PROSPECTUS SUPPLEMENT
dated September 28, 1998
to Prospectus dated July 2, 1998
UP TO 1,735,000 SHARES
SHELDAHL, INC.
Common Stock
Sheldahl, Inc., a Minnesota corporation (Sheldahl or the Company) has
registered 1,735,000 shares of its Common Stock (including preferred stock
purchase rights), which may be offered by this Prospectus Supplement and the
accompanying Prospectus from time to time by the stockholders identified
herein or their transferees, pledgees, donees or other successors in interest
(the Selling Shareholders).
This Prospectus Supplement is qualified in its entirety by reference by
the more detailed information and the consolidated financial statements of the
Company, including the notes thereto, appearing or incorporated by reference
herein or in the accompanying Prospectus dated July 2, 1998. All capitalized
terms used in this Prospectus Supplement are defined as set forth elsewhere
herein or in the accompanying Prospectus. All references in this Prospectus
Supplement to the Prospectus are to the Company's Prospectus dated July 2,
1998 accompanying this Prospectus Supplement.
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol SHEL.
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE RISK FACTORS BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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The date of this Prospectus Supplement is September 28, 1998
<PAGE>
This Prospectus Supplement contains and incorporates by reference
certain forward-looking statements based on current expectations which involve
risks and uncertainties. Actual results and the timing of certain events may
differ materially from those projected in such forward-looking statements due
to a number of risk factors, including those set forth below. The Company has
tried, wherever possible, to identify these forward-looking statements by
using words such as believe, anticipate, estimate, expect and similar
expressions. The Company undertakes no obligation to release publicly the
results of any revisions to any such forward-looking statements that may be
made to reflect events or circumstances after the date of this Prospectus or
to reflect the occurrence of unanticipated events.
RECENT DEVELOPMENTS
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.
See Risk Factors - Anti-Takeover Provisions.
Executive Management Restructuring. On September 17, 1998, the Company
announced 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, effective January 13, 1999. Mr. Donaghy will replace James
S. Womack, who will leave the Board in accordance with the Company retirement
policy for 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 soldermark
materials and surface finishes to accommodate all end-product 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. The Company estimates the potential market
size for its new product to be $250-300 million in 1998, growing at a
projected rate of 30% per year. However, there can be no assurance that the
Company's new product will achieve market acceptance or that the market size
will develop and grow at rates currently anticipated.
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. At this time, it is the
Company's estimate that the strike has had a $1.5 million effect on the
Company's results for the fourth quarter of fiscal 1998. There can be no
assurance that the Company's results of the fourth quarter and fiscal year
ending August 28, 1998 will not be more adversely affected by this labor
strike. See Risk Factors - Variability of Quarterly Results.
Series D Preferred Stock. On July 30, 1998, the Company sold an
aggregate of 32,917 shares of Series D Convertible Preferred Stock ("Series D
Preferred Stock"), to the Selling Shareholders pursuant to the Convertible
Preferred Stock Purchase Agreement among the Company and the Selling
Shareholders (the "Agreement"). The Series D Preferred Stock is entitled to
5% cumulative dividends, payable in cash or shares of Common Stock at the
election of the Company. The conversion price for the Series D Preferred
Stock is $6.15 per share. In connection with the issuance of the Series D
Preferred Stock, the Company granted to each Selling Shareholder Warrants 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 shares at an exercise price of $7.6875 per share. The Company also
granted to the Selling Shareholders certain registration rights with respect
to the shares of the Company's Common Stock issuable to the Selling
Shareholders upon conversion of the Series D Preferred Stock, accrued
dividends and the Warrants.
The Company may require holders of Preferred Stock to convert to Common
Stock provided that the Company's Common Stock trades at 200% of the
conversion price.
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.
Also in connection with the transactions contemplated by the Agreement
and in the related joint venture described below, 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 offerings. The documentation
memorializing the granting of such rights has not yet been finalized.
