, by facsimile, by hand delivery
or overnight mail to a party at its address set forth below (or at such other
address as shall be designated for such purpose by such party in a written
notice to the other party hereto):
if to Sheldahl: Sheldahl, Inc.
1150 Sheldahl Road
Northfield MN 55057
Attention: James E. Donaghy
Fax: 507-663-8326
with a copy to: Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South 8th Street
Minneapolis MN 55042
Attention: Charles P. Moorse
Fax: 612-371-3207
7
<PAGE>
if to Molex: Molex Incorporated
2222 Wellington Court
Lisle IL 60532
Attention: Frederick A. Krehbiel
Fax: 630-512-8632
With a copy to: Sonnenschein Nath & Rosenthal
8000 Sears Tower
Chicago IL 60603
Attention: Michael Froy
Fax: 312-876-7934
All such notices and communications shall be effective when received by the
addressee. In the event that any date provided for in this Agreement falls on a
Saturday, Sunday or legal holiday, such date shall be deemed extended to the
next business day.
4.6 SEVERABILITY. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, the remainder of the terms, provisions, covenants and restriction
of this Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
4.7 COSTS AND EXPENSES. Each party hereto shall pay its own costs and
expenses incurred in connection herewith, including the fees of its counsel,
auditors and other representatives, whether or not the transactions contemplated
herein are consummated.
4.8 NO THIRD PARTY RIGHTS. Nothing in this Agreement shall create or be
deemed to create any rights in any person or entity not a party to this
Agreement.
4.9 REMEDIES. Sheldahl and Molex acknowledge that a breach of this
Agreement by one party could cause the other party damage which may not be
adequately compensated by damages at law. Therefore, Sheldahl and Molex agree
that, in addition to other relief afforded by law, seeking an injunction for
specific performance shall be a proper mode of relief for violations of this
Agreement.
8
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective authorized officers as of the date aforesaid.
SHELDAHL, INC.
By /s/ Edward L. Lundstrom
--------------------------------
Its President
-------------------------------
MOLEX INCORPORATED
By /s/ Thomas S. Lee
--------------------------------
Its Vice President New Ventures & Acquisitions
---------------------------------------------
9
<PAGE>
EXHIBIT A
BENEFICIAL OWNERSHIP OF SHELDAHL, INC.
BY MOLEX INCORPORATED
As of July 30, 1998
<TABLE>
<CAPTION>
Common Shares
-------------
<S> <C>
Common Shares Issued and Outstanding 9,660,615
Series B Preferred (including dividends
converted at $6.01 through 7/30/98) 1,330,795
Outstanding Warrants 167,812
Series D Warrants 329,170
Series D Preferred (converted at $6.15) 5,352,358
----------
Total Sheldahl Common Stock (per Section 3.1) 16,840,750
----------
----------
Molex Incorporated 340,000
Series D Warrants 120,000
Series D Preferred $12.0M 1,951,219
----------
Molex Incorporated Ownership 2,411,219
----------
----------
Molex Incorporated Percentage Ownership 14.32%
</TABLE>
<PAGE>
FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of November 25, 1998, is made by and among
Sheldahl, Inc., a Minnesota corporation (the "Borrower"), NORWEST BANK
MINNESOTA, NATIONAL ASSOCIATION, a national banking association ("Norwest"; in
its separate capacity as administrative agent for the Lenders, the "Agent"), and
each of the financial institutions appearing on the signature pages hereof.
Recitals
The Borrower, the Agent and the Lenders are parties to a Credit and
Security Agreement dated as of June 19, 1998 (the "Credit Agreement").
Capitalized terms used in these recitals and in the preamble have the meanings
given to them in the Credit Agreement unless otherwise specified.
On July 31, 1998, the Borrower paid the Bridge Notes in full and no
Additional Warrants were issued.
The Borrower is presently in default of various financial covenants
and has requested that the Lenders waive such defaults and agree to make certain
amendments to the Credit Agreement. The Agent is willing to grant the Borrower's
requests pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements herein contained, it is agreed as follows:
1. DEFINED TERMS. Capitalized terms used in this Amendment which
are defined in the Credit Agreement shall have the same meanings as defined
therein, unless otherwise defined herein. In addition, Section 1.1 of the Credit
Agreement is amended by adding or amending, as the case may be, the following
definitions:
"'Borrowing Base' means, at any time, the lesser of:
(a) the aggregate Revolving Facility Amounts of the Lenders, or
(b) subject to change from time to time in the sole discretion of
all the Lenders, the sum of:
(i) eighty-five percent (85%) of Eligible Accounts, plus
(ii) the lesser of $4,000,000 or sixty percent (60%) of Eligible Raw
Materials Inventory, plus
<PAGE>
(iii) the lesser of $4,000,000 or fifty percent (50%) of Eligible
Finished Goods Inventory, plus
(iv) the lesser of $2,000,000 or twenty percent (20%) of Eligible
Other Inventory, LESS
(v) $1,000,000."
"'Cash Flow Available for Debt Service' as of a given date means the
sum of (i) Pre-tax Net Income, (ii) Interest Expense, (iii) depreciation
and amortization, (iv) operating lease payments, and (v) Net Equity
Proceeds, LESS (v) Capital Expenditures, for the fiscal year-to-date period
ending on such date."
"'Debt Service' as of a given date means the sum of (i) all payments
of principal on Debt of the Borrower, whether scheduled or unscheduled,
(ii) Interest Expense, (iii) operating lease payments, (iv) cash paid for
restructuring charges or against restructuring reserves, and (v) all
installments of rent under capitalized lease obligations of the Borrower
(determined in accordance with GAAP) incurred during the fiscal year-to-
date period ending on such date."
"'First Amendment' means the First Amendment to Credit and Security
Agreement by and among the Borrower, the Lenders and the Agent dated as of
November 25, 1998."
"'First Amendment Effective Date' means the date all conditions set
forth in Section 8 of the First Amendment are satisfied."
"'Net Equity Proceeds" means the net cash proceeds actually received
by the Borrower from sale of additional common or preferred stock or
convertible instruments in the Borrower on or after the First Amendment
Effective Date.
"'Revolving Floating Rate' means, effective as of November 20, 1998,
an annual rate equal to (i) from November 20, 1998 through the date the
Borrower receives not less than $4,900,000 in Net Equity Proceeds, the sum
of the Base Rate plus one half of one percent (0.5%), and (ii) after such
amount is received, the Base Rate, which rate shall change when and as the
Base Rate changes."
"'Term Floating Rate' means, effective as of November 20, 1998, an
annual rate equal to (i) from November 20, 1998 through the date the
Borrower receives not less than $4,900,000 in Net Equity Proceeds, the sum
of the Base Rate plus one half of one percent (0.5%), and (ii) after such
amount is received, the Base Rate, which rate shall change when and as the
Base Rate changes."
2
<PAGE>
2. FINANCIAL COVENANTS. Sections 6.17 through 6.21 and Section 7.12
of the Credit Agreement are amended to read as follows and a new Section 6.22 is
added immediately after Section 6.21:
"Section 6.17 RESERVED.
