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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)...........FOR THE FISCAL YEAR ENDED SEPTEMBER 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM --------------- TO ---------------
COMMISSION FILE NUMBER: 0-45
SHELDAHL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MINNESOTA 41-0758073
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
1150 SHELDAHL ROAD
NORTHFIELD, MN 55057
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (507) 663-8000 SECURITIES
REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED
PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, PAR VALUE OF $0.25 PER SHARE
PREFERRED STOCK PURCHASE RIGHTS (TITLE OF CLASS)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of shares held by non-affiliates was approximately
$35,454,303 on November 15, 2000, when the last sales price of the Registrant's
Common Stock, as reported in the Nasdaq National Market System, was $2.9375.
As of November 15, 2000, the Company had outstanding 12,069,550 shares of Common
Stock.
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PART I
ITEM 1. BUSINESS
GENERAL
Sheldahl (the "Company") creates and distributes thin, flexible
laminates and their derivatives to worldwide markets. The Company's laminates
are of two types: adhesive-based tapes and materials, and its patented
adhesiveless material, Novaclad. From these materials, the Company fabricates
high-value derivative products: single- and double-sided flexible interconnects
and assemblies under the trade names Flexbase(R), Novaflex(R) HD and Novaflex(R)
VHD and substrates for silicon chip carriers under the trade names ViaArray(R)
and ViaThin(R). Management believes that Sheldahl's leading technology products
serve the electronic interface between the function of electronic-based products
and their integrated circuits. The Company targets specific OEMs in the datacom
and automotive markets in the drive to create electronic-based products that
require increased functionality.
The Company operates in two business segments identified as the
Company's Core Business and Micro Products business. The Core Business segment
consists of flexible laminates and derivative products, principally flexible
interconnect circuits and assemblies. These products are targeted across all
markets served by the Company with the automotive market generating 57.5% of
fiscal 2000 sales for this segment. The Company's Novaclad, Novaflex HD and VHD
are marketed and sold through the Core Business. The Micro Products business
segment is a developing business that targets the integrated circuit ("IC")
industry of the electronics market. The Company's ViaArray and ViaThin products
are marketed and sold through this segment and are exclusively reflected in the
Company's datacom market sales.
The Company's manufacturing and assembly sites with their related
assets are used to manufacture specific product offerings of the Company
regardless of business segment. For instance, the Longmont facility today
contributes to the manufacture of all Novaclad-based products. These products,
including Novaflex HD and VHD, are sold through the Core Business and ViaThin is
sold through Micro Products.
The Company's high performance products - ViaArray, ViaThin, Novaflex
HD and Novaflex VHD - are based on the Company's patented Novaclad laminate.
These products provide substantial benefits compared to traditional flexible
circuits, including the capability for very fine circuit traces and very small
holes, or vias, thus utilizing both sides of the laminate for circuit routing
reducing size and cost per function. The Company has designed its Novaclad-based
products to be used as a base material for high performance printed circuits and
IC substrates. The Company has developed its ViaThin to enable IC manufacturers
to package future generations of ICs economically by attaching the silicon die
to a ViaThin substrate manufactured by the Company or other circuitry
manufacturers using the Company's Novaclad or ViaArray products. As ICs are
becoming increasingly powerful, they produce more heat and require a greater
number of connections to attach the silicon die, placing substantially greater
demands on IC packaging materials. Novaflex VHD utilizes many of the product
features of ViaThin in applications other than IC packages.
See also "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Recent Developments" in Item 7 of this Form 10-K.
PRODUCTS
Novaclad. Novaclad is a thin and flexible adhesiveless copper laminate
used in the design and manufacture of flexible interconnects and high-density
substrates. Novaclad consists of a polyimide film onto which copper has been
vacuum deposited on both sides. After the vacuum deposition process, additional
copper is plated onto the laminate to achieve a desired thickness of copper
ranging from 5 microns to 35 microns (a micron is one-millionth of a meter).
Novaclad provides a number of important benefits when compared to traditional
adhesive-based laminates, including the capability for finer circuit traces
(down to 1 mil, or .001 inch) and corresponding higher circuit density, greater
heat tolerance and dissipation, improved signal speed and impedance control,
increased dimensional stability, resistance to chemicals and greater durability.
Because of these characteristics, the Company believes that Novaclad is a
cost-effective, high-performance material solution for a broad range of
interconnect systems, especially high-density substrates for IC packages and
increasingly dense
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circuitry for personal communication devices and computers and high end disc
drives. In fiscal 2000, sales of Novaclad-based laminates totaled $53.3 million,
or 39.0% of total Company sales revenue.
ViaArray. ViaArray is a higher-value-added form of Novaclad with
pre-drilled small holes, or vias, measuring down to 1 mil in diameter. ViaArray
is coated with copper and enables the transmission of electrical currents
between the two sides of the laminate. The combination of thin copper traces and
very small vias permits the design of circuits that are up to six times denser
than current flexible circuitry technology. Because of its adhesiveless
character, ViaArray provides all of the benefits of Novaclad. The combination of
these characteristics allows circuit fabricators the opportunity to eliminate
several costly processing steps in the manufacture of printed circuits. The
Company believes this product provides solutions for a variety of applications,
including high density interconnects, IC packages and multi-chip modules. The
Company believes there is also an opportunity for rigid printed circuit
manufacturers to use ViaArray based circuits as an interlayer in multilayer
circuit boards. There were no sales for ViaArray in fiscal 2000. The Company
expects to market and to accept prototype sales orders for this product during
fiscal 2001.
ViaThin. The Company uses ViaArray in the manufacture of high-density
substrates primarily for IC packages. Those high-density substrates are called
ViaThin. The material properties of ViaArray allow for very dense circuitry
patterns which enable IC designers to improve the processing capabilities of ICs
by increasing the number of connections to the silicon die, while reducing the
cost per connection. ViaThin enhances signal speed because its traces are very
smooth and its dimensional stability is maintained. These features allow the
Company's ViaThin to be designed into ball grid array, pin grid array, and other
high-density IC packages. The Company's strategy is to target the high-density
segment of the market for IC packaging and multichip module applications where
circuit density requirements as small as 1 mil traces and vias can be met using
ViaThin. As the market for high-density substrates develops, the Company will
consider licensing the manufacturing process of its high-density substrates to
increase the demand for its ViaArray product. In fiscal 2000, sales of ViaThin
substrates accounted for $6.7 million, or 4.9% of the Company's total revenue.
Novaflex VHD. The Company also uses ViaArray in the manufacture of
circuits that require the very fine features of an application outside of IC
packages, such as direct chip attach circuitry for high-end disk drives.
Novaflex VHD, introduced in September 1998, utilizes similar processes of the
Company's ViaThin product in applications that require two layers of circuitry
to provide an increased number of interconnection in a relatively small physical
space. The Company is targeting this product to manufacturers of high-end disk
drives, personal communications devices and unique medical applications. In
fiscal 2000, sales of Novaflex VHD totaled $4.1 million, or 3.0% of the
Company's total sales revenue.
Novaflex HD. The Company uses its Novaclad as the base material for
flexible interconnect circuits and assemblies that based on their end-use
require a combination of circuit density and operating characteristics that
withstand harsh environments such as under-the-hood automotive applications and
hinge flex applications in laptop computers. These products are sold under the
trade name Novaflex HD. Fiscal 2000 sales for Novaflex HD were $42.5 million, or
31.1% of the Company's total sales revenue.
Flexbase Flexible Interconnects. The Company uses its adhesive-based
laminates, which are marketed under the trade name Flexbase, as the base
material for a line of traditional flexible printed circuitry. The Company's
flexible printed circuitry is typically manufactured in a roll-to-roll process
from polyester or polyimide film to which copper is laminated. The laminate is
processed through various imaging, etching, and plating processes and then
selectively protected with a dielectric covering to produce a flexible printed
circuit. Automated screen-printing and photo imaging processes produce single-
and double-sided flexible circuits. In fiscal 2000, Flexbase interconnect
products represented revenue of approximately $51.1 million, or 37.4% of total
Company sales revenue.
Additionally, through internal capabilities and contract assemblers the
Company offers value-added processing, including surface mount assembly, wave
soldering, connector and terminal staking, custom folding, stiffener attachment,
application of pressure-sensitive adhesive and hand soldering, in order to
deliver a ready-to-use products to the end customer. The Company's targets
applications where increased performance, reduced size and weight, circuitry
density, ability to accommodate packaging contours or a reduction in the number
of assembly steps is desired to reduce the customer's overall cost and enhances
the value of its product lines.
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Laminate Materials. The Company's materials products consist of
adhesive-based tapes, laminates, and composite material made through vacuum
processes. Moisture barrier tape and flat cable tape is used in automobile air
bag systems. Splicing tape is used in the manufacture of commercial and
industrial sandpaper belts. Thermal insulating materials are used primarily in
the aerospace/defense market for satellites. Accentia(TM) is a relatively new
product line of conductive coatings on optically clear films. The application
for the Accentia(TM) product line is electroluminecent lighting, and touch panel
displays. The Company produces its materials using coating, laminating, and
vacuum metalizing processes. Coating involves applying chemicals or adhesives to
a thin flexible material. Laminating consists of combining two or more materials
through applications of heat and pressure. Vacuum metalizing typically involves
placing a metal onto a thin film, foil, or fabric by evaporation, sputtering, or
pattern deposition. The Company's materials provide extended flexibility,
strength, conductivity, durability, and heat dissipation. In fiscal 2000,
external sales of materials accounted for $32.3 million, or 23.7% of the
Company's total revenue.
SALES AND CUSTOMER SUPPORT
The Company's sales and customer support efforts are directed by
product or market managers who are responsible for defining target markets and
customers, strategic product planning and new product introduction. These
product or market managers supervise a sales force of account managers, which
are supported by engineers, technicians and customer service personnel. The
Company employs a team approach led by account managers who work extensively
with the Company's customers at the design stage, seeking to influence product
designs and applications, particularly in the automotive and emerging
datacommunications product areas. The Company believes that its close ties with
customers at all stages of a project distinguish it from many competitors who
principally manufacture products according to customer specifications without
providing significant design, technical or consulting services. Account managers
also coordinate appropriate design, research and development, engineering, order
fulfillment and other personnel to support customer needs. To supplement its
direct sales efforts, the Company uses domestic and international distributors.
The cornerstone of the Company's sales and customer support strategy is to
provide superior customer service, from prompt and efficient technical support
to rapid delivery of prototype and production orders through its electronic data
interchange and just-in-time delivery capabilities.
International. The Company works with European and Asian manufacturers
and suppliers, with sales offices in France, Germany, Great Britain, Hong Kong
and Singapore. The Company supplements its direct sales efforts with independent
manufacturers' representatives and distributors in Europe and Asia, principally
for flexible laminates. The Company's export sales during fiscal years 2000,
1999 and 1998 were $43.1 million, $30.0 million and $24.5 million, respectively.
The Company's preference is to minimize foreign currency translation
risk by conducting business in US currency. The Company has a limited exposure
to foreign currency risk with smaller sales contracted in British Sterling,
German Marks and French Francs. These contracts and the exchange rate are
reviewed periodically. As of September 1, 2000, the Company has no material
sales contracts in any currency not mentioned above. On January 1, 1999, the
Euro, the new European currency began commercial use. As of September 1, 2000, a
few of the Company's customers or suppliers had suggested pricing contracts in
Euro. In order to remain competitive, the Company anticipates pricing certain
contracts in Euro and has systems in place to support such contracts by
converting foreign currency transactions to six decimal places. When warranted
by the size of foreign currency denominated sales contracts, the Company may use
a variety of hedging techniques, including financial derivatives, to prudently
reduce its exposure to foreign currency fluctuations. No such contracts existed
as of September 1, 2000.
MANUFACTURING
The Company manufactures and assembles its products in Northfield,
Minnesota; Britton, South Dakota; and Longmont, Colorado. The Company focuses on
quality in its manufacturing efforts, and believes that its vertically
integrated manufacturing capabilities enhance its ability to control product
quality. The Company has been a qualified supplier to various automotive
manufacturers for many years and has received QS9000/ISO9001 certification in
its Minnesota and South Dakota facilities. The Company also employs contract
manufacturing relationships for the assembly of products in Mexico, Canada and
the Philippines.
