SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended February 26, 1999 Commission File Number: 0-45
SHELDAHL, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0758073
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
Northfield, Minnesota 55057
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (507) 663-8000
As of March 25, 1999, 11,152,588 shares of the Registrant's common stock were
outstanding.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
<PAGE>
PART I: FINANCIAL INFORMATION
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
February 26, February 27,
(In thousands, 1999 1998
except for per share data)
Net sales $56,516 $56,743
Cost of sales 50,697 54,036
_______ _______
Gross profit 5,819 2,707
_______ _______
Expenses:
Sales and marketing 4,751 4,915
General and administrative 3,758 3,942
Research and development 1,253 2,002
Interest 987 1,122
Restructuring costs 3,100 4,000
_______ _______
Total expenses 13,849 15,981
_______ _______
Loss before income taxes and
cumulative effect of change in
method of accounting (8,030) (13,274)
Benefit for income taxes - 4,840
_______ _______
Net loss before cumulative effect
of change in method of accounting
for start-up costs (8,030) (8,434)
Cumulative effect of change in
method of accounting for
start-up costs - (5,206)
_______ _______
Net loss before preferred dividends (8,030) (13,640)
Convertible preferred stock dividends (1,072) (359)
_______ ________
Net loss applicable to common
shareholders $(9,102) $(13,999)
======= =======
Net loss per common share:
Basic -
Net loss before change in method
of accounting and after
convertible preferred stock dividends $ (0.84) $ (0.97)
Change in accounting method - (0.57)
_______ _______
Net loss per common share $ (0.84) $ (1.54)
======= =======
Diluted -
Net loss before change in method
of accounting and after
convertible preferred stock dividends $ (0.84) $ (0.97)
Change in accounting method - (0.57)
_______ _______
Net loss per common share $ (0.84) $ (1.54)
======= =======
Number of shares outstanding - Basic 10,772 9,084
Number of shares outstanding - Diluted 10,772 9,084
The accompanying notes are an integral part of these statements.
<PAGE>
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
February 26, February 27,
(In thousands, 1999 1998
except for per share data)
Net sales $28,042 $27,751
Cost of sales 24,930 27,184
_______ _______
Gross profit 3,112 567
_______ _______
Expenses:
Sales and marketing 2,531 2,515
General and administrative 1,831 2,092
Research and development 679 1,070
Interest 664 609
Restructuring costs 3,100 4,000
_______ _______
Total expenses 8,805 10,286
_______ _______
Loss before income taxes (5,693) (9,719)
Benefit for income taxes - 3,465
_______ _______
Net loss before preferred dividends (5,693) (6,254)
Convertible preferred stock dividends (418) (172)
_______ _______
Net loss applicable to common
shareholders $(6,111) $(6,426)
======= =======
Net loss per common share:
Basic
Net loss per common share $ (0.55) $ (0.70)
======= =======
Diluted
Net loss per common share $ (0.55) $ (0.70)
======= =======
Number of shares outstanding - Basic 11,037 9,131
Number of shares outstanding - Diluted 11,037 9,131
The accompanying notes are an integral part of these statements.
<PAGE>
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands) February 26, August 28,
1999 1998
(unaudited)
Current assets:
Cash $ 1,327 $ 1,005
Accounts receivable, net 19,100 15,727
Inventories 17,224 15,488
Other current assets 1,257 627
_______ _______
Total current assets 38,908 32,847
_______ _______
Construction in process 5,985 26,682
Land and buildings 28,555 28,255
Machinery and equipment 133,715 113,642
Less: accumulated depreciation (71,664) (66,322)
_______ _______
Net plant and equipment 96,591 102,257
_______ _______
Other assets 1,109 1,202
_______ _______
$136,608 $136,306
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 3,884 $ 4,296
Accounts payable 8,845 7,766
Accrued compensation 1,126 1,554
Other accruals 5,228 4,518
Restructuring reserves 5,166 5,494
_______ _______
Total current liabilities 24,249 23,628
Long-term debt 31,839 27,829
Restructuring reserves 1,638 2,131
Other long-term accruals 3,920 3,961
_______ _______
Total liabilities 61,646 57,549
_______ _______
Stockholders' Equity:
Convertible preferred stock 40 41
Common stock 2,788 2,415
Additional paid-in capital 106,381 99,751
Subscribed preferred stock (1,695) -
Accumulated deficit (32,552) (23,450)
_______ _______
Total shareholders' equity 74,962 78,757
_______ _______
$136,608 $136,306
======= =======
The accompanying notes are an integral part of these statements.
<PAGE>
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
(In thousands) February 26, February 27,
1999 1998
Operating activities:
Net loss $ (9,102) $(13,998)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 8,066 7,103
Preferred stock dividends 1,072 359
Deferred income taxes - (4,840)
Accounting method change - 5,206
Restructuring costs charged to operations 3,100 4,000
Restructuring payments made (3,427) -
Net change in other operating activities:
Accounts receivable (3,373) (998)
Inventories (1,736) (1,488)
Prepaid expenses and other current assets (630) (276)
Other assets 93 54
Accounts payable and accrued liabilities 1,700 2,406
Other non-current liabilities (41) (82)
_______ _______
Net cash used in operating activities (4,278) (2,554)
_______ _______
Investing activities:
Capital expenditures, net (3,642) (14,120)
_______ _______
Financing activities:
Net borrowings under revolving credit
facilities 5,980 10,486
Proceeds from other long-term debt - 2,334
Repayments of long-term debt (2,449) (475)
Costs and redemption of Series B
preferred stock (837) (300)
Net proceeds of Series E preferred stock 5,392 -
Stock options exercised 156 163
_______ _______
Net cash provided by financing
activities 8,242 12,208
_______ _______
Net increase (decrease) in cash
equivalents 322 (4,466)
Cash and cash equivalents at
beginning of period 1,005 5,567
_______ _______
Cash and cash equivalents at
end of period $ 1,327 $ 1,101
======= =======
Supplemental cash flow information:
Interest paid $ 1,662 $ 1,853
======= =======
Income taxes paid $ 69 $ 7
======= =======
The accompanying notes are an integral part of these statements.
<PAGE>
SHELDAHL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
These condensed and unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
condensed unaudited consolidated financial statements reflect all adjustments,
of a normal and recurring nature, necessary for a fair statement of the
interim periods, on a basis consistent with the annual audited financial
statements. Certain information, accounting policies and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Although these disclosures should be
considered adequate, the Company strongly suggests that these condensed
unaudited financial statements be read in conjunction with the financial
statements and summary of significant accounting policies and notes thereto
included in the Company's latest annual report on Form 10-K.
1) Inventories, which are valued at the lower of first-in first-out cost or
market, consists of (in thousands):
February 26, 1999 August 28, 1998
Raw materials $ 5,717 $ 4,964
Work-in-process 5,207 4,742
Finished goods 6,300 5,782
_______ _______
$17,224 $15,488
======= =======
2) Equity Transactions.
During February 1999, the Company issued 7,210 shares of Series E
convertible preferred stock. As of February 26, 1999, the Company had
received cash of $5,515,000 relating to the issuance of the stock and
received the remaining $1,695,000 by March 5, 1999. By March 8, 1999, the
Company had issued additional 1,350 shares of Series E convertible
preferred stock and received the related proceeds of $1,350,000. The
investors were also issued warrants to purchase a total of 85,600 shares of
Common Stock of the Company at $7.8125 per share. The warrants are
exercisable for a period of five years. During the three months ended
February 26, 1999, 231,336 shares of common stock were issued upon the
conversion of 1,097 shares of Series B convertible preferred stock.
As of March 31, 1999, the Company's equity structure is summarized as
follows:
A) 11,152,588 common shares outstanding.
B) $32,917,000 in stated value of Series D 5% convertible preferred stock,
with a fixed conversion price of $6.15 per share and dividends payable
in cash or in common stock annually on each July 1. Accrued but unpaid
dividends are also due upon the conversion of such preferred shares.
C) $8,560,000 in stated value of Series E 5% convertible preferred stock
with a fixed conversion price of $6.25 per share and dividends payable
in cash or in common stock annually on each March 1. Accrued but unpaid
dividends are also due upon the conversion of such preferred shares.
D) $167,000 in stated value of Series B 5% convertible preferred stock with
a floating conversion price estimated to be $6.30 per share as of March
17, 1999 and dividends payable in cash or in common stock at conversion.
On February 26, 1999, the Company had accrued approximately $990,000 in
total dividends on these groups of preferred stock.
3) Restructuring Costs.
In February 1999, the Company recorded a charge of $3.1 million to reserve
for the separation costs incurred in reducing its salaried work force. The
restructuring costs provide for approximately $1.7 million for severance
and early retirement salary costs and approximately $1.4 million for
medical, dental and other benefits being provided to the affected
individuals. Approximately 53 people are affected by this action. These
new restructuring costs are in addition to the $8.5 million of similar
costs charged to operations in fiscal 1998 ($4.0 million in the second
quarter ended February 27, 1998 and $4.5 million in the third quarter ended
May 29, 1998).
As of February 26, 1999, the Company had total remaining restructuring
reserves of $6.8 million. Of this amount, approximately $6.3 million
related to severance, wages and benefits and approximately $500,000 related
to the remaining equipment disposal, facility closedown and other costs.
In total, for all restructuring costs recorded at February 26, 1999, the
Company expects to make cash outlays of $2.8 million during the last six
months of fiscal 1999 and $2.6 million for all of fiscal 2000. The
remaining $1.4 million of restructuring costs are expected to be paid out
over the ten years beginning in fiscal 2001.