"Section 6.18 MINIMUM CASH FLOW AVAILABLE FOR DEBT SERVICE. The
Borrower will achieve Cash Flow Available for Debt Service, determined as
at the end of each fiscal quarter, at not less than the amount set forth
opposite such quarter:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING MINIMUM CASH FLOW
ON OR ABOUT AVAILABLE FOR DEBT
SERVICE
<S> <C>
11/30/98 $(300,000)
2/28/99 $5,500,000
5/31/99 $10,300,000
8/31/99 $21,100,000
</TABLE>
"Section 6.19 MINIMUM DEBT SERVICE COVERAGE RATIO. The Borrower will
maintain its Debt Service Coverage Ratio, determined as at the end of each
quarter, at not less than the ratio set forth opposite such quarter:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING MINIMUM DEBT SERVICE
ON OR ABOUT COVERAGE RATIO
<S> <C>
2/28/99 0.70 to 1.00
8/31/99 1.50 to 1.00
</TABLE>
"Section 6.20 MINIMUM PRE-TAX NET INCOME. The Borrower will achieve
Pre-tax Net Income, determined as of the end of each fiscal quarter
described below, of not less than the amount set forth opposite such fiscal
quarter:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING ON MINIMUM PRE-TAX NET
OR ABOUT INCOME
<S> <C>
11/30/98 $(2,710,000)
2/28/99 $(5,050,000)
5/31/99 $(4,985,000)
8/31/99 $(4,210,000)
</TABLE>
"Section 6.21 MINIMUM NET WORTH. The Borrower will maintain its Net
Worth, determined as at the end of each fiscal quarter described below, of
not less than the amount set forth opposite such fiscal quarter:
3
<PAGE>
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING ON MINIMUM NET WORTH
OR ABOUT
<S> <C>
11/30/98 $74,200,000
2/28/99 $76,400,000
5/31/99 $76,000,000
8/31/99 $81,300,000
</TABLE>
"Section 6.22 NEW COVENANTS. Within 60 days after each fiscal year end
of the Borrower, the Borrower and the Required Banks shall agree on new
covenant levels for Sections 6.18 through 6.21 for periods after such
fiscal year end. The new covenant levels will be based on the Borrower's
projections for such periods and shall be no less stringent than the
present levels.
"Section 7.12 CAPITAL EXPENDITURES. The Borrower will not, and will
not permit any Subsidiary to, expend or contract to expend, in the
aggregate, for Capital Expenditures during each fiscal quarter described
below, amounts in excess of the amount set forth opposite such quarter:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING CAPITAL EXPENDITURES
ON OR ABOUT
<S> <C>
11/30/98 $2,500,000
2/28/99 $2,200,000
5/31/99 $1,400,000
8/31/99 $1,500,000
</TABLE>
PROVIDED, HOWEVER, that amounts not expended during any fiscal quarter
listed above (other than the last) may be carried forward and expended
through August 31, 1999."
3. PAYMENTS ON DEBT. The following new Section 7.21 is added to the
Credit Agreement immediately after Section 7.20:
"Section 7.21 PAYMENTS ON DEBT OWED TO THIRD PARTIES. The Borrower
shall not make any payments on Debt owed to Persons other than the Banks
except: (i) regularly scheduled payments of principal and interest pursuant
to the terms of Debt instruments satisfactory to the Agent; and
(ii) prepayments of Debt owed to ReliaStar in the amount of $500,000 on
December 1, 1998, $250,000 on January 1, 1999 and $250,000 on February 1,
1999."
4. EVENTS OF DEFAULT. Section 8.1(q) of the Credit Agreement is
amended to read as follows:
4
<PAGE>
"(q) Failure of the Borrower to receive Net Equity Proceeds
of at least $4,900,000 by February 28, 1999, and at least $4,900,000
by August 30, 1999."
5. COMPLIANCE CERTIFICATE. Exhibit F to the Credit Agreement is
replaced by Exhibit A to this First Amendment.
6. NO OTHER CHANGES. Except as explicitly amended by this
Amendment, all of the terms and conditions of the Credit Agreement shall remain
in full force and effect and shall apply to any advance or letter of credit
thereunder.
7. WAIVER OF DEFAULTS. The Borrower is in default of the following
provisions of the Credit Agreement as of August 28, 1998 (collectively, the
"Defaults"):
<TABLE>
<CAPTION>
COVENANT REQUIRED ACTUAL
<S> <C> <C>
Section 6.18 Cash Flow Available for Debt Not less than $(3,398,000)
Service $(3,403,000)
Section 6.20 Minimum Pre-tax Net Income Not less than $(36,497,000)
$(36,000,000)
Section 6.21 Minimum Net Worth Not less than $78,380,000
$78,533,000
Section 7.12 Capital Expenditures Not more than $5,504,000
$5,170,000
</TABLE>
Also, the Borrower has borrowed money from Boeing Capital Corporation in
violation of Section 7.2 of the Credit Agreement and redeemed 623 shares of
Series B Preferred stock held by Southbrook, Inc. in violation of Section 7.5
of the Credit Agreement.
Upon the terms and subject to the conditions set forth in this Amendment, the
Lenders hereby waives the Defaults. This waiver shall be effective only in
this specific instance and for the specific purpose for which it is given,
and this waiver shall not entitle the Borrower to any other or further waiver
in any similar or other circumstances.
8. CONDITIONS PRECEDENT. This Amendment, and the waiver set
forth in Paragraph 7 hereof, shall be effective when the Lenders shall have
received an executed original hereof, together with each of the following,
each in substance and form acceptable to the Lenders in its sole discretion:
(a) A Certificate of the Secretary of the Borrower certifying as to
(i) the resolutions of the board of directors of the Borrower approving the
execution and delivery of this Amendment, (ii) the fact that the articles
of incorporation and bylaws of the Borrower, which were certified and
delivered to the Lenders pursuant to the
5
<PAGE>
Certificate of Authority of the Borrower's secretary or assistant
secretary dated as of June 19, 1998 in connection with the execution and
delivery of the Credit Agreement continue in full force and effect and
have not been amended or otherwise modified except as set forth in the
Certificate to be delivered, and (iii) certifying that the officers and
agents of the Borrower who have been certified to the Lenders, pursuant
to the Certificate of Authority of the Borrower's secretary or assistant
secretary dated as of June 19, 1998, as being authorized to sign and to
act on behalf of the Borrower continue to be so authorized or setting
forth the sample signatures of each of the officers and agents of the
Borrower authorized to execute and deliver this Amendment and all other
documents, agreements and certificates on behalf of the Borrower.
(b) Such other matters as the Lenders may require.
9. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents
and warrants to the Lenders as follows:
(a) The Borrower has all requisite power and authority to execute
this Amendment and to perform all of its obligations hereunder, and this
Amendment has been duly executed and delivered by the Borrower and
constitute the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate action and
do not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree
presently in effect, having applicability to the Borrower, or the articles
of incorporation or by-laws of the Borrower, or (iii) result in a breach of
or constitute a default under any indenture or loan or credit agreement or
any other agreement, lease or instrument to which the Borrower is a party
or by which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article V
of the Credit Agreement are correct on and as of the date hereof as though
made on and as of such date, except to the extent that such representations
and warranties relate solely to an earlier date.
10. REFERENCES. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Security Documents to the Credit Agreement
shall be deemed to refer to the Credit Agreement as amended hereby.
11. NO OTHER WAIVER. Except as set forth in Paragraph 7 hereof, the
execution of this Amendment and acceptance of any documents related hereto shall
not be
6
<PAGE>
deemed to be a waiver of any Default or Event of Default under the Credit
Agreement or breach, default or event of default under any Security Document
or other document held by the Lenders, whether or not known to the Lenders
and whether or not existing on the date of this Amendment.
