SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended May 26, 2000 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 (Zip Code)
executive offices)
Registrant's telephone number, including area code: (507) 663-8000
As of July 1, 2000, 11,762,111 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
Item 1. Financial Statements
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
(In thousands,
except for per share data) May 26, 2000 May 28, 1999
Net sales $102,994 $89,091
Cost of sales 91,794 79,224
_______ _______
Gross profit 11,200 9,867
_______ _______
Expenses:
Sales and marketing 6,103 6,923
General and administrative 6,640 6,153
Research and development 2,375 1,870
Interest 2,746 1,787
Restructuring costs - 2,600
_______ _______
Total expenses 17,864 19,333
_______ _______
Loss before income taxes (6,664) (9,466)
Income taxes - -
_______ _______
Net loss before preferred dividends (6,664) (9,466)
Convertible preferred stock dividends (1,555) (1,593)
_______ _______
Net loss applicable to common shareholders $ (8,219) $ (11,059)
======= =======
Net loss after convertible preferred
stock dividends
- basic and diluted $ (0.70) $ (1.02)
======= =======
Weighted average number of shares
outstanding - basic and diluted 11,680 10,857
======= =======
<PAGE>
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
(In thousands,
except for per share data) May 26, 2000 May 28, 1999
Net sales $36,152 $32,575
Cost of sales 33,801 28,527
_______ _______
Gross profit 2,351 4,048
_______ _______
Expenses:
Sales and marketing 2,151 2,172
General and administrative 2,134 2,396
Research and development 793 616
Interest 940 799
Restructuring costs - (500)
_______ _______
Total expenses 6,018 5,483
_______ _______
Loss before income taxes (3,667) (1,435)
Income taxes - -
_______ _______
Net loss before preferred dividends (3,667) (1,435)
Convertible preferred stock dividends (528) (521)
_______ _______
Net loss applicable to common shareholders $ (4,195) $ (1,956)
======= =======
Net loss per common share
- basic and diluted $ (0.36) $ (0.18)
======= =======
Weighted average number of shares
outstanding - basic and diluted 11,762 11,153
======= =======
<PAGE>
SHELDAHL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)
(In thousands) May 26, August 27,
2000 1999
Current assets:
Cash and cash equivalents $ 972 $ 1,043
Accounts receivable, net 22,330 19,908
Inventories 18,434 18,746
Prepaid expense and other current assets 939 593
_______ _______
Total current assets 42,675 40,290
_______ _______
Construction in progress 793 3,399
Land and buildings 28,662 28,560
Machinery and equipment 130,786 127,377
Less: accumulated depreciation (88,274) (76,491)
_______ _______
Net plant and equipment 71,967 82,845
_______ _______
Other assets 773 795
_______ _______
$115,415 $123,930
======= =======
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt $ 3,468 $ 4,142
Accounts payable 12,082 10,493
Accrued salaries 1,310 1,323
Other accrued liabilities 5,069 4,682
Restructuring reserves 1,227 2,713
_______ _______
Total current liabilities 23,156 23,353
_______ _______
Long-term debt 27,708 29,284
Restructuring reserves 1,734 2,484
Other non-current liabilities 3,340 3,477
_______ _______
Total liabilities 55,938 58,598
_______ _______
Shareholders' investment:
Convertible preferred stock 42 40
Common stock 2,940 2,903
Additional paid-in capital 111,732 109,407
Accumulated deficit (55,237) (47,018)
_______ _______
Total shareholders' investment 59,477 65,332
_______ _______
$115,415 $123,930
======== =======
<PAGE>
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
(In thousands) May 26, 2000 May 28, 1999
Operating activities:
Net loss $(8,219) $(11,059)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 12,459 12,620
Preferred stock dividends 1,555 1,593
Deferred income taxes - -
Restructuring costs charged to operations - 2,600
Net change in other operating activities:
Accounts receivable (2,422) (4,799)
Inventories 312 (2,535)
Prepaid expenses and other current assets (222) (118)
Other assets 22 204
Accounts payable and accrued liabilities 461 2,219
Restructuring payments made (2,289) (4,195)
Other non-current liabilities (136) (238)
