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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 27, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER: 0-45
SHELDAHL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MINNESOTA 41-0758073
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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
$51,538,582 on November 26, 1999, when the last sales price of the Registrant's
Common Stock, as reported in the Nasdaq National Market System, was $4.438.
As of November 26, 1999, the Company had outstanding 11,613,020 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's definitive proxy statement for its annual
meeting to be held January 12, 2000, are incorporated by reference in Part III
of this Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Sheldahl (the Company) 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, the Company fabricates high-value
derivative products: single- and double-sided flexible interconnects and
assemblies under the trade names Flexbase(R), Novaflex(R) HD and Novaflex(R) VHD
and substrates for silicon chip carriers under the trade names ViaArray(R)and
ViaThin(R). Management believes that Sheldahl's leading technology products
serve the electronic interface between the function of electronic-based products
and their integrated circuits. The Company targets specific OEMs in the datacom
and automotive markets in the drive to create electronic-based products that
require increased functionality.
The Company operates in two business segments identified as the Company's
Core Business and Micro Products business. The Core Business segment consists of
flexible laminates and derivative products, principally flexible interconnect
circuits and assemblies. These products are targeted across all markets served
by the Company with the automotive market generating 68% of fiscal 1999 sales
for this segment. The Company's Novaclad, Novaflex HD and VHD are marketed and
sold through the Core Business. The Micro Products business segment is a
developing business that targets the integrated circuit (IC) industry of the
electronics market. The Company's ViaArray and ViaThin products are marketed and
sold through this segment and are exclusively reflected in the Company's datacom
market sales.
The Company's manufacturing and assembly sites with their related assets
are used to manufacture specific product offerings of the Company regardless of
business segment. For instance, the Longmont facility today contributes to the
manufacture of all Novaclad-based products. These products, including Novaflex
HD and VHD, are sold through the Core Business and ViaThin is sold through Micro
Products.
The Company's high performance products -- ViaArray, ViaThin, Novaflex HD
and Novaflex 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. Novaflex VHD utilizes many of the
product features of ViaThin in applications other than IC packages.
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 material solution for a broad range of
interconnect systems, especially high-density substrates for IC packages and
increasing dense circuitry for personal communication devices and computers and
high end disc drives. In fiscal 1999, sales of Novaclad laminate totaled $0.4
million, accounting for 0.3% of total Company sales revenue.
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.
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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. There were no sales for ViaArray in fiscal 1999.
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 1999, sales of ViaThin
substrates accounted for $1.5 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 of an application outside of IC
packages, such as direct chip attach circuitry for high-end disk drives.
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. In fiscal 1999, sales of
Novaflex VHD totaled $5.6 million accounting for 5% of the Company's total sales
revenue.
Novaflex HD. The Company uses its Novaclad as the base material for
flexible interconnect circuits and assemblies that based on their end use
required a combination of circuit density and operating characteristics that
withstand harsh environments such as under-the-hood automotive applications and
hinge flex applications in laptop computers. These products are sold under the
trade name Novaflex HD. Fiscal 1999 sales for Novaflex HD were $33.7 million
accounting for 28% of the Company's total sales revenue.
Flexbase Flexible Interconnects. The Company uses its adhesive-based
laminates, which are marketed under the trade name Flexbase, as the base
material for a line of traditional flexible printed circuitry. 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. In fiscal 1999, Flexbase interconnect
products represented revenue of approximately $51.8 million accounting for 42%
of total Company sales revenue.
Additionally, the Company offers through internal capabilities and contract
assemblers value-added processing, including surface mount assembly, wave
soldering, connector and terminal staking, custom folding, stiffener attachment,
application of pressure-sensitive adhesive and hand soldering, in order to
deliver a ready-to-use products to the end customer. The Company's targets
applications where increased performance, reduced size and weight, circuitry
density, ability to accommodate packaging contours or a reduction in the number
of assembly steps is desired to reduce the customer's overall cost and enhances
the value of its product lines.
Laminate 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 materials 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
materials provide extended flexibility, strength, conductivity, durability, and
heat dissipation. In fiscal 1999, external sales of materials accounted for
$29.1 million, or 24% of the Company's total revenue.
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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 principally
manufacture products according to customer specifications without providing
significant design, technical or consulting services. Account managers also
coordinate appropriate design, research and development, engineering, order
fulfillment and other personnel to support customer needs. To supplement its
direct sales efforts, the Company uses domestic and international distributors.
The cornerstone of the Company's sales and customer support strategy is to
provide superior customer service, from prompt and efficient technical support
to rapid 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 1999, 11.1% and 10.6% of the Company's net sales went to
multiple sourcing locations of Siemens and Motorola. The Company also provides
products through first tier suppliers to Chrysler, Ford 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 sales
offices in France, Germany and Great Britain. The Company supplements its direct
sales efforts with independent manufacturers' representatives and distributors
in Europe and Asia, principally for flexible laminates and has a sales office
established in Hong Kong. The Company's export sales during fiscal years 1999,
1998 and 1997 were $30.0 million, $24.5 million and $15.0 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 27, 1999, the
Company has no material sales contracts in any currency not mentioned above. On
January 1, 1999, the Euro, the new European currency began commercial use. As of
August 27, 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 denominated sales
contracts, the Company may use a variety of hedging techniques, including
financial derivatives, to prudently reduce its exposure to foreign currency
fluctuations. No such contracts existed as of August 27, 1999.
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, Canada and
the Philippines.
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 a family of derivative products (see Products). The Company converts various
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 derivative product in
to value added assemblies. These assembly process capabilities include
surface-mount assembly, wave soldering, connector and terminal staking, custom
folding, stiffener attach, application of pres-
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sure-sensitive adhesive, and hand soldering. These operations are performed at
the Company's facilities in Britton, South Dakota, or at subcontractors in
Mexico, Canada and the Philippines.
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. Manufacturing under this
joint venture commenced in fiscal 1999. In fiscal 2000, 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 2000 are anticipated to increase as these
opportunities are developed.
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. Development costs of $400,000 for such components being designed and
developed by Sheldahl for the new systems were reimbursed by Molex in fiscal
1999 and other future development costs may be funded by loans or direct
reimbursement 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 27, 1999, the
Company's investment in and the impact of accounting for its investment in
Origin under the equity method has not been material.
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
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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. 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 Innovex, Inc. in the computer and
telecommunications 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-based ViaArray and ViaThin 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, mechanical 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.
LIQUIDITY AND GOING CONCERNS MATTERS
During the three-year period ended August 27, 1999, the Company incurred,
principally from its Micro Products operations, cumulative net losses totaling
approximately $68.7 million, including restructuring and other charges of $27.7
million. During this three-year period, the Company used cash of approximately
$59.5 million supporting capital expenditures and approximately $6.8 million for
net operating activities. The Company has financed these transactions
principally through equity and debt financing.
Cash requirements to fund restructuring charges taken during fiscal 1999
and 1998 are expected to be approximately $2.7 million in fiscal 2000 compared
to $5.0 million in fiscal 1999. Fiscal 2000 capital expenditures for the Company
are planned at approximately $7.0 million, compared with $5.5 million in fiscal
1999. Debt repayments for fiscal 2000, including refinancing of the Longmont
facility, will be $3.8 million including $2.5 million on the bank term facility
and $1.0 million for various capital lease payments.
The impact of anticipated fiscal 2000 operating losses, tighter borrowing
levels pursuant to its amended debt agreements and the uncertainty of the timing
of sales growth from the Company's Micro Products business places significant
pressure on the cash reserves of the Company. Cash flow projections based on the
Company's operating plan for fiscal 2000 reflect an increased level of cash flow
from operations during the first half of the year with increasing demand for
cash later in the fiscal year as working capital expands to support projected
sales growth. The Company believes this growth in working capital can be
supported under its current credit agreement, although there will be intervals
of time where borrowing capacity under its debt agreements will be severely
reduced. The inability of the Company to i) obtain sufficient, substantial
production orders and sales for Micro Product's ViaThin in the range of $10 to
$12 million; ii) improve operating results in Micro Products for fiscal 2000;
iii) achieve operating performance from the Company's
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Core Business at or above fiscal 1999 levels; iv) achieve other cost or
productivity improvements included in the Company's fiscal 2000 budget and v)
maintain adequate liquidity to fund normal operations would result in the
Company being out of compliance with certain of its debt covenants thereby
allowing the Company's lenders to require full repayment of the outstanding
borrowings under the Company's credit agreement and/or leave the Company in a
cash reserve position that would require additional capital to fund operations.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. Management has and will continue to implement operational
measures designed to assist the Company in achieving its fiscal 2000 budget and
cash flow objectives. Should any of the matters discussed above ultimately
occur, management believes the Company could obtain the necessary additional new
capital, including the issuance of additional new debt or additional new equity
financing to fund operations. However, there can be no assurance that the
Company will be successful in achieving its projected operating results for
fiscal 2000, in meeting its quarterly debt covenants during fiscal 2000 or in
its attempt to issue additional debt or to raise additional capital on terms
acceptable to the Company.
On October 21, 1999, the Board of Directors of the Company established a
Special Committee consisting of Kenneth J. Roering (Chairman), Dennis M.
Mathisen and Gerald E. Magnuson to assist management and the Company's financial
advisors in evaluating strategic alternatives available to the Company. Mr.
Mathisen has resigned from the Board of Directors. Messrs. Roering and Magnuson
are currently directors of the Company.
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 27, 1999, and August 28, 1998, was approximately $16.4 million and
$23.5 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. Beginning in fiscal 1999, the Company changed
its order and production planning process that recorded orders from customers
with pull delivery systems at the time of shipment (pull). As a result, the
backlog amount for fiscal 1999 is understated when compared to fiscal 1998 by an
estimated $6 to $8 million.
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. Federal trademark registrations have been obtained on
Novaclad(R), ViaArray(R), ViaThin(R), Flexbase(R), Novaflex(R), Novaflex(R) HD
and VHD. In November 1998, the Company was awarded a patent for its SmartHORN(R)
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 against 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. See "Legal Proceedings."
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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 1999. Similarly, fiscal 2000 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 27, 1999, the Company was not
involved in any significant specific action, legal or regulatory, regarding
environmental regulations except as indicated in the next paragraph.
In fiscal 1999, the Company was notified by BMC Industries, Inc. (BMC) that
it had been named as a de minimis waste generator on the Casmalia Disposal Site
in Santa Barbara County, California (Casmalia) by the United States
Environmental Protection Agency (USEPA). Based on the sale of certain facilities
in Southern California to Sheldahl in September 1986, BMC asserted a counter
claim against Sheldahl stating that part of the waste generation and disposal
originated from such manufacturing sites after the sale to Sheldahl. After a
review of related documentation, BMC and the Company agreed on October 15, 1999
to share the claim liability. The amount of this settlement was not material.
EMPLOYEES AND UNION CONTRACT
As of September 1, 1999, the Company employed approximately 847 people in
the United States and Europe, including 784 in production, 71 in sales,
marketing, application engineering, and customer support, 20 in research and
development and 43 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 390) are represented by the Union of Needletrade, Industrial and
Textile Employees, which has been the bargaining agent since 1963. The Company
has a two-year collective bargaining agreement with the Union, which expires in
October 31, 2001. As part of this agreement, the Company agrees that if a
decision is made to sell the Company, either in whole or in part, the Union
shall be notified and treated as an equivalent buyer, with the understanding
that there is currently another company with the Right of First Refusal. The
Union (or its agents) shall be given the necessary information as an interested
buyer, upon execution of a confidentiality agreement, and shall be given the
opportunity to make bids on an equivalent basis and time period. The Company
further agrees that it will consider employee-ownership options if any sale of
the Company or its parts is considered. 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 a 102,000 square foot facility in Longmont,
Colorado. The Company 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.
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 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 was dismissed. This legal
proceeding was previously reported in the Company's fiscal 1998 Form 10-K.
7
<PAGE> 9
As is typical in the semiconductor equipment industry, the Company has from
time to time received, and may in the future receive, communications from third
parties asserting patents or copyrights on certain of the Company's equipment,
products and technologies. A number of users of machine-vision technology,
including the Company, have received notice of alleged patent infringement from,
and/or have been sued by, the Lemelson Medical, Education and Research
Foundation Limited Partnership ("Lemelson Foundation") alleging that equipment
used in the manufacture of electronic devices infringes certain patents issued
to Jerome H. Lemelson relating to "machine vision" or "barcode reader"
technologies. Although the Company has not fully evaluated the alleged
infringement claims nor has it been named a defendant in any related lawsuit,
the Company believes that if any liability for infringement exists, such
liability would not be born by the Company but rather would be borne by the
Company's machine-vision equipment manufacturers. Accordingly, the Company has
given those manufacturers notice that it intends to seek indemnification from
them for any damages and expenses resulting from this matter if the Company is
found liable or if it settles the claims. The Company cannot predict the outcome
of this or any similar claim or its effect upon the Company, and there can be no
assurance that any such litigation or claim would not have a material adverse
effect upon the Company's financial condition or results of operations.
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>
DATE FIRST
NAME AGE APPOINTED POSITION
- - - ---- --- --------------- --------
<S> <C> <C> <C>
James E. Donaghy................. 65 1999 Chairman of the Board and Director
Edward L. Lundstrom.............. 49 1999 President, CEO and Director
Jill D. Burchill................. 45 1999 Vice President and Chief Financial Officer
Gregory D. Closser............... 47 1999 Vice President -- Core Business
Michele C. Edwards............... 35 1997 Vice President -- Supply Chain Operations
James L. Havener................. 56 1998 Vice President -- Micro Products
Vice President -- Finance and Asst.
John V. McManus.................. 52 1991 Secretary
Sidney J. Roberts................ 53 1996 Vice President -- Research and Development
Gerald E. Magnuson............... 67 1975 Secretary and Director
</TABLE>
James E. Donaghy was elected to the post of Chairman of the Board in
January 1999. He joined the Company in March 1988 as its President and Chief
Operating Officer and became President and Chief Executive Officer in 1991. In
September 1998, he passed the title of President to Ed Lundstrom. Prior to that
time, he held various executive-level positions at DuPont Company in Wilmington,
Delaware. Mr. Donaghy is a director of William Mitchell College of Law and the
Institute of Printed Circuitry.
Edward L. Lundstrom was named President and Chief Executive Officer in
January 1999. 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.
Jill D. Burchill joined the Company in March 1999 as Vice President and
Chief Financial Officer. Previously, she had held the positions of Chief
Financial Officer at Angeon Corporation and Imation Corporation. She was
responsible for all global financial operations and strategy as well as investor
relations. Burchill also served in various senior financial management positions
at 3M Company within the Information, Imaging and Electronic Sector, including
Sector Controller, Group Controller, and Division Financial Manager. In
addition, she was Asia Pacific Financial Manager and International Tax Manager.
She began her career as an audit professional at Peat, Marwick, Mitchell &
Company.
Gregory D. Closser has served as Vice President -- Core Business since
March 1999. Prior to that, he was Vice President -- Flexible Interconnects since
January 1996. 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.
8
<PAGE> 10
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 --
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 September 1991. From 1987 to 1991, he
served as Corporate Controller. Mr. McManus has resigned from the Company
effective February 25, 2000.
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 -- 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 WSI Industries, Inc.
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 27, 1999:
First Quarter....................................... 8.500 4.563
Second Quarter...................................... 8.063 5.063
Third Quarter....................................... 7.000 5.250
Fourth Quarter...................................... 8.625 5.500
FISCAL YEAR ENDED AUGUST 28, 1998:
First Quarter....................................... 24.625 15.250
Second Quarter...................................... 18.000 12.9375
Third Quarter....................................... 17.750 8.625
Fourth Quarter...................................... 10.125 4.9375
</TABLE>
On November 26, 1999, the last reported sales price of the Common Stock was
$4.438. 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.
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 29,
1997, August 28, 1998 and August 27, 1999 and the consolidated balance sheet
data as of August 28, 1998 and August 27, 1999 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.
9
<PAGE> 11
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------------------------------------
SEPTEMBER 1, AUGUST 30, AUGUST 29, AUGUST 28, AUGUST 27,
1995 1996 1997 1998 1999
------------ ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales................................ $95,216 $114,120 $105,266 $117,045 $122,086
Cost of sales............................ 74,752 89,171 94,933 109,143 109,157
------- -------- -------- -------- --------
Gross profit............................. 20,464 24,949 10,333 7,902 12,929
------- -------- -------- -------- --------
Expenses:
Sales and marketing................... 9,090 9,254 9,560 9,861 9,666
General and administrative............ 3,895 5,129 6,839 8,152 8,742
Research and development.............. 2,270 2,755 4,705 3,881 2,825
Restructuring costs................... -- -- -- 8,500 3,050
Impairment charges and other.......... -- -- -- 3,300 7,635
Interest.............................. 875 539 1,298 2,547 2,499
------- -------- -------- -------- --------
Total expenses...................... 16,130 17,677 22,402 36,241 34,417
------- -------- -------- -------- --------
Income (loss) before provision for income
taxes and cumulative effect of change
in method of accounting............... 4,334 7,272 (12,069) (28,339) (21,488)
Provision (benefit) for income taxes..... 1,200 2,500 (4,100) 2,952 --
------- -------- -------- -------- --------
Net income (loss) before cumulative
effect of change in method of
accounting............................ 3,134 4,772 (7,969) (31,291) (21,488)
Cumulative effect of change in method of
accounting(4)......................... -- -- -- (5,206) --
------- -------- -------- -------- --------
Net income (loss) before convertible
preferred stock dividends............. 3,134 4,772 (7,969) (36,497) (21,488)
Convertible preferred stock dividends.... -- -- -- (689) (2,080)
------- -------- -------- -------- --------
Net income (loss) applicable to common
shareholders.......................... $ 3,134 $ 4,772 $ (7,969) $(37,186) $(23,568)
======= ======== ======== ======== ========
Net income (loss) per
common share -- basic................. $ 0.47 $ 0.57 $ (0.89) $ (3.97) $ (2.15)
======= ======== ======== ======== ========
-- diluted............. $ 0.45 $ 0.55 $ (0.89) $ (3.97) $ (2.15)
======= ======== ======== ======== ========
Weighted average common shares
outstanding -- basic.................. 6,692 8,414 8,967 9,364 10,987
======= ======== ======== ======== ========
-- diluted................ 6,925 8,686 8,967 9,364 10,987
======= ======== ======== ======== ========
Balance Sheet Data:
Working capital, net..................... $16,332 $ 22,051 $ 22,943 $ 9,219 $ 16,356
Total assets............................. 94,186 115,887 139,367 136,306 123,930
Long-term debt, excluding current
portion............................... 33,864 21,858 40,869 27,829 29,284
Total shareholders' investment............. 40,952 75,337 82,932 78,757 65,332
Supplemental Business Unit Data(1)--
Core Business Segment:
Revenues................................. $91,600 $113,955 $104,908 $116,002 $120,556
Gross profit............................. 20,231 28,847 21,376 21,810 26,228
Pretax operating income(3)............... 4,874 13,291 3,400 2,838 7,840
Micro Products Business Segment:
Revenues................................. $ -- $ 165 $ 358 $ 1,043 $ 1,530
Gross loss(2)............................ (214) (3,898) (11,043) (13,908) (13,299)
Pretax operating loss(3)................. (731) (6,019) (15,469) (19,377) (18,643)
</TABLE>
- - - ---------------
(1) Does not include aviation components, a product line sold in 1995
(2) Net of ARPA funding in 1994, 1995 and 1996
(3) Fiscal 1999 and 1998 do not include restructuring costs or impairment
charges
10
<PAGE> 12
(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.
The Company operates in two business segments identified as the Company's
Core Business and Micro Products business. The Core Business segment consists of
flexible laminates and derivative products, principally flexible interconnect
circuits and assemblies. These products are targeted across all markets served
by the Company with the automotive market generating 68% of fiscal 1999 sales
for this segment. The Micro Products business segment is a developing business
that targets the integrated circuit (IC) industry of the electronics market. The
Company's ViaArray and ViaThin products are marketed and sold through this
segment and are exclusively reflected in the Company's datacom market sales.
The Company's manufacturing and assembly sites with their related assets
are used to manufacture specific product offering of the Company regardless of
business segment. For instance, the Longmont facility today contributes to the
manufacture of all Novaclad-based products. These products, including NovaflexHD
and VHD, are sold through the Core Business and ViaThin and ViaArray is sold
through Micro Products.
BACKGROUND
The Company's business strategy is focused to achieve leadership as a
creator and distributor of flexible laminates and their derivative to the world
market based on the Company's core materials technologies. Management believes
that Sheldahl's leading technology products serve the electronic interface
between the function of electronic-based products and their integrated circuit.
The Company targets specific OEM in the datacom and automotive markets in the
drive to create electronic based products that require increased functionality.
The Company's strategy initially focused on the automotive electronics
market and has achieved a substantial market position with sales of $82.1
million in fiscal 1999. In 1992 the Company patented its Novaclad
high-performance adhesiveless flexible laminate targeted at the datacom market.
The features of Novaclad allow circuitry designers to increase circuit density
for integrated circuit (IC) packaging and other interconnect solutions. Over the
past five years, the Company has introduced high performance products based on
this 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 and product lines. The Novaclad-based family of products accounted
for $41.2 million or 34% of the Company's net sales in fiscal 1999.
Through August 27, 1999, the Company had invested approximately $69 million
in an advanced new production facility in Longmont, Colorado to produce its
Novaclad family of products in commercial volumes. 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. As of August 27, 1999, the net book value
of the Longmont facility is approximately $38 million.
11
<PAGE> 13
The Company originally expected to commence production in the Longmont
facility principally serving the Company's Micro Products business 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 August 27,
1999, the Company is in production for ViaThin products for three OEM customers.
Shipments of these low volume production orders are expected to lead to larger
orders from these and other customers as the Company demonstrates consistent
quality and on-time delivery. The adverse financial impact with respect to
developing the Micro Products business has been and will continue to be
significant. In 1999, the Micro Products business resulted in a pretax loss
prior to restructuring costs and impairment charges of $18.6 million as compared
with a $19.4 million and $15.5 million loss in 1998 and 1997, respectively. Such
significant losses are expected to continue until efficient volume production
and related sales revenue is achieved. As of August 27, 1999, the Longmont
facility is operating at approximately 20% of stated overall production capacity
with projected breakeven at 40% to 60% of factory utilization or approximately
$24 million to $26 million of annual revenue of ViaThin and supporting
production of Novaflex HD and VHD products. Breakeven volume at Longmont is not
expected until the fourth quarter of fiscal 2000 at the earliest. During this
lengthy qualification period, the Company has been working with leading
customers, including five original equipment manufacturers and seven package
assemblers 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
SECURED REAL ESTATE MORTGAGE REFINANCED. On November 16, 1999, the Company
refinanced its outstanding secured real estate loan with an insurance company.
The new $4.3 million, ten-year secured real estate mortgage carries an interest
rate of 8.53% and requires the Company to meet certain performance and reporting
covenants, including maintaining a certain debt service coverage ratio. Annual
principal payments and interest under the new secured loan will be $417,000
versus $1.3 million on the existing loan. Concurrent with the closing of this
refinancing, the Company fully satisfied the $3.6 million secured real estate
loan plus accrued and unpaid interest that was outstanding to the insurance
company. The net effect of this refinancing enhanced short-term liquidity by
$0.7 million by reducing fiscal 2000 debt payments by approximately $0.5 million
and interest payments by approximately $0.2 million.
SPECIAL COMMITTEE OF BOARD APPOINTED. On October 21, 1999, the Board of
Directors of the Company established a Special Committee consisting of Kenneth
J. Roering (Chairman), Dennis M. Mathisen and Gerald E. Magnuson to assist
management and the Company's financial advisors in evaluating strategic
alternatives available to the Company. This action was precipitated by the
Company's financial performance and the current level of liquidity (see
Financial Conditions and Capital Reserves). Mr. Mathisen has resigned from the
Board of Directors. Messrs. Roering and Magnuson are currently directors of the
Company.
BANK AGREEMENT WAIVER. The Company's 1998 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 27,
1999, the amount available to borrow on the revolver was $6.6 million based on a
$18.3 million borrowing base on the revolver. The term facility of $16 million
has an outstanding balance as of the end of the fiscal year of $14.4 million
with monthly repayments of $205,000 through May 2001. On November 8, 1999, the
Company's borrowing available under the working capital portion of its 1998
credit facility was reduced. This change was initiated by the Company's lenders
in conjunction with a waiver issued by the lenders related to the Company's
failure to achieve certain financial ratios and the Company's current level of
borrowing under the working capital revolver related to its events of
non-compliance. Under the $25 million working capital revolver, the Company has
the ability to borrow based on the levels of accounts receivable and inventory,
which establishes a borrowing base. As of November 26, 1999, the Company's
borrowing base was $24.5 million. This action by the lenders reduced the
borrowing base by $2.5 million to $22.0 million. Actual borrowing under this
working capital revolver as of November 26, 1999 was $14.4 million and the
amount available to borrow was $7.6 million (see Capital Reserves). The
applicable interest rate on the loan effective October 1, 1999 and August 27,
1999 was 10.25% and 8.25%, respectively. In addition, in December 1999, the
Company received a waiver from its lenders relating to the qualified opinion of
Arthur Andersen LLP, the Company's independent public accountants.
12
<PAGE> 14
RESULTS OF OPERATIONS
Fiscal 1999 was a challenging and difficult year for the Company. The
Company's Core Business underwent significant change as it realized the full
impact of the downsizing initiated in February 1998 with the establishment of
subcontracting assembly operations in Mexico, Canada and the Philippines while
at the same time putting in place a new planning and operating system (Oracle).
The system upgrades were necessary to provide improved functionality and
efficiency while in part providing a Y2K solution for the Company's computer
based business system. The Company's Longmont facility achieved a successful
product ramp up of the Company's Novaflex VHD product resulting in $5.6 million
of sales growth in fiscal 1999 reflected in the Core Business. The Company's
Micro Products segment continued to develop a market position for ViaThin
building a production backlog of over $1.0 million as of the end of the fiscal
year, with production orders from Vitesse, Texas Instruments and Altera and
prototype orders from other targeted OEM and assemblers.
In February 1999, the Company recorded a charge of $3.1 million for
separation costs incurred in reducing its salaried work force. This charge was
increased by $0.5 million in August 1999. The restructuring costs provide for
approximately $2.0 million for severance and early retirement salary costs and
approximately $1.6 million for medical, dental and other benefits being provided
to the affected individuals. Approximately 46 people were affected by this
action. The fiscal 1999 restructuring costs are in addition to the $8.5 million
of similar costs charged to operations in fiscal 1998. As of August 27, 1999,
approximately $.4 million has been charged to the aforementioned restructuring
reserve and by November 1, 1999, 42 employees had terminated employment with the
Company.
In August 1999 and May 1998, non-cash impairment charges of $7.6 million
and $3.3 million were recorded against the Company's statement of operations.
These charges relate to equipment located principally at the Company's Longmont,
Colorado facility and certain computer software which, based upon analysis by
management and anticipated production processes, is not expected to contribute
to the Company's future cash flows.
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 provision of a deferred tax valuation
allowance for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------
AUGUST 27, AUGUST 28, AUGUST 29,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales............................. 100.0% 100.0% 100.0%
Cost of sales......................... 89.4% 93.2% 90.2%
Gross profit.......................... 10.6% 6.8% 9.8%
Expenses:
Sales and marketing................. 7.9% 8.4% 9.1%
General and administrative.......... 7.2% 7.0% 6.5%
Research and development............ 2.3% 3.3% 4.5%
Interest............................ 2.0% 2.2% 1.2%
------ ------ ------
Total expenses................... 19.4% 20.9% 21.3%
------ ------ ------
Loss before income taxes,
restructuring costs, impairment
charges, and cumulative effect of
change in method of accounting...... (8.8%) (14.1%) (11.5%)
====== ====== ======
</TABLE>
For fiscal 1999, the Company's Core Business sales increased $4.6 million,
or 3.9%, over the prior year due to growth in sales of the Company's Novaflex HD
and VHD product lines which accounted for $39.3 million or one-third of the Core
Business sales compared to $23.5 million and $13 million in fiscal years 1998
and 1997, respectively. Novaflex VHD sales of $5.6 million in fiscal 1999 were
exclusively for datacom market applications serving the high-end disc drive
market segment while $33.7 million of Novaflex HD sales in fiscal 1999 reflected
increased growth in the automotive engine control market segment and initial
penetration in datacom applications for laptop and notebook computers. The sales
gains in the Novaflex family of products were offset by sales declines of $12.1
million in standard Flexbase products. Laminate materials sales increased $0.9
million to $29.1 million compared to $28.2 million and $27.9 million for the
fiscal years 1998 and 1997, respectively.
13
<PAGE> 15
The table below shows, for the period indicated, the Company's sales by
business unit (in thousands):
<TABLE>
<CAPTION>
AUGUST 27, 1999 AUGUST 28, 1998 AUGUST 29, 1997
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Core Business.............. $120,556 98.7% $116,002 99.1% $104,908 99.7%
Micro Products............. 1,530 1.3% 1,043 .9% 358 .3%
-------- ------ -------- ------ -------- ------
Net sales.................. $122,086 100.0% $117,045 100.0% $105,266 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
The table below shows, for the periods indicated, the Company's sales to
various markets (in thousands):
<TABLE>
<CAPTION>
AUGUST 27, 1999 AUGUST 28, 1998 AUGUST 29, 1997
------------------ ------------------ ------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Automotive................. $ 82,119 67.3% $ 80,365 68.7% $ 71,026 67.5%
Datacom.................... 20,521 16.8% 15,463 13.2% 12,529 11.9%
Aerospace/Defense.......... 8,441 6.9% 10,030 8.5% 9,201 8.7%
Industrial................. 7,098 5.8% 7,451 6.4% 8,046 7.6%
Consumer................... 3,907 3.2% 3,736 3.2% 4,464 4.3%
-------- ------ -------- ------ -------- ------
Net sales.................. $122,086 100.0% $117,045 100.0% $105,266 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
Micro Products sales increased to $1.5 million in fiscal 1999 with 45% of
sales revenue being shipped in the Company's fourth quarter compared to $1.0
million in fiscal 1998. Micro Products is in volume production with three
customers. All of Micro Products sales are reflected in the datacom market and
represent ViaThin product sales for IC packages used in application specific
integrated circuits (ASIC).
COST OF SALES/GROSS PROFIT. During fiscal 1999, gross profit increased
$5.0 million reflecting the impact of $5.0 million increase in sales revenue and
lower variable cost per each dollar of sales when compared to fiscal 1998. Total
gross profit as a percent to sales increased to 10.6% in fiscal 1999 compared to
6.8% and 9.8% in fiscal years 1998 and 1997, respectively. Core Business gross
profit increased by $4.4 million to $26.2 million, or 21.5% of sales, compared
to 18.8% and 20.4% in fiscal years 1998 and 1997, respectively. Improvement in
product mix and lower payroll expense were offset by higher freight and related
costs.
The Micro Products fiscal 1999 gross profit improved marginally to a
negative $13.3 million versus $13.9 million in fiscal 1998. Added sales revenue
of $0.5 million, which absorbed an increased share of fixed operating expenses
of the Company's Longmont facility improved gross profit. Gross profit in fiscal
1997 was a negative $11.0 million reflecting less fixed costs in support of the
Micro Products segment.
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 Core Business
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 essentially in support of the Company's Micro Product business.
Depreciation and other fixed costs accounted for this increase.
SALES AND MARKETING EXPENSES. Sales and marketing expenses decreased
$195,000, or 2%, in fiscal 1999 after an increase of $301,000, or 3%, in fiscal
1998. The Core Business sales and marketing expense was $8.0 million, $8.1
million and $8.5 million in fiscal years 1999, 1998 and 1997, respectively,
while Micro Products sales and marketing expenses were $1.7 million, $1.8
million and $1.1 million for the same respective periods. As a percentage of
total Company net sales, sales and marketing expenses were 8% in fiscal 1999, 8%
in fiscal 1998, and 9% in fiscal 1997. Fiscal 1999 reductions in sales and
marketing expense reflected lower spending levels for travel and promotional
related activities. 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 $590,000, or 7%, to $8.7 million in fiscal 1999 and $1.3
million, or 19%, to $8.2 million in fiscal 1998. The Company's general and
administrative expenses increased in fiscal 1999 reflecting an additional $1.2
million depreciation expense on the Company's new Enterprise Resource Planning
(ERP) system. The Company committed significant resources to completely renew
its information technology systems, converting from mainframe technologies to
open-architecture client/server technologies. This strategic change is being
driven by
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<PAGE> 16
anticipated gains from information technology improvements needed to manage the
Company's expected sales growth and, secondarily, to address Y2K compliance
issues, decrease salary labor costs and other administrative expenses. In 1998,
the increase in general and administrative expenses was due to depreciation and
maintenance expense of the computer network systems and infrastructure to
support the ERP system.
The Company's general and administrative expenses are allocated to the
business segments based on a combination of assets and personnel employed. Core
Business general and administrative expenses were $6.5 million, $6.2 million and
$5.4 million for fiscal years 1999, 1998 and 1997, respectively, while Micro
Products general and administrative expenses were $2.2 million, $2.0 million and
$1.4 million for the same respective periods.
RESEARCH AND DEVELOPMENT EXPENSES. Gross research and development expenses
declined $883,000, or 21%, in fiscal 1999 to $3.2 million. Direct external
funding applied to research and development expenses were $400,000, $227,000 and
$500,000 in fiscal years 1999, 1998, and 1997. This resulted in net research and
development expenses of $2.8 million, $3.9 million, and $4.7 million in fiscal
years 1999, 1998, and 1997, respectively.
The table below shows, for the periods indicated, the Company's research
and development expenses (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------
AUGUST 27, AUGUST 28, AUGUST 29,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Gross expense......................... $3,225 $4,108 $5,214
External funding...................... (400) (227) (509)
------ ------ ------
Net expense........................... $2,825 $3,881 $4,705
====== ====== ======
Percent of sales...................... 2.3% 3.3% 4.5%
</TABLE>
Fiscal 1999's decline in research and development expense directly relates
to the shift of technical talent to support production efforts and attrition
connected with fiscal 1998 early retirement program. Further, expenses
associated with travel and material were also reduced. The external funding of
the research and development efforts in fiscal 1999 were related to product and
process development for circuitry targeted for the Company's joint venture
(Origin) with Molex Incorporated. No ARPA related expense or funding was
incurred or received in fiscal 1999 as consortium objectives were completed in
fiscal 1998.
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 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.
Net research and development expenses which is essentially directly
incurred to support each business were $1.8 million, $3.6 million and $3.8
million for the Core Business in fiscal years 1999, 1998 and 1997 respectively,
and $1.0 million, $0.3 million and $0.9 million for Micro Products for the same
respective periods.
INTEREST EXPENSE. Gross interest expense decreased to $3.5 million in
fiscal 1999 from $4.5 million in fiscal 1998 and increased from $3.0 million in
fiscal 1997, as the Company reduced borrowing through the addition of new
capital and reduced capital expenditures while funding operating losses.
Capitalized interest decreased to $1.0 million in fiscal 1999 from $1.9 million
in fiscal 1998 and $1.7 million in fiscal 1997. The Company anticipates lower
capitalized interest in fiscal 2000 as it completes current capital programs and
manages overall capital spending to a level consistent with fiscal 1999.
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<PAGE> 17
The following shows a breakdown of interest expense for the fiscal years
indicated (in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------
AUGUST 27, AUGUST 28, AUGUST 29,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Gross interest........................ $ 3,489 $ 4,450 $ 3,033
Capitalized interest.................. (990) (1,903) (1,735)
Investment income..................... -- -- --
------- ------- -------
Net expense........................... $ 2,499 $ 2,547 $ 1,298
======= ======= =======
Percent of sales...................... 2.0% 2.2% 1.2%
</TABLE>
RESTRUCTURING COSTS. In February 1999, the Company recorded a charge of
$3.1 million for separation costs incurred in reducing its salaried work force.
This charge was increased by $0.5 million in August 1999. The restructuring
costs provide for approximately $2.0 million for severance and early retirement
salary costs and approximately $1.6 million for medical, dental and other
benefits being provided to the affected individuals. Approximately 46 people
were affected by this action. The fiscal 1999 restructuring costs are in
addition to the $8.5 million of similar costs charged to operations in fiscal
1998. As of August 27, 1999, approximately $.4 million has been charged to the
aforementioned restructuring reserve and by November 1, 1999, 42 employees had
terminated employment with the Company.
In February 1998, a restructuring charge of $4.0 million was recorded
related to the culmination of the Company's 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 were affected by this
action.
In May 1998, an additional restructuring charge of $4.5 million was
recorded and subsequently reduced by $0.5 million in May 1999. 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 $1.4 million for severance costs,
approximately $0.4 million for medical, dental and other benefits being provided
to the affected individuals and approximately $2.2 million for equipment
disposal, losses related to the closure of the Aberdeen facility, outplacement
and other costs. Approximately 196 jobs were affected by this action.
Both 1998 aforementioned restructuring charges were related to the
Company's efforts to decrease cost and increase throughput. As of August 27,
1999, approximately $5.4 million had been charged to the Company's restructuring
reserves and by November 1999, 269 employees had terminated employment with the
Company related to the fiscal 1998 restructuring actions.
IMPAIRMENT CHARGES. In August 1999 and May 1998, non-cash impairment
charges of $7.6 million and $3.3 million were recorded against the Company's
statement of operations. These charges relate to equipment located principally
at the Company's Longmont, Colorado facility and certain computer software
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 restructuring charges, 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. Since that time, the Company
has not and 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
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<PAGE> 18
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.
FINANCIAL CONDITION. On November 16, 1999, the Company refinanced its
outstanding secured real estate loan with an insurance company. The new $4.3
million, ten-year secured real estate mortgage carries an interest rate of 8.53%
and requires the Company to meet certain performance and reporting covenants.
Annual principal payments and interest under the new secured loan will be
$417,000 versus $1.3 million on the existing loan. Concurrent with the closing
of this refinancing, the Company fully satisfied the $3.6 million secured real
estate loan plus accrued and unpaid interest that was outstanding to the
insurance company. The net effect of this refinancing enhanced short-term
liquidity by $0.7 million by reducing fiscal 2000 debt payments by approximately
$0.5 million and interest payments by approximately $0.2 million.
The Company's 1998 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 27, 1999, the amount available
to borrow on the revolver was approximately $6.6 million based on a $18.3
million borrowing base on the revolver. The term facility of $16 million has an
outstanding balance as of the end of the fiscal year of $14.4 million with
monthly repayments of $205,000 through May 2001. On November 12, 1999, the
Company's borrowing available under the working capital portion of its 1998
credit facility was reduced. This change was initiated by the Company's lenders
in conjunction with a waiver issued by the lenders related to the Company's
failure to achieve certain financial ratios and the Company's current level of
borrowing under the working capital revolver related to its events of
non-compliance. Under the $25 million working capital revolver, the Company has
the ability to borrow based on the levels of accounts receivable and inventory,
which establishes a borrowing base. As of November 26, 1999, the Company's
borrowing base would have been $24.5 million but due to a $2.5 million reduction
by its lenders was only $22.0 million. Actual borrowing under this working
capital revolver was $14.4 million as of November 26, 1999 and the amount
available to borrow was $7.6 million (see Capital Reserves). The applicable
interest rate on the loan effective October 1, 1999 and August 27, 1999 was
10.25% and 8.25%, respectively.
During late February and early March of fiscal 1999, the Company issued
$8.5 million of Series E Preferred Stock in a private placement. This new
equity, with the agreement of the Company's lenders, satisfied the then existing
covenant, which required the Company to raise additional equity capital during
fiscal 1999. These equity proceeds were used to reduce current borrowing levels
providing needed liquidity.
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 Micro Products 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.
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 Nasdaq rules. 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
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<PAGE> 19
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 Nasdaq rules, the Company
issued to the Investors only a portion of the shares for which they requested
conversion. Three of the four investors requested that, and the Company did seek
and obtain shareholder approval at its annual meeting on January 13, 1999 to
issue the additional shares issuable from their conversion notices as well as
for future conversions. The fourth Investor decided on October 20, 1998 to force
the Company to redeem its 623 in convertible 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.
CAPITAL RESERVES. Since fiscal 1995, the Company has invested
significantly in new plant and equipment providing manufacturing capacity to
deliver its patented Novaclad(R)-based line of products to both existing and new
customers. This included building and equipping a 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 March 1999, raising $100.5 million. The longer than expected
period of time to achieve full product and market acceptance has resulted in
greater losses generated from an under-utilized manufacturing facility and its
supporting workforce. At the Longmont facility, the Company manufactures
ViaArray(R) and ViaThin(R) -- both Novaclad-based substrates for IC packages,
plus the Company's Novaflex(R) VHD product targeted at the high-end disc drive
market. Sheldahl received its initial volume order for the VHD product line in
October 1998. The Company's fiscal 1999 sales volume from Novaflex VHD was $5.6
million. Additionally, the base material for the Company's Novaflex HD is also
produced in the Longmont facility. For all of fiscal 1999, $41.2 million of
Novaclad based product was produced all or in part at the Longmont facility.
As of the end of fiscal 1999, the Longmont facility was operating at
approximately 20% of stated production capacity with projected breakeven at 40%
- - - -60% of factory utilization or approximately $24 - $26 million of annual revenue
of ViaThin and ViaArray products plus related volume of the Novaflex HD and VHD
product lines. Breakeven volume at the Longmont facility is not expected until
fiscal 2000 at the earliest. Overall, the Longmont manufacturing operation is
estimated to have between a $2.5 million to $3.0 million negative impact on
operating cash flow in fiscal 2000.
During the three-year period ended August 27, 1999, the Company incurred,
principally at its Micro Products operations, cumulative net losses totaling
approximately $68.7 million, including restructuring and other charges of $27.7
million. During this three-year period, the Company used cash of approximately
$59.5 million supporting capital expenditures and approximately $6.8 million for
net operating activities. The Company has financed these transactions
principally through equity and debt financing.
Cash requirements to fund restructuring charges taken during fiscal 1999
and 1998 are expected to be approximately $2.7 million in fiscal 2000 compared
to $5.0 million in fiscal 1999. Fiscal 2000 capital expenditures for the Company
are planned at approximately $7.0 million, compared with $5.5 million in fiscal
1999. Debt repayments for fiscal 2000, including refinancing of the Longmont
facility, will be $3.8 million including $2.5 million on the bank term facility
and $1.0 million for various capital lease payments.
