SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended May 28, 1999 Commission File Number: 0-45
SHELDAHL, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-075807
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
Northfield, Minnesota 55057
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (507) 663-8000
As of July 6, 1999, 11,152,588 shares of the Registrant's common stock were
outstanding.
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:
<PAGE>
PART I: FINANCIAL INFORMATION
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
May 28, May 29,
(In thousands, except for per share data) 1999 1998
Net sales $89,091 $88,633
Cost of sales 79,224 83,131
______ ______
Gross profit 9,867 5,502
______ ______
Expenses:
Sales and marketing 6,923 7,416
General and administrative 6,153 6,056
Research and development 1,870 3,048
Interest 1,787 1,688
Impairment charges - 3,300
Restructuring costs 2,600 8,500
______ ______
Total expenses 19,333 30,008
______ ______
Loss before income taxes and cumulative
effect of change in method of accounting (9,466) (24,506)
Provision for income taxes - (2,952)
______ ______
Net loss before cumulative effect of
change in method of accounting for
start-up costs (9,466) (27,458)
Cumulative effect of change in method
of accounting for start-up costs - (5,205)
______ ______
Net loss before preferred dividends (9,466) (32,663)
Convertible preferred stock dividends (1,593) (455)
______ ______
Net loss applicable to common shareholders $(11,059) $(33,118)
====== ======
Net loss per common share:
Basic -
Net loss before change in method
of accounting and after convertible
preferred stock dividends $ (1.02) $ (3.01)
Change in accounting method - (0.56)
______ ______
Net loss per common share $ (1.02) $ (3.57)
====== ======
Diluted -
Net loss before change in method
of accounting and after convertible
preferred stock dividends $ (1.02) $ (3.01)
Change in accounting method - (0.56)
______ ______
Net loss per common share $ (1.02) $ (3.57)
====== ======
Number of shares outstanding - Basic 10,857 9,267
Number of shares outstanding - Diluted 10,857 9,267
The accompanying notes are an integral part of these statements.
<PAGE>
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
May 28, May 29,
(In thousands, except for per share data) 1999 1998
Net sales $32,575 $31,890
Cost of sales 28,527 29,094
______ ______
Gross profit 4,048 2,796
______ ______
Expenses:
Sales and marketing 2,172 2,501
General and administrative 2,396 2,115
Research and development 616 1,046
Interest 799 566
Impairment charges - 3,300
Restructuring costs (500) 4,500
______ ______
Total expenses 5,483 14,028
______ ______
Loss before income taxes (1,435) (11,232)
Provision for income taxes - (7,792)
______ ______
Net loss before preferred dividends (1,435) (19,024)
Convertible preferred stock dividends (521) (96)
______ ______
Net loss applicable to common shareholders $ (1,956) $(19,120)
====== ======
Net loss per common share:
Basic
Net loss per common share $ (0.18) $ (1.98)
====== ======
Diluted
Net loss per common share $ (0.18) $ (1.98)
====== ======
Number of shares outstanding - Basic 11,153 9,634
Number of shares outstanding - Diluted 11,153 9,634
The accompanying notes are an integral part of these statements.
<PAGE>
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands) May 28, August 28,
1999 1998
(unaudited)
Current assets:
Cash $ 628 $ 1,005
Accounts receivable, net 20,526 15,727
Inventories 18,023 15,488
Other current assets 745 627
______ ______
Total current assets 39,922 32,847
______ ______
Construction in process 3,512 26,682
Land and buildings 28,561 28,255
Machinery and equipment 137,682 113,642
Less: accumulated depreciation (76,104) (66,322)
______ ______
Net plant and equipment 93,651 102,257
______ ______
Other assets 998 1,202
______ ______
$134,571 $136,306
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 4,144 $ 4,296
Accounts payable 9,486 7,766
Accrued compensation 1,397 1,554
Other accruals 5,174 4,518
Restructuring reserves 2,936 5,494
______ ______
Total current liabilities 23,137 23,628
Long-term debt 29,205 27,829
Restructuring reserves 2,600 2,131
Other long-term accruals 3,578 3,961
______ ______
Total liabilities 58,520 57,549
______ ______
Stockholders' Equity:
Convertible preferred stock 42 41
Common stock 2,788 2,415
Additional paid-in capital 107,730 99,751
Accumulated deficit (34,509) (23,450)
______ ______
Total shareholders' equity 76,051 78,757
______ ______
$134,571 $136,306
====== ======
The accompanying notes are an integral part of these statements.