_______ _______
Net cash provided by (used in) operating
activities 1,521 (3,708)
_______ _______
Investing activities:
Capital expenditures, net (1,705) (5,547)
_______ _______
Financing activities:
Net borrowings (repayments)
under revolving credit facilities (290) 4,599
Payments of term facility - (1,025)
Proceeds from other long-term debt 4,300 -
Repayments of long-term debt (6,261) (2,452)
Costs and redemption of Series B
preferred stock - (837)
Net proceeds of Series E preferred stock - 8,437
Net proceeds of Series F preferred stock 1,800 -
Stock options exercised 564 156
_______ _______
Net cash provided by financing activities 113 8,878
_______ _______
Net decrease in cash equivalents (71) (377)
_______ _______
Cash and cash equivalents at
beginning of period 1,043 1,005
_______ _______
Cash and cash equivalents at
end of period $ 972 $ 628
======= =======
Supplemental cash flow information:
Interest paid $ 2,746 $ 2,547
======= =======
Income taxes paid $ 42 $ 152
======= =======
<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, consist of (in thousands):
May 26, 2000 August 27, 1999
Raw materials $ 8,549 $ 6,635
Work-in-process 6,250 7,751
Finished goods 3,635 4,360
_______ _______
$18,434 $18,746
======= =======
2) Liquidity and Going Concern Matters
Cash requirements to fund restructuring charges taken during fiscal 1999
and 1998 were $2.3 million in the nine months of fiscal 2000 and are
expected to be approximately $0.4 million in the fourth quarter of fiscal
2000, compared to $5.0 million in total for fiscal 1999. Fiscal 2000
capital expenditures for the Company are planned at approximately $3.0
million compared with $5.5 million in fiscal 1999. Debt repayments for
fiscal 2000, including refinancing of the Longmont facility, will be $3.8
million including $2.5 million on the bank term facility and $1.0 million
for various capital lease payments.
The impact of operating losses incurred during the first nine months of
fiscal 2000 and anticipated operating results during the fourth quarter
of fiscal 2000, tighter borrowing levels for the fourth quarter of fiscal
2000 pursuant to the Company's amended debt agreements and the continued
uncertainty of the timing of sales growth of the Company's Micro Products
business places significant pressure on the cash reserves of the Company.
The Company was out of compliance with one of its debt covenants at May
26, 2000 and received a waiver from its lenders with respect to such
matters of non-compliance. In addition, new debt covenants have been
established for the Company's fourth quarter ending September 1, 2000.
3) Restructuring Expenses and Impairment Charges
In February 1999, the Company recorded a charge of $3.1 million for
separation costs incurred in reducing its salaried work force. This
charge was increased by $0.5 million in August 1999. The restructuring
costs provide for approximately $2.0 million for severance and early
retirement salary costs and approximately $1.6 million for medical,
dental and other benefits being provided to the affected individuals.
Approximately 46 people were affected by this action. The fiscal 1999
restructuring costs are in addition to the $8.5 million of similar costs
charged to operations in fiscal 1998. As of May 26, 2000, approximately
$1.8 million has been charged to the aforementioned restructuring reserve
and by May 26, 2000, 46 employees had terminated employment with the
Company.
In February 1998, a restructuring charge of $4.0 million was recorded
related to the culmination of the Company's business re-engineering
initiative that began two years ago. Due to significant productivity
benefits resulting from the initiative, the Company reduced the size of
its salaried workforce. The resulting workforce reduction involved
layoffs, early retirement offerings, reassignments and reclassifications
of positions. The restructuring costs provided for approximately $2.5
million for severance and early retirement salary costs, approximately
$1.3 million for medical, dental and other benefits being provided to the
affected individuals, and approximately $0.2 million for outplacement and
other costs. Approximately 73 jobs were affected by this action.