The impact of anticipated fiscal 2000 operating losses, tighter borrowing
levels pursuant to its amended debt agreements and the uncertainty of the timing
of sales growth from the Company's Micro Products business places significant
pressure on the cash reserves of the Company. Cash flow projections based on the
Company's operating plan for fiscal 2000 reflect an increased level of cash flow
from operations during the first half of the year with increasing demand for
cash later in the fiscal year as working capital expands to support projected
sales growth. The Company believes this growth in working capital can be
supported under its current credit agreement, although there will be intervals
of time where borrowing capacity under its debt agreements will be severely
reduced. The inability of the Company to i) obtain sufficient, substantial
production orders and sales for Micro Product's ViaThin in the range of $10 to
$12 million; ii) improve operating results in Micro Products for fiscal 2000;
iii) achieve operating performance from the Company's Core Business at or above
fiscal 1999 levels; iv) achieve other cost or productivity improvements included
in the Company's fiscal 2000 budget and v) maintain adequate liquidity to fund
normal operations would result in the Company being out of compliance with
certain of its debt covenants thereby allowing the Company's lenders to require
full repayment of the outstanding borrowings under the Company's credit
agreement and/or
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<PAGE> 20
leave the Company in a cash reserve position that would require additional
capital to fund operations. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management has and will
continue to implement operational measures designed to assist the Company in
achieving its fiscal 2000 budget and cash flow objectives. Should any of the
matters discussed above ultimately occur, management believes the Company could
obtain the necessary additional new capital, including the issuance of
additional new debt or additional new equity financing to fund operations.
However, there can be no assurance that the Company will be successful in
achieving its projected operating results for fiscal 2000, in meeting its
quarterly debt covenants during fiscal 2000 or in its attempt to issue
additional debt or to raise additional capital on terms acceptable to the
Company.
Net working capital increased to $16.9 million in 1999 from $9.2 million in
1998. An increase in the Company's accounts receivable and inventory of $7.4
million reflect greater sales growth in the fourth quarter of fiscal 1999 over
the same period last year.
FOREIGN CURRENCY RISK. In fiscal 1999, 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
27, 1999, the Company has no material contracts in any currency not mentioned
above.
On January 1, 1999, the Euro, the new European currency, initiated internal
commercial use. As of August 27, 1999, none of the Company's sales order or
purchase orders are priced 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.
NEW ACCOUNTING PRONOUNCEMENTS. Effective in the year ended August 27,
1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 superseded SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position.
Effective January 1, 1998, the Company adopted SFAS No. 132, "Employers'
disclosures about Pensions and Other Post-retirement Benefits." The statement
supersedes the disclosure requirements in SFAS No. 87, "Employers' Accounting
for Pensions," SFAS No. 88, "Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Post-retirement Benefits Other Than Pensions." The
overall objective of SFAS No. 132 is to improve and standardize disclosures
about pensions and other post-retirement benefits and to make the required
information more understandable. The adoption of SFAS No. 132 did not affect
results of operations or financial position, but did affect the disclosures for
pensions and other post-retirement benefits.
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 presents potential concerns for
business and consumer computing. In addition to the well-known calculation
problems with the use of 2-digit date formats as the year changes from 1999 to
2000, the Year 2000 is a special case leap year and in many organizations using
older technology, dates were used for special programmatic functions. The
problem exists for many kinds of software and hardware, including mainframes,
mini computers, PCs, and embedded systems. The consequences of this issue may
include systems failures and business process interruption.
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<PAGE> 21
At the end of fiscal 1999, all of the Company's critical and priority
manufacturing and non-manufacturing systems were determined to be already year
2000 capable, or necessary remediation (replacements, changes, upgrades or
workarounds) had been determined and unit testing and deployment had been
completed. The Company continues to work on internal systems that were not
categorized as critical or priority, and expects to have work on these systems
substantially completed by the end of calendar 2000.
The Company has also been actively working with suppliers of products and
services to determine the extent to which the suppliers' operations and the
products and services they provide are year 2000 capable, and to monitor their
progress toward year 2000 capability. The Company has made inquiries of its
major suppliers and has received responses to its inquiries from 100% of
critical suppliers. Follow-up activities seek to determine whether the supplier
is taking all appropriate steps to fix year 2000 problems and to be prepared to
continue functioning effectively as a supplier in accordance with the Company's
standards and requirements. As discussed below, contingency plans are being
developed to address issues related to suppliers that are not considered to be
making sufficient progress in becoming year 2000 capable.
As discussed below, the Company has developed contingency plans to address
possible changes in customer order patterns due to year 2000 issues. As with the
Company's suppliers, the readiness of customers, and their suppliers, to deal
with year 2000 issues may affect their operations and their ability to order and
pay for products. The Company has surveyed its major direct customers about
their year 2000 readiness in critical areas of their operations. The results
identified certain key areas to be addressed by the customers, primarily related
to supplier readiness, including external infrastructure providers, and
contingency planning. The Company has also been communicating information about
its own readiness to customers. Communications with customers for the remainder
of 1999 will be primarily aimed at focusing customer attention on contingency
planning.
The Company believes that its most reasonably likely worst-case year 2000
scenarios would relate to problems with the systems of third parties rather than
with the Company's internal systems or its products. Because the Company has
less control over assessing and remediating the year 2000 problems of third
parties, the Company believes the risks are greatest with infrastructure (e.g.,
electricity supply and water and sewer service), telecommunications,
transportation supply channels and critical suppliers of materials and services.
The Company's operations are conducted in a network of domestic and foreign
facilities. Each location relies on local private and governmental suppliers for
electricity, water, sewer and other needed supplies. Failure of an electricity
grid or an uneven supply of power, for example, would be a worst-case scenario
that would completely shut down the affected facilities. Electrical failure
could also shut down airports and other transportation facilities.
Although most sites have some back-up electrical power, the Company does
not generally maintain its own facilities that would generate sufficient
electrical or water supply for full operations. A worst-case scenario involving
a critical supplier of materials would be the partial or complete shutdown of
the supplier and its resulting inability to provide critical supplies to the
Company on a timely basis. The Company does not maintain the capability to
replace most third-party supplies with internal production. Where efforts to
work with critical suppliers to ensure year 2000 capability have not been
successful, contingency planning includes provisions for extra raw materials
above that needed for normal operations, staffing the plants with critical
personnel on January 1st, scheduling the New Year's holiday to provide extra
time for recovery in the event it is needed, and duplication of production
capability at its various facilities. These contingency plans apply to all
Company facilities as appropriate. Because of the Company's internal Year 2000
program, the Company does not believe there is a significant risk of disruption
of operations due to malfunction of its internal systems or equipment.
The Company is not in a position to identify or to avoid all possible
scenarios; however, the Company is currently assessing scenarios and taking
steps to mitigate the impacts of various scenarios if they were to occur.
Preliminary contingency plans for critical business operations were in place by
the end of August 1999. It is expected that these plans will be expanded and
refined as the Company learns more about the preparations and vulnerabilities of
third parties regarding year 2000 issues. Due to the large number of variables
involved, the Company cannot provide an estimate of the damage it might suffer
if any of these scenarios, or a combination of scenarios, were to occur.
The Company's year 2000 efforts have been undertaken largely with its
existing personnel. In some instances, consultants have been engaged to provide
specific assessment, remediation or other services. Activities with suppliers
and customers have also involved their staffs and consultants. The Company
engaged a third-party firm to assist with planning and taking the inventory of
internal systems, and engaged another firm to perform an assessment of the
overall scope and schedule of the Company's year 2000 efforts.
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<PAGE> 22
The Company currently expects that the total cost of these programs,
including both incremental spending and redeployed resources, will be
approximately $100,000. This amount has been expensed as incurred. No
significant internal systems projects are being deferred due to the year 2000
program efforts. In some instances, the installation schedule of new software
and hardware in the normal course of business was accelerated to also afford a
solution to year 2000 capability issues. In addition, the estimated cost does
not include any potential costs related to customer or other claims, or
potential amounts related to executing contingency plans, such as costs incurred
as a result of an infrastructure or supplier failure. All expected costs are
based on the current assessment of the programs and are subject to change as the
programs progress.
Based on currently available information, management does not believe that
the year 2000 matters discussed above related to internal systems or products
sold to customers will have a material adverse impact on the Company's financial
condition or overall trends in results of operations; however, it is uncertain
to what extent the Company may be affected by such matters. In addition, there
can be no assurance that the failure to ensure year 2000 capability by a
supplier, customer or another party would not have a material adverse effect on
the Company's financial condition or overall trends in results of operations
through business interruption or shutdown, financial loss, reputational damage
and legal liability to third parties.
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 continue to 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
fails to achieve levels of sales growth and operational performance that
sustains sufficient cash flow to operate the business and satisfy existing
covenants with the Company's 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 prime rate plus 2%, which as of
October 1, 1999 was now 10 1/2%. Should the lenders base rate change, the
Company's interest expense will increase or decrease accordingly. As of August
27, 1999, the Company had borrowed approximately $26.1 million subject to
interest rate risk. On this amount, a 1% increase in the interest rate would
cost the Company $261,000 in additional gross interest cost on an annual basis.
21
<PAGE> 23
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 1999 and 1998 is set forth
in Note 11 to the Consolidated Financial Statements included with this report
(see Note 15).
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 27, 1999, and such
information required by such items is incorporated herein by reference from the
proxy statement.
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> <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 27, 1999 and August
28, 1998.................................................... F-3
Consolidated Statements of Operations for the Fiscal Years
Ended August 27, 1999, August 28, 1998 and August 29,
1997........................................................ F-4
Consolidated Statements of Changes in Shareholders'
Investment for the Fiscal Years Ended August 27, 1999,
August 28, 1998 and August 29, 1997......................... F-5
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Consolidated Statements of Cash Flows for the Fiscal Years
Ended August 27, 1999, August 28, 1998 and August 29,
1997........................................................ F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
2. Consolidated Financial Statement Schedules
<TABLE>
<CAPTION>
FORM 10-K
DESCRIPTION PAGE REFERENCE
- - - ----------- --------------
<S> <C>
Schedule II -- Valuation and Qualifying Accounts....... S-1
</TABLE>
(b) Reports on Form 8-K
None.
(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 February 26, 1999.
3.2 Bylaws, as amended, incorporated by reference from Exhibit
3.2 of the Registrant's Form 10-K for the fiscal year ended
August 28, 1998.
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - - ----------- -----------
<C> <S>
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.
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, incorporated by
reference from Exhibit 4.1.3 of Registrant's Form 10-K for
the Fiscal Year ended August 28, 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 Deed of Trust and Security Agreement By and Between Sheldahl
Colorado, LLC, The Registrant, The Public Trustee Of Boulder
County, Colorado and Morgan Guaranty Trust Company of New
York dated November 16, 1999.
10.5 Fixed Rate Note between the Registrant as the sole member of
Sheldahl Colorado LLC and Morgan Guaranty Trust Company of
New York dated November 16, 1999.
10.6 Guaranty by the Registrant to Morgan Guaranty Trust Company
of New York dated November 16, 1999.
10.7 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
Financing, Inc., incorporated by reference from Exhibit 10.1
of the Registrant's Form S-3 dated July 1, 1998 (File No.
333-58307)
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - - ----------- -----------
<C> <S>
10.7.1 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.,
incorporated by reference from Exhibit 10.4.1 of the
Registrant's Form 10-K filed December 3, 1998.
10.7.2 Second Amendment to the Credit and Security Agreement, dated
March 4, 1999 between the Company and Norwest Bank
Minnesota, N.A., Harris Trust and Savings Bank, The First
National Bank of Chicago, and The CIT Group., incorporated
by reference from Exhibit 10.1 of the Registrant's Form 10-Q
filed April 9, 1999.
10.7.3 Third Amendment to the Credit and Security Agreement, dated
April 5, 1999 between the Company and Norwest Bank
Minnesota, N.A., Harris Trust and Savings Bank, The First
National Bank of Chicago, and The CIT Group., incorporated
by reference from Exhibit 10.2 of the Registrant's Form 10-Q
filed April 9, 1999.
10.7.4 Fourth Amendment to the Credit and Security Agreement, dated
November 12, 1999 between the Company and Norwest Bank
Minnesota, N.A., Harris Trust and Savings Bank, The First
National Bank of Chicago, and The CIT Group.
10.8 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
Financing, Inc., incorporated by reference from Exhibit 10.2
of the Registrant's Form S-3 dated July 1, 1998 (File No.
333-58307).
10.9(*) 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.
10.10 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.
10.11 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.
10.12 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.
10.12.1 Form of Amendment No. 1 to Employment (change of control)
Agreement for Executive Officers of the Registrant,
incorporated by Reference from Exhibit 10.10.1 of the
Registrant's Form 10-K for the fiscal year ended August 28,
1998.
10.12.2 Form of Amendment No. 2 to Employment (change of control)
Agreement for Executive Officers of the Registrant.
10.13 Supplementary Executive Retirement Plan Agreement between
the Registrant and James E. Donaghy dated November 5, 1996,
incorporated by reference from Exhibit 10.12 of the
Registrant's Form 10-K for the fiscal year ended August 28,
1998.
10.14 Letter Agreement between John V. McManus and the Registrant
dated October 15, 1999.
10.15 Abstract of Agreement between the Union of Needletrades
Industrial and Textile Employees and the Registrant dated
November 12, 1999.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- - - ----------- -----------
<C> <S>
10.20 Agreement dated January 10, 1994 between the MCM-L
Consortium and the Advanced Projects Research Agency,
incorporated by reference from Exhibit 10.4 of the
Registrant's Form 10-Q for the quarter ended February 25,
1994.
10.21 Articles of Collaboration dated November 30, 1993 for the
MCM-L Consortium, incorporated by reference from Exhibit
10.5 of the Registrant's Form 10-Q for the quarter ended
February 25, 1994.
10.22 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.
10.23 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.
10.24 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.
10.25 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.
10.26 Technology Development Agreement dated August 15, 1995
between Low Cost Flip Chip Consortium and the Advanced
Projects Research Agency incorporated by reference from
Exhibit 10.27 of the Registrant's Form 10-K for the fiscal
year ended September 1, 1995.
10.27 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.
10.28 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.
10.29 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.
10.30 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.
10.30.1 Amendment No. 1 to License Agreement dated June 20, 1994
between Sidrabe and the Registrant, incorporated by
reference from Exhibit 10.28.1 of the Registrant's Form 10-K
for the fiscal year ended August 28, 1998.
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>
25
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: December 13, 1999
SHELDAHL, INC.
By: /s/ EDWARD L. LUNDSTROM
------------------------------------
President and Chief Executive
Officer
By: /s/ JILL D. BURCHILL
------------------------------------
Vice President and Chief Financial
Officer
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 December 13, 1999 and in the capacities indicated.
(POWER OF ATTORNEY)
Each person whose signature appears below constitutes and appoints Edward
L. Lundstrom and Jill D. Burchill 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 E. DONAGHY Chairman of the Board
(principal executive officer)
- - - --------------------------------------------------------
James E. Donaghy
By: /s/ EDWARD L. LUNDSTROM President and CEO
- - - --------------------------------------------------------
Edward L. Lundstrom
By: /s/ JILL D. BURCHILL Vice President and CFO
- - - --------------------------------------------------------
Jill D. Burchill
By: /s/ JOHN G. KASSAKIAN Director
- - - --------------------------------------------------------
John G. Kassakian
By: /s/ GERALD E. MAGNUSON Director
- - - --------------------------------------------------------
Gerald E. Magnuson
By: /s/ WILLIAM B. MILLER Director
- - - --------------------------------------------------------
William B. Miller
By: /s/ KENNETH J. ROERING Director
- - - --------------------------------------------------------
Kenneth J. Roering
By: /s/ RAYMOND C. WIESER Director
- - - --------------------------------------------------------
Raymond C. Wieser
By: /s/ BEEKMAN WINTHROP Director
- - - --------------------------------------------------------
Beekman Winthrop
</TABLE>
26
<PAGE> 28
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of August 27, 1999 and August
28, 1998.................................................. F-3
Consolidated Statements of Operations for the Fiscal Years
Ended August 27, 1999, August 28, 1998, and August 29,
1997...................................................... F-4
Consolidated Statements of Changes in Shareholders'
Investment for the Fiscal Years Ended August 27, 1999,
August 28, 1998, and August 29, 1997...................... F-5
Consolidated Statements of Cash Flows for the Fiscal Years
Ended August 27, 1999, August 28, 1998, and August 29,
1997...................................................... F-6
Notes to Consolidated Financial Statements.................. F-7
Schedule II: Valuation and Qualifying Accounts.............. S-1
</TABLE>
F-1
<PAGE> 29
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 27, 1999 and August
28, 1998 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 27, 1999. These financial statements and the schedule
referred to below 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 27, 1999 and August 28, 1998 and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended August 27, 1999, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and is unable to ascertain whether it will have sufficient liquidity available
under its current credit agreement to fund operations or whether the Company
will meet various covenant requirements contained in its credit agreement. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The accompanying financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
As discussed in Note 2 to the financial statements, effective August 30,
1997, the Company changed its method of accounting for start-up costs.
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.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
October 15, 1999
F-2
<PAGE> 30
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 28,
1999 1998
------------ ------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,043 $ 1,005
Accounts receivable, net of allowances of $339 and $225... 19,908 15,727
Inventories............................................... 18,746 15,488
Prepaid expenses and other current assets................. 593 627
-------- --------
Total current assets................................... 40,290 32,847
-------- --------
Plant and equipment:
Land and buildings........................................ 28,560 28,255
Machinery and equipment................................... 127,377 113,642
Construction in progress.................................. 3,399 26,682
Accumulated depreciation.................................. (76,491) (66,322)
-------- --------
Net plant and equipment................................ 82,845 102,257
-------- --------
Other assets................................................ 795 1,202
-------- --------
$123,930 $136,306
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt...................... $ 4,142 $ 4,296
Accounts payable.......................................... 10,493 7,766
Accrued salaries.......................................... 1,323 1,554
Other accrued liabilities................................. 4,682 4,518
Restructuring reserves.................................... 2,713 5,494
-------- --------
Total current liabilities.............................. 23,353 23,628
Long-term debt, less current maturities..................... 29,284 27,829
Restructuring reserves...................................... 2,484 2,131
Other non-current liabilities............................... 3,477 3,961
-------- --------
Total liabilities...................................... 58,598 57,549
-------- --------
Commitments and contingencies (Notes 2, 4, 6-9).............
Shareholders' investment:
Preferred stock, $1 par value, 500,000 shares authorized;
Series B, D and E 5% cumulative convertible preferred,
167, 32,417 and 8,060 and 7,653, 32,914 and 0 shares
issued and outstanding................................ 40 41
Common stock, $.25 par value, 50,000,000 shares
authorized; 11,610,356 and 9,660,614 shares issued and
outstanding............................................ 2,903 2,415
Additional paid-in capital................................ 109,407 99,751
Accumulated deficit....................................... (47,018) (23,450)
-------- --------
Total shareholders' investment......................... 65,332 78,757
-------- --------
$123,930 $136,306
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 31
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
--------------------------------------
AUGUST 27, AUGUST 28, AUGUST 29,
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS,)EXCEPT PER SHARE DATA
<S> <C> <C> <C>
Net sales................................................ $122,086 $117,045 $105,266
Cost of sales............................................ 109,157 109,143 94,933
-------- -------- --------
Gross profit............................................. 12,929 7,902 10,333
-------- -------- --------
Expenses:
Sales and marketing.................................... 9,666 9,861 9,560
General and administrative............................. 8,742 8,152 6,839
Research and development............................... 2,825 3,881 4,705
Restructuring costs.................................... 3,050 8,500 --
Impairment charges..................................... 7,635 3,300 --
Interest............................................... 2,499 2,547 1,298
-------- -------- --------
Total expenses...................................... 34,417 36,241 22,402
-------- -------- --------
Loss before income taxes and cumulative effect of change
in method of accounting................................ (21,488) (28,339) (12,069)
Provision (benefit) for income taxes..................... -- 2,952 (4,100)
-------- -------- --------
Loss before cumulative effect of change in method of
accounting............................................. (21,488) (31,291) (7,969)
Cumulative effect of change in method of accounting...... -- (5,206) --
-------- -------- --------
Loss before convertible preferred stock dividends........ (21,488) (36,497) (7,969)
Convertible preferred stock dividends.................... (2,080) (689) --
-------- -------- --------
Loss applicable to common shareholders................... $(23,568) $(37,186) $ (7,969)
======== ======== ========
Loss per common share:
Basic and diluted -
Loss before cumulative effect of change in method of
accounting and after convertible preferred stock
dividends........................................... $ (2.15) $ (3.41) $ (0.89)
Cumulative effect of change in method of accounting.... -- (0.56) --
-------- -------- --------
Loss per common share.................................. $ (2.15) $ (3.97) $ (0.89)
======== ======== ========
Number of shares outstanding - basic and diluted......... 10,987 9,364 8,967
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 32
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
--------------------------------------
AUGUST 27, AUGUST 28, AUGUST 29,
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Series B convertible preferred stock:
Balance at beginning of period......................... $ 8 $ 15 $ --
Proceeds from stock issuance........................... -- -- 15
Preferred stock redemption............................. (6) -- --
Conversion to common stock............................. (2) (7) --
-------- -------- --------
Balance at end of period............................... $ -- $ 8 $ 15
======== ======== ========
Series D convertible preferred stock:
Balance at beginning of period......................... $ 33 $ -- $ --
Proceeds from stock issuance........................... -- 33 --
Conversion to common stock............................. (1) -- --
-------- -------- --------
Balance at end of period............................... $ 32 $ 33 $ --
======== ======== ========
Series E convertible preferred stock:
Balance at beginning of period......................... $ -- $ -- $ --
Proceeds from stock issuance........................... 9 -- --
Conversion to common stock............................. (1) -- --
-------- -------- --------
Balance at end of period............................... $ 8 $ -- $ --
======== ======== ========
Common stock:
Balance at beginning of period......................... $ 2,415 $ 2,258 $ 2,228
Conversion of Series B preferred stock................. 366 144 --
Conversion of Series D preferred stock................. 21 -- --
Conversion of Series E preferred stock................. 20 -- --
Proceeds from stock purchase plan transactions......... 15 5 --
Proceeds from stock options exercised.................. -- 8 30
Common stock issued for preferred stock dividends...... 66 -- --
-------- -------- --------
Balance at end of period............................... $ 2,903 $ 2,415 $ 2,258
======== ======== ========
Additional paid-in capital:
Balance at beginning of period......................... $ 99,751 $ 66,923 $ 51,404
Issuance (cost) of Series B convertible preferred
stock............................................... -- (316) 14,285
Conversion of Series B preferred stock................. 24 38 --
Conversion of Series D preferred stock................. 1 -- --
Conversion of Series E preferred stock................. (10) -- --
Redemption of Series B preferred stock................. (623) -- --
Fair value of warrants issued with credit agreement.... -- 377 --
Proceeds from stock purchase plan transactions......... 280 135 --
Proceeds from stock options exercised.................. -- 218 1,234
Issuance (cost) of Series D preferred stock............ (23) 32,376 --
Issuance of Series E preferred stock................... 8,452 -- --
Common stock issued to preferred stock dividends....... 1,555 -- --
-------- -------- --------
Balance at end of period............................... $109,407 $ 99,751 $ 66,923
======== ======== ========
Retained earnings (deficit):
Balance at beginning of period......................... $(23,450) $ 13,736 $ 21,705
Net loss............................................... (23,568) (37,186) (7,969)
-------- -------- --------
Balance at end of period............................... $(47,018) $(23,450) $ 13,736
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 33
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
--------------------------------------
AUGUST 27, AUGUST 28, AUGUST 29,
1999 1998 1997
---------- ---------- ----------
) (IN THOUSANDS
<S> <C> <C> <C>
Operating activities:
Net loss............................................... $(23,568) $(37,186) $ (7,969)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization....................... 17,069 14,382 10,650
Deferred income taxes............................... -- 2,952 (4,196)
Restructuring costs................................. 3,050 8,500 --
Impairment charges.................................. 7,635 3,300 --
Change in method of accounting...................... -- 5,206 --
Net change in other operating activities:
Accounts receivable................................. (4,181) 153 5,211
Inventories......................................... (3,258) (2,410) (1,553)
Prepaid expenses and other current assets........... (34) (221) (16)
Other assets........................................ 407 (523) 146
Accounts payable and accrued liabilities............ 4,419 1,903 (1,118)
Restructuring reserves.............................. (4,985) (875) --
Other non-current liabilities....................... (484) 251 544
-------- -------- --------
Net cash provided by (used in) operating activities.... (3,930) (4,568) 1,699
-------- -------- --------
Investing activities:
Capital expenditures, net.............................. (5,541) (23,268) (30,729)
-------- -------- --------
Financing activities:
Net borrowings (repayments) under revolving credit and
bridge facilities................................... 5,674 (26,456) 17,275
Proceeds from term facility and warrants, net.......... -- 16,000 --
Proceeds from other long-term debt..................... -- 2,335 1,452
Repayments of long-term debt........................... (4,373) (1,064) (598)
Redemption of Series B preferred stock................. (623) -- --
Issuance of preferred stock, net....................... 8,460 32,093 14,300
Stock options and stock purchase plan.................. 295 366 1,264
-------- -------- --------
Net cash provided by financing activities........... 9,433 23,274 33,693
-------- -------- --------
Net increase (decrease) in cash and cash equivalents..... 38 (4,562) 4,663
-------- -------- --------
Cash and cash equivalents at beginning of period......... 1,005 5,567 904
-------- -------- --------
Cash and cash equivalents at end of period............... $ 1,043 $ 1,005 $ 5,567
======== ======== ========
Supplemental cash flow information:
Interest paid.......................................... $ 3,489 $ 4,423 $ 3,078
======== ======== ========
Income taxes paid (refunded)........................... $ 173 $ 36 $ (68)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 34
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(R). From these materials, Sheldahl fabricates high-value derivative
products: single- and double-sided flexible interconnects and assemblies under
the trade names Flexbase(R), Novaflex(R)HD and Novaflex(R) VHD and integrated
circuit substrates under the trade name ViaArray(R) and ViaThin(R).
The Company operates in two business segments identified as the Company's
Core Business and the Micro Products business. The Core Business segment
consists of flexible laminates and derivative products, principally flexible
interconnect circuits and assemblies. These products are targeted across all
markets served by the Company with the automotive market generating 68% of
fiscal 1999 sales for this segment. The Micro Products business segment is a
developing business that targets the integrated circuit (IC) industry of the
electronics market. The Company's ViaArray and ViaThin products are marketed and
sold through this segment and are exclusively reflected in the Company's datacom
market sales.
The Company's manufacturing and assembly sites with their related assets
are used to manufacture specific product offerings of the Company regardless of
business segment. For instance, the Longmont facility today contributes to the
manufacture of all Novaclad-based products. These products, including Novaflex
HD and VHD, are sold through the Core Business and ViaThin is sold through Micro
Products. The Company allocates its shared production assets based on an
appropriate percentage of asset utilization with unused capacity being assigned
to the segment originating the investment.
(2) Liquidity and Going Concern Matters
During the three-year period ended August 27, 1999, the Company incurred,
principally at its Micro Products operations, cumulative net losses totaling
approximately $68.7 million, including restructuring and other charges of $27.7
million. During this three-year period, the Company used cash of approximately
$59.5 million supporting capital expenditures and approximately $6.8 million for
net operating activities. The Company has financed these transactions
principally through equity and debt financing.
Cash requirements to fund restructuring charges taken during fiscal 1999
and 1998 are expected to be approximately $2.7 million in fiscal 2000 compared
to $5.0 million in fiscal 1999. Fiscal 2000 capital expenditures for the Company
are planned at approximately $7.0 million, compared with $5.5 million in fiscal
1999. Debt repayments for fiscal 2000, including refinancing of the Longmont
facility, will be $3.8 million including $2.5 million on the bank term facility
and $1.0 million for various capital lease payments.
The impact of anticipated fiscal 2000 operating losses, tighter borrowing
levels pursuant to its amended debt agreements and the uncertainty of the timing
of sales growth from the Company's Micro Products business places significant
pressure on the cash reserves of the Company. Cash flow projections based on the
Company's operating plan for fiscal 2000 reflect an increased level of cash flow
from operations during the first half of the year with increasing demand for
cash later in the fiscal year as working capital expands to support projected
sales growth. The Company believes this growth in working capital can be
supported under its current credit agreement, although there will be intervals
of time where borrowing capacity under its debt agreements will be severely
reduced. The inability of the Company to i) obtain sufficient, substantial
production orders and sales for Micro Product's ViaThin in the range of $10 to
$12 million; ii) improve operating results in Micro Products for fiscal 2000;
iii) achieve operating performance from the Company's Core Business at or above
fiscal 1999 levels; iv) achieve other cost or productivity improvements included
in the Company's fiscal 2000 budget and v) maintain adequate liquidity to fund
normal operations would result in the Company being out of compliance with
certain of its debt covenants thereby allowing the Company's lenders to require
full repayment of the outstanding borrowings under the Company's credit
agreement and/or leave the Company in a cash reserve position that would require
additional capital to fund operations. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management has and
will continue to implement operational measures designed to assist the Company
in achieving its fiscal 2000 budget and cash flow objectives. Should any of the
matters discussed above ultimately occur, management believes the Company could
obtain the necessary additional new capital, including the issuance of
additional new debt or additional new equity financing to fund operations.
However, there can be no assurance that the Company will be successful in
achieving its projected operating results for fiscal 2000, in
F-7
<PAGE> 35
meeting its quarterly debt covenants during fiscal 2000 or in its attempt to
issue additional debt or to raise additional capital on terms acceptable to the
Company.
On October 21, 1999, the Board of Directors of the Company established a
Special Committee consisting of Kenneth J. Roering (Chairman), Dennis M.
Mathisen and Gerald E. Magnuson to assist management and the Company's financial
advisors in evaluating strategic alternatives available to the Company. Mr.
Mathisen has resigned from the Board of Directors. Messrs. Roering and Magnuson
are currently directors of the Company.
(3) 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.
Significant Customers --
The Company's two largest customers accounted for sales of $13,607,000 and
$12,917,000 in fiscal 1999. The Company's three largest customers accounted for
sales of $18,100,000, $12,100,000 and $11,700,000 in 1998 and the Company's two
largest customers in 1997 accounted for $12,052,000 and $11,143,000. No other
customers accounted for more than 10% of net sales in any of the last three
fiscal years.
Export Sales --
The Company had export sales of $29,984,000 in 1999; $24,501,000 in 1998;
and $15,040,000 in 1997.
Revenue Recognition --
The Company recognizes revenue principally as products are shipped. In
addition, the Company grants credit to customers and generally do 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 27, AUGUST 28,
1999 1998
---------- ----------
<S> <C> <C>
Raw material...................................... $ 6,635 $ 4,964
Work-in-process................................... 7,751 4,742
Finished goods.................................... 4,360 5,782
------- -------
Total............................................. $18,746 $15,488
======= =======
</TABLE>
F-8
<PAGE> 36
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 $990,000 in 1999, $1,903,000 in
1998, and $1,735,000 in 1997. 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. Beginning in fiscal 1998, the Company began
providing a valuation allowance against the Company's net deferred tax assets
(see note 9).
Earnings per Share --
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share". Basic earnings per share are 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 1999, 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 --
Effective in the year ended August 27, 1999, the Company adopted SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information." SFAS
No. 131 superseded SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The adoption of SFAS No. 131 did not affect results of
operations or financial position (see Note 13).
In the beginning of fiscal 1998, the Company adopted SFAS No. 132,
"Employers' Disclosures About Pensions and Other Post-retirement Benefits." This
statement supersedes the disclosure requirements in SFAS No. 87, "Employers'
Accounting for Pensions," SFAS No. 88, "Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and
SFAS No. 106, "Employers' Accounting for Post-retirement Benefits Other Than
Pensions." The overall objective of SFAS No. 132 is to improve and standardize
disclosures about pensions and other post-retirement benefits and to make the
required information more understandable. The adoption of SFAS No. 132 did not
affect results of operations or financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which has been
deferred until fiscal 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 accounting criteria are met. Special accounting for qualifying hedges
allows 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 determined the timing of adoption of SFAS
No. 133. While the Company does not expect the adoption to materially impact its
results of operations or financial position, adoption of SFAS No. 133 could
increase volatility in earnings for periods subsequent to adoption.
F-9
<PAGE> 37
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 retroactively to the beginning of fiscal 1998, and the Company's first
and second quarters were restated to reflect this change in method of
accounting, in accordance with the provisions of SOP 98-5 and APB 20.
(4) Restructuring and Impairment Charges
In February 1999, the Company recorded a charge of $3.1 million for
separation costs incurred in reducing its salaried work force. This charge was
increased by $0.5 million in August 1999. The restructuring costs provide for
approximately $2.0 million for severance and early retirement salary costs and
approximately $1.6 million for medical, dental and other benefits being provided
to the affected individuals. Approximately 46 people were affected by this
action. The fiscal 1999 restructuring costs are in addition to the $8.5 million
of similar costs charged to operations in fiscal 1998. As of August 27, 1999,
approximately $.4 million has been charged to the aforementioned restructuring
reserve and by November 1, 1999, 42 employees had terminated employment with the
Company.
In February 1998, a restructuring charge of $4.0 million was recorded
related to the culmination of the Company's business re-engineering initiative
that began in 1996. Due to significant productivity benefits resulting from the
initiative, the Company reduced the size of its salaried workforce. The
resulting workforce reduction involved layoffs, early retirement offerings,
reassignments and reclassifications of positions. The restructuring costs
provided 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 were affected by this
action.
In May 1998, an additional restructuring charge of $4.5 million was
recorded and subsequently reduced by $0.5 million in May 1999. This
restructuring charge related to the closing of the Company's Aberdeen, South
Dakota assembly facility and reducing its Northfield production workforce. The
restructuring costs provided for approximately $1.4 million for severance costs,
approximately $0.4 million for medical, dental and other benefits being provided
to the affected individuals and approximately $2.2 million for equipment
disposal, losses related to the closure of the Aberdeen facility, outplacement
and other costs. Approximately 196 jobs were affected by this action.
Both fiscal 1998 restructuring charges were related to the Company's
efforts to decrease cost and increase throughput. As of August 27, 1999,
approximately $3.5 million had been charged to the Company's restructuring
reserves related to severance and early retirement salary costs, approximately
$0.8 million related to medical, dental and other benefits and approximately
$1.2 million for equipment disposal and other costs and by November 1, 1999, 269
employees have terminated employment with the Company related to the fiscal 1998
restructuring actions.
The Company periodically evaluates whether events and circumstances have
occurred which may affect the estimated useful life or the recoverability of the
remaining balance of its long-lived assets. If such events or circumstances were
to indicate that the carrying amount of these assets would not be recoverable,
the Company would estimate the future cash flows expected to result from the use
of the assets and their eventual disposition. If the sum of the expected future
cash flows (undiscounted and without interest charges) were less than the
carrying amount of the long-lived assets, the Company would recognize an
impairment charge. During 1999 and 1998, the Company recorded non-cash
impairment charges of $7.6 million and $3.3 million, respectively, related to
equipment located principally at its Longmont, Colorado facility and certain
computer software and equipment, which, based upon analysis by management and
anticipated production processes, these items are not expected to contribute to
the Company's future cash flows.
F-10
<PAGE> 38
(5) Financing
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 28,
1999 1998
---------- ----------
<S> <C> <C>
Revolving facility.......................................... $11,737 $ 6,062
Term facility, net.......................................... 14,119 15,623
Note payable to insurance company, secured by real estate
mortgage. Varying interest rates and principal payments
through September 1, 2002................................. 3,787 5,195
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.................. 1,190 1,534
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............... 444 572
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.............................................. 1,699 2,099
Note payable to Economic Development Agency, interest at
3.0% with monthly interest only payments of $1 until
October 2001 due August 2009.............................. 450 533
Other....................................................... -- 507
------- -------
33,426 32,125
Less-current maturities..................................... (4,142) (4,296)
------- -------
$29,284 $27,829
======= =======
</TABLE>
The Company's credit agreement provides three separate facilities: a
revolver facility of up to $25 million based on the Company's adjusted 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 prime rate, which was 8.25% as of August 27,
1999 and 8.5% as of August 28, 1998. As of August 27, 1999, the amount available
to borrow on the revolver was approximately $6.6 million. 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 including
restricting the payments of cash dividends, capital expenditures and the
redemption of preferred stock, and requires the Company to maintain certain
levels of net worth, net income and to maintain certain levels of cash flows
from operations. All borrowings under the agreement are secured by the Company's
tangible and intangible assets. The term facility requires monthly repayments of
$205,000, which started in January 1999. The revolving credit facility is due on
May 31, 2001. As of August 27, 1999, the Company was out of compliance with its
minimum level of net worth, minimum level of net (loss)/income, level of cash
flow available for debt service and debt service coverage covenants under this
agreement. In conjunction with obtaining waivers for these fiscal 1999 events of
non-compliance, the lenders reduced the Company's borrowing base by $2.5 million
and increased the interest rate to 10.25% (see Note 2).
Future maturities of debt as of August 27, 1999 are as follows (in
thousands):
<TABLE>
<S> <C>
Fiscal 2000................................................. 4,142
Fiscal 2001................................................. 25,164
Fiscal 2002................................................. 1,810
Fiscal 2003................................................. 1,943
Fiscal 2004................................................. 62
Thereafter.................................................. 305
-------
$33,426
=======
</TABLE>
F-11
<PAGE> 39
In November 1999, the Company refinanced its outstanding secured real
estate loan with an insurance company. The new $4.3 million, ten-year secured
real estate mortgage carries an interest rate of 8.53% and requires the Company
to meet certain performance and reporting covenants, including maintaining a
certain debt service coverage ratio. Annual principal payments and interest
under the new secured loan will be approximately $417,000 versus approximately
$1.3 million on the existing loan. Concurrent with the closing of this
refinancing, the Company fully satisfied the $3.6 million secured real estate
loan plus accrued and unpaid interest that was outstanding to the insurance
company. The net effect of this refinancing enhanced short-term liquidity by
$0.9 million and reducing fiscal 2000 debt payments by approximately $0.4
million and interest payments by approximately $0.5 million.
(6) Preferred Stock
In February and March of 1999, the Company issued 8,560 shares of Series E
Convertible Preferred Stock with a total stated value of $8,560,000. This Series
E preferred stock earns a 5% dividend rate, payable annually, and is convertible
to nearly 1.4 million shares at a fixed rate of $6.25 per share. The purchases
of the Series E preferred stock were also issued 8,560 warrants to purchase the
Company's common stock at a price of $7.8125 per share. These warrants expire in
February 2004. Net proceeds from the Series E preferred stock were approximately
$8,460,000. As of August 27, 1999, 8,060 shares of Series E convertible
preferred stock were outstanding. Dividends of $212,000 were declared and
$10,000 were paid during fiscal 1999. Accrued dividends of $202,000 are included
in accounts payable in the accompanying 1999 consolidated balance sheet.
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, payable annually, 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 in
July 2001. Net proceeds from the Series D preferred stock were $32,409,000. As
of August 27, 1999, 32,417 shares of Series D Convertible Stock were
outstanding. Dividends of $1,641,000 were declared and $1,643,000 were paid
during fiscal 1999. Accrued dividends of $135,000 are included in accounts
payable in the accompanying 1999 consolidated balance sheet.
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 in August 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. During fiscal
1999, the Company received conversion notices for $6,860,000 in stated value of
Series B preferred stock. In accordance with the agreement, the Company issued
1,461,262 shares of common stock (including accrued dividends) at a conversion
price ranging from $4.91 to $5.30 per share of common stock. Additionally, in
October 1998, the Company redeemed 623 shares of Series B Preferred for cash
payments totaling $837,000. As of August 27, 1999, 167 shares of the Series B
convertible preferred stock were outstanding. Dividends of $227,000 were
declared and $596,000 were paid in cash during fiscal 1999. Accrued dividends of
$8,000 are included in accounts payable in the accompanying 1999 consolidated
balance sheet.
(7) 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
F-12
<PAGE> 40
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 27, 1999, the Plans authorize the future granting of
options to purchase up to 220,000 shares of common stock.
Stock option transactions during 1997, 1998, and 1999 are summarized as
follows:
<TABLE>
<CAPTION>
SHARES PRICE PER SHARE
--------- ------------------
<S> <C> <C>
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
Granted................................................. 207,215 $ 5.125 to $7.4375
Lapsed.................................................. (126,062) $ 11.50 to $22.125
---------
Outstanding at August 27, 1999............................ 1,553,966 $ 5.00 to $22.125
=========
</TABLE>
Options exercisable were 1,054,653 as of August 27, 1999, 946,710 as of
August 28, 1998, and 669,562 as of August 29, 1997.
The options outstanding as of August 27, 1999, expire five or ten years
after the grant date as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
FISCAL YEARS THAT EXPIRE
------------ -----------------
<S> <C>
2000................................................ 94,646
2001................................................ 48,718
2002................................................ 100,000
2003................................................ 81,702
2004................................................ 98,998
2005................................................ 40,489
2006................................................ 252,500
2007................................................ 305,700
2008................................................ 321,781
2009................................................ 209,432
</TABLE>
As provided for in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", the Company continues to measure
compensation cost for its plans using the method of accounting prescribed by
Accounting Principles Board Opinion No. 25. Entities electing to remain with the
accounting in APB 25 must make pro forma disclosures of net income (loss) and,
if presented, earnings per share, as if the fair value based method of
accounting defined in SFAS No. 123 had been followed.
The following weighted average assumptions were utilized by the Company:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
-------------------------------------------------
AUGUST 27, AUGUST 28, AUGUST 29,
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Risk-free interest rate.................... 4.84 - 6.11% 5.07 - 6.18% 6.21 - 6.63%
Expected lives............................. 7 years 7 years 7 years
Expected volatility........................ 49.13 - 55.16% 49.17 - 70.46% 48.75 - 65.44%
</TABLE>
Using the Black-Scholes option pricing model, the total value of stock
options granted during 1999, 1998, and 1997 was $777,000, $2,645,000, and
$4,958,000, respectively, which would be amortized on a pro forma
F-13
<PAGE> 41
basis over the vesting period of the options (typically ranging from six months
to three years). The weighted average fair value of options granted during 1999,
1998, and 1997 was $3.71 per share, $6.86 per share, and $11.96 per share,
respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net loss per share (basic and
diluted) would have been as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
--------------------------------------------------------------------------------
AUGUST 27, AUGUST 28, AUGUST 29,
1999 1998 1997
------------------------ ------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss).... $(23,568) $(27,630) $(37,186) $(41,134) $(7,969) $(9,887)
Loss per share....... $ (2.15) $ (2.51) $ (3.97) $ (4.39) $ (0.89) $ (1.10)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards prior to
September 1, 1995, and additional awards are anticipated to be granted in future
years.
(8) Commitments and Contingencies
Lease Commitments --
The Company has non-cancelable operating lease commitments for certain
manufacturing equipment, which expire at various dates through fiscal 2004.
Minimum commitments as of August 27, 1999 under operating leases are $2,003,000
in 2000, $1,181,000 in 2001, $631,000 in 2002, $609,000 in 2003, and $102,000 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 $2,489,000 in 1999, $2,816,000 in 1998, and
$2,721,000 in 1997.