12. RELEASE. The Borrower hereby absolutely and unconditionally
releases and forever discharges the Lenders, and any and all participants,
parent corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors, successors and assigns thereof, together with all of the present
and former directors, officers, agents and employees of any of the foregoing,
from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under
any state or federal law or otherwise, which the Borrower has had, now has or
has made claim to have against any such person for or by reason of any act,
omission, matter, cause or thing whatsoever arising from the beginning of time
to and including the date of this Amendment, whether such claims, demands and
causes of action are matured or unmatured or known or unknown.
13. COSTS AND EXPENSES. The Borrower hereby reaffirms its agreement
under the Credit Agreement to pay or reimburse the Lenders on demand for all
costs and expenses incurred by the Lenders in connection with the Credit
Agreement, the Security Documents and all other documents contemplated thereby,
including without limitation all reasonable fees and disbursements of legal
counsel. Without limiting the generality of the foregoing, the Borrower
specifically agrees to pay all fees and disbursements of counsel to the Lenders
for the services performed by such counsel in connection with the preparation of
this Amendment and the documents and instruments incidental hereto. The Borrower
hereby agrees that the Lenders may, at any time or from time to time in its sole
discretion and without further authorization by the Borrower, make a loan to the
Borrower under the Credit Agreement, or apply the proceeds of any loan, for the
purpose of paying any such fees, disbursements, costs and expenses.
14. MISCELLANEOUS. This Amendment may be executed in any number of
counterparts, each of which when so executed and delivered shall be deemed an
original and all of which counterparts, taken together, shall constitute one and
the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be duly executed as of the date first written above.
NORWEST BANK MINNESOTA, SHELDAHL, INC.
NATIONAL ASSOCIATION, as Agent
By /s/ Terry S. Jackson By /s/ John V. McManus
----------------------------- -----------------------------
Terry S. Jackson John V. McManus
Its Vice President Its Vice President of Finance
7
<PAGE>
NORWEST BANK MINNESOTA, HARRIS TRUST AND SAVINGS
NATIONAL ASSOCIATION BANK
By /s/ Terry S. Jackson By /s/ George Dluhy
----------------------------- -----------------------------
Terry S. Jackson George Dluhy
Its Vice President Its Vice President
NBD BANK THE CIT GROUP/EQUIPMENT
FINANCING, INC.
By /s/ Marguerite C. Gordy By /s/ William Hickey
----------------------------- -----------------------------
Marguerite C. Gordy William Hickey
Its Vice President Its Assistant Vice President
8
<PAGE>
Exhibit A to First Amendment to
Credit and Security Agreement
COMPLIANCE CERTIFICATE
TO: Terry S. Jackson
Norwest Bank Minnesota, National Association
DATE: ____________________, 199__
SUBJECT: Financial Statements
Dear Mr. Jackson:
I am the duly qualified and acting [Vice President of Finance]
[assistant corporate controller] of Sheldahl, Inc. (the "Borrower") and I am
familiar with the financial statements and financial affairs of the Borrower.
I am authorized to execute this Compliance Certificate on behalf of the
Borrower.
Pursuant to Section 6.1 of the Credit and Security Agreement dated
as of June 19, 1998, by and among the Borrower, Norwest Bank Minnesota,
National Association, as agent ("Norwest"; herein in such capacity, together
with any party which may become the successor Agent under such Credit and
Security Agreement, the "Agent"), and each of the financial institutions
which are now or may hereafter become parties to such Credit and Security
Agreement, as amended by the First Amendment to Credit and Security Agreement
dated as of November ___, 1998 (as the same may be further amended,
supplemented or restated from time to time, the "Credit Agreement"), enclosed
are an unaudited balance sheet and statements of income and retained earnings
of the Borrower, as of ___________, 199__ (the "Reporting Date"), and for the
year-to-date period ending on the Reporting Date. All terms used in this
Compliance Certificate shall have the meanings given in the Credit Agreement.
The balance sheet and statements of income and retained earnings
fairly present the financial condition of the Borrower as of the date
thereof. They have been prepared in accordance with GAAP.
I hereby certify to the Lenders as follows:
/ / The undersigned does not have knowledge of the occurrence of a Default
or Event of Default under the Credit Agreement.
<PAGE>
/ / The undersigned has knowledge of the occurrence of a Default or Event
of Default under the Credit Agreement and attached hereto is a
statement of the facts with respect to thereto.
I further certify to the Lenders as follows:
1. MINIMUM CASH FLOW AVAILABLE FOR DEBT SERVICE. Pursuant to
Section 6.18, as of the Reporting Date, the Borrower's Cash Flow Available
for Debt Service was $_____________, which / / satisfies / / does not
satisfy the requirement that such amount be no less than
$_____________________ as set forth in the table below:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING MINIMUM CASH FLOW
ON OR ABOUT AVAILABLE FOR DEBT
SERVICE
<S> <C>
11/30/98 $(300,000)
2/28/99 $5,500,000
5/31/99 $10,300,000
8/31/99 $21,100,000
</TABLE>
2. MINIMUM DEBT SERVICE COVERAGE RATIO. Pursuant to Section 6.19 of
the Credit Agreement, as of the Reporting Date, the Borrower's Debt Service
Coverage Ratio was _____ to 1.00 which / / satisfies / / does not satisfy
the requirement that such ratio be no less than ______ to 1.00 on the
Reporting Date as set forth in table below:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING ON OR MINIMUM DEBT SERVICE
ABOUT COVERAGE RATIO
<S> <C>
2/28/99 0.70 to 1.00
8/31/99 1.50 to 1.00
</TABLE>
3. MINIMUM PRE-TAX NET INCOME. Pursuant to Section 6.20 of the
Credit Agreement, the Borrower's Pre-tax Net Income as of the Reporting
Date, was $____________, which / / satisfies / / does not satisfy the
requirement that such amount be not less than $_____________ during such
period as set forth in table below:
-2-
<PAGE>
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING ON MINIMUM PRE-TAX NET INCOME
OR ABOUT
<S> <C>
11/30/98 $(2,710,000)
2/28/99 $(5,050,000)
5/31/99 $(4,985,000)
8/31/99 $(4,210,000)
</TABLE>
4. MINIMUM BOOK NET WORTH. Pursuant to Section 6.21 of the Credit
Agreement, as of the Reporting Date, the Borrower's Book Net Worth was
$____________, which / / satisfies / / does not satisfy the requirement that the
Borrower's Book Net Worth be not less than $_________________ on the Reporting
Date as set forth below:
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING ON MINIMUM NET WORTH
OR ABOUT
<S> <C>
11/30/98 $74,200,000
2/28/99 $76,400,000
5/31/99 $76,000,000
8/31/99 $81,300,000
</TABLE>
5. CAPITAL EXPENDITURES. Pursuant to Section 7.12 of the Credit
Agreement, for the fiscal quarter ending on the Reporting Date, the Borrower and
its Subsidiaries have expended or contracted to expend for Capital Expenditures,
$__________________ in the aggregate, which / / satisfies / / does not satisfy
the requirement that such expenditures not exceed $__________ in the aggregate
during such fiscal quarter as set forth below plus $_________________ which was
carried forward from prior fiscal quarters in accordance with Section 7.12.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDING ON CAPITAL EXPENDITURES
OR ABOUT
<S> <C>
11/30/98 $2,500,000
2/28/99 $2,200,000
5/31/99 $1,400,000
8/31/99 $1,500,000
</TABLE>
-3-
<PAGE>
Attached hereto are all relevant facts in reasonable detail to
evidence, and the computations of the financial covenants referred to above.