In May 1998, an additional restructuring charge of $4.5 million was
recorded and subsequently reduced by $0.5 million in May 1999. This
restructuring charge relates to the closing of the Company's Aberdeen,
South Dakota assembly facility and reducing its Northfield production
workforce. The restructuring costs provide for approximately $1.4
million for severance costs, approximately $0.4 million for medical,
dental and other benefits being provided to the affected individuals and
approximately $2.2 million for equipment disposal, losses related to the
closure of the Aberdeen facility, outplacement and other costs.
Approximately 196 jobs were affected by this action.
Both 1998 aforementioned restructuring charges were related to the
Company's efforts to decrease cost and increase throughput. As of May
26, 2000, approximately $6.8 million had been charged to these
restructuring reserves and by May 26, 2000, 269 employees had terminated
employment with the Company related to the fiscal 1998 restructuring
actions.
In the fiscal quarters ended August 1999 and May 1998, non-cash
impairment charges of $7.6 million and $3.3 million were recorded against
the Company's statements of operations. These charges relate to
equipment located principally at the Company's Longmont, Colorado
facility and certain computer software which, based upon analysis by
management and anticipated production processes, was not expected to
contribute to the Company's future cash flows.
4 ) Subsequent Event
On June 26, 2000, the Company announced that it has begun exclusive
negotiations with International Flex Technologies Inc. (IFT), a
privately-held company which acquired IBM Corporation's fine-line
flexible circuit business in February 1999, concerning a proposal under
which the Company would acquire IFT in exchange for shares of the
Company's common stock. In addition, IFT shareholders and other
potential investors have proposed to infuse approximately $40 million in
new capital into the Company in exchange for shares of a new series of
the Company's convertible preferred stock. As a result of the proposed
acquisition and new investment, the IFT shareholders and potential other
investors would hold securities representing beneficial ownership of
approximately 43% of the Company.
5) Segment Reporting
The following is a summary of certain financial information relating to
the two segments for the nine months ended as follows:
May 26, 2000 May 28, 1999
Total sales by segment:
Core Business $ 99,239 $ 88,245
Micro Products 3,755 846
_______ _______
Total company sales $102,994 $ 89,091
======= =======
Operating Profit (loss) by segment:
Core Business:
Before corporate allocation $ 11,536 $ 13,401
Corporate cost allocation 5,435 4,922
Interest expense 2,252 1,430
_______ _______
Total $ 3,849 $ 7,049
======= =======
Micro Products:
Before corporate allocation $ (8,816) $(12,323)
Corporate cost allocation 1,203 1,235
Interest expense 494 357
_______ _______
Total $(10,513) $(13,915)
======= =======
Total segments operating losses (6,664) (6,866)
Sales by product line:
Laminate material $ 24,855 $ 21,262
ViaThin 3,755 846
Novaflex HD 32,346 23,337
Novaflex VHD 3,267 4,188
Flexbase interconnects 38,771 39,458
_______ _______
$102,994 $ 89,091
======= =======
The following is a summary of certain financial information relating to the
two segments for the three months ended as follows:
May 26, 2000 May 28, 1999
Total sales by segment:
Core Business $34,808 $32,364
Micro Products 1,344 211
_______ _______
Total company sales $36,152 $32,575
======= =======
Operating Profit (loss) by segment:
Core Business:
Before corporate allocation $ 2,821 $ 5,301
Corporate cost allocation 1,758 1,911
Interest expense 771 639
_______ _______
Total $ 292 $ 2,751
======= =======
Micro Products:
Before corporate allocation $(3,401) $(4,054)
Corporate cost allocation 389 474
Interest expense 169 160
_______ _______
Total $(3,959) $(4,687)
======= =======
Total segments operating losses (3,667) (1,935)
Sales by product line:
Laminate material $ 8,585 $ 8,513
ViaThin 1,345 211
Novaflex HD 11,444 8,470
Novaflex VHD 994 1,358
Flexbase interconnects 13,784 14,023
_______ _______
$36,152 $32,575
======= =======
<PAGE>
Item 2. Management Discussion and Analysis
SHELDAHL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED OPERATING RESULTS AND FINANCIAL CONDITION
Nine Months Ended May 26, 2000 and May 28, 1999
SALES
The Company's net sales increased $13.9 million, or 15.6% from $89.1 million
for the nine months ended May 28, 1999 to $103.0 million for the nine months
ended May 26, 2000. Core Business sales increased $11.0 million, or 12.5%, to
$99.2 million, while Micro Products sales increased $2.9 million, or 343.9%
when compared to the first nine months of fiscal 1999. The increased sales
were principally realized from the Company's family of Novacladr products -
ViaThinr, Novaflexr HD and VHD - for applications serving the datacom market.
