SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): January 15, 1999
Sheldahl, Inc.
(Exact name of Registrant as specified in its charter)
Minnesota 0-45 41-0758073
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
1150 Sheldahl Road
Northfield, Minnesota 55057
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (507) 663-8000
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Item 5. Other Events
This filing is being made for the purpose of updating the Risk Factors of
Sheldahl, Inc. (the Company) set forth in the Company's documents on file with
the Securities and Exchange Commission and to provide investors with cautionary
statements regarding any forward-looking statements that may be made from time
to time by the Company in its filings with the Securities and Exchange
Commission, press releases and other public statements.
RISK FACTORS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution investors that the
Company has made and makes forward-looking statements regarding the intent,
belief or current expectations of the Company and its management. Prospective
investors are cautioned that any such forward-looking statements involve risks
and uncertainties, and that the actual results may differ materially from those
in the forward-looking statements as a result of various uncertainties and
risks, including those set forth below. These uncertainties and risks in some
cases have affected the Company's actual results and could cause the Company's
results to differ materially from those expressed in such forward-looking
statements.
Liquidity and Possible Need for Additional Financing
The impact of improving performance from the Company's Northfield
operations along with reduced capital spending, a strengthened balance sheet
from the new credit facility, and the proceeds from the Series D Preferred
Stock should provide adequate liquidity to fund operations over the next
nine to twelve months. Liquidity would significantly deteriorate if the
anticipated improvement in the Company's Northfield operations is not
realized or the ramp up of revenue from Micro Products extends beyond the
third quarter of fiscal 1999. Management believes with planned operating
improvements that the Company has adequate liquidity to provide
uninterrupted support for its business operations during fiscal 1999.
Nevertheless, the Company is in the process of seeking additional debt or
equity capital to ensure the necessary capital to support the ongoing
operations of the Company. This is based on the uncertainty of achieving
expected improved operating results, including realizing significant sales
growth in fiscal 1999 from the Company's Micro Products business, and is
necessary to meet the covenants under the Company's credit and security
agreement. The Company is required to raise additional equity capital
of $5 million by February 26, 1999 and another $5 million of equity capital
by August 27, 1999. In the event the Company is unable to raise the
capital, the Company would be in technical default under its credit and
security agreement enabling the Company's lenders to require immediate
repayment of the borrowings under the credit and security agreement. If
the Company does not achieve its projected operating results and/or it does
not have borrowings available under its current credit and security
agreement, management believes that it has options available to obtain
necessary additional new capital, including the issuance of additional new
debt or additional new equity financing. There can be no assurance,
however, that the Company will be successful in its attempt to issue
additional debt or to raise additional capital on terms acceptable to the
Company.
Minimal Cash Flow
Cash flow requirements to fund restructuring charges taken during fiscal
1998 are expected to be approximately $5.5 million in fiscal 1999 as employee
severance and plant shut down costs are paid. Therefore, the overall cash flow
from operations is expected to be minimal or negative over the first half of
fiscal 1999 with borrowing levels increasing under the existing credit facility
to fund both operations and the reduced levels of capital expenditures. During
the second half of fiscal 1999, sales levels are projected to increase as
greater production volume is generated at the Longmont facility covering an
increasing portion of fixed costs and increasing cash flow thus reducing the
growth in debt financing. There can be no assurance that the projected sales
level during the second half of fiscal 1999 will be achieved.
Market Acceptance of New Products of Micro Products' Business
A significant portion of the Company's anticipated future success in the
data communication market and a significant portion of future revenue growth of
the Company will depend on market acceptance of its Novaclad-based ViaArray and
Via-Thin products as marketed by the Company's Micro Products business.
Although the Company believes that these products have attractive performance
characteristics and utility in a potentially broad range of products, sales of
its Novaclad-based products will depend on the Company's ability to (i)
convince potential customers that the advantages and applications of these
products justify the expense and production changes necessary to
incorporate the Company's products into the customer's manufacturing
process; (ii) work with designers of integrated circuit (IC) packages and
electronics to incorporate these products; (iii) qualify these products
for inclusion in the customer's products within the time requirements of
the customer's design cycle and (iv) produce sufficient quantities of
these products in a timely manner. Moreover, these products will compete
with certain other thin film laminates or alternative materials offered by
other manufacturers and such materials may achieve wider market acceptance
than the Company's products. Failure of the Company's Novaclad-based
ViaArray and Via-Thin products to achieve timely or sufficient market
acceptance has had and will continue to have a material adverse effect on
the Company's results of operations until efficient volume production and
related sales revenue is achieved.