<PAGE>
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
(In thousands) May 28, May 29,
1999 1998
Operating activities:
Net loss $(11,059) $(33,119)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 12,620 10,808
Preferred stock dividends 1,593 455
Deferred income taxes - 2,952
Accounting method change - 5,205
Restructuring costs charged to operations 2,600 8,500
Restructuring payments made (4,195) -
Impairment charges - 3,300
Net change in other operating activities:
Accounts receivable (4,799) (1,610)
Inventories (2,535) (1,760)
Prepaid expenses and other current assets (118) (442)
Other assets 204 19
Accounts payable and accrued liabilities 2,219 3,907
Other non-current liabilities (238) (38)
______ ______
Net cash used in operating activities (3,708) (1,823)
______ ______
Investing activities:
Capital expenditures, net (5,547) (17,764)
______ ______
Financing activities:
Customer overpayment - 9,334
Net borrowings under revolving credit facilities 4,599 4,125
Payments of term facility (1,025) -
Proceeds from other long-term debt - 2,334
Repayments of long-term debt (2,452) (814)
Costs and redemption of Series B preferred stock (837) (300)
Net proceeds of Series E preferred stock 8,437 -
Stock options exercised 156 226
______ ______
Net cash provided by financing activities 8,878 14,905
______ ______
Net increase (decrease) in cash equivalents (377) (4,682)
Cash and cash equivalents at beginning of period 1,005 5,567
______ ______
Cash and cash equivalents at end of period $ 628 $ 885
====== ======
Supplemental cash flow information:
Interest paid $ 2,547 $ 2,901
====== ======
Income taxes paid $ 152 $ 36
====== ======
The accompanying notes are an integral part of these statements.
<PAGE>
SHELDAHL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
These condensed and unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
condensed unaudited consolidated financial statements reflect all adjustments,
of a normal and recurring nature, necessary for a fair statement of the
interim periods, on a basis consistent with the annual audited financial
statements. Certain information, accounting policies and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Although these disclosures should be
considered adequate, the Company strongly suggests that these condensed
unaudited financial statements be read in conjunction with the financial
statements and summary of significant accounting policies and notes thereto
included in the Company's latest annual report on Form 10-K.
1) Inventories, which are valued at the lower of first-in first-out cost or
market, consists of (in thousands):
May 28, 1999 August 28, 1998
Raw materials $ 6,166 $ 4,964
Work-in-process 7,593 4,742
Finished goods 4,264 5,782
______ ______
$18,023 $15,488
====== ======
2) Equity Transactions.
During late February and early March of 1999, the Company issued 8,560
shares of Series E Convertible Preferred Stock. The Company received cash
of $8,560,000 relating to the issuance of the stock. The investors were
also issued warrants to purchase a total of 85,600 shares of Common Stock
of the Company at $7.8125 per share. The warrants are exercisable for a
period of five years.
As of May 28, 1999, the Company's equity structure is summarized as
follows:
A) 11,152,588 common shares outstanding.
B) $32,917,000 in stated value of Series D 5% Convertible Preferred Stock,
with a fixed conversion price of $6.15 per share and dividends payable
in cash or in common stock annually on each July 1. Accrued but unpaid
dividends are also due upon the conversion of such preferred shares.
C) $8,560,000 in stated value of Series E 5% Convertible Preferred Stock
with a fixed conversion price of $6.25 per share and dividends payable
in cash or in common stock annually on each March 1. Accrued but unpaid
dividends are also due upon the conversion of such preferred shares.