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The Company uses a continuous roll-to-roll manufacturing process to
efficiently produce a large volume of high-quality flexible laminates using
coating, laminating, and vacuum metalizing techniques. The Company consumes
approximately one-half of the flexible laminates it produces for the manufacture
of a family of derivative products (see Products). The Company converts various
flexible laminates into circuits by using either photo exposing or screen
printing to image the circuit patterns onto flexible laminates. The laminates
then go through various etching and plating processes that result in copper
patterns remaining on the laminate. The circuits are then protected with a
dielectric covering. The Company processes certain of its derivative products
into value-added assemblies. These assembly process capabilities include
surface-mount assembly, wave soldering, connector and terminal staking, custom
folding, stiffener attach, application of pressure-sensitive adhesive, and hand
soldering. These operations are performed at the Company's facilities in
Britton, South Dakota, or at Maquilladora Operations in Mexico, and
subcontractor facilities in Canada and the Philippines.
In August 1995, the Company entered into various agreements to form a
joint venture in Jiujiang Jiangxi, China with Jiangxi Changjiang Chemical Plant
and Hong Kong Wah Hing (China) Development Co., Ltd. Under the agreements, the
Company licensed certain technology to the joint venture and provided certain
technical support. The Company has received a 20% ownership interest in the
joint venture and received cash payments totaling $900,000 upon completion of
certain milestones. The joint venture has been established to manufacture
flexible adhesive-based laminates and associated cover film tapes in China.
Under the terms of the agreements, the joint venture will market these products
in China, Taiwan, Hong Kong and Macau, and the Company will market the products
produced by the joint venture in all other markets. Manufacturing under this
joint venture commenced in fiscal 1999. As of September 1, 2000, the Company's
investment in and the impact of accounting for its investment in Jiujiang
Jiangxi under the equity method has not been material.
RESEARCH AND DEVELOPMENT
Sheldahl's recent research and development efforts have focused on
opportunities presented by the demand for higher density and thinner packaging
for electronic devices. The Company has also identified within its core
technologies other opportunities for participation in the trend towards
miniaturization within the electronics industry and has pursued these
opportunities independently and through various consortia. Research and
development expenses in fiscal 2001 are anticipated to increase as these
opportunities are developed.
In August 1994, Sheldahl acquired a minority ownership interest in
Joint Stock Company Sidrabe ("Sidrabe"), a privatized vacuum deposition
developmental company located in Riga, Latvia. Sidrabe historically was a
developmental agency for the former Soviet Union's military and aerospace
programs, specializing in the design and production of vacuum deposition
equipment. With the Company's ownership position in Sidrabe, the Company
received worldwide rights to some key elements of Sidrabe technology and the
Company has access to Sidrabe's scientific and technical personnel with
extensive product and process expertise. The Company has also purchased certain
manufacturing equipment from Sidrabe. The Company is currently exploring certain
joint product development opportunities with Sidrabe.
MOLEX JOINT VENTURE
On July 28, 1998, the Company and Molex Incorporated ("Molex") formed a
joint venture to design, market and assemble modular interconnect systems to
replace wiring harnesses in primarily the automotive market. The new company was
named Modular Interconnect Systems, L.L.C. and it is a Delaware limited
liability company ("Origin"). Origin will utilize proprietary flexible products
developed by the Company and proprietary connectors developed by Molex in the
development of the new modular interconnect system as an alternative to
conventional automotive wiring harnesses and flex circuit assemblies. The
Company and Molex will supply their respective products to Origin pursuant to
long-term supply contracts. The Company owns 40% and Molex owns 60% of Origin.
Each party has a right of first refusal with respect to the other party's
ownership interest. Origin is being funded by contributions from the Company and
Molex. Both the Company and Molex granted Origin a non-exclusive license to
certain of their intellectual property for purposes of producing the new modular
interconnect systems. Each license takes effect and is contingent upon a change
of control of the Company or Molex and the purchase of such person's membership
interest in Origin. As of September 1, 2000, the Company's investment in and the
impact of accounting for its investment in Origin under the equity method has
not been material.
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SUPPLIERS
The Company qualifies strategic suppliers through a Vendor
Certification Program, which limits the number of suppliers to those who provide
the Company with the best total value and quality. The Company closely monitors
product quality and delivery schedules of its supply base. Certain raw materials
used by the Company in the manufacture of its products are currently obtained
from single sources. The Company has not historically experienced significant
problems in the delivery of these raw materials. The Company currently depends
on one supplier for its polyimide supply, which serves as the base material for
the Company's Novaclad family of products. There have been no interruptions of
supply from this vendor over the last three years. The Company continues to
evaluate other sources of supply for polyimide film as well as other single
sourced raw materials. The Company believes that other manufacturers' products
are available, thus any interruption in supply from these vendors would not have
a material adverse effect on the Company's operations.
COMPETITION
The Company's business is highly competitive with principal competitive
factors being product quality, performance, price and service. The Company
believes its vertical integration, which allows it to control product quality
and manufacturing efficiencies better than many of its competitors, is a
competitive advantage. Sheldahl's competitors include materials suppliers,
flexible and rigid circuit manufacturers, as well as electronics manufacturers
who produce their own materials and interconnect systems. Some of the Company's
competitors have substantially greater financial and other resources than the
Company. The Company's primary competitors with respect to its flexible printed
circuitry and interconnect systems include Pressac Limited (a U.K. company) and
Parlex Corp. in the automotive electronics market and Mektec Corp., Fujikura
Ltd. (a Japanese company) and Innovex, Inc. in the computer and
telecommunications market. The Company's primary competition for its flexible
laminate products includes Rogers Corporation and GTS Flexible Materials, Ltd.
(a U.K. company).
The Company's Novaclad-based ViaArray and ViaThin compete with other
substrates produced through several alternative processes. These competing
products include single-sided, polyimide-based, etched copper laminate produced
using various methods of production by Minnesota Mining and Manufacturing, Inc.
("3M") and several Japanese companies. The Company believes the production
processes required for each of these competing substrates, which include copper
sputtering, mechanical drilling and traditional etching techniques, are
inherently more expensive than the Company's method of production and result in
products that are not as easily utilized as the Company's emerging products in
the design and production of higher-density IC packages. The Company's emerging
products also compete with ceramic packaging products produced by companies such
as Coors Electronic and Kyocera of Japan, although the Company believes these
products are more expensive than the Company's substrate products, and with
resin-based substrates supplied by companies such as Amkor Electronics and
Tessera, both of which the Company believes are limited in their ability to
accommodate increased circuit densities beyond current levels. The Company
expects these and other competitors will continue to refine their processes or
develop new products that will compete on the basis of cost and performance with
the Company's emerging products.
LIQUIDITY AND GOING CONCERN MATTERS
During the three-year period ended September 1, 2000, the Company
incurred, principally from its Micro Products operations, cumulative net losses
totaling approximately $75.7 million, including restructuring and other charges
of $27.7 million. During this three-year period, the Company used cash of
approximately $31.2 million supporting capital expenditures and approximately
$9.7 million for net operating activities. The Company has financed these
expenditures and losses principally through equity and debt financing.
Cash requirements to fund restructuring charges taken during fiscal
1999 and 1998 are expected to be approximately $0.9 million in fiscal 2001
compared to $2.7 million and $5.0 million in fiscal 2000 and 1999 respectively.
Fiscal 2001 capital expenditures for the Company are planned at approximately
$12.0 million, compared with $2.4 million in fiscal 2000. Debt repayments for
fiscal 2001 will be $3.5 million including approximately $2.5 million on the
bank term facility and approximately $1.0 million for various capital lease
payments.
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The impact of anticipated fiscal 2001 operating losses, tight borrowing
levels pursuant to its debt agreements and the uncertainty of the timing of
sales growth from the Company's Micro Products business places significant
pressure on the cash reserves of the Company. Cash flow projections based on the
Company's operating plan for fiscal 2001 reflect an increased level of cash flow
requirements during the year as working capital expands to support projected
sales growth. The Company believes that the Transactions discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments" will alleviate the Company's cash flow and
liquidity constraints and provide the needed cash flow to continue to fund
normal operations. The inability of the Company to (i) consummate the
Transactions described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments" or raise additional
debt or equity of at least $5 million during the first half of fiscal 2001; (ii)
execute the sales orders received from the Micro Products business customers;
(iii) improve operating results in the Micro Products business; (iv) achieve
operating performance from the Company's Core Business at or above fiscal 2000
levels; (v) achieve other cost or productivity improvements included in the
Company's fiscal 2001 budget; and (vi) maintain adequate liquidity to fund
normal operations would result in the Company being out of compliance with
certain of its debt covenants thereby allowing the Company's lenders to require
full repayment of the outstanding borrowings under the Company's credit
agreement and/or leave the Company in a cash reserve position that would require
additional capital to fund operations. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management has and
will continue to implement operational measures designed to assist the Company
in achieving its fiscal 2001 budget and cash flow objectives. Should any of the
matters discussed above ultimately not occur, management will attempt to take
one or all of the following actions: (i) obtain new equity capital, (ii) issue
new debt, and/or (iii) significantly restructure the Company's operations.
However, there can be no assurance that the Company will be successful in
closing the Transactions described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Recent Developments", in
achieving its projected operating results for fiscal 2001, in meeting its
quarterly debt covenants during fiscal 2001 or in its attempt to issue
additional debt or to raise additional capital on terms acceptable to the
Company, or in the event of the failure of the foregoing, successfully take the
actions described above.
BACKLOG
The Company's backlog consists of those orders for which the Company
has delivery dates. Automotive customers typically provide for four to six weeks
of committed shipments while datacommunications customers generally provide for
up to eight weeks of committed shipments. The Company's backlog of unshipped
orders as of September 1, 2000 and August 27, 1999 was approximately $20.2
million and $16.4 million, respectively. Generally, most orders in backlog are
shipped during the following three months. Because of the Company's quick turn
of orders to work-in-process, the timing of orders, delivery intervals, customer
and product mix and the possibility of customer changes in delivery schedules,
the Company's backlog at any particular date may not be representative of actual
sales for any succeeding period.
PROPRIETARY TECHNOLOGY
The Company owns three United States patents for Novaclad and the
processes for making Novaclad and five additional applications are pending.
Applications are pending for foreign patents on Novaclad in Japan and Canada.
The European Patent was awarded in April 2000. Federal trademark registrations
have been obtained on Novaclad(R), ViaArray(R), ViaThin(R), Flexbase(R),
Novaflex(R), Novaflex(R) HD and VHD. Sheldahl also relies on internal security
and secrecy measures and on confidentiality agreements for protection of trade
secrets and proprietary know-how. There can be no assurance that Sheldahl's
efforts to protect its intellectual property will be effective to prevent
misappropriation or that others may not independently develop similar
technology. The Company believes that it possesses adequate proprietary rights
to the technology involved in its products and that its products, trademarks and
other intellectual property rights do not infringe upon the proprietary rights
of third parties. The Company's primary Novaclad patents expire between years
2009 and 2015.
The Company was named as a defendant in a patent infringement matter
regarding its Novaclad products which was dismissed for lack of jurisdiction in
January 1994 and which has not been commenced elsewhere. There can be no
assurance that this plaintiff or others will not bring other actions against the
Company. The Company is also aware of a patent, which may cover certain plated
through holes of the double-sided circuits made of the Company's Novaclad
materials. Although no claims have been made against the Company under this
patent, the owner of the patent may attempt to construe the patent broadly
enough to cover certain Novaclad products
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manufactured currently or in the future by the Company. The Company believes
that prior commercial art and conventional technology, including certain patents
of the Company, exist which would allow the Company to prevail in the event any
such claim is made under this patent. Any action commenced by or against the
Company could be time consuming and expensive and could result in requiring the
Company to enter into a license agreement or cease manufacture of any products
ultimately determined to infringe such patent.
See also the discussion related to the Lemelson Foundation in "Legal
Proceedings," Item 3 of Part I of this Form 10-K.
ENVIRONMENTAL REGULATIONS
The Company is subject to various federal, state and local
environmental laws relating to the Company's operations. The Company's
manufacturing and assembly facilities are registered with the U.S. Environmental
Protection Agency and are licensed, where required, by state and local
authorities. The Company has agreements with licensed hazardous waste
transportation and disposal companies for transportation and disposal of its
hazardous wastes generated at its facilities. The Longmont Facility has been
specifically designed to reduce water usage in the manufacturing process and
employs a sophisticated waste treatment system intended to substantially reduce
discharge streams. Compliance with federal and state environmental laws and
regulations did not have a material effect on the Company's capital
expenditures, earnings or competitive position during fiscal 2000. Similarly,
fiscal 2001 capital expenditures to comply with such laws and regulations are
not expected to be material. The Company believes it is in material compliance
with federal and state environmental laws and regulations. As of September 1,
2000, the Company was not involved in any significant specific action, legal or
regulatory, regarding environmental regulations.