This Prospectus relates to the shares of Common Stock issuable to the
Selling Shareholders pursuant to the Agreement. The foregoing description of
the Agreement, the Warrants and the registration rights does not purport to be
complete and is qualified in its entirety by reference to the Company's report
on Form 8-K, filed on August 18, 1998, which includes such agreements as
exhibits and is incorporated herein by reference.
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 (Modular Interconnect).
Modular Interconnect 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 Modular Interconnect pursuant
to long-term supply contracts.
The Company owns 40% and Molex owns 60% of Modular Interconnect. Each
party has a right of first refusal with respect to the other party's ownership
interest. Modular Interconnect 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 Modular Interconnect 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 Modular Interconnect.
Modular Interconnect is managed by five managers, three of whom are
designated by Molex and two by Sheldahl. Certain transactions require the
approval of the majority of managers designated by each party.
The Limited Liability Company Agreement of Modular Interconnect (the LLC
Agreement) is filed as Exhibit 10.1 to the Company's current report on Form
8-K filed on August 28, 1998. The Company has requested that certain
portions of the Agreement be granted confidential treatment by the Commission.
Accordingly, certain portions of the Agreement have been deleted and replaced
by brackets with asterisks.
There can be no assurance that the joint venture will be successful or
that the new products will gain market acceptance or be commercialized, if at
all, in a profitable manner by Modular Interconnect. In addition, some
statements made herein may be forward-looking and subject to risks and
uncertainties such as those included in the Company's annual report, 10-K, 10-
Q and other SEC filings, as well as the risks and uncertainties inherent in
embarking upon a new joint venture for the purpose of developing a new
product.
The foregoing description of the LLC Agreement does not purport to be
complete and is qualified in its entirety by reference to the Company's report
on Form 8-K, filed on August 28, 1998, which includes such Agreement as an
exhibit and is incorporated herein by reference.
New Credit Facility. On June 19, 1998, the Company entered into a new
financing arrangement in the form of a debt facility with its existing bank
group, Norwest Business Credit, Inc., Harris Trust and Savings Bank and NED
Bank, as well as a new member, CIT Group. The facility is a three-year
agreement totaling $60 million, consisting of a $25 million capital revolver
and term loan facilities. The term loans are comprised of a $16 million
facility that amortizes over seven years with a balloon payment in May 2001.
Payments are paid monthly commencing January 1999. The second term facility
is a $19 million loan that is amortized over two years with repayments
commencing August 29, 1998. On July 31, 1998, the Company satisfied the $19
million second term facility. Under the terms of the facility, the Company
issued Warrants expiring June 18, 2003 with an exercise price of $6.92
covering an aggregate of 100,000 shares of the Company's Common Stock. The
Company believes the new debt facility along with the Series D preferred
equity placement has strengthened its capital structure and will enable it to
further develop its Micro Products business. The capital liquidity of the
Company is adequate but will remain tight until the cash flow from operations
reflects improvement. See Risk Factors - Liquidity and Possible Need for
Additional Financing.
Third Quarter Results. The Company's unaudited results for the third
quarter of fiscal 1998, including a pretax charge for restructuring costs and
asset impairment charges as well as further charges relating to a tax asset
allowance and the adoption of a FASB pronouncement on start-up costs, resulted
in a net loss for the nine months and quarter ended May 29, 1998 of $33.1
million or $3.57 per share and $19.0 million or $1.98 per share, respectively.
For the third quarter, the Company's core business generated operating pretax
profit of $1.4 million, while its Micro Products business posted a pretax loss
of $4.9 million. The core business, based on increased sales and reduced
costs, improved operating pretax profits by $2.8 million for the third
quarter, as compared to the second quarter. Gross margin in the core business
rose to 19.1 percent compared to 12.7 percent for the second quarter.
Additionally, for the nine months ended May 29, 1998, the loss was due in part
to the following:
The Company's decision to move jobs and make other organizational
efficiencies from its Northfield, Minnesota and Aberdeen, South
Dakota facilities to Mexico has affected 240 jobs and resulted in
a restructuring charge of $4.5 million in the third quarter of
1998 related to the cost of staff reductions, the sale of certain
assets and the closing of the Company's Aberdeen assembly
facility. The Company expects that 200 of the affected jobs will
move to Mexico by the end of September 1998, with the balance
completed in the third quarter of fiscal 1999. The Company
anticipates that it will realize annual costs savings of
approximately $7.0 million associated with this restructuring of
its operations when fully completed.