During the six months ended February 26, 1999, the Company paid $3.4
million of restructuring expenses relating to reserves charged to
operations in fiscal 1998. Also, the Company wrote off $494,000 of fixed
assets relating to the Aberdeen, South Dakota facility and charged this
amount to previously established reserves.
4) Earnings Per Share
The basic loss per share amount is determined based on the weighted average
of common shares outstanding. Diluted loss per share is determined based
on the same figure, since the Company's potentially dilutive items,
convertible preferred stock, stock options and warrants, are anti-dilutive
in the periods presented.
<PAGE>
SHELDAHL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED OPERATING RESULTS AND FINANCIAL CONDITION
Six Months Ended February 26, 1999, and February 27, 1998
Sales
The Company's net sales declined $226,000, or 0.4%, from $56.7 million for the
six months ended February 27, 1998 to $56.5 million for the six months ended
February 26, 1999. The automotive market sales for the six months ended
February 26, 1999 declined 3.5% to $38.7 million. This decline represents
weaker than anticipated orders during the mid-December 1998 to mid-January
1999 period plus continued price pressure with the industry.
Sales to the datacom market increased 39.2% to $9.2 million for the six months
ended February 26, 1999. Sales of the Company's new Novaflexr VHD product
accounted for approximately $2 million of the increase. Additionally, sales
for the Company's ViaThinr substrates for IC packages also increased $167,000
during this period. Sales to the aerospace defense market consisting
principally of various laminate materials declined $1.1 million or 24%
reflecting the typical order pattern of this market.
The chart below details the Company's sales by market during the period (in
thousands):
Six Months Ended Six Months Ended
Market Feb 26, 1999 Feb 27, 1998 Gross Change % Change
Automotive $ 38,702 $ 40,092 $ (1,390) (3.5%)
Datacom 9,225 6,628 2,597 39.2%
Industrial 3,683 3,718 (35) (.9%)
Consumer 1,402 1,673 (271) (16.1%)
Aerospace/Defense 3,504 4,632 (1,128) (24.3%)
_______ _______ _______ _______
Total $ 56,516 $ 56,743 $ (227) .4%
======= ======= ======= =======
Gross Profit
Gross profit increased to 10.3% of sales, or $5.8 million, for the six months
ended February 26, 1999. As reflected in the table below, Micro Products
grossed a $6.7 million loss. The combined Materials and Interconnect business
units' gross profit increased $3.1 million to $12.5 million, or 22.4%, of
sales. The improved performance is due to savings realized in production
labor as well as more effective cost management of factory costs.
Six Months Fiscal 1999 Six Months Fiscal 1998
Interconnect Micro Total Interconnect Micro Total
& Material Products Company & Materials Products Company
(In millions)
Sales $55,881 $ 635 $56,516 $56,275 $ 468 $56,743
Cost of
sales 43,361 7,336 50,697 46,864 7,172 54,036
Gross
profit 12,520 (6,701) 5,819 9,411 (6,704) 2,707
% of sales 22.4% N/A 10.3% 16.7% N/A 4.8%
Sales and marketing expense decreased $164,000, or 3.3%, from $4.9 million for
the six months ended February 27, 1998, to $4.8 million for the six months
ended February 26, 1999. Decreases in travel, advertising and other expenses
accounted for the decline in expenses.
General and administrative expenses decreased $184,000, or 4.7%, from $3.9
million for the six months ended February 27, 1998, to $3.8 million for the
six months ended February 26, 1999. Increases in staff salaries and
depreciation expense related to the new computer based systems were more than
offset by a decrease in expenditures for consulting, communications and
software.
Research and development expenses decreased $749,000, or 37.4%, from $2.0
million for the six months ended February 27, 1998, to $1.3 million for the
six months ended February 26, 1999. This decline relates to the transition of
resources out of research and development to direct support production in the
Company's Longmont facility. A decline in salaries, research materials and
supplies plus travel account for the major portion of the reduction.
Interest costs and activities for the noted periods are detailed below (in
thousands):
Six Months Ended Six Months Ended
February 26, 1999 February 27, 1998 Change
Gross interest expense $ 1,719 $ 1,922 $ (203)
Capitalized interest (732) (800) 68
_______ _______ _______
Net interest $ 987 $ 1,122 $ (135)
======= ======= =======
During the current six months, lower borrowings accounted for the decrease in
gross interest costs. At February 27, 1998, total borrowings were $54.0
million, while at February 26, 1999 total borrowings were reduced to $35.7
million. Higher interest rates charged by the Company's lenders prevented
greater cost savings.
In February 1999, the Company recorded a charge of $3.1 million to reserve for
the separation costs incurred in reducing its salaried work force. The
Company continues to realize benefits from streamlining its business
processes. The restructuring costs provide for approximately $1.7 million for
severance costs and approximately $1.4 million for medical, dental and other
benefits being provided to the affected individuals. Approximately 53 people
are affected by this action. These new restructuring costs are in addition to
the $8.5 million of similar costs charged to operations in fiscal 1998 ($4.0
million in the second quarter ended February 27, 1998 and $4.3 million in the
third quarter ended May 29, 1998).
In February 1998, a restructuring charge of $4.0 million was recorded related
to the culmination of the Company's business process design initiative that
began two years ago. 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.
As of February 26, 1999, the Company's restructuring reserve was $6.8 million.
In total, for all restructuring costs recorded at February 26, 1999, the
Company expects to make cash outlays of $2.8 million during the last six
months of fiscal 1999 and $2.6 million for all of fiscal 2000. The remaining
$1.4 million of restructuring costs are expected to be paid out over the ten
years beginning in fiscal 2001. During the six months ended February 26,
1999, the Company paid $3.4 million of restructuring expenses relating to
reserves charged to operations in fiscal 1998.
Income taxes were applied at 34% in the six months ended February 27, 1998.
No income taxes were applied in the current period as the Company provides
allowances for all of its net deferred tax assets. Dividends on preferred
stock were $1.1 million for the six months ended February 26, 1999, up
$713,000 from the $359,000 figure for the six months ended February 27, 1998.
The $32.9 million Series D preferred stock issued in July of 1998 accounted
for this increase. As a result, net loss to common shareholders for the six
months ended February 26, 1999 was $9.1 million, or $0.84 per share. This
compares with a loss per share before changes of method of accounting of $0.97
for the six months ended February 27, 1998.
<PAGE>
SHELDAHL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED OPERATING RESULTS AND FINANCIAL CONDITION
Three Months Ended February 26, 1999 and February 27, 1998
Sales
The Company's net sales increased $291,000, or 1.1%, from $27.8 million for
the three months ended February 27, 1998 to $28.0 million for the three months
ended February 26, 1999. The automotive market sales for the three months
ended February 26, 1999 decreased 6% to $18.6 million. This decline represents
weaker than anticipated orders during the mid-December 1998 to mid-January
1999 period plus continued price pressure within the industry.
Sales to the datacom market increased $2.2 million, or 73%, for the three
months ended February 26, 1999 to $5.3 million. Sales of the Company's new
Novaflexr VHD product accounted for $1.5 million of the increase. Sales to
all other markets reflect a decrease of 16%, or $780,000.
The table below details the Company's sales by market for the period (in
thousands):
Three Months Ended Three Months Ended
Market February 26, 1999 February 27, 1998 Gross Change % Change
Automotive $ 18,621 $ 19,795 $ (1,174) (5.9%)
Datacom 5,303 3,058 2,245 73.4%
Industrial 1,559 1,678 (119) (7.1%)
Consumer 646 1,090 (444) (40.7%)
Aerospace/Defense 1,913 2,130 (217) (10.2%)
_______ _______ _______ _______
Total $ 28,042 $ 27,751 $ 291 1.1%
======= ======= ======= =======
Gross Profit
Gross profit increased to 11.1% of sales, or $3.1 million for the three months
ended February 26, 1999. As reflected in the table below, the Micro Products
business gross loss decreased by 10%, or $359,000, to $3.0 million. Less
depreciation and salaried expenses are the primary cause of this improvement.
The combined Materials and Interconnect business units' gross profit increased
to $6.1 million, or 22.3% of sales. The improved performance is due to
savings realized in production labor as well as more effective cost management
of factory costs.
Three Months Fiscal 1999 Three Months Fiscal 1998
Interconnect Micro Total Interconnect Micro Total
& Material Products Company & Materials Products Company
(In millions)
Sales $27,551 $ 491 $28,042 $27,507 $ 244 $27,751
Cost of
sales 21,411 3,519 24,930 23,553 3,631 27,184
Gross
profit 6,140 (3,028) 3,112 3,954 (3,387) 567
% of sales 22.3% N/A 11.1% 14.4% N/A 2%
Sales and marketing expenses remained level at $2.5 million for the three
months ended February 26, 1999 compared to the same period one year ago.
Increases in outsourced computer design expenses were offset by declines in
salaries and travel.
General and administrative expenses decreased $261,000, or 12%, from $2.1
million for the three months ended February 27, 1998, to $1.8 million for the
three months ended February 26, 1999. Increases in depreciation were offset
by declines in salaries, consulting expense and office expense.
Research and development expenses decreased $391,000, or 36%, from $1.1
million for the three months ended February 27, 1998, to $679,000 for the
three months ended February 26, 1999. This decline relates to the transition
of resources out of research and development to direct support production in
the Company's Longmont facility. A decline in salaries, research materials
and supplies, and travel account for a major portion of the reduction.