See also the discussion related to the Colorado noise litigation in
"Legal Proceedings," Item 3 of Part I of this Form 10-K.
EMPLOYEES
As of September 1, 2000, the Company employed 808 people in the United
States and Europe, including 488 in production, 52 in sales, marketing,
application engineering, and customer support, 15 in research and development
and 34 in administration. The production staff consists principally of full-time
workers employed in the Company's four currently operating manufacturing and
assembly plants. In Northfield, Minnesota, approximately 370 production workers
are represented by the Union of Needletrade, Industrial and Textile Employees
(the "Union"), which has been the bargaining agent for these workers since 1963.
The Company has a two-year collective bargaining agreement with the Union, which
expires on October 31, 2001. As part of this agreement, the Company agrees that
if a decision is made to sell the Company, either in whole or in part, the Union
shall be notified and, upon execution of a confidentiality agreement, shall be
given the necessary information as an interested buyer and shall be given the
opportunity to make bids on an equivalent basis and time period as other
parties. The Company also agreed with the Union that Sheldahl will consider
employee-ownership options if any sale of the Company or its parts is
considered. The Company has never experienced a work stoppage and believes that
its employee relations are good.
ITEM 2. PROPERTIES.
The Company owns two manufacturing facilities totaling 305,000 square
feet and a 20,000 square foot administration and sales support office in
Northfield, Minnesota. The Company also owns a 102,000 square foot facility in
Longmont, Colorado. The Company owns a 30,000 square foot assembly facility in
Britton, South Dakota. The Company also leases a 2,500 square foot technical
sales and design office in Detroit, Michigan. The Company also leases technical
sales space in Hong Kong and Singapore. Management believes that all facilities
currently in use are generally in good condition, well maintained and adequate
for their current operations.
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ITEM 3. LEGAL PROCEEDINGS
The Company's operations expose it to the risk of certain legal and
environmental claims in the normal course of business. The Company believes that
these general matters will not have a material adverse effect on the Company's
results of operations or financial condition.
As is typical in the semiconductor equipment industry, the Company has
from time to time received, and may in the future receive, communications from
third parties asserting patents or copyrights on certain of the Company's
equipment, products and technologies. A number of users of machine-vision
technology, including the Company, have received notice of alleged patent
infringement from, and/or have been sued by, the Lemelson Medical, Education and
Research Foundation Limited Partnership ("Lemelson Foundation") alleging that
equipment used in the manufacture of electronic devices infringes certain
patents issued to Jerome H. Lemelson relating to "machine vision" or "barcode
reader" technologies. Although the Company has not fully evaluated the alleged
infringement claims nor has it been named a defendant in any related lawsuit,
the Company believes that if any liability for infringement exists, such
liability would not be born by the Company but rather would be born by the
Company's machine-vision equipment manufacturers. Accordingly, the Company has
given those manufacturers notice that it intends to seek indemnification from
them for any damages and expenses resulting from this matter if the Company is
found liable or if it settles the claims. The Company cannot predict the outcome
of this or any similar claim or its effect upon the Company, and there can be no
assurance that any such litigation or claim would not have a material adverse
effect upon the Company's financial condition or results of operations.
The Company has been named a defendant in Rick Matthews et al. v.
Sheldahl, Inc., Boulder County District Court, Case No. 2000CV1126-2. The
Matthews family previously lived directly west of the Sheldahl facility in
Longmont, Colorado. The Matthews allege that due to excessive noise emanating
from the facility's cooling equipment that they have sustained economic and
non-economic damages. The plaintiffs constitute all four members of the family.
Claims for nuisance, trespass, negligence, loss of consortium, and punitive
damages have been raised. Trial is scheduled to begin April 9, 2001. The claims
at this time are being vigorously defended. Plaintiffs allege damages in excess
of $300,000 based on decreased value in the property, loss of improvements to
the property, and physical and emotional pain and suffering.
Pioneer Engineering Technology Co., Ltd, a Taiwan company has sued
Sheldahl for unpaid contract payments in the amount of $554,964 and for breach
of contract damages in excess of $75,000. Sheldahl has answered the complaint
and has made a counterclaim against Pioneer for damages caused by equipment
malfunction.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the Nasdaq National Market under the
symbol "SHEL". The following table sets forth the high and low sales prices of
the Common Stock for the period indicated, as reported on the Nasdaq National
Market.
HIGH LOW
FISCAL YEAR ENDED SEPTEMBER 1, 2000:
First Quarter 7.125 3.875
Second Quarter 8.625 4.000
Third Quarter 7.750 3.875
Fourth Quarter 6.250 3.156
FISCAL YEAR ENDED AUGUST 27, 1999:
First Quarter 8.500 4.563
Second Quarter 8.063 5.063
Third Quarter 7.000 5.250
Fourth Quarter 8.625 5.500
9
<PAGE> 10
On November 15, 2000, the last reported sales price of the Common Stock
was $2.9375. As of this date, there were approximately 1,267 record holders of
the Company's Common Stock and an estimated additional 4,000 shareholders who
held beneficial interests in shares of Common Stock registered in nominee names
of banks and brokerages houses.
Pursuant to its current credit and security agreement, the Company is
restricted from declaring or paying cash dividends without the consent of the
Company's lenders. The Company has never declared or paid any dividends on its
Common Stock. The Company currently intends to retain any earnings for use in
its operations and expansion of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere herein the "Management's Discussion and Analysis of
Financial Condition and Results of Operations". The consolidated statements of
operations data presented below as of and for the fiscal years ended August 28,
1998, August 27, 1999 and September 1, 2000 and the consolidated balance sheet
data as of August 27, 1999 and September 1, 2000 have been derived from the
Company's Consolidated Financial Statements included elsewhere in this report,
which have been audited by Arthur Andersen LLP, independent public accountants.
The statement of operations data set forth below for the years ended August 30,
1996 and August 29, 1997, and the consolidated balance sheet data as of August
30, 1996, August 29, 1997 and August 28, 1998 are derived from audited financial
statements not included herein.
<TABLE>
<CAPTION>
Fiscal Years Ended
(in thousands, except per share data)
August 30, August 29, August 28, August 27, September 1,
1996 1997 1998 1999 2000
--------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Net sales $114,120 $105,266 $117,045 $122,086 $136,741
Cost of sales 89,171 94,933 109,143 109,157 $124,677
-------- -------- -------- -------- --------
Gross profit 24,949 10,333 7,902 12,929 $ 12,064
-------- -------- -------- -------- --------
Expenses:
Sales and marketing 9,254 9,560 9,861 9,666 8,657
General and administrative 5,129 6,839 8,152 8,742 9,159
Research and development 2,755 4,705 3,881 2,825 3,083
Restructuring costs - - 8,500 3,050 -
Impairment charges and other - - 3,300 7,635 -
Interest 539 1,298 2,547 2,499 4,060
-------- -------- -------- -------- --------
Total expenses 17,677 22,402 36,241 34,417 24,959
-------- -------- -------- -------- --------
Income (loss) before provision for
income taxes and cumulative effect
of change in method of accounting 7,272 (12,069) (28,339) (21,488) (12,895)
Provision (benefit) for income taxes 2,500 (4,100) 2,952 - -
-------- -------- -------- -------- --------
Net income (loss) before cumulative
effect of change in method of
accounting 4,772 (7,969) (31,291) (21,488) (12,895)
Cumulative effect of change in
method of accounting(1) - - (5,206) - -
-------- -------- -------- -------- --------
Net income (loss) before convertible
preferred stock dividends 4,772 (7,969) (36,497) (21,488) (12,895)
Convertible preferred stock dividends - - (689) (2,080) (2,091)
-------- -------- -------- -------- --------
Net income (loss) applicable to
common shareholders $ 4,772 $(7,969) $(37,186) $(23,568) $(14,986)
======== ======== ========= ========= =========
Net income (loss) per
common share - basic $ 0.57 $ (0.89) $ (3.97) $ (2.15) $ (1.28)
======== ======== ========= ========= =========
- diluted $0.55 $(0.89) $(3.97) $(2.15) $(1.28)
======== ======== ========= ========= =========
Weighted average common shares
outstanding - basic 8,414 8,967 9,364 10,987 11,753
======== ======== ========= ========= =========
- diluted 8,686 8,967 9,364 10,987 11.753
======== ======== ========= ========= =========
Balance Sheet Data:
Working capital, net $ 22,051 $ 22,943 $ 9,219 $ 16,356 $ 21,294
Total assets 115,887 139,367 136,306 123,930 111,062
Long-term debt, excluding
current portion 21,858 40,869 27,829 29,284 31,537
Total shareholders' investment 75,337 82,932 78,757 65,332 54,495
Supplemental Business Unit Data(2) -
Core Business Segment:
Revenues $113,955 $104,908 $116,002 $120,556 $130,061
Gross profit 28,847 21,376 21,810 26,228 21,378
Pretax operating income(3) 13,291 3,400 2,838 7,840 1,797
Micro Products Business Segment:
Revenues $ 165 $ 358 $ 1,043 $ 1,530 $ 6,680
Gross loss(4) (3,898) (11,043) (13,908) (13,299) (9,308)
Pretax operating loss(3) (6,019) (15,469) (19,377) (18,643) (14,692)
</TABLE>
--------------------
(1) The Company adopted the provisions of SOP 98-5, "Reporting on the Costs
of Start-up Activities" effective August 30, 1997.
(2) Does not include aviation components, a product line sold in 1995
(3) Net of ARPA funding in 1996
(4) Fiscal 1998 and 1999 do not include restructuring costs or impairment
charges
10
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------------------------------------------
PROFILE
Sheldahl creates and distributes thin, flexible laminates and their
derivatives to worldwide markets. The Company's laminates are of two types:
adhesive-based tapes and materials, and its patented adhesiveless material,
Novaclad. From these materials, Sheldahl fabricates high-value derivative
products: single- and double-sided flexible interconnects and assemblies under
the trade names Flexbase, Novaflex HD and Novaflex VHD and substrates for
silicon chip carriers under the trade names ViaArray and ViaThin.
The Company operates in two business segments identified as the
Company's Core Business and Micro Products business. The Core Business segment
consists of flexible laminates and derivative products, principally flexible
interconnect circuits and assemblies. These products are targeted across all
markets served by the Company with the automotive market generating 57.6% of
fiscal 2000 sales for this segment. The Micro Products business segment is a
developing business that targets the integrated circuit ("IC") industry of the
electronics market. The Company's ViaArray and ViaThin products are marketed and
sold through this segment and are exclusively reflected in the Company's datacom
market sales.
The Company's manufacturing and assembly sites with their related
assets are used to manufacture specific product offering of the Company
regardless of business segment. For instance, the Longmont facility today
contributes to the manufacture of all Novaclad-based products. These products,
including Novaflex HD and VHD, are sold through the Core Business and ViaThin
and ViaArray is sold through Micro Products.
11
<PAGE> 12
BACKGROUND
The Company's business strategy is focused to achieve leadership as a
creator and distributor of flexible laminates and their derivative to the world
market based on the Company's core materials technologies. Management believes
that Sheldahl's leading technology products serve the electronic interface
between the function of electronic-based products and their integrated circuit.
The Company targets specific OEM in the datacom and automotive markets in the
drive to create electronic based products that require increased functionality.
The Company's strategy initially focused on the automotive electronics
market and has achieved a substantial market position with sales of $78.6
million in fiscal 2000. In 1992 the Company patented its Novaclad
high-performance adhesiveless flexible laminate targeted at the datacom market.
The features of Novaclad allow circuitry designers to increase circuit density
for IC packaging and other interconnect solutions. Over the past five years, the
Company has introduced high performance products based on this proprietary thin
film laminate technology: ViaArray and ViaThin (high-density substrates).
ViaArray, a higher-value form of Novaclad, has predrilled small holes (vias)
that allow printed circuit manufacturers to produce interconnects to meet the
changing need of the market. The Company uses ViaArray to manufacture
chip-carrier substrates (ViaThin) primarily for IC packages. These
Novaclad-based products provide substantial benefits compared to traditional
flexible circuits, including the capability for very fine circuit traces (down
to 1 mil, or .001 inch) as well as greater heat tolerance and dissipation. The
Company has designed these products to enable IC manufacturers to package future
generations of ICs economically by attaching the silicon die to ViaThin or
high-density substrates manufactured by other circuitry manufacturers using the
Company's Novaclad or ViaArray products. As ICs are becoming increasingly
powerful, they produce more heat and require a greater number of connections to
attach the silicon die, placing substantially greater demands on IC packaging
materials. These products support the industry's drive for increasing functional
performance at a decreasing cost per function. Additionally, Novaclad is used to
manufacture the Company's Novaflex VHD and Novaclad HD and product lines. The
Novaclad-based family of products accounted for $53.3 million, or 39.0% of the
Company's net sales in fiscal 2000.