The write down of equipment amounting to $3.3 million in the third
quarter of 1998, principally at the Company's Longmont, Colorado
facility, which equipment, based upon analysis by management and
anticipated production processes, is not expected to contribute to
the Company's future cash flows.
The decision and analysis by management, based upon recent
restructurings, write-offs and continued losses at the Company's
Micro Products venture, to provide a valuation allowance for its
net deferred tax assets, resulting in a $7.8 million charge to
income during the third quarter of 1998. As a result, the Company
will not reflect in immediate future periods a tax provision or
benefit until such net operating losses 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 remaining value of the allowance.
The adoption by the Company of Statement of Position No. 98-5,
Reporting on the Costs of Start-Up Activities, (SOP 98-5) which
requires the expensing of these items as incurred, versus
capitalizing and expensing them over a period of time. The early
adoption of this statement resulted in a cumulative effect of a
change in accounting method of approximately $5.2 million, related
to costs capitalized by the Company from its Micro Products
venture. The adoption of this statement will be retro-active to
the beginning of fiscal 1998, and the Company's first and second
quarters will be restated to reflect this change in accounting, in
accordance with the provisions of SOP 98-5. 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 write down of certain equipment, which was
noted above.
RISK FACTORS
The securities offered hereby involve a high degree of risk.
Accordingly, in analyzing an investment in these securities, prospective
investors should carefully consider the following risk factors, along with
other information referred to herein. No investor should participate in this
offering unless such investor can afford the loss of his or her entire
investment.
Because of the variety and uncertainty of the factors affecting the
Company's operating results, past financial performance and historic trends
may not be a reliable indicator of future performance. These factors, as well
as other factors affecting the Company's operating performance, and the fact
that the Company participates in a highly dynamic and competitive industry,
may result in significant volatility in the Company's Common Stock price.
Liquidity and Possible Need for Additional Financing
The Company believes it will be able to fund its near-term anticipated
working capital and capital expenditure requirements from bank borrowings,
proceeds from the sale of the Company's equity securities and funds generated
from operations. The Company will continue to assess the need for additional
capital recognizing that the amount and form of the capital is directly
dependent on the operational performance of the business and the need to
expand manufacturing capacity. Currently, the Company is being funded through
the working capital borrowing base under its bank line of credit and improving
cash flow from operations. Enhanced cash flow from operations is in part
linked to the expectation that successful full volume production from the
Longmont facility will commence in the third quarter of fiscal 1999. However,
there can be no assurance that unanticipated developments, including but not
limited to possible requirements to redeem the Company's Series B Stock,
failure to achieve full volume production from the Longmont facility, or
failure to achieve any other operational objectives of the Company, will not
create an earlier need for additional capital. If any of these events occur,
the Company could be required to seek additional capital as early as the end
of the second quarter of fiscal 1999. There can be no assurance, however,
that such additional capital will be available when needed by the Company or
that such capital will be available on terms acceptable to the Company.
Utilization of Longmont Facility
The Company has completed construction of, and installation of equipment
to be used in, the Longmont Facility, but has not commenced extensive volume
production of its ViaArray and Via-Thin products at this facility. The
Company had originally expected to begin volume production at the Longmont
Facility in April 1996, but the Company initially suffered delays in delivery
and installation of certain production equipment as a result of financial
difficulties of a key supplier, a longer than anticipated installation and
testing period, and recently is experiencing a far more rigorous and lengthy
qualification process by the Company's customers and their customers than the
Company anticipated. The Company is producing Novaclad for sale to the market
and internal use and has now begun initial production of Via-Thin. Via-Thin
is a product still in the early stages of market acceptance. The Company
believes that it has validated the technical capabilities of its processes and
equipment at the Longmont Facility, although there can be no assurance that
validation problems or difficulties will not materialize once full volume
production has commenced. The Company's ability to begin full volume
production of Via-Thin is subject to final qualification by the Company's
customers, and in some cases, their customers, as well as the ability of its
production equipment to produce sufficient quantities of products at
acceptable quality levels. Once the Longmont Facility has commenced full
volume production of Via-Thin, the Company still expects that it will not
initially produce sufficient sales volume or profit contribution to offset the
depreciation and other expenses related to its operation. As a result, the
Longmont Facility has had a material adverse effect on the Company's results
of operations and will continue to have such an effect until sales of the
Company's Novaclad-based ViaArray and Via-Thin products increase sufficiently
to cover expenses.