These computations were made in accordance with GAAP.
SHELDAHL, INC.
By
------------------------------
Its [Vice President of Finance] [Assistant
Corporate Controller]
-4-
<PAGE>
AMENDMENT
TO
EMPLOYMENT (CHANGE IN CONTROL) AGREEMENT
This Amendment, made as of the 29th day of July, 1998 between Sheldahl,
Inc., a Minnesota corporation (hereinafter called the "Company"), and
_____________, an executive of the Company (hereinafter called the "Executive").
WHEREAS, the Company and Executive entered into an Employment (Change in
Control) Agreement dated as of the ____ day of ________, 199__ (the "Change in
Control Agreement"); and
WHEREAS, the Company and Executive desire to amend the Change in Control
Agreement as provided in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth and for other good and valuable consideration, the parties hereby agree as
follows:
1. Section 2(a)(i) of the Change in Control Agreement is hereby amended
by adding the following at the end of such section:
"Notwithstanding the foregoing, a Change in Control shall not be
deemed to occur with respect to Molex Incorporated and its Affiliates and
Associates until such time as any one of them becomes the beneficial owner
of twenty-two percent (22%) or more of the voting power of the Company and
references to "twenty percent (20%)" in this Agreement shall be deemed to
refer to "twenty-two percent (22%)" when applied to Molex Incorporated and
its Affiliates and Associates; provided that Common Stock received by Molex
Incorporated as dividends paid or accrued on the Company's Series D
Convertible Preferred Stock (the "Series D Preferred") shall be excluded
from such beneficial ownership calculation for Molex Incorporated and its
Affiliates and Associates so long as such beneficial ownership includes
only shares of the Company's Common Stock owned as of the date hereof,
shares of Series D Preferred, shares of Series D Preferred converted into
Common Stock, Common Stock received as dividends paid or accrued on the
Series D Preferred and Common Stock issued directly to Molex Incorporated
after the date hereof by the Company."
2. All other terms of the Change in Control Agreement shall remain
unchanged.
IN WITNESS WHEREOF, the Company and the Executive have executed this
Amendment as of the date first written above.
SHELDAHL, INC.
By _______________________________
Edward L. Lundstrom
President
__________________________________
[Executive]
<PAGE>
SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN AGREEMENT
This Agreement, between Sheldahl, Inc., a Minnesota corporation
("Sheldahl"), and James E. Donaghy (the "Executive") is made and entered into
this 5th day of November, 1996.
WHEREAS, the Executive has, and is expected to provide, valuable services
to Sheldahl as its Chief Executive Officer; and
WHEREAS, Sheldahl desires to provide the Executive with a meaningful
pension benefit upon his termination of employment with Sheldahl, taking into
account the benefits to which the Executive is otherwise due from other sources;
and
WHEREAS, Sheldahl desires to encourage the Executive to continue his
employment with Sheldahl.
THEREFORE, Sheldahl and the Executive hereby agree as follows:
1. PURPOSE. The purpose of this Agreement is to provide an unfunded
deferred compensation benefit for the Executive, who is a member of a select
group of management employees of Sheldahl as that term is used in the Employee
Retirement Income Security Act of 1974, as amended.
2. RETIREMENT PENSION BENEFIT.
(a) If the Executive's employment with Sheldahl is terminated,
whether voluntary or involuntary, (except in the event of Executive's
death), he will be paid an annual retirement pension benefit equal to 50%
of the average of the annual cash compensation (and excluding all non-cash
compensation such as income recognized as a result of the exercise of stock
options or the sale of stock so acquired) paid to Executive by Sheldahl for
the five (5) calendar years preceding the calendar year which includes
Executive's termination date but not less than $137,500, less the Reduction
Amount (defined in Section 3).
(b) If Executive's termination of employment occurs prior to his 65th
birthday, he will be paid an annual pension benefit equal to $137,500, less
the Reduction Amount.
3. The Reduction Amount for purposes of this Agreement shall mean an
amount which for calculation purposes only equals the sum of (a) the aggregate
of twelve (12) monthly payments received by Executive or/and Anne Donaghy under
Executive's Dupont Employee Pension Plan or any other deferred compensation plan
attributable to contributions by Dupont or its affiliates ("Dupont Plans") and
(b) an amount which equals the one year value of a joint and
<PAGE>
100% survivor annuity on the lives of Executive and Anne Donaghy which could
be purchased with Executive's vested benefits attributable to (i) Company
contributions in Company Sponsored Employee Plans and (ii) Executive's
$15,600 automatic deferral (the "Automatic Deferral") to Company Sponsored
Employee Plans as required under his Employment Agreement with Sheldahl dated
March 1, 1988, calculated, in each case, as of the date of Executive's
termination of employment. The following additional rules apply to the
calculation of the Reduction Amount:
(a) The monthly payments under the Dupont Plans shall be $4,583
($55,000 annually) during Executive's life and $1,833 ($22,000 annually)
upon his death.
(b) The annuity valuation shall be based upon Executive's and Anne
Donaghy's ages as of Executive's termination date, provided, however, that
if Anne Donaghy is not surviving on such termination date, the annuity
shall be a single life annuity on the life of Executive.
(c) "Company Sponsored Employee Plans" shall include all qualified
and non-qualified employee pension benefit plans, as defined in Section
3(2)(A) of the Employee Retirement Security Act of 1974.
(d) For purposes of Section 3(b)(i), "Company contributions"
shall not include any salary reduction or deferred compensation
amounts elected by Executive or other contributions made by Executive.
Nothing herein shall affect Executive's right to receive any amounts included in
the Reduction Amount nor any elections made with respect to the receipt or
deferral of such amounts.
4. PAYMENT OF RETIREMENT PENSION BENEFITS. Retirement pension benefits
payable to Executive under Section 2(a) or 2(b) above shall continue for
Executive's life and, after his death, if he is survived by his spouse, Anne
Donaghy, shall continue to be paid to her for the duration of her life. All
payments under this Agreement shall cease as of the date of the death of the
survivor of Executive and Anne Donaghy. The annual pension benefits payable to
Executive in any calendar year pursuant to Section 2(a) or 2(b) above shall be
paid to Executive or to Anne Donaghy in twelve (12) equal monthly installments,
commencing the first day of the calendar month following the date of Executive's
termination of employment.
5. FORFEITURE OF BENEFITS. Notwithstanding anything herein to the
contrary, no retirement pension benefits shall be payable to the Executive or
his spouse or beneficiaries under this Agreement if Executive's employment is
terminated for Cause, as defined in that certain employment agreement between
Executive and Sheldahl dated March 1, 1988.
6. ASSIGNMENT OF BENEFITS. Neither the Executive, nor his spouse may
assign or alienate benefits payable under this Agreement, whether voluntary or
involuntary, or directly or
2
<PAGE>
indirectly, except that the Executive may assign the retirement pension
benefits payable under this Agreement to a trust or similar investment entity
provided such trust or entity was established by the Executive and the sole
beneficiaries thereunder during the Executive's lifetime are limited to the
Executive and/or his immediate family (as defined in Code Section 267).