Development of Micro Products Business; Utilization of Longmont Facility
The Company originally expected to commence production in the Longmont
Facility in April 1996. However, the realization of full volume production has
been delayed, initially due to late deliveries of certain production equipment
as a result of financial difficulties of a supplier, Micro Plating Systems,
Inc., as well as a longer than anticipated installation period and more
recently due to a far more rigorous and lengthy process qualification and
product acceptance (validation) by the Company's customers and their
customers. During the last eighteen months, the Company has identified
additional equipment suppliers so that the design and delivery of future
key production equipment can be improved. As of the date hereof, Texas
Instruments and Vitesse Semiconductor have qualified ViaThin substrates
for their operations. Shipments of small volume production orders have
begun and the Company expects that their initial orders will lead to
larger orders from these and other customers as demonstrated by new
designs and prototype orders currently in process from these and other
customers. The adverse financial impact with respect to developing the Micro
Products business has been and will continue to be significant. In 1998, the
Micro Products business resulted in a pretax loss prior to restructuring costs
and impairment charges of $19.4 million as compared with a $15.5 million and
$6.0 million loss in 1997 and 1996, respectively. Such significant losses are
expected to continue until efficient volume production and related sales
revenue is achieved. As of October 30, 1998, the Longmont Facility was
operating at less than 5% of stated production capacity with projected
breakeven at 45% of factory utilization or some $24 million to $26 million
of annual revenue of ViaThin and ViaArray products. Breakeven volume at
Longmont is not expected until the fourth quarter of fiscal 1999 at the
earliest, and the fourth quarter of fiscal 2000 at the latest. There can
be no assurance, however, that validation problems or difficulties will
not materialize once full volume production has commenced or that the
Company will be able to achieve breakeven production in the time specified.
Dependence on Automotive Market
Sales to the automotive market as a percentage of total sales were
approximately 67.5% in fiscal 1997 and 68.7% in fiscal 1998. The Company's
production of component products for the automotive market fluctuates as
automotive manufacturers begin production of new models and end production of
others. A decrease in the number of the Company's electronic components
included in new models could have a material adverse effect on the Company's
results of operations. A general downturn in the automotive market, such
as the General Motors labor strike, could have and has had a material
adverse effect on the demand for the electronic components supplied by
the Company to its customers in the automotive market. For example,
during the Company's fiscal 1998 fourth quarter, the Company's sales to
the automotive market were adversely impacted by the General Motors strike
by an amount equal to approximately $2.0 million. In addition, as the
automotive industry continues to qualify and reduce the number of
suppliers and demand higher performance products at a lower cost, there
can be no assurance that the Company will be able to maintain its current
sales volumes at existing profit margins to automotive manufacturers and
their suppliers.
Customers' Product Obsolescence and Standards
The Company supplies component products primarily to the automotive
electronics and data communication markets. Substantially all of the products
in these markets which incorporate the Company's component products are subject
to technological obsolescence, performance standards and pricing requirements.
The Company's future success in these markets will depend upon its ability to
(i) work closely with manufacturers to design end products or applications
which incorporate the Company's products and achieve market acceptance,
(ii) develop technologies to meet the evolving market requirements of its
customers, (iii) continue to deliver high-performance, cost-effective
products and (iv) expand its sales and marketing efforts domestically and
internationally. There can be no assurance that the Company will continue
to meet the current qualification requirements of its major customers,
meet new qualification requirements imposed by its customers or continue
to be selected as a supplier by new customers.
Capital Intensive Business
The Company's business is capital intensive. In the past four years, the
Company has invested approximately $112 million in total capital expenditures,
including approximately $65.6 million in the Longmont Facility. In order to
remain competitive, the Company must continue to make significant expenditures
for capital equipment, expansion of operations and research and development.
The Company has had initial success with introducing its Novaclad-based
products but further penetration is required. If the Company is successful
in its Novaclad-based products, it may be required to make additional
capital investments to increase manufacturing capacity before sufficient
positive cash flow can be derived from the initial investment in the
Longmont Facility. Presently, however, capital expenditure plans in
fiscal 1999 are planned at $7 million, significantly lower than in the
recent past. Reduced capital spending, along with anticipated improving
cash flow from operations, funds available under its credit and security
agreement, and proceeds from future sales of additional equity capital are
expected to provide adequate funds to meet these needs of the Company.