Market Acceptance of New Products
A significant portion of the Company's anticipated future success in the
data communication market and a significant portion of future revenue growth
of the Company will depend on market acceptance of its Novaclad-based,
ViaArray and Via-Thin products. Although the Company believes that these
products have attractive performance characteristics and utility in a
potentially broad range of products, sales of its Novaclad-based products will
depend on the Company's ability to (i) convince potential customers that the
advantages and applications of these products justify the expense and
production changes necessary to incorporate the Company's products into the
customer's manufacturing process; (ii) work with designers of integrated
circuit (IC) packages and electronics to incorporate these products; (iii)
qualify these products for inclusion in the customer's products within the
time requirements of the customer's design cycle and (iv) produce sufficient
quantities of these products in a timely manner. Moreover, these products
will compete with certain other thin film laminates or alternative materials
offered by other manufacturers and such materials may achieve wider market
acceptance than the Company's products. Failure of the Company's Novaclad-
based, ViaArray and Via-Thin products to achieve timely or sufficient market
acceptance would have a material adverse effect on the Company's results of
operations.
Dependence on Automotive Market
Sales to the automotive market as a percentage of total sales were
approximately 69.2% in fiscal 1996 and 67.5% in fiscal 1997. The Company's
production of component products for the automotive market fluctuates as
automotive manufacturers begin production of new models and end production of
others. A decrease in the number of the Company's electronic components
included in new models could have a material adverse effect on the Company's
results of operations. A general downturn in the automotive market, such as
the General Motors labor strike, could have and has had a material adverse
effect on the demand for the electronic components supplied by the Company to
its customers in the automotive market. For example, during the Company's
fourth quarter, the Company's sales to the automotive market were adversely
impacted by the General Motors strike by an amount equal to approximately $1.5
million. In addition, as the automotive industry continues to qualify and
reduce the number of suppliers and demand higher performance products at a
lower cost, there can be no assurance that the Company will be able to
maintain its current sales volumes at existing profit margins to automotive
manufacturers and their suppliers.
Capital Intensive Business
The Company's business is capital intensive. In the past four years,
the Company has invested approximately $112 million in total capital
expenditures, including approximately $60 million in the Longmont Facility.
In order to remain competitive, the Company must continue to make significant
expenditures for capital equipment, expansion of operations and research and
development. The Company has had initial success with introducing its
Novaclad-based products but further penetration is required. If the Company
is successful in its Novaclad-based products, it may be required to make
additional capital investments to increase manufacturing capacity before
sufficient positive cash flow can be derived from the initial investment in
the Longmont Facility. Presently, however, capital expenditure plans in
fiscal 1999 are expected to be in the range of $10 to $12 million,
significantly lower than in the recent past.
Customer Concentration
The Company's customer base is concentrated. The Company's ten largest
customers for the 1997 fiscal year accounted for approximately 60.7% of net
sales, and 11.5%, 10.6% and 7.4% of the Company's net sales during fiscal 1997
were to Ford Motor Company, Motorola, Inc. and Molex Incorporated,
respectively. The Company expects that sales to a relatively small number of
customers will continue to account for a significant portion of sales for the
foreseeable future, and the loss of, or a significant decline in orders from,
one of the Company's key customers could have a material adverse effect on the
Company's results of operations.