7. NO GUARANTY OF EMPLOYMENT. The existence of this Agreement does not
constitute a guaranty or contract of employment between the Executive and
Sheldahl and nothing in this Agreement shall modify or amend any employment
agreement between the Executive and Sheldahl or to otherwise restrict or
interfere with the right of Sheldahl to terminate the employment of Executive or
the right of Executive to terminate his employment with Sheldahl in accordance
with the terms of any employment agreement then in existence, or, in the absence
of any such employment agreement, at any time at its or his will.
8. FUNDING OF PAYMENTS. In order to assure the performance by Sheldahl
or its successor of its obligations under this Agreement, Sheldahl may deposit
in trust an amount equal to the maximum payment that will be due Executive under
the terms hereof. Under a written trust instrument, the Trustee shall be
instructed to pay to Executive (or to Anne Donaghy, as the case may be) the
amount to which Executive shall be entitled under the terms hereof, and the
balance, if any, of the trust not so paid or reserved for payment shall be
repaid to Sheldahl. If and to the extent there are not amounts in trust
sufficient to pay Executive or Anne Donaghy under this Agreement, Sheldahl shall
remain liable for any and all payments due to Executive or to Anne Donaghy. In
accordance with the terms of such trust, at all times during the term of this
Agreement Executive and Anne Donaghy shall have no rights, other than as
unsecured general creditors of Sheldahl to any amounts held in trust and all
trust assets shall be general assets of Sheldahl and subject to the claims of
creditors of Sheldahl.
9. RESTRICTIONS ON COMPETITION. So long as payments are being made to
Executive under this Agreement, Executive shall not, without the prior written
consent of Sheldahl, accept employment or render service to any person, firm or
corporation directly or indirectly in competition with Sheldahl or affiliate
thereof, in the United States or any of its territories or possessions, or
directly or indirectly enter into or in any manner take part in or lend his
name, counsel or assistance to any venture, enterprise, business or endeavor,
either as proprietor, principal, investor, partner, director, officer, employee,
consultant, advisor, agent, independent contractor, or in any other capacity
whatsoever for any purpose which would be competitive with the business of
Sheldahl or any affiliate thereof, or any of their respective successors,
provided, however, that the foregoing shall not be deemed to prohibit Executive
from acquiring an equity interest not in excess of 5% in any company, the shares
of which are listed on any national stock exchange or are traded and quoted on
the National Association of Securities Dealers Automated Quotations System.
10. TITLE TO CERTAIN TANGIBLE PROPERTY. All tangible materials (whether
original or duplicate) including, but not in any way limited to, equipment
purchase agreements, file or data base materials in whatever form, books,
manuals, sales literature, equipment price lists, training
3
<PAGE>
materials, customer lists and records, customer files, correspondence,
documents, contracts, orders, messages, memoranda, notes, agreements,
invoices, receipts, lists, software listings or printouts, specifications,
models, computer programs, and records of any kind in the possession or
control of Executive which in any way relate or pertain to Sheldahl's
business, including the business of the subsidiaries or affiliates of
Sheldahl, whether furnished to Executive by Sheldahl or prepared, compiled or
required by Executive during his employment with Sheldahl, shall be the sole
property of Sheldahl. At any time upon request of Sheldahl, Executive shall
deliver all such materials to Sheldahl.
11. TRADE SECRETS AND CONFIDENTIAL INFORMATION. Executive will not,
without the express written consent of Sheldahl directly or indirectly
communicate or divulge to, or use for his own benefit or the benefit of any
other person, firm, association or corporation, any of Sheldahl's or its
subsidiaries' or affiliates' trade secrets, proprietary data or other
confidential information including, by way of illustration, the information
described in Section 10, which trade secrets, proprietary data and other
confidential information were communicated to or otherwise learned or acquired
by Executive in the course of his employment with Sheldahl, except that
Executive may disclose such matters to the extent that disclosure is required
(a) in the course of his employment with Sheldahl or (b) by a court or other
governmental agency of competent jurisdiction. As long as such matters remain
trade secrets, proprietary data or other confidential information, Executive
will not use such trade secrets, proprietary data or other confidential
information in any way or in any capacity other than to further Sheldahl's
interests.
12. THE COMPLETE AGREEMENT. This Agreement represents the complete
Agreement between Sheldahl and Executive concerning the subject matter hereof
and supersedes all prior agreements or understandings, written or oral. No
attempted modification or waiver of any of the provisions hereof shall be
binding on either party unless in writing and signed by both Executive and
Sheldahl.
13. NOTICES. Any notice required or permitted to be given hereunder shall
be in writing and shall be effective three business days after it is properly
sent by registered or certified mail, if to Sheldahl to President, Sheldahl,
Inc., 1150 Sheldahl Road, Northfield, Minnesota 55057, or if to Executive at his
residence address, or to such other address as either party may from time to
time designate by notice.
14. ASSIGNABILITY. This Agreement may not be assigned by either party
without the prior written consent of the other party, except that no consent is
necessary for Sheldahl to assign this Agreement to a corporation succeeding to
substantially all the assets or business of Sheldahl whether by merger,
consolidation, acquisition or otherwise, so long as such successor corporation
expressly assumes all of the obligations of Sheldahl under this Agreement. This
Agreement shall be binding upon Executive, his heirs and permitted assigns and
Sheldahl, its successors and permitted assigns.
4
<PAGE>
15. APPLICABLE LAW. It is the intention of the parties hereto that all
questions with respect to the construction and performance of this Agreement and
the rights and liabilities of the parties hereto shall be determined in
accordance with the laws of the State of Minnesota.
SHELDAHL, INC.
By /s/ James S. Womack
---------------------------------------
James S. Womack, Chairman of the Board
/s/ James E. Donaghy
---------------------------------------
James E. Donaghy
5
<PAGE>
WAIVER AND AMENDMENT
November 25, 1998
Northern Life Insurance Company
c/o ReliaStar Investment Research, Inc.
100 Washington Avenue South, Suite 800
Minneapolis, Minnesota 55401-2121
Reference is made to the Note Purchase Agreement dated as of August
31, 1995 (as amended, the "Note Purchase Agreement") between Sheldahl, Inc.
(the "Company"), and Northern Life Insurance Company (the "Purchaser"),
pursuant to which the Purchaser purchased the 8.32% Senior Secured Notes
(collectively, the "Notes") of the Company dated August 31, 1995 in the
original aggregate principal amount of $5,700,000. The Purchaser is the
registered holder of 100% of the outstanding principal amount of the Notes as
reflected in the Note Register required to be maintained by the Company
pursuant to paragraph 11 of the Note Purchase Agreement. Capitalized terms
used herein and not otherwise defined shall have the meaning set forth in the
Note Purchase Agreement.
The purpose of this letter is to request the Purchaser to waive
compliance with and amend certain covenants of the Note Purchase Agreement.
Accordingly, the Company requests the Purchaser's consent to the following:
1. VOLUNTARY PREPAYMENT OF THE NOTES. The Company requests that
paragraph 2(a) of the Note Purchase Agreement be amended and restated in its
entirety to read as follows:
(a) VOLUNTARY PREPAYMENTS. The Company may, at its option, on any
date, prepay the Notes, at par, in whole or in part (but if in part only in
the aggregate amount of $100,000 or integral multiples thereof), upon 5
days' prior written notice to the holders of the Notes.