There can be no assurance, however, that the Company will have adequate
funds to support its capital expenditure plans in fiscal 1999 or that the
Company will be able to raise additional equity capital on terms
acceptable to the Company.
Customer Concentration
The Company's customer base is concentrated. The Company's ten largest
customers for the 1998 fiscal year accounted for approximately 64.1% of net
sales, and 15.4%, 10.2% and 10.3% of the Company's net sales during fiscal 1998
were to Motorola, Inc., Ford Motor Company and Siemens, respectively. The
Company expects that sales to a relatively small number of customers will
continue to account for a significant portion of sales for the foreseeable
future, and the loss of, or a significant decline in orders from, one of the
Company's key customers could have a material adverse effect on the Company's
results of operations.
Variability of Quarterly Results
Historically, the Company's quarterly results of operations have
fluctuated significantly primarily because of the timing of orders from its
larger customers and mix of products manufactured and sold, as impacted from
time to time by work stoppages in the automotive industry and other broad
economic events. Due to this and the inherent uncertainty associated with the
development of new products and production facilities, the Company expects that
its quarterly results of operations will continue to be subject to significant
fluctuations.
Intense Competition
The Company's business is highly competitive with principal competitive
factors being product quality, price, distribution and service. The Company
believes its vertical integration, which allows it to control product quality
and manufacturing efficiencies better than many of its competitors, is a
competitive advantage. Sheldahl's competitors include materials suppliers,
flexible and rigid circuit manufacturers, as well as electronics manufacturers
who produce their own materials and interconnect systems. Some of the
Company's competitors have substantially greater financial and other
resources than the Company. The Company's primary competitors with
respect to its flexible printed circuitry and interconnect systems include
Pressac Limited (a U.K. company) and Parlex Corp. in the automotive
electronics market and Mektec Corp., Fujikura Ltd. (a Japanese company)
and ADFlex Solutions, Inc. in the datacommunications market. The
Company's primary competition for its laminate materials includes Rogers
Corporation and GTS Flexible Materials, Ltd. (a U.K. company).
Specifically addressing the Company's high-density ViaArray (formerly ViaGrid)
and ViaThin products, the Company offers not only a unique via generation
capability along with Novaclad-based material, but the products provide two
layers of copper for increased linear inches of circuit traces while
maintaining an equal or smaller physical size to the substrate when
compared to competitor's one metal layer product such as that supplied by
3M. Additionally, IBM has chosen to exit the two metal tape business and
their leading customer, Vitesse, is converting to use Sheldahl's ViaThin.
Therefore, the Company feels it has a competitive advantage or strength
versus its major competitors with its ViaArray and ViaThin products.
Although the Company believes performance and price characteristics of
its Novaclad-based products will provide competitive solutions for its
customers' needs, there can be no assurance that its customers will not
choose other technologies due to such customers' familiarity with the
competing technology, the financial resources of the supplier or the ease of
incorporating alternative technology into customers' manufacturing processes.
In addition, there can be no assurance that other competitors will not
enter the markets served by the Company. The Company's results may be
adversely affected by the actions of its competitors, including the
development of new technologies, the introduction of new products or the
reduction of prices. There also can be no assurance that the Company will
be able to take actions necessary to maintain its competitive position.
Possible Volatility of Stock Price
Factors such as unexpected market activity in the Company's Common Stock,
announcements by the Company or its competitors, fluctuations in the Company's
operating results, general conditions in the automotive and data communication
markets or the worldwide economy, and changes in earnings or estimates by
analysts could cause the price of the Company's Common Stock to fluctuate,
perhaps substantially. Also, prices for many technology company stocks,
including the Common Stock, may fluctuate widely for reasons that are not
always related to the operating performance of such companies.