Interest costs and activities for the noted period are detailed below (in
thousands):
Three Months Ended Three Months Ended
February 26, 1999 February 27, 1998 Change
Gross interest expense $ 921 $ 1,062 $ (141)
Capitalized interest (257) (453) 196
_______ _______ _______
Net interest $ 664 $ 609 $ 55
======= ======= =======
During the current quarter, lower borrowings accounted for the decrease in
gross interest costs. At February 27, 1998, total borrowings were $54.0
million, while at February 26, 1999, total borrowings were $35.7 million.
Higher interest rates charged by the Company's primary lenders prevented
greater cost reduction in interest expense. Fewer projects in process account
for the decline in capitalized interest.
In February 1999, the Company recorded a charge of $3.1 million to reserve for
the separation costs incurred in reducing its salaried work force. The
Company continues to realize benefits from streamlining its business
processes. The restructuring costs provide for approximately $1.7 million for
severance and early retirement salary costs, approximately $1.4 million for
medical, dental and other benefits being provided to the affected individuals.
Approximately 53 people are affected by this action. These new restructuring
costs are in addition to the $8.5 million of similar costs charged to
operations in fiscal 1998 ($4.0 million in the second quarter ended February
27, 1998 and $4.3 million in the third quarter ended May 29, 1998).
As of February 26, 1999, the Company had remaining restructuring reserves of
$6.8 million. In total, for all restructuring costs recorded at February 26,
1999, the Company expects to make cash outlays of $2.8 million during the last
six months of fiscal 1999 and $2.6 million for all of fiscal 2000. The
remaining $1.4 million of restructuring costs are expected to be paid out over
the ten years beginning in fiscal 2001.
In February 1998, a restructuring charge of $4.0 million was recorded related
to the culmination of the Company's business process design initiative that
began two years ago. 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
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.
No taxes were applied in the three months ended February 26, 1999 as
allowances against all of the Company's net deferred tax assets have been
recorded. Last year, income taxes were applied at 34% reflecting a tax
benefit of $3.5 million. Convertible preferred stock dividends increased to
$418,000 for the three months ended February 26, 1999. This increase is due
to the Series D preferred stock issued in July of 1998. As a result, net loss
to common shareholders for the three months ended February 26, 1999, was $6.1
million, or $0.55 per share. This compares to a net loss of $6.4 million, or
$0.36 per share, for the three months ended February 27, 1998.
Financial Condition and Cash Flow
Since the end of fiscal 1998, the Company's financial condition has
strengthened. The Company's Interconnect and Materials businesses have
registered improved operating results while the Micro Products business has
managed costs and is vigorously pursuing volume orders. In February of 1999,
the liquidity of the Company was enhanced with the $8.56 million preferred
stock equity placement. As a result, the Company's lenders have removed the
requirement that the Company raise additional equity funds as part of its
Credit and Security Agreement. As of March 26, 1999, the Company had $10.1
million outstanding on its revolving credit note and had an additional $8.6
million available to borrow. The Company expects, with anticipated growth in
revenue during the third and fourth quarters of fiscal 1999, to generate
sufficient cash flow from operations to fund restructuring payments ($2.8
million), term debt obligations ($2.0 million) and modest capital spending
($1.5 million to $2.0 million per quarter). These are all within the
borrowing limits of the existing Credit and Security Agreement with its
lenders.
For the first six months of fiscal 1999, operations consumed cash of $4.3
million. Net of $3.4 million of restructuring payments, operations generated
a negative cash flow of $0.9 million, an improvement of $1.7 million over the
six months ended February 27, 1998. This improvement was due to increased
gross profits offset by increased inventories and accounts receivables. The
increase in receivables is attributable to increased sales during the last
four weeks of the current period. Inventories increased to support a higher
level of customer orders in the coming quarter.
Equity Transactions
During February 1999, the Company issued 7,210 share of Series E convertible
preferred stock. As of February 26, 1999, the Company had received cash of
$5,515,000 relating to the issuance of the stock and the Company received the
remaining $1,695,000 by March 5, 1999. By March 8, 1999, the Company had
issued additional 1,350 shares of Series E convertible preferred stock and
received the related proceeds of $1,350,000. The investors were also issued
warrants to purchase a total of 85,600 shares of Common Stock of the Company
at $7.8125 per share. The warrants are exercisable for a period of five
years. Additionally, during the quarter ended February 26, 1999, 231,336
shares of common stock were issued upon the conversion of 1,097 shares of
Series B convertible preferred stock.
As of March 31, 1999, the Company's equity structure is summarized as follows:
A. 11,152,588 common shares outstanding.
B. $32,917,000 in stated value of Series D 5% convertible preferred stock,
with a fixed conversion price of $6.15 per share and dividends payable in
cash or in common stock annually on each July 1. Accrued but unpaid
dividends are also due upon the conversion of such preferred shares.
C. $8,560,000 in stated value of Series E 5% convertible preferred stock with
a fixed conversion price of $6.25 per share and dividends payable in cash
or in common stock annually on each March 1. Accrued but unpaid dividends
are also due upon the conversion of such preferred shares.
D. $167,000 in stated value of Series B 5% convertible preferred stock with a
floating conversion price estimated to be $6.30 per share as of March 17,
1999 and dividends payable in cash or in common stock at conversion.
On February 26, 1999, the Company had accrued approximately $990,000 in
total dividends on these groups of preferred stock.
Year 2000 Update
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
equipment, software, devices and products with imbedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a shut down
in the Company's manufacturing operations, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
State of Readiness. The Company has undertaken various initiatives to
evaluate the Year 2000 readiness of the products sold by the Company
("Products"), the information technology systems used in the Company's
operations ("IT Systems"), its non-IT systems, such as power to its
facilities, HVAC systems, building security, voicemail and other systems, as
well as the readiness of its customers and suppliers. The Company has
identified eleven Year 2000 target areas that cover the entire scope of the
Company's business and has internally established teams committed to
completing an 8-step Compliance Validation Process ("CVP") for each target
area. Each team is expected to fully complete this process on or before
September 1, 1999. The table below identifies the Company's target areas as
well as the 8-step CVP with its expected timeline. Sheldahl's Y2K teams are
either complete or near complete with Phase 1 of this process and progressing
with Phase 2 remediation activities.
Year 2000 Target Areas
_______________
1. Business Computer Systems
2. Technical Infrastructure
3. End-User Computing
4. Manufacturing Equipment
5. Test Lab
6. Telecommunications
7. Research and Development
8. Logistics
9. Facilities
10. Customers
11. Suppliers/Key Service Providers
Compliance Validation Process:
Phase 1 - Expected Completion April 30, 1999
_______________
1. Team Formation
2. Inventory Assessment
3. Compliance Assessment
4. Risk Assessment
Phase 2 - Expected Completion September 1, 1999
_______________
1. Resolution/Remediation
2. Validation
3. Contingency Plan
4. Sign-Off Acceptance
With respect to the Company's relationships with third parties, the Company
relies both domestically and internationally upon various vendors,
governmental agencies, utility companies, telecommunications service
companies, delivery service companies and other service providers. Although
these service providers are outside the Company's control, the Company has
mailed letters to those with whom it believes its relationships are material
and has verbally communicated with some of its strategic customers to
determine the extent to which interfaces with such entities are vulnerable to
Year 2000 issues and whether products and services purchased from or by such
entities are Year 2000 ready. In February 1999 the Company initiated a
Business Partner Assessment Program focused on evaluating customers and
suppliers Year 2000 readiness to identify third parties that imposed
significant risk on Sheldahl. The Company intends to complete follow-up
activities, including but not limited to site surveys, phone surveys, mailings
and remediation assistance, with identified third parties as part of the Phase
2 validation.
Costs to Address Year 2000 Issues. To date, the Company has not incurred any
material expenditures in connection with identifying or evaluating Year 2000
compliance issues. The Company has incurred the majority of its costs from
the recent installation of a business computer system consisting primarily of
the Enterprise Requirements Planning (ERP) System as well as the opportunity
cost of time spent by employees of the Company evaluating Year 2000 compliance
matters generally. Because the Company did not accelerate the installation of
the ERP System, it does not consider the costs related thereto to be charges
for Year 2000 compliance. Presently, the Company estimates for the cost of
Year 2000 upgrades and enhancements to its IT Systems and non-IT Systems to be
less than $100,000. The Company anticipates that these costs will be contained
within the Company's fiscal 1999 budget. At this time, the Company does not
possess information necessary to estimate the potential financial impact of
Year 2000 compliance issues relating to its vendors, customers and other third
parties. Such impact, including the effect of a Year 2000 business
disruption, could have a material adverse impact on the Company's financial
condition and results of operations.
Risks of Year 2000 Issues. Because the Company is still in the discovery and
evaluation phase of assessing its overall Year 2000 exposure, it cannot at
this time state with certainty that the Year 2000 issues will not have a
material adverse impact on its financial condition, results of operations and
liquidity. Although the Company considers them unlikely, the Company believes
that the following several situations, not in any particular order, make up
the Company's "most reasonably likely worst case Year 2000 scenarios":
1. Disruption of a Significant Customer's Ability to Accept Products or
Pay Invoices.
The Company's significant customers are large, well-informed customers,
mostly in the automotive field, who are disclosing information to their
vendors that indicates they are well along the path toward Year 2000
compliance. These customers have demonstrated their awareness of the
Year 2000 issue by issuing requirements of their suppliers and
indicating the stages of identification and remediation which they
consider adequate for progressive calendar quarters leading up to the
century mark. The Company's significant customers, moreover, are
substantial companies that the Company believes would be able to make
adjustments in their processes as required to cause timely payment of
invoices. Because of lengthy lead times in the industry, disruption of
orders from the Company is not likely a problem. Any deliveries
occurring in the first half of 2000 will be those resulting from orders
placed in 1999, while any disruptions of the order process early in 2000
will concern deliveries made many months later, with adequate
opportunity for correction (or manual handling) of the order process
before the timing becomes critical.