The Company has entered into various capital lease arrangements for the
purchase of certain communication and computer equipment and related software
totaling approximately $2.7 million. Amortization expense relating to these
capital leases was $448,000 in fiscal 1999 and $140,000 in 1998. The following
is a schedule of future gross minimum capital lease payments (in thousands):
<TABLE>
<S> <C>
Fiscal 2000................................................. $ 653
Fiscal 2001................................................. 653
Fiscal 2002................................................. 597
Fiscal 2003................................................. 24
------
$1,927
Less amount representing interest........................... (253)
------
Present value of net minimum capital lease payments......... $1,674
======
</TABLE>
Employment Agreements --
The Company has employment agreements with various officers which are
renewable in successive one-year terms after August 21, 1999. If a change in
control which was not approved by the Board of Directors had occurred at the end
of fiscal year 1999, the Company would have paid an aggregate of $2.5 million in
severance benefits 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.
F-14
<PAGE> 42
(9) Income Taxes
The provision (benefit) for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 28, AUGUST 29,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Currently payable..................... $ -- $ -- $ 96
Deferred.............................. -- 2,952 (4,196)
------ ------ -------
Provision (benefit) for income
taxes............................... $ -- $2,952 $(4,100)
====== ====== =======
</TABLE>
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:
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 28, AUGUST 29,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Federal statutory rates............... $(7,306) $(11,404) $(4,100)
Research and experimentation tax
credits............................. -- (356) --
State income taxes, net of federal
benefit............................. (582) (908) 96
Change in valuation allowance......... 7,433 15,389 --
Other................................. (455) 231 (96)
------- -------- -------
$ -- $ 2,952 $(4,100)
======= ======== =======
</TABLE>
As of August 27, 1999, the Company had federal net operating loss
carryforwards of approximately $50.1 million and federal income tax credit carry
forwards of approximately $976,000 that expire through 2019. Future uses 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.
Temporary differences and carryforwards which result in net deferred income
tax assets as of August 27, 1999 and August 28, 1998 were as follows:
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 28,
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $18,397 $14,045
Restructuring reserves.................................... 2,066 2,942
Income tax credit carryforwards........................... 976 1,333
Postretirement benefits................................... 825 752
Deferred compensation..................................... 727 580
Inventories............................................... 713 508
Medical reserves.......................................... 250 239
Vacation reserve.......................................... 144 186
Bad debt reserve.......................................... 124 83
Other..................................................... 193 117
------- -------
Deferred tax assets....................................... 24,415 20,785
Deferred tax liabilities:
Depreciation.............................................. (1,388) (5,191)
Valuation allowance......................................... (23,027) (15,594)
------- -------
Net deferred taxes.......................................... $ -- $ --
======= =======
</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.
F-15
<PAGE> 43
(10) 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.
The change in benefit obligation and plan assets consisted of the
following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------
AUGUST 27, AUGUST 28,
1999 1998
---------- ----------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year................... $6,491,198 $4,846,596
Service cost.............................................. 258,687 200,234
Interest cost............................................. 449,119 382,495
Plan amendments........................................... -- 244,647
Benefits paid............................................. (188,275) (153,114)
Actuarial (gain) loss..................................... (701,593) 970,340
---------- ----------
Benefit obligation at end of year......................... $6,309,136 $6,491,198
========== ==========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year............ $6,233,723 $5,317,234
Actual return on plan assets.............................. 1,132,652 1,069,603
Employer contributions.................................... 221,000 --
Benefits paid............................................. (188,275) (153,114)
---------- ----------
Fair value of plan assets at end of year.................. $7,399,100 $6,233,723
========== ==========
</TABLE>
The funded status of the Company's plan is as follows:
<TABLE>
FISCAL YEAR ENDED
------------------------
AUGUST 27, AUGUST 28,
1999 1998
---------- ----------
<S> <C> <C>
RECONCILIATION OF FUNDED STATUS
Funded status............................................. $1,089,964 $ (257,475)
Employer contribution after measurement date.............. -- 221,000
Unrecognized actuarial gain............................... (2,180,913) (1,032,143)
Unrecognized transition obligation........................ 30,083 40,112
Unrecognized prior service cost........................... 666,592 853,189
Additional minimum liability.............................. -- (82,158)
---------- ----------
Accrued benefit cost................................... $ (394,274) $ (257,475)
========== ==========
</TABLE>
The following weighted average assumptions were used to account for the
plan:
<TABLE>
FISCAL YEAR ENDED
------------------------
AUGUST 27, AUGUST 28,
1999 1998
---------- ----------
<S> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate............................................. 7.50% 7.00%
Expected long-term rate of return on plan assets.......... 8.00% 8.50%
</TABLE>
F-16
<PAGE> 44
The components of net periodic benefit costs are as follows:
<TABLE>
<S> <C> <C> <C>
FISCAL YEAR ENDED
--------------------------------------
AUGUST 27, AUGUST 28, AUGUST 29,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost........................................ $ 258,687 $ 200,234 $ 177,223
Interest cost....................................... 449,119 382,495 350,735
Expected return on plan assets...................... (541,476) (422,346) (341,163)
Amortization of prior service cost.................. 64,274 50,429 50,429
Amortization of transitional obligation............. 10,029 10,029 10,029
Recognized actuarial gain........................... (21,676) (48,356) (26,083)
--------- --------- ---------
Net periodic benefit cost........................... $ 218,957 $ 172,485 $ 221,170
========= ========= =========
</TABLE>
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 $389,000 in 1999,
$448,000 in 1998, and $475,000 in 1997.
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 render 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.
F-17
<PAGE> 45
The change in benefit obligation and plan assets consisted of the
following:
<TABLE>
FISCAL YEAR ENDED
------------------------
AUGUST 27, AUGUST 28,
1999 1998
---------- ----------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ 986,906 $ 909,175
Service cost................................................ 46,058 35,311
Interest cost............................................... 68,162 64,387
Actuarial loss (gain)....................................... (282,494) 12,065
Benefits paid............................................... (43,370) (34,032)
--------- ---------
Benefits obligation at end of year.......................... $ 775,262 $ 986,906
========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. $ -- $ --
Employer contributions...................................... 43,370 34,032
Participant contributions................................... 35,214 28,795
Benefits paid............................................... (78,584) $ (62,827)
Fair value of plan assets at end of year.................... $ -- $ --
========= =========
RECONCILIATION OF FUNDED STATUS
Funded status............................................... $(775,262) $(986,906)
Unrecognized actuarial loss (gain).......................... (186,846) 102,506
Accrued benefit cost........................................ (962,108) (884,400)
Employer contribution after measurement date................ 6,992 2,445
--------- ---------
Accrued benefit cost........................................ $(955,116) $(881,955)
========= =========
WEIGHTED AVERAGE ASSUMPTION:
Discount rate............................................... 7.50% 7.00%
Expected return on plan assets.............................. 9.50% 10.00%
</TABLE>
For measurement purposes, a 9.5 percent annual rate of increase in the per
capita cost of covered health care benefits was assumed for the fiscal year
ended August 27, 1999. The rate was assumed to decrease gradually to 5.5 percent
for fiscal 2007 and remain at that level thereafter.
The components of net periodic benefit costs are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------
AUGUST 27, AUGUST 28, AUGUST 29,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Service cost..................................... $ 46,058 $ 35,311 $ 34,369
Interest cost.................................... 68,162 64,387 66,044
Recognized actuarial loss........................ 6,858 673 5,376
-------- -------- --------
Net periodic benefit cost........................ $121,078 $100,371 $105,789
======== ======== ========
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for post retirement medical benefit plans. A one percentage
point change in assumed health care cost trend rates would not have a material
impact or total service and interest cost components or on the post retirement
benefit obligations.
(11) 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
F-18
<PAGE> 46
$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.
(12) 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. Development costs of $400,000 for such components being designed and
developed by the Company for the new systems were reimbursed by Molex in fiscal
1999 and other future development costs may be funded by loans or direct
reimbursement 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 27, 1999, 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 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.
(13) Segment Information
The Company's revenue producing businesses are identified as the Core
Business and Micro Products. The Management Team, a group of operating
executives, is responsible for defining the strategies and directions for the
businesses. The Core Business segment consists of flexible laminates and
derivative products, principally flexible interconnect circuits and assemblies.
These products are targeted across all markets served by the Company with the
automotive market generating 68% of fiscal 1999 sales for this segment. The
Company's Novaclad, Novaflex HD and VHD products are marketed and sold by this
business. The Micro Products business segment is a developing business that
targets the integrated circuit (IC) industry of the electronics market. The
Company's ViaArray and ViaThin products are marketed and sold through this
segment and are exclusively reflected in the Company's datacom market sales.
The Company markets and sells its products to major North American and
European automotive original equipment manufacturers (OEM's) and first and
second tier suppliers to the automotive industry. The Company also markets and
sells its products to the datacom (electronics) market in areas that require
dense electronic packaging such as integrated circuit packages, laptop
computers, high-end disc drives and portable communication devices.
The Company's manufacturing and assembly sites with their related assets
are used to manufacture specific product offering of the Company regardless of
business segment. For instance, the Longmont facility today contributes to the
manufacture of all Novaclad-based products. The Company allocates its shared
production assets based on approximate percentage of asset utilization with
unused capacity being assigned to the segment originating the investment. All of
the Company's long-term assets are located in and all of the Company's sales
revenue is generated from North America.
F-19
<PAGE> 47
The following is a summary of certain financial information relating to the
two segments for fiscal years ended:
<TABLE>
<CAPTION>
AUGUST 27, AUGUST 28, AUGUST 29,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Total sales by segment
Core Business............................................. $120,556 $116,002 $104,908
Micro Products............................................ 1,530 1,043 358
-------- -------- --------
Total sales............................................... 122,086 117,045 105,266
-------- -------- --------
Operating Profit (loss) by segment
CORE BUSINESS:
Before corporate allocation............................... 16,421 9,293 9,609
Corporate allocation...................................... 6,580 4,858 4,895
Interest.................................................. 2,001 1,597 1,314
-------- -------- --------
Total..................................................... 7,840 2,838 3,400
-------- -------- --------
MICRO PRODUCTS:
Before corporate allocation............................... (16,603) (16,427) (13,579)
Corporate allocation...................................... 1,541 2,002 1,613
Interest.................................................. 499 948 277
-------- -------- --------
Total..................................................... (18,643) (19,377) (15,469)
-------- -------- --------
Total segments operating losses............................. (10,803) (16,539) (12,069)
Restructuring costs......................................... 3,050 8,500 --
Impairment charges.......................................... 7,635 3,300 --
-------- -------- --------
Loss before income taxes and cumulative effect of change in
method accounting......................................... $(21,488) $(28,339) $(12,069)
======== ======== ========
Long-term assets by segment
Core Business............................................. $ 40,247 $ 48,082 $ 51,839
Micro Products............................................ 27,568 36,790 39,855
-------- -------- --------
Total identifiable assets................................. 67,815 84,872 91,694
Corporate and other assets................................ 15,030 17,385 9,111
-------- -------- --------
Total assets.............................................. $ 82,845 $102,257 $100,805
======== ======== ========
Depreciation and amortization by segment
Core Business............................................. $ 8,662 $ 8,236 $ 6,033
Micro Products............................................ 6,035 5,001 4,316
Corporate and other....................................... 2,372 1,145 301
-------- -------- --------
Total depreciation and amortization....................... $ 17,069 $ 14,382 $ 10,650
======== ======== ========
Capital expenditures by segment
Core Business............................................. $ 1,511 $ 11,914 $ 16,198
Micro Products............................................ 2,812 1,935 6,757
Corporate and other....................................... 1,218 9,419 7,774
-------- -------- --------
Total capital expenditures................................ $ 5,541 $ 23,268 $ 30,729
======== ======== ========
Sales by product line
Laminate material......................................... $ 29,523 $ 28,595 $ 27,905
ViaThin................................................... 1,530 1,043 358
Novaflex HD............................................... 33,700 23,500 13,000
Novaflex VHD.............................................. 5,556 -- --
Flexbase interconnects.................................... 51,777 63,907 64,003
-------- -------- --------
$122,086 $117,045 $105,266
======== ======== ========
</TABLE>
F-20
<PAGE> 48
(14) Events Subsequent to the Date of Report of Independent Public Accountants
(Unaudited)
(15) Quarterly Results of Operations (Unaudited)
The consolidated results of operations for the four quarters of 1999 and
1998 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
FISCAL 1999
-----------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net sales........................................ $28,474 $28,042 $32,575 $ 32,995
Cost of sales and other expenses................. 30,811 30,635 34,510 36,933
Restructuring costs.............................. -- 3,100 (500) 450
Impairment charges............................... -- -- -- 7,635
------- ------- ------- --------
Pretax operating loss............................ (2,337) (5,693) (1,435) (12,023)
Preferred dividends.............................. (654) (418) (521) (487)
------- ------- ------- --------
Net loss to common shareholders.................. $(2,991) $(6,111) $(1,956) $(12,510)
======= ======= ======= ========
Net loss per common share -- basic and diluted... $ (0.29) $ (0.55) $ (0.18) $ (1.10)
======= ======= ======= ========
Weighted average common shares
Outstanding -- basic and diluted............... 10,402 11,037 11,153 11,352
======= ======= ======= ========
</TABLE>
<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.
F-21
<PAGE> 49
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 27, 1999, August 28, 1998, and August 29, 1997, were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year............................... $225,000 $224,704 $243,472
Recoveries (accounts charged off), net................... 11,984 296 (18,768)
Additional allowance provided............................ 102,000 -- --
-------- -------- --------
Balance, end of year..................................... $338,984 $225,000 $224,704
======== ======== ========
</TABLE>
RESTRUCTURING RESERVES:
The transactions in the restructuring reserves accounts for the fiscal
years ending August 27, 1999, August 28, 1998, and August 29, 1997 were as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year............................... $ 7,625 $ -- $ --
Amounts charged to operations, net....................... 3,050 8,500 --
Cash payments made....................................... (4,985) (875) --
Other.................................................... (493) -- --
-------- -------- --------
Balance, end of year..................................... $ 5,197 $ 7,625 $ --
======== ======== ========
</TABLE>
S-1
<PAGE> 1
EXHIBIT 10.4
================================================================================
Loan No. V_06437
SHELDAHL COLORADO, LLC, a Minnesota limited liability company, as grantor
(Borrower)
SHELDAHL, INC., a Minnesota corporation
(Fee Owner)
to
THE PUBLIC TRUSTEE OF BOULDER COUNTY, COLORADO, as trustee
(Trustee)
for the benefit of
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as beneficiary
(Lender)
-----------------------------------
DEED OF TRUST AND
SECURITY AGREEMENT
-----------------------------------
Dated: November 16, 1999
PREPARED BY AND UPON
RECORDATION RETURN TO:
WOMBLE CARLYLE SANDRIDGE & RICE, PLLC
3500 One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
Attention: Robert F. Cook, Esq.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C> <C>
ARTICLE 1 - GRANTS OF SECURITY....................................................................................1
Section 1.1 PROPERTY CONVEYED.............................................................1
Section 1.2 ASSIGNMENT OF RENTS...........................................................5
Section 1.3 DEFINITION OF PERSONAL PROPERTY...............................................5
Section 1.4 PLEDGE OF MONIES HELD.........................................................5
ARTICLE 2 - DEBT AND OBLIGATIONS SECURED..........................................................................6
Section 2.1 DEBT..........................................................................6
Section 2.2 OTHER OBLIGATIONS.............................................................6
Section 2.3 DEBT AND OTHER OBLIGATIONS....................................................7
Section 2.4 PAYMENTS......................................................................7
ARTICLE 3 - BORROWER COVENANTS....................................................................................7
Section 3.1 INCORPORATION BY REFERENCE....................................................7
Section 3.2 INSURANCE.....................................................................8
Section 3.3 PAYMENT OF TAXES, ETC........................................................14
Section 3.4 CONDEMNATION.................................................................15
Section 3.5 USE AND MAINTENANCE OF PROPERTY..............................................15
Section 3.6 WASTE........................................................................16
Section 3.7 COMPLIANCE WITH LAWS; ALTERATIONS............................................16
Section 3.8 BOOKS AND RECORDS............................................................16
Section 3.9 PAYMENT FOR LABOR AND MATERIALS..............................................18
Section 3.10 PERFORMANCE OF OTHER AGREEMENTS..............................................18
Section 3.11 FORMATION OF MUNICPIAL DISTRICT..............................................18
Section 3.12 WITHHOLDING AND SALES TAXES..................................................18
ARTICLE 4 - SPECIAL COVENANTS....................................................................................19
Section 4.1 PROPERTY USE.................................................................19
Section 4.2 ERISA........................................................................19
Section 4.3 SINGLE PURPOSE ENTITY........................................................20
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES.......................................................................22
Section 5.1 BORROWER'S REPRESENTATIONS...................................................22
Section 5.2 WARRANTY OF TITLE............................................................22
Section 5.3 STATUS OF PROPERTY...........................................................23
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
Section 5.4 NO FOREIGN PERSON............................................................24
Section 5.5 SEPARATE TAX LOT.............................................................24
ARTICLE 6 - OBLIGATIONS AND RELIANCES............................................................................24
Section 6.1 RELATIONSHIP OF BORROWER AND LENDER..........................................24
Section 6.2 NO RELIANCE ON LENDER........................................................24
Section 6.3 NO LENDER OBLIGATIONS........................................................24
Section 6.4 RELIANCE.....................................................................25
ARTICLE 7 - FURTHER ASSURANCES...................................................................................25
Section 7.1 RECORDING FEES...............................................................25
Section 7.2 FURTHER ACTS.................................................................25
Section 7.3 CHANGES IN TAX, DEBT CREDIT AND DOCUMENTARY STAMP LAWS.......................26
Section 7.4 CONFIRMATION STATEMENT.......................................................26
Section 7.5 SPLITTING OF SECURITY INSTRUMENT.............................................27
Section 7.6 REPLACEMENT DOCUMENTS........................................................27
ARTICLE 8 - DUE ON SALE/ENCUMBRANCE..............................................................................27
Section 8.1 LENDER RELIANCE..............................................................27
Section 8.2 NO SALE/ENCUMBRANCE..........................................................28
Section 8.3 EXCLUDED AND PERMITTED TRANSFERS.............................................28
Section 8.4 NO IMPLIED FUTURE CONSENT....................................................30
Section 8.5 COSTS OF CONSENT.............................................................30
Section 8.6 CONTINUING SEPARATENESS REQUIREMENTS.........................................30
ARTICLE 9 - DEFAULT..............................................................................................31
Section 9.1 EVENTS OF DEFAULT...........................................................31
Section 9.2 DEFAULT INTEREST.............................................................33
ARTICLE 10 - RIGHTS AND REMEDIES.................................................................................33
Section 10.1 REMEDIES.....................................................................33
Section 10.2 RIGHT OF ENTRY...............................................................41
ARTICLE 11 - INDEMNIFICATION; SUBROGATION........................................................................41
Section 11.1 GENERAL INDEMNIFICATION......................................................41
Section 11.2 ENVIRONMENTAL INDEMNIFICATION................................................42
Section 11.3 EXCLUDED OCCURRENCES.........................................................45
Section 11.4 DUTY TO DEFEND AND ATTORNEYS AND OTHER FEES AND EXPENSES.....................45
Section 11.5 SURVIVAL OF INDEMNITIES......................................................45
ARTICLE 12 - SECURITY AGREEMENT..................................................................................45
Section 12.1 SECURITY AGREEMENT...........................................................45
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
ARTICLE 13 - WAIVERS.............................................................................................46
Section 13.1 MARSHALLING AND OTHER MATTERS................................................47
Section 13.2 WAIVER OF NOTICE.............................................................47
Section 13.3 SOLE DISCRETION OF LENDER....................................................47
Section 13.4 SURVIVAL.....................................................................47
SECTION 13.5 WAIVER OF TRIAL BY JURY......................................................47
Section 13.6 WAIVER OF AUTOMATIC OR SUPPLEMENTAL STAY.....................................48
ARTICLE 14 - NOTICES.............................................................................................48
Section 14.1 NOTICES......................................................................48
ARTICLE 15 - APPLICABLE LAW......................................................................................50
Section 15.1 GOVERNING LAW; JURISDICTION..................................................50
Section 15.2 USURY LAWS...................................................................50
Section 15.3 PROVISIONS SUBJECT TO APPLICABLE LAW.........................................50
ARTICLE 16 - SECONDARY MARKET....................................................................................51
Section 16.1 TRANSFER OF LOAN.............................................................51
ARTICLE 17 - COSTS...............................................................................................51
Section 17.1 PERFORMANCE AT BORROWER'S EXPENSE............................................51
Section 17.2 ATTORNEY'S FEES FOR ENFORCEMENT..............................................51
ARTICLE 18 - DEFINITIONS.........................................................................................51
Section 18.1 GENERAL DEFINITIONS..........................................................51
ARTICLE 19 - MISCELLANEOUS PROVISIONS............................................................................52
Section 19.1 NO ORAL CHANGE...............................................................52
Section 19.2 LIABILITY....................................................................52
Section 19.3 INAPPLICABLE PROVISIONS......................................................52
Section 19.4 HEADINGS, ETC................................................................52
Section 19.5 DUPLICATE ORIGINALS; COUNTERPARTS............................................52
Section 19.6 NUMBER AND GENDER............................................................52
Section 19.7 SUBROGATION..................................................................53
Section 19.8 ENTIRE AGREEMENT.............................................................53
</TABLE>
-iii-
<PAGE> 5
Index of Defined Terms
<TABLE>
<S> <C>
"ADA" ............................................................................................................15
"APPLICABLE LAWS" ................................................................................................15
"ATTORNEYS' FEES".................................................................................................52
"ATTORNEYS" ......................................................................................................42
"BANKRUPTCY CODE" .................................................................................................2
"BORROWER".....................................................................................................1, 52
"BUSINESS DAY" ...................................................................................................50
"COLLATERAL" .....................................................................................................46
"COUNSEL FEES" ...................................................................................................52
"DEBT" ............................................................................................................5
"DEFAULT RATE" ...................................................................................................34
"ENVIRONMENTAL INDEMNITY" .........................................................................................7
"ENVIRONMENTAL LAW" ..............................................................................................43
"ENVIRONMENTAL LIEN" .............................................................................................44
"ERISA" ..........................................................................................................19
"ESCROW AGREEMENT" ................................................................................................4
"EVENT OF DEFAULT" ...............................................................................................31
"EVENT" ..........................................................................................................51
"EXCULPATED PORTION" .............................................................................................41
"FEES AND EXPENSES" ..............................................................................................42
"GUARANTOR" ......................................................................................................20
"HAZARDOUS SUBSTANCES" ...........................................................................................44
"IMPROVEMENTS" ....................................................................................................2
"INDEMNIFIED PARTIES" ............................................................................................44
"INDEMNITOR" ......................................................................................................7
"INSURANCE PREMIUMS" .............................................................................................10
"INSURED CASUALTY" ...............................................................................................11
"INTANGIBLES" .....................................................................................................4
"INVESTOR" .......................................................................................................51
"LAND" ............................................................................................................1
"LEASE" ...........................................................................................................2
"LEASES" ..........................................................................................................3
"LEGAL FEES" .....................................................................................................52
"LENDER" ......................................................................................................1, 52
"LOAN DOCUMENTS" ..................................................................................................7
"LOAN" ...........................................................................................................30
"LOSSES" .........................................................................................................44
"NOTE" ........................................................................................................1, 52
"OBLIGATIONS" .....................................................................................................6
"ORIGINAL PRINCIPALS".............................................................................................29
"OTHER CHARGES" ..................................................................................................13
</TABLE>
Index-1
<PAGE> 6
<TABLE>
<S> <C>
"OTHER LOAN DOCUMENTS"............................................................................................7
"OTHER OBLIGATIONS"...............................................................................................6
"PERMITTED EXCEPTIONS"...........................................................................................22
"PERSON" ........................................................................................................52
"PERSONAL PROPERTY"...............................................................................................5
"POLICIES" .......................................................................................................9
"POLICY" .........................................................................................................9
"PRINCIPAL" .....................................................................................................20
"PROPERTY" ...................................................................................................1, 52
"QUALIFIED INSURER"...............................................................................................9
"RATING AGENCY" .................................................................................................51
"RELEASE" .......................................................................................................45
"REMEDIATION" ...................................................................................................45
"RENTS" ..........................................................................................................3
"SECURITIES" ....................................................................................................51
"SECURITY INSTRUMENT".............................................................................................1
"TAXES" .........................................................................................................13
"TRUSTEE" ........................................................................................................1
"UNIFORM COMMERCIAL CODE".........................................................................................2
</TABLE>
Index-2
<PAGE> 7
THIS DEED OF TRUST AND SECURITY AGREEMENT (this "SECURITY INSTRUMENT") is made
as of the ____ day of November, 1999, by SHELDAHL COLORADO, LLC, a Minnesota
limited liability company, having its principal place of business at 1150
Sheldahl Road, P.O. Box 170, Northfield, Minnesota 55057 ("BORROWER"), SHELDAHL,
INC., a Minnesota corporation, having its principal place of business at 1150
Sheldahl Road, P.O. Box 170, Northfield, Minnesota 55057 ("FEE OWNER", with
Borrower and Fee Owner being collectively referred to herein as "GRANTOR") to
THE PUBLIC TRUSTEE OF BOULDER COUNTY, COLORADO ("TRUSTEE"), for the benefit of
MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a New York banking corporation,
having its principal place of business at 60 Wall Street, New York, New York
10260-0060, as beneficiary ("LENDER").
RECITALS:
Borrower by its Fixed Rate Note of even date herewith given to Lender
is indebted to Lender in the principal sum of $4,300,000.00 in lawful money of
the United States of America (such Fixed Rate Note, together with all
extensions, renewals, modifications, substitutions and amendments thereof, shall
collectively be referred to as the "NOTE"), with interest from the date thereof
at the rates set forth in the Note, principal and interest to be payable in
accordance with the terms and conditions provided in the Note, and with a
maturity date of December 1, 2009.
Borrower desires to secure the payment of the Debt (as defined in
Article 2) and the performance of all of its obligations under the Note and the
Other Obligations (as defined in Article 2).
Fee Owner is an affiliate of Borrower and will enjoy substantial
benefit from the Loan.
ARTICLE 1 - GRANTS OF SECURITY
Section 1.1 PROPERTY CONVEYED. Grantor does hereby irrevocably,
unconditionally and absolutely, grant, bargain, sell, pledge, enfeoff, assign,
warrant, transfer and convey to Trustee (with power of sale) in trust for the
purposes herein set forth, all right, title and interest in and to the following
property, rights, interests and estates now owned, or hereafter acquired, by
Grantor (collectively, the "PROPERTY"):
(a) Land and Leaseholds. (i) The real property described in
Exhibit A attached hereto and made a part hereof (collectively, the
"LAND"), together with all additional lands and estates therein which
may, from time to time, by supplemental mortgage or otherwise be
expressly made subject to the lien of this Security Instrument; and
(ii) Borrower's leasehold estate in and to the Land and any
after-acquired title of Borrower in the Land including all rights,
options and privileges of Borrower as ground lessee under that certain
Net Lease Agreement dated November ___, 1999, between Fee Owner and
Borrower, a memorandum of which is recorded in the real property
records of Boulder County on Film No. ______ at Reception No.
__________ (the "GROUND LEASE") and any and all security deposits or
other property of Borrower held by Fee Owner pursuant to the terms of
or in connection with the Ground Lease, together with all additional
lands and estates therein
-1-
<PAGE> 8
which may from time to time, by supplemental deed of trust or otherwise
be expressly made subject to the lien of this Security Instrument;
(b) Improvements. All the buildings, structures, fixtures,
additions, accessions, enlargements, extensions, modifications,
repairs, replacements and improvements now or hereafter erected or
located on the Land (the "IMPROVEMENTS");
(c) Easements. All easements, rights-of-way or use, rights,
strips and gores of land, streets, ways, alleys, passages, sewer
rights, water, water courses, water rights and powers, air rights and
development rights, and all estates, rights, titles, interests,
privileges, liberties, servitudes, tenements, hereditaments and
appurtenances of any nature whatsoever, in any way now or hereafter
belonging, relating or pertaining to the Land and the Improvements and
the reversion and reversions, remainder and remainders, and all land
lying in the bed of any street, road or avenue, opened or proposed, in
front of or adjoining the Land, to the center line thereof and all the
estates, rights, titles, interests, dower and rights of dower, curtesy
and rights of curtesy, property, possession, claim and demand
whatsoever, both at law and in equity, of Grantor of, in and to the
Land and the Improvements and every part and parcel thereof, with the
appurtenances thereto;
(d) Fixtures and Personal Property. All machinery, equipment,
goods, inventory, consumer goods, fixtures (including, but not limited
to, all heating, air conditioning, plumbing, lighting, communications
and elevator fixtures) and other property of every kind and nature
whatsoever owned by Grantor, or in which Grantor has or shall have an
interest, now or hereafter permanently located upon the Land and the
Improvements, or appurtenant thereto, and solely used in connection
with the present or future use, maintenance, enjoyment, operation and
occupancy of the Land and the Improvements and all building equipment,
materials and supplies of any nature whatsoever owned by Grantor, or in
which Grantor has or shall have an interest, now or hereafter
permanently located upon the Land and the Improvements, or appurtenant
thereto, or solely used in connection with the present or future
operation and occupancy of the Land and the Improvements, and the
right, title and interest of Grantor in and to any of the Personal
Property (as hereinafter defined) which may be subject to any security
interests, as defined in the Uniform Commercial Code, as adopted and
enacted by the state or states where any of the Property is located
(the "UNIFORM COMMERCIAL CODE"), superior in lien to the lien of this
Security Instrument and all proceeds and products of the above;
(e) Leases and Rents. All leases and other agreements
affecting the use, enjoyment or occupancy of the Land and the
Improvements heretofore or hereafter entered into, whether before or
after the filing by or against Grantor of any petition for relief under
11 U.S.C. ss. 101 et seq., as the same may be amended from time to time
(the "BANKRUPTCY COde") (individually, a "LEASE"; collectively, the
"LEASES") and all right, title and interest of Grantor, its successors
and assigns therein and thereunder, including, without limitation, cash
or securities deposited thereunder to secure the performance by the
lessees of their
-2-
<PAGE> 9
obligations thereunder and all rents (including all tenant security and
other deposits), additional rents, revenues, issues and profits
(including all oil and gas or other mineral royalties and bonuses) from
the Land and the Improvements whether paid or accruing before or after
the filing by or against Grantor of any petition for relief under the
Bankruptcy Code (collectively the "RENTS") and all proceeds from the
sale or other disposition of the Leases and the right to receive and
apply the Rents to the payment of the Debt;
(f) Condemnation Award. All awards or payments, including
interest thereon, which may heretofore and hereafter be made with
respect to the Property, whether from the exercise of the right of
eminent domain (including but not limited to any transfer made in lieu
of or in anticipation of the exercise of the right), or for a change of
grade, or for any other injury to or decrease in the value of the
Property;
(g) Insurance Proceeds. All proceeds of and any unearned
premiums on any insurance policies covering the Property, including,
without limitation, the right to receive and apply the proceeds of any
insurance, judgments, or settlements made in lieu thereof, for damage
to the Property;
(h) Tax Certiorari. All refunds, rebates or credits in
connection with a reduction in real estate taxes and assessments
charged against the Property as a result of tax certiorari or any
applications or proceedings for reduction;
(i) Conversion. All proceeds of the conversion, voluntary or
involuntary, of any of the foregoing including, without limitation,
proceeds of insurance and condemnation awards, into cash or liquidation
claims;
(j) Rights. The right, in the name and on behalf of Grantor, to
appear in and defend any action or proceeding brought with respect to
the Property and to commence any action or proceeding to protect the
interest of Trustee and/or Lender in the Property;
(k) Agreements. All agreements, contracts (including purchase,
sale, option, right of first refusal and other contracts pertaining to
the Property), certificates, instruments, franchises, permits,
licenses, approvals, consents, plans, specifications and other
documents, now or hereafter entered into, and all rights therein and
thereto, respecting or pertaining solely to the use, occupation,
construction, management or operation of the Property (including any
Improvements or respecting any business or activity conducted on the
Land and any part thereof) and all right, title and interest of Grantor
therein and thereunder, including, without limitation, the right, upon
the happening of any default hereunder, to receive and collect any sums
payable to Grantor thereunder;
(l) Trademarks. All trade names,trademarks, service marks,
logos, copyrights, goodwill, books and records and all other general
intangibles relating to or used solely in connection with the operation
of the Property;
-3-
<PAGE> 10
(m) Accounts. All accounts, accounts receivable,escrows
(including, without limitation, all escrows, deposits, reserves and
impounds established pursuant to that certain
-4-
<PAGE> 11
Escrow Agreement for Reserves and Impounds of even date herewith
between Borrower and Lender; hereinafter, the "ESCROW AGREEMENT"),
documents, instruments, chattel paper, claims, reserves (including
deposits) representations, warranties and general intangibles, as one
or more of the foregoing terms may be defined in the Uniform Commercial
Code, and all contract rights, franchises, books, records, plans,
specifications, permits, licenses (to the extent assignable),
approvals, actions, choses, claims, suits, proofs of claim in
bankruptcy and causes of action which now or hereafter relate to, are
solely derived from or are solely used in connection with the Property,
or the use, operation, maintenance, occupancy or enjoyment thereof or
the conduct of any business or activities thereon (hereinafter
collectively called the "INTANGIBLES"); and
(n) Other Rights. Any and all other rights of Grantor in and
to the Property and any accessions, renewals, replacements and
substitutions of all or any portion of the Property and all proceeds
derived from the sale, transfer, assignment or financing of the
Property or any portion thereof.
(o) Water Rights. All water, water rights, wells and well
rights, ditches and ditch rights, reservoirs and reservoir rights,
pumps and pipelines and pump and pipeline rights, and permits,
agreements, leases, and contracts pertaining to or authorizing use of
water, appurtenant to or used in connection with the Land including,
without limitation, shares of stock evidencing any of the same.
(p) Excluded Property. Notwithstanding anything to the
contrary contained herein, the Property shall not include (i) existing
and future manufacturing equipment owned by Fee Owner and specifically
installed to facilitate Fee Owner's manufacturing operations; or (ii)
inventory owned by Fee Owner; or (iii) the agreements, trademarks and
accounts of Fee Owner as described in subparagraphs (k), (l), and (m)
above; provided, however the Property shall include such agreements,
trademarks and accounts of Borrower, except for rights to the name
"Sheldahl."
Section 1.2 ASSIGNMENT OF RENTS. Grantor hereby absolutely and
unconditionally assigns to Lender Grantor's right, title and interest in and to
all current and future Leases and Rents; it being intended by Grantor that this
assignment constitutes a present, absolute and unconditional assignment and not
an assignment for additional security only. Nevertheless, subject to the terms
of this Section 1.2 and the terms and conditions of that certain Assignment of
Rents and Leases, of even date herewith between Grantor and Lender, Lender
grants to Borrower a revocable license to collect and receive the Rents.
Borrower shall hold the Rents, or a portion thereof sufficient to discharge all
current sums due on the Debt, for use in the payment of such sums.
Section 1.3 DEFINITION OF PERSONAL PROPERTY. For purposes of
this Security Instrument, the Property identified in Subsections 1.1(d) through
1.1(n), inclusive, shall be collectively referred to herein as the "PERSONAL
PROPERTY."
Section 1.4 PLEDGE OF MONIES HELD. Borrower hereby pledges to Lender
any and all monies now or hereafter held by Lender, including, without
limitation, any sums deposited in the Funds (as defined in the Escrow
Agreement), all insurance proceeds described in Section 3.2 and
-5-
<PAGE> 12
condemnation awards or payments described in Section 3.4, as additional security
for the Obligations until expended or applied as provided in this Security
Instrument.
CONDITIONS TO GRANT
TO HAVE AND TO HOLD the above granted and described Property unto and
to the use and benefit of Trustee, and the successors and assigns of Trustee,
forever;
PROVIDED, HOWEVER, these presents are upon the express condition that,
if Borrower shall well and truly pay to Lender the Debt at the time and in the
manner provided in the Note and this Security Instrument, shall well and truly
perform the Other Obligations as set forth in this Security Instrument and shall
well and truly abide by and comply with each and every covenant and condition
set forth herein and in the Note, these presents and the estate hereby granted
shall cease, terminate and be void; provided however, that Borrower's obligation
to indemnify and hold harmless Lender pursuant to the provisions hereof with
respect to matters relating to any period of time during which this Security
Instrument was in effect shall survive any such payment or release.
ARTICLE 2 - DEBT AND OBLIGATIONS SECURED
Section 2.1 DEBT. This Security Instrument and the grants, assignments
and transfers made in Article 1 are given for the purpose of securing the
following, in such order of priority as Lender may determine in its sole
discretion (the "DEBT"):
(a) the payment of the indebtedness evidenced by the Note
in lawful money of the United States of America;
(b) the payment of interest, default interest, late charges and
other sums, as provided in the Note, this Security Instrument or the
Other Loan Documents (as hereinafter defined);
(c) the payment of all other moneys agreed or provided to be
paid by Borrower in the Note, this Security Instrument or the Other
Loan Documents;
(d) the payment of all sums advanced pursuant to this
Security Instrument to protect and preserve the Property and the lien
and the security interest created hereby; and
(e) the payment of all sums advanced and costs and expenses
incurred by Lender in connection with the Debt or any part thereof, any
renewal, extension, or change of or substitution for the Debt or any
part thereof, or the acquisition or perfection of the security
therefor, whether made or incurred at the request of Borrower or
Lender.
Section 2.2 OTHER OBLIGATIONS. This Security Instrument and the grants,
assignments and transfers made in Article 1 are also given for the purpose of
securing the following (the "OTHER OBLIGATIONS"):
-6-
<PAGE> 13
(a) the performance of all other obligations of Borrower
contained herein;
(b) the performance of each obligation of Borrower contained
in any other agreement given by Borrower to Lender which is for the
purpose of further securing the obligations secured hereby, and any
amendments, modifications and changes thereto; and
(c) the performance of each obligation of Borrower contained
in any renewal, extension, amendment, modification, consolidation,
change of, or substitution or replacement for, all or any part of the
Note, this Security Instrument or the Other Loan Documents.
Section 2.3 DEBT AND OTHER OBLIGATIONS. Borrower's obligations for the
payment of the Debt and the performance of the Other Obligations shall be
referred to collectively herein as the "OBLIGATIONS."
Section 2.4 PAYMENTS. Unless payments are made in the required amount
in immediately available funds at the place where the Note is payable,
remittances in payment of all or any part of the Debt shall not, regardless of
any receipt or credit issued therefor, constitute payment until the required
amount is actually received by Lender in funds immediately available at the
place where the Note is payable (or any other place as Lender, in Lender's sole
discretion, may have established by delivery of written notice thereof to
Borrower) and shall be made and accepted subject to the condition that any check
or draft may be handled for collection in accordance with the practice of the
collecting bank or banks. Acceptance by Lender of any payment in an amount less
than the amount then due shall be deemed an acceptance on account only, and the
failure to pay the entire amount then due shall be and continue to be an Event
of Default (as hereinafter defined).
ARTICLE 3 - BORROWER COVENANTS
Borrower covenants and agrees that:
Section 3.1 INCORPORATION BY REFERENCE. All the covenants, conditions
and agreements contained in (a) the Note, and (b) all and any of the documents
other than the Note or this Security Instrument now or hereafter executed by
Borrower and/or others and by or in favor of Lender in connection with the
creation of the Obligations, the payment of any other sums owed by Borrower to
Lender or the performance of any Obligations (collectively the "OTHER LOAN
DOCUMENTS"), are hereby made a part of this Security Instrument to the same
extent and with the same force as if fully set forth herein. The term "LOAN
DOCUMENTS" as used herein shall individually and collectively refer to the Note,
this Security Instrument and the Other Loan Documents; provided, however, that
notwithstanding any provision of this Security Instrument to the contrary, the
Obligations of the indemnitor(s) under that certain Environmental Indemnity
Agreement of even date herewith executed by Borrower and Sheldahl, Inc., a
Minnesota corporation (whether one or more, "INDEMNITOR") in favor of Lender
(the "ENVIRONMENTAL INDEMNITY") shall not be deemed or construed to be secured
by this Security Instrument or otherwise restricted or affected by the
foreclosure of the lien hereof or any other exercise by Lender of its remedies
-7-
<PAGE> 14
hereunder or under any other Loan Document, such Environmental Indemnity being
intended by the signatories thereto to be its (or their) unsecured obligation.
Section 3.2 INSURANCE.