Sales of substantial amounts of the Company's Common Stock in the public
market or the prospect of such sales could materially and adversely affect the
market price of the Common Stock. As of December 1, 1998, the Company had
outstanding 10,890,729 shares of Common Stock, 913 shares of Series B Preferred
Stock, 32,917 shares of Series D Preferred Stock convertible into 5,352,358
shares of Common Stock, and warrants to purchase 496,982 shares of Common
Stock. The number of shares of Common Stock issuable upon conversion of the
Series B Preferred Stock changes depending upon the lowest sale prices of
the Common Stock during the applicable measurement period immediately
preceding the date of conversion. There is no minimum conversion price and
thus no maximum number of shares of Common Stock into which the Series B
Preferred Stock may be converted. In addition, as of December 1, 1998,
the Company had granted options to purchase 1,472,813 shares of Common
Stock under its 1987 Stock Option Plan, 1994 Stock Option Plan, and
Employee Stock Purchase Plan (collectively, the "Stock Option Plans").
Almost all of the Company's outstanding shares of Common Stock may be
sold without substantial restrictions. All of the shares purchased under the
Stock Option Plans are available for sale in the public market, subject in some
cases to volume and other limitations.
Sales in the public market of substantial amounts of Common Stock,
including sales of Common Stock issued upon conversion of the Series B
Preferred Stock or the Series D Preferred Stock, or the perception that
such sales could occur, could depress prevailing market prices for the
Common Stock. The conversion terms of the Series B Preferred Stock, which
allow holders of the Series B Preferred Stock to convert their shares of
Series B Preferred Stock into shares of Common Stock at a discount to the
current market price of the Common Stock, and then immediately resell such
shares at market prices, could result in downward pressure on the price of
the Common Stock, making it difficult for a sustained rise in the price of
the Common Stock to occur, if such a rise occurs at all. For example, if
the holders of the 913 shares of the Company's Series B Preferred Stock
were to have requested conversion as of December 1, 1998, such shares would
convert into shares representing 1.4% of the Company's currently
outstanding Common Stock, or 147,656 shares of Common Stock on such date,
which includes 8,795 shares representing dividends related to such
shares.
The existence of the private warrants and any other options or warrants
may prove to be a hindrance to future equity financing by the Company. Further,
the holders of such warrants and options may exercise them at a time when the
Company would otherwise be able to obtain additional equity capital on terms
more favorable to the Company.
Reliance on Specialized Manufacturing Facilities
The Company has separate manufacturing and assembly facilities, certain of
which perform processes dependent upon products produced at its other
facilities. The Company's flexible laminates are produced at facilities in
Longmont and Northfield, Minnesota and further processed into printed
circuitry in a separate facility, also located in Northfield, Minnesota.
In addition, the Company also fabricates ViaArray and ViaThin at the
Longmont Facility. Further assembly is performed at one facility in South
Dakota, two in Mexico and one in Canada. Delays or disruption at its
flexible laminate facility may result in an insufficient supply of
materials for its flexible printed circuitry facility and its assembly
facilities. The Company's Novaclad-based ViaArray and Via-Thin
products will be manufactured primarily at the Longmont Facility.
Each of these facilities contains or will contain specialized equipment
which may not be quickly replaceable. While the Company carries business
interruption insurance, any natural or other event affecting any one of
these facilities or the manufacturing equipment could materially and
adversely affect the Company's position in its markets and results of
operations.
Dependence on Certain Suppliers
The Company qualifies strategic suppliers through a Vendor Certification
Program, which limits the number of suppliers to those who provide the Company
with the best total value and quality. The Company closely monitors product
quality and delivery schedules of its supply base. Certain raw materials used
by the Company in the manufacture of its products are currently obtained from
single sources. The Company has not historically experienced significant
problems in the delivery of these raw materials. The Company currently depends
on one supplier for its polyimide supply, which serves as the base material for
the Company's Novaclad family of products. This supplier currently
manufacturers this polyimide film in the United States and Japan through
multiple production lines. There have been no interruptions of supply from
this vendor over the last three years. The Company continues to evaluate
other sources of supply for polyimide film as well as other single sourced
raw materials. Although the Company believes that other manufacturers'
products are available, there can be no assurance that any interruption in
supply from these vendors would not have a material adverse effect on the
Company's operations.
Dependence on Key Personnel
The Company's business is dependent on the efforts and abilities of its
executive officers and key personnel, especially in the development, marketing
and manufacturing of its Novaclad-based ViaArray and Via-Thin products. The
Company's continued success will also depend on its ability to continue to
attract and retain qualified employees. The loss of services of any key
personnel could have a material adverse effect on the Company. The Company
does not have key-person life insurance on any of its employees.
Dividends
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.