Core Business sales for the nine months ended May 26, 2000 to the automotive
market decreased 0.6% to $60.2 million and represents 58.4% of total Company
sales. Datacom sales for the same period increased $16.0 million, or 117.7%,
to $29.5 million, driven mainly by new customers in the computer segment.
Datacom sales represent 28.7% of total Company sales of which $25.7 million is
from the Core Business segment and $3.8 million is from the Micro Products
segment.
Sales to the Company's other markets totaled $13.3 million, or 12.9%, of total
Company revenue reflecting a decrease of $1.7 million, or 11.5% from the same
period one year ago.
The chart below details the Company's sales by market during the period (in
thousands):
Nine Month Ended Nine Months Ended
Market May 26, 2000 May 28, 1999 Inc(Dec)% Change
Automotive $ 60,162 $ 60,513 $ (351) (.6)%
Datacom 29,510 13,558 15,952 117.7%
Industrial 5,142 5,880 (738) (12.6)%
Consumer 2,744 2,531 213 8.4%
Aerospace/Defense 5,436 6,609 (1,173) (17.7)%
_______ _______ _______ _______
Total $102,994 $ 89,091 $ 13,903 15.6%
======= ======= ======= =======
GROSS PROFIT
Gross profit decreased to 10.9% of sales, or $11.2 million, for the nine
months ended May 26, 2000 compared to $9.9 million the same period one year
ago. As reflected in the table below, increased sales volume and improved
manufacturing operations reduced Micro Products gross loss to $6.6 million
compared to $10.0 million for the same period one year ago. Core Business
gross profit decreased $2.1 million to $17.8 million, or 17.9% of sales.
This reflected a less profitable sales mix with higher material costs as a
percent of sales. Additionally, conversion costs consisting of direct labor
and factory cost of sales for the Core Business product lines increased $1.0
million when compared to the same period one year ago with freight costs being
a major part of the increase.
Nine Months Fiscal 2000 Nine Months Fiscal 1999
Core Micro Total Core Micro Total
Business Products Company Business Products Company
Sales $99,239 $ 3,755 $102,994 $88,245 $ 846 $89,091
Cost of sales 81,487 10,307 91,794 68,370 10,854 79,224
_______ _______ _______ _______ _______ _______
Gross profit $17,752 $(6,552) $ 11,200 $19,875 $(10,008) $ 9,867
======= ======= ======= ======= ======= =======
% of sales 17.9% N/A 10.9% 22.5% N/A 11.1%
OTHER EXPENSES
The Company's expenses excluding interest and restructuring charges increased
$0.2 million, or 1.2% from $14.9 million for the nine months ended May 28,
1999 to $15.1 million for the nine months ended May 26, 2000. Increased
depreciation expenses for the Company's information technology upgrade fully
deployed in the second half of fiscal 1999 was partially offset by declines in
salaries.