D) $167,000 in stated value of Series B 5% Convertible Preferred Stock with
a floating conversion price estimated to be $5.50 per share as of June
17, 1999 and dividends payable in cash or in common stock at conversion.
On May 28, 1999, the Company had accrued approximately $1,511,000 in total
dividends on these groups of preferred stock.
3) Restructuring Costs.
In February 1999, the Company recorded a charge of $3.1 million to reserve
for the separation costs incurred in reducing its salaried work force. The
restructuring costs provide for approximately $1.7 million for severance
and early retirement salary costs and approximately $1.4 million for
medical, dental and other benefits being provided to the affected
individuals. Approximately 53 people are affected by this action. These
new restructuring costs are in addition to the $8.5 million of similar
costs charged to operations in fiscal 1998 ($4.0 million in the second
quarter ended February 27, 1998 and $4.5 million in the third quarter ended
May 29, 1998). The Company, in the third quarter of fiscal 1999 reversed
$500,000 of the restructuring charge taken in fiscal 1998 reflecting the
change in anticipated personnel separation numbers and cost.
As of May 28, 1999, the Company had total remaining restructuring reserves
of $5.5 million. Of this amount, approximately $4.8 million related to
severance, wages and benefits and approximately $661,000 related to the
remaining equipment disposal, facility closedown and other costs.
In total, for all restructuring costs recorded at February 26, 1999, the
Company expects to make cash outlays of $0.8 million during the last three
months of fiscal 1999 and $2.5 million for all of fiscal 2000. The
remaining $2.2 million of restructuring costs are expected to be paid out
over the ten years beginning in fiscal 2001, and relate principally to
continued medical and severance benefits.
During the nine months ended May 28, 1999, the Company paid $4.2 million of
restructuring expenses relating to reserves charged to operations in fiscal
1998 and fiscal 1999. Also, the Company disposed of approximately $500,000
of fixed assets related to the closed Aberdeen, South Dakota facility as
previously provided.
4) Earnings Per Share
The basic loss per share amount is determined based on the weighted average
of common shares outstanding. Diluted loss per share is determined based
on the same figure, since the Company's potentially dilutive items,
convertible preferred stock, stock options and warrants, are anti-dilutive
in the periods presented.
<PAGE>
Item 2. Management's Discussion and Analysis of Consolidated Operating Results
and Financial Condition
NINE MONTHS ENDED MAY 28, 1999 AND MAY 29, 1998
Sales
_______________
The Company's net sales increased $458,000 from $88.6 million for the nine
months ended May 29, 1998 to $89.1 million for the nine months ended May 28,
1999. The automotive market sales for the nine months ended May 28, 1999
declined 2% or $1.3 million. This automotive sales decline year over year
reflects weaker order demand during the middle of the Company's second quarter
as automotive sales for quarter three of fiscal 1999 were on par with last
year.
Sales to the datacom market increased 21.4% to $13.6 million for the nine
months ended May 28, 1999. Sales of the Company's new Novaflexr VHD product
accounted for approximately $3.1 million of total sales. Sales to the
aerospace defense market, consisting principally of various laminate
materials, decreased $0.8 million or 11.2% reflecting the typical order
pattern of this market.
The chart below details the Company's sales by market during the period (in
thousands):
Nine Months Ended
Market May 28, 1999 May 29, 1998 Gross Change % Change
Automotive $ 60,513 $ 61,776 $ (1,263) (2.0%)
Datacom 13,558 11,169 2,389 21.4%
Industrial 5,880 5,662 218 3.9%
Consumer 2,531 2,582 (51) (2.0%)
Aerospace/Defense 6,609 7,444 (835) (11.2%)
______ ______ ______ ______
Total $ 89,091 $ 88,633 $ 458 .5%
====== ====== ====== ======
Gross Profit
_______________
Gross profit increased to 11.1% of sales, or $9.9 million, for the nine months
ended May 28, 1999. As reflected in the table below, Micro Products grossed a
$10.2 million loss. The combined Materials and Interconnect business units'
gross profit increased $5.6 million to $20.1 million, or 22.8%, of sales. The
improved gross margin directly relates to cost reductions resulting from
restructuring actions taken last fiscal year plus a slight change in sales
volume and product mix.