As of September 1, 2000, the Company had invested approximately $69.8
million in an advanced new production facility in Longmont, Colorado to produce
its Novaclad family of products in commercial volumes. Changes in the product
characteristics of high density substrates relating to precious metal plating,
solder mask overcoat and testing, plus the installation of assembly equipment
not originally anticipated, significantly increased the original investment to
bring the Longmont facility on line. As of September 1, 2000, the net book value
of the Longmont facility is approximately $30.3 million.
The Company originally expected to commence production in the Longmont
facility in April 1996. However, the realization of full volume production was
delayed, initially due to late deliveries of certain production equipment as a
result of financial difficulties of a supplier, Micro Plating Systems, Inc., and
in the last few years due to a longer than anticipated installation period and a
far more rigorous and lengthy process qualification and product acceptance
(validation) by the Company's customers and their customers. During this lengthy
qualification period, the Company has been working with leading customers,
including five original equipment manufacturers and seven package assemblers in
the design, manufacture, assembly and qualification of both ball-grid array and
chip scale packages. As of September 1, 2000, the Company is in production for
ViaThin products for three OEM customers. During the second half of fiscal 2000,
shipments to these customers increased significantly. The adverse financial
impact with respect to developing the Micro Products business has been
significant. In fiscal 2000, the Micro Products business resulted in a pretax
loss of $14.7 million as compared with a $18.6 million and $19.4 million loss in
1999 and 1998, respectively. Expected increases in efficient volume production
and related sales revenue will lead to continued improvements in pre-tax
results. As of September 1, 2000, the Longmont facility is operating at
approximately 30% of stated overall production capacity with projected breakeven
at 40% to 60% of factory utilization or approximately $25 -29 million of annual
revenue of ViaThin and supporting production of Novaflex HD and VHD products.
Breakeven volume at Longmont is not expected until the second half of fiscal
2001, at the earliest.
12
<PAGE> 13
RECENT DEVELOPMENTS
Summary
On November 10, 2000, Sheldahl announced that it had entered into
various agreements for a series of transactions (the "Transactions") that if
consummated will result in an issuance of Sheldahl's securities that will both
result in a change of control of Sheldahl and will be equal to more than 20% of
Sheldahl's common stock currently outstanding. Under the Rules of the Nasdaq
Stock Market, consummation of the Transactions would require either shareholder
approval or an exception therefrom. If Sheldahl were to seek shareholder
approval for the Transactions, Sheldahl estimates that a shareholder meeting for
such would occur in early March 2001. Given Sheldahl's current financial
condition, Sheldahl believes that its financial viability would be seriously
jeopardized if it were to seek shareholder approval of the Transactions. For
that reason, Sheldahl's Audit Committee of its Board of Directors determined
that Sheldahl should apply to Nasdaq to seek an exception to its shareholder
approval requirement. On November 22, 2000, after having filed such application,
Sheldahl was notified by Nasdaq that it had been granted the exception and could
consummate the Transactions provided that Sheldahl mails to all of its
shareholders, not later than ten days before completion of the Transactions, a
letter alerting the shareholders to Sheldahl's omission to seek shareholder
approval that would otherwise be required and indicating that Sheldahl's Audit
Committee had expressly approved the exception (the "Nasdaq Shareholder
Notice"). Sheldahl believes that it will mail such notice on or before December
4, 2000. A summary of the Transactions is provided below.
Merger
On November 10, 2000, Sheldahl ("Sheldahl" or the "Company") announced
it will acquire all of the outstanding securities of International Flex
Technologies, Inc. ("IFT") for approximately 7.6 million shares of Sheldahl's
common stock, $.25 par value ("Common Stock") under the terms of a definitive
merger agreement (the "Merger Agreement") by and among Sheldahl, IFT West
Acquisition Company, a newly formed subsidiary of Sheldahl ("West"),
International Flex Holdings, Inc., the sole shareholder and operating company of
IFT ("Holdings"), and the stockholders of Holdings (the "Stockholders"). Under
the terms of the Merger Agreement, West will merge with and into Holdings, with
Holdings surviving and becoming a wholly-owned subsidiary of Sheldahl (the
"Merger"). After the Merger, Sheldahl will own all of the outstanding shares of
IFT. As consideration for the Merger, holders of outstanding shares of Holdings'
common stock, Class A Stock, Class B Stock and Series A Preferred Stock will
receive shares of Sheldahl Common Stock. Holdings' option holders and warrant
holder will receive equivalent options and a warrant to purchase shares of
Sheldahl Common Stock. The total number of shares of Sheldahl Common Stock to be
issued, including shares to be issued upon exercise of options and warrants,
will be approximately 7.6 million.
Under the terms of the Merger Agreement, each party's obligations to
close the Merger are conditioned upon customary closing conditions, as well as
the following:
o closing of the Common Stock and Series G Investment (described
below)
o closing of the Subordinated Notes and Warrant Purchase Investment
(described below)
o shareholder approval of the transactions or the receipt of an
exception therefrom as may be granted by the Nasdaq Stock Market
("Nasdaq")
o receipt of approval for the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1930, as amended
o execution of the Governance Agreement (described below)
o execution of the Registration Rights Agreement
o amendment by Sheldahl of its Rights Agreement
o appointment of a Chief Executive Officer of Sheldahl acceptable to
IFT
o there being no material adverse effect on (i) the business of
either Sheldahl, Holdings or their respective subsidiaries, taken
as a whole, and (ii) the business, financial condition or
prospects of Sheldahl's Micro Products business taken alone
Because Sheldahl has requested and received an exception to Nasdaq's requirement
to seek shareholder approval for the Transactions, assuming all other conditions
contained in the Merger Agreement have been met, closing of the Merger will
occur on the first business day that is ten days after the date of mailing of
the Nasdaq Shareholder Notice.
13
<PAGE> 14
Common Stock and Series G Investment
Concurrent with entering into the Merger Agreement, Sheldahl executed a
stock purchase agreement (the "Stock Purchase Agreement") by and among Sheldahl,
and three accredited investors including Morgenthaler Venture Partners V, L.P.
("Morgenthaler V"), and Ampersand IV Limited Partnership and Ampersand IV
Companion Fund Limited Partnership (collectively the "Ampersand Funds"). Under
the terms of the Stock Purchase Agreement, Morgenthaler V and the Ampersand
Funds (the "Investors") will collectively invest an aggregate of $25.0 million
in equity capital in exchange for approximately 4.9 million shares of Sheldahl
Common Stock and 11,303 shares of a newly created 11.06% Series G Convertible
Preferred Stock of Sheldahl, par value $1.00 per share (the "Series G Stock"),
such shares being convertible in the aggregate into approximately 4.1 million
shares of Sheldahl Common Stock (the "Equity Investment"). The cash used by the
Investors to complete the Equity Investment will come from the liquid assets of
the Investors.
The Series G Stock is convertible into shares of the Company's Common
Stock at any time. Each holder of the Series G Stock is entitled to convert each
share of Series G 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 approximately $2.77 per share and is subject to adjustment from
time-to-time under certain customary anti-dilution provisions. The Series G
Stock is entitled to 11.06% dividends, payable annually. For a period of
twenty-four (24) months from the date of issuance, Sheldahl is obligated to pay
the dividend in shares of its Common Stock at a Dividend Conversion Price of
approximately $3.54, as adjusted from time-to-time under customary anti-dilution
provisions. Thereafter, Sheldahl may pay the dividend in shares of its Common
Stock, or, at its option, cash. One year of dividends at the Dividend Conversion
Price would equate to approximately 353,000 shares.
The Series G Stock is subordinate to the Company's Series D, E and F
Convertible Preferred Stock with regard to payment of dividends and proceeds
upon liquidation. Upon a liquidation of all of the assets of Sheldahl, the
holders of the Series G Stock would be entitled to receive $25.0 million plus
any accrued but unpaid dividends less the market value of the shares of Common
Stock purchased under the Stock Purchase Agreement and retained by the holders
of the Series G Stock following the adoption of a plan of liquidation, provided
that any shares of Common Stock purchased under the Stock Purchase Agreement may
be turned into the Company for cancellation at the election of the holders of
the Series G Stock. The Company may require holders of the Series G Stock to
convert to Common Stock provided that the Company's Common Stock trades at
certain pre-set price levels.
Under the terms of the Stock Purchase Agreement, each party's
obligations to close the Investment are conditioned upon customary closing
conditions, as well as the following:
o closing of the Merger (described above)
o closing of the Subordinated Notes and Warrant Purchase Investment
(described below)
o receipt of all required approvals and consents for the Equity
Investment
o shareholder approval of the transactions or the receipt of an
exception therefrom as may be granted by Nasdaq
o receipt of approval for the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1930, as amended
o execution of the Governance Agreement (described below)
o execution of the Registration Rights Agreement
o amendment by Sheldahl of its Rights Agreement
o appointment of a Chief Executive Officer of Sheldahl reasonably
acceptable to the Investors
o there being no material adverse effect on (i) the business of
Sheldahl, its subsidiaries and Holdings, taken as a whole, and
(ii) the business, financial condition or prospects of Sheldahl's
Micro Products business taken alone
Because Sheldahl has requested and received an exception to Nasdaq's requirement
to seek shareholder approval for the Transactions, assuming all other conditions
contained in the Stock Purchase Agreement have been met, closing of the Equity
Investment will occur on the first business day that is ten days after the date
of mailing of the Nasdaq Shareholder Notice.
14
<PAGE> 15
Subordinated Notes and Warrant Purchase Investment
Concurrent with entering into the Merger Agreement and Stock Purchase
Agreement, Sheldahl executed a subordinated notes and warrant purchase agreement
(the "Debt Agreement") by and among Sheldahl, Morgenthaler V, the Ampersand
Funds and Molex Incorporated, Sheldahl's largest shareholder ("Molex"). Under
the terms of the Debt Agreement, Morgenthaler V, the Ampersand Funds and Molex
(the "Purchasers") will purchase up to $15.0 million of 12% Senior Subordinated
Notes ("Notes") and related warrants (the "Warrants") (the "Debt Investment").
Initially, the Purchasers will collectively purchase an aggregate of $6.5
million in Notes and receive Warrants to purchase 988,201 shares of Sheldahl
Common Stock (the "Initial Closing"). During the nine (9) months period after
the Initial Closing, Sheldahl may require up to two subsequent closings of at
least $1.0 million each, up to an additional maximum amount of $8.5 million in
Notes and Warrants to purchase an additional 1,292,265 shares of Sheldahl Common
Stock ("Subsequent Closings"). Sheldahl may only drawn down on this facility
twice. If Sheldahl makes no additional draws, Molex has the right to require the
sale to it of up to $2,127,877 of Notes and Warrants to purchase 323,503 shares.
The Warrants issuable under the Debt Agreement are exercisable at $.01 per share
and are exercisable for seven years from the date of issuance. Under the terms
of the Debt Agreement, Sheldahl must also use its reasonable best efforts to
obtain the consent of its senior lender, Wells Fargo Bank, N.A., and any other
lender that has a security interest in assets of the Company to permit the
Purchasers to take a security interest in such assets. The cash used by the
Purchasers to complete the Debt Investment will come from the liquid assets of
the Purchasers.
Under the terms of the Debt Agreement, each party's obligations are
conditioned upon customary closing conditions, as well as the following:
o closing of the Merger (described above)
o closing of the Common Stock and Series G Investment (described
above)
o receipt of all required approvals and consents for the Debt
Investment
o execution of an Intercreditor Agreement and, if applicable, a
Security Agreement and Deed of Trust
o receipt of approval for the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1930, as amended
o execution of the Registration Rights Agreement
o amendment by Sheldahl of its Rights Agreement
o there being no material adverse effect on (i) the business of
Sheldahl, its subsidiaries and Holdings, taken as a whole, and
(ii) the business, financial condition or prospects of Sheldahl's
Micro Products business taken alone
Once all conditions contained in the Debt Agreement have been met, closing will
occur immediately. The Debt Agreement may be terminated in the event the Merger
Agreement or the Stock Purchase Agreement is terminated.
Governance Agreement
At the time of closing of the Merger, the Equity Investment and the
Debt Investment (collectively, the "Transactions"), Sheldahl will enter into a
governance agreement by and among it and Morgenthaler V, the Ampersand Funds and
Sound Beach Technology Partners, LLC, a former IFT stockholder ("Sound Beach")
(collectively, the "Parties") establishing the terms and conditions regarding
(i) future purchases and sales of the Company's securities, and (ii) the
Parties' relationship with the Company (the "Governance Agreement"). Molex will
not be a party to the Governance Agreement.