During the first nine months, higher interest rates and borrowing level's on
the Company's credit and security agreement with its bank group increased
gross interest expense $0.2 million. Reflecting reduced capital spending,
capitalized interest declined nearly $0.8 million for the nine months ended
May 26, 2000 when compared to the same period one year ago. As a result, net
interest expense rose $1.0 million, or 53.7% to $2.7 million compared to the
same period one year ago.
Interest costs and activities for the noted period are detailed below:
Nine Months Nine Months
May 26, 2000 May 28, 1999 Change
Gross interest expense $ 2,856 $ 2,648 $ 208
Capitalized interest (110) (862) 752
_______ _______ _______
Net interest $ 2,746 $ 1,786 $ 960
======= ======= =======
INCOME TAXES
As the result of the continuing losses in the Company's Micro Products
business, the Company has not and will not reflect in immediate future periods
any tax provision or benefit.
<PAGE>
SHELDAHL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED OPERATING RESULTS AND FINANCIAL CONDITION
Three Months Ended May 26, 2000 and May 28, 1999
SALES
The Company's net sales increased $3.6 million, or 11.0%, from $32.6 million
for the three months ended May 28, 1999 to $36.2 million for the three months
ended May 26, 2000. Core Business sales increased $2.4 million, or 7.6%, to
$34.8 million while Micro Products sales increased $1.1 million, or 537.0%,
when compared to the third Quarter of fiscal 1999. The increased sales were
principally realized from the Company's family of Novacladr products -
ViaThinr, Novaflexr HD and VHD - for applications serving the datacom market.
Core Business sales for the three months ended May 26, 2000 to the automotive
market decreased 6.0% from the same quarter last year to $20.4 million and
represents 56.4% of total Company sales. Datacom sales for the same period
increased $6.0 million, or 110.1%, to $11.4 million. Datacom sales represent
31.7% of total Company sales of which $10.1 million is from the Core Business
segment and $1.3 million is from the Micro Products segment.
Sales to the Company's other markets totaled $4.3 million, or 11.9%, of total
Company revenue reflecting a decrease of $1.2 million, or 21.3%, from the same
period one year ago.
The table below details the Company's sales by market for the period (in
thousands):
Three Months Three Months
Market May 26, 2000 May 28, 1999 Gross Change % Change
Automotive $20,402 $21,660 $(1,258) (6.0)%
Datacom 11,444 5,446 5,998 110.1%
Industrial 1,752 1,480 272 18.4%
Consumer 878 1,130 (252) (22.3)%
Aerospace/Defense 1,676 2,859 (1,183) (41.4)%
_______ _______ _______ _______
Total $36,152 $32,575 $ 3,577 11.0%
======= ======= ======= =======
GROSS PROFIT
Total gross profit decreased $1.7 million to 6.5% of sales for the three
months ended May 26, 2000 compared to the same period one year ago. As
reflected in the chart below, Micro Products gross loss decreased by 27.1% to
$2.6 million compared to $3.5 million for the same period one year ago.
Increased sales, reduced direct material usage in relation to sales and
reduced fixed costs positively impacted gross loss. The Core Business gross
profit decreased $2.6 million resulting in a gross profit percent to sales of
14.1% compared to 23.4% for the same period one year ago. This reflected a
less profitable sales mix with higher material costs as a percent of sales.
Three Months Fiscal 2000 Three Months Fiscal 1999
Core Micro Total Core Micro Total
Business Products Company Business Products Company
Sales $34,808 $ 1,344 $36,152 $32,364 $ 211 $32,575
Cost of sales 29,895 3,906 33,801 24,805 3,722 28,527
_______ _______ _______ _______ _______ _______
Gross profit $ 4,913 $(2,562) $ 2,351 $ 7,560 $(3,512) $ 4,048
======= ======= ======= ======= ======= =======
% of sales 14.1% N/A 6.5% 23.4% N/A 12.4%
OTHER EXPENSES
The Company's expenses, excluding interest and restructuring charges,
decreased $0.1 million, or 2.0%, from $5.2 million for the three months ended
May 28, 1999 to $5.1 million for the quarter ended May 26, 2000. A decline in
headcount and controlled discretionary spending was the principle area
contributing to this decrease.