Nine Months Fiscal 1999 Nine Months Fiscal 1998
Interconnect Micro Total Interconnect Micro Total
& Material Products Company & Materials Products Company
(In millions)
Sales $88,245 $ 846 $89,091 $87,812 $ 821 $88,633
Cost of sales 68,165 11,059 79,224 73,314 9,817 83,131
Gross profit 20,080 (10,213) 9,867 14,498 (8,996) 5,502
% of sales 22.8% - 11.1% 16.5% - 6.2%
Sales and marketing expense decreased $493,000 or 7%, from $7.4 million for
the nine months ended May 29, 1998, to $6.9 million for the nine months ended
May 28, 1999. The decreased consulting and advertising expense, coupled with
1.4% drop in salaried labor cost resulting from the Company's restructuring
actions, contributed to the decline in expenses.
General and administrative expenses increased $97,000, or 2%, from $6.1
million for the nine months ended May 29, 1998, to $6.2 million for the nine
months ended May 28, 1999. This increase in expense is driven by a $790,000
increase in depreciation expense related to the Company's new computer system
which was offset by reductions in salaried labor plus other expenses including
charitable contributions and shareholder expense.
Research and development expenses decreased $1,178,000, or 39%, from $3.0
million for the nine months ended May 29, 1998, to $1.9 million for the nine
months ended May 28, 1999. This decline relates to the transition of
resources out of research and development to direct support of production in
the Company's Longmont facility. A decline in salaries, travel and
development materials account for a major portion of the reductions. Included
in this reduction are funds received from Molex Incorporated in conjunction
with the Company's joint venture to develop large format flex circuitry
technology targeted to replace hard wiring in automobiles and light trucks.
Interest costs and activities for the noted periods are detailed below (in
thousands):
Nine Months Nine Months
May 29, 1999 May 28, 1998 Change
Gross interest expense $ 2,648 $ 3,063 $ (415)
Capitalized interest (862) (1,375) 513
______ ______ ______
Net interest $ 1,786 $ 1,688 $ 98
====== ====== ======
During the current nine months, lower borrowings accounted for the decrease in
gross interest costs. At May 29, 1998, total borrowings were $47.3 million,
while at May 28, 1999, total borrowings were reduced to $33.3 million. Higher
interest rates charged by the Company's lenders prevented greater cost
savings.
In February 1999, the Company recorded a charge of $3.1 million to reserve for
the separation costs incurred in reducing its salaried work force. The
Company continues to realize benefits from streamlining its business
processes. The restructuring costs provide for approximately $1.7 million for
severance costs and approximately $1.4 million for medical, dental and other
benefits being provided to the affected individuals. Approximately 53 people
are affected by this action. These new restructuring costs are in addition to
the $8.5 million of similar costs charged to operations in fiscal 1998 ($4.0
million in the second quarter ended February 27, 1998 and $4.3 million in the
third quarter ended May 29, 1998). The Company, in the third quarter of fiscal
1999 reversed $500,000 of the restructuring charge taken in fiscal 1998
reflecting the change in anticipated personnel separation numbers and cost.
As of May 28, 1999, the Company's restructuring reserve was $5.5 million. In
total, for all restructuring costs recorded at May 28, 1999, the Company
expects to make cash outlays of $0.8 million during the last three months of
fiscal 1999 and $2.5 million for all of fiscal 2000. The remaining $2.2
million of restructuring costs are expected to be paid out over the ten years
beginning in fiscal 2001. During the nine months ended May 28, 1999, the
Company paid $4.2 million of restructuring expenses relating to reserves
charged to operations in fiscal years 1998 and 1999.