Under the terms of the Governance Agreement, until the third
anniversary of the closing of the Transactions, the Parties and their respective
affiliates are restricted from beneficially owning any Sheldahl securities in
excess of that issued or issuable (i) in the Merger, (ii) under the Stock
Purchase Agreement, (iii) upon conversion of the Series G Stock, (iv) issuable
in respect of dividends due on the Series G Stock, and (v) upon exercise of the
Warrants issued under the Debt Agreement. The Parties are also restricted from
doing a business combination or proxy solicitation during the same period. This
restriction does not include, however, acquiring securities directly from the
Company or making business combination or tender offer proposals to the Company
or conducting a proxy solicitation in response to the same made by third
parties.
Also under the terms of the Governance Agreement, for one year from the
date of the closing of the Transactions, the Parties are restricted from
transferring any of their shares of Common Stock, Series G Stock and
15
<PAGE> 16
Warrants, other than to their Affiliates or Associates. At any time prior to the
third anniversary of the closing of the Transactions, any transferees of such
parties, other than a partner or a member of a Party, must become a signatory to
the Governance Agreement. After one year, any of the Parties that is an
investment fund may distribute its shares to its partners and members.
The terms of the Governance Agreement also require that the initial
composition of Board of Directors of Sheldahl after the closing of the
Transactions is established to be comprised of (i) three continuing directors
from Sheldahl (each a "Continuing Director"), (ii) the director appointed by
Molex (the "Molex Director"), and (iii) three directors nominated by
Morgenthaler V, the Ampersand Funds and Sound Beach. The number of directors
which may be nominated by Morgenthaler V, the Ampersand Funds and Sound Beach
will be reduced as their collective ownership in the Company is reduced. The
terms of the Governance Agreement require that the identity of directors to
stand for election by the Company's shareholders or to fill vacancies on the
Board of Directors be determined by a nominating committee of the Board of
Directors (the "Nominating Committee"). For the first regular meeting of the
Company's shareholders subsequent to the closing of the Transactions, the
Nominating Committee is to be comprised of one director appointed by
Morgenthaler V, the Ampersand Funds and Sound Beach together, one Continuing
Director and the Molex Director.
In the event the Company desires to enter into a transaction with any
of the holders of the Series G Stock or their affiliates, the Governance
Agreement requires that such transaction must be approved by a majority vote of
the Board of Directors, excluding any Series G Director who is a party to or
otherwise has an interest in the transaction.
Without the consent of Morgenthaler V and the Ampersand Funds, the
Company may not authorize or enter into any agreement relating to a merger, sale
or lease of substantially all of the Company's assets, set the number of
directors at a number other than seven (7), subject to an amendment to the
Company's Bylaws to reduce the current number of directors from nine (9) to
seven (7), or repurchase or redeem any equity securities of the Company, as long
as such Party continues to hold at least 15% of the shares of Common Stock
issued or issuable to it pursuant to the Transactions.
Post Transactions Ownership
After completion of all the Transactions, Morgenthaler V, the other
Stockholders of Holdings and the Ampersand Funds will collectively hold
securities representing ownership of approximately 49% of Sheldahl on a fully
diluted basis (assuming conversion of all Sheldahl convertible securities). In
addition, Molex will increase its ownership of Sheldahl securities and, after
participation in these transactions and assuming Molex makes its maximum
investment permissible under the Debt Agreement, will own approximately 10% of
Sheldahl on a fully diluted basis.
On a beneficial basis, calculated in conformance with Rule 13d-1 of the
Securities Exchange Act of 1934, as amended, the parties will have ownership as
follows:
o Morgenthaler V will own or have the right to acquire 11,999,886
shares of Sheldahl Common Stock, representing 43.40% of Sheldahl.
o The Ampersand Funds will own or have the right to acquire
3,111,796 shares of Sheldahl Common Stock, representing 12.21% of
Sheldahl.
o Molex will own or have the right to acquire 3,827,069 shares of
Sheldahl Common Stock, representing 14.10% of Sheldahl.
o Sound Beach will own or have the right to acquire 2,096,213 shares
of Sheldahl Common Stock, representing 8.79% of Sheldahl.
o Other former Stockholders of Holdings will collectively own or
have the right to acquire 747,206 shares of Sheldahl Common Stock,
representing 3.09% of Sheldahl.
Bank Agreement Waiver. The Company's 1998 three-year credit agreement
with a group of lenders lead by Wells Fargo Bank, N.A., as agent, consists of a
working capital revolver of $25 million based on levels of working capital and a
term facility of $16 million based on the Company's fixed assets. The term
facility of $16 million has an outstanding balance as of the end of the fiscal
year of $11.6 million with monthly repayments of $205,000 through December 2001.
On November 8, 1999, the Company's borrowing available under the working
16
<PAGE> 17
capital portion of its 1998 credit facility was reduced by $2.5 million. This
change was initiated by the Company's lenders in conjunction with a waiver
issued by the lenders related to the Company's failure to achieve certain
financial ratios and the Company's current level of borrowing under the working
capital revolver related to its events of non-compliance. Under the $25 million
working capital revolver, the Company has the ability to borrow based on the
levels of accounts receivable and inventory, which establishes a borrowing base.
Effective November 1999, in connection with the waiving of covenant
non-compliance, the Company's lenders increased the interest rate to prime plus
2% and instituted a $2.5 million liquidity reserve. In June 2000, the Company's
lenders agreed to amend the credit agreement to extend its maturity date to
December 1, 2001 and to reduced the liquidity reserve from $2.5 million to $1.5
million. As of September 1, 2000, the amount available to borrow on the revolver
was approximately $8.2 million, which reflects the $1.5 million liquidity
reserve. In November 2000, in connection with the Company's executing the
Transaction documents described above, the Company's lenders removed the $1.5
million liquidity reserve. Actual borrowing under this working capital revolver
as of November 24, 2000 was $15.0 million and the amount available to borrow was
$3.2 million (see Capital Reserves). The applicable interest rate on the loan
effective September 1, 2000 and August 27, 1999 was 11.5% and 8.25%,
respectively.
RESULTS OF OPERATIONS
Fiscal 2000 was a challenging and difficult year for the Company. The
Company's customers were hesitant to place new programs with the Company due to
their concern over the Company's financial viability. In addition, the Company's
suppliers tightened credit terms for similar reasons. Overall, the Company
experienced $14.7 million in sales growth during fiscal 2000, reflected in both
the Core and Micro Products Businesses. The Novaflex HD products represented
$8.8 million of the sales growth in fiscal 2000. The Company's Micro Products
segment continued to develop a market position for ViaThin with total sales
growth of $5.2 million and a production backlog of over $3.9 million as of
September 1, 2000, with production orders from Vitesse, Texas Instruments and
Altera and prototype orders from other targeted OEM and assemblers.
The following table shows the percentage of net sales represented by
certain line items from the Company's consolidated statements of operations
excluding the aforementioned restructuring asset impairment and cumulative
effect of change in method of accounting for the periods indicated.
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------
September 1, August 27, August 28,
2000 1999 1998
------------ ---------- ----------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 91.2% 89.4% 93.2%
------ ------ ------
Gross profit 8.8% 10.6% 6.8%
------ ------ ------
Expenses:
Sales and marketing 6.3% 7.9% 8.4%
General and administrative 6.7% 7.2% 7.0%
Research and development 2.3% 2.3% 3.3%
Interest 3.0% 2.0% 2.2%
------ ------ ------
Total expenses 18.3% 19.4% 20.9%
------ ------ ------
Loss before income taxes,
restructuring costs, impairment charges,
and cumulative effect of change in method
of accounting (9.5%) (8.8%) (14.1%)
====== ====== ======
</TABLE>
For fiscal 2000, the Company's Core Business sales increased $9.5
million, or 7.8%, over the prior year due to growth in sales of the Company's
Novaflex HD and VHD product lines which accounted for $46.6 million of the Core
Business sales compared to $39.3 million and $23.5 million in fiscal years 1999
and 1998, respectively. The sales gains in the Novaflex family of products were
offset slightly by sales declines of $0.7 million in standard Flexbase products.
Laminate materials sales increased $2.8 million to $32.3 million compared to
$29.5 million and $28.2 million for fiscal years 1999 and 1998, respectively.
The Company's Micro Products segment grew $5.2
17
<PAGE> 18
million over the prior year sales of $1.5 million, with 43.3 % of the sales
revenue being shipped in the Company's fourth quarter.
The table below shows, for the period indicated, the Company's sales by business
unit (in thousands):
<TABLE>
<CAPTION>
September 1, 2000 August 27, 1999 August 28, 1998
------------------- ------------------ ------------------
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Core Business $130,061 95.1% $120,556 98.7% $116,002 99.1%
Micro Products 6,680 4.9% 1,530 1.3% 1,043 .9%
-------- ------ -------- ------ -------- ------
Net sales $136,741 100.0% $122,086 100.0% $117,045 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
The table below shows, for the periods indicated, the Company's sales
to various markets (in thousands):
<TABLE>
<CAPTION>
September 1, 2000 August 27, 1999 August 28, 1998
------------------- ------------------ ------------------
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Automotive 78,571 57.6% $ 82,119 67.3% $ 80,365 68.7%
Datacom 40,377 29.5% 20,521 16.8% 15,463 13.2%
Aerospace/Defense 7,362 5.4% 8,441 6.9% 10,030 8.5%
Industrial 6,941 5.0% 7,098 5.8% 7,451 6.4%
Consumer 3,490 2.5% 3,907 3.2% 3,736 3.2%
-------- ------ -------- ------ -------- -------
Net sales $136,741 100.0% $122,086 100.0% $117,045 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
Cost of Sales/Gross Profit. During fiscal 2000, gross profit decreased
$0.9 million reflecting the impact of increased sales revenue to the Datacom
markets which carried with them lower gross margins, lower than anticipated unit
cost reductions and accelerated price reductions. Total gross profit as a
percent of sales decreased to 8.8% in fiscal 2000 compared to 10.6% and 6.8% in
fiscal years 1999 and 1998, respectively. Core Business gross profit decreased
by $4.8 million to $21.4 million, or 15.7% of sales, compared to 21.5% and 18.8%
in fiscal years 1999 and 1998, respectively.
The Micro Products segment fiscal 2000 gross profit improved to a
negative $9.3 million versus a negative $13.3 million in fiscal 1999. Added
sales revenue of $5.2 million, which absorbed an increased share of fixed
operating expenses of the Company's Longmont facility, improved gross profit.
Gross profit in fiscal 1998 was a negative $13.9 million reflecting less fixed
costs in support of the Micro Products segment.
Sales and Marketing Expenses. Sales and marketing expenses decreased
$1.0 million, or 10.3%, in fiscal 2000 after a decrease of $195,000, or 2%, in
fiscal 1999. The Core Business sales and marketing expense was $7.3 million,
$8.0 million and $8.1 million in fiscal years 2000, 1999 and 1998, respectively,
while Micro Products sales and marketing expenses were $1.4 million, $1.7
million and $1.8 million for the same respective periods. As a percentage of
total Company net sales, sales and marketing expenses were 6.3% in fiscal 2000,
8% in fiscal 1999 and 8% in fiscal 1998. Fiscal 2000 reductions in sales and
marketing expense reflected lower spending levels for travel and promotional
related activities.
General and Administrative Expenses. General and administrative
expenses increased $0.5 million, or 5.7%, to $9.2 million in fiscal 2000 and
$0.6 million, or 7%, to $8.7 million in fiscal 1999. The Company's general and
administrative expenses increase in fiscal 2000 reflects $0.4 million related to
the Company's strategic alternative actions. In 1999, the increase in general
and administrative expenses was due to depreciation and maintenance expense of
the computer network systems and infrastructure to support the ERP system.
The Company's general and administrative expenses are allocated to the
business segments based on a combination of assets and personnel employed. Core
Business general and administrative expenses were $7.0 million, $6.5 million and
$6.2 million for fiscal years 2000, 1999 and 1998, respectively, while Micro
Products
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<PAGE> 19
general and administrative expenses were $2.1 million, $2.2 million and $2.0
million for the same respective periods.
Research and Development Expenses. Gross research and development
expenses decreased $0.1 million or 4.0%, in fiscal 2000 to $3.1 million. Direct
external funding applied to research and development expenses were $0, $400,000
and $227,000 in fiscal years 2000, 1999 and 1998. This resulted in net research
and development expenses of $3.1 million, $2.8 million and $3.9 million in
fiscal years 2000, 1999 and 1998, respectively.