2. MINIMUM CONSOLIDATED TANGIBLE NET WORTH. The Company requests
that the Purchaser waive any failure of the Company to comply with the
requirements of paragraph 4(o) of the Note Purchase Agreement through August
28, 1998, and that paragraph 4(o) of the Note Purchase Agreement be amended
and restated in its entirety to read as follows:
<PAGE>
(o) MINIMUM CONSOLIDATED TANGIBLE NET WORTH. At all times maintain
Consolidated Tangible Net Worth in an amount not less than the sum of (i)
$66,623,000, PLUS (ii) 50% of cumulative Consolidated Net Income, but, in
each case, only if Consolidated Net Income is a positive number, for each
completed fiscal quarter beginning with the fiscal quarter ended August 28,
1998, PLUS (iii) the aggregate amount of all increases in the Company's
Consolidated Tangible Net Worth resulting from Net Equity Proceeds.
3. MAXIMUM CONSOLIDATED DEBT TO TANGIBLE NET WORTH RATIO. The
Company requests that the Purchaser waive any failure by the Company to comply
with the requirements of paragraph 4(p) of the Note Purchase Agreement through
August 28, 1998, and that paragraph 4(p) of the Note Purchase Agreement be
amended and restated in its entirety to read as follows:
(p) MAXIMUM CONSOLIDATED INDEBTEDNESS TO TOTAL CAPITALIZATION RATIO
AND CONSOLIDATED DEBT TO TANGIBLE NET WORTH RATIO.
(i) At all times during the fiscal year of the Company ending
August 27, 1999, maintain the ratio of Consolidated Indebtedness to
Total Capitalization, calculated as at the end of each fiscal month,
at not more than 0.40 to 1.00; and
(ii) At all times during each fiscal year ending after August 27,
1999, maintain the ratio of Consolidated Debt to Consolidated Tangible
Net Worth, calculated as at the end of each fiscal month, at not more
than 1.25 to 1.00.
4. MINIMUM CONSOLIDATED INTEREST AND RENT COVERAGE RATIO. The
Company requests that the Purchaser waive any failure by the Company to comply
with the requirements of paragraph 4(q) of the Note Purchase Agreement through
August 28, 1998, and that paragraph 4(q) of the Note Purchase Agreement be
amended and restated in its entirety to read as follows:
(q) QUARTERLY MINIMUM EBITDA AMOUNT AND MINIMUM CONSOLIDATED INTEREST
AND RENT COVERAGE RATIO.
(i) During the period commencing on September 1, 1998 and ending
on each fiscal quarter set forth below, maintain EBITDA at least equal
to the amount set forth below for each such period:
2
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
PERIOD BEGINNING MINIMUM
SEPTEMBER 1, 1998 AND EBITDA
--------------------- ------
<S> <C>
ending on or about
November 30, 1998 $1,500,000
ending on or about
February 28, 1999 $2,800,000
ending on or about
May 31, 1999 $4,700,000
ending on or about
August 31, 1999 $5,900,000
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
(ii) At all times after the fiscal year ending August 27, 1999,
maintain its Consolidated Interest and Rent Coverage Ratio, calculated
as at the end of each fiscal quarter of the Company and based upon the
previous four fiscal quarters (including such fiscal quarter), at not
less than 2.0 to 1.0.
5. MINIMUM FIXED CHARGE COVERAGE RATIO. The Company requests
that the Purchaser waive any failure by the Company to comply with the
requirements of paragraph 4(r) of the Note Purchase Agreement through August
27, 1999.
6. LIMITATION ON FUNDED DEBT. The Company requests that the
Purchaser waive any failure by the Company to comply with the requirements of
paragraph 5(a) of the Note Purchase Agreement through August 27, 1999.
7. SALE OF ASSETS. The Company requests that paragraph 5(e) of
the Note Purchase Agreement be amended and restated in its entirety to read
as follows:
(e) SALE OF ASSETS. Sell, lease or otherwise dispose of all or any
part of its assets, provided that (i) any Subsidiary may sell, lease or
otherwise dispose of all or any part of its assets to the Company or other
Subsidiary, (ii) the Company and any Subsidiary may sell inventory in the
ordinary course of business, (iii) the Company and any Subsidiary may sell
or otherwise dispose of assets which are obsolete, worn out or no longer
useful in the conduct of their respective businesses, and (iv) the Company
and any Subsidiary may sell or otherwise dispose of assets provided that
the aggregate book value of all such assets sold or otherwise disposed of
in any fiscal year of the Company shall not exceed 5% of the Consolidated
Tangible Net Worth of the Company and its Subsidiaries as of the end of the
immediately preceding fiscal year, unless the net proceeds of such sale or
disposition which exceed 5% are used exclusively to make Voluntary
Prepayments as described in paragraph 2(a) of the Note Purchase Agreement,
as amended herein.
3
<PAGE>
8. DIVIDEND RESTRICTIONS. The Company requests that the
Purchaser waive any failure by the Company to comply with the requirements of
paragraph 5(j) of the Note Purchase Agreement through November 26, 1998.
9. CAPITAL EXPENDITURES. The Company requests that the Purchaser
waive any failure by the Company to comply with the requirements of paragraph
5(k) of the Note Purchase Agreement through August 28, 1998, and that
paragraph 5(k) of the Note Purchase Agreement be amended and restated in its
entirety to read as follows:
(k) CAPITAL EXPENDITURES.
(i) For the fiscal year of the Company ending August 27, 1999,
expend or contract to expend Capital Expenditures in excess of (i)
$3,000,000 for the fiscal quarter ending on or about November 30,
1998, (ii) $5,700,000 for the two fiscal quarters ending on or about
February 28, 1999, (iii) $7,100,000 for the three fiscal quarters
ending on or about May 31, 1999, (iv) $8,600,000 for the fiscal year
ending on or about August 31, 1999.
(ii) For each fiscal year ending after August 27, 1999, expend or
contract to expend Capital Expenditures in excess of $10,000,000
during any fiscal year of the Company.
10. DEFINITIONS. (a) The Company requests that paragraph 15 of
the Note Purchase Agreement be amended to include new definitions to read as
follows:
"CONSOLIDATED INDEBTEDNESS" shall mean all Indebtedness of the Company
and its Subsidiaries determined on a consolidated basis in accordance with
generally accepted accounting principles.
"EBITDA" shall mean, for any period, the sum of (i) Consolidated Net
Income for such period, (ii) Interest Expense for such period to the extent
deducted in the computation of Consolidated Net Income, (iii) income tax
expense for such period to the extent deducted in the computation of
Consolidated Net Income, (iv) depreciation expense for such period to the
extent deducted in the computation of Consolidated Net Income, and (v)
amortization expense for such period to the extent deducted in the
computation of Consolidated Net Income.
"INDEBTEDNESS" shall mean (i) all obligations for borrowed money, (ii)
all payment obligations constituting Capitalized Lease Obligations, (iii)
all obligations which are secured by any lien existing on any asset or
property whether or not the obligations secured thereby shall have been
assumed, (iv) all obligations for the unpaid purchase price for goods,
property or services acquired, except for trade accounts payable arising in
the ordinary course of business that are not past due, (v)
4
<PAGE>
all obligations to purchase goods, property or services where payment
therefor is required regardless of whether delivery of such goods or
property or the performance of such services is ever made or tendered
(generally referred to as "take or pay contracts"), (vi) all obligations
in respect of any interest rate or currency swap, rate cap or other
similar transaction (valued in an amount equal to the highest termination
payment, if any, that would be payable upon termination for any reason on
the date of determination), and (vii) all obligations of others similar
in character to those described in clauses (i) through (vi) of this
definition creating contingent liability as obligor, guarantor, surety or
in any other capacity, or in respect of which obligations assures a
creditor against loss or agrees to take any action to prevent any such
loss (other than endorsements of negotiable instruments for collection in
the ordinary course of business), including without limitation all
reimbursement obligations of such person in respect of letters of credit,
surety bonds or similar obligations and all obligations of such person to
advance funds to, or to purchase assets, property or services in order to
maintain the financial condition of such other person.