(a) Borrower shall obtain and maintain, and shall pay all
premiums in accordance with Subsection 3.2(b) below for, insurance for
Borrower and the Property providing at least the following coverages:
(i) comprehensive all risk insurance (including, without
limitation, riot and civil commotion, vandalism, malicious
mischief, water, fire, burglary and theft) on the Improvements
and the Personal Property and in each case (A) in an amount
equal to the lesser of the principal balance of the Note or
100% of the "Full Replacement Cost", which for purposes of
this Security Instrument shall mean actual replacement value
(exclusive of costs of excavations, foundations, underground
utilities and footings) with a waiver of depreciation; (B)
containing an agreed amount endorsement with respect to the
Improvements and Personal Property waiving all co-insurance
provisions; (C) providing that the deductible shall not exceed
the lesser of $10,000.00 or one percent (1%) of the face value
of the policy; and (D) containing Demolition Costs, Increased
Cost of Construction and "Ordinance or Law Coverage" or
"Enforcement" endorsements if any of the Improvements or the
use of the Property shall at any time constitute legal
non-conforming structures or uses or the ability to rebuild
the Improvements is restricted or prohibited. The Full
Replacement Cost may be redetermined from time to time by an
appraiser or contractor designated and paid by Lender or by an
engineer or appraiser in the regular employ of the insurer. No
omission on the part of Lender to request any such appraisals
shall relieve Borrower of any of its obligations under this
Subsection;
(ii) comprehensive general liability insurance against
claims for personal injury, bodily injury, death or property
damage occurring upon, in or about the Property, such
insurance (A) to be on the so-called "occurrence" form with a
combined single limit of not less than $1,000,000.00 and not
less than $3,000,000.00 if the Property has one or more
elevators, as well as liquor liability insurance in a minimum
amount of $2,000,000.00 if any part of the Property is covered
by a liquor license; (B) to continue at not less than the
aforesaid limit until required to be changed by Lender in
writing by reason of changed economic conditions making such
protection inadequate; (C) to cover at least the following
hazards: (1) premises and operations; (2) products and
completed operations on an "if any" basis; (3) independent
contractors; (4) blanket contractual liability for all written
and oral contracts; (5) contractual liability covering the
indemnities contained in Article 11 hereof to the extent the
same is available; and (D) to be without deductible;
(iii) business income insurance (A) with loss payable
to Lender; (B) covering losses of income and/or Rents derived
from the Property and any non-
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<PAGE> 15
insured property on or adjacent to the Property resulting from
any risk or casualty whatsoever; (C) containing an extended
period of indemnity endorsement which provides that after the
physical loss to the Improvements and Personal Property has
been repaired, the continued loss of income will be insured
until such income either returns to the same level it was at
prior to the loss, or the expiration of eighteen (18) months
from the date of the loss, whichever first occurs, and
notwithstanding that the policy may expire prior to the end of
such period; and (D) in an amount equal to 100% of the
projected gross income from the Property for a period of
eighteen (18) months. The amount of such business income
insurance shall be determined by Lender prior to the date
hereof and at least once each year thereafter based on
Borrower's reasonable estimate of the gross income from the
Property for the succeeding eighteen (18) month period. All
insurance proceeds payable to Lender pursuant to this
Subsection 3.2(a) shall be held by Lender and shall be applied
to the obligations secured hereunder from time to time due and
payable hereunder and under the Note; provided, however, that
nothing herein contained shall be deemed to relieve Borrower
of its obligations to pay the obligations secured hereunder on
the respective dates of payment provided for in the Note
except to the extent such amounts are actually paid out of the
proceeds of such business income insurance;
(iv) at all times during which structural
construction, repairs or alterations are being made with
respect to the Improvements: (A) owner's contingent or
protective liability insurance covering claims not covered by
or under the terms or provisions of the above mentioned
commercial general liability insurance policy; and (B) the
insurance provided for in Subsection 3.2(a)(i) written in a
so-called builder's risk completed value form (1) on a
non-reporting basis, (2) against all risks insured against
pursuant to Subsection 3.2(a)(i), (3) including permission to
occupy the Property, and (4) with an agreed amount endorsement
waiving co-insurance provisions;
(v) workers' compensation, subject to the statutory
limits of the state in which the Property is located, and
employer's liability insurance with a limit of at least
$1,000,000.00 per accident and per disease per employee, and
$1,000,000.00 for disease aggregate in respect of any work or
operations on or about the Property, or in connection with the
Property or its operation (if applicable);
(vi) if required by Lender, and if available in the
area where the Property is located, earthquake or sinkhole
insurance in the amount reasonably required by Lender;
(vii) comprehensive boiler and machinery insurance
(without exclusion for explosion), if applicable, in amounts
as shall be reasonably required by Lender and covering all
boilers or other pressure vessels, machinery and equipment
located at or about the Property (including, without
limitation, electrical equipment, sprinkler
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<PAGE> 16
systems, heating and air conditioning equipment, refrigeration
equipment and piping);
(viii) flood hazard insurance if any portion of the
Improvements is currently or at any time in the future located
in a federally designated "special flood hazard area," flood
hazard insurance in an amount equal to the lesser of (a) the
outstanding principal balance of the Note, (b) the Full
Replacement Cost, or (c) the maximum amount of such insurance
available under the National Flood Insurance Act of 1968, the
Flood Disaster Protection Act of 1973 or the National Flood
Insurance Reform Act of 1994, as each may be amended; and
(ix) such other insurance and in such amounts as
Lender from time to time may reasonably request against such
other insurable hazards which at the time are commonly insured
against for property similar to the Property located in or
around the region in which the Property is located, including,
without limitation, earthquake insurance (in the event the
Property is located in an area with a high degree of seismic
activity), mine subsidence insurance and environmental
insurance.
(b) All insurance provided for in Subsection 3.2(a) hereof
shall be obtained under valid and enforceable policies (the "POLICIES"
or in the singular, the "POLICY"), in such forms and, from time to time
after the date hereof, in such amounts as may from time to time be
satisfactory to Lender, issued by financially sound and responsible
insurance companies authorized to do business in the state in which the
Property is located as admitted or unadmitted carriers which, in either
case, have been approved by Lender and which have a general policy
rating of A- or better and a financial class of VIII or better by A.M.
Best Co. or claims paying ability rating of A or better issued by
Standard & Poor's Ratings Group (each such insurer shall be referred to
below as a "QUALIFIED INSURER"). Such Policies shall not be subject to
invalidation due to the use or occupancy of the Property for purposes
more hazardous than the use of the Property at the time such Policies
were issued. Not less than thirty (30) days prior to the expiration
dates of the Policies theretofore furnished to Lender pursuant to
Subsection 3.2(a), certified copies of the Policies marked "premium
paid" or accompanied by evidence satisfactory to Lender of payment of
the premiums due thereunder (the "INSURANCE PREMIUMS"), shall be
delivered by Borrower to Lender; provided, however, that in the case of
renewal Policies, Borrower may furnish Lender with binders therefor to
be followed by the original Policies when issued.
(c) Borrower shall not obtain (i) separate insurance
concurrent in form or contributing in the event of loss with that
required in Subsection 3.2(a) to be furnished by, or which may be
reasonably required to be furnished by, Borrower, or (ii) any umbrella
or blanket liability or casualty Policy unless, in each case, Lender's
interest is included therein as provided in this Security Instrument
and such Policy is issued by a Qualified Insurer. If Borrower obtains
separate insurance or an umbrella or a blanket Policy, Borrower shall
notify Lender of the same and shall cause certified copies of each
Policy to be delivered as
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<PAGE> 17
required in Subsection 3.2(a). Any blanket insurance Policy shall
specifically allocate to the Property the amount of coverage from time
to time required hereunder and shall otherwise provide the same
protection as would a separate Policy insuring only the Property in
compliance with the provisions of Subsection 3.2(a).
(d) All Policies of insurance provided for or contemplated by
Subsection 3.2(a) shall name Lender, its successors and assigns,
including any servicers, trustees or other designees of Lender, and
Borrower as the insured or additional insured, as their respective
interests may appear, and in the case of property damage, boiler and
machinery, and flood insurance, shall contain a so-called New York
standard non-contributing Lender clause in favor of Lender providing
that the loss thereunder shall be payable to Lender.
(e) All Policies of insurance provided for in Subsection
3.2(a) shall contain clauses or endorsements to the effect that:
(i) no act or negligence of Borrower, or anyone acting
for Borrower, or of any tenant under any Lease or other
occupant, or failure to comply with the provisions of any
Policy which might otherwise result in a forfeiture of the
insurance or any part thereof, shall in any way affect the
validity or enforceability of the insurance insofar as Lender
is concerned;
(ii) the Policy shall not be materially changed (other
than to increase the coverage provided on the Property
thereby) or canceled without at least thirty (30) days' prior
written notice to Lender and any other party named therein as
an insured;
(iii) each Policy shall provide that the issuers thereof
shall give written notice to Lender if the Policy has not been
renewed thirty (30) days prior to its expiration; and
(iv) Lender shall not be liable for any Insurance
Premiums thereon or subject to any assessments thereunder.
(f) Borrower shall furnish to Lender within ten (10) calendar
days after Lender's request therefor, a statement certified by Borrower
or a duly authorized officer of Borrower of the amounts of insurance
maintained in compliance herewith, of the risks covered by such
insurance and of the insurance company or companies which carry such
insurance and, if requested by Lender, verification of the adequacy of
such insurance by an independent insurance broker or appraiser
acceptable to Lender.
(g) If at any time Lender is not in receipt of written
evidence that all insurance required hereunder is in full force and
effect, Lender shall have the right but not the obligation, without
notice to Borrower, to take such action as Lender deems necessary to
protect its interest in the Property, including, without limitation,
the obtaining of such insurance coverage as Lender in its sole
discretion deems appropriate, and all expenses
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<PAGE> 18
incurred by Lender in connection with such action or in obtaining such
insurance and keeping it in effect shall be paid by Borrower to Lender
upon demand and until paid shall be secured by this Security Instrument
and shall bear interest at the Default Rate (as hereinafter defined).
(h) If the Property shall be damaged or destroyed, in whole or
in part, by fire or other casualty, Borrower shall give prompt notice
thereof to Lender.
(i) In case of loss covered by Policies, Lender may
either (1) settle and adjust any claim without the consent of
Borrower, or (2) allow Borrower to agree with the insurance
company or companies on the amount to be paid upon the loss;
provided, that Borrower may adjust losses aggregating not in
excess of $100,000.00 if such adjustment is carried out in a
competent and timely manner, and provided that in any case
Lender shall and is hereby authorized to collect and receive
any such insurance proceeds; and the expenses incurred by
Lender in the adjustment and collection of insurance proceeds
shall become part of the Debt and be secured hereby and shall
be reimbursed by Borrower to Lender upon demand (unless
deducted by and reimbursed to Lender from such proceeds).
(ii) In the event of any insured damage to or destruction
of the Property or any part thereof (herein called an "INSURED
CASUALTY"), if (A) in the reasonable judgment of Lender, the
Property can be restored within six (6) months after insurance
proceeds are made available to an economic unit not less
valuable (including an assessment by Lender of the impact of
the termination of any Leases due to such Insured Casualty)
and not less useful than the same was prior to the Insured
Casualty, and after such restoration will adequately secure
the outstanding balance of the Debt, and (B) no Event of
Default (hereinafter defined) shall have occurred and be then
continuing, then the proceeds of insurance shall be applied to
reimburse Borrower for the cost of restoring, repairing,
replacing or rebuilding the Property or part thereof subject
to Insured Casualty, as provided below; and Borrower hereby
covenants and agrees forthwith to commence and diligently to
prosecute such restoring, repairing, replacing or rebuilding;
provided, however, in any event Borrower shall pay all costs
(and if required by Lender, Borrower shall deposit the total
thereof with Lender in advance) of such restoring, repairing,
replacing or rebuilding in excess of the net proceeds of
insurance made available pursuant to the terms hereof.
(iii) Except as provided above, the proceeds of insurance
collected upon any Insured Casualty shall, at the option of
Lender in its sole discretion, be applied to the payment of
the Debt or applied to reimburse Borrower for the cost of
restoring, repairing, replacing or rebuilding the Property or
part thereof subject to the Insured Casualty, in the manner
set forth below. Any such application to the Debt shall NOT be
considered a voluntary prepayment requiring payment of the
prepayment
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<PAGE> 19
consideration provided in the Note, and shall not reduce or
postpone any payments otherwise required pursuant to the Note,
other than the final payment on the Note.
(iv) If proceeds of insurance, if any, are made
available to Borrower for the restoring, repairing, replacing
or rebuilding of the Property, Borrower hereby covenants to
restore, repair, replace or rebuild the same to be of at least
equal value and of substantially the same character as prior
to such damage or destruction, all to be effected in
accordance with applicable law and plans and specifications
approved in advance by Lender.
(v) If Borrower is entitled to reimbursement out of
insurance proceeds held by Lender, such proceeds shall be
disbursed from time to time upon Lender being furnished with
(1) evidence satisfactory to it (which evidence may include
inspection[s] of the work performed) that the restoration,
repair, replacement and rebuilding covered by the disbursement
has been completed in accordance with plans and specifications
approved by Lender, (2) evidence satisfactory to it of the
estimated cost of completion of the restoration, repair,
replacement and rebuilding, (3) funds, or, at Lender's option,
assurances satisfactory to Lender that such funds are
available, sufficient in addition to the proceeds of insurance
to complete the proposed restoration, repair, replacement and
rebuilding, and (4) such architect's certificates, waivers of
lien, contractor's sworn statements, title insurance
endorsements, bonds, plats of survey and such other evidences
of cost, payment and performance as Lender may reasonably
require and approve; and Lender may, in any event, require
that all plans and specifications for such restoration,
repair, replacement and rebuilding be submitted to and
approved by Lender prior to commencement of work. With respect
to disbursements to be made by Lender: (A) no payment made
prior to the final completion of the restoration, repair,
replacement and rebuilding shall exceed ninety percent (90%)
of the value of the work performed from time to time; (B)
funds other than proceeds of insurance shall be disbursed
prior to disbursement of such proceeds; and (C) at all times,
the undisbursed balance of such proceeds remaining in the
hands of Lender, together with funds deposited for that
purpose or irrevocably committed to the satisfaction of Lender
by or on behalf of Borrower for that purpose, shall be at
least sufficient in the reasonable judgment of Lender to pay
for the cost of completion of the restoration, repair,
replacement or rebuilding, free and clear of all liens or
claims for lien and the costs described in Subsection
3.2(h)(vi) below. Any surplus which may remain out of
insurance proceeds held by Lender after payment of such costs
of restoration, repair, replacement or rebuilding shall be
paid to any party entitled thereto. In no event shall Lender
assume any duty or obligation for the adequacy, form or
content of any such plans and specifications, nor for the
performance, quality or workmanship of any restoration,
repair, replacement and rebuilding.
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<PAGE> 20
(vi) Notwithstanding anything to the contrary
contained herein, the proceeds of insurance reimbursed to
Borrower in accordance with the terms and provisions of this
Security Instrument shall be reduced by the reasonable costs
(if any) incurred by Lender in the adjustment and collection
thereof and in the reasonable costs incurred by Lender of
paying out such proceeds (including, without limitation,
reasonable attorneys' fees and costs paid to third parties for
inspecting the restoration, repair, replacement and rebuilding
and reviewing the plans and specifications therefor).
Section 3.3 PAYMENT OF TAXES, ETC.
(a) Borrower shall pay all taxes, assessments, water
rates, sewer rents, governmental impositions, and other charges,
including without limitation, vault charges and license fees for the
use of vaults, chutes and similar areas adjoining the Land, now or
hereafter levied or assessed or imposed against the Property or any
part thereof (the "TAXES"), all ground rents, maintenance charges and
similar charges, now or hereafter levied or assessed or imposed against
the Property or any part thereof (the "OTHER CHARGES"), and all charges
for utility services provided to the Property as same become due and
payable. Borrower will deliver to Lender, promptly upon Lender's
request, evidence satisfactory to Lender that the Taxes, Other Charges
and utility service charges have been so paid or are not then
delinquent. Borrower shall not allow and shall promptly cause to be
paid and discharged any lien or charge whatsoever which may be or
become a lien or charge against the Property. Except to the extent sums
sufficient to pay all Taxes and Other Charges have been deposited with
Lender in accordance with the terms of this Security Instrument,
Borrower shall furnish to Lender paid receipts for the payment of the
Taxes and Other Charges prior to the date the same shall become
delinquent.
(b) After prior written notice to Lender, Borrower,
at its own expense, may contest by appropriate legal proceeding,
promptly initiated and conducted in good faith and with due diligence,
the amount or validity or application in whole or in part of any of the
Taxes, provided that (i) no Event of Default has occurred and is
continuing under the Note, this Security Instrument or any of the Other
Loan Documents, (ii) Borrower is permitted to do so under the
provisions of any other mortgage, deed of trust or deed to secure debt
affecting the Property, (iii) such proceeding shall suspend the
collection of the Taxes from Borrower and from the Property or Borrower
shall have paid all of the Taxes under protest, (iv) such proceeding
shall be permitted under and be conducted in accordance with the
provisions of any other instrument to which Borrower is subject and
shall not constitute a default thereunder, (v) neither the Property nor
any part thereof or interest therein will be in danger of being sold,
forfeited, terminated, canceled or lost, (vi) Borrower shall have set
aside and deposited with Lender adequate reserves for the payment of
the Taxes, together with all interest and penalties thereon, unless
Borrower has paid all of the Taxes under protest, and (vii) Borrower
shall have furnished the security as may be required in the
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<PAGE> 21
proceeding, or as may be requested by Lender to insure the payment of
any contested Taxes, together with all interest and penalties thereon.
Section 3.4 CONDEMNATION. Borrower shall promptly give Lender notice of
the actual or threatened commencement of any condemnation or eminent domain
proceeding and shall deliver to Lender copies of any and all papers served in
connection with such proceedings. Lender is hereby irrevocably appointed as
Borrower's attorney-in-fact, coupled with an interest, with exclusive power to
collect, receive and retain any award or payment for said condemnation or
eminent domain and to make any compromise or settlement in connection with such
proceeding, subject to the provisions of this Security Instrument.
Notwithstanding any taking by any public or quasi-public authority through
eminent domain or otherwise (including but not limited to any transfer made in
lieu of or in anticipation of the exercise of such taking), Borrower shall
continue to pay the Debt at the time and in the manner provided for its payment
in the Note and in this Security Instrument and the Debt shall not be reduced
until any award or payment therefor shall have been actually received and
applied by Lender, after the deduction of expenses of collection, to the
reduction or discharge of the Debt. Lender shall not be limited to the interest
paid on the award by the condemning authority but shall be entitled to receive
out of the award interest at the rate or rates provided herein or in the Note.
Borrower shall cause the award or payment made in any condemnation or eminent
domain proceeding, which is payable to Borrower, to be paid directly to Lender.
Lender may apply any award or payment to the reduction or discharge of the Debt
whether or not then due and payable (such application to be free from any
prepayment consideration provided in the Note, except that if an Event of
Default, or an event which with notice and/or the passage of time, or both,
would constitute an Event of Default, has occurred, then such application shall
be subject to the full prepayment consideration computed in accordance with the
Note). If the Property is sold, through foreclosure or otherwise, prior to the
receipt by Lender of the award or payment, Lender shall have the right, whether
or not a deficiency judgment on the Note shall have been sought, recovered or
denied, to receive the award or payment, or a portion thereof sufficient to pay
the Debt.
Section 3.5 USE AND MAINTENANCE OF PROPERTY. Borrower shall cause the
Property to be maintained and operated in a good and safe condition and repair
and in keeping with the condition and repair of properties of a similar use,
value, age, nature and construction. Borrower shall not use, maintain or operate
the Property in any manner which constitutes a public or private nuisance or
which makes void, voidable, or cancelable, or increases the premium of, any
insurance then in force with respect thereto. The Improvements and the Personal
Property shall not be removed, demolished or materially altered (except for
normal replacement of the Personal Property with items of the same utility and
of equal or greater value) without the prior written consent of Lender. Borrower
shall promptly repair, replace or rebuild any part of the Property which may be
destroyed by any casualty, or become damaged, worn or dilapidated or which may
be affected by any proceeding of the character referred to in Section 3.4 hereof
and shall complete and pay for any structure at any time in the process of
construction or repair on the Land. Borrower shall not initiate, join in,
acquiesce in, or consent to any change in any private restrictive covenant,
zoning law or other public or private restriction, limiting or defining the uses
which may be made of the Property
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<PAGE> 22
or any part thereof. If under applicable zoning provisions the use of all or any
portion of the Property is or shall become a nonconforming use, Borrower will
not cause or permit the nonconforming use to be discontinued or abandoned
without the express written consent of Lender. Borrower shall not take any steps
whatsoever to convert the Property, or any portion thereof, to a condominium or
cooperative form of management.
Section 3.6 WASTE. Borrower shall not commit or suffer any waste of the
Property or, without first obtaining such additional insurance as may be
necessary to cover a proposed change in use of the Property, make any change in
the use of the Property which will in any way materially increase the risk of
fire or other hazard arising out of the operation of the Property, or take any
action that might invalidate or give cause for cancellation of any Policy, or do
or permit to be done thereon anything that may in any way impair the value of
the Property or the security of this Security Instrument. Borrower will not,
without the prior written consent of Lender, permit any drilling or exploration
for or extraction, removal, or production of any minerals from the surface or
the subsurface of the Land, regardless of the depth thereof or the method of
mining or extraction thereof.
Section 3.7 COMPLIANCE WITH LAWS; ALTERATIONS.
(a) Borrower shall promptly comply with all existing and future
federal, state and local laws, orders, ordinances, governmental rules
and regulations or court orders affecting or which may be interpreted
to affect the Property, or the use thereof, including, but not limited
to, the Americans with Disabilities Act (the "ADA") (collectively
"APPLICABLE LAWS").
(b) Notwithstanding any provisions set forth herein or in any
document regarding Lender's approval of alterations of the Property,
Borrower shall not alter the Property in any manner which would
increase Borrower's responsibilities for compliance with Applicable
Laws without the prior written approval of Lender. Lender's approval of
the plans, specifications, or working drawings for alterations of the
Property shall create no responsibility or liability on behalf of
Lender for their completeness, design, sufficiency or their compliance
with Applicable Laws. The foregoing shall apply to tenant improvements
constructed by Borrower or by any of its tenants. Lender may condition
any such approval upon receipt of a certificate of compliance with
Applicable Laws from an independent architect, engineer, or other
person acceptable to Lender.
(c) Borrower shall give prompt notice to Lender of the receipt
by Borrower of any notice related to a violation of any Applicable Laws
and of the commencement of any proceedings or investigations which
relate to compliance with Applicable Laws.
(d) Borrower shall take appropriate measures to prevent and
will not engage in or knowingly permit any illegal activities at the
Property.
Section 3.8 BOOKS AND RECORDS.
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<PAGE> 23
(a) Borrower shall keep accurate books and records of account in
accordance with sound accounting principles in which full, true and correct
entries shall be promptly made with respect to Borrower, the Property and the
operation thereof, and will permit all such books and records (including without
limitation all contracts, statements, invoices, bills and claims for labor,
materials and services supplied for the construction, repair or operation to
Borrower of the Improvements) to be inspected or audited and copies made by
Lender and its representatives during normal business hours and at any other
reasonable times. Borrower represents that its chief executive office is as set
forth in the introductory paragraph of this Security Instrument and that all
books and records pertaining to the Property are maintained at the Property or
such other location as may be expressly disclosed to Lender in writing. Borrower
will furnish, or cause to be furnished, to Lender on or before forty-five (45)
calendar days after the end of each calendar quarter the following items, each
certified by Borrower as being true and correct, in such format and in such
detail as Lender or its servicer may request:
(i) a written statement (rent roll) dated as of the last day of
each such calendar quarter identifying each of the Leases by the term,
space occupied, rental required to be paid (including percentage rents
and tenant sales), security deposit paid, any rental concessions, all
rent escalations, any rents paid more than one (1) month in advance,
any special provisions or inducements granted to tenants, any taxes,
maintenance and other common charges paid by tenants, all vacancies and
identifying any defaults or payment delinquencies thereunder; and
(ii) quarterly and year-to-date operating statements prepared for
each calendar quarter during each such reporting period detailing the
total revenues received, total expenses incurred, total cost of all
capital improvements, total debt service and total cash flow.
(b) Within ninety (90) calendar days following the end of each calendar
year, Borrower shall furnish a statement of the financial affairs and condition
of the Borrower and the Property including a statement of profit and loss for
the Property in such format and in such detail as Lender or its servicer may
request, and setting forth the financial condition and the income and expenses
for the Property for the immediately preceding calendar year prepared by an
independent certified public accountant. Borrower shall deliver to Lender copies
of all income tax returns, requests for extension and other similar items
contemporaneously with its delivery of same to the Internal Revenue Service.
(c) Borrower will permit representatives appointed by Lender, including
independent accountants, agents, attorneys, appraisers and any other persons, to
visit and inspect during its normal business hours and at any other reasonable
times any of the Property and to make photographs thereof, and to write down and
record any information such representatives obtain, and shall permit Lender or
its representatives to investigate and verify the accuracy of the information
furnished to Lender under or in connection with this
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<PAGE> 24
Security Instrument or any of the Other Loan Documents and to discuss all such
matters with its officers, employees and representatives. Borrower will furnish
to Lender at Borrower's expense all evidence which Lender may from time to time
reasonably request as to the accuracy and validity of or compliance with all
representations and warranties made by Borrower in the Loan Documents and
satisfaction of all conditions contained therein. Any inspection or audit of the
Property or the books and records of Borrower, or the procuring of documents and
financial and other information, by or on behalf of Lender, shall be for
Lender's protection only, and shall not constitute any assumption of
responsibility or liability by Lender to Borrower or anyone else with regard to
the condition, construction, maintenance or operation of the Property, nor
Lender's approval of any certification given to Lender nor relieve Borrower of
any of Borrower's obligations.
Section 3.9 PAYMENT FOR LABOR AND MATERIALS. Borrower will promptly pay
when due all bills and costs for labor, materials, and specifically fabricated
materials incurred in connection with the Property and never permit to exist
beyond the due date thereof in respect of the Property or any part thereof any
lien or security interest, even though inferior to the liens and the security
interests hereof, and in any event never permit to be created or exist in
respect of the Property or any part thereof any other or additional lien or
security interest other than the liens or security interests hereof, except for
the Permitted Exceptions (as hereinafter defined).
Section 3.10 PERFORMANCE OF OTHER AGREEMENTS. Borrower shall observe
and perform each and every term to be observed or performed by Borrower pursuant
to the terms of any agreement or recorded instrument affecting or pertaining to
the Property, or given by Borrower to Lender for the purpose of further securing
an obligation secured hereby and any amendments, modifications or changes
thereto.
Section 3.11 FORMATION OF MUNICIPAL DISTRICT. Borrower shall not
hereafter form, cause to be formed, or consent to or permit the formation of, or
enter into any agreement with respect to the formation of, any municipality,
special district, special improvement district, local improvement district,
quasi-municipal corporation, or other political subdivision of the State of
Colorado ("Municipal District") relating to the Property without the prior
written consent of Lender. Borrower shall promptly provide Lender with a copy of
all notices of any kind relating to the formation of any Municipal District or
of any elections that may be held regarding the formation of a Municipal
District.
Section 3.12 WITHHOLDING AND SALES TAXES.
(a) If Borrower operates a business on the Property or
Borrower is otherwise an employer required to deduct and withhold for
federal income tax purposes a percentage of the wages of an employee
under the terms of ss. 39-22-604, C.R.S. 1973, as amended ("Withholding
Tax"), Borrower shall comply with the provisions of ss. 39-22-604 so
that the assets and property used by Borrower in the conduct of
Borrower's business, including, without limitation, the Property, are
not subject to the lien granted to the State of Colorado Department of
Revenue (the "Department") pursuant to ss. 39-22-604 (7)(a), C.R.S.
1973, as
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amended. If required by Lender, Borrower shall post with the
Department security for the payment of the Withholding Tax on such
terms as required by the Department and shall procure a certificate
from the Department certifying that such security has been posted and
that the assets and property used by Borrower in the conduct of
Borrower's business are exempt from attachment under the lien granted
to the Department under ss. 39-22-604(7)(a), C.R.S. 1973, as amended.
(b) If Borrower leases any part of the Property to a tenant who
is either (i) a "retailer," as defined in ss. 39-26-102(8), C.R.S.
1973, as amended, so that such Property is subject to the lien
described in ss. 39-26-117 (1)(a), C.R.S. 1973, as amended, or (ii) an
employer required to pay Withholding Tax so that such property is
subject to the lien described in ss. 39-22-604 (7)(a), C.R.S. 1973, as
amended, Borrower shall comply, or cause the tenant to comply, with
the provisions of ss. 39-26-117 (1)(b), C.R.S. 1973, as amended, or
ss. 39-22-604 (7)(c), C.R.S. 1973, as amended, respectively, to obtain
an exemption of the Property from such liens. If required to obtain
such exemption, Borrower shall, within ten (10) days of executing such
lease file a memorandum of lease with the Department on such forms as
prescribed by the Department. The leased property must be reasonably
identifiable from the lease description and the tenant must have no
right to become the owner of the leased property.
ARTICLE 4 - SPECIAL COVENANTS
Borrower covenants and agrees that:
Section 4.1 PROPERTY USE. The Property shall be used only for
industrial purposes, and for no other use without the prior written consent of
Lender, which consent may be withheld in Lender's sole and absolute discretion.
Section 4.2 ERISA.
(a) It shall not engage in any transaction which would cause
any obligation, or action taken or to be taken, hereunder (or the
exercise by Lender of any of its rights under the Note, this Security
Instrument and the Other Loan Documents) to be a non-exempt (under a
statutory or administrative class exemption) prohibited transaction
under the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
(b) It shall deliver to Lender such certifications or other
evidence from time to time throughout the term of the Security
Instrument, as requested by Lender in its sole discretion, that (i)
Borrower is not an "employee benefit plan" as defined in Section 3(3)
of ERISA, which is subject to Title I of ERISA, or a "governmental
plan" within the meaning of Section 3(32) of ERISA; (ii) Borrower is
not subject to state statutes regulating investments and fiduciary
obligations with respect to governmental plans; and (iii) one or more
of the following circumstances is true:
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(i) Equity interests in Borrower are publicly offered
securities, within the meaning of 29 C.F.R.
ss.2510.3-101(b)(2);
(ii) Less than twenty-five percent (25%) of each
outstanding class of equity interests in Borrower are held by
"benefit plan investors" within the meaning of 29 C.F.R.
ss.2510.3-101(f)(2); or
(iii) Borrower qualifies as an "operating company" or a
"real estate operating company" within the meaning of 29
C.F.R. ss.2510.3-101(c) or (e) or an investment company
registered under The Investment Company Act of 1940.
Section 4.3 SINGLE PURPOSE ENTITY. Borrower covenants and agrees that
it has not and shall not:
(a) engage in any business or activity other than the
acquisition, ownership, operation and maintenance of the Property, and
activities incidental thereto;
(b) acquire or own any material asset other than (i) the
Property, and (ii) such incidental Personal Property as may be
necessary for the operation of the Property;
(c) merge into or consolidate with any person or entity or
dissolve, terminate or liquidate in whole or in part, transfer or
otherwise dispose of all or substantially all of its assets or change
its legal structure, without in each case Lender's consent;
(d) fail to preserve its existence as an entity duly
organized, validly existing and in good standing (if applicable) under
the laws of the jurisdiction of its organization or formation, or
without the prior written consent of Lender, amend, modify, terminate
or fail to comply with the provisions of Borrower's Partnership
Agreement, Articles or Certificate of Incorporation, Articles of
Organization, Operating Agreement or similar organizational documents,
as the case may be;
(e) own any subsidiary or make any investment in or acquire
the obligations or securities of any other person or entity without
the consent of Lender;
(f) commingle its assets with the assets of any of its
general partner(s), if Borrower is a partnership, its managing
members, if Borrower is a limited liability company, or its principal
shareholders, if Borrower is a corporation (in each case,
"PRINCIPAL"), affiliates, or of any other person or entity;
(g) incur any debt, secured or unsecured, direct or
contingent (including guaranteeing any obligation), other than the
Debt, except unsecured trade and operational debt incurred with trade
creditors in the ordinary course of its business of owning and
operating the Property in such amounts as are normal and reasonable
under the circumstances, provided that such debt is not evidenced by a
note and is paid when due and
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provided in any event the outstanding principal balance of such debt
shall not exceed at any one time one percent (1%) of the Outstanding
Debt;
(h) fail to pay its debts and liabilities from its own
assets;
(i) fail to maintain its records, books of account and bank
accounts separate and apart from those of the general partners,
members, principals and affiliates of Borrower, the affiliates of a
general partner or member of Borrower, and any other person or entity;
(j) enter into any contract or agreement with any general
partner, member, principal or affiliate of Borrower, any guarantor of
all or a portion of the Debt (a "GUARANTOR") or Indemnitor, or any
general partner, member, principal or affiliate thereof, except upon
terms and conditions that are intrinsically fair and substantially
similar to those that would be available on an arms-length basis with
third parties other than any general partner, member, principal or
affiliate of Borrower, Guarantor or Indemnitor, or any general
partner, member, principal or affiliate thereof;
(k) seek dissolution or winding up in whole, or in part;
(l) fail to correct any known misunderstandings regarding the
separate identity of Borrower;
(m) hold itself out to be responsible (or pledge its assets
as security) for the debts of another person;
(n) make any loans or advances to any third party, including
any general partner, member, principal or affiliate of Borrower, or
any general partner, member, principal or affiliate thereof;
(o) fail to file its own tax returns or to use separate
stationery (whether separately or as part of a consolidated group),
invoices and checks;
(p) agree to, enter into or consummate any transaction which
would render Borrower unable to furnish the certification or other
evidence referred to in Subsection 4.2(b) hereof;
(q) fail either to hold itself out to the public as a legal
entity separate and distinct from any other entity or person or to
conduct its business solely in its own name in order not (i) to
mislead others as to the entity with which such other party is
transacting business, or (ii) to suggest that Borrower is responsible
for the debts of any third party (including any general partner,
member, principal or affiliate of Borrower, or any general partner,
member, principal or affiliate thereof);
(r) fail to allocate fairly and reasonably among Borrower and
any third party (including, without limitation, any Guarantor) any
overhead for shared office space;
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(s) fail to pay the salaries of its own employees and
maintain a sufficient number of employees for its contemplated
business operations;
(t) fail to maintain adequate capital for the normal
obligations reasonably foreseeable in a business of its size and
character and in light of its contemplated business operations;
(u) file or consent to the filing of any petition, either
voluntary or involuntary, to take advantage of any applicable
insolvency, bankruptcy, liquidation or reorganization statute, or make
an assignment for the benefit of creditors; or
(v) share any common logo with or hold itself out as or be
considered as a department or division of (i) any general partner,
principal, member or affiliate of Borrower, (ii) any affiliate of a
general partner of Borrower, or (iii) any other person or entity.
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES
Section 5.1 BORROWER'S REPRESENTATIONS. Borrower represents and
warrants to Lender that each of the representations and warranties set forth in
that certain Closing Certificate of even date herewith executed by Borrower in
favor of Lender are true and correct as of the date hereof and are hereby
incorporated and restated in this Security Instrument by this reference.
Section 5.2 WARRANTY OF TITLE. Borrower represents and warrants that
Grantor has good and marketable title to the Property and has the right to
grant, bargain, sell, pledge, assign, warrant, transfer and convey the same and
that Grantor possesses unencumbered fee simple title in the Land and the
Improvements and that Grantor owns the Property free and clear of all liens,
encumbrances and charges whatsoever except for those exceptions shown in the
title insurance policy insuring the lien of this Security Instrument (the
"PERMITTED EXCEPTIONS"). Borrower shall, at its sole cost and expense, forever
warrant, defend and preserve the title and the validity and priority of the lien
of this Security Instrument and shall, at its sole cost and expense, forever
warrant and defend the same to Trustee and Lender against the claims of all
persons whomsoever.
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Section 5.3 STATUS OF PROPERTY.
(a) No portion of the Improvements is located in an area
identified by the Secretary of Housing and Urban Development or any
successor thereto as an area having special flood hazards pursuant to
the National Flood Insurance Act of 1968 or the Flood Disaster
Protection Act of 1973, as amended, or any successor law, or, if
located within any such area, Borrower has obtained and will maintain
the insurance prescribed in Section 3.2 hereof.
(b) Borrower has obtained all necessary certificates, permits,
licenses and other approvals, governmental and otherwise, necessary for
the use, occupancy and operation of the Property and the conduct of its
business (including, without limitation, certificates of completion and
certificates of occupancy) and all required zoning, building code, land
use, environmental and other similar permits or approvals, all of which
are in full force and effect as of the date hereof and not subject to
revocation, suspension, forfeiture or modification.
(c) The Property and the present and contemplated use and
occupancy thereof are to the best knowledge of Borrower in full
compliance with all Applicable Laws, including, without limitation,
zoning ordinances, building codes, land use and environmental laws,
laws relating to the disabled (including, but not limited to, the ADA)
and other similar laws.
(d) The Property is served by all utilities required for the
current or contemplated use thereof. All utility service is provided by
public utilities and the Property has accepted or is equipped to accept
such utility service.
(e) All public roads and streets necessary for service of and
access to the Property for the current or contemplated use thereof have
been completed, are serviceable and are physically and legally open for
use by the public.
(f) The Property is served by public water and sewer systems.
(g) The Property is free from damage caused by fire or other
casualty. There is no pending or, to the best knowledge of Borrower,
threatened condemnation proceedings affecting the Property or any
portion thereof.
(h) All costs and expenses of any and all labor, materials,
supplies and equipment used in the construction of the Improvements
have been paid in full and no notice of any mechanics' or materialmen's
liens or of any claims of right to any such liens have been received.
(i) Borrower has paid in full for, and is the owner of, all
furnishings, fixtures and equipment (other than tenants' property) used
in connection with the operation of the Property, free and clear of any
and all security interests, liens or encumbrances, except the lien and
security interest created hereby.
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(j) All liquid and solid waste disposal, septic and sewer
systems located on the Property are to the best knowledge of Borrower
in a good and safe condition and repair and in compliance with all
Applicable Laws.
(k) All Improvements lie within the boundary of the Land.
(l) The Property will be managed solely by the Borrower, and
no property manager shall be retained or appointed without the prior
written consent of Lender. Such property manager and any property
management agreement shall be satisfactory to Lender in its sole
discretion, and as a condition to Lender's approval such property
manager shall execute and deliver a lien waiver and subordination
agreement satisfactory to Lender in its sole discretion which also
provides Lender the right, at its option, to terminate the property
management agreement or assume Borrower's obligations thereunder upon
an Event of Default.
Section 5.4 NO FOREIGN PERSON. Borrower is not a "foreign person"
within the meaning of Section 1445(f)(3) of the Internal Revenue Code of 1986,
as amended, and the related Treasury Department regulations, including temporary
regulations.
Section 5.5 SEPARATE TAX LOT. The Property is assessed for real estate
tax purposes as one or more wholly independent tax lot or lots, separate from
any adjoining land or improvements not constituting a part of such lot or lots,
and no other land or improvements is assessed and taxed together with the
Property or any portion thereof.
ARTICLE 6 - OBLIGATIONS AND RELIANCES
Section 6.1 RELATIONSHIP OF BORROWER AND LENDER. The relationship
between Borrower and Lender is solely that of debtor and creditor, and Lender
has no fiduciary or other special relationship with Borrower, and no term or
condition of any of the Note, this Security Instrument and the other Loan
Documents shall be construed so as to deem the relationship between Borrower and
Lender to be other than that of debtor and creditor.
Section 6.2 NO RELIANCE ON LENDER. The general partners, members,
principals and (if Borrower is a trust) beneficial owners of Borrower are
experienced in the ownership and operation of properties similar to the
Property, and Borrower and Lender are relying solely upon such expertise and
business plan in connection with the ownership and operation of the Property.
Borrower is not relying on Lender's expertise, business acumen or advice in
connection with the Property.
Section 6.3 NO LENDER OBLIGATIONS.
(a) Notwithstanding the provisions of Subsections 1.1(e) and
1.1(l) or Section 1.2, Lender is not undertaking (i) any obligations
under the Leases; or (ii) any
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obligations with respect to such agreements, contracts, certificates,
instruments, franchises, permits, trademarks, licenses and other
documents.
(b) By accepting or approving anything required to be
observed, performed or fulfilled or to be given to Lender pursuant to
this Security Instrument, the Note or the Other Loan Documents,
including without limitation, any officer's certificate, balance
sheet, statement of profit and loss or other financial statement,
survey, appraisal, or insurance policy, Lender shall not be deemed to
have warranted, consented to, or affirmed the sufficiency, legality or
effectiveness of same, and such acceptance or approval thereof shall
not constitute any warranty or affirmation with respect thereto by
Lender.
Section 6.4 RELIANCE. Borrower recognizes and acknowledges that in
accepting the Note, this Security Instrument and the Other Loan Documents,
Lender is expressly and primarily relying on the truth and accuracy of the
warranties and representations set forth in Article 5 and that certain Closing
Certificate of even date herewith executed by Borrower, without any obligation
to investigate the Property and notwithstanding any investigation of the
Property by Lender; that such reliance existed on the part of Lender prior to
the date hereof; that such warranties and representations are a material
inducement to Lender in accepting the Note, this Security Instrument and the
Other Loan Documents; and that Lender would not be willing to make the Loan (as
hereinafter defined) and accept this Security Instrument in the absence of the
warranties and representations as set forth in Article 5 and such Closing
Certificate.
ARTICLE 7 - FURTHER ASSURANCES
Section 7.1 RECORDING FEES. Borrower will pay all taxes, filing,
registration or recording fees, and all expenses incident to the preparation,
execution, acknowledgment and/or recording of the Note, this Security
Instrument, the Other Loan Documents, any note or deed of trust supplemental
hereto, any security instrument with respect to the Property and any instrument
of further assurance, and any modification or amendment of the foregoing
documents, and all federal, state, county and municipal taxes, duties, imposts,
assessments and charges arising out of or in connection with the execution and
delivery of this Security Instrument, any deed of trust supplemental hereto, any
security instrument with respect to the Property or any instrument of further
assurance, and any modification or amendment of the foregoing documents, except
where prohibited by law so to do.
Section 7.2 FURTHER ACTS. Grantor will, at the cost of Borrower, and
without expense to Lender, do, execute, acknowledge and deliver all and every
such further acts, deeds, conveyances, deeds of trust, assignments, notices of
assignments, transfers and assurances as Lender shall, from time to time,
require, for the better assuring, conveying, assigning, transferring, and
confirming unto Lender the property and rights hereby granted, bargained, sold,
conveyed, confirmed, pledged, assigned, warranted and transferred or intended
now or hereafter so to be, or which Grantor may be or may hereafter become bound
to convey or assign to Lender, or for carrying out the intention or facilitating
the performance of the terms of this Security Instrument or for filing,
registering or recording this Security Instrument, or for complying with all
Applicable Laws. Grantor, on demand,
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will execute and deliver and hereby authorizes Lender to execute in the name of
Grantor or without the signature of Grantor to the extent Lender may lawfully do
so, one or more financing statements, chattel mortgages or other instruments, to
evidence more effectively the security interest of Lender in the Property.
Grantor grants to Lender an irrevocable power of attorney coupled with an
interest for the purpose of exercising and perfecting any and all rights and
remedies available to Lender at law and in equity, including without limitation
such rights and remedies available to Lender pursuant to this Section 7.2.
Section 7.3 CHANGES IN TAX, DEBT CREDIT AND DOCUMENTARY STAMP LAWS.
(a) If any law is enacted or adopted or amended after the
date of this Security Instrument which imposes a tax, either directly
or indirectly, on the Debt or Lender's interest in the Property,
requires revenue or other stamps to be affixed to the Note, this
Security Instrument, or the Other Loan Documents, or imposes any other
tax or charge on the same, Borrower will pay the same, with interest
and penalties thereon, if any. If Lender is advised by counsel chosen
by it that the payment of tax by Borrower would be unlawful or taxable
to Lender or unenforceable or provide the basis for a defense of
usury, then Lender shall have the option, by written notice of not
less than ninety (90) calendar days, to declare the Debt immediately
due and payable.
(b) Borrower will not claim or demand or be entitled to any
credit or credits on account of the Debt for any part of the Taxes or
Other Charges assessed against the Property, or any part thereof, and
no deduction shall otherwise be made or claimed from the assessed
value of the Property, or any part thereof, for real estate tax
purposes by reason of this Security Instrument or the Debt. If such
claim, credit or deduction shall be required by law, Lender shall have
the option, by written notice of not less than ninety (90) calendar
days, to declare the Debt immediately due and payable.
Section 7.4 CONFIRMATION STATEMENT.
(a) After request by Lender, Borrower, within ten (10) days,
shall furnish Lender or any proposed assignee with a statement, duly
acknowledged and certified, confirming to Lender (or its designee) (i)
the amount of the original principal amount of the Note, (ii) the
unpaid principal amount of the Note, (iii) the rate of interest of the
Note, (iv) the terms of payment and maturity date of the Note, (v) the
date installments of interest and/or principal were last paid, and
(vi) that, except as provided in such statement, there are no defaults
or events which with the passage of time or the giving of notice or
both, would constitute an event of default under the Note or this
Security Instrument; provided, however, Lender shall not be entitled
hereunder to receive more than one (1) such statement in each calendar
year.