The table below shows, for the periods indicated, the Company's
research and development expenses (in thousands):
Fiscal Years Ended
----------------------------------------------
September 1, August 27, August 28,
2000 1999 1998
------------ ---------- ----------
Gross expense $3,083 $ 3,225 $ 4,108
External funding - (400) (227)
------ ------- -------
Net expense $3,083 $ 2,825 $ 3,881
====== ======= =======
Percent of sales 2.3% 2.3% 3.3%
R&D spending continued flat for the year. Net expenses increased as
there were no offsets from external funding as in the previous year. The Company
continued to emphasize its R&D efforts on short term issues related to improving
yields out of the Micro Products business and increased throughput during the
beginning of the year. Other R&D efforts centered around process refinement for
Micro Products, with product improvement and cost reduction as the goal. In
addition, the Company focused its R&D efforts in the Core Business on activities
to support its emerging business in Accentia(TM) display materials.
Fiscal 1999's decline in research and development expense directly
relates to the shift of technical talent to support production efforts and
attrition connected with the fiscal 1998 early retirement program. Further,
expenses associated with travel and material were also reduced. The external
funding of the research and development efforts in fiscal 1999 were related to
product and process development for circuitry targeted for the Company's joint
venture with Molex.
Net research and development expenses which is essentially directly
incurred to support each business were $2.1 million, $1.8 million and $3.6
million for the Core Business in fiscal years 2000, 1999 and 1998, respectively,
and $1.0 million, $1.0 million and $0.3 million for Micro Products for the same
respective periods.
Interest Expense. Gross interest expense increased to $4.1 million in
fiscal 2000 from $3.5 million in fiscal 1999 and $4.5 million in fiscal 1998, as
interest rates increased and the Company paid penalties for failing to meet its
bank covenants. Capitalized interest decreased to $0.1 million in fiscal 2000 as
compared to $1.0 million in fiscal 1999 and $1.9 million in fiscal 1998. The
Company anticipates higher capitalized interest in fiscal 2001 as it increases
its overall capital spending by approximately $9.6 million.
The following shows a breakdown of interest expense for the fiscal
years indicated (in thousands):
Fiscal Years Ended
----------------------------------------------
September 1, August 27, August 28,
2000 1999 1998
------------ ---------- ----------
Gross interest $4,182 $ 3,489 $ 4,450
Capitalized interest (122) (990) (1,903)
------ ------- -------
Net expense $4,060 $ 2,499 $ 2,547
====== ======= =======
Percent of sales 3.0% 2.0% 2.2%
19
<PAGE> 20
Restructuring Costs. In February 1999, the Company recorded a charge of
$3.1 million for separation costs incurred in reducing its salaried work force.
This charge was increased by $0.5 million in August 1999. The restructuring
costs provide for approximately $2.0 million for severance and early retirement
salary costs and approximately $1.6 million for medical, dental and other
benefits being provided to the affected individuals. Approximately 43 people
were affected by this action.
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 three years ago. Due to significant productivity benefits resulting
from the initiative, the Company has reduced the size of its salaried workforce.
The 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. Approximately 73 people 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 people were affected by this action.
As of September 1, 2000, approximately $5.3 million had been charged to
the Company's restructuring reserves related to severance and early retirement
salary costs, approximately $1.4 million related to medical, dental and other
benefits and approximately $2.4 million for equipment disposal and other costs
and by November 1, 2000, 312 employees have terminated employment with the
Company related to the fiscal 1998 and 1999 restructuring actions. The remaining
severance and early retirement salary costs are anticipated to be paid through
fiscal 2002, and the remaining medical, dental and other benefits are
anticipated to be paid through fiscal 2003.
Impairment Charges. In August 1999 and May 1998, non-cash impairment
charges of $7.6 million and $3.3 million were recorded against the Company's
statement of operations. These charges relate to equipment located principally
at the Company's Longmont, Colorado facility and certain computer software
which, based upon analysis by management and anticipated production processes,
is not expected to contribute to the Company's future cash flows.
Income Taxes. In May 1998, based upon restructuring charges, write-offs
and continued losses at the Company's Longmont, Colorado facility, management
provided a valuation allowance for its net deferred tax assets. This resulted in
a $3.0 million charge to income during fiscal 1998. Since that time, the Company
has not and will not reflect in immediate future periods any tax provision or
benefit until such net deferred tax assets are offset by reported pretax profits
or that the degree of certainty increases as to the future profit performance of
the Company to allow for the reversal of the valuation allowance.
Change in Method of Accounting. During fiscal 1998, the Company adopted
Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities,"
which requires the expensing of these items as incurred, versus capitalizing and
expensing them over a period of time. Start-up activities are broadly defined
and include one-time activities related to opening a new facility, introducing a
new product or service, conducting business in a new territory, conducting
business with a new class of customer or beneficiary, initiating a new process
in an existing facility, commencing some new operation, and organizing a new
entity. The adoption of this statement resulted in a cumulative effect of a
change in method of accounting of approximately $5.2 million, primarily related
to costs capitalized by the Company from its Longmont, Colorado facility. The
adoption of this statement was applied retroactively to the beginning of fiscal
1998, and the Company's first and second quarters have been restated to reflect
this change in method of accounting, in accordance with the provisions of SOP
98-5 and APB 20.
Financial Condition. The Company's credit agreement with a group of its
two remaining lenders lead by Wells Fargo, N.A., as agent, consists of a working
capital revolver of $25 million based on levels of working capital and a term
facility of $16 million based on the Company's fixed assets. The term facility
of $16 million has an
20
<PAGE> 21
outstanding balance as of the end of the fiscal year of $11.6 million with
monthly repayments of $205,000 through December 2001. In November 1999, the
Company's borrowing available under the working capital portion of its 1998
credit facility was reduced. This change was initiated by the Company's lenders
in conjunction with a waiver issued by the lenders related to the Company's
failure to achieve certain financial ratios and the Company's current level of
borrowing under the working capital revolver related to its events of
non-compliance. Under the $25 million working capital revolver, the Company has
the ability to borrow based on the levels of accounts receivable and inventory,
which establishes a borrowing base. Effective November 1999, in connection with
the waiving of covenant non-compliance, the Company's lenders increased the
interest rate to prime plus 2% and required the Company to establish a liquidity
reserve of $2.5 million. In June 2000, the Company's lenders agreed to amend the
credit agreement to extend its maturity date to December 1, 2001 and to reduce
the liquity reserve from $2.5 million to $1.5 million. As of September 1, 2000,
the amount available to borrow on the revolver was approximately $8.2 million,
which reflects the $1.5 million liquidity reserve. In November 2000, in
connection with the Company's execution of the Transaction documents described
in "Recent Developments" above, the Company's lenders removed the $1.5 million
liquidity reserve. Actual borrowing under this working capital revolver as of
November 24, 2000 was $15.0 million and the amount available to borrow was $3.2
million (see Capital Reserves). The applicable interest rate on the loan
effective September 1, 2000 and August 27, 1999 was 11.5% and 8.25%,
respectively.
In November 1999, the Company refinanced its outstanding secured real
estate loan with an insurance company. The new $4.3 million, ten-year secured
real estate mortgage carries an interest rate of 8.53% and requires the Company
to meet certain reporting covenants. Annual principal payments and interest
under the new secured loan are $417,000 versus $1.3 million on the prior loan.
Concurrent with the closing of this refinancing, the Company fully satisfied the
$3.6 million secured real estate loan plus accrued and unpaid interest that was
outstanding to the insurance company. The net effect of this refinancing
enhanced short-term liquidity by $0.6 million by reducing fiscal 2000 debt
payments by approximately $0.5 million and interest payments by approximately
$0.1 million.
On January 11, 2000, the Company issued 1,800 shares of Series F
Convertible Preferred Stock with a total stated value of $1,800,000. This Series
F preferred stock earns dividends at a rate of 5%, payable annually, and is
convertible to nearly 330,000 shares at an initial rate of $5.46 per share. The
purchasers of the Series F preferred stock were also issued 55,800 warrants to
purchase the Company's Common Stock at a price of $5.46 per share. These
warrants expire in January 2005. Net proceeds from the Series F preferred stock
were approximately $1,800,000. As of September 1, 2000, 1,800 shares of Series F
preferred stock were outstanding. No dividends were declared during fiscal 2000.
Accrued dividends of approximately $56,000 are included in accounts payable in
the accompanying 2000 consolidated balance sheet.
During late February and early March of 1999, the Company issued $8.5
million of Series E Preferred Stock in a private placement. This new equity,
with the agreement of the Company's lenders, satisfied the then existing
covenant, which required the Company to raise additional equity capital during
fiscal 1999. These equity proceeds were used to reduce current borrowing levels
providing needed liquidity. This Series E Preferred Stock earns dividends at a
rate of 5%, payable annually, and is convertible to nearly 1.4 million shares at
an initial rate of $5.46. The holders of the Series E Preferred Stock were also
issued 85,600 warrants to purchase the Company's common stock at a price of
$7.8125 per share. These warrants expire in February 2004. Net proceeds from the
Series E Preferred Stock were approximately $8,461,000. As of September 1, 2000,
8,060 shares of Series E Preferred Stock were outstanding. Dividends of $403,000
were declared during fiscal 2000 and paid in shares of the Company's common
stock. Accrued dividends of approximately $202,000 are included in accounts
payable in the accompanying 2000 consolidated balance sheet.
On July 30, 1998, the Company issued 32,917 shares of Series D
Convertible Preferred Stock with a total stated value of $32,917,000. This
Series D Preferred Stock earns dividends at a rate of 5%, payable annually, and
is convertible to nearly 5.4 million shares at an initial rate of $6.15 per
share. The holders of the Series D Preferred Stock were also issued 329,170
warrants to purchase the Company's common stock at a price of $7.6875 per share.
These warrants expire in July 2001. Net proceeds from the Series D Preferred
Stock were $32,409,000. As of September 1, 2000, 32,353 shares of Series D
Preferred Stock were outstanding. Due to the issuance of common stock in respect
of dividends paid on the Company's securities junior to the Series D Preferred
Stock, in accordance with the terms of the Series D Preferred Stock, the
conversion and dividend payment rate of the Series D has been adjusted to $6.12
per share. Dividends of $1,617,650 were declared during fiscal 2000 and paid in
shares of the
21
<PAGE> 22
Company's common stock. Accrued dividends of approximately $135,000 are included
in accounts payable in the accompanying 2000 consolidated balance sheet.
In August 1997, the Company issued to a group of investors (the
"Investors") 15,000 shares of Series B Convertible Preferred Stock (the "Series
B Preferred Stock") resulting in gross proceeds to the Company of $15,000,000
and warrants to purchase common stock at a price of $27.65 per share. The Board
of Directors authorized the sale of the Series B Preferred Stock in order to
raise proceeds, which were applied principally towards the development of the
Longmont Facility for the Company's Micro Products Business. During fiscal years
1998 and 1999, the Investors converted most of their shares of Series B
Preferred Stock. In February of 2000, the Company received a final conversion
notice for $172,870 in stated value of Series B Preferred Stock. In accordance
with the terms of the Series B Preferred Stock, the Company issued 36,148 shares
of Common Stock (including accrued dividends) at a conversion price of $4.74 per
share of common stock in conversion of such Series B Preferred Stock in February
2000. As of September 1, 2000, all of the shares of the Series B Preferred Stock
had been converted or redeemed and all of the warrants have expired.
Capital Reserves. Since fiscal 1995, the Company has invested
significantly in new plant and equipment providing manufacturing capacity to
deliver its patented Novaclad(R)-based line of products to both existing and new
customers. This included building and equipping a facility in Longmont,
Colorado, to manufacture substrates for IC packages. These capital expenditures
were funded by a series of equity offerings commencing in June 1994 through
February 2000, raising $102.3 million. The longer than expected period of time
to achieve full product and market acceptance has resulted in greater losses
generated from an under-utilized manufacturing facility and its supporting
workforce. At the Longmont facility, the Company manufactures ViaArray(R) and
ViaThin(R) - both Novaclad-based substrates for IC packages, plus the Company's
Novaflex(R) VHD product targeted at the high-end disk drive market. Sheldahl
received its initial volume order for the VHD product line in October 1998. The
Company's fiscal 2000 sales volume from Novaflex VHD was $4.1 million.
Additionally, the base material for the Company's Novaflex HD is also produced
in the Longmont facility. For fiscal 2000, $42.5 million of Novaclad based
product was produced all or in part at the Longmont facility.