Variability of Quarterly Results
Historically, the Company's quarterly results of operations have
fluctuated significantly primarily because of the timing of orders from its
larger customers and mix of products manufactured and sold, as impacted from
time to time by work stoppages in the automotive industry and other broad
economic events. Due to this and the inherent uncertainty associated with the
development of new products and production facilities, the Company expects
that its quarterly results of operations will continue to be subject to
significant fluctuations.
Customers' Product Obsolescence and Standards
The Company supplies component products primarily to the automotive
electronics and data communication markets. Substantially all of the products
in these markets which incorporate the Company's component products are
subject to technological obsolescence, performance standards and pricing
requirements. The Company's future success in these markets will depend upon
its ability to (i) work closely with manufacturers to design end products or
applications which incorporate the Company's products and achieve market
acceptance, (ii) develop technologies to meet the evolving market requirements
of its customers, (iii) continue to deliver high-performance, cost-effective
products and (iv) expand its sales and marketing efforts domestically and
internationally. There can be no assurance that the Company will continue to
meet the current qualification requirements of its major customers, meet new
qualification requirements imposed by its customers or continue to be selected
as a supplier by new customers.
Dependence on Key Personnel
The Company's business is dependent on the efforts and abilities of its
executive officers and key personnel, especially in the development, marketing
and manufacturing of its Novaclad-based, ViaArray and Via-Thin products. The
Company's continued success will also depend on its ability to continue to
attract and retain qualified employees. The loss of services of any key
personnel could have a material adverse effect on the Company. The Company
does not have key-person life insurance on any of its employees.
Intense Competition
The market segments served by the Company are highly competitive. Some
of the Company's competitors have substantially greater financial and
marketing resources than the Company. Although the Company believes
performance and price characteristics of its Novaclad-based products will
provide competitive solutions for its customers' needs, there can be no
assurance that its customers will not choose other technologies due to such
customers' familiarity with the competing technology, the financial resources
of the supplier or the ease of incorporating alternative technology into
customers' manufacturing processes. In addition, there can be no assurance
that other competitors will not enter the markets served by the Company. The
Company's results may be adversely affected by the actions of its competitors,
including the development of new technologies, the introduction of new
products or the reduction of prices. There also can be no assurance that the
Company will be able to take actions necessary to maintain its competitive
position.
Possible Volatility of Stock Price
Factors such as unexpected market activity in the Company's Common
Stock, announcements by the Company or its competitors, fluctuations in the
Company's operating results, general conditions in the automotive and data
communication markets or the worldwide economy or changes in earnings or
estimates by analysts could cause the price of the Company's Common Stock to
fluctuate, perhaps substantially. Also, prices for many technology company
stocks, including the Common Stock, may fluctuate widely for reasons that are
not always related to the operating performance of such companies.
Reliance on Specialized Manufacturing Facilities
The Company has separate manufacturing and assembly facilities, certain
of which perform processes dependent upon products produced at its other
facilities. The Company's flexible laminates are produced at facilities in
Longmont and Northfield, Minnesota and further processed into printed
circuitry in a separate facility, also located in Northfield, Minnesota. In
addition, the Company also fabricates ViaThin at the Longmont facility.
Further assembly is performed at one facility in South Dakota and one in
Mexico. Delays or disruption at its flexible laminate facility may result in
an insufficient supply of materials for its flexible printed circuitry
facility and its assembly facilities. The Company's Novaclad-based, ViaArray
and Via-Thin products will be manufactured primarily at the Longmont Facility.
Each of these facilities contains or will contain specialized equipment which
is not quickly replaceable. While the Company carries business interruption
insurance, any natural or other event affecting any one of these facilities or
the manufacturing equipment could materially and adversely affect the
Company's position in its markets and results of operations.
Dependence on Certain Suppliers
The Company is dependent upon single source suppliers for certain of the
raw materials used in the Company's manufacturing processes. While the
Company has not experienced significant problems in the delivery of these
materials or services, the Company believes an interruption in the supply of
such materials or services could have a material adverse effect on the
Company's results of operations.