No income taxes were applied in the current period as the Company provides
allowances for all of its net deferred tax assets. Dividends on preferred
stock were $1.6 million for the nine months ended May 28, 1999, up $1.1
million from the $0.5 million figure for the nine months ended May 29, 1998.
Dividends on the $32.9 million Series D preferred stock and the $8.6 million
Series E preferred stock issued in July 1998 and February 1999 accounted for
this increase. As a result, net loss to common shareholders for the nine
months ended May 28, 1999 was $11.1 million, or $1.02 per share. This
compares with a loss per share before changes of method of accounting of $27.5
million, or $3.01 per share, for the nine months ended May 29, 1998.
<PAGE>
THREE MONTHS ENDED MAY 28, 1999 AND MAY 29, 1998
Sales
_______________
The Company's net sales increased $685,000, or 2%, from $31.9 million for the
three months ended May 29, 1998 to $32.6 million for the three months ended
May 28, 1999. Automotive market sales for the three months ended May 28, 1999
at $21.7 million remained unchanged from the same period in fiscal 1998.
Sales to the datacom market increased $917,000, or 20%, for the three months
ended May 28, 1999 to $5.4 million. Sales of the Company's new Novaflexr VHD
product accounted for $1.3 million of total sales to that market. Sales to
all other markets reflect a minor dollar variation.
The table below details the Company's sales by market for the period (in
thousands):
Three Months Ended
Market May 28, 1999 May 29, 1998 Gross Change % Change
Automotive $ 21,660 $ 21,683 $ (23) (0.1%)
Datacom 5,446 4,529 917 20.3%
Industrial 1,480 1,814 (334) (18.4%)
Consumer 1,130 1,051 79 7.5%
Aerospace/Defense 2,859 2,814 45 1.6%
______ ______ ______ ______
Total $ 32,575 $ 31,891 $ 685 2.1%
====== ====== ====== ======
Gross Profit
________________
Gross profit increased by $1.3 million, or 12.4% of sales, for the three
months ended May 28, 1999. As reflected in the table below, the Micro
Products business gross loss increased by $0.3 million to $3.5 million. The
impact of low volume production and increased depreciation expenses are the
primary causes of the change in Micro Products gross profit. The combined
Materials and Interconnect business units' gross profit increased to $7.6
million, or 23.4% of sales. The improved performance is due to savings
realized in labor costs as well as more effective cost management of factory
costs. Additional sales volume plus a change in product mix contributed to
improved gross profit.
Three Months Fiscal 1999 Three Months Fiscal 1998
Interconnect Micro Total Interconnect Micro Total
& Material Products Company & Materials Products Company
(In millions)
Sales $32,365 $ 210 $32,575 $31,537 $ 353 $31,890
Cost of sales 24,805 3,722 28,527 25,522 3,572 29,094
Gross profit 7,560 (3,512) 4,048 6,015 (3,219) 2,796
% of sales 23.4% - 12.4% 19.1% - 8.8%
Sales and marketing expenses decreased $329,000 for the three months ended May
28, 1999 compared to the same period one year ago to $2.2 million. The
reduction in salaried labor, travel related costs and other sales related
expense contributed to the 13% decline.
General and administrative expenses increased $281,000, or 13%, from $2.1
million for the three months ended May 29, 1998, to $2.4 million for the three
months ended May 28, 1999. Increased depreciation expenses related to the
Company's new computer system was offset in part by reduced labor and other
expenses.
Research and development expenses decreased $430,000, or 41%, from $1.0
million for the three months ended May 29, 1998, to $0.6 million for the three
months ended May 28, 1999. This decline relates to the transition of
resources out of research and development to directly support production in
the Company's Longmont facility. A decline in salaries, research materials
and supplies, and travel account for a major portion of the reduction.