As of September 1, 2000, the Longmont facility was operating at
approximately 30% of stated production capacity with projected breakeven at 40%
- 60% of factory utilization or approximately $25 - $29 million of annual
revenue of ViaThin and ViaArray products plus related volume of the Novaflex HD
and VHD product lines. Breakeven volume at the Longmont facility is not expected
until the second half of fiscal 2001 at the earliest. Overall, the Longmont
manufacturing operation is estimated to have between a $5.5 million to $6.0
million negative impact on operating cash flow in fiscal 2001.
During the three-year period ended September 1, 2000, the Company
incurred, principally at its Micro Products operations, cumulative net losses
totaling approximately $75.7 million, including restructuring and other charges
of $27.7 million. During this three-year period, the Company used cash of
approximately $31.2 million supporting capital expenditures and approximately
$9.7 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 $0.9 million in fiscal 2001
compared to $2.7 million and $5.0 million in fiscal 2000 and 1999, respectively.
Fiscal 2001 capital expenditures for the Company are planned at approximately
$12.0 million, compared with $2.4 and $5.5 million in fiscal 2000 and 1999,
respectively. Debt repayments for fiscal 2001 will be $3.5 million including
$2.5 million on the bank term facility and $1.0 million for various capital
lease payments.
The impact of anticipated fiscal 2001 operating losses, tight borrowing
levels pursuant to its debt agreements and the uncertainty of the timing of
sales growth from the Company's Micro Products business places significant
pressure on the cash reserves of the Company. Cash flow projections based on the
Company's operating plan for fiscal 2001 reflect an increased level of cash flow
requirements during the year as working capital expands to support projected
sales growth. The Company believes that the Transactions discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments" will alleviate the Company's cash flow and
liquidity constraints and provide the needed cash flow to continue to fund
normal operations. The inability of the Company to i) consummate the
Transactions described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments" or raise additional
debt or equity of at least $5 million during the first half of fiscal 2001; ii)
execute the sales orders
22
<PAGE> 23
received from the Micro Products business customers; iii) improve operating
results in the Micro Products business; iv) achieve operating performance from
the Company's Core Business above fiscal 2000 levels; v) achieve other cost or
productivity improvements included in the Company's fiscal 2001 budget; and vi)
maintain adequate liquidity to fund normal operations would result in the
Company being out of compliance with certain of its debt covenants thereby
allowing the Company's lenders to require full repayment of the outstanding
borrowings under the Company's credit agreement and/or leave the Company in a
cash reserve position that would require additional capital to fund operations.
These matters raise substantial doubt about the Company's ability to continue as
a going concern. Management has and will continue to implement operational
measures designed to assist the Company in achieving its fiscal 2001 budget and
cash flow objectives. Should any of the matters discussed above ultimately not
occur, management will attempt to take one or all of the following actions: (i)
obtain new equity capital, (ii) issue new debt, and/or (iii) significantly
restructure the Company's operations. However, there can be no assurance that
the Company will be successful in closing the Transactions described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Developments", in achieving its projected operating results
for fiscal 2001, in meeting its quarterly debt covenants during fiscal 2001 or
in its attempt to issue additional debt or to raise additional capital on terms
acceptable to the Company, or in the event of the failure of the foregoing,
successfully take the actions described above.
Net working capital increased to $21.3 million in 2000 from $16.4 and
$9.2 million in 1999 and 1998, respectively. A net increase in the Company's
accounts receivable and inventory of $1.0 million reflect greater sales growth
in the fourth quarter of fiscal 2000 over the same period last year.
Foreign Currency Risk. The Company periodically maintains a limited
exposure to foreign currency risk with smaller programs contracted in British
Sterling, German Marks and French Francs. These contracts and the exchange rate
are reviewed periodically. As of September 1, 2000, the Company has no material
contracts outstanding.
On January 1, 1999, the Euro, the new European currency, initiated
internal commercial use. As of September 1, 2000, none of the Company's sales
order or purchase orders are priced in Euro. However, in order to remain
competitive, the Company anticipates pricing certain contracts in Euro and has
systems in place to support such contracts by converting foreign currency
transactions to six decimal places. When warranted by the size of foreign
currency contracts, the Company will use a variety of hedging techniques,
including financial derivatives, to prudently reduce, but not eliminate, its
exposure to foreign currency fluctuations.
New Accounting Pronouncements. Effective in the year ended August 27,
1999, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 superseded SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and hedging Activities," effective
for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge 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 will adopt SFAS No. 133
at the beginning of fiscal 2001 and does not expect the adoption to materially
impact its results of operations or financial position.
CAUTIONARY STATEMENT
Statements included in this management's discussion and analysis of
financial condition and results of operations, in the letter to shareholders,
elsewhere in this Form 10-K, in the Company's annual report, and in future
23
<PAGE> 24
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases, and oral statements made with the approval of an
authorized executive officer that are not historical, or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Certain risks and
uncertainties could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The following important
factors, among others, in some cases have affected and in the future could
affect the Company's actual financial performance and cause it to differ
materially from that expressed in any forward-looking statement: (i) the
Company's ability to begin full volume production at its Micro Products facility
is dependent upon final qualification by the Company's customers and, in some
cases, their customers, of ViaThin as well as the ability of its production
equipment to produce sufficient quantities of product at acceptable quality
levels; (ii) delays in achieving full volume production at the Micro Products
facility will have a material adverse impact on the Company's results of
operations and liquidity position; (iii) a general downturn in the automotive
market, the Company's principal market, could have a material adverse effect on
the demand for the electronic components supplied by the Company to its
customers; (iv) the Company's ability to continue to make significant capital
expenditures for equipment, expansion of operations, and research and
development is dependent upon funds generated from operations and the
availability of capital from other sources; (v) the extremely competitive
conditions that currently exist in the automotive and datacommunications markets
are expected to continue, including development of new technologies, the
introduction of new products, and the reduction of prices; (vi) the Company
fails to achieve levels of sales growth and operational performance that
sustains sufficient cash flow to operate the business and satisfy existing
covenants with the Company's lenders; and (vii) the completion of the
Transactions described in "Recent Developments" above. The foregoing list should
not be construed as exhaustive and the Company disclaims any obligation
subsequently to revise any forward-looking statements to reflect the events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's Credit and Security Agreement described in Note 3 to the
financial statements as well as in the Management Discussion and Analysis
carries interest rate risk. Amounts borrowed under this Agreement are subject to
interest charges at a rate equal to the lender's prime rate plus 2%, which as of
November 1, 2000 was 11.5%. Should the lenders base rate change, the Company's
interest expense will increase or decrease accordingly. As of September 1, 2000,
the Company had borrowed approximately $25.9 million subject to interest rate
risk. On this amount, a 1% increase in the interest rate would cost the Company
$259,000 in additional gross interest cost on an annual basis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements are listed under Item 14 of this
report. Unaudited quarterly financial data for fiscal 2000 and 1999 is set forth
in Note 14 to the Consolidated Financial Statements included with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
24
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names of the Company's Directors, as of November 15, 2000, their
principal occupations and other information is set forth below, based upon
information furnished to the Company by the Directors.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DIRECTOR
NAME AND AGE AND OTHER DIRECTORSHIPS SINCE
------------ ----------------------- --------
<S> <C> <C>
James E. Donaghy (66) Chairman of the Board of the Company; Chief 1988
Executive Officer of the Company from 1988
until December 1998; prior to 1988, Director
of Planning and Development for Dupont
Electronics, Wilmington, Delaware
(electronics manufacturer).
John G. Kassakian (57) Professor of Electrical Engineering and 1985
Director, Laboratory for Electromagnetic and
Electronic Systems, Massachusetts Institute
of Technology, Cambridge, Massachusetts;
Director of Ault Incorporated and ISO New
England.
Edward L. Lundstrom (50) Chief Executive Officer of the Company since 1999
January 1999; President of the Company since
September 1997; since 1976, held various
management positions with the Company;
Director of Research, Incorporated.
Gerald E. Magnuson (70) Retired Partner, Lindquist & Vennum 1975
P.L.L.P., Minneapolis, Minnesota (law firm)
since December 1994; Director of Research,
Incorporated and WSI Industries, Inc.
William B. Miller (68) Partner, Miller & Company, Ayr, Scotland 1991
(business consulting); prior to 1991,
Managing Director and Chairman, Prestwick
Holdings plc, Ayr, Scotland (electronic
component manufacturer); Director of Magnum
Power plc and Stathclyde University
Incubator Ltd.
Kenneth J. Roering (58) Professor, School of Management, University 1988
of Minnesota, Minneapolis, Minnesota; Vice
Chairman of the Board of the Company;
Director of TSI, Inc., Transport
Corporation of America, Inc. and Arctic Cat,
Inc.
Raymond C. Wieser (62) Corporate Vice President of Molex 1998
Incorporated (connector manufacturer).
</TABLE>
As of November 15, 2000, the executive officers of the Company, who are
appointed annually to serve one year terms, are as follows:
<TABLE>
<CAPTION>
Date First
Name Age Appointed Position
---- --- ---------- --------
<S> <C> <C> <C>
James E. Donaghy 66 1999 Chairman of the Board and Director
Kenneth J. Roering 58 1998 Vice Chairman of the Board and Director
Edward L. Lundstrom 50 1999 President, CEO and Director
Jill D. Burchill 46 1999 Vice President and Chief Financial Officer
Gregory D. Closser 48 1999 Vice President - Core Business
Michele C. Edwards 36 1997 Vice President - Supply Chain Operations
James L. Havener 57 1998 Vice President - Micro Products
Sidney J. Roberts 54 1996 Vice President - Research and Development
</TABLE>
25
<PAGE> 26
James E. Donaghy was elected to the post of Chairman of the Board in
January 1999. He joined the Company in March 1988 as its President and Chief
Operating Officer and became President and Chief Executive Officer in 1991. In
September 1998, he passed the title of President to Ed Lundstrom. Prior to that
time, he held various executive-level positions at DuPont Company in Wilmington,
Delaware. Mr. Donaghy is a director of William Mitchell College of Law and the
Institute of Printed Circuitry.
Kenneth J. Roering was named Vice Chairman of the Board in October
1998. Mr. Roering has been a Director of the Company since 1988. Mr. Roering is
a Professor in the Carlson School of Management at the University of Minnesota.
Mr. Roering is also a member of the Boards of Directors of TSI, Inc., Transport
Corporation of America, Inc. and Arctic Cat, Inc.
Edward L. Lundstrom was named President and Chief Executive Officer in
January 1999. Since joining the Company in 1976 as Corporate Tax Manager, he has
held various positions with the Company: Executive Vice President, Vice
President-Sales and Marketing, Vice President-Treasurer, Corporate Controller,
Vice President-Interconnect, Vice President and Treasurer, President of the
Sheldahl subsidiary, Symbolic Displays, Inc. (SDI), and Vice President, General
Manager of the Northfield Circuit Division. Mr. Lundstrom is a director of
Research Incorporated.
Jill D. Burchill joined the Company in March 1999 as Vice President and
Chief Financial Officer. Previously, she had held the positions of Chief
Financial Officer at Angeon Corporation and Imation Corporation. She was
responsible for all global financial operations and strategy as well as investor
relations. Burchill also served in various senior financial management positions
at 3M Company within the Information, Imaging and Electronic Sector, including
Sector Controller, Group Controller, and Division Financial Manager. In
addition, she was Asia Pacific Financial Manager and International Tax Manager.
She began her career as an audit professional at Peat, Marwick, Mitchell &
Company.
Gregory D. Closser has served as Vice President - Core Business since
March 1999. Prior to that, he was Vice President - Flexible Interconnects since
January 1996. From 1983 to 1989, he held the position of Quality Director. From
1989 to 1993, he was the General Manager of Interconnect Manufacturing. From
1993 to 1995 he was Vice President - Interconnect Operations.
Michele Edwards was named to the position of Vice President - Supply
Chain Operations in September 1997. She joined Sheldahl in 1989 as a
Manufacturing Engineer in the Materials Business.
James L. Havener joined the Company in January of 1998 as Vice
President - Micro Products. He was previously Business Manager, Strategic
Planning and Advance Products Marketing for 3M Company's Electronic Products
Division.
Sidney J. Roberts joined the Company in 1973 and has held various
positions with the Company, including Director of Manufacturing and Engineering
- Materials, Business Director - Novaclad, Manager of Research and Development -
Materials and Interfacial Engineering, and Technical Director - Materials. He
was named to his present position, Vice President - Research and Development, in
November 1996.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
These insiders are required by Securities and Exchange Commission regulations to
furnish the Company with copies of all Section 16(a) forms they file, including
Forms 3, 4 and 5.