Patents, Trademarks and Proprietary Rights
The Company's success depends, to a large extent, on its ability to
maintain a competitive proprietary position in its product areas. The Company
has received certain patents with respect to its products and processes and
has several other patent applications pending. There can be no assurance that
patents will be issued on the basis of the Company's applications, that any
patent issued to the Company will not be challenged, invalidated or
circumvented or that the rights granted under any patent will provide
significant benefits to the Company. The Company is aware of a patent which
may cover certain plated through holes of double-sided circuits made of the
Company's Novaclad material. 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. In addition to patent
protection, the Company also attempts to protect its trademarks through
registration and proper use. The Company also attempts to protect its
proprietary information as trade secrets by taking security precautions at its
facilities. Further, the Company maintains confidentiality through the use of
secrecy or confidentiality agreements and other measures intended to prevent
the public dissemination of trade secret information. There can be no
assurance that these steps will prevent misappropriation of the Company's
proprietary rights or that third parties will not independently develop
functionally equivalent or superior non-infringing technology.
Environmental Matters
The Company's production processes require the use, storage and disposal
of certain substances which are considered hazardous under applicable federal
and state laws. Accordingly, the Company is subject to a variety of
regulatory requirements for the handling of such substances. The Company has
maintained a safety and environmental compliance program for a number of
years. An inadvertent mishandling of materials or similar incident, however,
could adversely affect the operations of the Company and result in costly
administrative or legal proceedings. In addition, future environmental
regulations could add to overall costs of doing business.
Anti-Takeover Provisions
The Company's Articles of Incorporation and the Minnesota Business
Corporation Act include certain anti-takeover provisions. These provisions,
including the power to issue additional stock and to establish separate
classes or series of stock, may, in certain circumstances, deter or discourage
takeover attempts and other changes in control of the Company not approved by
the Board. In addition, in June 1996, the Board of Directors of the Company
adopted a Rights Agreement (the Rights Agreement), commonly called a poison
pill. Pursuant to the terms of the Rights Agreement, one right (a Right) was
issued in respect of each share of the Company's Common Stock outstanding.
Such Rights also attach to each share of Common Stock issued subsequent to the
adoption of the Rights Agreement, including the Shares offered hereby. Each
Right entitles the holder thereof to purchase a fraction of a share of the
Company's Series A Preferred Stock or, in certain instances, Common Stock of
the Company or stock of an Acquiring Person (as defined below) in the event
that (i) a third party or a group (an Acquiring Person) acquires beneficial
ownership of 15% or more of the Common Stock or (ii) a tender offer or
exchange offer that would result in a person or group becoming an Acquiring
Person is commenced. On July 30, 1998, the Company amended Section 1(a) of
the Rights Agreement to provide that when applied to Molex Incorporated and
any of its affiliated parties the 15% threshold for beneficial ownership shall
be 22%. The Rights Agreement will be in effect through June 2006 and could
have the effect of discouraging tender offers or other transactions which
could result in shareholders receiving a premium over the market price of
Common Stock.
SELLING SHAREHOLDERS
The Shares of Common Stock offered hereby by the Selling Shareholders
are issuable (i) upon conversion of the Series B Preferred Stock held by the
Selling Shareholders, (ii) as accrued dividends on the Series B Preferred
Stock and (iii) upon the exercise of outstanding warrants held by the Selling
Shareholders (the Warrants). A total of 15,000 shares of Series B Preferred
Stock and Warrants to purchase up to 67,812 shares of the Company's Common
Stock at an exercise price of $27.65 per share were issued to the Selling
Shareholders in connection with a private placement in August 1997. Through
September 1, 1998, a total of 7,350 shares of the Series B Preferred Stock
have been converted into 575,149 shares of Common Stock.
The number of Shares registered on the registration statement of which
this Prospectus is a part and the number of Shares offered hereby have been
determined by agreement between the Company and the Selling Shareholders. The
number of Shares of Common Stock that will ultimately be issued to the Selling
Shareholders upon conversion of the Series B Preferred Stock is dependent upon
a conversion formula which relies, in part, on the closing bid price of the
Common Stock preceding the date of conversion and therefore cannot be
determined at this time. 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 preceeding August 29, 1997 and (ii) 101% of the
average of the lowest closing bid prices for five consecutive trading days
during the 30 consecutive trading days immediately preceeding the date of
conversion of the Series B Preferred Stock. The Warrants are exercisable for
an aggregate of 67,812 Shares of Common Stock.