2. Disruption of Supply Materials.
Recently, the Company began a process of surveying its vendors for
public disclosures in regards to their Year 2000 readiness and is now in
the process of assessing and cataloging these disclosures. The Company
expects to work with vendors that provide inadequate disclosures or show
a need for remediation assistance. Where ultimate survey results show
that the need arises, the Company will arrange for back-up vendors
before the changeover date.
3. Disruption of the Company's IT Systems.
The Company is proceeding with a scheduled upgrade of its current
hardware and software IT systems to state-of-the-art systems and such
process has required Year 2000 compliance in the various invitations for
proposals. Year 2000 testing is occurring as upgrades proceed and, in
addition, will occur after all upgrades are complete, sometime during
fiscal 1999. For this reason, the Company considers that disruption of
its IT Systems is unlikely.
4. Disruption of the Company's Non-IT Systems.
The Company is completing a comprehensive assessment of all non-IT
systems, including among other things its manufacturing systems and
operations, with respect to both embedded processors and obvious
computer control. For some systems, upgrades are already completed or
scheduled, and the remaining non-compliant systems remediation needs are
being planned. Considering the nature of the equipment and systems
involved, the Company expects to complete any remediation efforts on a
reasonably short schedule, and in any case before arrival of the Year
2000. The Company also believes that, after such assessment and
remediation, if any disruptions do occur, such will be dealt with
promptly and will be no more severe with respect to correction or impact
than would be an unexpected breakdown of well-maintained equipment.
5. De-Listing of Company as a Vendor to Certain Customers.
Several of our principal customers, through the intermediary of an
automotive industry information agency, have required updated reports in
the form of answers to an extensive multiple-choice survey on our Year
2000 compliance efforts. According to these customers, failure to reply
to the readiness survey would have led to de-listing as a supplier at
the present time, resulting in possible current inability to bid on
procurements requiring deliveries two years or more in the future.
Although we did respond to these reports on a timely basis, the
substance of our answers to the readiness surveys have placed Sheldahl
in a "red" or "danger" zone with respect to those customers'
guidelines. One of our two largest customers involved in the efforts of
the independent audit agency had also already presented a survey
directly to Sheldahl, and as a result had arranged at its own expense
for an independent audit of our Year 2000 readiness. The independent
audit agency had reported, in the third quarter of fiscal 1998, that
although Sheldahl's level of readiness placed us in the "red" or
"danger" category, we (i) were proceeding rapidly with its evaluation
and remediation efforts, (ii) were expected to reach the ultimate
compliance goals of the survey in adequate time, and (iii) should not be
considered a risk to the customer's sources of supply. In December 1998,
Sheldahl was re-audited by a Remediation Assistance Program consultant
on behalf of this customer. At the conclusion of this audit the
consultant recommended that Sheldahl's Year 2000 Readiness be upgraded
to a "medium level of risk" from the previous high level of risk
("red zone"). Furthermore, the consultant noted that in reviewing
Sheldahl's "Y2K plan against the goals of the remediation assistance
process, the assessor could not find any gaps or areas of recovery that
were not covered or considered." We expect but cannot guarantee that
responses from other customers will be similar. In addition, we do not
know whether other customers' expectations will or will not be as
stringent as those referred to above and whether our current schedule
will meet or exceed such expectations.
Contingency Plans. While we recognize the need for contingency
planning, we have not yet developed any specific contingency plans for
potential Year 2000 disruptions. The aforementioned 8-step Compliance
Validation Process, however, does include contingency planning by each team
and we will review such plans as developed. We do anticipate developing
contingency plans for our most critical areas, but details of such plans will
depend on our final assessment of the problem as well as the evaluation and
success of our remediation efforts. Future disclosures will include
contingency plans as they become available.
Foreign Currency Exposure
During fiscal 1998, the Company's exposure to foreign currency risk declined
as two large programs were converted to the United States Dollar. The Company
maintains a very 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 February 26, 1999, none of the Company's customers or
suppliers has suggested pricing any contracts in Euro. However, in order to
remain competitive, the Company anticipates pricing certain contracts in Euro
and has systems in place to support such contracts by converting foreign
currency transactions to six decimal places. When warranted by the size of
foreign currency contracts, the Company will use a variety of hedging
techniques, including financial derivatives, to prudently reduce, but not
eliminate, its exposure to foreign currency fluctuations. No such contracts
existed as of February 26, 1999.
New Accounting Pronouncements
During June 1997, the Financial Accounting Standards Board released SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
requires disclosure of business and geographic segments in the consolidated
financial statements of the Company. The Company will adopt SFAS No. 131 in
its fiscal 1999 Form 10-K and is currently analyzing the impact it will have
on the disclosures in its financial statements.
During February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," effective for fiscal years beginning after December 31, 1997.
SFAS No. 132 revises certain of the disclosure requirements, but does not
change the measurement or recognition of those plans. The adoption of SFAS
No. 132 will result in revised and additional disclosures, but will have no
effect on the financial position, results of operations, or liquidity of the
Company. The Company will adopt SFAS No. 132 in fiscal 1999 and is currently
analyzing the impact it will have on the disclosures in its financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and hedging Activities," effective
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.
<PAGE>
PART II - OTHER INFORMATION
SHELDAHL, INC. AND SUBSIDIARY
FORM 10-Q
Item 2. Changes in Securities and Use of Proceeds
On February 17, 1999, the Board of Directors of Sheldahl, Inc., a
Minnesota corporation (the "Company"), ratified and approved a private
placement of its newly created Series E Convertible Preferred Stock,
$1.00 par value per share, and Warrants (the "Warrants") to purchase
shares of the Company's Common Stock, $0.25 par value per share (the
"Preferred Stock"), to a group of accredited investors (the
"Investors"). The Board also authorized granting the Investors
certain registration rights with regard to the shares of Common Stock
underlying the Preferred Stock and the Warrants. The closing of the
private placement of $7,210,000 occurred on February 26, 1999, with an
additional $1,350,000 funded on March 8, 1999. Based on the manner of
sale and representations of the Investors, all of which were accredited,
the Company believes that pursuant to Rule 506 of Regulation D, the
private placement was a transaction not involving any public offering
within the meaning of section 4(2) of the Securities Act of 1933, as
amended, and was, therefore, exempt from the registration requirements
thereof.
The Company sold an aggregate of 8,560 shares of the Preferred Stock to
the Investors for an aggregate purchase price of $8,560,000 pursuant to
the Convertible Preferred stock Purchase Agreement among the Company and
the Investors (the "Agreement").
The Preferred Stock is entitled to 5% dividends, payable annually, in
shares of Common Stock or cash, at the option of the Company. The
Preferred Stock is convertible into shares of the Company's Common Stock
at any time. Each holder of Preferred Stock is entitled to convert
shares of the Company's Preferred Stock into that number of shares of
Common Stock that equals $1,000 plus accrued dividends divided by the
Conversion Price. The Conversion Price is $6.25 per share. The
Conversion Price is subject to adjustment for certain dilution and
market price events.
The Company may require holders of Preferred Stock to convert to Common
Stock provided that the Company's Common Stock trades at certain pre-set
price levels.
The Agreement between the Company and the Investors, and the Certificate
of Designation for the Preferred Stock, are incorporated herein by
reference as Exhibits 4.1 and 4.2 to the Company's Current Report on
Form 8-K filed March 9, 1999.
Warrants
In connection with the issuance of the Preferred Stock, the Company also
granted to each Investor a Warrant to purchase shares of the Company's
Common Stock. The aggregate amount of shares of Common Stock the
Company is obligated to issue under the Warrants is 85,600 at an
exercise price of $7.8125 per share. The Warrants are exercisable for a
period of five years. The form of Warrant issued by the Company to the
Investors is incorporated herein by reference as Exhibit 4.3 to the
Company's Current Report on Form 8-K filed March 9, 1999.
Registration Rights
The Company granted the Investors certain registration rights. The
registration rights cover all shares of Common Stock issuable to the
Investors (i) upon conversion of shares of the Preferred Stock, (ii) as
accrued dividends on the Preferred Stock, and (iii) upon exercise of the
Warrants. The Company is obligated to file a shelf Registration
Statement on Form S-3.
The Registration Rights Agreement between the Company and the Investors
specifying the terms of the registration rights is incorporated herein
by reference as Exhibit 4.4 to the Company's Current Report on Form 8-K
filed March 9, 1999.
Use of Proceeds
The proceeds from the private placement were used by the Company to
improve the Company's liquidity position. The Company will not receive
any proceeds from the resale of the shares of Common Stock issuable to
the Investors upon conversion of the Preferred Stock. If the Warrants
issued to the Investors are exercised in full, the Company will receive
$668,750. Such amount is intended to be used by the Company for working
capital purposes. There can be no assurance, however, that the Warrants
will be exercised.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the shareholders of Sheldahl, Inc. was held on
January 13, 1999. There were 10,890,792 shares of common stock entitled
to vote at the meeting and a total of 9,637,084 shares were represented
at the meeting.