Patents, Trademarks and Proprietary Rights
The Company's success depends, to a large extent, on its ability to
maintain a competitive proprietary position in its product areas. The Company
has received certain patents with respect to its products and processes and has
several other patent applications pending. There can be no assurance that
patents will be issued on the basis of the Company's applications, that any
patent issued to the Company will not be challenged, invalidated or
circumvented or that the rights granted under any patent will provide
significant benefits to the Company. The Company is aware of a patent
which may cover certain plated through holes of double-sided circuits made
of the Company's Novaclad material. Although no claims have been made
against the Company under this patent, the owner of the patent may attempt
to construe the patent broadly enough to cover certain Novaclad products
manufactured currently or in the future by the Company. The Company
believes that prior commercial art and conventional technology, including
certain patents of the Company, exist which would allow the Company to
prevail in the event any such claim is made under this patent.
Any action commenced by or against the Company could be time consuming and
expensive and could result in requiring the Company to enter into a license
agreement or cease manufacture of any products ultimately determined to
infringe such patent. In addition to patent protection, the Company also
attempts to protect its trademarks through registration and proper use.
The Company also attempts to protect its proprietary information as trade
secrets by taking security precautions at its facilities. Further, the
Company maintains confidentiality through the use of secrecy or
confidentiality agreements and other measures intended to prevent the
public dissemination of trade secret information. There can be no
assurance that these steps will prevent misappropriation of the Company's
proprietary rights or that third parties will not independently develop
functionally equivalent or superior non-infringing technology.
Environmental Matters
The Company is subject to various federal, state and local environmental
laws relating to the Company's operations. The Company's manufacturing and
assembly facilities are registered with the U.S. Environmental Protection
Agency and are licensed, where required, by state and local authorities.
The Company has agreements with licensed hazardous waste transportation and
disposal companies for transportation and disposal of its hazardous wastes
generated at its facilities. The Longmont Facility has been specifically
designed to reduce water usage in the manufacturing process and employs a
sophisticated waste treatment system intended to substantially reduce
discharge streams. Compliance with federal and state environmental laws
and regulations did not have a material effect on the Company's capital
expenditures, earnings or competitive position during fiscal 1998.
Similarly, fiscal 1999 capital expenditures to comply with such laws and
regulations are not expected to be material. The Company believes it is
in material compliance with federal and state environmental laws and
regulations. As of August 28, 1998, the Company was not involved in any
significant specific action, legal or regulatory, regarding environmental
regulations. An inadvertent mishandling of materials or similar incident,
however, could adversely affect the operations of the Company and result
in costly administrative or legal proceedings. In addition, future
environmental regulations could add to overall costs of doing business.
Anti-Takeover Provisions
The Company's Articles of Incorporation and the Minnesota Business
Corporation Act include certain anti-takeover provisions. These provisions,
including the power to issue additional stock and to establish separate classes
or series of stock, may, in certain circumstances, deter or discourage takeover
attempts and other changes in control of the Company not approved by the
Board. In addition, in June 1996, the Board of Directors of the Company
adopted a Rights Agreement (the Rights Agreement), commonly called a
poison pill. Pursuant to the terms of the Rights Agreement, one right (a
Right) was issued in respect of each share of the Company's Common Stock
outstanding. Such Rights also attach to each share of Common Stock issued
subsequent to the adoption of the Rights Agreement, including the Shares
offered hereby. Each Right entitles the holder thereof to purchase a
fraction of a share of the Company's Series A Preferred Stock or, in
certain instances, Common Stock of the Company or stock of an Acquiring
Person (as defined below) in the event that (i) a third party or a group
(an Acquiring Person) acquires beneficial ownership of 15% or more of
the Common Stock or (ii) a tender offer or exchange offer that would
result in a person or group becoming an Acquiring Person is commenced. On
July 30, 1998, the Company amended Section 1(a) of the Rights Agreement to
provide that when applied to Molex Incorporated (Molex) and any of its
affiliated parties the 15% threshold for beneficial ownership shall be
22%. The Company increased this threshold with respect to Molex in
connection with Molex's investment in the Series D Preferred Stock which
otherwise would have resulted in Molex triggering provisions of the Rights
Agreement. The Rights Agreement will be in effect through June 2006 and
could have the effect of discouraging tender offers or other transactions
which could result in shareholders receiving a premium over the market
price of Common Stock.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Sheldahl, Inc.
By /s/ John V. McManus
John V. McManus, Vice President-Finance
Dated: January 15, 1999.
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