Interest costs and activities for the noted period are detailed below (in
thousands):
Three Months Three Months
May 28, 1999 May 29, 1998 Change
Gross interest expense $ 929 $ 1,141 $ (212)
Capitalized interest (130) (575) 445
______ ______ ______
Net interest $ 799 $ 566 $ 233
====== ====== ======
During the current quarter, lower borrowings accounted for the decrease in
gross interest costs. At May 29, 1998, total borrowings were $47.3 million,
while at May 28, 1999, total borrowings were $33.3 million. Higher interest
rates prevented greater cost reduction in interest expense. Fewer capital
projects in process account for the decline in capitalized interest.
In February 1999, the Company recorded a charge of $3.1 million to reserve for
the separation costs incurred in reducing its salaried work force. The
Company continues to realize benefits from streamlining its business
processes. The restructuring costs provide for approximately $1.7 million for
severance and early retirement salary costs, approximately $1.4 million for
medical, dental and other benefits being provided to the affected individuals.
Approximately 53 people are affected by this action. These new restructuring
costs are in addition to the $8.5 million of similar costs charged to
operations in fiscal 1998 ($4.0 million in the second quarter ended February
27, 1998 and $4.3 million in the third quarter ended May 29, 1998). The
Company, in the third quarter of fiscal 1999, reversed $500,000 of the
restructuring charge taken in fiscal 1998 reflecting the change in anticipated
personnel separation numbers and cost.
As of May 28, 1999, the Company had remaining restructuring reserves of $5.5
million. In total, for all restructuring costs recorded at May 28, 1999, the
Company expects to make cash outlays of $0.8 million during the last three
months of fiscal 1999 and $2.5 million for all of fiscal 2000. The remaining
$2.2 million of restructuring costs are expected to be paid out over the ten
years beginning in fiscal 2001.
No taxes were applied in the three months ended May 28, 1999 as allowances
against all of the Company's net deferred tax assets have been recorded. For
the three months ended May 29, 1998, the tax provision of $7.8 million
reflects a change in estimate concerning the ultimate recovery of the
company's deferred tax assets. Because of restructuring and write-offs, as
well as continuing losses in the Company's Micro Products business, the
Company has established an allowance for all of its tax assets.
Convertible preferred stock dividends increased to $521,000 for the three
months ended May 28, 1999. This increase is due to the Series D and E
preferred stock issued in July 1998 and February 1999. As a result, net loss
to common shareholders for the three months ended May 28, 1999, was $2.0
million, or $0.18 per share. This compares to a net loss of $19.1 million, or
$1.98 per share, for the three months ended May 29, 1998, which included
restructuring and impairment charges plus accounting changes of $15.6 million.
Financial Condition and Cash Flow
_______________
Since the end of fiscal 1998, the Company's financial condition has
strengthened. The Company's Interconnect and Materials businesses have
registered improved operating results while the Micro Products business has
managed costs and is vigorously pursuing volume orders. In February of 1999,
the liquidity of the Company was enhanced with the $8.56 million preferred
stock equity placement. As a result, the Company's lenders have removed the
requirement that the Company raise additional equity funds as part of its
Credit and Security Agreement. As of July 6, 1999, the Company had $12.9
million outstanding on its revolving credit note and had an additional $6.1
million available to borrow. As of May 28, 1999, the Company has complied or
received a waiver on certain covenants covered by the existing Credit and
Security Agreement with its lenders. The Company expects, with anticipated
growth in revenue during the next four quarters, to generate sufficient cash
flow from operations to fund restructuring payments ($600,000 to $800,000 per
quarter), term debt obligations ($1.0 million per quarter) and modest capital
spending ($1.5 million to $2.0 million per quarter). These are all within the
borrowing limits of the existing Credit and Security Agreement with its
lenders.
For the first nine months of fiscal 1999, operations used cash of $3.7
million. Net of $4.2 million of restructuring payments, operations generated
a positive cash flow of $0.5 million, an improvement of $2.4 million over the
nine months ended May 29, 1998. This improvement was due to increased gross
profits offset by increased inventories and accounts receivables. The
increase in receivables is attributable to increased sales of 15% during the
current quarter. Inventories increased to support a higher level of customer
orders in the coming quarter.