(b) The Company requests that the definition of "Net Equity
Proceeds" be amended and restated in its entirety to read as follows:
"NET EQUITY PROCEEDS" shall mean the net cash proceeds actually
received by the Company from the sale of additional common or preferred
stock in the Company on or after August 28, 1998, including cash received
from the exercise of stock options.
11. PAYMENT OF INTEREST AND PRINCIPAL ON NOTES. As of the date
hereof, the outstanding principal amount of the Note is $5,147,210.29, and
interest has been paid through November 1, 1998. In consideration of the
foregoing waivers and amendments, the Company agrees that, notwithstanding
anything to the contrary in paragraph 1(a) of the Note Purchase Agreement or
in the Note, the remaining principal amount of and interest on the Note shall
be payable as follows: on December 1, 1998 a payment in the principal amount
of $500,000, plus accrued interest at the rate hereinafter set forth; on
January 1, 1999 a payment in the principal amount of $250,000, plus accrued
interest at the rate hereinafter set forth; on February 1, 1999 a payment in
the principal amount of $250,000, plus accrued interest at the rate
hereinafter set forth; on March 1, 1999, and on the first day of each month
thereafter, a payment in the principal amount of $60,000, plus accrued
interest at the rate hereinafter set forth. The Notes shall bear interest
(i) through November 30, 1998 at the rate of 8.32% per annum, (ii) from
December 1, 1998 through January 31, 1998 at the rate of 10.00% per annum,
(iii) from February 1, 1999 through February 28, 1998 at the rate of 12% per
annum, (iv) from March 1, 1999 through March 31, 1999 at the rate of 13% per
annum, (v) from April 1, 1999 to April 30, 1999 at the rate of 14% per annum,
and (vi) from and after May 1, 1999 and continuing until payment in full of
the principal amount thereof at the rate of 15% per annum (provided that
solely for the purposes of determining the portion of annual interest
allocable to any interest payment period, it shall be assumed that a year is
comprised of 360
5
<PAGE>
days and 12 30-day months). To evidence the foregoing amendments, the
Company and the Purchaser shall execute an addendum to the Note in the form
of Exhibit A hereto.
12. MISCELLANEOUS. Except as specifically set forth herein, all
terms and provisions of the Note Purchase Agreement and the Notes, and all
other documents and instruments related thereto, shall remain in full force
and effect with no other modification or waiver. This Waiver and Amendment
may be executed in two or more counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
[The remainder of this page is intentionally left blank.]
6
<PAGE>
If you agree to the foregoing waivers and amendments of the
provisions of the Note Purchase Agreement, please so indicate by executing
the form of acknowledgment set forth below. The waivers and amendments shall
then take effect as of the date hereof.
Very truly yours,
SHELDAHL, INC.
By /s/ John V. McManus
--------------------------------------
Its Vice President - Finance
--------------------------------
Agreed to and accepted as of the
date first-above mentioned:
NORTHERN LIFE INSURANCE COMPANY
By /s/ James V. Wittich
-------------------------------------
Its Assistant Treasurer
-------------------------------
[Signature page for Waiver and Amendment]
7
<PAGE>
EXHIBIT A
ADDENDUM
TO THE
8.32% SENIOR SECURED NOTE
OF
SHELDAHL, INC.
DATED AUGUST 31, 1995
This Addendum to the above-referenced Senior Secured Note (together
with any note or notes issued in exchange therefor, the "Note") of Sheldahl,
Inc. (the "Company") payable to Northern Life Insurance Company or registered
assigns is made as of the 25th day of November 1998. The Company agrees as
follows:
1. The principal amount of the Note outstanding on the date of
this Addendum is $5,147,210.29, and interest has been paid through November
1, 1998.
2. Notwithstanding anything to the contrary contained in
paragraph 1(a) of the Note Purchase Agreement or in the Note, the remaining
principal amount of and interest on this Note shall be payable as follows:
on December 1, 1998 a payment in the principal amount of $500,000, plus
accrued interest at the rate hereinafter set forth; on January 1, 1999 a
payment in the principal amount of $250,000, plus accrued interest at the
rate hereinafter set forth; on February 1, 1999 a payment in the principal
amount of $250,000, plus accrued interest at the rate hereinafter set forth;
on March 1, 1999, and on the first day of each month thereafter, a payment in
the principal amount of $60,000, plus accrued interest at the rate
hereinafter set forth. This Note shall bear interest (i) through November
30, 1998 at the rate of 8.32% per annum, (ii) from December 1, 1998 through
January 31, 1998 at the rate of 10.00% per annum, (iii) from February 1, 1999
through February 28, 1998 at the rate of 12% per annum, (iv) from March 1,
1999 through March 31, 1999 at the rate of 13% per annum, (v) from April 1,
1999 to April 30, 1999 at the rate of 14% per annum, and (vi) from and after
May 1, 1999 and continuing until payment in full of the principal amount
hereof at the rate of 15% per annum (provided that solely for the purposes of
determining the portion of annual interest allocable to any interest payment
period, it shall be assumed that a year is comprised of 360 days and 12
30-day-months).
<PAGE>
Upon execution and delivery by the Company and acceptance by the
holder of the Note of this Addendum, this Addendum shall become part of the
Note. All references to the Note in the Note, the Note Purchase Agreement,
the Deed of Trust, and this Addendum shall hereinafter be deemed to
references to the Note as amended by this Addendum. Except as expressly set
forth herein, the Note shall remain in full force and effect without
modification.
This Addendum shall be governed by the laws of the State of
Minnesota.
SHELDAHL, INC.
By /s/ John V. McManus
-----------------------------------
Its Vice President-Finance
--------------------------------
Agreed to and accepted as of
the date first-above mentioned:
NORTHERN LIFE INSURANCE COMPANY
By /s/ James V. Wittich
----------------------------
Its Assistant Treasurer
-------------------------
[Signature Page for Addendum to the Note]
<PAGE>
AMENDMENT ONE
TO
LICENSE AGREEMENT
This is an Amendment to an Agreement (the "Agreement") made as of 20 June, 1994
between SIDRABE, a Latvian corporation, having a principal place of business at
Riga, Latvia, (the "Licensor"), and SHELDAHL, INC., a Minnesota corporation,
having a principal place of business at Northfield, Minnesota, (the "Licensee")
and is entered into as of September 14, 1994 by Licensor and Licensee.
1. Article II of the Agreement is amended by adding the following sections:
"SECTION 2.3 FURTHER LICENSE GRANT. The Licensor further hereby grants to
Licensee a nontransferable, exclusive, perpetual license to use Licensor's
technical information and other technology existing at the date hereof to put
metals with a thickness of 0.1 microns to 5 microns on flexible polymeric
substrates in order to produce and sell products, including without limitation
the ability to put active and passive electronic components on thin substrates.