During the quarter, gross interest expense was unchanged from the same period
one year ago. Reflecting reduced capital spending, capitalized interest
declined $0.1 million for the three months ended May 26, 2000 when compared to
the same period one year ago. As a result, net interest expense rose $0.1
million, or 17.6% to $0.9 million compared to the same period one year ago.
Interest costs and activities for the noted period are detailed below:
Three Months Three Months
May 26, 2000 May 28, 1999 Change
Gross interest expense $ 951 $ 929 $ 22
Capitalized interest (11) (130) 119
_______ _______ _______
Net interest $ 940 $ 799 $ 141
======= ======= =======
FINANCIAL CONDITION
On November 16, 1999, the Company refinanced its outstanding secured real
estate loan. The new $4.3 million, ten-year secured real estate mortgage
carries an interest rate of 8.53% and requires the Company to meet certain
reporting requirements. Annual principal payments and interest under the new
secured loan will be $417,000 versus $1.3 million on the previous loan.
Concurrent with the closing of this refinancing, the Company fully satisfied
the $3.6 million secured real estate loan plus accrued and unpaid interest
that was outstanding to the lender. The net effect of this refinancing
enhanced fiscal 2000 liquidity by $0.9 million by reducing debt payments by
approximately $0.4 million and interest payments by approximately $0.5
million.
The Company's 1998 three-year Credit and Security Agreement with Norwest Bank,
N.A. and the CIT Group/Equipment Financing Inc. consists of a working capital
revolver of $25 million based on levels of working capital and a term facility
of $16 million based on the Company's fixed assets. As of August 27, 1999,
the amount available to borrow on the revolver was approximately $6.6 million
based on a $18.3 million borrowing base on the revolver. The term facility of
$16 million had an outstanding balance as of the end of fiscal 1999 of $14.4
million with monthly repayments of $205,000 through May 2001. On November 8,
1999, the Company's borrowing available under the working capital portion of
its 1998 credit facility was reduced by $2.5 million and then modified on June
29, 2000 to $1.5 million. This change was initiated by the Company's lenders
in conjunction with a waiver issued by the lenders related to (i) the
Company's failure to achieve certain quarterly financial ratios and (ii) the
Company's then current level of borrowing under the working capital revolver
related to its events of non-compliance. Under the $25 million working capital
revolver, the Company has the ability to borrow based on the levels of
accounts receivable and inventory, which establishes a borrowing base. As of
June 2, 2000, the Company's reduced borrowing base was $17.7 million. Actual
borrowing under this working capital revolver was $11.1 million as of June 2,
2000 and the amount available to borrow was $6.6 million (see Capital
Reserves). The applicable interest rate for borrowings under the credit
agreement at May 26, 2000 was at 11.5%.
Capital Reserves
____________________
Since fiscal 1995, the Company has invested significantly in new plant and
equipment providing manufacturing capacity to deliver its patented Novacladr-
based line of products to both existing and new customers. This included
building and equipping a facility in Longmont, Colorado, to manufacture
substrates for integrated circuit (IC) packages. This capital expenditure was
funded by a series of equity offerings commencing in June 1994 through January
2000, raising $102.3 million, with 1.8 million raised in the issuance of newly
created Series F Convertible Preferred Stock, $1.00 par value per share, and
Warrants in January 2000. The longer than expected period of time to achieve
full product and market acceptance has resulted in greater losses generated
from an under-utilized manufacturing facility and its supporting workforce.