1. A proposal was made to ratify and approve the issuance of Common
Stock upon conversion of shares of the Company's Series B Convertible
Preferred Stock in compliance with the rules of the Nasdaq National
Market. Shares were voted as follows:
For Against Abstain Broker Non-Vote
5,008,004 138,952 26,626 4,463,502
2. A proposal was made to ratify and approve an amendment to the
Company's Amended and Restated Articles of Incorporation to increase
the Company's authorized shares of Common Stock from 20,000,000 to
50,000,000. Shares were voted as follows:
For Against Abstain
9,288,134 316,400 32,549
3. Nine directors were elected at the meeting to serve for one year or
until their successors are elected and qualified. Shares were voted
as follows:
For Against
James E. Donaghy 9,431,509 205,574
John G. Kassakian 9,490,741 146,343
Edward L. Lundstrom 9,484,864 152,220
Gerald E. Magnuson 9,486,570 150,514
Dennis M. Mathisen 9,493,668 143,415
William B. Miller 9,487,407 149,677
Kenneth J. Roering 9,491,605 145,479
Raymond C. Wieser 9,489,967 147,117
Beekman Winthrop 9,490,457 146,627
4. A proposal was made to approve the selection of the Company's
independent public accountants for the current fiscal year. Shares
were voted as follows:
For Against Abstain
9,577,655 24,946 34,481
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
3.1 Amended and Restated Articles of Incorporation of
Sheldahl, Inc.
10.1 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.
10.2 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.
10.3 Consulting Agreement, dated December 31, 1998, between
the Company and James E. Donaghy.
10.4 Waiver and Amendment with Addendum to the note Purchase
Agreement between the Registrant and Northern Life
Insurance Company dated March 31, 1999.
27 Financial Data Schedule
B) Reports on Form 8-K
Form 8-K filed on January 15, 1999 regarding Item 5, Other
Events.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHELDAHL, INC.
(Registrant)
Dated: April 9, 1999 By /s/ Edward L. Lundstrom
President and Chief Executive Officer
Dated: April 9, 1999 By /s/ Jill D. Burchill
Vice President
Chief Financial Officer
Dated: April 9, 1999 By /s/ John V. McManus
Vice President Finance
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the February
26, 1999 financial statements and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> AUG-27-1999 AUG-27-1999
<PERIOD-END> FEB-26-1999 FEB-26-1999
<CASH> 1327 1327
<SECURITIES> 0 0
<RECEIVABLES> 19100 19100
<ALLOWANCES> 0 0
<INVENTORY> 17224 17224
<CURRENT-ASSETS> 38908 38908
<PP&E> 168255 168255
<DEPRECIATION> 71664 71664
<TOTAL-ASSETS> 136608 136608
<CURRENT-LIABILITIES> 24249 24249
<BONDS> 0 0
0 0
40 40
<COMMON> 2788 2788
<OTHER-SE> 72134 72134
<TOTAL-LIABILITY-AND-EQUITY> 136608 136608
<SALES> 28042 56516
<TOTAL-REVENUES> 28042 56516
<CGS> 24830 50697
<TOTAL-COSTS> 8141 12862
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 664 987
<INCOME-PRETAX> 5693 8030
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6111 9102
<EPS-PRIMARY> .55 .84
<EPS-DILUTED> .55 .84
</TABLE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
SHELDAHL, INC.
ARTICLE I
The name of this corporation shall be Sheldahl, Inc.
ARTICLE II
The registered office of this corporation shall be 1150 Sheldahl Road,
Northfield, Minnesota 55057.
ARTICLE III
The authorized capital stock of this corporation shall be Fifty Million
(50,000,000) shares of Common Stock of the par value of twenty-five cents
($.25) per share (the "Common Stock") and Five Hundred Thousand (500,000)
shares of Preferred Stock of the par value of One Dollar ($1.00) per share
(the "Preferred Stock"). The relative voting rights, preferences and other
privileges of such capital stock, shall be as follows:
(a) Common Stock. Each share of Common Stock shall entitle the
holder thereof to one vote; all such shares of Common Stock shall be
equal in all respects and shall confer equal rights upon the holders
thereof.
(b) Preferred Stock. Each share of Preferred Stock shall entitle the
holder thereof to such rights, voting power, dividends, redemption
rights or privileges, rights on liquidation or dissolution, conversion
rights and privileges, sinking or purchase fund rights and other
preferences, privileges and restrictions as may be fixed by the Board
of Directors by resolution thereof filed in accordance with Chapter
302A of the Minnesota Statutes.
ARTICLE IV
A. In addition to any affirmative vote required by law or these
Amended and Restated Articles of Incorporation, and except as otherwise
expressly provided in Section B of this Article IV, a Business Combination
(as hereinafter defined) shall require the affirmative vote of not less than
seventy-five percent (75%) of the votes entitled to be cast by the holders of
all then outstanding shares of Voting Stock (as hereinafter defined), voting
together as a single class. Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage or separate class vote may be specified, by law or by any other
provision of these Amended and Restated Articles of Incorporation or in any
agreement with any national securities exchange or otherwise.
B. The provisions of Section A of this Article IV shall not be
applicable to any particular Business Combination, and such Business
Combination shall require only such affirmative vote, if any, as is required
by law or by any other provision of these Amended and Restated Articles of
Incorporation or in any agreement with any national securities exchange or
otherwise, if the conditions specified in either of the following Paragraphs
1 or 2 are met:
1. The Business Combination shall have been approved by a
majority of the Continuing Directors (as hereinafter defined).
2. All of the following conditions shall have been met:
a. The aggregate amount of cash and the Fair Market Value (as
hereinafter defined) as of the date of the consummation of
the Business Combination of consideration other than cash
to be received per share by holders of Common Stock in such
Business Combination shall be at least equal to the higher
amount determined under clauses (i) and (ii) below:
(i) (if applicable) the highest per share price
(including any brokerage commissions, transfer taxes
and soliciting dealers' fees) paid by or on behalf of
the Interested Shareholder (as hereinafter defined)
for any share of Common Stock in connection with the
acquisition by the Interested Shareholder of
beneficial ownership of shares of Common Stock (a)
within the two-year period immediately prior to the
date of the first public announcement of the proposed
Business Combination (the "Announcement Date") or (b)
in the transaction in which it became an Interested
Shareholder, whichever is higher; and
(ii) the Fair Market Value per share of Common Stock on
the Announcement Date or on the date on which the
Interested Shareholder became an Interested
Shareholder (such latter date being referred to
herein as the "Determination Date"), whichever is
higher.
b. The aggregate amount of cash and the Fair Market Value as
of the date of the consummation of the Business Combination
of consideration other than cash to be received per share
by holders of shares of any class or series of outstanding
Capital Stock (as hereinafter defined), other than Common
Stock, shall be at least equal to the highest amount
determined under clauses (i), (ii) and (iii) below:
(i) (if applicable) the highest per share price
(including any brokerage commissions, transfer taxes
and soliciting dealers' fees) paid by or on behalf of
the Interested Shareholder for any share of such
class or series of Capital Stock in connection with
the acquisition by the Interested Shareholder of
beneficial ownership of shares of such class or
series of Capital Stock (a) within the two-year
period immediately prior to the Announcement Date or
(b) in the transaction in which it became an
Interested Shareholder, whichever is higher;
(ii) the Fair Market Value per share of such class or
series of Capital Stock on the Announcement Date or
on the Determination Date, whichever is higher; and
(iii) (if applicable) the highest preferential amount per
share to which the holders of shares of such class or
series of Capital Stock would be entitled in the
event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the
corporation, regardless of whether the Business
Combination to be consummated constitutes such an
event.
The provisions of this Paragraph 2.b shall be required to
be met with respect to every class or series of outstanding
Capital Stock, whether or not the Interested Shareholder
has previously acquired beneficial ownership of any shares
of a particular class or series of Capital Stock.
c. The consideration to be received by holders of a particular
class or series of outstanding Capital Stock shall be in
cash or in the same form as previously has been paid by or
on behalf of the Interested Shareholder in connection with
its direct or indirect acquisition of beneficial ownership
of shares of such class or series of Capital Stock. If the
consideration so paid for shares of any class or series of
Capital Stock varied as to form, the form of consideration
for such class or series of Capital Stock shall be either
cash or the form used to acquire beneficial ownership of
the largest number of shares of such class or series of
Capital Stock previously acquired by the Interested
Shareholder. The price determined in accordance with
Paragraphs 2.a and 2.b of Section B of this Article IV
shall be subject to appropriate adjustment in the event of
any stock dividend, stock split, combination of shares or
similar event.
d. After such Interested Shareholder has become an Interested
Shareholder and prior to the consummation of such Business
Combination: (i) there shall have been no failure to
declare and pay at the regular date therefor any full
quarterly or other required periodic dividends (whether or
not cumulative) payable in accordance with the terms of any
outstanding Capital Stock having a preference over the
Common Stock as to dividends, or upon liquidation, except
as approved by a majority of the Continuing Directors; (ii)
there shall have been no reduction in the annual rate of
dividends paid on the Common Stock (except as necessary to
reflect any stock dividend, stock split, combination of
shares or similar event), except as approved by a majority
of the Continuing Directors; (iii) there shall have been an
increase in the annual rate of dividends paid on the Common
Stock as necessary to reflect any reclassification
(including any reverse stock split), recapitalization,
reorganization or any similar transaction that has the
effect of reducing the number of outstanding shares of
Common Stock, unless the failure to increase such annual
rate is approved by a majority of the Continuing Directors;
and (iv) except as approved by a majority of the Continuing
Directors, such Interested Shareholder shall not have
become the beneficial owner of any additional shares of
Capital Stock except as part of the transaction that
results in such Interested Shareholder becoming an
Interested Shareholder and except in the transaction that,
after giving effect thereto, would not result in any
increase in the Interested Shareholder's percentage
beneficial ownership of any class or series of Capital
Stock.
