SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q\A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____
FOR THE QUARTER ENDED November 27, 1998 Commission file number 0-45
SHELDAHL, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0758073
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1150 Sheldahl Road 55057
Northfield, Minnesota
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 507-663-8000
As of December 22, 1998, 10,820,792 shares of the Registrant's common stock
were outstanding. Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes: X No:
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This Form 10-Q\A hereby amends Registrant's quarterly report for the period
ended November 27, 1998 Item 2, Management's Discussion and Analysis of
Consolidated Operating Results and Financial Condition, to provide additional
information under Recent Developments with respect to the Oversight Committee
described herein and to conform the net interest costs table to the
historical financial statements.
SHELDAHL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED OPERATING RESULTS AND FINANCIAL CONDITION
THREE MONTHS ENDED NOVEMBER 27, 1998 AND NOVEMBER 28, 1997
RECENT DEVELOPMENTS
Establishment of Oversight Committee of Board of Directors; Election of Vice
Chairman. On December 17, 1998, the Board of Directors of the Company
established an Oversight Committee (the "Committee") consisting of Kenneth J.
Roering (Chairman), Dennis M. Mathisen and Raymond C. Wieser. All three
members of the Committee are currently directors of the Company. Mr. Roering
holds seats on several public company Boards and is a Professor at the
University of Minnesota's School of Management. Mr. Mathisen is Chairman of
the Board of Governors of Marshall Ventures LLC, Chief Executive Officer of
Marshall Financial Partners, L.P. and President, Director and 100% owner of
Marshall Financial Group, Inc. He also serves as a Director for several
public companies. Mr. Wieser is the Corporate Vice President of Molex
Incorporated, a connector manufacturer and a significant investor in the
Company. Each Committee member currently receives a fee of $800 for each day
of meetings of the Committee and the Committee Chairman will be paid an
additional $2,000 during fiscal 1999. The Committee was appointed to assist
in the management of the Company and to monitor management's performance in
achieving goals and objectives established from time to time by the
committee, its Chairman or the Board of Directors. The Committee will exist
until further action by the Board of Directors. In addition to establishing
the Committee, the Board also elected Kenneth J. Roering to be Vice Chairman
effective immediately.
SALES
The Company's net sales declined $518,000 or 1.8% to $28.5 million for the
three months ended November 27, 1998, as compared to the same period one year
ago. The automotive market sales for the three months ended November 27,
1998 marginally declined to $20.1 million. Automotive sales for the most
recent quarter were adversely affected by about $1 million, due to an
unexpected design change from a major engine control customer. This resulted
in a six-week gap in shipments. Production has since resumed, and despite
this slight deviation in automotive market sales, the market overall remains
strong.
Sales to the datacom market increased 9% to $3.9 million for the three months
ended November 27, 1998. This included $600,000 of sales of the Company's new
Novaflex VHD product line.
Sales to the aerospace/defense markets decreased $910,000 or 36% from $2.5
million for the three months ended November 28, 1997 to $1.6 million for the
three months ended November 27, 1998. Lower demand and greater price
competition for the Company's thin film material used in the commercial
satellite industry accounted for this decline in sales. Sales to the
consumer and industrial markets reflect the typical ordering cycle, which
increased to $2.9 million, a gain of 10.8% over the same quarter one year
ago.
The table below summarizes the Company's sales by market.
Three Months Ended
------------------
November 27, November 28, Gross %
Market 1998 1997 Change Change
Automotive $20,081 $20,298 $ (217) (1.1%)
Datacom 3,922 3,570 352 9.0%
Aerospace/Defense 1,591 2,501 (910) (36.4%)
Industrial 2,124 2,040 84 4.1%
Consumer 756 583 173 29.7%
------- -------- ------- -------
$28,474 $28,992 $ (518) 1.8%
GROSS PROFIT
Gross profit increased $567,000 to 9.5% of sales for the three months ended
November 27, 1998, compared to the same period one year ago. As reflected in
the chart below, the Micro Products business gross loss was $3.7 million as
compared with a loss of $3.3 million for the same period one year ago. On the
other hand, the combined materials and interconnect business units gross
profit increased 16% to $6.4 million or 23% of sales. The primary reason for
the increased gross profit is lower salary and wage expenses obtained through
the restructuring activities put in place during fiscal 1998 and overall
expense control.