"Metals" as used in this Section 2.3 include, without limitation, copper,
aluminum, chrome and lithium, and composites of one or more metals. "Products"
as used in this Section 2.3 include, without limitation, flexible composites of
metals and films, flexible printed circuits, Multichip Modules, single and
several chip packages, batteries and displays for use within the electrical
interconnect industry.
SECTION 2.4 FUTURE DEVELOPMENTS. If Licensor shall develop new technical
information and technology of the kind described in Section 2.3 (as
distinguished from modifications and improvements of such technical information
and technology existing at the date hereof), Licensor will first offer the right
to License such technical information and technology to Licensee for use in the
production and sale of products within the electrical interconnect industry. If
within 90 days after Licensor has notified Licensee in writing of the new
development Licensee advises Licensor of Licensee's interest in the further
license, the parties will negotiate in good faith to agree upon a commercially
reasonable License Agreement covering the new technical information and
technology.
SECTION 2.5 INTERCHANGE OF INFORMATION. To assure a continuous and free
interchange of information concerning Licensor Improvements, Licensee
Improvements and new technical information and technology developments, the
parties hereby establish a Joint Technical Advisory Board made up of two
technically trained and experienced employees from each party. The Joint
Technical Advisory Board shall meet not less than two times each year. At those
meetings the parties shall advise each other thoroughly regarding Licensor
Improvements, Licensee Improvements and new technical information and technology
improvements since the preceding meeting. Neither party shall be obligated to
disclose information to the other party if (i) the information was provided by
an independent third party subject to a nondisclosure or confidentiality
agreement or (ii) restrictions on disclosure of the information exist by virtue
of other agreements to which the party having the information is bound."
<PAGE>
2. Section 4.0 of the Agreement is amended to read as follows:
"SECTION 4.0 LUMP SUM PAYMENTS. In consideration of the Licensor's
furnishing the Technical Information and services to the Licensee relating to
the Licensed Products as set forth in Article III and for the licenses granted
to the Licensee under Section 2.1 and as may be granted pursuant to Section 3.7,
the Licensee shall pay to the Licensor an annual licensing fee of $50,000. For
the year of 1994 this fee shall be payable at the rate of $10,000 per week for
five weeks, the first payment of $10,000 being made upon the execution date of
this Agreement with all subsequent annual payments of $50,000 being paid in a
lump sum on each subsequent January 15, beginning on January 15, 1995, and
continuing throughout the term of this Agreement. However, the entire License
Fee will become immediately due and payable upon the Licensor's termination of
this agreement under Article IX.
In consideration of the Licensor's furnishing technical information and
services to the Licensee relating to technical information and technology
described in Section 2.3 and for the licenses granted to the Licensee under
Section 2.3, the Licensee shall pay to Licensor the following licensing fees:
$100,000 at the execution of this Amendment, receipt of which is
acknowledged by Licensor;
$50,000 on February 1, 1995;
$50,000 on August 1, 1995; and
An amount equal to 3% of the sales by Sheldahl of materials
manufactured by Licensee using Licensor's technology described in
Section 2.3, up to a maximum of $10,000,000 of such sales (a
maximum of $300,000 in additional licensing fees). Payment of
such amount shall be made annually on or before March 1 for sales
made during the preceding calendar year.
That license fees provided in this Section 4.0 shall be paid in United
States currency by money transfer to the following account of the Licensor:
UNIBANC A/S, STAUNINGS PLADS 1-3, COPENHAGEN, DK-1786 COPENHAGEN V, DENMARK
FOR RIGA BANK ACCOUNT NO. 5005568953 IN FAVOR OF A/P "SIDRABE" ACCOUNT NO.
0700311."
3. The rights, obligations, representations and commitments of the parties
relating to the Technical Information and Licensed Products set forth in
Articles III, V, VI, VII and VIII of the Agreement shall in all respects extend
to and be applicable to the license granted in, and the technical information
and technology described in, Section 2.3.
4. Except as set forth in this Agreement, the Agreement shall continue in full
force and effect.
2
<PAGE>
EXECUTION
In consideration of the foregoing terms and conditions, Licensor and Licensee
have executed this Agreement as of the date first written above.
SIDRABE
By /s/ Edgar Yadin
------------------------------------
Its President
------------------------------------
SHELDAHL, INC.
By /s/ Ross P. Miller
------------------------------------
Its Vice President - Europe
------------------------------------
3
<PAGE>
Exhibit 11
SHELDAHL, INC. AND SUBSIDIARY
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the Fiscal Years Ended
August 30, 1996 August 29, 1997 August 28, 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Basic earnings per share:
Weighted average number of issued shares
outstanding used to compute basic
earnings per share 8,414 8,967 9,364
-------- -------- --------
-------- -------- --------
Net income (loss) before convertible
preferred stock dividends $ 4,772 $ (7,969) $(36,497)
Convertible preferred stock dividends - - (689)
-------- -------- --------
Net income (loss) applicable to
common shareholders $ 4,772 $ (7,969) $(37,186)
-------- -------- --------
-------- -------- --------
Net income (loss) per common share $ 0.57 $ (0.89) $ (3.97)
-------- -------- --------
-------- -------- --------
Diluted earnings per share:
Weighted average number of issued shares
outstanding to compute basic
earnings per share 8,414 8,967 9,364
Effect of exercise of stock options
under the treasury stock method 272 - -
-------- -------- --------
Weighted average number of issued shares
outstanding used to compute diluted
earnings per share 8,686 8,967 9,364
-------- -------- --------
-------- -------- --------
Net income (loss) before convertible
preferred stock dividends $ 4,772 $ (7,969) $(36,497)
Convertible preferred stock dividends - - (689)
-------- -------- --------
Net income (loss) applicable to common
shareholders $ 4,772 $ (7,969) $(37,186)
-------- -------- --------
-------- -------- --------
Net income (loss) per common share $ 0.55 $ (0.89) $ (3.97)
-------- -------- --------
-------- -------- --------
</TABLE>
<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, 333-36267, 333-40719,
333-47183, 333-58307 and 333-64273.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
November 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUGUST
29, 1997 AND AUGUST 28, 1998 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-28-1998
<PERIOD-END> AUG-29-1997 AUG-28-1998
<CASH> 5,567 1,005
<SECURITIES> 0 0
<RECEIVABLES> 15,880 15,727
<ALLOWANCES> 0 0
<INVENTORY> 13,078 15,488
<CURRENT-ASSETS> 35,696 32,487
<PP&E> 157,841 168,579
<DEPRECIATION> 57,036 66,322
<TOTAL-ASSETS> 139,367 136,306
<CURRENT-LIABILITIES> 12,753 23,628
<BONDS> 0 0
0 0
15 41
<COMMON> 3,258 2,415
<OTHER-SE> 66,923 76,301
<TOTAL-LIABILITY-AND-EQUITY> 139,367 136,306
<SALES> 105,266 117,045
<TOTAL-REVENUES> 105,266 117,045
<CGS> 94,933 109,143
<TOTAL-COSTS> 21,104 33,694
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,298 2,547
<INCOME-PRETAX> 12,069 28,339
<INCOME-TAX> 4,100 2,952
<INCOME-CONTINUING> 7,969 31,291
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 5,206
<NET-INCOME> 7,969 37,186
<EPS-PRIMARY> 0.89 3.97
<EPS-DILUTED> 0.89 3.97
</TABLE>