e. After such Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have
received the benefit, directly or indirectly (except
proportionately as a shareholder of the corporation), of
any loans, advances, guarantees, pledges or other financial
assistance or any tax credits or other tax advantages
provided by the corporation, whether in anticipation of or
in connection with such Business Combination or otherwise.
f. A proxy or information statement describing the proposed
Business Combination and complying with the requirements of
the Securities Exchange Act of 1934 (the "Act") and the
rules and regulations thereunder (or any subsequent
provisions replacing such Act, rules or regulations) shall
be mailed to all shareholders of the corporation at least
30 days prior to the consummation of such Business
Combination (whether or not such proxy or information
statement is required to be mailed pursuant to the Act or
subsequent provisions). The proxy or information statement
shall contain on the first page thereof, in a prominent
place, any statement as to the advisability (or
inadvisability) of the Business Combination that a majority
of the Continuing Directors may choose to make and, if
deemed advisable by a majority of the Continuing Directors
as to the fairness (or lack of fairness) of the terms of
the Business Combination from a financial point of view to
the holders of the outstanding shares of Capital Stock
other than the Interested Shareholder and its Affiliates
(as hereinafter defined) or Associates (as hereinafter
defined).
g. Such Interested Shareholder shall not have made or caused
to be made any major change in the corporation's business
or equity capital structure without the approval of a
majority of the Continuing Directors.
C. For the purpose of this Article IV:
1. The term "Business Combination" shall mean:
a. any merger, consolidation or statutory exchange of shares
of the corporation or any Subsidiary (as hereinafter
defined) with (i) any Interested Shareholder or (ii) any
other corporation (whether or not itself an Interested
Shareholder) which is or after such merger, consolidation
or statutory share exchange would be an Affiliate or
Associate of an Interested Shareholder; provided, however,
that the foregoing shall not include the merger of a wholly
owned Subsidiary of the corporation into the corporation or
the merger of two or more wholly owned Subsidiaries of the
corporation; or
b. any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of
transactions) to or with an Interested Shareholder or any
Affiliate or Associate of any Interested Shareholder of any
assets of the corporation or any Subsidiary equal to or
greater than ten percent (10%) of the book value of the
consolidated assets of the corporation; or
c. any sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of
transactions) to or with the corporation or any Subsidiary
of any assets of any Interested Shareholder or any
Affiliate or Associate of any Interested Shareholder equal
to or greater than ten percent (10%) of the book value of
the consolidated assets of the corporation; or
d. the issuance or transfer by the corporation or any
Subsidiary (in one transaction or a series of transactions)
to any Interested Shareholder or any Affiliate or Associate
of any Interested Shareholder of any securities of the
corporation (except pursuant to stock dividends, stock
splits, or similar transactions which would not have the
effect, directly or indirectly, of increasing the
proportionate share of any class or series of Capital
Stock, or any securities convertible into Capital Stock or
into equity securities of any Subsidiary, that is
beneficially owned by any Interested Shareholder or any
Affiliate or Associate of any Interested Shareholder) or of
any securities of a Subsidiary (except pursuant to a pro
rata distribution to all holders of Common Stock of the
corporation); or
e. the adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by or on behalf of
an Interested Shareholder or any Affiliate or Associate of
any Interested Shareholder; or
f. any transaction (whether or not with or otherwise involving
an Interested Shareholder) that has the effect, directly or
indirectly, of increasing the proportionate share of any
class or series of Capital Stock, or any securities
convertible into Capital Stock or into equity securities of
any Subsidiary, that is beneficially owned by any
Interested Shareholder or any Affiliate or Associate of any
Interested Shareholder, including, without limitation, any
reclassification of securities (including any reverse stock
split), or recapitalization of the corporation, or any
merger, consolidation or statutory exchange of shares of
the corporation with any of its Subsidiaries; or
g. any agreement, contract or other arrangement or
understanding providing for any one or more of the actions
specified in the foregoing clauses (a) to (f).
2. The term "Capital Stock" shall mean all capital stock of the
corporation authorized to be issued from time to time under
Article III of these Amended and Restated Articles of
Incorporation. The term "Voting Stock" shall mean all Capital
Stock of the corporation entitled to vote generally in the
election of directors of the corporation.
3. The term "person" shall mean any individual, firm, corporation or
other entity and shall include any group comprised of any person
and any other person or persons with whom such person or any
Affiliate or Associate of such person has any agreement,
arrangement or understanding, directly or indirectly, for the
purpose of acquiring, holding, voting or disposing of Capital
Stock.
4. The term "Interested Shareholder" shall mean any person (other
than the corporation or any Subsidiary and other than any profit-
sharing, employee stock ownership or other employee benefit plan
of the corporation or any Subsidiary or any trustee of or
fiduciary with respect to any such plan when acting in such
capacity) who (a) is the beneficial owner of Voting Stock
representing ten percent (10%) or more of the votes entitled to
be cast by the holders of all then outstanding shares of Voting
Stock; or (b) is an Affiliate or Associate of the corporation and
at any time within the two-year period immediately prior to the
date in question was the beneficial owner of Voting Stock
representing ten percent (10%) or more of the votes entitled to
be cast by the holders of all then outstanding shares of Voting
Stock; or (c) is an assignee of or has otherwise succeeded to any
shares of Voting Stock which were at any time within the two-year
period immediately prior to the date in question beneficially
owned by an Interested Shareholder, if such assignment or
succession shall have occurred in the course of a transaction or
series of transactions not involving a public offering within the
meaning of the Securities Act of 1933.
5. A person shall be a "beneficial owner" of any Capital Stock (a)
which such person or any of its Affiliates or Associates
beneficially owns, directly or indirectly; (b) which such person
or any of its Affiliates or Associates has, directly or
indirectly, (i) the right to acquire (whether such right is
exercisable immediately or subject only to the passage of time),
pursuant to any agreement, arrangement or understanding or upon
the exercise of conversion rights, exchange rights, warrants or
options, or otherwise, or (ii) the right to vote pursuant to any
agreement, arrangement or understanding, or (iii) the right to
dispose or direct the disposition of, pursuant to any agreement,
arrangement or understanding; or (c) which are beneficially
owned, directly or indirectly, by any other person with which
such person or any of its Affiliates or Associates has any
agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of Capital
Stock. For the purposes of determining whether a person is an
Interested Shareholder pursuant to Paragraph 4 of this Section C,
the number of shares of Capital Stock deemed to be outstanding
shall include shares deemed beneficially owned by such person
through application of this Paragraph 5, but shall not include
any other shares of Capital Stock that may be issuable pursuant
to any agreement, arrangement or understanding, or upon exercise
of conversion rights, exchange rights, warrants or options, or
otherwise.
6. The term "Affiliate," used to indicate a relationship with a
specified person, shall mean a person that directly, or
indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such specified
person. The term "Associate," used to indicate a relationship
with a specified person, shall mean (a) any person (other than
the corporation or a Subsidiary) of which such specified person
is an officer or partner or is, directly or indirectly, the
beneficial owner of ten percent (10%) or more of any class of
equity securities, (b) any trust or other estate in which such
specified person has a substantial beneficial interest or as to
which such specified person serves as trustee or in a similar
fiduciary capacity, (c) any relative or spouse of such specified
person or any relative of such spouse, who has the same home as
such specified person or who is a director or officer of the
corporation or any Subsidiary, and (d) any person who is a
director or officer of such specified person or any of its
parents or subsidiaries (other than the corporation or a
Subsidiary).
7. The term "Subsidiary" shall mean any corporation of which a
majority of any class of equity security is beneficially owned,
directly or indirectly, by the corporation; provided, however,
that for the purposes of Paragraph 4 of this Section C, the term
"Subsidiary" shall mean only a corporation of which a majority of
each class of equity security is beneficially owned, directly or
indirectly, by the corporation.
8. The term "Continuing Director" shall mean any member of the Board
of Directors of the corporation, while such person is a member of
the Board of Directors, who was a member of the Board of
Directors prior to the time that the Interested Shareholder
involved in the Business Combination in question became an
Interested Shareholder, and any member of the Board of Directors,
while such person is a member of the Board of Directors, whose
election, or nomination for election by the corporation's
shareholders, was approved by a vote of a majority of the
Continuing Directors; provided, however, that in no event shall
an Interested Shareholder involved in the Business Combination in
question or any Affiliate, Associate or representative of such
Interested Shareholder, be deemed to be a Continuing Director.
9. The term "Fair Market Value" shall mean (a) in the case of cash,
the amount of such cash; (b) in the case of stock, the highest
closing sale price during the 30-day period immediately preceding
the date in question of a share of such stock on the Composite
Tape for the New York Stock Exchange Listed Stocks, or, if such
stock is not quoted on the Composite Tape, on the New York Stock
Exchange, or, if such stock is not listed on such Exchange, on
the principal United States securities exchange registered under
the Act on which such stock is listed, or, if such stock is not
listed on any such exchange, the highest closing sale or closing
bid quotation (whichever is applicable) with respect to a share
of such stock during the 30-day period immediately preceding the
date in question of a share of such stock on the National
Association of Securities Dealers, Inc. Automated Quotations
System or any similar system then in use, or if no such
quotations are available, the fair market value on the date in
question of a share of such stock as determined by a majority of
the Continuing Directors in good faith; and (c) in the case of
property other than cash or stock, the fair market value of such
property on the date in question as determined in good faith by a
majority of the Continuing Directors.