November 27, 1998 November 28, 1997
Interconnect Interconnect
and Micro Total and Micro Total
Materials Products Company Materials Products Company
Sales $28,329 $ 145 $28,474 $28,768 $ 224 $28,992
Cost of sales 21,950 3,817 25,767 23,313 3,539 26,852
Gross profit 6,379 (3,672) 2,707 5,455 (3,315) 2,140
% of sales 23% N/A 9.5% 19% N/A 7.4%
The Company's expenses, exclusive of interest, declined $461,000 or 9% from
$5.2 million for the two months ended November 28, 1997 to $4.7 million for
the three months ended November 27, 1998. Overall, this reduction is due to
staff reductions associated with the 1998 restructuring activities and
tighter expense control. Changes in selling, general and administrative, and
research expenses also reflect reassignment of certain personnel to different
areas, the most notable of which is the reassignment of the Company's
President, Ed Lundstrom, out of sales and marketing in 1998 to general and
administrative in 1999.
Interest costs and activities for the noted period are detailed below:
Three Months Ended
November 27, 1998 November 28, 1997 Change
(in thousands)
Gross interest expense $ 799 $ 860 $ (61)
Capitalized interest (476) (347) (129)
------- ------- -------
Net interest $ 323 $ 513 $ (190)
During the current quarter, lower borrowings accounted for the decrease in
gross interest costs. At November 28, 1997, total borrowings were $45.0
million while at November 27, 1998, total borrowings were $36.2 million.
Income taxes were applied at 34% for the three months ended November 28,
1997.
No tax benefits were recorded for the most recent quarter as a valuation
allowance was established during the third quarter of fiscal 1998 for all of
the Company's deferred tax assets as it was determined that it was more
likely than not that such net deferred tax assets would not be utilized. As
a result, and after preferred stock dividends, net loss to common
shareholders for the three months ended November 27, 1998 was $3.0 million,
or $0.29 per share. After preferred stock dividends and after a $5.2 million
charge for changes in method of accounting, net loss to common shareholders
for the three months ended November 28, 1997 was $7.6 million or $0.84 per
share.
FINANCIAL CONDITION
As of November 28, 1998, the Company has a credit facility, which consists of
a $16 million term loan and a $25 million revolving facility. The term
facility is based on the appraised value of the Company's unencumbered
equipment while the revolving facility is based on the Company's receivables
and inventories. For the revolving facility, otherwise eligible collateral
is reduced by $1 million to determine maximum available funds. Both
facilities are secured by the Company's tangible and intangible assets and
have interest rates at prime plus 50 basis points. As of November 28, 1998,
borrowings under the revolving facility were $10.9 million and $4.4 million
was available to borrow. As of December 25, 1998, borrowings were $10.5
million and $5 million was available to the Company. The credit facility (as
amended) requires certain covenants that restrict the payments of cash
dividends, capital expenditures, redemption of preferred stock, and require
the Company to maintain certain levels of net worth and net income, and
maintain certain levels of cash flows from operations. It also requires the
Company to raise additional equity capital of $5 million by February 26, 1999
and another $5 million of equity capital by August 27, 1999. The term
facility requires monthly repayments of $205,000 beginning January 1999. The
revolving credit facility is due on May 31, 2001. As of November 27, 1998,
the Company has complied with or has obtained waivers for all debt covenants.