(b) Subject to the provisions of the Leases, Borrower shall
deliver to Lender, promptly upon request (but not more frequently than
once annually so long as Borrower is not in default hereunder), duly
executed estoppel certificates from any one or more lessees
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as required by Lender attesting to such facts regarding the Lease as
Lender may require, including but not limited to attestations that
each Lease covered thereby is in full force and effect with no
defaults thereunder on the part of any party, that none of the Rents
have been paid more than one month in advance, and that the lessee
claims no defense or offset against the full and timely performance of
its obligations under the Lease.
(c) Upon any transfer or proposed transfer contemplated by
Section 16.1 hereof, at Lender's request, Borrower, any Guarantors and
any Indemnitors shall provide an estoppel certificate to the Investor
(defined in Section 16.1) or any prospective Investor in such form,
substance and detail as Lender, such Investor or prospective Investor
may require.
Section 7.5 SPLITTING OF SECURITY INSTRUMENT. This Security Instrument
and the Note shall, at any time until the same shall be fully paid and
satisfied, at the sole election of Lender, be split or divided into two or more
notes and two or more security instruments, each of which shall cover all or a
portion of the Property to be more particularly described therein. To that end,
Borrower, upon written request of Lender, shall execute, acknowledge and
deliver, or cause to be executed, acknowledged and delivered by the then owner
of the Property, to Lender and/or its designee or designees substitute notes and
security instruments in such principal amounts, aggregating not more than the
then unpaid principal amount of Debt, and containing terms, provisions and
clauses similar to those contained herein and in the Note, and such other
documents and instruments as may be required by Lender.
Section 7.6 REPLACEMENT DOCUMENTS. Upon receipt of an affidavit of an
officer of Lender as to the loss, theft, destruction or mutilation of the Note
or any Other Loan Document which is not of public record, and, in the case of
any such mutilation, upon surrender and cancellation of such Note or Other Loan
Document, Borrower, at its expense, will issue, in lieu thereof, a replacement
Note or Other Loan Document, dated the date of such lost, stolen, destroyed or
mutilated Note or Other Loan Document in the same principal amount thereof and
otherwise of like tenor.
ARTICLE 8 - DUE ON SALE/ENCUMBRANCE
Section 8.1 LENDER RELIANCE. Borrower acknowledges that Lender has
examined and relied on the creditworthiness of Borrower and experience of
Borrower and its general partners, members, principals and (if Borrower is a
trust) beneficial owners in owning and operating properties such as the Property
in agreeing to make the Loan, and will continue to rely on Borrower's ownership
of the Property as a means of maintaining the value of the Property as security
for repayment of the Debt and the performance of the Other Obligations. Borrower
acknowledges that Lender has a valid interest in maintaining the value of the
Property so as to ensure that, should Borrower default in the repayment of the
Debt or the performance of the Other Obligations, Lender can recover the Debt by
a sale of the Property.
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Section 8.2 NO SALE/ENCUMBRANCE.
(a) Borrower agrees that Borrower shall not, without the prior
written consent of Lender, sell, convey, mortgage, grant, bargain,
encumber, pledge, assign, or otherwise transfer the Property or any
part thereof or permit the Property or any part thereof to be sold,
conveyed, mortgaged, granted, bargained, encumbered, pledged, assigned,
or otherwise transferred. Lender shall not be required to demonstrate
any actual impairment of its security or any increased risk of default
hereunder in order to declare the Debt immediately due and payable upon
Borrower's sale, conveyance, mortgage, grant, bargain, encumbrance,
pledge, assignment, or transfer of the Property without Lender's
consent.
(b) Subsection 8.2(a) shall apply to: (i) an installment sales
agreement wherein Borrower agrees to sell the Property or any part
thereof for a price to be paid in installments; (ii) an agreement by
Borrower leasing all or a substantial part of the Property for other
than actual occupancy by a space tenant thereunder or a sale,
assignment or other transfer of, or the grant of a security interest
in, Borrower's right, title and interest in and to any Leases or any
Rents; (iii) if Borrower, Guarantor, or any general partner of Borrower
or Guarantor is a corporation, any merger, consolidation or the
voluntary or involuntary sale, conveyance or transfer of such
corporation's stock (or the stock of any corporation directly or
indirectly controlling such corporation by operation of law or
otherwise) or the creation or issuance of new stock in one or a series
of transactions by which an aggregate of ten percent (10%) or more of
such corporation's stock shall be vested in a party or parties who are
not now stockholders (provided, however, in no event shall this subpart
[iii] apply to any Guarantor whose stock, shares or partnership
interests are traded on a nationally recognized stock exchange); (iv)
if Borrower, Guarantor, or any general partner of Borrower or Guarantor
is a limited liability company or limited partnership, the voluntary or
involuntary sale, conveyance or transfer by which an aggregate of fifty
percent (50%) or more of the ownership interest in such limited
liability company or fifty percent (50%) or more of the limited
partnership interests in such limited partnership shall be vested in
parties not having an ownership interest as of the date of this
Security Instrument; and (v) if Borrower, any Guarantor or any general
partner of Borrower or any Guarantor is a limited or general
partnership or joint venture, the change, removal or resignation of a
general partner, managing partner or joint venturer or the transfer of
all or any portion of the partnership interest of any general partner,
managing partner or joint venturer.
Section 8.3 EXCLUDED AND PERMITTED TRANSFERS.
(a) A sale, conveyance, alienation, mortgage, encumbrance,
pledge or transfer within the meaning of this Article 8 shall not
include (i) transfers made by devise or descent or by operation of law
upon the death of a joint tenant, partner, member or shareholder,
subject, however, to all the following requirements: (A) written notice
of any transfer under this Section 8.3, whether by will, trust or other
written instrument, operation of law or otherwise, is provided to
Lender or its servicer, together with copies of such documents
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relating to the transfer as Lender or its servicer may reasonably
request, (B) control over the management and operation of the Property
is retained by Sheldahl, Inc., a Minnesota corporation (the "ORIGINAL
PRINCIPALS", whether one or more) at all times prior to the death or
legal incapacity of all the Original Principals and is thereafter
assumed by persons who are acceptable in all respects to Lender in its
sole and absolute discretion, (C) no such transfer by any of the
Original Principals will release the respective estate from any
liability as a Guarantor, and (D) no such transfer, death or other
event has any adverse effect either on the bankruptcy-remote status of
Borrower under the requirements of any national rating agency for the
Securities (hereinafter defined) or on the status of Borrower as a
continuing legal entity liable for the payment of the Debt and the
performance of all other obligations secured hereby, (ii) transfers
otherwise by operation of law in the event of a bankruptcy, or (iii) a
Lease of a portion of the Property to a space tenant.
(b) Notwithstanding any provision of this Security Instrument
to the contrary, the prohibitions in Subsection 8.2(a) shall not apply
to (i) an inter vivos or testamentary transfer of all or any portion
of the Property to one or more family members of Original Principals
or a trust in which all of the beneficial interest is held by one or
more family members of Original Principals or a partnership or limited
liability company in which a majority of the capital and profits
interests are held by one or more family members of Original
Principals, or (ii) any inter vivos or testamentary transfer or
issuance of capital stock in Borrower or the general partner of
Borrower to one or more family members of Original Principals a trust
in which all of the beneficial interest is held by one or more family
members of Original Principals or a partnership or limited liability
company in which a majority of the capital and profits interests are
held by one or more family members of Original Principals; provided,
that any inter vivos transfer of all or any portion of the Property or
any inter vivos transfer or issuance of capital stock in Borrower or
Borrower's general partner is made in connection with Original
Principals' bona fide, good faith estate planning and that the
person(s) with voting control of Borrower or the management of the
Property are (i) the same person(s) who had such voting control and
management rights immediately prior to the transfer in question, or
(ii) reasonably acceptable to Lender. Lender acknowledges that
Original Principals and/or an Original Principal's spouse are
acceptable to exercise voting control of Borrower and the management
of the Property. As used herein, "family members" shall include the
spouse, children and grandchildren and any lineal descendants.
(c) Notwithstanding the provisions of Section 8.2 above,
Lender will give its consent to a sale or transfer of Property, if
(but only if) no Event of Default under the Loan Documents has
occurred and is continuing, and if each of the following conditions
precedent have been fully satisfied (as determined in Lender's sole
and absolute discretion): (i) the grantee's or transferee's integrity,
reputation, financial condition, character and management ability are
satisfactory to Lender in its sole discretion, and all information
relating thereto requested by Lender is delivered to Lender at least
30 days prior to the proposed transfer, (ii) the grantee's or
transferee's (and its sole general partner's) single purpose and
bankruptcy remote character are satisfactory to Lender in its sole
discretion, and all information relating
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thereto requested by Lender is delivered to Lender at least 30 days
prior to the proposed transfer, (iii) Lender has obtained such
estoppels from any guarantors of the Note or replacement guarantors
and such other legal opinions, Securities and similar matters as
Lender may require, (iv) all of Lender's costs and expenses associated
with the sale or transfer (including reasonable attorneys' fees) are
paid by Borrower or the grantee or transferee, (v) the payment of a
transfer fee not to exceed 1% of the then unpaid principal balance of
the loan evidenced by the Note and secured hereby (the "LOAN"), (vi)
the execution and delivery to Lender of a written assumption agreement
and substitute guaranty (in its sole and absolute discretion) and such
modifications to the Loan Documents executed by such parties and
containing such terms and conditions as Lender may require in its sole
and absolute discretion prior to such sale or transfer (provided that
in the event the Loan is included in a REMIC and is a performing Loan,
no modification to the terms and conditions shall be made or permitted
that would cause (A) any adverse tax consequences to the REMIC or any
holders of any Mortgage-Backed Pass-Through Securities, (B) the
Security Instrument to fail to be a Qualifying Security Instrument
under applicable federal law relating to REMIC's, or (C) result in a
taxation of the income from the Loan to the REMIC or cause a loss of
REMIC status), and (vii) the delivery to Lender of an endorsement (at
Borrower's sole cost and expense) to Lender's policy of title
insurance then insuring the lien created by this Security Instrument
in form and substance acceptable to Lender in its sole judgment.
(d) Without limiting the foregoing, if Lender shall consent
to any such transfer, the written assumption agreement described in
Subsection 8.3(c)(vi) above shall provide for the release of Borrower
and, if approved by Lender, each Guarantor and Indemnitor of personal
liability under the Note and Other Loan Documents, but as to acts or
events occurring, or obligations arising, after the closing of such
transfer.
Section 8.4 NO IMPLIED FUTURE CONSENT. Lender's consent to one sale,
conveyance, alienation, mortgage, encumbrance, pledge or transfer of the
Property shall not be deemed to be a waiver of Lender's right to require such
consent to any future occurrence of same. Any sale, conveyance, alienation,
mortgage, encumbrance, pledge or transfer of the Property made in contravention
of this Article 8 shall be null and void and of no force and effect.
Section 8.5 COSTS OF CONSENT. Borrower agrees to bear and shall pay or
reimburse Lender on demand for all reasonable expenses (including, without
limitation, all recording costs, reasonable attorneys' fees and disbursements
and title search costs) incurred by Lender in connection with the review,
approval and documentation of any such sale, conveyance, alienation, mortgage,
encumbrance, pledge or transfer.
Section 8.6 CONTINUING SEPARATENESS REQUIREMENTS. In no event shall
any of the terms and provisions of this Article 8 amend or modify the terms and
provisions contained in Section 4.3 herein.
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ARTICLE 9 - DEFAULT
Section 9.1 EVENTS OF DEFAULT. The occurrence of any one or more of
the following events shall constitute an "EVENT OF DEFAULT":
(a) if any portion of the Debt is not paid prior to the tenth
(10th) calendar day after the same is due or if the entire Debt is not
paid on or before the maturity date, along with applicable prepayment
premiums, if any;
(b) if Borrower, or Principal, if applicable, violates or
does not comply with any of the provisions of Section 4.3 or Article
8;
(c) if any representation or warranty of Borrower or of its
members, general partners, principals, affiliates, agents or
employees, or of any Guarantor or Indemnitor made herein or in the
Environmental Indemnity or in any other Loan Document, in any
guaranty, or in any certificate, report, financial statement or other
instrument or document furnished to Lender shall have been false or
misleading in any material respect when made;
(d) if Borrower or any Guarantor or any Indemnitor shall make
an assignment for the benefit of creditors or if Borrower or any
Guarantor or Indemnitor shall admit in writing its inability to pay,
or Borrower's or any Guarantor's or any Indemnitor's failure to pay
its debts as they become due;
(e) if (i) Borrower or any subsidiary or general partner or
member of Borrower, or any Guarantor or any Indemnitor shall commence
any case, proceeding or other action (A) under any existing or future
law of any jurisdiction, domestic or foreign, relating to bankruptcy,
insolvency, reorganization, conservatorship or relief of debtors,
seeking to have an order for relief entered with respect to it, or
seeking to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-up, liquidation,
dissolution, composition or other relief with respect to it or its
debts, or (B) seeking appointment of a receiver, trustee, custodian,
conservator or other similar official for it or for all or any
substantial part of its assets, or Borrower or any subsidiary or
general partner or member of Borrower, or any Guarantor or any
Indemnitor shall make a general assignment for the benefit of its
creditors; or (ii) there shall be commenced against Borrower or any
subsidiary or general partner or member of Borrower, or any Guarantor
or any Indemnitor any case, proceeding or other action of a nature
referred to in clause (i) above which (A) results in the entry of an
order for relief or any such adjudication or appointment or (B)
remains undismissed, undischarged or unbonded for a period of sixty
(60) calendar days; or (iii) there shall be commenced against Borrower
or any subsidiary or general partner or member of Borrower or any
Guarantor or any Indemnitor any case, proceeding or other action
seeking issuance of a warrant of attachment, execution, distraint or
similar process against all or any substantial part of its assets
which results in the entry of any order for any such relief which
shall not have been vacated, discharged, or stayed or bonded pending
appeal within sixty (60) calendar days from the entry thereof; or (iv)
Borrower or any
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subsidiary or general partner or member of Borrower, or any Guarantor
or any Indemnitor shall take any action in furtherance of, or
indicating its consent to, approval of, or acquiescence in, any of the
acts set forth in clause (i), (ii) or (iii) above; or (v) Borrower or
any subsidiary or general partner or member of Borrower, or any
Guarantor or any Indemnitor shall generally not, or shall be unable
to, or shall admit in writing its inability to, pay its debts as they
become due;
(f) subject to Borrower's right to contest certain liens as
provided in this Security Instrument, if the Property becomes subject
to any mechanic's, materialman's or other lien other than a lien for
local real estate taxes and assessments not then due and payable and
the lien shall remain undischarged of record (by payment, bonding or
otherwise) for a period of thirty (30) calendar days;
(g) if any federal tax lien is filed against Borrower, any
general partner of Borrower, any Guarantor, any Indemnitor or the
Property and same is not discharged of record within thirty (30)
calendar days after same is filed;
(h) except as permitted in this Security Instrument, the
actual or threatened alteration, improvement, demolition or removal of
any of the Improvements without the prior consent of Lender;
(i) damage to the Property in any manner which is not covered
by insurance, which lack of coverage arises solely as a result of
Borrower's failure to maintain the insurance required under this
Security Instrument;
(j) if a property manager is appointed in accordance with
Section 5.2 (k) hereof, and if without Lender's prior written consent,
(i) such manager resigns or is removed, or (ii) the ownership,
management or control of such manager is transferred to a person or
entity other than the general partner, managing partner or managing
member of the Principal of the Borrower, or (iii) there is any
material change in the management agreement (or any successor
management agreement) for the operation of the Property;
(k) this Security Instrument shall cease to constitute a
first-priority lien on the Property (other than in accordance with its
terms);
(l) seizure or forfeiture of the Property, or any portion
thereof, or Borrower's interest therein, resulting from criminal
wrongdoing or other unlawful action of Borrower, its affiliates, or
any tenant in the Property under any federal, state or local law;
(m) if Borrower consummates a transaction which would cause
this Security Instrument or Lender's exercise of its rights under this
Security Instrument, the Note or the Other Loan Documents to
constitute a nonexempt prohibited transaction under ERISA or result in
a violation of a state statute regulating governmental plans,
subjecting Lender to liability for a violation of ERISA or a state
statute;
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(n) if any default occurs under the Environmental Indemnity
given by Borrower and Indemnitor to Lender and other Indemnified
Parties (as hereinafter defined) and such default continues after the
expiration of applicable notice and grace periods, if any;
(o) if any default occurs under any guaranty or indemnity
executed in connection herewith and such default continues after the
expiration of applicable grace periods, if any;
(q) if Borrower, any Guarantor or any Indemnitor, as the case
may be, shall continue to be in default under any other term, covenant
or condition of this Security Instrument or any Other Loan Documents
(excluding the Note) for thirty (30) calendar days after notice from
Lender; provided that if such default cannot reasonably be cured
within such thirty (30) calendar day period and Borrower (or such
Guarantor or Indemnitor as the case may be) shall have commenced to
cure such default within such thirty (30) calendar day period and
thereafter diligently and expeditiously proceeds to cure the same,
such thirty (30) calendar day period shall be extended for so long as
it shall require Borrower (or such Guarantor or Indemnitor as the case
may be) in the exercise of due diligence to cure such default, it
being agreed that no such extension shall be for a period in excess of
sixty (60) calendar days after the notice from Lender referred to
above;
(r) if a property manager is appointed, then if a default has
occurred and continues beyond any applicable cure period under the
management agreement (or any successor management agreement) or if
such default permits the manager to terminate or cancel the management
agreement (or any successor management agreement); and
(s) if Borrower shall fail to observe or perform any term,
covenant, condition or agreement in the Ground Lease beyond any cure
period contained therein, or if the Ground Lease shall be cancelled or
terminated for any reason.
Section 9.2 DEFAULT INTEREST. Borrower will pay, from the date of an
Event of Default through the earlier of the date upon which the Event of Default
is cured or the date upon which the Debt is paid in full, interest on the unpaid
principal balance of the Note at a per annum rate equal to the lesser of (a) the
greater of (i) five percent (5%) plus the Prime Rate (as defined in the Note),
and (ii) five percent (5%) plus the Applicable Interest Rate (as defined in the
Note), and (b) the maximum interest rate which Borrower may by law pay or Lender
may charge and collect (the "DEFAULT RATE").
ARTICLE 10 - RIGHTS AND REMEDIES
Section 10.1 REMEDIES. Upon the occurrence of any Event of Default,
Borrower agrees that Lender may take such action, by or through Trustee, by
Lender itself or otherwise, without notice or demand, as it deems advisable to
protect and enforce its rights against Borrower and in and to the Property,
including, but not limited to, the following actions, each of which may be
pursued concurrently or otherwise, at such time and in such order as Lender may
determine, in its sole discretion, without impairing or otherwise affecting the
other rights and remedies of Lender:
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(a) Acceleration. Lender may declare the entire principal of the Note
then outstanding, and all accrued and unpaid interest thereon, and all other
obligations of Borrower to Lender set forth in any of the Loan Documents
(including any premium due under the Note upon acceleration thereof), to be due
and payable immediately, anything in the Note, this Security Instrument or any
other Loan Document to the contrary notwithstanding.
(b) Right of Entry/Receiver. Lender, personally or by its agents or
attorneys, or through a duly appointed receiver, may enter into and upon and
take possession of all or any part of the Property, and each and every part
thereof, and all bank accounts and other accounts containing any monies, rents,
issues, profits, income, proceeds or revenue derived from the Property or the
occupancy, use, operation, maintenance, repair, management, leasing or enjoyment
thereof or any business conducted by Borrower or any other person on the
Property (collectively, the "Bank Accounts"), and any business assets used in
connection therewith and may exclude Borrower and its agents wholly therefrom;
and, having and holding the same, may use, operate, manage, maintain, repair,
lease, improve and control the Property and conduct the business thereof; and
Lender, personally, or by its agents or attorneys, or through a duly appointed
receiver shall thereafter be entitled to collect and receive all earnings,
revenues, rents, issues, profits, proceeds, royalties, rights, benefits, awards,
payments and income of, from, and relating to the Property and every part
thereof and any business conducted by Borrower or any other party thereon,
whether or not Lender or a receiver is then in possession of the Property.
Lender shall be entitled to the ex parte appointment of a receiver as a matter
of right and without proof of any grounds for appointment other than a default
hereunder and without notice to Borrower or to anyone claiming under Borrower,
and without regard to statutory grounds therefor, the solvency or insolvency of
Borrower or the then owner of the Property, or the condition of the Property,
and whether or not the apparent value of the Property exceeds the indebtedness
secured hereby, and any receiver appointed may serve without bond. Employment by
Lender shall not disqualify a person from serving as a receiver.
The exercise of any right under this Section shall not be deemed an
election of remedies or preclude the exercise of any other right or remedy.
Lender or the receiver shall be vested with the fullest powers permitted under
applicable law, including, without limitation, the power to:
(i) enter upon, take possession of and use, operate, manage,
maintain, repair, replace, lease, preserve, protect, control and
conduct the Property, the Bank Accounts, and any business conducted on
the Property and make expenditures for all maintenance, repairs, and
construction or renovation of Improvements as in its judgment are
proper;
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(ii) collect all earnings, rents, revenues, income, issues,
profits, royalties, rights, benefits, awards, and payments of, from or
relating to the Property or the use, occupation, operation or
enjoyment thereof and any business conducted thereon;
(iii) complete any construction in progress and in that
connection pay bills, borrow funds, employ contractors and make any
changes in plans or specifications as it deems appropriate;
(iv) oust tenants for nonpayment of rent and enter into,
abrogate, modify, terminate, ratify, confirm, renegotiate, and/or hold
all leases and rental agreements leasing or renting all or a portion
of the Property on such terms and conditions as are deemed
commercially reasonable in the receiver's judgment, including leases
for terms extending beyond the duration of the receivership;
(v) enter into, abrogate, modify, terminate, ratify, confirm
and/or renegotiate, contracts or other agreements related to the
operation of the Property, including, but not limited to, hiring and
firing of employees, present or future managers or management
companies, leasing agents, or other professionals dealing with the
Property;
(vi) enter into contracts with third parties to accomplish
any of the powers of the receivership and for purposes of
administration of the receivership, including, but not limited to, the
hiring of managers and/or management companies, leasing agents,
listing agents, accountants, attorneys, and other professionals, which
contracts may extend past the term of the receivership;
(vii) make alterations, renewals, replacements, additions,
betterments, improvements, and repairs and deduct the cost thereof
from the income;
(viii) pay appropriate operating, maintenance, management and
repair costs and expenses, and other costs and expenses of the
possession of the Property or the receivership;
(ix) make any payments and pay other amounts due under the
Note, this Security Instrument, or the other Loan Documents;
(x) pay other amounts secured by this Security Instrument or
the other Loan Documents;
(xi) pay taxes, assessments, ground rents, insurance
premiums, utility charges, payments due under the permits or licenses
necessary for the operation of the Property, and other similar charges
and renewals thereof; and
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(xii) perform such other duties as deemed appropriate by any
court with jurisdiction; provided that, if a receiver is appointed, in
no event shall any payments be made to the holder of any junior lien
or interest until the indebtedness evidenced and secured by this
Security Instrument and the other Loan Documents has been paid in
full.
If the revenues produced by the Property are insufficient to pay
expenses, the receiver may borrow, from Lender or otherwise, such sums as it
deems necessary for the purposes stated herein and issue receiver's certificates
for the sums advanced. In the event receivers' certificates are issued to and
held by Lender, repayment of such sums shall be secured by the lien hereof and
Lender may elect to treat the amount evidenced by such receivers' certificates
as an advance of funds under this Security Instrument or the Assignment of
Rents, in which event the amounts evidenced by such receivers' certificates
shall bear interest at the Default Rate and may be added (i) to the amount
necessary to cure any default, (ii) to the amount of the bid made by Lender at
the time of foreclosure sale or other proceedings, and (iii) to the cost of
redemption in the event the owner of the Property, Borrower, a junior lien
holder, or other person entitled to do so redeems any foreclosure sale.
Notwithstanding the foregoing, nothing contained herein shall be construed as
imposing any obligation on Lender to make such loan. If, at such time as Lender
is entitled to the appointment of a receiver pursuant to this Security
Instrument, Lender brings any action to have a receiver appointed, Borrower
agrees to pay to Lender the costs and attorneys' fees incurred by Lender
thereby.
(c) Judicial Action. Lender may bring an action in any court of
competent jurisdiction to foreclose this instrument or to enforce any of the
covenants and agreements hereof. Borrower hereby irrevocably submits in all
matters hereunder to the jurisdiction of any Colorado State or Federal court
sitting in the City and County of Denver, State of Colorado, as Lender may
elect, in any action or proceeding arising out of or relating to this Security
Instrument or any other Loan Document to which it is or will be party, and
Borrower hereby irrevocably agrees that all claims in respect of such actions or
proceedings may be heard and determined in such court. Borrower hereby
irrevocably waives, to the fullest extent it may effectively do so, any
objection it may have to the laying of venue or the defense of an inconvenient
forum, with respect to the maintenance of such actions or proceedings, and its
right to demand a trial by jury on any issue. Borrower also waives the pleading
of any statutes of limitation as a defense to any obligation secured by this
security Instrument or the other Loan Documents to the fullest extent it may
effectively do so. Nothing in this paragraph shall affect the right of Lender to
bring any action or proceeding against Borrower or its property in the courts of
any other jurisdictions.
(d) Sale. Trustee may, and, upon the written request of Lender, shall,
and Lender may to the extent permitted by law, with or without entry, personally
or by its agents or attorneys, insofar as applicable:
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(i) Sell the Property and otherwise exercise the power of
sale granted herein in the manner provided by Colorado law including
the following:
(1) Deliver to Trustee a written notice of default and
election and demand for sale to foreclose Borrower's
interest in the Property by advertisement and sale in the
manner provided in Colorado Revised Statutes, or any
successors thereto;
(2) Should Lender elect to foreclose by advertisement
and sale, Lender shall deposit with Trustee this Security
Instrument and the Note and such receipts and evidence of
expenditures made and secured hereby as Trustee may require.
Lender or Trustee shall then execute and cause to be
recorded and published as required by law a written notice
of default and election to sell the Property to satisfy the
obligations secured hereby, whereupon Trustee shall fix the
time and place of sale, give notice thereof as then required
by law and proceed to foreclose this Security Instrument in
the manner provided. If a person permitted to do so by
Colorado law (or any successor thereto) does not cure the
default as provided therein, or if Lender does not withdraw
the foreclosure, the sale shall be held on the date and at
the time and place designated in the notice of sale (or the
time to which the sale may be postponed as provided by law).
At Lender's election, Trustee may sell the Property either
in one parcel or in separate parcels at auction to the
highest bidder for cash, payable at the time of sale. For
purposes of facilitating a foreclosure, any personal
property shall, at the option of Lender and to the extent
permitted by the laws of the State of Colorado, be deemed
real property. Trustee shall deliver to the purchaser its
certificate of purchase and deed in form as required by law.
Any person, including Lender, may purchase at the sale. When
Trustee sells the Property pursuant to the powers provided
herein, Trustee shall apply the proceeds of sale to payment
of: first, the expenses of sale and the expenses of Trustee
and Lender, including, without limitation, attorneys' fees
and other costs and expenses as herein provided, second, to
the indebtedness and other amounts secured by this Security
Instrument then remaining unpaid with interest thereon at
the Default Rate; third, the surplus, if any, to the person
legally entitled to such surplus;
(ii) Institute proceedings for the complete or partial
foreclosure of this Security Instrument as a mortgage in the manner
provided by Colorado law; and/or
(iii) Abandon its security interest in the Property.
(e) Bid. Upon any judicial or nonjudicial sale made under or by
virtue of this Section, Lender may bid for and acquire the Property or any part
thereof and in lieu of paying cash therefor may make settlement for the purchase
price by crediting upon the
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indebtedness of Borrower secured by this Security Instrument the net sales price
after deducting therefrom the expenses of the sale and the cost of the action
and any other sums which Lender is authorized to deduct under applicable law or
this Security Instrument.
(f) No Contradiction. Nothing herein relating to foreclosure
procedures or specifying particular actions to be taken by Lender or by Trustee
shall be deemed to contradict or add to the requirements and procedures (now or
hereafter existing) of the law of the State of Colorado and any such conflict or
inconsistency shall be resolved in favor of the law of the State of Colorado
applicable at the time of foreclosure.
(g) Debt Secured; Redemption. This Security Instrument shall secure,
in addition to the indebtedness described herein, any additional advances,
whether mandatory or discretionary, and any expenditures made by Lender as
determined in its sole discretion, including, without limitation, any payments
made in respect of the Property and for taxes, special assessments, insurance
premiums, sums due on any prior lien or encumbrance, costs of completing the
construction of unfinished improvements, including, without limitation, tenant
improvements, costs of repair, maintenance and preservation of said
improvements, costs of leasing the Property or any portion thereof, utility
charges, delinquent payment fees, attorneys' fees and other charges which shall
bear interest at the Default Rate. It shall be lawful for the purchaser at any
sale under foreclosure of this Security Instrument or under execution or order
of any court of competent jurisdiction which has received from Trustee or the
sheriff conducting such sale a certificate of purchase evidencing such sale to
make expenditures for any of the following: taxes, special assessments,
insurance premiums, sums due on any prior lien or encumbrance, costs of
completing the construction of unfinished improvements, costs of repair,
maintenance and preservation of the Property, costs of leasing the Property or
any portion thereof, utility charges, costs of defending, protecting, and
securing the Property and the holder's interest therein, receiver's fees and
expenses, inspection fees, appraisal fees, costs of an environmental
investigation, court costs, attorney fees and expenses (including fees and
expenses of an attorney in the employment of the holder of the certificate of
purchase), fees and expenses of legal assistants and law clerks, and all other
costs and expenses which now or hereafter may be allowed by law. Such payments
and expenditures shall bear interest at the Default Rate from the date paid.
Before redemption can be made from such sale, the party redeeming shall be
required to pay, in addition to the amount specified in said certificate of
purchase, the further and additional amounts represented by the foregoing
expenditures. Upon the occurrence of an Event of Default or foreclosure and if,
in the opinion of Lender, it is necessary to complete construction of any
incomplete improvements or make repairs, alterations or renovations to the
Property, Lender shall have the right to proceed as it deems advisable, and in
that connection, Borrower does hereby appoint Lender as its attorney-in-fact to
do such things as are provided herein and such power of attorney is coupled with
an interest in the said property and is irrevocable.
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(h) Commercial Code Remedies. Lender may exercise any and all rights
and remedies granted to a secured party upon default under the Uniform
Commercial Code, including, without limiting the generality of the foregoing:
(i) the right to take possession of the Personal Property or any part thereof,
and to take such other measures as Lender may deem necessary for the care,
protection and preservation of the Personal Property, and (ii) request Borrower
at its expense to assemble the Personal Property and make it available to Lender
at a convenient place acceptable to Lender. Any notice of sale, disposition or
other intended action by Lender with respect to the Personal Property sent to
Borrower in accordance with the provisions hereof at least five (5) days prior
to such action, shall constitute commercially reasonable notice to Borrower.
(i) Apply Escrow Funds. Lender may apply any Funds (as defined in the
Escrow Agreement) and any other sums held in escrow or otherwise by Lender in
accordance with the terms of this Security Instrument or any Other Loan Document
to the payment of the following items in any order in its uncontrolled
discretion:
(i) Taxes and Other Charges;
(ii) Insurance Premiums;
(iii)Interest on the unpaid principal balance of the Note;
(iv) Amortization of the unpaid principal balance of the Note; and
(v) All other sums payable pursuant to the Note, this Security
Instrument and the Other Loan Documents, including without limitation
advances made by Lender pursuant to the terms of this Security
Instrument.
(j) Other Rights. Lender (i) may surrender the Policies maintained
pursuant to this Security Instrument or any part thereof, and upon receipt shall
apply the unearned premiums as a credit on the Debt, and, in connection
therewith, Borrower hereby appoints Lender as agent and attorney-in-fact (which
is coupled with an interest and is therefore irrevocable) for Borrower to
collect such premiums; and (ii) may apply the Tax and Insurance Escrow Fund (as
defined in the Escrow Agreement) and/or the Replacement Escrow Fund (as defined
in the Escrow Agreement) and any other funds held by Lender toward payment of
the Debt; and (iii) shall have and may exercise any and all other rights and
remedies which Lender may have at law or in equity, or by virtue of any of the
Loan Documents, or otherwise.
(k) Discontinuance of Remedies. In case Lender shall have proceeded to
invoke any right, remedy, or recourse permitted under the Loan Documents and
shall thereafter elect to discontinue or abandon same for any reason, Lender
shall have the unqualified right so to do and, in such event, Borrower and
Lender shall be restored to their former positions with
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respect to the Debt, the Loan Documents, the Property or otherwise, and the
rights, remedies, recourses and powers of Lender shall continue as if same had
never been invoked.
(l) Remedies Cumulative. All rights, remedies, and recourses of Lender
granted in the Note, this Security Instrument and the Other Loan Documents, any
other pledge of collateral, or otherwise available at law or equity: (i) shall
be cumulative and concurrent; (ii) may be pursued separately, successively, or
concurrently against Borrower, the Property, or any one or more of them, at the
sole discretion of Lender; (iii) may be exercised as often as occasion therefor
shall arise, it being agreed by Borrower that the exercise or failure to
exercise any of same shall in no event be construed as a waiver or release
thereof or of any other right, remedy, or recourse; (iv) shall be nonexclusive;
(v) shall not be conditioned upon Lender exercising or pursuing any remedy in
relation to the Property prior to Lender bringing suit to recover the Debt; and
(vi) in the event Lender elects to bring suit on the Debt and obtains a judgment
against Borrower prior to exercising any remedies in relation to the Property,
all liens and security interests, including the lien of this Security
Instrument, shall remain in full force and effect and may be exercised
thereafter at Lender's option.
(m) Bankruptcy Acknowledgment. In the event the Property or any
portion thereof or any interest therein becomes property of any bankruptcy
estate or subject to any state or federal insolvency proceeding, then Lender
shall immediately become entitled, in addition to all other relief to which
Lender may be entitled under this Security Instrument, to obtain (i) an order
from the Bankruptcy Court or other appropriate court granting immediate relief
from the automatic stay pursuant to ss. 362 of the Bankruptcy Code so to permit
Lender to pursue its rights and remedies against Borrower as provided under this
Security Instrument and all other rights and remedies of Lender at law and in
equity under applicable state law, and (ii) an order from the Bankruptcy Court
prohibiting Borrower's use of all "cash collateral" as defined under ss. 363 of
the Bankruptcy Code. In connection with such Bankruptcy Court orders, Borrower
shall not contend or allege in any pleading or petition filed in any court
proceeding that Lender does not have sufficient grounds for relief from the
automatic stay. Any bankruptcy petition or other action taken by the Borrower to
stay, condition, or inhibit Lender from exercising its remedies are hereby
admitted by Borrower to be in bad faith and Borrower further admits that Lender
would have just cause for relief from the automatic stay in order to take such
actions authorized under state law.
(n) Application of Proceeds. The proceeds from any sale, lease, or
other disposition made pursuant to this Security Instrument, or the proceeds
from the surrender of any insurance policies pursuant hereto, or any Rents
collected by Lender from the Property, or the Tax and Insurance Escrow Fund or
the Replacement Escrow Fund (as defined in the Escrow Agreement) or proceeds
from insurance which Lender elects to apply to the Debt pursuant to Article 3
hereof, shall be applied by Trustee, or by Lender, as the case may be, to the
Debt in the following order and priority: (1) to the payment of all expenses of
advertising, selling, and conveying the Property or part thereof, and/or
prosecuting or otherwise collecting Rents, proceeds, premiums or other sums
including reasonable
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attorneys' fees and a reasonable fee or commission to Trustee, not to exceed
five percent of the proceeds thereof or sums so received; (2) to that portion,
if any, of the Debt with respect to which no person or entity has personal or
entity liability for payment (the "EXCULPATED PORTION"), and with respect to the
Exculpated Portion as follows: first, to accrued but unpaid interest, second, to
matured principal, and third, to unmatured principal in inverse order of
maturity; (3) to the remainder of the Debt as follows: first, to the remaining
accrued but unpaid interest, second, to the matured portion of principal of the
Debt, and third, to prepayment of the unmatured portion, if any, of principal of
the Debt applied to installments of principal in inverse order of maturity; (4)
the balance, if any or to the extent applicable, remaining after the full and
final payment of the Debt to the holder or beneficiary of any inferior liens
covering the Property, if any, in order of the priority of such inferior liens
(Trustee and Lender shall hereby be entitled to rely exclusively on a commitment
for title insurance issued to determine such priority); and (5) the cash
balance, if any, to the Borrower. The application of proceeds of sale or other
proceeds as otherwise provided herein shall be deemed to be a payment of the
Debt like any other payment. The balance of the Debt remaining unpaid, if any,
shall remain fully due and owing in accordance with the terms of the Note and
the other Loan Documents.
Section 10.2 RIGHT OF ENTRY. Lender and its agents shall have the
right to enter and inspect the Property at all reasonable times.
ARTICLE 11 - INDEMNIFICATION; SUBROGATION
Section 11.1 GENERAL INDEMNIFICATION.
(a) Borrower shall indemnify, defend and hold Lender and Trustee
harmless against: (i) any and all claims for brokerage, leasing, finder's or
similar fees which may be made relating to the Property or the Debt, and (ii)
any and all liability, obligations, losses, damages, penalties, claims, actions,
suits, costs and expenses (including Lender's reasonable attorneys' fees,
together with reasonable appellate counsel fees, if any) of whatever kind or
nature which may be asserted against, imposed on or incurred by Lender or
Trustee in connection with the Debt, this Security Instrument, the Property, or
any part thereof, or the exercise by Lender or Trustee of any rights or remedies
granted to it under this Security Instrument; provided, however, that nothing
herein shall be construed to obligate Borrower to indemnify, defend and hold
harmless Lender from and against any and all liabilities, obligations, losses,
damages, penalties, claims, actions, suits, costs and expenses enacted against,
imposed on or incurred by Lender by reason of Lender's willful misconduct or
gross negligence.
(b) If Lender is made a party defendant to any litigation or any claim
is threatened or brought against Lender concerning the secured indebtedness,
this Security Instrument, the Property, or any part thereof, or any interest
therein, or the construction, maintenance, operation or occupancy or use
thereof, then Lender shall notify Borrower of such litigation or claim and
Borrower shall indemnify, defend and hold Lender harmless
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from and against all liability by reason of said litigation or claims,
including reasonable attorneys' fees (together with reasonable appellate
counsel fees, if any). The right to such attorneys' fees (together with
reasonable appellate counsel fees, if any) and expenses incurred by Lender
in any such litigation or claim of the type described in this Subsection
11.1(b), whether or not any such litigation or claim is prosecuted to
judgment, shall be deemed to have accrued on the commencement of such claim
or action and shall be enforceable whether or not such claim or action is
prosecuted to judgment. If Lender commences an action against Borrower to
enforce any of the terms hereof or to prosecute any breach by Borrower of
any of the terms hereof or to recover any sum secured hereby, Borrower
shall pay to Lender its reasonable attorneys' fees (together with
reasonable appellate counsel fees, if any) and expenses. If Borrower
breaches any term of this Security Instrument, Lender may engage the
services of an attorney or attorneys to protect its rights hereunder, and
in the event of such engagement following any breach by Borrower, Borrower
shall pay Lender reasonable attorneys' fees (together with reasonable
appellate counsel fees, if any) and expenses incurred by Lender, whether or
not an action is actually commenced against Borrower by reason of such
breach. All references to "ATTORNEYS" in this Subsection 11.1(b) and
elsewhere in this Security Instrument shall include without limitation any
attorney or law firm engaged by Lender and Lender's in-house counsel, and
all references to "FEES AND EXPENSES" in this Subsection 11.1(b) and
elsewhere in this Security Instrument shall include without limitation any
fees of such attorney or law firm and any allocation charges and allocation
costs of Lender's in-house counsel.
(c) A waiver of subrogation shall be obtained by Borrower from its
insurance carrier and, consequently, Borrower waives any and all right to
claim or recover against Lender, its officers, employees, agents and
representatives, for loss of or damage to Borrower, the Property,
Borrower's property or the property of others under Borrower's control from
any cause insured against or required to be insured against by the
provisions of this Security Instrument.
Section 11.2 ENVIRONMENTAL INDEMNIFICATION. Borrower shall, at its sole
cost and expense, protect, defend, indemnify, release and hold harmless the
Indemnified Parties from and against any and all Losses (as hereinafter defined)
imposed upon or incurred by or asserted against any Indemnified Parties (other
than those arising solely from a state of facts that first came into existence
after Lender acquired title to the Property through foreclosure or a deed in
lieu thereof), and directly or indirectly arising out of or in any way relating
to any one or more of the following: (a) any presence of any Hazardous
Substances (as hereinafter defined) in, on, above, or under the Property; (b)
any past, present or future Release (as hereinafter defined) of Hazardous
Substances in, on, above, under or from the Property; (c) any activity by
Borrower, any person or entity affiliated with Borrower, and any tenant or other
user of the Property in connection with any actual, proposed or threatened use,
treatment, storage, holding, existence, disposition or other Release,
generation, production, manufacturing, processing, refining, control,
management, abatement, removal, handling, transfer or transportation to or from
the Property of any Hazardous Substances at any time located in, under, on or
above the Property; (d) any activity by Borrower, any person or
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entity affiliated with Borrower, and any tenant or other user of the Property in
connection with any actual or proposed Remediation (as hereinafter defined) of
any Hazardous Substances at any time located in, under, on or above the
Property, whether or not such Remediation is voluntary or pursuant to court or
administrative order, including but not limited to any removal, remedial or
corrective action; (e) any past, present or threatened non-compliance or
violations of any Environmental Law (as hereinafter defined) (or permits issued
pursuant to any Environmental Law) in connection with the Property or operations
thereon, including but not limited to any failure by Borrower, any person or
entity affiliated with Borrower, and any tenant or other user of the Property to
comply with any order of any governmental authority in connection with any
Environmental Laws; (f) the imposition, recording or filing or the future
imposition, recording or filing of any Environmental Lien (as hereinafter
defined) encumbering the Property; (g) any administrative processes or
proceedings or judicial proceedings in any way connected with any matter
addressed in this Section 11.2; (h) any misrepresentation or inaccuracy in any
representation or warranty or material breach or failure to perform any
covenants or other obligations under the Environmental Indemnity of even date
executed by Borrower and Indemnitor; and (i) any diminution in value of the
Property in any way connected with any occurrence or other matter referred to in
this Section 11.2.