10. In the event of any Business Combination in which the corporation
survives, the phrase "consideration other than cash to be
received" as used in Paragraphs 2.a and 2.b of Section B of this
Article IV shall include the shares of Common Stock and/or the
shares of any other class or series of Capital Stock retained by
the holders of such shares.
D. The Continuing Directors by majority vote shall have the power to
determine for the purposes of this Article IV, on the basis of information
known to them after reasonable inquiry, (a) whether a person is an Interested
Shareholder, (b) the number of shares of Capital Stock (including Voting
Stock) or other securities beneficially owned by any person, (c) whether a
person is an Affiliate or Associate of another, (d) whether the assets that
are the subject of any Business Combination equal or exceed ten percent (10%)
of the book value of the consolidated assets of the corporation, (e) whether
a proposed plan of dissolution or liquidation is proposed by or on behalf of
an Interested Shareholder or any Affiliate or Associate of any Interested
Shareholder, (f) whether any transaction has the effect, directly or
indirectly, of increasing the proportionate share of any class or series of
Capital Stock, or any securities convertible into Capital Stock or into
equity securities of any Subsidiary, that is beneficially owned by an
Interested Shareholder or any Affiliate or Associate of an Interested
Shareholder, (g) whether any Business Combination satisfies the conditions
set forth in Paragraph 2 of Section B of this Article IV, and (h) such other
matters with respect to which a determination is required under this Article
IV. Any such determination made in good faith shall be binding and
conclusive on all parties.
E. Nothing contained in this Article IV shall be construed to
relieve any Interested Shareholder from any fiduciary obligation imposed by
law.
F. The fact that any Business Combination complies with the
provisions of Section B of this Article IV shall not be construed to impose
any fiduciary duty, obligation or responsibility on the Board of Directors,
or any member thereof, or the Continuing Directors, or any of them, to
approve such Business Combination or recommend its adoption or approval to
the shareholders of the corporation, nor shall such compliance limit,
prohibit or otherwise restrict in any manner the Board of Directors, or any
member thereof, or the Continuing Directors, or any of them, with respect to
evaluations of or actions and responses taken with respect to such Business
Combination.
G. Notwithstanding any other provisions of these Amended and
Restated Articles of Incorporation (and notwithstanding the fact that a
lesser percentage or separate class vote may be specified by law or these
Amended and Restated Articles of Incorporation), the affirmative vote of the
holders of not less than seventy five percent (75%) of the votes entitled to
be cast by the holders of all then outstanding shares of Voting Stock, voting
together as a single class, shall be required to amend or repeal, or adopt
any provisions inconsistent with this Article IV.
ARTICLE V
No shareholder of this corporation shall have any preemptive rights to
subscribe for, purchase, or acquire any shares of the corporation of any
class, whether unissued or now or hereafter authorized, or any obligations or
other securities convertible into or exchangeable for any such shares.
ARTICLE VI
The number of the directors of this corporation shall be fixed in the
manner provided in the Bylaws.
ARTICLE VII
Any action required or permitted to be taken at a meeting of the Board
of Directors of this corporation not needing approval by shareholders under
Minnesota Statutes, Chapter 302A, may be taken in written action signed by
the number of directors that would be required to take such action at a
meeting of the Board of Directors at which all directors were present.
ARTICLE VIII
Except as otherwise provided in Article IV, the affirmative vote of the
holders of a majority of the voting power of the shares represented and
entitled to vote at a duly held meeting of shareholders of this corporation,
voting together as a single class, shall be required for an action of the
shareholders.
ARTICLE IX
No director of this Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its shareholders; (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a
knowing violation of law; (iii) under Sections 302A.559 or 80A.23 of the
Minnesota Statutes; (iv) for any transaction from which the director derived
any improper personal benefit; or (v) for any act or omission occurring prior
to the date when this provision becomes effective.
The provisions of this Article shall not be deemed to limit or preclude
indemnification of a director by the Corporation for any liability of a
director which has not been eliminated by the provisions of this Article.
If the Minnesota Statutes hereafter are amended to authorize corporate
action further eliminating or limiting the personal liability of directors,
then the liability of a director of this Corporation shall be eliminated or
limited to the fullest extent permitted by the Minnesota Statutes, as so
amended.
<PAGE>
SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of March 4, 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, 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 received Net Equity Proceeds of $8,000,000 on or
before March 8, 1999, and has requested that the Lenders delete Section
8.1(q) of the Credit Agreement. The Required Lenders are willing to grant the
Borrower's request subject to the terms of this Agreement.
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.
2. Section 8.1(q). Section 8.1(q) of the Credit Agreement is
deleted.
3. 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.
4. 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.
5. No Other Waiver. 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.
6. 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 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.
7. 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.
8. 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, NATIONAL
ASSOCIATION, as Agent
By /s/ Terry S. Jackson
Terry S. Jackson
Its Vice President
SHELDAHL, INC.
By /s/ John V. McManus
John V. McManus
Its Vice President of Finance
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION
By /s/ Terry S. Jackson
Terry S. Jackson
Its Vice President
HARRIS TRUST AND SAVINGS BANK
By /s/ Cathy Ciolek
Cathy Ciolek
Its Vice President
THE CIT GROUP/EQUIPMENT
FINANCING, INC.
By /s/ William Hickey
William Hickey
Its Assistant Vice President
<PAGE>
THIRD AMENDMENT TO CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of April 5, 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 and
as amended by a Second Amendment to Credit and Security Agreement dated as of
March 4, 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. Default Fee. Section 2.22 of the Credit Agreement is hereby
amended by adding the following new subsection (g):
"(g) Default Fee. If a default occurs under Section 6.18, 6,19,
6.20, 6.21 or 7.12 during the Borrower's fiscal year-ending on or about August
31, 1999, the Borrower shall pay one default fee of $50,000, due and payable
on the date that the Borrower's financial statement under Section 6.1(a) or
6.1(b), as applicable, is due. Such default fee will not cure such default or
affect the Lenders' ability to impose the Default Rate under Section
2.13(e)."
2. Financial Covenants. Sections 6.18 through 6.21 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:
Fiscal Quarter Ending on or about Minimum Cash Flow
Available for Debt
Service
5/28/99 $10,300,000
8/27/99 $15,000,000
"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:
Fiscal Quarter Ending on or about Minimum Debt Service
Coverage Ratio
8/27/99 0.90 to 1.00
"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:
Fiscal Quarter Ending on or about Minimum Pre-tax Net
Income
5/28/99 $(9,500,000)
8/27/99 $(9,400,000)
"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:
Fiscal Quarter Ending on or about Minimum Net Worth
5/28/99 $75,500,000
8/27/99 $76,500,000
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. Waiver of Defaults. For the Borrower's second fiscal quarter
ending on or about February 28, 1999, the Borrower is in default of the
following provisions of the Credit Agreement (collectively, the "Defaults"):
Covenant Required Actual
Section 6.18 Cash Flow Available Not less than $4,224,000
for Debt Service $5,500,000
Section 6.19 Minimum Debt Service Not less than 0.53 to 1.00
Coverage Ratio 0.70 to 1.00
Section 6.20 Minimum Pre-tax Net Not less than $(8,030,000)
Income $(5,050,000)
Section 6.21 Minimum Net Worth Not less than $74,962,000
$76,400,000
Upon the terms and subject to the conditions set forth in this Amendment, the
Agent hereby waives the Defaults.
In addition, Section 6.1(a) of the Credit Agreement requires the Borrower to
"within 90 days after the end of each fiscal year of the Borrower" deliver
its audited financial statements to each Lender. The Borrower is in default
of this Section as no audited financial statements have been delivered. So
long as the audited financial statements are delivered to each Lender on or
before April 30, 1999, the Agent waives this default.
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.
5. Amendment Fee. The Borrower shall pay the Lenders as of the
date hereof a fully earned, non-refundable fee in the amount of $20,000 in
consideration of the Lenders' execution of this Amendment.
6. Conditions Precedent. This Amendment, and the waiver set
forth in Paragraph 4 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:
(a) Payment of the fee described in Paragraph 5.
(b) Such other matters as the Lender may require.
7. 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.
8. 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.
9. No Other Waiver. Except as set forth in Paragraph 4 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.
10. 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 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.
11. 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 5 hereof.
12. 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, NATIONAL
ASSOCIATION, as Agent
By /s/ Terry S. Jackson
Terry S. Jackson
Its Vice President
SHELDAHL, INC.
By /s/ John V. McManus
John V. McManus
Its Vice President of Finance
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION
By /s/ Terry S. Jackson____________
Terry S. Jackson
Its Vice President
HARRIS TRUST AND SAVINGS BANK
By /s/ Cathy Ciolek
Cathy Ciolek
Its Vice President
NBD BANK
By /s/ Dennis Saletta
Dennis Saletta
Its First Vice President
THE CIT GROUP/EQUIPMENT
FINANCING, INC.
By /s/ William Hickey
William Hickey
Its Assistant Vice President
<PAGE>
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is entered into this 31st
day of December, 1998 by and between Sheldahl, Inc., a Minnesota corporation
("Company") and James E. Donaghy ("Donaghy").
W I T N E S S E T H:
In consideration of the covenants and agreements herein set forth and
of the mutual benefits accruing to Company and to Donaghy from the consulting
relationship to be established between the parties by the terms of this
Agreement, Company and Donaghy agree as follows:
1. Consulting Relationship. As of January 1, 1999, Company will retain
Donaghy and Donaghy will be retained by Company, as an independent consultant
and not as an employee, on the terms and conditions described herein. The
consulting arrangement shall terminate on August 27, 1999, unless an earlier
or later date is agreed upon by the parties in writing prior to that date.