On November 25, 1998, the Company amended the terms and conditions of its
note payable to an insurance company. The amended agreement requires
principal payments of $500,000 due December 1, 1998, which has been paid,
$250,000 due January 1, 1999, $250,000 due February 1, 1999 and $60,000 due
each month thereafter beginning March 1, 1999. The interest rate charged
will be 10% effective December 1, 1998 and will increase monthly to 15%
effective May 1, 1999. The agreement requires certain covenants that
restrict the payment of cash dividends, total corporate debt, sales of
corporate assets, capital expenditures and maintain certain levels of net
worth and cash flows. As of November 27, 1998, the Company has complied with
or has obtained waivers for all debt comments.
CASH FLOWS
During the three months ended November 27, 1998, operations consumed cash of
$869,000. Net of the $1.8 million of restructuring payments made, operations
generated cash of $936,000, a significant improvement of $704,000 over
$232,000 from the three months ended November 28, 1997.
Restructuring payments will be significant through the remainder of fiscal
1999. Management estimates payments of $1.9 million for the three months
ended February 26, 1999, $1.1 million for the three months ended May 28, 1999
and $983,000 for the three months ended August 27, 1999. In fiscal year
2000, restructuring payments are expected to be $1.6 million for the entire
year.
YEAR 2000 UPDATE
The company is progressing in its efforts to mitigate the exposures of the
Year 2000 as described in the Company's latest Form 10-K. In regards to the
"Risks of Year 2000 Issues, Item 5. De-Listing of Company as a Vendor to
Certain Customers" the company was re-assessed in December by a
customer-designated third party. The result of this assessment was a
recommendation for the Company to be upgraded from a high-risk to a
medium-risk. This result reduces the likelihood of the Company being
de-listed as a vendor to these customers. It is important to note that most
companies in this industry are rated in the medium risk category.
FOREIGN CURRENCY EXPOSURE
During fiscal 1998, the Company's exposure to foreign currency risk declined
as two large programs were converted to the United States Dollar. The
Company maintains a limited exposure to foreign currency risk with smaller
programs contracted in British Sterling, German Marks and French Francs.
These contracts and the exchange rate are reviewed periodically.
Beginning January 1, 1999, the Euro, the new European currency, will be used
commercially. As of November 27, 1998, none of the Company's customers or
suppliers have suggested pricing any contracts in Euro. However, in order to
remain competitive, the Company anticipates pricing certain contracts in Euro
and has systems in place to support such contracts by converting foreign
currency transactions to six decimal places. When warranted by the size of
foreign currency contracts, the Company will use a variety of hedging
techniques, including financial derivatives, to prudently reduce, but not
eliminate, its exposure to foreign currency fluctuations. No such contracts
existed as of November 27, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
During June 1997, the Financial Accounting Standards Board released SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
requires disclosure of business and geographic segments in the consolidated
financial statements of the Company. The Company will adopt SFAS No. 131 in
its fiscal 1999 Form 10-K and is currently analyzing the impact it will have
on the disclosures in its financial statements.
During February 1998, the Financial Accounting Standards Board issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," effective for fiscal years beginning after December 31, 1997.
SFAS No. 132 revises certain of the disclosure requirements, but does not
change the measurement or recognition of those plans. The adoption of SFAS
No. 132 will result in revised and additional disclosures, but will have no
effect on the financial position, results of operations, or liquidity of the
Company. The Company will adopt SFAS No. 132 in fiscal 1999 and is currently
analyzing the impact it will have on the disclosures in its financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and hedging Activities," effective 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.
CAUTIONARY STATEMENT
The statements included herein which are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
the Private Securities Reform Act of 1995. Factors which could cause actual
results to differ materially from those anticipated by some of the statements
made herein include, but are not limited to, the Company's ability to achieve
full volume production at its Micro Products facility and other factors
detailed from time to time in the Company's SEC reports, including the report
on Form 10-K for the year ended August 27, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this amended report to be signed on its behalf by
the undersigned thereunto duly authorized.
SHELDAHL, INC.
Dated: January 8, 1999 /s/ Edward L. Lundstom
Edward L. Lundstrom, President
Dated: January 8, 1999 /s/ John V. McManus
John V. McManus, Vice President
Finance
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