The amount of Common Stock shown in the following table represents
approximately the amount into which the remaining 7,650 shares of Series B
Preferred Stock might have been converted on September 21, 1998 based on the
then conversion price of $4.911125. The amount of Common Stock shown in the
table also includes 84,375 shares of Common Stock representing accrued
dividends for three years on the remaining shares of Series B Preferred Stock
based on the conversion price of $4.911125, as well as 67,812 shares of Common
Stock issuable to the Selling Shareholders upon exercise of the Warrants:
Common Stock Number of
Beneficially Shares of Owned After
Owned Prior to Common Stock Offering(2)(3)
Selling Shareholder Offering (1) Offered(2) Number Percent
Southbrook International
Investments, Ltd. 551,991 551,991 0 *
Marshall Capital
Management, Inc. 492,716 492,716 0 *
HBK Cayman L.P. 326,744 326,744 0 *
HBK Offshore Fund Ltd. 326,744 326,744 0 *
Brown Simpson Strategic
Growth Fund, L.P. (4) 452 452 0 *
Brown Simpson Asset
Management, LLC (4) 11,227 11,227 0 *
___________________________
* Less than 1%.
(1) The Agreement limits the conversion and exercise rights of a Selling
Shareholder to the extent that the shares of Common Stock held by such
Selling Shareholder after a conversion of Series B Preferred Stock
and/or exercise of the Warrant issued to such Selling Shareholder would
exceed 4.999% of the then issued and outstanding shares of Common Stock
following such conversion and/or exercise.
(2) Represents the maximum number of Shares that may be sold by each Selling
Shareholder pursuant to this Prospectus; provided, however, that
pursuant to Rule 416 under the Securities Act of 1933, as amended, the
Registration Statement of which this Prospectus is a part shall also
cover any additional shares of Common Stock which become issuable in
connection with the Shares registered for sale hereby by reason of (i)
any stock dividend, stock split, recapitalization or other transaction
effected without the receipt of consideration which results in an
increase in the Company's number of outstanding shares of Common Stock
or (ii) decreases in the conversion price applicable to the Series B
Preferred Stock. In the event Rule 416 is not available, the Company is
obligated to register such additional shares of Common Stock.
(3) Assumes the sale of all Shares offered hereby to unaffiliated third
parties. The Selling Shareholders may sell all or part of their
respective Shares.
(4) Represents Shares issuable solely upon exercise of Warrants.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
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) Annual Report on Form 10-K for the year
ended August 29, 1997; (2) Quarterly Reports on Form 10-Q for the quarters
ended November 28, 1997, February 27, 1998 and May 27, 1998; (3) Proxy
Statement for Annual Meeting of Shareholders held on January 14, 1998 (except
to the extent portions of such document are not deemed incorporated by
reference into any filing under the Securities Act or the Exchange Act); (4)
Current Report on Form 8-K filed on August 18, 1998; (5) Current Report on
Form 8-K filed on August 28, 1998; and (6) the description of the Company's
Common Stock contained in the Company's Registration Statement on Form S-3
filed with the Commission under the Exchange Act on October 12, 1995, declared
effective on November 15, 1995 (No. 33-63373), and as such description is
supplemented by Form 8-A, filed with the Commission on June 21, 1996, and
amended on July 30, 1998.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus shall
be deemed to be incorporated by reference herein and to be a part hereof from
the date of filing of such reports and documents (except to the extent
portions of such document are not deemed incorporated by reference into any
filing under the Securities Act or the Exchange Act).
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document that also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of any such
person, a copy of any or all of the documents incorporated herein by
reference, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Written requests
for such copies should be directed to John V. McManus, Vice President-Finance,
Sheldahl, Inc., 1150 Sheldahl Road, Northfield, Minnesota 55057. Telephone
requests may be directed to John V. McManus at (507) 663-8000.
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