2. Consulting Services. During the term of this Agreement, Donaghy will,
with a reasonable degree of skill and care, perform such duties and execute
the policies of Company as reasonably requested by its Board of Directors;
provided, that said duties and policies will not be inconsistent with the
nature of the duties performed by Donaghy during his active service with
Company as an officer and employee thereof. Such duties shall include the
following:
(a) Establish new relationships with investment bankers and improve
analyst coverage;
(b) Develop market partners;
(c) Identify a chip industry candidate for the Company's Board of
Directors;
(d) Continue to develop the Shinko, Hitachi, and Sumitomo Bakelite
relationships;
(e) Manage a transition with the Company's large investors;
(f) Participate in the quarterly conference calls; and
(g) Assist in capital raising.
(h) Introduce management team to Institute of Printed Circuitry and
manage appropriate transition.
3. Compensation. During the term of this Agreement, the Company agrees to
pay Donaghy at an annual rate of One Hundred Seventy-Five Thousand Dollars
($175,000), payable in pro rata installments on the first and fifteenth day
of each month, the first such payment due on January 15, 1999.
4. Restrictions on Competition. So long as payments are being made to
Donaghy under this Agreement, Donaghy shall not, without the prior written
consent of the Company, accept employment or render service to any person,
firm or corporation directly or indirectly in competition with the Company or
affiliate thereof, in the United States or any of its territories or
possessions, or directly or indirectly enter into or in any manner take part
in or lend his name, counsel or assistance to any venture, enterprise,
business or endeavor, either as proprietor, principal, investor, partner,
director, officer, employee, consultant, advisor, agent, independent
contractor, or in any other capacity whatsoever for any purpose which would
be competitive with the business of the Company or any affiliate thereof,
provided, however, that the foregoing shall not be deemed to prohibit Donaghy
from acquiring an equity interest not in excess of five percent (5%) in any
company, the shares of which are listed on any national stock exchange or are
traded and quoted on the National Association of Securities Dealers Automated
Quotations System.
5. Title to Certain Tangible Property. All tangible materials (whether
original or duplicate) including, but not in any way limited to, equipment
purchase agreements, file or data base materials in whatever form, books,
manuals, sales literature, equipment price lists, training materials,
customer lists and records, customer files, correspondence, documents,
contracts, orders, messages, memoranda, notes, agreements, invoices,
receipts, lists, software listings or printouts, specifications, models,
computer programs, and records of any kind in the possession or control of
Donaghy which in any way relate or pertain to Company's business, including
the business of the subsidiaries or affiliates of Company, whether furnished
to Donaghy by Company or prepared, compiled or required by Donaghy during his
consulting relationship with Company, shall be the sole property of Company.
At any time upon request of Company, and in any event promptly upon
termination of this Agreement, Donaghy shall deliver all such materials to
Company.
6. Trade Secrets and Confidential Information. During the term of the
Agreement or at any time thereafter, Donaghy will not, without the express
written consent of Company directly or indirectly communicate or divulge to,
or use for his own benefit or the benefit of any other person, firm,
association or corporation, any of Company's or its subsidiaries' or
affiliates' trade secrets, proprietary data or other confidential information
including, by way of illustration, the information described in Section 5,
which trade secrets, proprietary data and other confidential information were
communicated to or otherwise learned or acquired by Donaghy in the course of
the consulting relationship covered by this Agreement, except that Donaghy
may disclose such matters to the extent that disclosure is required (a) in
the course of the consulting relationship with Company, or (b) by a Court or
other governmental agency of competent jurisdiction. As long as such matters
remain trade secrets, proprietary data or other confidential information,
Donaghy will not use such trade secrets, proprietary data or other
confidential information in any way or in any capacity other than pursuant to
this Agreement and to further the Company's interests.
7. The Complete Agreement. This Agreement represents the complete
Agreement between Company and Donaghy concerning the subject matter hereof
and supersedes all prior agreements or understandings, written or oral. No
attempted modification or waiver of any of the provisions hereof shall be
binding on either party unless in writing and signed by both Donaghy and
Company.
8. General Provisions.
(a) Notices. Any notice required or permitted to be given hereunder
shall be in writing and shall be effective three business days after it
is properly sent by registered or certified mail, if to the Company to
President, Sheldahl, Inc., 1150 Sheldahl Road, Northfield, Minnesota
55057, or if to Donaghy at his resident address, or to such other
address as either party may from time to time designate by notice.
(b) Assignability. This Agreement may not be assigned by either
party without the prior written consent of the other party, except that
no consent is necessary for the Company to assign this Agreement to a
corporation succeeding to substantially all of the assets or business
of the Company whether by merger, consolidation, acquisition or
otherwise, so long as such successor corporation expressly assumes all
of the obligations of the Company under this Agreement. This Agreement
shall be binding upon Donaghy, his heirs and permitted assigns and the
Company, its successors and permitted assigns.
(c) Independent Contractor. Donaghy is an independent contractor and
not an employee, partner or co-venturer of, or in any other service
relationship with, the Company, and the manner in which Donaghy's
services are rendered shall be within Donaghy's sole control and
discretion. Donaghy shall be responsible for all payroll and other
taxes arising from compensation and other amounts paid under this
Agreement.
(d) Termination. Either the Company or Donaghy may terminate this
Agreement at any time on thirty (30) days' prior written notice upon a
material breach of the provisions of this Agreement if such breach has
not been cured during such notice period. On termination of this
Agreement Donaghy shall deliver to the Company all Company property and
information in the possession of Donaghy or any of his employees,
representatives or agents.
(e) Damages. Donaghy acknowledges that a breach of any of the terms
of Sections 4, 5 or 6 of this Agreement will render irreparable harm to
the Company, and that a remedy at law for breach or threatened breach
of the Agreement is inadequate, and that the Company shall therefore be
entitled to any and all equitable relief, including, but not limited
to, injunctive relief, and to any other remedy that may be available
under any applicable law or agreement between the parties.
(f) Acknowledgment. Donaghy acknowledges and agrees that the
restrictions, covenants, agreements and obligations contained in this
Agreement hereof are reasonable and necessary for the protection of the
legitimate interests of the Company. Donaghy represents and warrants
that Donaghy has not previously assumed any obligations inconsistent
with those undertaken by Donaghy under this Agreement.
(g) Waiver. The waiver by the Company of a breach of any provision
of this Agreement by Donaghy shall not operate or be construed as a
waiver of a subsequent breach by Donaghy.
(h) Applicable Law. It is the intention of the parties hereto that
all questions with respect to the construction and performance of this
Agreement and the rights and liabilities of the parties hereto shall be
determined in accordance with the laws of the State of Minnesota.
SHELDAHL, INC.
By /s/ Kenneth J. Roering
Kenneth J. Roering
Its Vice Chairman of the Board
/s/ James E. Donaghy
James E. Donaghy
<PAGE>
WAIVER AND AMENDMENT
March 31, 1999
Northern Life Insurance Company
c/o ReliaStar Investment Research, Inc.
100 Washington Avenue South, Suite 800
Minneapolis, MN 55401-2121
Reference is made to the Note Purchase Agreement dated as of August 31,
1995 (as amended, the "Note Purchase Agreement") between Sheldahl, Inc. (the
"Company"), and Northern Life Insurance Company (the "Purchaser"),
pursuant to which the Purchaser purchased the 8.32% Senior Secured Notes
(collectively, the "Notes") of the Company dated August 31, 1995 in the
original aggregate principal amount of $5,700,000. The Purchaser is the
registered holder of 100% of the outstanding principal amount of the Notes as
reflected in the Note Register required to be maintained by the Company
pursuant to paragraph 11 of the Note Purchase Agreement. Capitalized terms
used herein and not otherwise defined shall have the meaning set forth in the
Note Purchase Agreement.
The purpose of this letter is to request the Purchaser to waive
compliance with certain covenants of the Note Purchase Agreement.
Accordingly, the Company requests the Purchaser's consent to the following:
1. Quarterly Minimum EBITDA Amount. The Company requests that the
Purchaser waive any failure by the Company to comply with the requirements of
paragraph 4(q)(i) of the Note Purchase Agreement through February 26, 1999.
In addition, paragraph 4(q)(i) of the Note Purchase Agreement shall be
amended by increasing the minimum EBITDA requirement for the period beginning
on September 1, 1998, and ending on or about May 31, 1999, from $4,700,000 to
$4,800,00, and increasing the minimum EBITDA requirement for the period
beginning on September 1, 1998, and ending on or about August 31, 1999, from
$5,900,000 to $10,000,000.
2. Miscellaneous. Except as specifically set forth herein, all
terms and provisions of the Note Purchase Agreement and the Notes, and all
other documents and instruments related thereto, shall remain in full force
and effect with no other modification or waiver. This Waiver and Amendment
may be executed in two or more counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
If you agree to the foregoing waivers and amendments of the provisions
of the Note Purchase Agreement, please so indicate by executing the form of
acknowledgement set forth below. The waivers and amendments shall then take
effect as of the date hereof.
Very truly yours,
SHELDAHL, INC.
By: /s/ John V. McManus
John V. McManus
Its: VP Finance
Agreed to and accepted as of the
Date first-above mentioned:
NORTHERN LIFE INSURANCE COMPANY
By: /s/ Christopher Patton
Christopher Patton
[Signature page for Waiver and Amendment]
<PAGE>