At the Longmont facility, the Company manufactures ViaArrayr and ViaThin -
both Novaclad-based substrates for IC packages, plus the Company's Novaflex
VHD product targeted at the high-end disc drive market. Sheldahl received its
initial volume order for the VHD product line in October 1998. The Company's
fiscal 1999 sales volume from Novaflex VHD was $5.6 million. Additionally,
the base material for the Company's Novaflex HD is also produced in the
Longmont facility. For all of fiscal 1999, $40.8 million of Novaclad based
product was sold and produced all or in part at the Longmont facility. For
the first nine months of fiscal 2000, $39.4 million of Novaclad-based product
was sold and produced all or in part at the Longmont facility.
At of the end of fiscal 1999, the Longmont facility was operating at
approximately 20% of stated production capacity with projected gross margin
breakeven at 40% - 60% of factory utilization or approximately $24 - $26
million of annual revenue of ViaThin and ViaArray products plus related volume
of the Novaflex HD and VHD product lines. As of May 26, 2000, there has been
no material change in the utilization. Breakeven volume at the Longmont
facility is not expected until the second half of fiscal 2001 at the earliest.
During the three-year period ended August 27, 1999, the Company incurred,
principally at its Micro Products operations, cumulative net losses totaling
approximately $68.7 million, including restructuring and other charges of
$27.7 million. During this three-year period, the Company used cash of
approximately $59.5 million supporting capital expenditures and approximately
$6.8 million for net operating activities. The Company has financed these
transactions principally through equity and debt financing.
Cash requirements to fund restructuring charges taken during fiscal 1999 and
1998 are expected to be approximately $2.7 million in fiscal 2000 compared to
$5.0 million in fiscal 1999. Fiscal 2000 capital expenditures for the Company
are planned at approximately $3.0 million, compared to $5.5 million in fiscal
1999. Debt repayments for fiscal 2000, including refinancing of the Longmont
facility, will be $3.8 million including $2.5 million on the bank term
facility and $1.0 million for various capital lease payments.
For the nine month period ended May 26, 2000, the Company improved its
operating performance with cash flow from operations, excluding restructuring
cost payments, with a positive $3.8 million but did not meet all of the
financial covenants established by its bank group. The Company received a
waiver from its lenders with respect to such matters of non-compliance.
Anticipated operating results during the fourth quarter of fiscal 2000,
tighter borrowing levels for the fourth quarter of fiscal 2000 pursuant to the
Company's amended debt agreements and the continued uncertainty of the timing
of sales growth of the Company's Micro Products business places significant
pressure on the cash reserves of the Company. Capital spending for the nine
months ended May 26, 2000 was $1.7 million or $3.8 million below the same
period one year ago.
Net working capital increased to $19.5 million for the nine months ended May
26, 2000 from $16.9 million as of August 27, 1999. An increase in the
Company's accounts receivable of $2.4 million reflected greater sales growth
in the first nine months of fiscal 2000.
NEW ACCOUNTING PRONOUNCEMENTS
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, 2000. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge criteria are met.
Special accounting for qualifying hedges allow a derivative's gains or losses
to offset related results on the hedged item in the income statement and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The Company has
not yet quantified the impacts of adopting SFAS No. 133 and has not yet
determined the timing or method of adoption.