The term "ENVIRONMENTAL LAW" means any present and future federal,
state and local laws, statutes, ordinances, rules, regulations and the like, as
well as common law, relating to protection of human health or the environment,
relating to Hazardous Substances, relating to liability for or costs of
Remediation or prevention of Releases of Hazardous Substances or relating to
liability for or costs of other actual or threatened danger to human health or
the environment. The term "ENVIRONMENTAL LAW" includes, but is not limited to,
the following statutes, as amended, any successor thereto, and any regulations
promulgated pursuant thereto, and any state or local statutes, ordinances,
rules, regulations and the like addressing similar issues: the Comprehensive
Environmental Response, Compensation and Liability Act; the Emergency Planning
and Community Right-to-Know Act; the Hazardous Substances Transportation Act;
the Resource Conservation and Recovery Act (including but not limited to
Subtitle I relating to underground storage tanks); the Solid Waste Disposal Act;
the Clean Water Act; the Clean Air Act; the Toxic Substances Control Act; the
Safe Drinking Water Act; the Occupational Safety and Health Act; the Federal
Water Pollution Control Act; the Federal Insecticide, Fungicide and Rodenticide
Act; the Endangered Species Act; the National Environmental Policy Act; and the
River and Harbors Appropriation Act. The term "ENVIRONMENTAL LAW" also includes,
but is not limited to, any present and future federal, state and local laws,
statutes, ordinances, rules, regulations and the like, as well as common law:
conditioning transfer of property upon a negative declaration or other approval
of a governmental authority of the environmental condition of the Property;
requiring notification or disclosure of Releases of Hazardous Substances or
other environmental condition of the Property to any governmental authority or
other person or entity, whether or not in connection with transfer of title to
or interest in property; imposing conditions or requirements in connection with
permits or other authorization for lawful activity; relating to nuisance,
trespass or other causes of action related to the Property; and relating to
wrongful death, personal injury, or property or other damage in connection with
any physical condition or use of the Property.
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The term "ENVIRONMENTAL LIEN" includes but is not limited to any lien
or other encumbrance imposed pursuant to Environmental Law, whether due to any
act or omission of Borrower or any other person or entity.
The term "HAZARDOUS SUBSTANCES" includes but is not limited to any and
all substances (whether solid, liquid or gas) defined, listed, or otherwise
classified as pollutants, hazardous wastes, hazardous substances, hazardous
materials, extremely hazardous wastes, or words of similar meaning or regulatory
effect under any present or future Environmental Laws or that may have a
negative impact on human health or the environment, including but not limited to
petroleum and petroleum products, asbestos and asbestos-containing materials,
polychlorinated biphenyls, lead, lead-based paints, radon, radioactive
materials, flammables and explosives.
The term "INDEMNIFIED PARTIES" includes but is not limited to Lender,
any person or entity who is or will have been involved in originating the Loan
evidenced by the Note, any person or entity who is or will have been involved in
servicing the Loan, any person or entity in whose name the encumbrance created
by this Security Instrument is or will have been recorded, persons and entities
who may hold or acquire or will have held a full or partial interest in the Loan
(including but not limited to those who may acquire any interest in Securities,
as well as custodians, trustees and other fiduciaries who hold or have held a
full or partial interest in the Loan for the benefit of third parties), as well
as the respective directors, officers, shareholders, partners, employees,
agents, servants, representatives, contractors, subcontractors, affiliates,
subsidiaries, participants, successors and assign of any and all of the
foregoing (including but not limited to any other person or entity who holds or
acquires or will have held a participation or other full or partial interest in
the Loan or the Property, whether during the term of the Loan or as part of or
following foreclosure pursuant to the Loan) and including but not limited to any
successors by merger, consolidation or acquisition of all or a substantial part
of Lender's assets and business.
The term "LOSSES" includes but is not limited to any claims, suits,
liabilities (including but not limited to strict liabilities), administrative or
judicial actions or proceedings, obligations, debts, damages, losses, costs,
expenses, diminutions in value, fines, penalties, charges, fees, expenses, costs
of Remediation (whether or not performed voluntarily), judgments, award, amounts
paid in settlement, foreseeable and unforeseeable consequential damages,
litigation costs, attorneys' fees, engineer's fees, environmental consultants'
fees and investigation costs (including but not limited to costs for sampling,
testing and analysis of soil, water, air, building materials, and other
materials and substances whether solid, liquid or gas), of whatever kind or
nature, and whether or not incurred in connection with any judicial or
administrative proceedings.
The term "RELEASE" with respect to any Hazardous Substance includes but
is not limited to any release, deposit, discharge, emission, leaking, leaching,
spilling, seeping, migrating, injecting, pumping, pouring, emptying, escaping,
dumping, disposing or other movement of Hazardous Substances.
The term "REMEDIATION" includes but is not limited to any response,
remedial, removal, or corrective action; any activity to cleanup, detoxify,
decontaminate, contain or otherwise remediate
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any Hazardous Substance; any actions to prevent, cure or mitigate any Release of
any Hazardous Substance; any action to comply with any Environmental Laws or
with any permits issued pursuant thereto; any inspection, investigation, study,
monitoring, assessment, audit, sampling and testing, laboratory or other
analysis, or evaluation relating to any Hazardous Substances or to anything
referred to in this Article 11.
Section 11.3 EXCLUDED OCCURRENCES. Notwithstanding any provision of
this Security Instrument to the contrary, where after the date of this Security
Instrument there shall occur an event (including, without limitation, a Release)
for which Borrower would have an obligation under this Security Instrument to
indemnify, defend, protect or hold harmless the Indemnified Parties, then
Borrower shall have no such obligation to indemnify, defend, protect, release
and hold harmless the Indemnified Parties from and against Losses for acts or
omissions the cause(s) of which is outside or beyond the control of Borrower.
For purposes of this Section 11.3, Borrower shall be deemed and construed to
have control over the acts and omissions of all tenants and subtenants of the
Property and each of their respective agents, vendors, guests, invitees,
licencees, servants, employees, officers, directors, representatives,
contractors, subcontractors, affiliates and subsidiaries.
Section 11.4 DUTY TO DEFEND AND ATTORNEYS AND OTHER FEES AND EXPENSES.
Upon written request by any Indemnified Party, Borrower shall defend such
Indemnified Party (if requested by any Indemnified Party, in the name of the
Indemnified Party) by attorneys and other professionals approved by the
Indemnified Parties. Notwithstanding the foregoing, any Indemnified Parties may,
in their sole and absolute discretion, engage their own attorneys and other
professionals to defend or assist them, and, at the option of Indemnified
Parties, their attorneys shall control the resolution of claim or proceeding.
Upon demand, Borrower shall pay or, in the sole and absolute discretion of the
Indemnified Parties, reimburse, the Indemnified Parties for the payment of
reasonable fees and disbursements of attorneys, engineers, environmental
consultants, laboratories and other professionals in connection therewith.
Section 11.5 SURVIVAL OF INDEMNITIES. Notwithstanding any provision of
this Security Instrument or any other Loan Document to the contrary, the
provisions of Section 11.1 and Section 11.2, and Borrower's obligations
thereunder, shall survive (a) the repayment of the Note, (b) the foreclosure of
this Security Instrument, and (c) the release (or reconveyance, as applicable)
of the lien of this Security Instrument.
ARTICLE 12 - SECURITY AGREEMENT
Section 12.1 SECURITY AGREEMENT. This Security Instrument is both a
real property mortgage and a "security agreement" within the meaning of the
Uniform Commercial Code. The Property includes both real and personal property
and all other rights and interests, whether tangible or intangible in nature, of
Borrower in the Property. Borrower by executing and delivering this Security
Instrument has granted and hereby grants to Lender and Trustee, as security for
the Obligations, a security interest in the Property to the full extent that the
Property may be subject to the Uniform Commercial
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Code (said portion of the Property so subject to the Uniform Commercial Code
being called in this paragraph the "COLLATERAL"). Borrower hereby agrees with
Lender to execute and deliver to Lender, in form and substance satisfactory to
Lender, such financing statements, continuation statements, other uniform
commercial code forms and shall pay all expenses and fees in connection with the
filing and recording thereof, and such further assurances as Lender may from
time to time, reasonably consider necessary to create, perfect, and preserve
Lender's security interest herein granted. This Security Instrument shall also
constitute a "fixture filing" for the purposes of the Uniform Commercial Code.
All or part of the Property are or are to become fixtures. Information
concerning the security interest herein granted may be obtained from the parties
at the addresses of the parties set forth in the first paragraph of this
Security Instrument. If an Event of Default shall occur, Lender, in addition to
any other rights and remedies which they may have, shall have and may exercise
immediately and without demand, any and all rights and remedies granted to a
secured party upon default under the Uniform Commercial Code, including, without
limiting the generality of the foregoing, the right to take possession of the
Collateral or any part thereof, and to take such other measures as Lender may
deem necessary for the care, protection and preservation of the Collateral. Upon
request or demand of Lender, Borrower shall at its expense assemble the
Collateral and make it available to Lender at a convenient place acceptable to
Lender. Borrower shall pay to Lender on demand any and all expenses, including
legal expenses and attorneys' fees, incurred or paid by Lender in protecting the
interest in the Collateral and in enforcing the rights hereunder with respect to
the Collateral. Any notice of sale, disposition or other intended action by
Lender with respect to the Collateral sent to Borrower in accordance with the
provisions hereof at least five (5) days prior to such action, shall constitute
commercially reasonable notice to Borrower. The proceeds of any disposition of
the Collateral, or any part thereof, may be applied by Lender to the payment of
the Obligations in such priority and proportions as Lender in its discretion
shall deem proper. In the event of any change in name, identity or structure of
any Borrower, such Borrower shall notify Lender thereof, and promptly after
request shall execute, file and record such Uniform Commercial Code forms as are
necessary to maintain the priority of Lender's lien upon and security interest
in the Collateral, and shall pay all expenses and fees in connection with the
filing and recording thereof. If Lender shall require the filing or recording of
additional Uniform Commercial Code forms or continuation statements, Borrower
shall, promptly after request, execute, file and record such Uniform Commercial
Code forms or continuation statements as Lender shall deem necessary, and shall
pay all expenses and fees in connection with the filing and recording thereof it
being understood and agreed, however, that no such additional documents shall
increase Borrower's obligations under the Note, this Security Instrument and the
Other Loan Documents. Borrower hereby irrevocably appoints Lender as its
attorney-in-fact, coupled with an interest, to file with the appropriate public
office on its behalf any financing or other statements signed only by Lender, as
Borrower's attorney-in-fact, in connection with the Collateral covered by this
Security Instrument. Notwithstanding the foregoing, Borrower shall appear and
defend in any action or proceeding which affects or purports to affect the
Property and any interest or right therein, whether such proceeding effects
title or any other rights in the Property (and in conjunction therewith,
Borrower shall fully cooperate with Lender in the event Lender is a party to
such action or proceeding).
ARTICLE 13 - WAIVERS
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Section 13.1 MARSHALLING AND OTHER MATTERS. Borrower hereby waives, to
the extent permitted by law, the benefit of all appraisement, valuation, stay,
extension, reinstatement and redemption laws now or hereafter in force and all
rights of marshalling in the event of any sale hereunder of the Property or any
part thereof or any interest therein. Further, Borrower hereby expressly waives
any and all rights of redemption from sale under any order or decree of
foreclosure of this Security Instrument on behalf of Borrower, and on behalf of
each and every person acquiring any interest in or title to the Property
subsequent to the date of this Security Instrument and on behalf of all persons
to the extent permitted by applicable law.
Section 13.2 WAIVER OF NOTICE. Borrower shall not be entitled to any
notices of any nature whatsoever from Lender except with respect to matters for
which this Security Instrument specifically and expressly provides for the
giving of notice by Lender to Borrower and except with respect to matters for
which Lender is required by applicable law to give notice, and Borrower hereby
expressly waives the right to receive any notice from Lender with respect to any
matter for which this Security Instrument does not specifically and expressly
provide for the giving of notice by Lender to Borrower.
Section 13.3 SOLE DISCRETION OF LENDER. Wherever pursuant to this
Security Instrument Lender exercises any right given to it to approve or
disapprove, or any arrangement or term is to be satisfactory to Lender, the
decision of Lender to approve or disapprove or to decide that arrangements or
terms are satisfactory or not satisfactory shall be in the sole discretion of
Lender and shall be final and conclusive, except as may be otherwise expressly
and specifically provided herein.
Section 13.4 SURVIVAL. The indemnifications made pursuant to Article
11, shall continue indefinitely in full force and effect and shall survive and
shall in no way be impaired by: any satisfaction or other termination of this
Security Instrument, any assignment or other transfer of all or any portion of
this Security Instrument or Lender's interest in the Property (but, in such
case, shall benefit both Indemnified Parties and any assignee or transferee),
any exercise of Lender's rights and remedies pursuant hereto including but not
limited to foreclosure or acceptance of a deed in lieu of foreclosure, any
exercise of any rights and remedies pursuant to the Note or any of the Other
Loan Documents, any transfer of all or any portion of the Property (whether by
Borrower or by Lender following foreclosure or acceptance of a deed in lieu of
foreclosure or at any other time), any amendment to this Security Instrument,
the Note or the Other Loan Documents, and any act or omission that might
otherwise be construed as a release or discharge of Borrower from the
obligations pursuant hereto.
Section 13.5 WAIVER OF TRIAL BY JURY.
BORROWER HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE
TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE
EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THIS
SECURITY INSTRUMENT, THE NOTE OR THE OTHER LOAN DOCUMENTS, OR ANY CLAIM,
COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION THEREWITH INCLUDING, BUT NOT
LIMITED TO
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THOSE RELATING TO (A) ALLEGATIONS THAT A PARTNERSHIP EXISTS BETWEEN
LENDER AND BORROWER; (B) USURY OR PENALTIES OR DAMAGES THEREFOR; (C) ALLEGATIONS
OF UNCONSCIONABLE ACTS, DECEPTIVE TRADE PRACTICE, LACK OF GOOD FAITH OR FAIR
DEALING, LACK OF COMMERCIAL REASONABLENESS, OR SPECIAL RELATIONSHIPS (SUCH AS
FIDUCIARY, TRUST OR CONFIDENTIAL RELATIONSHIP); (D) ALLEGATIONS OF DOMINION,
CONTROL, ALTER EGO, INSTRUMENTALITY, FRAUD, REAL ESTATE FRAUD,
MISREPRESENTATION, DURESS, COERCION, UNDUE INFLUENCE, INTERFERENCE OR
NEGLIGENCE; (E) ALLEGATIONS OF TORTIOUS INTERFERENCE WITH PRESENT OR PROSPECTIVE
BUSINESS RELATIONSHIPS OR OF ANTITRUST; OR (F) SLANDER, LIBEL OR DAMAGE TO
REPUTATION. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND
VOLUNTARILY BY BORROWER, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH INSTANCE
AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE ACCRUE.
LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY PROCEEDING
AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY BORROWER.
Section 13.6 WAIVER OF AUTOMATIC OR SUPPLEMENTAL STAY. In the event of
the filing of any voluntary or involuntary petition under the Bankruptcy Code by
or against Borrower (other than an involuntary petition filed by or joined in by
Lender), the Borrower shall not assert, or request any other party to assert,
that the automatic stay under ss. 362 of the Bankruptcy Code shall operate or be
interpreted to stay, interdict, condition, reduce or inhibit the ability of
Lender to enforce any rights it has by virtue of this Security Instrument, or
any other rights that Lender has, whether now or hereafter acquired, against any
guarantor of the Debt. Further, Borrower shall not seek a supplemental stay or
any other relief, whether injunctive or otherwise, pursuant to ss. 105 of the
Bankruptcy Code or any other provision therein to stay, interdict, condition,
reduce or inhibit the ability of Lender to enforce any rights it has by virtue
of this Security Instrument against any guarantor of the Debt. The waivers
contained in this paragraph are a material inducement to Lender's willingness to
enter into this Security Instrument and Borrower acknowledges and agrees that no
grounds exist for equitable relief which would bar, delay or impede the exercise
by Lender of Lender's rights and remedies against Borrower or any guarantor of
the Debt.
ARTICLE 14 - NOTICES
Section 14.1 NOTICES. All notices or other written communications
hereunder shall be deemed to have been properly given (i) upon delivery, if
delivered in person or by facsimile transmission with receipt acknowledged, (ii)
one (1) Business Day after having been deposited for overnight delivery with any
reputable overnight courier service, or (iii) three (3) Business Days after
having been deposited in any post office or mail depository regularly maintained
by the U.S. Postal Service and sent by registered or certified mail, postage
prepaid, addressed as follows:
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If to Borrower: Sheldahl Colorado LLC
1150 Sheldahl Road, P.O. Box 170,
Northfield, Minnesota 55057
Attention: Jill D. Burchill
Facsimile: (507) 663-8545
If to Fee Owner: Sheldahl, Inc.
1150 Sheldahl Road, P.O. Box 170,
Northfield, Minnesota 55057
Attention: Jill D. Burchill
Facsimile: (507) 663-8545
With a copy to: Lindquist & Vennum, PLLP
4200 IDS Center
80 South 8th Street
Minneapolis, Minnesota 55402-2205
Attention: Debra K. Page, Esq.
Facsimile No.: (612) 371-3207
If to Lender: Morgan Guaranty Trust Company of New York
60 Wall Street
New York, New York 10260-0060
Attention: Nancy Alto, Commercial Mortgage
Finance Group
Loan Servicing
Facsimile No.: (212) 648-5274
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With a copy to: Womble Carlyle Sandridge & Rice, PLLC
3500 One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
Attention: Robert F. Cook, Esq.
Facsimile No.: (404) 888-7490
or addressed as such party may from time to time designate by written notice to
the other parties. For purposes of this subsection, the term "BUSINESS DAY"
shall mean a day on which commercial banks are not authorized or required by law
to close in New York, New York.
Any party by notice to the other parties may designate additional or
different addresses for subsequent notices or communications.
ARTICLE 15 - APPLICABLE LAW
Section 15.1 GOVERNING LAW; JURISDICTION. This Security Instrument
shall be governed by and construed in accordance with applicable federal law and
the laws of the state where the Property is located, without reference or giving
effect to any choice of law doctrine. Borrower hereby irrevocably submits to the
jurisdiction of any court of competent jurisdiction located in the state in
which the Property is located in connection with any proceeding arising out of
or relating to this Security Instrument.
Section 15.2 USURY LAWS. This Security Instrument and the Note are
subject to the express condition that at no time shall Borrower be obligated or
required to pay interest on the Debt at a rate which could subject the holder of
the Note to either civil or criminal liability as a result of being in excess of
the maximum interest rate which Borrower is permitted by applicable law to
contract or agree to pay. If by the terms of this Security Instrument or the
Note, Borrower is at any time required or obligated to pay interest on the Debt
at a rate in excess of such maximum rate, the rate of interest under the
Security Instrument and the Note shall be deemed to be immediately reduced to
such maximum rate and the interest payable shall be computed at such maximum
rate and all prior interest payments in excess of such maximum rate shall be
applied and shall be deemed to have been payments in reduction of the principal
balance of the Note. All sums paid or agreed to be paid to Lender for the use,
forbearance, or detention of the Debt shall, to the extent permitted by
applicable law, be amortized, prorated, allocated, and spread throughout the
full stated term of the Note until payment in full so that the rate or amount of
interest on account of the Debt does not exceed the maximum lawful rate of
interest from time to time in effect and applicable to the Debt for so long as
the Debt is outstanding.
Section 15.3 PROVISIONS SUBJECT TO APPLICABLE LAW. All rights, powers
and remedies provided in this Security Instrument may be exercised only to the
extent that the exercise thereof does not violate any applicable provisions of
law and are intended to be limited to the extent necessary so that they will not
render this Security Instrument invalid, unenforceable or not entitled to be
recorded, registered or filed under the provisions of any applicable law. If any
term of this
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Security Instrument or any application thereof shall be invalid or
unenforceable, the remainder of this Security Instrument and any other
application of the term shall not be affected thereby.
ARTICLE 16 - SECONDARY MARKET
Section 16.1 TRANSFER OF LOAN. Lender may, at any time, sell, transfer
or assign the Note, this Security Instrument and the Other Loan Documents, and
any or all servicing rights with respect thereto, or grant participations
therein or issue mortgage pass-through certificates or other securities
evidencing a beneficial interest in a rated or unrated public offering or
private placement (the "SECURITIES"). Lender may forward to each purchaser,
transferee, assignee, servicer, participant, investor in such Securities or any
Rating Agency (as hereinafter defined) rating such Securities (collectively, the
"INVESTOR") and each prospective Investor, all documents and information which
Lender now has or may hereafter acquire relating to the Debt and to Borrower,
any Guarantor, any Indemnitor and the Property, whether furnished by Borrower,
any Guarantor, any Indemnitor or otherwise, as Lender determines necessary or
desirable. The term "RATING AGENCY" shall mean each statistical rating agency
that has assigned a rating to the Securities.
ARTICLE 17 - COSTS
Section 17.1 PERFORMANCE AT BORROWER'S EXPENSE. Borrower acknowledges
and confirms that Lender shall impose certain administrative processing and/or
commitment fees in connection with (a) the extension, renewal, modification,
amendment and termination (excluding the scheduled maturity of the Note) of its
loans, (b) the release or substitution of collateral therefor, or (c) obtaining
certain consents, waivers and approvals with respect to the Property (the
occurrence of any of the above shall be called an "EVENT"). Borrower hereby
acknowledges and agrees to pay, immediately, upon demand, all such fees (as the
same may be increased or decreased from time to time), and any additional fees
of a similar type or nature which may be imposed by Lender from time to time,
upon the occurrence of any Event.
Section 17.2 ATTORNEY'S FEES FOR ENFORCEMENT. (a) Borrower shall pay
all legal fees incurred by Lender in connection with (i) the preparation of the
Note, this Security Instrument and the Other Loan Documents and (ii) the items
set forth in Section 17.1 above, and (b) Borrower shall pay to Lender on demand
any and all expenses, including legal expenses and attorneys' fees, incurred or
paid by Lender in protecting its interest in the Property or Personal Property
and/or collecting any amount payable or in enforcing its rights hereunder with
respect to the Property or Personal Property, whether or not any legal
proceeding is commenced hereunder or thereunder and whether or not any default
or Event of Default shall have occurred and is continuing, together with
interest thereon at the Default Rate from the date of payment or incurring by
Lender until paid by Borrower.
ARTICLE 18 - DEFINITIONS
Section 18.1 GENERAL DEFINITIONS. Unless the context clearly indicates
a contrary intent or unless otherwise specifically provided herein, words used
in this Security Instrument may
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be used interchangeably in singular or plural form and the word "BORROWER" shall
mean "each Borrower and any subsequent owner or owners of the Property or any
part thereof or any interest therein," the word "LENDER" shall mean "Lender and
any subsequent holder of the Note," the word "NOTE" shall mean "the Note and any
other evidence of indebtedness secured by this Security Instrument," the word
"PERSON" shall include an individual, corporation, partnership, trust,
unincorporated association, government, governmental authority, and any other
entity, the word "PROPERTY" shall include any portion of the Property and any
interest therein, and the phrases "ATTORNEYS' FEES," "LEGAL FEES" and "COUNSEL
FEES" shall include any and all attorneys', paralegal and law clerk fees and
disbursements, including, but not limited to, fees and disbursements at the
pre-trial, trial and appellate levels incurred or paid by Lender in protecting
its interest in the Property, the Leases and the Rents and enforcing its rights
hereunder.
ARTICLE 19 - MISCELLANEOUS PROVISIONS
Section 19.1 NO ORAL CHANGE. This Security Instrument, the Note, and
the Other Loan Documents and any provisions hereof or thereof, may not be
modified, amended, waived, extended, changed, discharged or terminated orally or
by any act or failure to act on the part of Borrower or Lender, but only by an
agreement in writing signed by the party against whom enforcement of any
modification, amendment, waiver, extension, change, discharge or termination is
sought.
Section 19.2 LIABILITY. If Borrower consists of more than one person,
the obligations and liabilities of each such person hereunder shall be joint and
several. This Security Instrument shall be binding upon and inure to the benefit
of Borrower and Lender and their respective successors and assigns forever.
Section 19.3 INAPPLICABLE PROVISIONS. If any term, covenant or
condition of the Note or this Security Instrument is held to be invalid, illegal
or unenforceable in any respect, the Note and this Security Instrument shall be
construed without such provision.
Section 19.4 HEADINGS, ETC. The headings and captions of various
Sections of this Security Instrument are for convenience of reference only and
are not to be construed as defining or limiting, in any way, the scope or intent
of the provisions hereof.
Section 19.5 DUPLICATE ORIGINALS; COUNTERPARTS. This Security
Instrument may be executed in any number of duplicate originals and each
duplicate original shall be deemed to be an original. This Security Instrument
may be executed in several counterparts, each of which counterparts shall be
deemed an original instrument and all of which together shall constitute a
single Security Instrument. The failure of any party hereto to execute this
Security Instrument, or any counterpart hereof, shall not relieve the other
signatories from their obligations hereunder.
Section 19.6 NUMBER AND GENDER. Whenever the context may require, any
pronouns used herein shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns and pronouns shall include the
plural and vice versa.
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Section 19.7 SUBROGATION. If any or all of the proceeds of the Note
have been used to extinguish, extend or renew any indebtedness heretofore
existing against the Property, then, to the extent of the funds so used, Lender
shall be subrogated to all of the rights, claims, liens, titles, and interests
existing against the Property heretofore held by, or in favor of, the holder of
such indebtedness and such former rights, claims, liens, titles, and interests,
if any, are not waived but rather are continued in full force and effect in
favor of Lender and are merged with the lien and security interest created
herein as cumulative security for the repayment of the Debt, the performance and
discharge of Borrower's obligations hereunder, under the Note and the Other Loan
Documents and the performance and discharge of the Other Obligations.
Section 19.8 ENTIRE AGREEMENT. The Note, this Security Instrument and
the Other Loan Documents constitute the entire understanding and agreement
between Borrower and Lender with respect to the transactions arising in
connection with the Debt and supersede all prior written or oral understandings
and agreements between Borrower and Lender with respect thereto. Borrower hereby
acknowledges that, except as incorporated in writing in the Note, this Security
Instrument and the Other Loan Documents, there are not, and were not, and no
persons are or were authorized by Lender to make, any representations,
understandings, stipulations, agreements or promises, oral or written, with
respect to the transaction which is the subject of the Note, this Security
Instrument and the Other Loan Documents.
ARTICLE 20 - TRUSTEE
Trustee may resign by the giving of notice of such resignation in
writing or verbally to Lender. If Trustee shall die, resign, or become
disqualified from acting in the execution of this trust, or if, for any reason,
Lender shall prefer to appoint a substitute trustee or multiple substitute
trustees, or successive substitute trustees or successive multiple substitute
trustees, to act instead of the aforenamed Trustee, Lender shall have full power
to appoint a substitute trustee (or, if preferred, multiple substitute trustees)
in succession who shall succeed (and if multiple substitute trustees are
appointed, each of such multiple substitute trustees shall succeed) to all the
estates, rights, powers, and duties of the aforenamed Trustee. Such appointment
may be executed by any authorized agent of Lender, and if such Lender be a
corporation and such appointment be executed in its behalf by any officer of
such corporation, such appointment shall be conclusively presumed to be executed
with authority and shall be valid and sufficient without proof of any action by
the board of directors or any superior officer of the corporation. Borrower
hereby ratifies and confirms any and all acts which the aforenamed Trustee, or
his successor or successors in this trust, shall do lawfully by virtue hereof.
If multiple substitute Trustees are appointed, each of such multiple substitute
Trustees shall be empowered and authorized to act alone without the necessity of
the joinder of the other multiple substitute trustees, whenever any action or
undertaking of such substitute trustees is requested or required under or
pursuant to this Security Instrument or applicable law. Any substitute Trustee
appointed pursuant to any of the provisions hereof shall, without any further
act, deed, or conveyance, become vested with all the estates, properties,
rights, powers, and trusts of its or his predecessor in the rights hereunder
with like effect as if originally named as Trustee herein; but nevertheless,
upon the written request of Lender or of the substitute Trustee, the Trustee
ceasing to
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act shall execute and deliver any instrument transferring to such substitute
Trustee, upon the trusts herein expressed, all the estates, properties, rights,
powers, and trusts of the Trustee so ceasing to act, and shall duly assign,
transfer and deliver any of the property and moneys held by such Trustee to the
substitute Trustee so appointed in the Trustee's place. No fees or expenses
shall be payable to Trustee, except in connection with a foreclosure of the
Property or any part thereof or in connection with the release of the Property
following payment in full of the Debt.
ARTICLE 21 - GROUND LEASE PROVISIONS
(a) Borrower will: (i) pay the rent reserved by the Ground
Lease as the same becomes due and payable; (ii) promptly perform and
observe all of the covenants, agreements, obligations and conditions
required to be performed and observed by the Borrower under the Ground
Lease, and do all things necessary to preserve and keep unimpaired its
rights thereunder; (iii) promptly notify Lender in writing of the
commencement of a proceeding under the federal bankruptcy laws by or
against Borrower or the Fee Owner under the Ground Lease; (iv) if any
of the indebtedness secured hereby remains unpaid at the time when
notice may be given by the Lender under the Ground Lease of the
exercise of any right to renew or extend the term of the Ground Lease,
promptly give notice to the ground lessor of the exercise of such right
of extension or renewal; (v) in case any proceeds of insurance upon the
Property or any part thereof are deposited with any person other than
Lender, promptly notify Lender in writing of the name and address of
the person with whom such proceeds have been deposited and the amount
so deposited; (vi) promptly notify the Lender in writing of the receipt
by the Borrower of any notice (other than notices customarily sent on a
regular periodic basis) from the ground lessor under the Ground Lease
and of any notice noting or claiming any default by the Borrower in the
performance or observance of any of the terms, covenants, or conditions
on the part of the Borrower to be performed or observed under the
Ground Lease; (vii) promptly notify the Lender in writing of the
receipt by the Borrower of any notice from the ground lessor of any
termination of the Ground Lease pursuant to the provisions of the
Ground Lease; (viii) promptly cause a copy of each such notice received
by the Borrower from the ground lessor under the Ground Lease to be
delivered to the Lender, and (ix) promptly notify Lender in writing of
any request made by either party to the Ground Lease to the other party
thereto for arbitration or appraisal proceedings pursuant to the Ground
Lease, and of the institution of any arbitration or appraisal
proceedings and promptly deliver to Lender a copy of the determination
of the arbitrators or appraisers in each such proceeding.
(b) Borrower will not surrender the Ground Lease or Borrower's
leasehold estate and interest therein, nor terminate or cancel the
Ground Lease; and will not, without the prior written consent of Lender
modify, change, supplement, alter or amend the Ground Lease, either
orally or in writing, and as further security for the repayment of the
indebtedness hereby secured and for the performance of the covenants,
agreements, obligations and conditions herein and in the Ground Lease
contained, Borrower hereby assigns to Lender all of its rights,
privileges and prerogatives as ground lessee under the Ground Lease to
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terminate, cancel, modify, change, supplement, alter or amend the
Ground Lease and any such termination, cancellation, modification,
change, supplement, alteration or amendment of the Ground Lease,
without the prior written consent thereto by Lender, shall be void and
of no force and effect. Without limiting the generality of the
foregoing, Borrower will not reject the Ground Lease pursuant to 11
U.S.C. Section 365(a) or any successor law, or allow the Ground Lease
to be deemed rejected by inaction and lapse of time, and will not elect
to treat the Ground Lease as terminated by the ground lessor's
rejection of the Ground Lease pursuant to 11 U.S.C. Section 365(h)(1)
or any successor law, and as further security for the repayment of the
indebtedness secured hereby and for the performance of the covenants,
agreements, obligations and conditions herein and in the Ground Lease
contained, Borrower hereby assigns to Lender all of its rights,
privileges and prerogatives of Borrower and Borrower's bankruptcy
trustee to deal with the Ground Lease, which right may arise as a
result of the commencement of a proceeding under the federal bankruptcy
laws by or against Borrower or ground lessor under the Ground Lease,
including, without limitation, the right to assume or reject, or to
compel the assumption or rejection of the Ground Lease pursuant to 11
U.S.C. Section 365(a) or any successor law, the right to seek and
obtain extensions of time to assume or reject the Ground Lease, the
right to elect whether to treat the Ground Lease as terminated by the
ground lessor's rejection of the Ground Lease or to remain in
possession of the Property and offset damages pursuant to 11 U.S.C.
Section 365(b)(1) or any successor law; and any exercise of such
rights, privileges or prerogatives by Borrower or Borrower's bankruptcy
trustee without the prior written consent thereto by Lender shall be
void and of no force and effect. No release or forbearance of any of
Borrower's obligations as ground lessee under the Ground Lease, whether
pursuant to the Ground Lease or otherwise, shall release Borrower from
any of its obligations under this Security Instrument, including, but
not limited to, Borrower's obligations with respect to the payment of
rent as provided for in the Ground Lease and the observance and
performance of all of the covenants, agreements, obligations and
conditions contained in the Ground Lease to be observed and performed
by the ground lessee thereunder. Borrower hereby expressly grants to
Lender, and agrees that Lender shall have, the absolute and immediate
right (notwithstanding any cure periods applicable to acceleration of
the Note or exercise of remedies provided for herein) to enter in and
upon the Property or any part thereof, to such extent and as often as
Lender, in its sole discretion, deems necessary or desirable in order
to prevent or to cure any such default by Borrower. Lender may
immediately pay and expend such sums of money (notwithstanding any cure
periods applicable to acceleration of the Note or exercise of remedies
provided for herein) as Lender, in its sole discretion, deems necessary
to prevent or cure any such default by Borrower, and Borrower hereby
agrees to pay to Lender, immediately and without demand, all such sums
so paid and expended by Lender, together with interest thereon from the
date of each such payment at the Default Rate as specified in the Note.
All sums so paid and expended by Lender, and the interest thereon,
shall be added to and be secured by the lien of this Security
Instrument. Unless Lender shall otherwise expressly consent in writing,
the fee title to the real property demised by the Ground Lease and the
leasehold estate thereunder shall not merge, but shall always remain
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separate and distinct, notwithstanding the union of such estates either
in the Borrower or in a third party by purchase or otherwise.
(c) The Borrower will, within ten (10) days after written
demand from the Lender, use its best efforts to obtain from the ground
lessor under the Ground Lease and deliver to the Lender a certificate
stating that such Ground Lease is in full force and effect, is
unmodified, that no notice of termination thereon has been served on
the Borrower, stating the date to which the net rent has been paid and
stating whether or not there are any defaults thereunder and specifying
the nature of such defaults, if any.
(d) The Borrower will furnish to the Lender, upon demand,
proof of payment of all items which are required to be paid by the
Borrower pursuant to the Ground Lease.
[Remainder of page intentionally blank]
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IN WITNESS WHEREOF, THIS SECURITY INSTRUMENT has been executed by
Borrower the day and year first above written.
BORROWER:
SHELDAHL COLORADO, LLC, a Minnesota
limited liability company
By: SHELDAHL, INC., a Minnesota
corporation, its sole Member
By: /s/ Jill D. Burchill
-------------------------------------
Jill D. Burchill, Vice Pres. & CFO
FEE OWNER:
SHELDAHL, INC., a Minnesota corporation
By: /s/ Jill D. Burchill
-----------------------------------------
Jill D. Burchill, Vice Pres. & CFO
[Acknowledgments contained on following page]
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<PAGE> 64
ACKNOWLEDGMENTS
COUNTY OF :
------------------- : ss.
STATE OF :
-------------------
The foregoing instrument was acknowledged before me this day of
November, 1999, by Jill D. Burchill, Vice President and CFO of SHELDAHL, INC., a
Minnesota corporation, the sole member of SHELDAHL COLORADO, LLC, a Minnesota
limited liability company, on behalf of the company.
Witness my hand and official seal.
------------------------------------
NOTARY PUBLIC
My Commission Expires:
------------------------------------
COUNTY OF :
------------------ : ss.
STATE OF :
------------------
The foregoing instrument was acknowledged before me this day of
November, 1999, by Jill D. Burchill, Vice President and CFO of SHELDAHL INC., a
Minnesota corporation, on behalf of the corporation.
Witness my hand and official seal.
------------------------------------
NOTARY PUBLIC
My Commission Expires:
------------------------------------
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<PAGE> 65
JOINDER AGREEMENT
Sheldahl, Inc., a Minnesota corporation, hereby joins in the foregoing Security
Instrument as sublessee under that certain Net Sublease Agreement dated November
, 1999 (the "Ground Sublease"), for the purpose of acknowledging that (i)
the Ground Sublease is subordinate to the lien of the Security Instrument, and
(ii) the Ground Sublease shall terminate upon a foreclosure under the Security
Instrument.
SHELDAHL, INC., a Minnesota
corporation
By: /s/ Jill D. Burchill
---------------------------------
Jill D. Burchill, Vice Pres. & CFO
COUNTY OF :
------------------- : ss.
STATE OF :
-------------------
The foregoing instrument was acknowledged before me this day of
November, 1999, by Jill D. Burchill, Vice President and CFO of SHELDAHL INC., a
Minnesota corporation, on behalf of the corporation.
Witness my hand and official seal.
------------------------------------
NOTARY PUBLIC
My Commission Expires:
------------------------------------
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<PAGE> 66
EXHIBIT A
(Description of Land)
All of that certain lot, piece or parcel of land, with the buildings
and improvements thereon, situate, lying and being described as follows:
A-1
<PAGE> 1
EXHIBIT 10.5
Loan No. V_06437
FIXED RATE NOTE
$4,300,000.00 November 16, 1999
FOR VALUE RECEIVED, SHELDAHL COLORADO, LLC, a Minnesota limited
liability company (hereinafter referred to as "BORROWER"), promises to pay to
the order of MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a New York banking
corporation, its successors and assigns (hereinafter referred to as "LENDER"),
at the office of Lender or its agent, designee, or assignee at 60 Wall Street,
New York, New York 10260-0060, Attention: Loan Servicing, or at such place as
Lender or its agent, designee, or assignee may from time to time designate in
writing, the principal sum of FOUR MILLION THREE HUNDRED THOUSAND AND NO/100THS
DOLLARS ($4,300,000.00), in lawful money of the United States of America, with
interest thereon to be computed on the unpaid principal balance from time to
time outstanding at the Applicable Interest Rate (hereinafter defined) at all
times prior to the occurrence of an Event of Default (as defined in the Security
Instrument [hereinafter defined]), and to be paid in installments as set forth
below. Unless otherwise herein defined, all initially capitalized terms shall
have the meanings given such terms in the Security Instrument.
1. PAYMENT TERMS
Principal and interest due under this Note shall be paid as follows:
(a) A payment of interest only on the date hereof for the
period from the date hereof through November 30, 1999, both inclusive;
(b) A constant payment of $34,711.74, on the first day of
January, 2000, and on the first day of each calendar month thereafter, up to and
including the first day of November 2009; and
(c) On the Anticipated Repayment Date and on the first
day of each calendar month thereafter until this Note is paid in full, in the
manner set forth in Section 18 of this Note;
with payments under this Note to be applied pursuant to the provisions of
Section 18 of this Note, or if the provisions of Section 18 of this Note are not
yet effective, as follows:
(i) First, to the payment of interest and other costs
and charges due in connection with this Note or the Debt, as Lender may
determine in its sole discretion; and
(ii) The balance shall be applied toward the
reduction of the principal sum;
<PAGE> 2
and on the first day of December, 2009 (the "MATURITY DATE" or the "ANTICIPATED
REPAYMENT DATE"), the entire outstanding principal balance hereof, together with
all accrued but unpaid interest thereon, shall be due and payable in full,
provided, however, that in the event such amounts are not paid in full on such
date, the Maturity Date shall be extended to the first day of December, 2024
(the "EXTENDED MATURITY DATE"). Interest on the principal sum of this Note shall
be calculated on the basis of a three hundred sixty (360) day year and paid for
the actual number of days elapsed. All amounts due under this Note shall be
payable without setoff, counterclaim or any other deduction whatsoever.
2. INTEREST
The term "APPLICABLE INTEREST RATE" as used in this Note shall mean (a)
from the date of this Note through but not including the Anticipated Repayment
Date, a rate per annum equal to eight and fifty-three hundredths percent (8.53%)
(the "INITIAL INTEREST RATE"), and (b) from and after the Anticipated Repayment
Date through and including the date this Note is paid in full, a rate per annum
equal to the greater of (i) the Initial Interest Rate plus two percent (2.0%),
or (ii) the Treasury Index (as hereinafter defined) plus two and one-half
percent (2.50%) plus two percent (2.0%) ((i) or (ii), as applicable, the
"REVISED INTEREST RATE"). The term "TREASURY INDEX" for purposes of this Section
2 means the yield calculated by the linear interpolation of the yields, as
reported in Federal Reserve Statistical Release H.15-Selected Interest Rates
under the heading "U.S. Government Securities/Treasury Constant Maturities" for
the week ending prior to the Anticipated Repayment Date, of U.S. Treasury
constant maturities with maturity dates (one longer and one shorter) most nearly
approximating ten (10) years after the Anticipated Repayment Date. (In the event
Release H.15 is no longer published, Lender shall select a comparable
publication to determine the Treasury Rate.)
3. SECURITY
This Note is secured by, and Lender is entitled to the benefits of, the
Security Instrument, the Assignment, the Environmental Agreement, and the other
Loan Documents (hereinafter defined). The term "SECURITY INSTRUMENT" means the
Deed of Trust and Security Agreement dated the date hereof given by Borrower for
the use and benefit of Lender covering the estate of Borrower in certain
premises as more particularly described therein (which premises, together with
all properties, rights, titles, estates and interests now or hereafter securing
the Debt and/or other obligations of Borrower under the Loan Documents, are
collectively referred to herein as the "PROPERTY"). The term "ASSIGNMENT" means
the Assignment of Leases and Rents of even date herewith executed by Borrower in
favor of Lender. The term "ENVIRONMENTAL AGREEMENT" means the Environmental
Indemnity Agreement of even date herewith executed by Borrower in favor of
Lender. The term "ESCROW AGREEMENT" means the Escrow Agreement for Reserves and
Impounds of even date herewith executed by Borrower in favor of Lender. The term
"LOAN DOCUMENTS" refers collectively to this Note, the Security Instrument, the
Assignment, the Environmental Agreement, the Escrow Agreement and any and all
other documents executed in connection with this Note or now or hereafter
executed by Borrower and/or others and by or in favor of Lender, which wholly or
partially secure or guarantee payment of this Note or pertains to indebtedness
evidenced by this Note.
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<PAGE> 3
4. LATE FEE
If any installment payable under this Note is not received by Lender
within ten (10) days after the date on which it is due (without regard to any
applicable cure and/or notice period), Borrower shall pay to Lender upon demand
an amount equal to the lesser of (a) five percent (5%) of such unpaid sum, or
(b) the maximum amount permitted by applicable law to defray the expenses
incurred by Lender in handling and processing such delinquent payment and to
compensate Lender for the loss of the use of such delinquent payment, and such
amount shall be secured by the Loan Documents.