Equity Transactions
_______________
During February 1999, the Company issued 7,210 shares of Series E Convertible
Preferred Stock. As of February 26, 1999, the Company had received cash of
$5,515,000 relating to the issuance of the stock and the Company received the
remaining $1,695,000 by March 5, 1999. By March 8, 1999, the Company had
issued additional 1,350 shares of Series E Convertible Preferred Stock and
received the related proceeds of $1,350,000. The investors were also issued
warrants to purchase a total of 85,600 shares of Common Stock of the Company
at $7.8125 per share. The warrants are exercisable for a period of five
years. Additionally, during the quarter ended February 26, 1999, 231,336
shares of common stock were issued upon the conversion of 1,097 shares of
Series B Convertible Preferred Stock.
As of May 28, 1999, the Company's equity structure is summarized as follows:
A. 11,152,588 common shares outstanding.
B. $32,917,000 in stated value of Series D 5% Convertible Preferred Stock,
with a fixed conversion price of $6.15 per share and dividends payable in
cash or in common stock annually on each July 1. Accrued but unpaid
dividends are also due upon the conversion of such preferred shares.
C. $8,560,000 in stated value of Series E 5% Convertible Preferred Stock with
a fixed conversion price of $6.25 per share and dividends payable in cash
or in common stock annually on each March 1. Accrued but unpaid dividends
are also due upon the conversion of such preferred shares.
D. $167,000 in stated value of Series B 5% Convertible Preferred Stock with a
floating conversion price estimated to be $5.50 per share as of June 17,
1999 and dividends payable in cash or in common stock at conversion.
On May 28, 1999, the Company had accrued approximately $1.5 million in total
dividends on these groups of preferred stock.
Year 2000 Update
_______________
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. Sheldahl's Y2K teams are
complete with Phase 1 of this process and progressing with Phase 2 remediation
activities.
Year 2000 Target Areas:
1. Business Computer Systems
2. Technical Infrastructure
3. End-User Computing
4. Manufacturing Equipment
5. Test Lab
6. Telecommunications
7. Research & Development
8. Logistics
9. Facilities
10. Customers
11. Suppliers/Key Service Providers
PHASE 1
1. Team Formation
2. Inventory Assessment
3. Compliance Assessment
4. Risk Assessment
Complete as of May 28, 1999
PHASE 2
5. Resolution/Remediation
6. Validation
7. Contingency Plan
8. Sign-Off Acceptance
Expected Completion: October 1, 1999
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. In February 1999 the Company initiated a
Business Partner Assessment Program focused on evaluating customers and
suppliers Year 2000 readiness to identify third parties that imposed
significant risk on Sheldahl. The Company intends to complete follow-up
activities, including but not limited to site surveys, phone surveys, mailings
and remediation assistance, with identified third parties 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 estimates for the cost of
Year 2000 upgrades and enhancements to its IT Systems and non-IT Systems to be
less than $100,000. The Company anticipates that these costs will be contained
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 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.
2. Disruption of Supply Materials.
In February 1999, the Company surveyed, assessed and catalogued its
vendors for public disclosures in regards to their Year 2000 readiness.