CAUTIONARY STATEMENT
The discussion above contains statements within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements by their nature
involve substantial risks and uncertainties as described by Sheldahl's
periodic filings. Actual results may differ materially depending on a variety
of factors, including but not limited to the following: the achievement of
Sheldahl's projected operating results, the ability of Sheldahl to
successfully obtain waivers from its lenders for any defaults on its debt
covenants, the achievement of efficient volume production and related sales
revenue results at Longmont, the ability of the Company's major contract
manufacturer to secure financing for its business operations, the ability of
the Company to generate sufficient cash flow to fund operations, the ability
of Sheldahl to identify and successfully pursue other business opportunities
and Sheldahl not entering into an agreement with respect to a strategic
transaction or any such transaction not being consummated. Additional
information with respect to the risks and uncertainties faced by Sheldahl may
be found in, and the prior discussion is qualified in its entirety by, the
Risk Factors contained in the Company's filings with the Securities and
Exchange Commission, including Sheldahl's Annual Report, Form 10-K for the
fiscal year ended August 27, 1999, Form 10-Q for the quarters ended November
26, 1999, February 25, 2000, May 26, 2000 and other SEC filings.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's Credit and Security carries interest rate risk. Amounts
borrowed under this Agreement are subject to interest charges at a rate equal
to the lender's prime rate +2%, which as of May 26, 2000 was 11.5%. Should
the lender's base rate change, the Company's interest expense will increase or
decrease accordingly. As of May 26, 2000, to Company had borrowed
approximately $23.6 million subject to the interest rate risk. On this
amount, a 1% increase would cost the Company $236,000 in additional gross
interest on an annual basis.
<PAGE>
PART II - OTHER INFORMATION
SHELDAHL, INC. AND SUBSIDIARY
FORM 10-Q
Item 1. Legal Proceedings
In late February and early March, five state court lawsuits were commenced
against the Company, its directors and Molex Incorporated. The initial
lawsuit was filed by Kelly Townsend, on behalf of herself and others similarly
situated, in the Hennepin County District Court. That lawsuit was followed by
similar lawsuits filed in the Rice County District Court by James Delmonte,
John DeSchepper and Michael Miller, each on behalf of the named plaintiff and
others similarly situated. A fifth lawsuit was filed by Irwin L. Jacobs,
Daniel T. Lindsay, Dennis M. Mathisen and Marshall Financial Group, Inc. in
the Rice County District Court. Each of the lawsuits claimed that the
consideration to be paid in a proposed transaction between the Company and
Molex Incorporated, as announced by the Company on February 17, 2000, is
unfair and inadequate for the Company's shareholders. Each of the Complaints,
other than the Complaint filed by Irwin Jacobs, et al., requested
certification as a class action. All of the Complaints sought injunctive
relief and compensatory damages. Subsequent to the receipt of the Complaints
by the Company, the plaintiffs sought temporary restraining orders and
preliminary injunctions in both the Hennepin and Rice County Courts. Both
Courts denied the plaintiffs' relief. On March 20, 2000, the Company
announced that Molex Incorporated had notified the Company that it would not
make a proposal to enter into an agreement to acquire the remaining equity
interests of Sheldahl not currently owned by Molex. On March 22, 2000, Irwin
Jacobs, et. al. voluntarily dismissed their law suit. In April 2000, the
remaining lawsuits were also voluntarily dismissed.
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
10.1 Fifth Amendment to the Credit and Security Agreement,
dated June 16, 2000 between the Company and Norwest Bank,
Minnesota, N.A. and The CIT Group/Equipment Financing,
Inc.
10.2 Sixth Amendment to the Credit and Security Agreement,
dated June 27, 2000 between the Company and Norwest Bank,
Minnesota, N.A. and The CIT Group/Equipment Financing,
Inc.
10.3 Exclusive Letter Agreement among the Registrant,
Morgenthaler Partners and International Flex
Technologies, Inc. dated June 25, 2000, incorporated by
reference to Exhibit 99.1 of the Current Report on Form
8-K filed by the Registrant on June 26, 2000.
27 Financial data schedule
B) Reports on Form 8-K
Reports on Form 8-K filed March 15, 2000 announcing continued
discussions with Molex.
Reports on Form 8-K filed March 20, 2000 announcing cessation of
negotiations with Molex.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHELDAHL, INC.
(Registrant)
Dated: July 10, 2000 By /s/ Edward L. Lundstrom
President and
Chief Executive Officer
Dated: July 10, 2000 By /s/ Jill D. Burchill
Vice President and
Chief Financial Officer
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