5. DEFAULT AND ACCELERATION
So long as an Event of Default exists, Lender may, at its option,
without notice or demand to Borrower, declare the Debt immediately due and
payable. All remedies hereunder, under the Loan Documents and at law or in
equity shall be cumulative. In the event that it should become necessary to
employ counsel to collect the Debt or to protect or foreclose the security for
the Debt or to defend against any claims asserted by Borrower arising from or
related to the Loan Documents, Borrower also agrees to pay to Lender on demand
all costs of collection or defense incurred by Lender, including reasonable
attorneys' fees for the services of counsel whether or not suit be brought.
6. DEFAULT INTEREST
Upon the occurrence of an Event of Default Borrower shall pay interest
on the entire unpaid principal sum and any other amounts due under the Loan
Documents at the rate equal to the lesser of (a) the maximum rate permitted by
applicable law, or (b) the greater of (i) five percent (5%) above the Applicable
Interest Rate or (ii) five percent (5%) above the Prime Rate (hereinafter
defined), in effect at the time of the occurrence of the Event of Default (the
"DEFAULT RATE"). The term "PRIME RATE" means the prime rate reported in the
Money Rates section of The Wall Street Journal. In the event that The Wall
Street Journal should cease or temporarily interrupt publication, the term
"PRIME RATE" shall mean the daily average prime rate published in another
business newspaper, or business section of a newspaper, of national standing and
general circulation chosen by Lender. In the event that a prime rate is no
longer generally published or is limited, regulated or administered by a
governmental or quasi-governmental body, then Lender shall select a comparable
interest rate index which is readily available and verifiable to Borrower but is
beyond Lender's control. The Default Rate shall be computed from the occurrence
of the Event of Default until the actual receipt and collection of a sum of
money determined by Lender to be sufficient to cure the Event of Default.
Amounts of interest accrued at the Default Rate shall constitute a portion of
the Debt, and shall be deemed secured by the Loan Documents. This clause,
however, shall not be construed as an agreement or privilege to extend the date
of the payment of the Debt, nor as a waiver of any other right or remedy
accruing to Lender by reason of the occurrence of any Event of Default.
7. PREPAYMENT
(a) The principal balance of this Note may not be prepaid in whole or
in part (except with respect to the application of casualty or condemnation
proceeds) prior to the Maturity Date.
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<PAGE> 4
If following the occurrence of any Event of Default, Borrower shall tender
payment to Lender or Lender shall receive proceeds (whether through foreclosure
or the exercise of the other remedies available to Lender under the Security
Instrument or the other Loan Documents), Borrower shall pay in addition to
interest accrued and unpaid on the principal balance of this Note and all other
sums then due under this Note and the other Loan Documents a prepayment
consideration in an amount equal to the greater of (A) one percent (1%) of the
outstanding principal balance of this Note at the time such payment or proceeds
are received, or (B) (x) the present value as of the date such payment or
proceeds are received of the remaining scheduled payments of principal and
interest from the date such payment or proceeds are received through the
Maturity Date (including any balloon payment) determined by discounting such
payments at the Discount Rate (as hereinafter defined), less (y) the amount of
the payment or proceeds received. The term "DISCOUNT RATE" means the rate which,
when compounded monthly, is equivalent to the Treasury Rate (as hereinafter
defined), when compounded semi-annually. The term "TREASURY RATE" means the
yield calculated by the linear interpolation of the yields, as reported in
Federal Reserve Statistical Release H.15-Selected Interest Rates under the
heading "U.S. Government Securities/Treasury Constant Maturities" for the week
ending prior to the date the payment of such proceeds are received, of U.S.
Treasury constant maturities with maturity dates (one longer and one shorter)
most nearly approximating the Maturity Date. (In the event Release H.15 is no
longer published, Lender shall select a comparable publication to determine the
Treasury Rate.) Lender shall notify Borrower of the amount and the basis of
determination of the required prepayment consideration, which shall be
conclusive except in the case of manifest error. Notwithstanding the foregoing,
Borrower shall have the additional privilege to prepay the entire principal
balance of this Note (together with any other sums constituting the Debt) on any
scheduled payment date occurring on or after that date which is three (3) months
preceding the Maturity Date without any fee or consideration for such privilege.
(b) If the prepayment results from the application to the Debt
of the casualty or condemnation proceeds from the Property, no prepayment
consideration will be imposed. Partial prepayments of principal resulting from
the application of casualty or condemnation proceeds to the Debt shall not
change the amounts of subsequent monthly installments nor change the dates on
which such installments are due, unless Lender shall otherwise agree in writing.
(c) (i) Notwithstanding any provision of this Section 7 to the
contrary, at any time during which voluntary prepayment of this Note is
prohibited by Section 7(a) hereof and after the earlier of (1) the date which is
two (2) years after the "startup day," within the meaning of Section 860G(a)(9)
of the Internal Revenue Code of 1986, as amended from time to time or any
successor statute (the "Code"), of a "real estate mortgage investment conduit,"
within the meaning of Section 860D of the Code, that holds this Note, and (2) a
regularly scheduled payment date on or after that date which is four (4) years
after the date of the first monthly payment due under Section 1(b), and provided
no Event of Default (or any event which with the passage of time or the giving
of notice, or both, could become an Event of Default) has occurred under the
Security Instrument or under any of the Loan Documents, Borrower may cause the
release of the Property (in whole but not in part) from the lien of the Security
Instrument and the other Loan Documents upon the satisfaction of the following
conditions precedent:
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<PAGE> 5
(A) not less than thirty (30) days prior
written notice to Lender specifying a regularly scheduled
payment date (the "Release Date") on which the Defeasance
Deposit (hereinafter defined) is to be made;
(B) the payment to Lender of interest
accrued and unpaid on the principal balance of this Note to
and including the Release Date;
(C) the payment to Lender of all other sums,
not including scheduled interest or principal payments, due
under this Note, the Security Instrument and the other Loan
Documents;
(D) the payment to Lender of the
Defeasance Deposit; and
(E) the delivery to Lender of:
(1) a security agreement, in form
and substance satisfactory to Lender,
creating a first priority lien on the
Defeasance Deposit and the U.S. Obligations
(hereinafter defined) purchased on behalf of
Borrower with the Defeasance Deposit in
accordance with this subparagraph (the
"Security Agreement");
(2) a release of the Property from
the lien of the Security Instrument (for
execution by Lender) in a form appropriate
for the jurisdiction in which the Property
is located;
(3) an officer's certificate of
Borrower certifying that the requirements
set forth in this subparagraph (i) have been
satisfied;
(4) an opinion of counsel for
Borrower in form satisfactory to Lender
stating, among other things, that Lender has
a perfected first priority security interest
in the Defeasance Deposit and the U.S.
Obligations purchased by Lender on behalf of
Borrower;
(5) an opinion of a certified public
accountant acceptable to Lender to the
effect that the Defeasance Deposit is
adequate to provide payment on or prior to,
but as close as possible to, all successive
scheduled payment dates after the Release
Date upon which interest and principal
payments are required under this Note
(including the amounts due on the Maturity
Date) and in amounts equal to the scheduled
payments due on such dates under this Note;
(6) evidence in writing from the
applicable Rating Agencies to the effect
that such release will not result in a
re-qualification, reduction or withdrawal of
any rating in effect immediately prior to
such defeasance for any Securities;
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<PAGE> 6
(7) payment of all of Lender's
expenses incurred in connection with the
defeasance including, without limitation,
reasonable attorneys fees; and
(8) such other certificates,
documents or instruments as Lender may
reasonably request.
In connection with the conditions set forth in subsection (c)(i)(E)
above, Borrower hereby appoints Lender as its agent and attorney-in-fact for the
purpose of using the Defeasance Deposit to purchase U.S. Obligations which
provide payment on or prior to, but as close as possible to, all successive
scheduled payment dates after the Release Date upon which interest and principal
payments are required under this Note (including the amounts due on the Maturity
Date) and in amounts equal to the scheduled payments due on such dates under
this Note (the "Scheduled Defeasance Payments"). Borrower, pursuant to the
Security Agreement or other appropriate document, shall authorize and direct
that the payments received from the U.S. Obligations may be made directly to
Lender and applied to satisfy the obligations of the Borrower under this Note.
(ii) Upon compliance with the requirements of
this subsection (c), the Property shall be released from the lien of the
Security Instrument and the pledged U.S. Obligations shall be the sole source of
collateral securing this Note. Any portion of the Defeasance Deposit in excess
of the amount necessary to purchase the U.S. Obligations required by
subparagraph (c)(i) above and satisfy the Borrower's obligations under this
subsection (c) shall be remitted to the Borrower with the release of the
Property from the lien of the Security Instrument.
(iii) For purposes of this subsection (c), the
following terms shall have the following meanings:
(A) The term "Defeasance Deposit" shall
mean an amount equal to 100% of the remaining principal amount
of this Note, the Yield Maintenance Premium, any costs and
expenses incurred or to be incurred in the purchase of the
U.S. Obligations necessary to meet the Scheduled Defeasance
Payments and any revenue, documentary stamp or intangible
taxes or any other tax or charge due in connection with the
transfer of this Note or otherwise required to accomplish the
agreements of this subsection;
(B) The term "Yield Maintenance Premium"
shall mean the amount (if any) which, when added to the
remaining principal amount of this Note, will be sufficient to
purchase U.S. Obligations providing the required Scheduled
Defeasance Payments; and
(C) The term "U.S. Obligations" shall
mean direct non-callable obligations of the United States of
America.
(iv) Upon the release of the Property in
accordance with this subsection (c), Borrower shall, at Lender's request, assign
all its obligations and rights under this Note, together with the pledged
Defeasance Deposit, to a successor special purpose entity designated
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<PAGE> 7
by Borrower and approved by Lender in its sole discretion. Such successor entity
shall execute an assumption agreement in form and substance satisfactory to
Lender in its sole discretion pursuant to which it shall assume Borrower's
obligations under this Note and the Security Agreement. In connection with such
assignment and assumption, Borrower shall (x) deliver to Lender an opinion of
counsel in form and substance and delivered by counsel satisfactory to Lender in
its sole discretion stating, among other things, that such assumption agreement
is enforceable against Borrower and such successor entity in accordance with its
terms and that this Note, the Security Agreement and the other Loan Documents,
as so assumed, are enforceable against such successor entity in accordance with
their respective terms, and (y) pay all costs and expenses incurred by Lender or
its agents in connection with such assignment and assumption (including, without
limitation, the review of the proposed transferee and the preparation of the
assumption agreement and related documentation). In connection with such
assignment and assumption, Borrower and any Guarantor may be released of
personal liability under the Note and the other Loan Documents, but only as to
acts or events occurring after the closing of such assignment and assumption.
(v) Upon the release of the Property in
accordance with this subsection (c), Borrower shall have no further right to
prepay this Note pursuant to the other provisions of this Section 7 or
otherwise.
8. SAVINGS CLAUSE
This Note is subject to the express condition that at no time shall
Borrower be obligated or required to pay interest on the principal balance due
hereunder at a rate which could subject Lender to either civil or criminal
liability as a result of being in excess of the maximum interest rate which
Borrower is permitted by applicable law to contract or agree to pay. If by the
terms of this Note, Borrower is at any time required or obligated to pay
interest on the principal balance due hereunder at a rate in excess of such
maximum rate, the Applicable Interest Rate or the Default Rate, as the case may
be, shall be deemed to be immediately reduced to such maximum rate and all
previous payments in excess of the maximum rate shall be deemed to have been
payments in reduction of principal and not on account of the interest due
hereunder. All sums paid or agreed to be paid to Lender for the use,
forbearance, or detention of the Debt, shall, to the extent permitted by
applicable law, be amortized, prorated, allocated, and spread throughout the
full stated term of this Note until payment in full so that the rate or amount
of interest on account of the Debt does not exceed the maximum lawful rate of
interest from time to time in effect and applicable to the Debt for so long as
the Debt is outstanding. Notwithstanding anything to the contrary contained
herein or in any of the other Loan Documents, it is not the intention of Lender
to accelerate the maturity of any interest that has not accrued at the time of
such acceleration or to collect unearned interest at the time of such
acceleration.
9. WAIVERS
(a) Except as specifically provided in the Loan
Documents, Borrower and any endorsers, sureties or guarantors hereof jointly and
severally waive presentment and demand for payment, notice of intent to
accelerate maturity, notice of acceleration of maturity, protest and notice of
protest and non-payment, all applicable exemption rights, valuation and
appraisement, notice of demand, and all other notices in connection with the
delivery, acceptance, performance,
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<PAGE> 8
default or enforcement of the payment of this Note and the bringing of suit and
diligence in taking any action to collect any sums owing hereunder or in
proceeding against any of the rights and collateral securing payment hereof.
Borrower and any surety, endorser or guarantor hereof agree (i) that the time
for any payments hereunder may be extended from time to time without notice and
consent, (ii) to the acceptance by Lender of further collateral, (iii) the
release by Lender of any existing collateral for the payment of this Note, (iv)
to any and all renewals, waivers or modifications that may be granted by Lender
with respect to the payment or other provisions of this Note, and/or (v) that
additional Borrowers, endorsers, guarantors or sureties may become parties
hereto all without notice to them and without in any manner affecting their
liability under or with respect to this Note. No extension of time for the
payment of this Note or any installment hereof shall affect the liability of
Borrower under this Note or any endorser or guarantor hereof even though the
Borrower or such endorser or guarantor is not a party to such agreement.
(b) Failure of Lender to exercise any of the options
granted herein to Lender upon the happening of one or more of the events giving
rise to such options shall not constitute a waiver of the right to exercise the
same or any other option at any subsequent time in respect to the same or any
other event. The acceptance by Lender of any payment hereunder that is less than
payment in full of all amounts due and payable at the time of such payment shall
not constitute a waiver of the right to exercise any of the options granted
herein to Lender at that time or at any subsequent time or nullify any prior
exercise of any such option without the express written acknowledgment of the
Lender.
10. EXCULPATION
(a) Notwithstanding anything in the Loan Documents to the
contrary, but subject to the qualifications below, Lender and Borrower agree
that:
(i) Borrower shall be liable upon the Debt and
for the other obligations arising under the Loan Documents to the full
extent (but only to the extent) of the security therefor; provided,
however, that in the event (A) of fraud, willful misconduct or material
misrepresentation by Borrower, its general partners, if any, its
members, if any, its principals, its affiliates, its agents or its
employees or by any Guarantor or any Indemnitor in connection with the
loan evidenced by this Note, (B) of Borrower's breach or default under
Sections 4.3 or 8.2 of the Security Instrument, or (C) the Property or
any part thereof becomes an asset in a voluntary bankruptcy or
insolvency proceeding, the limitation on recourse set forth in this
Subsection 10(a) will be null and void and completely inapplicable, and
this Note shall be with full recourse to Borrower.
(ii) If a default occurs in the timely and proper
payment of all or any part of the Debt, Lender shall not enforce the
liability and obligation of Borrower to perform and observe the
obligations contained in this Note or the Security Instrument by any
action or proceeding wherein a money judgment shall be sought against
Borrower, except that Lender may bring a foreclosure action, action for
specific performance or other appropriate action or proceeding to
enable Lender to enforce and realize upon the Security Instrument, the
Other Loan Documents and the interest in the Property, the
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<PAGE> 9
Rents and any other collateral given to Lender created by the Security
Instrument and the Other Loan Documents; provided, however, that any
judgment in any action or proceeding shall be enforceable against
Borrower only to the extent of Borrower's interest in the Property, in
the Rents and in any other collateral given to Lender. Lender, by
accepting this Note and the Security Instrument, agrees that it shall
not, except as otherwise herein provided, sue for, seek or demand any
deficiency judgment against Borrower in any action or proceeding, under
or by reason of or under or in connection with this Note, the Other
Loan Documents or the Security Instrument.
(iii) The provisions of this Subsection 10(a)
shall not (A) constitute a waiver, release or impairment of any
obligation evidenced or secured by this Note, the Other Loan Documents
or the Security Instrument; (B) impair the right of Lender to name
Borrower as a party defendant in any action or suit for judicial
foreclosure and sale under the Security Instrument; (C) affect the
validity or enforceability of any indemnity, guaranty, master lease or
similar instrument made in connection with this Note, the Security
Instrument, or the Other Loan Documents; (D) impair the right of Lender
to obtain the appointment of a receiver; (E) impair the enforcement of
the Assignment executed in connection herewith; (F) impair the right of
Lender to enforce the provisions of Article 11 of the Security
Instrument; or (G) impair the right of Lender to obtain a deficiency
judgment or judgment on this Note against Borrower if necessary to
obtain any insurance proceeds or condemnation awards to which Lender
would otherwise be entitled under the Security Instrument; provided,
however, Lender shall only enforce such judgment against the insurance
proceeds and/or condemnation awards.
(iv) Notwithstanding the provisions of this
Article to the contrary, Borrower shall be personally liable to Lender
for the Losses it incurs due to: (A) the misapplication or
misappropriation of Rents; (B) the misapplication or misappropriation
of insurance proceeds or condemnation awards; (C) Borrower's failure to
return or to reimburse Lender for all Personal Property taken from the
Property by or on behalf of Borrower and not replaced with Personal
Property of the same utility and of the same or greater value; (D) any
act of actual waste or arson by Borrower, any principal, affiliate,
general partner or member thereof or by any Indemnitor or any
Guarantor; (E) any fees or commissions paid by Borrower to any
principal, affiliate, general partner or member of Borrower, any
Indemnitor or any Guarantor in violation of the terms of this Note, the
Security Instrument or the Other Loan Documents; (F) Borrower's failure
to comply with the provisions of Section 11.2 of the Security
Instrument; or (G) any breach of the Environmental Indemnity.
(b) Nothing herein shall be deemed to be a waiver of any
right which Lender may have under Sections 506(a), 506(b), 1111(b) or any other
provisions of the Bankruptcy Code to file a claim for the full amount of the
Debt or to require that all collateral shall continue to secure all of the Debt,
owing to Lender in accordance with this Note, the Security Instrument and the
Other Loan Documents.
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<PAGE> 10
11. AUTHORITY
Borrower (and the undersigned representative of Borrower, if any)
represents that Borrower has full power, authority and legal right to execute,
deliver and perform its obligations pursuant to this Note and the other Loan
Documents and that this Note and the other Loan Documents constitute legal,
valid and binding obligations of Borrower. Borrower further represents that the
loan evidenced by the Loan Documents was made for business or commercial
purposes and not for personal, family or household use.
12. NOTICES
All notices or other communications required or permitted to be given
pursuant hereto shall be given in the manner and be effective as specified in
the Security Instrument, directed to the parties at their respective addresses
as provided therein.
13. TRANSFER
Lender shall have the unrestricted right at any time or from time to
time to sell this Note and the loan evidenced by this Note and the Loan
Documents or participation interests therein. Borrower shall execute,
acknowledge and deliver any and all instruments requested by Lender to satisfy
such purchasers or participants that the unpaid indebtedness evidenced by this
Note is outstanding upon the terms and provisions set out in this Note and the
other Loan Documents. To the extent, if any, specified in such assignment or
participation, such assignee(s) or participant(s) shall have the rights and
benefits with respect to this Note and the other Loan Documents as such
assignee(s) or participant(s) would have if they were the Lender hereunder.
14. WAIVER OF TRIAL BY JURY
BORROWER HEREBY AGREES NOT TO ELECT A TRIAL BY JURY OF ANY ISSUE
TRIABLE OF RIGHT BY JURY, AND WAIVES ANY RIGHT TO TRIAL BY JURY FULLY TO THE
EXTENT THAT ANY SUCH RIGHT SHALL NOW OR HEREAFTER EXIST WITH REGARD TO THIS NOTE
OR THE OTHER LOAN DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING
IN CONNECTION THEREWITH INCLUDING, BUT NOT LIMITED TO, THOSE RELATING TO (A)
ALLEGATIONS THAT A PARTNERSHIP EXISTS BETWEEN LENDER AND BORROWER; (B) USURY OR
PENALTIES OR DAMAGES THEREFOR; (C) ALLEGATIONS OF UNCONSCIONABLE ACTS, DECEPTIVE
TRADE PRACTICE, LACK OF GOOD FAITH OR FAIR DEALING, LACK OF COMMERCIAL
REASONABLENESS, OR SPECIAL RELATIONSHIPS (SUCH AS FIDUCIARY, TRUST OR
CONFIDENTIAL RELATIONSHIP); (D) ALLEGATIONS OF DOMINION, CONTROL, ALTER EGO,
INSTRUMENTALITY, FRAUD, REAL ESTATE FRAUD, MISREPRESENTATION, DURESS, COERCION,
UNDUE INFLUENCE, INTERFERENCE OR NEGLIGENCE; (E) ALLEGATIONS OF TORTIOUS
INTERFERENCE WITH PRESENT OR PROSPECTIVE BUSINESS RELATIONSHIPS OR OF ANTITRUST;
OR (F) SLANDER, LIBEL OR DAMAGE TO REPUTATION. THIS WAIVER OF RIGHT TO TRIAL BY
JURY IS GIVEN KNOWINGLY AND VOLUNTARILY BY BORROWER, AND IS INTENDED TO
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<PAGE> 11
ENCOMPASS INDIVIDUALLY EACH INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A
TRIAL BY JURY WOULD OTHERWISE ACCRUE. LENDER IS HEREBY AUTHORIZED TO FILE A COPY
OF THIS PARAGRAPH IN ANY PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY
BORROWER.
15. APPLICABLE LAW
This Note shall be governed by and construed in accordance with the
laws of the state in which the real property encumbered by the Security
Instrument is located (without regard to any conflict of laws or principles) and
the applicable laws of the United States of America.
16. JURISDICTION
BORROWER HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY COURT OF
COMPETENT JURISDICTION LOCATED IN THE STATE IN WHICH THE PROPERTY IS LOCATED IN
CONNECTION WITH ANY PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE.
17. NO ORAL CHANGE
The provisions of this Note and the Loan Documents may be amended or
revised only by an instrument in writing signed by the Borrower and Lender. This
Note and all the other Loan Documents embody the final, entire agreement of
Borrower and Lender and supersede any and all prior commitments, agreements,
representations and understandings, whether written or oral, relating to the
subject matter hereof and thereof and may not be contradicted or varied by
evidence of prior, contemporaneous or subsequent oral agreements or discussions
of Borrower and Lender. There are no oral agreements between Borrower and
Lender.
18. ANTICIPATED REPAYMENT DATE PROVISIONS
(a) The following subsections shall apply from and after
the "ANTICIPATED REPAYMENT DATE":
(i) For the calendar year in which the
Anticipated Repayment Date occurs and for each calendar year thereafter
until this Note is paid in full, Borrower shall submit to Lender for
Lender's written approval an annual budget (an "ANNUAL BUDGET") not
later than (i) 60 days prior to the Anticipated Repayment Date for the
calendar year in which the Anticipated Repayment Date occurs and (ii)
sixty (60) days prior to the commencement of each calendar year
thereafter, in form satisfactory to Lender setting forth in reasonable
detail budgeted monthly operating income and monthly operating capital
and other expenses for the Property. Each Annual Budget shall contain,
among other things, limitations on management fees, third party service
fees and other expenses as Lender may reasonably determine. Each Annual
Budget must be satisfactory to Lender in its sole discretion and each
such Annual Budget approved by Lender in accordance with the terms
hereof shall hereinafter be referred to as an "APPROVED BUDGET." Until
such time as Lender approves a proposed Annual Budget, the most
recently Approved Budget shall apply; provided, that such Approved
Budget shall be
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adjusted to reflect actual increases in real estate taxes, insurance
premiums and utilities expenses.
(ii) In the event that Borrower must incur any
extraordinary operating expense or capital expense not set forth in the
applicable Approved Budget or reserved for in the On-going Replacement
Fund (each, an "EXTRAORDINARY EXPENSE"), then Borrower shall promptly
deliver to Lender a reasonably detailed explanation of such proposed
Extraordinary Expense for Lender's approval.
(iii) For the purposes of this Note, "OPERATING
EXPENSES" shall mean, for any period, the operating expenses for the
operation and maintenance of the Property as set forth in an Approved
Budget to the extent such expenses are actually paid by Borrower and
excluding (1) expenses for which Borrower shall be reimbursed from, or
which shall be paid for out of, any Funds (as defined in the Escrow
Agreement), and (2) any management fees payable to affiliates of the
Borrower unless Lender has approved the same in its sole discretion
pursuant to an Approved Budget.
(iv) From and after the Anticipated Repayment
Date, interest shall accrue on the unpaid principal balance from time
to time outstanding under this Note at the Revised Interest Rate.
Interest accrued at the Revised Interest Rate and not paid pursuant to
this Section 18 shall be deferred and added to the principal balance of
this Note and shall earn interest at the Revised Interest Rate to the
extent permitted by applicable law (such accrued interest and any
interest thereon is hereinafter referred to as "ACCRUED Interest"). All
of the unpaid principal balance of this Note, including, without
limitation, any Accrued Interest, if not sooner paid pursuant to the
provisions hereof shall be due and payable on the Extended Maturity
Date.
(v) Borrower shall be obligated to pay, and
Lender shall collect from the Deposit Account (as defined in the Cash
Management Agreement of even date herewith among Borrower and Lender)
to the extent of funds on deposit in such account, on the first day of
December, 1999, and on the first day of each calendar month thereafter
to and including the Extended Maturity Date, the following payments
from amounts in the Deposit Account to be applied in the listed order
of priority:
(1) First, to the payment of the amount
set forth in Section 1(b) of this Note (the "MONTHLY DEBT
SERVICE PAYMENT AMOUNT") to be applied first to the payment of
interest computed at the Initial Interest Rate with the
remainder applied to the reduction of the outstanding
principal balance of this Note;
(2) Second, to payments to the Tax and
Insurance Funds (as defined in the Escrow Agreement) in
accordance with the terms and conditions of the Escrow
Agreement;
(3) Third, to payments to the On-going
Replacement Funds (as defined in the Escrow Agreement) in
accordance with the terms and conditions of the Escrow
Agreement;
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<PAGE> 13
(4) Fourth, to payments to the TI&LC
Funds (as defined in the Escrow Agreement) in accordance with
the terms and conditions of the Escrow Agreement;
(5) Fifth, to payments for monthly
Operating Expenses pursuant to the terms and conditions of the
related Approved Budget;
(6) Sixth, to payment for Extraordinary
Expenses approved by Lender, if any;
(7) Seventh, to payment of the
outstanding principal balance of this Note until such
outstanding principal balance is paid in full; and
(8) Eighth, payments to Lender of the
balance of the funds then on deposit in the Deposit Account to
be applied to (x) any other amounts due under the Loan
Documents, and (y) Accrued Interest in whatever proportion and
priority as Lender may determine.
(vi) Nothing in this Article 18 shall limit,
reduce or otherwise affect Borrower's obligations to make payments of
the Monthly Debt Service Payment Amount, payments to the Tax and
Insurance Funds, On-going Replacement Funds, TI&LC Funds and payments
of other amounts due hereunder and under the other Loan Documents,
whether or not Rents (as defined in the Security Instrument) are
available to make such payments.
[Remainder of page intentionally blank]
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Executed as of the day and year first above written.
BORROWER:
SHELDAHL COLORADO, LLC, a Minnesota
limited liability company
By: SHELDAHL, INC., a Minnesota corporation,
its sole Member
By: /s/ Jill D. Burchill
--------------------------------------------
Jill D. Burchill, Vice Pres. & CFO
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<PAGE> 1
EXHIBIT 10.6
GUARANTY
THIS GUARANTY ("GUARANTY") is executed as of November 16, 1999, by
SHELDAHL, INC., a Minnesota corporation (singularly and collectively referred to
as "GUARANTOR"), for the benefit of MORGAN GUARANTY TRUST COMPANY OF NEW YORK, a
New York banking corporation ("LENDER").
A. SHELDAHL COLORADO, LLC, a Minnesota limited liability company
("BORROWER"), is indebted to Lender with respect to a loan ("LOAN") pursuant to
that certain Fixed Rate Note dated of even date herewith, payable to the order
of Lender in the original principal amount of $4,300,000.00 (together with all
renewals, modifications, increases and extensions thereof, the "NOTE"), which is
secured by the liens and security interests created by that certain Deed of
Trust and Security Agreement, of even date herewith (the "SECURITY INSTRUMENT"),
and further evidenced, secured or governed by the other Loan Documents (as
defined in the Note); and
B. Lender is not willing to make the Loan, or otherwise extend credit, to
Borrower unless Guarantor unconditionally guarantees payment and performance to
Lender of the Guaranteed Obligations (as hereinafter defined); and
C. Guarantor is the owner of a direct or indirect interest in Borrower, and
Guarantor will directly benefit from Lender's making the Loan to Borrower.
NOW, THEREFORE, as an inducement to Lender to make the Loan to Borrower
thereunder, and to extend such additional credit as Lender may from time to time
agree to extend under the Loan Documents, and for other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties do hereby agree as follows:
ARTICLE I
NATURE AND SCOPE OF GUARANTY
Section 1.1 GUARANTY OF OBLIGATIONS. Guarantor hereby absolutely,
irrevocably and unconditionally guarantees to Lender (and its successors and
assigns), jointly and severally, the payment and performance of the Guaranteed
Obligations as and when the same shall be due and payable, whether by lapse of
time, by acceleration of maturity or otherwise. Guarantor hereby absolutely,
irrevocably and unconditionally covenants and agrees that it is liable, jointly
and severally, for the Guaranteed Obligations as a primary obligor, and that
each Guarantor shall fully perform, jointly and severally, each and every term
and provision hereof.
Section 1.2 DEFINITION OF GUARANTEED OBLIGATIONS. As used herein, the term
"GUARANTEED OBLIGATIONS" shall be deemed to include, and Guarantor shall also be
liable for, and shall indemnify, defend and hold Lender harmless from and
against, any and all Losses (as hereinafter defined) incurred or suffered by
Lender and arising out of or in connection with the matters listed below:
<PAGE> 2
(a) the misapplication or misappropriation of Rents (as defined in the
Security Instrument);
(b) the misapplication or misappropriation of insurance proceeds or
condemnation awards;
(c) Borrower's failure to return or to reimburse Lender for all Personal
Property (as defined in the Security Instrument) taken from the Property (as
defined in the Security Instrument) by or on behalf of Borrower and not replaced
with Personal Property of the same utility and of the same or greater value;
(d) any act of actual waste or arson by Borrower, any principal, affiliate,
general partner or member thereof or by any Indemnitor (as defined in the
Security Instrument) or any Guarantor;
(e) any fees or commissions paid by Borrower to any principal, affiliate,
general partner or member of Borrower, any Indemnitor or any Guarantor in
violation of the terms of this Guaranty, the Security Instrument or the other
Loan Documents; or
(f) Borrower's failure to comply with the provisions of Section 11.2 of the
Security Instrument.
In addition, in the event (i) of any fraud, willful misconduct or material
misrepresentation by Borrower, its general partners, if any, its members, if
any, its principals, its affiliates, its agents or its employees or by any
Guarantor or Indemnitor in connection with the Loan, (ii) of Borrower's breach
or default under Sections 4.3 or 8.2 of the Security Instrument, or (iii) the
Property or any part thereof becomes an asset in a voluntary bankruptcy or
insolvency proceeding, then the Guaranteed Obligations shall also include the
unpaid balance of the Debt (as defined in the Security Instrument).
For purposes of this Guaranty, the term "Losses" includes any and all
claims, suits, liabilities (including, without limitation, strict liabilities),
actions, proceedings, obligations, debts, damages, losses, costs, expenses,
diminutions in value, fines, penalties, charges, fees, expenses, judgments,
awards, amounts paid in settlement, punitive damages, foreseeable and
unforeseeable consequential damages, of whatever kind or nature (including but
not limited to attorneys' fees and other costs of defense).
Section 1.3 NATURE OF GUARANTY. This Guaranty is an irrevocable, absolute,
continuing guaranty of payment and performance, is joint and several and is not
a guaranty of collection. This Guaranty shall continue to be effective with
respect to any Guaranteed Obligations arising or created after any attempted
revocation by Guarantor and after (if Guarantor is a natural person) Guarantor's
death (in which event this Guaranty shall be binding upon Guarantor's estate and
Guarantor's legal representatives and heirs). The fact that at any time or from
time to time the Guaranteed Obligations may be increased or reduced shall not
release or discharge the obligation of Guarantor to Lender with respect to
Guaranteed Obligations. This Guaranty may be enforced by Lender and any
subsequent holder of the Note and shall not be discharged by the assignment or
negotiation of all or part of the Note.
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Section 1.4 GUARANTEED OBLIGATIONS NOT REDUCED BY OFFSET. The Note, the
Guaranteed Obligations, and the liabilities and obligations of Guarantor to
Lender hereunder shall not be reduced, discharged or released because or by
reason of any existing or future offset, claim or defense of Borrower, or any
other party, against Lender or against payment of the Guaranteed Obligations,
whether such offset, claim or defense arises in connection with the Guaranteed
Obligations (or the transactions creating the Guaranteed Obligations) or
otherwise.
Section 1.5 PAYMENT BY GUARANTOR. If all or any part of the Guaranteed
Obligations shall not be punctually paid when due, whether at maturity or
earlier by acceleration or otherwise, Guarantor shall, immediately upon demand
by Lender, and without presentment, protest, notice of protest, notice of
non-payment, notice of intention to accelerate the maturity, notice of
acceleration of the maturity, or any other notice whatsoever, pay in lawful
money of the United States of America, the amount due on the Guaranteed
Obligations to Lender at Lender's address as set forth herein. Such demand(s)
may be made at any time coincident with or after the time for payment of all or
part of the Guaranteed Obligations, and may be made from time to time with
respect to the same or different items of Guaranteed Obligations. Such demand
shall be deemed made, given and received in accordance with the notice
provisions hereof.
Section 1.6 NO DUTY TO PURSUE OTHERS. It shall not be necessary for Lender
(and Guarantor hereby waives any rights which Guarantor may have to require
Lender), in order to enforce this Guaranty against Guarantor, first to (i)
institute suit or exhaust its remedies against Borrower or others liable on the
Loan or the Guaranteed Obligations or any other person, (ii) enforce Lender's
rights against any collateral which shall ever have been given to secure the
Loan, (iii) enforce Lender's rights against any other guarantors of the
Guaranteed Obligations, (iv) join Borrower or any others liable on the
Guaranteed Obligations in any action seeking to enforce this Guaranty, (v)
exhaust any remedies available to Lender against any collateral which shall ever
have been given to secure the Loan, or (vi) resort to any other means of
obtaining payment of the Guaranteed Obligations. Lender shall not be required to
mitigate damages or take any other action to reduce, collect or enforce the
Guaranteed Obligations.
Section 1.7 WAIVERS. Guarantor agrees to the provisions of the Loan
Documents, and hereby waives notice of (i) any loans or advances made by Lender
to Borrower, (ii) acceptance of this Guaranty, (iii) any amendment or extension
of the Note or of any other Loan Documents, (iv) the execution and delivery by
Borrower and Lender of any other loan or credit agreement or of Borrower's
execution and delivery of any promissory notes or other documents arising under
the Loan Documents or in connection with the Property, (v) the occurrence of any
breach by Borrower or Event of Default, (vi) Lender's transfer or disposition of
the Guaranteed Obligations, or any part thereof, (vii) sale or foreclosure (or
posting or advertising for sale or foreclosure) of any collateral for the
Guaranteed Obligations, (viii) protest, proof of non-payment or default by
Borrower, or (ix) any other action at any time taken or omitted by Lender, and,
generally, all demands and notices of every kind in connection with this
Guaranty, the Loan Documents, any documents or agreements evidencing, securing
or relating to any of the Guaranteed Obligations and the obligations hereby
guaranteed.
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Section 1.8 PAYMENT OF EXPENSES. In the event that Guarantor should breach
or fail to timely perform any provisions of this Guaranty, Guarantor shall,
immediately upon demand by Lender, pay Lender all costs and expenses (including
court costs and reasonable attorneys' fees) incurred by Lender in the
enforcement hereof or the preservation of Lender's rights hereunder. The
covenant contained in this section shall survive the payment and performance of
the Guaranteed Obligations.
Section 1.9 EFFECT OF BANKRUPTCY. In the event that, pursuant to any
insolvency, bankruptcy, reorganization, receivership or other debtor relief law,
or any judgment, order or decision thereunder, Lender must rescind or restore
any payment, or any part thereof, received by Lender in satisfaction of the
Guaranteed Obligations, as set forth herein, any prior release or discharge from
the terms of this Guaranty given to Guarantor by Lender shall be without effect,
and this Guaranty shall remain in full force and effect. It is the intention of
Borrower and Guarantor that Guarantor's obligations hereunder shall not be
discharged except by Guarantor's performance of such obligations and then only
to the extent of such performance.
Section 1.10 DEFERMENT OF RIGHTS OF SUBROGATION, REIMBURSEMENT AND
CONTRIBUTION.
(a) Notwithstanding any payment or payments made by any Guarantor
hereunder, no Guarantor will assert or exercise any right of Lender or of such
Guarantor against Borrower to recover the amount of any payment made by such
Guarantor to Lender by way of subrogation, reimbursement, contribution,
indemnity, or otherwise arising by contract or operation of law, and such
Guarantor shall not have any right of recourse to or any claim against assets or
property of Borrower, whether or not the obligations of Borrower have been
satisfied, all of such rights being herein expressly waived by such Guarantor.
Each Guarantor agrees not to seek contribution or indemnity or other recourse
from any other guarantor. If any amount shall nevertheless be paid to a
Guarantor by Borrower or another Guarantor prior to payment in full of the
Obligations (hereinafter defined), such amount shall be held in trust for the
benefit of Lender and shall forthwith be paid to Lender to be credited and
applied to the Obligations, whether matured or unmatured. The provisions of this
paragraph shall survive the termination of this Guaranty, and any satisfaction
and discharge of Borrower by virtue of any payment, court order or any
applicable law.
(b) Notwithstanding the provisions of Section 1.10(a), each Guarantor shall
have and be entitled to (1) all rights of subrogation otherwise provided by
applicable law in respect of any payment it may make or be obligated to make
under this Guaranty and (2) all claims it would have against any other Guarantor
in the absence of Section 1.10(a) and to assert and enforce same, in each case
on and after, but at no time prior to, the date (the "SUBROGATION TRIGGER DATE")
which is 91 days after the date on which all sums owed to Lender under the Loan
Documents (the "OBLIGATIONS") have been paid in full, if and only if (x) no
Event of Default of the type described in Section 9.1(d) or Section 9.1(e) of
the Security Instrument with respect to Borrower or any other Guarantor has
existed at any time on and after the date of this Guaranty to and including the
Subrogation Trigger Date and (y) the existence of each Guarantor's rights under
this Section 1.10(b) would not make such Guarantor a creditor (as defined in the
Bankruptcy Code, as such term is
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hereinafter defined) of Borrower or any other Guarantor in any insolvency,
bankruptcy, reorganization or similar proceeding commenced on or prior to the
Subrogation Trigger Date.
Section 1.11 BANKRUPTCY CODE WAIVER. It is the intention of the parties
that the Guarantor shall not be deemed to be a "creditor" or "creditors" (as
defined in Section 101 of the United States Bankruptcy Code [the "BANKRUPTCY
CODE"]) of Borrower, or any other guarantor, by reason of the existence of this
Guaranty, in the event that Borrower or any other guarantor, becomes a debtor in
any proceeding under the Bankruptcy Code, and in connection herewith, Guarantor
hereby waives any such right as a "creditor" under the Bankruptcy Code. This
waiver is given to induce Lender to make the Loan evidenced by the Note to
Borrower. After the Loan is paid in full and there shall be no obligations or
liabilities under this Guaranty outstanding, this waiver shall be deemed to be
terminated.
Section 1.12 "BORROWER." The term "Borrower" as used herein shall include
any new or successor corporation, association, partnership (general or limited),
joint venture, trust or other individual or organization formed as a result of
any merger, reorganization, sale, transfer, devise, gift or bequest of Borrower
or any interest in Borrower.
ARTICLE 2
EVENTS AND CIRCUMSTANCES NOT REDUCING
OR DISCHARGING GUARANTOR'S OBLIGATIONS
Guarantor hereby consents and agrees to each of the following, and agrees
that Guarantor's obligations under this Guaranty shall not be released,
diminished, impaired, reduced or adversely affected by any of the following, and
waives any common law, equitable, statutory or other rights (including without
limitation rights to notice) which Guarantor might otherwise have as a result of
or in connection with any of the following:
Section 2.1 MODIFICATIONS. Any renewal, extension, increase, modification,
alteration or rearrangement of all or any part of the Guaranteed Obligations,
Note, Loan Documents, or other document, instrument, contract or understanding
between Borrower and Lender, or any other parties, pertaining to the Guaranteed
Obligations or any failure of Lender to notify Guarantor of any such action.
Section 2.2 ADJUSTMENT. Any adjustment, indulgence, forbearance or
compromise that might be granted or given by Lender to Borrower or any
Guarantor.
Section 2.3 CONDITION OF BORROWER OR GUARANTOR. The insolvency,
bankruptcy, arrangement, adjustment, composition, liquidation, disability,
dissolution or lack of power of Borrower, Guarantor or any other party at any
time liable for the payment of all or part of the Guaranteed Obligations; or any
dissolution of Borrower or Guarantor, or any sale, lease or transfer of any or
all of the assets of Borrower or Guarantor, or any changes in the shareholders,
partners or members of Borrower or Guarantor; or any reorganization of Borrower
or Guarantor.
Section 2.4 INVALIDITY OF GUARANTEED OBLIGATIONS. The invalidity,
illegality or unenforceability of all or any part of the Guaranteed Obligations,
or any document or
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agreement executed in connection with the Guaranteed Obligations, for any reason
whatsoever, including without limitation the fact that (i) the Guaranteed
Obligations, or any part thereof, exceed the amount permitted by law, (ii) the
act of creating the Guaranteed Obligations or any part thereof, is ultra vires,
(iii) the officers or representatives executing the Note or the other Loan
Documents or otherwise creating the Guaranteed Obligations acted in excess of
their authority, (iv) the Guaranteed Obligations violate applicable usury laws,
(v) Borrower has valid defenses, claims or offsets (whether at law, in equity or
by agreement) which render the Guaranteed Obligations wholly or partially
uncollectible from Borrower, (vi) the creation, performance or repayment of the
Guaranteed Obligations (or the execution, delivery and performance of any
document or instrument representing part of the Guaranteed Obligations or
executed in connection with the Guaranteed Obligations, or given to secure the
repayment of the Guaranteed Obligations) is illegal, uncollectible or
unenforceable, or (vii) the Note or any of the other Loan Documents have been
forged or otherwise are irregular or not genuine or authentic, it being agreed
that Guarantor shall remain liable hereon regardless of whether Borrower or any
other person be found not liable on the Guaranteed Obligations or any part
thereof for any reason.