The Company has followed-up, via phone surveys, with vendors that
provided inadequate disclosures or showed a need for remediation
assistance. The Company is now assessing and cataloging the results of
these surveys to identify which vendors require remediation assistance
and where the Company should arrange for back-up vendors and other
contingencies 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 completing 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 completed or
scheduled, and the remaining non-compliant systems remediation needs are
being planned. Considering the nature of the equipment and systems
involved, the Company expects 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 our 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 our 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 we did respond to these reports on a timely basis, the
substance of our answers to the readiness surveys have placed Sheldahl
in a "red" or "danger" zone with respect to those customers'
guidelines. One of our two largest customers involved in the efforts of
the independent audit agency had also already presented a survey
directly to Sheldahl, and as a result had arranged at its own expense
for an independent audit of our Year 2000 readiness. The independent
audit agency had reported, in the third quarter of fiscal 1998, that
although Sheldahl's level of readiness placed us in the "red" or
"danger" category, we (i) were proceeding rapidly with its evaluation
and remediation efforts, (ii) were 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. In December 1998,
Sheldahl was re-audited by a Remediation Assistance Program consultant
on behalf of this customer. At the conclusion of this audit the
consultant recommended that Sheldahl's Year 2000 Readiness be upgraded
to a "medium level of risk" from the previous high level of risk
("red zone"). Furthermore, the consultant noted that in reviewing
Sheldahl's "Y2K plan against the goals of the remediation assistance
process, the assessor could not find any gaps or areas of recovery that
were not covered or considered." We expect but cannot guarantee that
responses from other customers will be similar. In addition, we do not
know whether other customers' expectations will or will not be as
stringent as those referred to above and whether our current schedule
will meet or exceed such expectations.
Contingency Plans. While we recognize the need for contingency planning, we
have not yet completed contingency plans for potential Year 2000 disruptions.
The aforementioned 8-step Compliance Validation Process includes contingency
planning by each team and management will review such plans as they are
developed. We anticipate developing contingency plans for our most critical
areas, but details of such plans will depend on our final assessment of the
problem as well as the evaluation and success of our remediation efforts.
Future disclosures will include discussion on contingency plans as they become
available.
Foreign Currency Exposure
_______________
During fiscal 1998, the Company's exposure to foreign currency risk declined
as two large programs were converted to pricing in the United States dollar.
The Company maintains a very limited exposure to foreign currency risk with
smaller programs contracted and priced in British Sterling, German Marks and
French Francs. These contracts and the exchange rate are reviewed
periodically.
Beginning January 1, 1999, the Euro, the new European currency, began to be
used commercially. As of May 28, 1999, none of the Company's customers or
suppliers has 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 May 28, 1999.
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
its fiscal 1999 Form 10-K 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,
as amended, for years beginning after June 15, 2000. 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.
Cautionary Statement
_______________
The statements included herein which are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
the Private Securities Reform Act of 1995. Factors which could cause actual
results to differ materially from those anticipated by some of the statements
made herein include, but are not limited to, the Company's ability to achieve
full volume production at its Micro Products facility and other factors
detailed from time to time in the Company's SEC reports, including the report
on Form 10-K for the year ended August 27, 1998.
<PAGE>
Item 3. Quantitative and qualitative disclosures about market risk
No material change since filing of the Company's last Form 10-K for fiscal
1998.
<PAGE>
PART II: OTHER INFORMATION
SHELDAHL, INC. AND SUBSIDIARY
FORM 10-Q
Item 1. Legal Proceedings
On June 30, 1999, the Company entered into a Settlement Agreement with
Structural Dynamics Research Corporation, Inc. ("SDRC"), whereby the
Company will pay $400,000 in installments through May 1, 2000, for
various software licenses and whereby the Company may activate such
licenses with current versions up through July 1, 2001, upon payment of
reduced maintenance fees. On the basis of the Settlement Agreement, the
case against the Company was dismissed. This legal proceeding was
previously reported in the Company's fiscal 1998 Form 10-K.
Item 2. Changes in Securities and Use of Proceeds
The Company conducted a private placement of its Series E Preferred
Stock, which closed in part in March 1999. A complete description of
this private placement was previously reported on the company's report
on form 10-Q for the quarter ended February 27, 1999.
Item 3. Defaults About Senior Securities and Use of Proceeds
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
27 Financial Data Schedule
B) Reports on Form 8-K
Current Report on Form 8-K filed March 9, 1999, reporting the
Company's Series E Preferred Stock private placement
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHELDAHL, INC.
(Registrant)
Dated: July 12, 1999 By /s/ Edward L. Lundstrom
President and Chief Executive Officer
Dated: July 12, 1999 By /s/ Jill D. Burchill
Vice President
Chief Financial Officer
<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MAY 28,
1999 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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