Section 2.5 RELEASE OF OBLIGORS. Any full or partial release of the
liability of Borrower on the Guaranteed Obligations, or any part thereof, or of
any co-guarantors, or any other person or entity now or hereafter liable,
whether directly or indirectly, jointly, severally, or jointly and severally, to
pay, perform, guarantee or assure the payment of the Guaranteed Obligations, or
any part thereof, it being recognized, acknowledged and agreed by Guarantor that
Guarantor may be required to pay the Guaranteed Obligations in full without
assistance or support of any other party, and Guarantor has not been induced to
enter into this Guaranty on the basis of a contemplation, belief, understanding
or agreement that other parties will be liable to pay or perform the Guaranteed
Obligations, or that Lender will look to other parties to pay or perform the
Guaranteed Obligations.
Section 2.6 OTHER COLLATERAL. The taking or accepting of any other
security, collateral or guaranty, or other assurance of payment, for all or any
part of the Guaranteed Obligations.
Section 2.7 RELEASE OF COLLATERAL. Any release, surrender, exchange,
subordination, deterioration, waste, loss or impairment (including without
limitation negligent, willful, unreasonable or unjustifiable impairment) of any
collateral, property or security, at any time existing in connection with, or
assuring or securing payment of, all or any part of the Guaranteed Obligations.
Section 2.8 CARE AND DILIGENCE. The failure of Lender or any other party to
exercise diligence or reasonable care in the preservation, protection,
enforcement, sale or other handling or treatment of all or any part of such
collateral, property or security, including but not limited to any neglect,
delay, omission, failure or refusal of Lender (i) to take or prosecute any
action for the collection of any of the Guaranteed Obligations, or (ii) to
foreclose, or initiate any action to foreclose, or, once commenced, prosecute to
completion any action to foreclose upon any security therefor, or (iii) to take
or prosecute any action in connection with any instrument or agreement
evidencing or securing all or any part of the Guaranteed Obligations.
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Section 2.9 UNENFORCEABILITY. The fact that any collateral, security,
security interest or lien contemplated or intended to be given, created or
granted as security for the repayment of the Guaranteed Obligations, or any part
thereof, shall not be properly perfected or created, or shall prove to be
unenforceable or subordinate to any other security interest or lien, it being
recognized and agreed by Guarantor that Guarantor is not entering into this
Guaranty in reliance on, or in contemplation of the benefits of, the validity,
enforceability, collectibility or value of any of the collateral for the
Guaranteed Obligations.
Section 2.10 MERGER. The reorganization, merger or consolidation of
Borrower into or with any other corporation or entity.
Section 2.11 PREFERENCE. Any payment by Borrower to Lender is held to
constitute a preference under bankruptcy laws, or for any reason Lender is
required to refund such payment or pay such amount to Borrower or someone else.
Section 2.12 OTHER ACTIONS TAKEN OR OMITTED. Any other action taken or
omitted to be taken with respect to the Loan Documents, the Guaranteed
Obligations, or the security and collateral therefor, whether or not such action
or omission prejudices Guarantor or increases the likelihood that Guarantor will
be required to pay the Guaranteed Obligations pursuant to the terms hereof, it
is the unambiguous and unequivocal intention of Guarantor that Guarantor shall
be obligated to pay the Guaranteed Obligations when due, notwithstanding any
occurrence, circumstance, event, action, or omission whatsoever, whether or not
contemplated, and whether or not otherwise or particularly described herein,
which obligation shall be deemed satisfied only upon the full and final payment
and satisfaction of the Guaranteed Obligations.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
To induce Lender to enter into the Loan Documents and extend credit to
Borrower, Guarantor represents and warrants to Lender as follows:
Section 3.1 BENEFIT. Guarantor is an affiliate of Borrower, is the owner
of a direct or indirect interest in Borrower, and has received, or will receive,
direct or indirect benefit from the making of this Guaranty with respect to the
Guaranteed Obligations.
Section 3.2 FAMILIARITY AND RELIANCE. Guarantor is familiar with, and has
independently reviewed books and records regarding, the financial condition of
Borrower and is familiar with the value of any and all collateral intended to be
created as security for the payment of the Note or Guaranteed Obligations;
provided, however, Guarantor is not relying on such financial condition or the
collateral as an inducement to enter into this Guaranty.
Section 3.3 NO REPRESENTATION BY LENDER. Neither Lender nor any other
party has made any representation, warranty or statement to Guarantor in order
to induce Guarantor to execute this Guaranty.
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Section 3.4 GUARANTOR'S FINANCIAL CONDITION. As of the date hereof, and
after giving effect to this Guaranty and the contingent obligation evidenced
hereby, Guarantor is, and will be, solvent, and has and will have assets which,
fairly valued, exceed its obligations, liabilities (including contingent
liabilities) and debts, and has and will have property and assets sufficient to
satisfy and repay its obligations and liabilities.
Section 3.5 LEGALITY. The execution, delivery and performance by Guarantor
of this Guaranty and the consummation of the transactions contemplated hereunder
do not, and will not, contravene or conflict with any law, statute or regulation
whatsoever to which Guarantor is subject or constitute a default (or an event
which with notice or lapse of time or both would constitute a default) under, or
result in the breach of, any indenture, mortgage, deed of trust, charge, lien,
or any contract, agreement or other instrument to which Guarantor is a party or
which may be applicable to Guarantor. This Guaranty is a legal and binding
obligation of Guarantor and is enforceable in accordance with its terms, except
as limited by bankruptcy, insolvency or other laws of general application
relating to the enforcement of creditors' rights.
Section 3.6 SURVIVAL. All representations and warranties made by Guarantor
herein shall survive the execution hereof.
Section 3.7 REVIEW OF DOCUMENTS. Guarantor has examined the Note and all
of the Loan Documents.
Section 3.8 LITIGATION. Except as otherwise disclosed to Lender, there are
no proceedings pending or, so far as Guarantor knows, threatened before any
court or administrative agency which, if decided adversely to Guarantor, would
materially adversely affect the financial condition of Guarantor or the
authority of Guarantor to enter into, or the validity or enforceability of this
Guaranty.
Section 3.9 TAX RETURNS. Guarantor has filed all required federal, state
and local tax returns and has paid all taxes as shown on such returns as they
have become due. No claims have been assessed and are unpaid with respect to
such taxes.
ARTICLE 4
SUBORDINATION OF CERTAIN INDEBTEDNESS
Section 4.1 SUBORDINATION OF ALL GUARANTOR CLAIMS. As used herein, the
term "GUARANTOR CLAIMS" shall mean all debts and liabilities of Borrower to
Guarantor, whether such debts and liabilities now exist or are hereafter
incurred or arise, or whether the obligations of Borrower thereon are direct,
contingent, primary, secondary, several, joint and several, or otherwise, and
irrespective of whether such debts or liabilities be evidenced by note,
contract, open account, or otherwise, and irrespective of the person or persons
in whose favor such debts or liabilities may, at their inception, have been, or
may hereafter be created, or the manner in which they have been or may hereafter
be acquired by Guarantor. The Guarantor Claims shall include, without
limitation, all rights and claims of Guarantor against Borrower (arising as a
result of subrogation or otherwise) as a result of Guarantor's payment of all or
a portion of the Guaranteed Obligations to the extent the provisions of Section
1.10 hereof are unenforceable. Any indebtedness of Borrower to Guarantor
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now or hereafter existing (including, but not limited to, any rights to
subrogation Guarantor may have as a result of any payment by Guarantor under
this Guaranty), together with any interest thereon, shall be, and such
indebtedness is, hereby deferred, postponed and subordinated to the prior
payment in full of the Debt. Until payment in full of the Debt (and including
interest accruing on the Note after the commencement of a proceeding by or
against Borrower under the Bankruptcy Reform Act of 1978, as amended, 11 U.S.C.
Sections 101 et seq., and the regulations adopted and promulgated pursuant
thereto (collectively, the "BANKRUPTCY CODE") which interest the parties agree
shall remain a claim that is prior and superior to any claim of Guarantor
notwithstanding any contrary practice, custom or ruling in cases under the
Bankruptcy Code generally), Guarantor agrees not to accept any payment or
satisfaction of any kind of indebtedness of Borrower to Guarantor and hereby
assigns such indebtedness to Lender, including the right to file proof of claim
and to vote thereon in connection with any such proceeding under the Bankruptcy
Code, including the right to vote on any plan of reorganization.
Section 4.2 CLAIMS IN BANKRUPTCY. In the event of receivership, bankruptcy,
reorganization, arrangement, debtor's relief, or other insolvency proceedings
involving Guarantor as debtor, Lender shall have the right to prove its claim in
any such proceeding so as to establish its rights hereunder and receive directly
from the receiver, trustee or other court custodian dividends and payments which
would otherwise be payable upon Guarantor Claims. Guarantor hereby assigns such
dividends and payments to Lender. Should Lender receive, for application upon
the Guaranteed Obligations, any such dividend or payment which is otherwise
payable to Guarantor, and which, as between Borrower and Guarantor, shall
constitute a credit upon the Guarantor Claims, then upon payment to Lender in
full of the Guaranteed Obligations, Guarantor shall become subrogated to the
rights of Lender to the extent that such payments to Lender on the Guarantor
Claims have contributed toward the liquidation of the Guaranteed Obligations,
and such subrogation shall be with respect to that portion of the Guaranteed
Obligations which would have been unpaid if Lender had not received dividends or
payments upon the Guarantor Claims.
Section 4.3 PAYMENTS HELD IN TRUST. In the event that, notwithstanding
anything to the contrary in this Guaranty, Guarantor should receive any funds,
payment, claim or distribution which is prohibited by this Guaranty, Guarantor
agrees to hold in trust for Lender an amount equal to the amount of all funds,
payments, claims or distributions so received, and agrees that it shall have
absolutely no dominion over the amount of such funds, payments, claims or
distributions so received except to pay them promptly to Lender, and Guarantor
covenants promptly to pay the same to Lender.
Section 4.4 LIENS SUBORDINATE. Guarantor agrees that any liens, security
interests, judgment liens, charges or other encumbrances upon Borrower's assets
securing payment of the Guarantor Claims shall be and remain inferior and
subordinate to any liens, security interests, judgment liens, charges or other
encumbrances upon Borrower's assets securing payment of the Guaranteed
Obligations, regardless of whether such encumbrances in favor of Guarantor or
Lender presently exist or are hereafter created or attach. Without the prior
written consent of Lender, Guarantor shall not (i) exercise or enforce any
creditor's right it may have against Borrower, or (ii) foreclose, repossess,
sequester or otherwise take steps or institute any action or proceedings
(judicial or otherwise, including without limitation the commencement of, or
joinder in, any liquidation,
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bankruptcy, rearrangement, debtor's relief or insolvency proceeding) to enforce
any liens, mortgages, deeds of trust, security interest, collateral rights,
judgments or other encumbrances on assets of Borrower held by Guarantor.
ARTICLE 5
MISCELLANEOUS
Section 5.1 WAIVER. No failure to exercise, and no delay in exercising, on
the part of Lender, any right hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right. The rights of Lender
hereunder shall be in addition to all other rights provided by law. No
modification or waiver of any provision of this Guaranty, nor consent to
departure therefrom, shall be effective unless in writing and no such consent or
waiver shall extend beyond the particular case and purpose involved. No notice
or demand given in any case shall constitute a waiver of the right to take other
action in the same, similar or other instances without such notice or demand.
Section 5.2 NOTICES. All notices or other written communications hereunder
shall be deemed to have been properly given (i) upon delivery, if delivered in
person or by facsimile transmission with receipt acknowledged, (ii) one (1)
Business Day (hereinafter defined) after having been deposited for overnight
delivery with any reputable overnight courier service, or (iii) three (3)
Business Days after having been deposited in any post office or mail depository
regularly maintained by the U.S. Postal Service and sent by registered or
certified mail, postage prepaid, addressed as follows:
Guarantor: Sheldahl, Inc.
1150 Sheldahl Road, P.O. Box 170
Northfield, Minnesota 55057
Attention: Jill D. Burchill, Vice Pres. & CFO
Facsimile No.: (507)663-8545
With a copy to: Lindquist & Vennum, PLLP
4200 IDS Center
80 South 8th Street
Minneapolis, Minnesota 55402-2205
Attention: Debra K. Page, Esq.
Facsimile No.: (612) 371-3207
Lender: Morgan Guaranty Trust Company of New York
60 Wall Street
New York, New York 10260-0060
Attention: Nancy Alto, Commercial Mortgage Finance
Group Loan Servicing
Facsimile No.: (212) 648-5274
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With a copy to: Womble Carlyle Sandridge & Rice, PLLC
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309
Attention: Robert F. Cook, Esq.
Facsimile No.: (404) 888-7490
or addressed as such party may from time to time designate by written notice to
the other parties. For purposes of this Section 5.2, the term "Business Day"
shall mean a day on which commercial banks are not authorized or required by law
to close in New York, New York.
Any party by notice to the other parties may designate additional or
different addresses for subsequent notices or communications.
Section 5.3 GOVERNING LAW; JURISDICTION. This Guaranty shall be governed
by and construed in accordance with the laws of the State in which the real
property encumbered by the Security Instrument is located and the applicable
laws of the United States of America. Guarantor hereby irrevocably submits to
the jurisdiction of any court of competent jurisdiction located in the state in
which the Property is located in connection with any proceeding out of or
relating to this Guaranty.
Section 5.4 INVALID PROVISIONS. If any provision of this Guaranty is held
to be illegal, invalid, or unenforceable under present or future laws effective
during the term of this Guaranty, such provision shall be fully severable and
this Guaranty shall be construed and enforced as if such illegal, invalid or
unenforceable provision had never comprised a part of this Guaranty, and the
remaining provisions of this Guaranty shall remain in full force and effect and
shall not be affected by the illegal, invalid or unenforceable provision or by
its severance from this Guaranty, unless such continued effectiveness of this
Guaranty, as modified, would be contrary to the basic understandings and
intentions of the parties as expressed herein.
Section 5.5 AMENDMENTS. This Guaranty may be amended only by an instrument
in writing executed by the party or an authorized representative of the party
against whom such amendment is sought to be enforced.
Section 5.6 PARTIES BOUND; ASSIGNMENT. This Guaranty shall be binding upon
and inure to the benefit of the parties hereto and their respective successors,
assigns and legal representatives; provided, however, that Guarantor may not,
without the prior written consent of Lender, assign any of its rights, powers,
duties or obligations hereunder.
Section 5.7 HEADINGS. Section headings are for convenience of reference
only and shall in no way affect the interpretation of this Guaranty.
Section 5.8 RECITALS. The recital and introductory paragraphs hereof are a
part hereof, form a basis for this Guaranty and shall be considered prima facie
evidence of the facts and documents referred to therein.
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Section 5.9 COUNTERPARTS. To facilitate execution, this Guaranty may be
executed in as many counterparts as may be convenient or required. It shall not
be necessary that the signature or acknowledgment of, or on behalf of, each
party, or that the signature of all persons required to bind any party, or the
acknowledgment of such party, appear on each counterpart. All counterparts shall
collectively constitute a single instrument. It shall not be necessary in making
proof of this Guaranty to produce or account for more than a single counterpart
containing the respective signatures of, or on behalf of, and the respective
acknowledgments of, each of the parties hereto. Any signature or acknowledgment
page to any counterpart may be detached from such counterpart without impairing
the legal effect of the signatures or acknowledgments thereon and thereafter
attached to another counterpart identical thereto except having attached to it
additional signature or acknowledgment pages.
Section 5.10 RIGHTS AND REMEDIES. If Guarantor becomes liable for any
indebtedness owing by Borrower to Lender, by endorsement or otherwise, other
than under this Guaranty, such liability shall not be in any manner impaired or
affected hereby and the rights of Lender hereunder shall be cumulative of any
and all other rights that Lender may ever have against Guarantor. The exercise
by Lender of any right or remedy hereunder or under any other instrument, or at
law or in equity, shall not preclude the concurrent or subsequent exercise of
any other right or remedy.
Section 5.11 ENTIRETY. THIS GUARANTY EMBODIES THE FINAL, ENTIRE AGREEMENT
OF GUARANTOR AND LENDER WITH RESPECT TO GUARANTOR'S GUARANTY OF THE GUARANTEED
OBLIGATIONS AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS, AGREEMENTS,
REPRESENTATIONS, AND UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE
SUBJECT MATTER HEREOF. THIS GUARANTY IS INTENDED BY GUARANTOR AND LENDER AS A
FINAL AND COMPLETE EXPRESSION OF THE TERMS OF THE GUARANTY, AND NO COURSE OF
DEALING BETWEEN GUARANTOR AND LENDER, NO COURSE OF PERFORMANCE, NO TRADE
PRACTICES, AND NO EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OR DISCUSSIONS OR OTHER EXTRINSIC EVIDENCE OF ANY NATURE SHALL BE
USED TO CONTRADICT, VARY, SUPPLEMENT OR MODIFY ANY TERM OF THIS GUARANTY
AGREEMENT. THERE ARE NO ORAL AGREEMENTS BETWEEN GUARANTOR AND LENDER.
Section 5.12 WAIVER OF RIGHT TO TRIAL BY JURY. GUARANTOR HEREBY AGREES NOT
TO ELECT A TRIAL BY JURY OF ANY ISSUE TRIABLE OF RIGHT BY JURY, AND WAIVES ANY
RIGHT TO TRIAL BY JURY FULLY TO THE EXTENT THAT ANY SUCH RIGHT SHALL NOW OR
HEREAFTER EXIST WITH REGARD TO THIS GUARANTY, THE MORTGAGE, OR THE OTHER LOAN
DOCUMENTS, OR ANY CLAIM, COUNTERCLAIM OR OTHER ACTION ARISING IN CONNECTION
THEREWITH. THIS WAIVER OF RIGHT TO TRIAL BY JURY IS GIVEN KNOWINGLY AND
VOLUNTARILY BY GUARANTOR, AND IS INTENDED TO ENCOMPASS INDIVIDUALLY EACH
INSTANCE AND EACH ISSUE AS TO WHICH THE RIGHT TO A TRIAL BY JURY WOULD OTHERWISE
ACCRUE. LENDER IS HEREBY AUTHORIZED TO FILE A COPY OF THIS PARAGRAPH IN ANY
PROCEEDING AS CONCLUSIVE EVIDENCE OF THIS WAIVER BY GUARANTOR.
-12-
<PAGE> 13
EXECUTED as of the day and year first above written.
GUARANTOR:
SHELDAHL, INC., a Minnesota corporation
By: /s/ Jill D. Burchill
-----------------------------------------
Jill D. Burchill, Vice Pres. & CFO
-13-
<PAGE> 1
EXHIBIT 10.7.4
FOURTH AMENDMENT TO CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of November 12, 1999, 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, as amended by a First
Amendment to Credit and Security Agreement dated as of November 25, 1998, as
amended by a Second Amendment to Credit and Security Agreement dated as of March
31, 1999 and as amended by a Third Amendment to Credit and Security Agreement
dated as of April 5, 1999 (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.
The Borrower is presently in default of various financial
covenants and has requested that the Lenders waive such defaults and reset the
financial covenants in the Credit Agreement. The Agent is willing to grant the
Borrower's requests pursuant to the terms and conditions set forth herein.
Accordingly, 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:
"'Base Rate' - deleted."
"`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
<PAGE> 2
(ii) the lesser of $4,000,000 or sixty percent (60%) of
Eligible Raw Materials Inventory, plus
(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) the Liquidity Reserve."
"`Fourth Amendment' means the Fourth Amendment to Credit and
Security Agreement by and among the Borrower, the Lenders and the Agent
dated as of November 12, 1999."
"`Fourth Amendment Effective Date' means the date all
conditions set forth in Section 6 of the Fourth Amendment are
satisfied."
"'Liquidity Reserve' means the amount of $2,500,000."
"`Prime Rate' means the rate publicly announced from time to
time by Wells Fargo Bank, N.A. as its "prime rate" or, if such bank
ceases to announce a rate so designated, any similar successor rate
designated by the Lender."
"`Revolving Floating Rate' means, effective as of October 1,
1999, an annual rate equal to the Prime Rate plus two percent (2.0%),
which rate shall change when and as the Prime Rate changes."
"`Term Floating Rate' means, effective as of October 1, 1999,
an annual rate equal to the Prime Rate plus two percent (2.0%), which
rate shall change when and as the Prime Rate changes."
2. Financial Covenants. Sections 6.18, 6.19, 6.20, 6.21, and
7.12 of the Credit Agreement are amended to read as follows:
"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 on Minimum Cash Flow
------------------------ -----------------
or about Available for Debt
-------- -----------------
Service
-------
<S> <C>
11/30/99 $3,410,000
2/29/00 $6,673,000
5/31/00 $9,247,000
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
Fiscal Quarter Ending on Minimum Cash Flow
------------------------ -----------------
or about Available for Debt
-------- -----------------
Service
-------
<S> <C>
8/31/00 $13,765,000
</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>
11/30/99 0.95 to 1.00
2/29/00 0.95 to 1.00
5/31/00 0.95 to 1.00
8/31/00 0.95 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 Minimum Pre-tax Net
--------------------- -------------------
on or about Income
----------- ------
<S> <C>
11/30/99 $(1,855,000)
2/29/000 $(3,207,000)
5/31/00 $(4,488,000)
8/31/00 $(4,235,000)
</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:
<TABLE>
<CAPTION>
Fiscal Quarter Ending Minimum Net Worth
--------------------- -----------------
on or about
-----------
<S> <C>
11/30/99 $63,477,000
2/29/000 $62,125,000
5/31/00 $60,844,000
8/31/00 $61,097,000
</TABLE>
The determination of Borrower's Net Worth will not consider the expense
associated with accruing for preferred dividends, nor the payment of
preferred dividends in common stock."
3
<PAGE> 4
"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 any fiscal year, amounts in
excess of $7,000,000. This limitation will not apply to the conversion
of any existing operating leases to capital leases."
3. 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.
4. New Compliance Certificate. Exhibit F to the Credit
Agreement is hereby amended in its entirety and replaced with Exhibit A to the
Fourth Amendment.
5. Waiver of Defaults. For the Borrower's fiscal quarter
ending on or about August 31, 1999, the Borrower is in default of the following
provisions of the Credit Agreement (collectively, the "Defaults"):
<TABLE>
<CAPTION>
Covenant Required Actual
-------- --------- ------
<S> <C> <C>
Section 6.18 Cash Flow Available for Debt Service Not less than $11,796,000
$15,000,000
Section 6.19 Minimum Debt Service Coverage Ratio Not less than 0.82 to 1.00
0.90 to 1.00
Section 6.20 Minimum Pre-tax Net Income Not less than $(12,487,000)
$(9,400,000)
Section 6.21 Minimum Net Worth Not less than $74,332,000
$76,500,000
</TABLE>
Upon the terms and subject to the conditions set forth in this Amendment, the
Agent hereby waives the Defaults.
These waivers shall be effective only in this specific instance and for the
specific purpose for which they are given, and these waivers shall not entitle
the Borrower to any other or further waiver in any similar or other
circumstances.
6. Amendment Fee. The Borrower shall pay the Lenders as of the
date hereof a fully earned, non-refundable fee in the amount of $120,000 in
consideration of the Lenders' execution of this Amendment.
7. Conditions Precedent. This Amendment, and the waiver set
forth in Paragraph 5 hereof, shall be effective when the Agent shall have
received an executed original hereof, together with each of the following, each
in substance and form acceptable to the Agent in its sole discretion:
4
<PAGE> 5
(a) Payment of the fee described in Paragraph 6.
(b) Such other matters as the Lender may require.
8. 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.
9. 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.
10. No Other Waiver. Except as set forth in Paragraph 5 above,
the execution of this Amendment and acceptance of any documents related hereto
shall not be 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.
11. 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
5
<PAGE> 6
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.
12. 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 and the fee
required under paragraph 6 hereof.
13. 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/ Jill Burchill
--------------------------- ------------------------
Terry S. Jackson Jill Burchill
Its Vice President Its Chief Financial Officer
NORWEST BANK MINNESOTA, HARRIS TRUST AND SAVINGS BANK
NATIONAL ASSOCIATION
By /s/ Terry S. Jackson By /s/ Cathy Ciolek
--------------------------- -----------------------
Terry S. Jackson Cathy Ciolek
Its Vice President Its Vice President
NBD BANK THE CIT GROUP/EQUIPMENT
FINANCING, INC.
By By /s/ Danny Nichols
--------------------- ------------------------------
Dennis Saletta Danny Nichols
Its First Vice President Its Assistant Vice President
6
<PAGE> 7
Exhibit A to Fourth Amendment to
Credit and Security Agreement
COMPLIANCE CERTIFICATE
TO: Terry S. Jackson
Norwest Bank Minnesota, National Association
DATE: ,
SUBJECT: Financial Statements
Dear Mr. Jackson:
I am the duly qualified and acting Chief Financial Officer 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 a First Amendment to Credit and Security Agreement dated as of
November 25, 1998, as amended by a Second Amendment to Credit and Security
Agreement dated as of March 31, 1999, as amended by a Third Amendment to Credit
and Security Agreement dated as of April 5, 1999, and as amended by a Fourth
Amendment to Credit and Security Agreement dated as of November , 1999 (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 , (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> 8
|_| 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>
11/30/99 $3,410,000
2/29/00 $6,673,000
5/31/00 $9,247,000
8/31/00 $13,765,000
</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 Minimum Debt Service
--------------------- --------------------
on or about Coverage Ratio
----------- ---------------
<S> <C>
11/30/99 0.95 to 1.00
2/29/00 0.95 to 1.00
5/31/00 0.95 to 1.00
8/31/00 0.95 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:
<TABLE>
<CAPTION>
Fiscal Quarter Ending Minimum Pre-tax Net
--------------------- -------------------
on or about Income
----------- ------
<S> <C>
11/30/99 $(1,855,000)
2/29/000 $(3,207,000)
5/31/00 $(4,488,000)
8/31/00 $(4,235,000)
</TABLE>
-9-
<PAGE> 9
4. Minimum Net Worth. Pursuant to Section 6.21 of the Credit
Agreement, as of the Reporting Date, the Borrower's 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 in table below:
<TABLE>
<CAPTION>
Fiscal Quarter Ending on or about Minimum Net Worth
--------------------------------- ------------------
<S> <C>
11/30/99 $63,477,000
2/29/000 $62,125,000
5/31/00 $60,844,000
8/31/00 $61,097,000
</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, excluding the conversion of
any existing operating leases to capital leases, which |_| satisfies |_| does
not satisfy the requirement that such expenditures not exceed $7,000,000 in the
aggregate during any fiscal year.
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
---------------------------------------
Jill Burchill
Its Chief Financial Officer
-10-
<PAGE> 1
EXHIBIT 10.12.2
AMENDMENT NO. 2 TO EMPLOYMENT
(CHANGE OF CONTROL) AGREEMENT
This Amendment, made as of November 22, 1999, 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
of Control) Agreement dated as of the day of , 19 , as amended (the
"Change of Control Agreement"); and
WHEREAS, the Company and Executive desire to amend the Change of
Control Agreement as provided in this Amendment;
NOW, THEREFORE, in consideration of the mutual covenants herein set
forth and for other good and valuable consideration, the parties hereto agree as
follows:
1. Section 2(a) of the Change of Control Agreement is hereby amended by
adding at the end of such section a new subparagraph (iv) as follows:
"(iv) Sheldahl disposes of, or enters into a joint venture transaction
with respect to, a division or business unit if Executive is the
manager or provides a substantial portion of his or her time to such
division or unit prior to such transaction and if Executive's
employment is terminated as a result of such transaction."
2. Section 4(d)(vi) is hereby amended in its entirety as follows:
"(vi) The Severance Payment shall be in lieu of and offset the amount
of any payment to which the Executive may be entitled in connection
with the termination of employment pursuant to the provisions of
Sheldahl's Severance Pay Plan, Document HR04.14, as amended from time
to time, or any successor to such policy; provided, however, that in
the event the payments required under the Company's Severance Pay Plan
are greater than the Severance Payment, Executive shall be entitled to
receive the greater amount, subject at all times to the terms,
conditions and provisions of this Agreement and the Severance Pay Plan.
3. All other terms of the Change of 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> 1
EXHIBIT 10.14
SHELDAHL, INC.
1150 Sheldahl Road
Northfield MN 55057-9444
October 15, 1999
Mr. John McManus
1609 Mayflower Drive
Northfield, MN 55057
Dear John:
This letter describes our agreement regarding your resignation as Vice
President, Finance and Officer of Sheldahl, Inc. ("Sheldahl"), effective
February 25, 2000 (your "VP Resignation Date"), and your resignation as a
Sheldahl employee, effective August 11, 2000 (your "Sheldahl Resignation Date").
We are offering to provide you with the following benefits in connection with
your departure from Sheldahl, contingent upon your timely execution and
non-rescission of this agreement and your compliance with your obligations
hereunder:
1. Until your VP Resignation Date, you will continue to execute your duties in
a professional and fully satisfactory manner, including but not limited to
key contributions to such matters as year-end closing and financial
reporting, the successful transition to the new corporate controller, Union
contract negotiations and other related business activities. If, prior to
your VP Resignation Date, you or Sheldahl determines that it is in your or
our best interests to accelerate said Date, that party will notify the
other party in writing of an accelerated VP Resignation Date. In that
event, your Sheldahl Resignation Date will be accelerated by the same
number of days. It is the intention of both parties, based on the
transition needs of the Company and the desires of McManus, to achieve a
fully satisfactory closure to his employment, making the acceleration of
his VP Resignation Date unlikely.
2. Effective as of your VP Resignation Date (as accelerated, if applicable),
you will continue your employment with Sheldahl as Special Projects
Consultant, at your base compensation rate then in effect, until your
Sheldahl Resignation Date.
3. You will be given credit for 180 hours of vacation time under HR Policy
04.21. Provided your Sheldahl Resignation Date occurs no sooner than August
4, 2000, this vacation benefit must be used during the period from February
25, 2000 to August 4, 2000 and there will be no vacation payout at the time
of your Sheldahl Resignation. If your Sheldahl Resignation Date occurs
prior to August 4, 2000, this provision will not apply and you will receive
the appropriate vacation benefit and payout as defined in HR04.21.
4. Beginning with our August 18, 2000 payday (or the appropriate accelerated
payday, in
<PAGE> 2
accordance with paragraph 1), we will pay you a weekly paycheck of
$3,045.49, subject to applicable withholding, on 102 consecutive weekly
paydays, through the payday of August 9, 2002.
The Company will pay you 75% of the bonus which you would have earned under
Sheldahl's FY2000 incentive compensation program if you had remained Vice
President, Finance through FY 2000 and if Sheldahl meets its FY2000 goals.
This amount, if any, is subject to applicable withholding and will be paid
to you when eligible executives receive their bonuses.
All payments from Sheldahl to you under this paragraph shall be reduced
dollar for dollar by any of the following payments to you: (a) severance
benefits under the Sheldahl, Inc. Severance Pay Plan or any other Sheldahl
plan (including, in the case of Disability, any Company short term or long
term disability plan or benefit), policy or otherwise, (b) payments which
you receive from Sheldahl under the Employee Agreement attached as Exhibit
A, (c) any compensation or fees in excess of $10,000 in any three-month
period or $40,000 per year (before taxes) which you receive from another
employer or other entity for which you are performing services (excluding
entities for which you are performing services as of the date of this
agreement), or (d) unemployment benefits.
5. The Company will continue to pay the full premiums of core level coverage
for your Sheldahl group health, dental and life insurance while you are
receiving severance pay pursuant to paragraph 3, or, if earlier, the date
on which you are participating in other group plans. You agree to notify
Sheldahl immediately if your participation under other group plans occurs.
If you are not covered under other such group plans as of the last day of
the severance period, Sheldahl will pay $400 per month of your Sheldahl
group premiums until the earlier of your coverage under other group plans
or your 65th birthday. All rights which you may have under Sheldahl's group
plans are subject to the terms of the plans, applicable laws and the
continuation of said plans for active Sheldahl employees. Information and
election forms concerning your group coverages will be provided to you at
the appropriate time.
6. Any of your stock options under any Sheldahl, Inc. Stock Option Plan which
are not 100% vested as of your Sheldahl Resignation Date shall continue to
vest as provided in the applicable Stock Option Agreement during your
severance period. In addition, the exercise period for your stock options
shall be the exercise period set forth in the applicable Stock Option
Agreement (the "Post-Termination Exercise Period"). If you die during the
Post-Termination Exercise Period, all of your stock options may be
exercised (to the extent vested on the date of your death) at any time
within not more than one year after your death but in no event after the
expiration date of any such option. Notwithstanding the above, if, during
the Post-Termination Exercise Period, you accept employment with, provide
services in any capacity for, engage in the business of a competitor of
Sheldahl, or in any other way violate the terms of this agreement or your
Employee Agreement (Exhibit A), any remaining vesting shall cease as of the
date of such action and the Post-Termination Exercise Period shall be
reduced to 30 days from the date of such action or the remaining time in
the Post-Termination Exercise Period, whichever is less. A schedule of your
stock options and their
<PAGE> 3
Mr. John McManus
October 15, 1999
Page 3
vesting status as of the date of this agreement is attached as Exhibit B.
7. The Company will pay the cost of one physical examination at the Mayo
Clinic, consistent with the executive physical examination program, prior
to February 28, 2001.
8. If you request this service, we will provide you with up to six months of
outplacement assistance, in a program selected by Sheldahl, with your
choice of Drake, Beam, Morin or Lee, Hecht, Harrison. This program must
commence no later than August 25, 2000.
9. Provided your Sheldahl Resignation Date occurs no sooner than August 4,
2000 and you are otherwise eligible under the plan, Sheldahl will provide
your designated beneficiary with a death benefit of $139,441.58 under your
Sheldahl, Inc. Retired Officers Life policy, minus the $5,000 death benefit
provided under the terminated Sheldahl, Inc. Defined Benefit Plan, for a
death benefit from that policy of $134,441.58. You will also receive the
$5,000 death benefit provided under the terminated Sheldahl, Inc. Defined
Benefit Plan. Your total death benefits from both plans will be
$139,441.58.
In consideration of the benefits to be afforded to you as outlined above, you
agree to do the following things:
1. You hereby release Sheldahl, Inc., its past and present affiliates, and its
and their past and present officers, directors, agents, shareholders,
employees, attorneys, insurers and indemnitors (collectively, the
"Releasees") from any and all claims and causes of action, known or
unknown, which you may have against any and all of them. Through this
release, you extinguish all causes of action against the Releasees
occurring up to the date on which you sign this agreement, including but
not limited to any contract, compensation or benefit claims; intentional
infliction of emotional distress, defamation or any other tort claims; all
claims for costs and attorney's fees; and all claims arising from any
federal, state or municipal law or ordinance, including the Employee
Retirement Income Security Act, the Family and Medical Leave Act and the
Fair Labor Standards Act. This release extinguishes any potential claims of
employment discrimination arising from your employment with and resignation
from Sheldahl, including specifically any claims under the Minnesota Human
Rights Act, the Americans With Disabilities Act, Title VII of the Civil
Rights Act of 1964, the Older Workers Benefit Protection Act, and the Age
Discrimination in Employment Act. This release does not extinguish any
claims which arise against Sheldahl after you sign this agreement.
You have until November 30, 1999 to review and consider this offer. If you
sign this agreement before that date, you will be voluntarily waiving your
right to the full review period. You also have the right to rescind this
agreement within 15 calendar days of the date upon which you sign it. You
understand that if you desire to rescind this agreement, you
<PAGE> 4
Mr. John McManus
October 15, 1999
Page 4
must put the rescission in writing and deliver it to Mr. David M. Pfister,
Sheldahl, Inc., 1150 Sheldahl Road, Northfield MN 55057-9444, by hand or by
mail within 15 calendar days of the date on which you sign this agreement.
If you deliver the rescission by mail, it must be postmarked within 15
calendar days of the date on which you sign this agreement and sent by
certified mail, return receipt requested. If you rescind this agreement,
your stock option exercise rights shall remain at 90 days from your
Sheldahl Resignation Date in accordance with your unamended stock option
agreement, and continuation of your group benefits will be in accordance
with Sheldahl policies and procedures.
2. At our specific request and at mutually convenient times while you are
receiving payments under this agreement, you agree to consult with me or my
designee with respect to transitional Sheldahl business matters. You also
agree to cooperate with Sheldahl in any current or future claims or
lawsuits involving Sheldahl where you have knowledge of the underlying
facts. In addition, you agree that you will not voluntarily aid, assist, or
cooperate with any claimants or plaintiffs or their attorneys or agents in
any claims or lawsuits commenced in the future against Sheldahl, provided,
however, that nothing in this agreement will be construed to prevent you
from testifying truthfully as required by valid legal or administrative
process.
3. You agree that you will not disclose the terms of this agreement to anyone
other than your spouse, tax advisor, attorney or as otherwise required by
valid administrative or judicial process. To the extent you make any
disclosures permitted in the preceding sentence, you will take all
necessary steps to assure that any such disclosee honors this
confidentiality obligation.
4. You certify that you will return to Sheldahl all credit cards, keys,
documents, software, confidential information and any other Sheldahl
property in your possession (including all copies) no later than your VP
Resignation Date or earlier if requested by Sheldahl. You may keep your
personal computer until your Sheldahl Resignation Date and Sheldahl will
provide to you any materials which you will need in the performance of your
Special Projects activities between your VP Resignation Date and your
Sheldahl Resignation Date.
You and Sheldahl agree that you will continue, as in the past, to speak
respectfully and positively about each other.
This agreement shall not in any way be construed as an admission of liability by
Sheldahl or as an admission that Sheldahl has acted wrongfully with respect to
you. Sheldahl specifically denies and disclaims any such liability or wrongful
acts. If any provision of this agreement is found to be illegal or
unenforceable, such provision will be severed or modified to the extent
necessary to make it enforceable, and as so severed or modified, the remainder
of this agreement shall remain in full force
<PAGE> 5
Mr. John McManus
October 15, 1999
Page 5
and effect.
This agreement sets forth our entire agreement and fully supersedes any prior
agreements, contracts, policies, programs or understandings between you and
Sheldahl, except for your Employee Agreement (Exhibit A) which shall remain
fully effective and enforceable according to its terms. All payments and
benefits provided to you under this agreement shall immediately cease if you
violate the terms of this agreement or your Employee Agreement; however your
release of your claims shall remain fully effective and enforceable in
consideration of the payments and benefits which you will have received prior to
any such violation.
Sheldahl asks that our records reflect that you conclude your employment on
terms you understand and accept. Therefore, we ask you to declare that you have
entered into this agreement voluntarily, without coercion, duress, or reliance
on any representations by any Sheldahl employee, agent or lawyer. If this letter
accurately reflects our understanding and agreement, please sign and date both
copies and return them to me.
Sincerely,
SHELDAHL, INC.
/s/ Edward L. Lundstrom
- - - ------------------------------
Edward L. Lundstrom, President
Acknowledged and agreed to, with declarations confirmed, this 15th day of
October, 1999.
/s/ John V. McManus
- - - ------------------------------
John McManus
<PAGE> 6
EXHIBIT A
EMPLOYEE AGREEMENT
<PAGE> 7
EXHIBIT B
STOCK OPTIONS
<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------------------
DATE GRANTED OPTIONS PRICE VESTING STATUS
- - - --------------------------------------------------------------------------------
<S> <C> <C> <C>
16-Aug-91 3861 8.750 100%
- - - --------------------------------------------------------------------------------
7-Sep-99 5256 9.000 100%
- - - --------------------------------------------------------------------------------
19-Aug-94 4574 11.500 100%
- - - --------------------------------------------------------------------------------
24-Aug-95 3671 16.500 100%
- - - --------------------------------------------------------------------------------
13-Dec-95 15000 18.375 100%
- - - --------------------------------------------------------------------------------
30-Apr-96 15000 22.125 100%
- - - --------------------------------------------------------------------------------
31-Oct-96 4716 15.375 100%
- - - --------------------------------------------------------------------------------
16-Aug-91 13466 22.000 66.7%*
- - - --------------------------------------------------------------------------------
21-Oct-97 9456 20.375 33.3%**
- - - --------------------------------------------------------------------------------
</TABLE>
* 100% vested on August 19, 2000
** 100% vested on October 21, 2000
Note - The shares listed above represent vesting status only. The actual number
of options may be less in the event vested options have been exercised.
<PAGE> 1
EXHIBIT 10.15
ABSTRACT OF UNION AGREEMENT
ITEM 13-J
The Employer agrees that if a decision is made to sell the Company,
either in whole or in part, the Union shall be notified and TREATED AS
AN EQUIVALENT BUYER, with the understanding that there is currently
another company with the Right of First Refusal. The Union (or its
agents) shall be given the necessary information as an interested
buyer, upon execution of a confidentiality agreement, and shall be
given the opportunity to make bids on an equivalent basis and time
period. The Employer further agrees that it will consider
employee-ownership options if any sale of the Company or its parts is
considered.
The Employer agrees that the contract is with the Sheldahl Company as
set out in Article I and its successors or assigns and agrees to
FACILITATE MEETINGS BETWEEN OTHER BUYERS AND THE UNION.
<PAGE> 1
EXHIBIT 22
SUBSIDIARIES OF REGISTRANT
Sheldahl International Sales, Inc.
a corporation organized under the laws
of the Virgin Islands
(Wholly-owned subsidiary of Sheldahl, Inc.)
Sheldahl Colorado, LLC
a Minnesota limited liability company
(Wholly-owned subsidiary of Sheldahl, Inc.)
<PAGE> 1
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 File Nos. 33-58549, 333-36153, 333-36267, 333-40719,
333-47183, 333-58307, 333-64273 and 333-76023.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
December 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUGUST
28, 1998 AND AUGUST 27, 1999 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-28-1998 AUG-27-1999
<PERIOD-END> AUG-28-1998 AUG-27-1999
<CASH> 1,005 1,043
<SECURITIES> 0 0
<RECEIVABLES> 15,727 19,908
<ALLOWANCES> 0 0
<INVENTORY> 15,488 18,746
<CURRENT-ASSETS> 32,487 40,290
<PP&E> 168,579 159,336
<DEPRECIATION> 66,322 76,491
<TOTAL-ASSETS> 136,306 123,930
<CURRENT-LIABILITIES> 23,628 23,353
<BONDS> 0 0
0 0
41 40
<COMMON> 2,415 2,903
<OTHER-SE> 76,301 62,389
<TOTAL-LIABILITY-AND-EQUITY> 136,306 123,930
<SALES> 117,045 122,086
<TOTAL-REVENUES> 117,045 122,086
<CGS> 109,143 109,157
<TOTAL-COSTS> 33,694 31,918
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,547 2,499
<INCOME-PRETAX> 28,339 21,488
<INCOME-TAX> 2,952 0
<INCOME-CONTINUING> 31,291 21,488
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 5,206 0
<NET-INCOME> 37,186 21,488
<EPS-BASIC> 3.97 2.15
<EPS-DILUTED> 3.97 2.15
</TABLE>