26
<PAGE> 27
To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended September 1, 2000, all
Section 16(a) filing requirements applicable to its insiders were complied with.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows, for the fiscal years ending September 1,
2000, August 27, 1999 and August 28, 1998, the cash compensation paid by the
Company, as well as certain other compensation paid or accrued for those years,
to Edward L. Lundstrom, the Company's Chief Executive Officer, and to each of
the four other most highly compensated executive officers of the Company in
office at the end of fiscal year 2000, whose total cash compensation exceeded
$100,000 during fiscal year 2000 in all capacities in which they served:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Annual Compensation Awards
-------------------------------------------------------------------------
Other
Annual Securities All Other
Name and Compensa- Underlying Compensa-
Principal Position Year Salary ($) Bonus ($) tion($)(1) Options tion($)(2)
------------------ ---- ---------- --------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Edward L. Lundstrom 2000 250,912 0 0 0 5,018
President and Chief 1999 200,176 0 63,924 75,000 3,687
Executive Officer 1998 199,953 0 0 10,654 3,691
Jill D. Burchill(3) 2000 200,378 50,000 0 0 4,008
Vice President 1999 94,432 50,000 75,000 0
Chief Financial
Officer
James Havener 2000 181,221 0 0 0 3,624
Vice President- Micro 1999 175,001 0 0 0 3,500
Products Business Unit 1998 111,745 0 0 75,000 2,221
Greg D. Closser 2000 150,078 0 0 0 3,002
Vice President- 1999 137,345 0 0 0 2,581
Core Business 1998 136,906 0 0 0 2,481
Michele Edwards 2000 149,789 0 0 10,000 2,996
Vice President- 1999 134,557 0 0 50,000 2,691
Supply Chain 1998 104,466 1,500 0 22,170 2,089
Operations
</TABLE>
------------------------
(1) With respect to Mr. Lundstrom, this amount represents taxable gain
related to option exercises during fiscal 1998.
(2) These amounts represent the Company's basic and matching contributions
to the Company's 401(k) plan on behalf of such employees.
(3) Ms. Burchill became Chief Financial Officer on March 13, 1999.
27
<PAGE> 28
STOCK OPTIONS
The following table contains information concerning the grant of stock
options under the Company's stock option plans to the Named Executive Officers
during the last fiscal year:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER VALUE AT ASSUMED
OF % OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE
UNDER- GRANTED TO APPRECIATION
LYING EMPLOYEES EXERCISE FOR OPTION TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION
NAME GRANTED YEAR PER SHARE DATE 5% 10%
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Edward L. Lundstrom -- -- -- -- -- --
Jill D.Burchill -- -- -- -- -- --
James Havener -- -- -- -- -- --
Greg D. Closser -- -- -- -- -- --
Michele Edwards 10,000 12.87% $5.00 10/21/09 $31,445 $79,687
</TABLE>
-----------------------------------
(1) Gains are reported net of the option exercise price, but before taxes
associated with exercise. These amounts represent certain assumed rates
of appreciation only. Actual gains, if any, on stock option exercises
are dependent on the future performance of the Common Stock, overall
stock market conditions, as well as the optionholder's continued
employment through the vesting period. The amounts reflected in this
table may not necessarily be achieved.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the Named
Executive Officers, concerning the exercise of options during the last fiscal
year and unexercised options held as of the end of fiscal year 2000:
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
Shares Fiscal Year-End Fiscal Year-End
Acquired on Value -------------------------- --------------------------------
Name Exercise Realized(1) Exercisable Unexercisable Exercisable(2) Unexercisable(2)
---- ----------- ----------- ----------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Edward L. Lundstrom 0 $0 171,448 28,552 $0 0
Jill D. Burchill 0 0 25,000 50,000 0 0
James Havener 0 0 75,000 0 0 0
Greg D. Closser 0 0 75,000 0 0 0
Michele Edwards 0 0 61,667 13,333 0 0
</TABLE>
-----------------------
(1) Market value on the date of exercise of shares covered by options
exercised, less option exercise price.
(2) Based on a per share price of $3.9375 which is the average of the high
and low prices for the Company's Common Stock on September 1, 2000.
Value is calculated on the difference between the option exercise price
and $3.9375 multiplied by the number of shares of Common Stock
underlying the options, but before taxes associated with exercise.
28
<PAGE> 29
BOARD COMPENSATION COMMITTEE REPORT
Decisions on compensation of the Company's executives are generally
made by the three member Compensation Committee of the Board consisting of
Messrs. Magnuson (Chairman), Donaghy and Roering . All decisions by the
Compensation Committee relating to the compensation of the Company's executive
officers are reviewed by the full Board. Pursuant to rules designed to enhance
disclosure of companies' policies toward executive compensation, set forth below
is a report submitted by Messrs. Magnuson, Donaghy and Roering in their capacity
as the Board's Compensation Committee addressing the Company's compensation
policies for fiscal year 2000 as they affected the executive officers. The
following report shall not be deemed incorporated by reference by any general
statement incorporating by reference this proxy statement into any filing under
the Securities Act of 1933 (the "1933 Act") or the Securities Exchange Act of
1934 (the "1934 Act"), except to the extent that the Company specifically
incorporates this information by reference, and shall not otherwise be deemed
filed under the 1933 Act or the 1934 Act.
Compensation Philosophy. The Company's primary objective is to enhance
long-term shareholder value by safely and profitably providing products of the
highest value and quality for key markets. In furtherance of this objective, the
Company is committed to a strong, positive link between its business and
strategic goals and its compensation programs. The financial goals for
compensation plans are reviewed and approved by the Board in conjunction with
its approval of the Company's strategic and operating plans.
The Company's total compensation philosophy is designed to support its
overall objective of creating value for its shareholders. Key objectives of this
philosophy are:
o Attract and retain key executives critical to the long-term
success of the Company.
o Support a performance-oriented environment that rewards
performance with respect to the Company's short and long-term
financial goals.
o Emphasize pay for performance by having a significant portion of
compensation "at-risk," particularly for senior executives.
o Encourage maximum performance through the use of appropriate
incentive programs.
o Encourage employee stock ownership to enhance a mutuality of
interest with other shareholders.
The Company has designed its executive compensation programs around
these objectives. The Compensation Committee believes the Company's programs
consistently meet these goals. Following is a description of the Company's
current programs and how each design element relates to the objectives outlined
above.
Base Salary. The Compensation Committee annually reviews each officer's
salary, including those of the Named Executive Officers. In determining
appropriate salary levels, the Compensation Committee considers level of
responsibility, experience, individual performance, internal equity, as well as
external pay practices.
Annual Incentives. Annual incentive (performance bonus) award
opportunities are made to managerial and executive employees to recognize and
reward corporate and individual performance. Each year, the Compensation
Committee will approve the performance measures selected, as well as specific
financial targets used. The Compensation Committee believes these goals drive
the future success of the Company's business and enhance shareholder value.
29
<PAGE> 30
The amount individual executives may earn is directly dependent upon
the individual's position, responsibility and ability to impact the Company's
financial success. Additionally, external market data is reviewed annually to
determine competitive incentive opportunities. Awarded amounts are related to
performance.
The short-term incentive plan is dependent on measured financial
performance. Every payout depends on results, not on efforts. Bonuses are paid
based upon attainment of financial goals. Jill Burchill, Chief Financial
Officer, received a bonus of $50,000 in fiscal 2000 under the terms of a Letter
Agreement with the Company entered into in connection with her commencement of
employment with the Company. No other bonuses were paid to management in fiscal
year 2000.
Long-Term Incentives. The Company's overall long-term compensation
philosophy is that long-term incentives should be related to improvement in the
creation of long-term shareholder value. In furtherance of this objective, the
Company awards to its executive officers stock options.
Stock Options. Stock options encourage and reward effective management
that results in long-term corporate financial success, as measured by stock
price appreciation. Stock options only have value for the executive officers if
the price of the Company's stock appreciates in value from the date the stock
options are granted. Shareholders also benefit from such stock price
appreciation.
In August 1997, the Committee approved, and in January 1998 the
shareholders approved, the Company's Target Grant Program under the 1994 Stock
Plan (the "Plan") and established specific levels ("Target Levels") of options
to be held by officers and key employees (the "Participants"). Those levels were
established based on the individual's position, level of responsibility and
ability to impact the Company's financial success. Options were granted in
August 1997 to bring the number of options held by Participants in the Plan to
their respective Target Level. Upon exercise of these options by the
Participants, new options will automatically be granted in order to maintain the
established Target Level. The Target Grant Program (the "Program") is intended
to increase the number of shares owned by the Company's executive officers and
key employees. The Program encourages option exercises by permitting an optionee
to exercise an option and be restored with a new option which replaces the
opportunity for future appreciation which that optionee would otherwise lose.
The Committee feels that this Program will more adequately align the interests
of officers and key employees with those of the shareholders and will place
greater emphasis on shareholder value creation and continued growth and
performance of the Company.
Under the terms of the Program, it is not intended that additional
stock options will be granted by the Board to the Participants except for
changes in responsibilities which may increase a Participant's Target Level or
as otherwise determined by the Board. Rather, new options (the "Replacement
Options") will be granted automatically up to an individual's Target Level as
current options are exercised. The Replacement Options will vest over three
years and will have an option exercise price equal to the fair market value on
the date of grant. The Committee believes this Program is consistent with the
Company's objectives to more heavily direct total compensation toward a
long-term equity interest for officers and key employees, with greater
opportunity for reward if long-term performance is sustained.
Chief Executive Officer Compensation. The salary and bonus of Edward L.
Lundstrom, the Chief Executive Officer, is set by and subject to the discretion
of the Compensation Committee with Board approval. Mr. Lundstrom's base salary
for fiscal 2001 is $250,000. Mr. Lundstrom participates in an incentive plan of
up to 150% of his base salary based on the attainment of financial goals and
earnings growth. Payments to Mr. Lundstrom under the incentive plan will be made
only if the Company is profitable. During fiscal year 2000, Mr. Lundstrom
received no bonus. During fiscal 1999, Mr. Lundstrom was awarded options for
75,000 shares under the Company's Target Grant Program to increase his Target
Level to 200,000 options. This level was previously established for the position
of Chief Executive Officer based upon level of responsibility and ability to
impact the Company's financial success. In determining Mr. Lundstrom's
compensation, the Committee reviewed comparable compensation levels for chief
executive officers in similarly situated companies as well as Mr. Lundstrom's
experience, responsibilities and individual performance.
Submitted by the Compensation Committee of the
Company's Board of Directors
GERALD E. MAGNUSON KENNETH J. ROERING JAMES E. DONAGHY
30
<PAGE> 31
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Magnuson, a Director and a member of the Compensation Committee and
the Company's former Secretary, is a retired partner of the law firm of
Lindquist & Vennum P.L.L.P. which was paid for legal services rendered to the
Company during the last fiscal year. Mr. Magnuson receives no financial benefit
on account of amounts paid by the Company to Lindquist & Vennum P.L.L.P. for
such services. It is anticipated that Lindquist & Vennum P.L.L.P. will continue
to perform legal services for the Company during the current fiscal year.
PERFORMANCE GRAPH
The Securities and Exchange Commission requires that the Company
include in this Proxy Statement a line graph presentation comparing cumulative,
five-year shareholder returns on an indexed basis with a broad market index and
either a nationally-recognized industry standard or an index of peer companies
selected by the Company. The Company has chosen the use of the Nasdaq Stock
Market (U.S. Companies) Index as its broad market index and the Nasdaq
Electronic Component Stock Index as its peer group index. The table below
compares the cumulative total return as of the end of each of the Company's last
five fiscal years on $100 invested as of September 1, 1995 in the Common Stock
of the Company, the Nasdaq Stock Market Index and the Nasdaq Electronic
Component Stock Index, assuming the reinvestment of all dividends. The
performance graph is not necessarily indicative of future investment
performance.
[GRAPHIC]
<TABLE>
<CAPTION>
=====================================================================================================================
Sep. 1, 1995 Aug. 30, 1996 Aug. 29, 1997 Aug. 28, 1998 Aug. 27, 1999 Sept. 1, 2000
------------------------------------------------------------------- --------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sheldahl, Inc. 100 98 122 26 33 17
---------------------------------------------------------------------------------------------------------------------
Nasdaq
Electronic
Component Stocks 100 113 157 149 276 422
Index
---------------------------------------------------------------------------------------------------------------------
Nasdaq Stock
Market Index
(U.S.) 100 102 206 142 359 782
=====================================================================================================================
</TABLE>
31
<PAGE> 32
DIRECTOR COMPENSATION
During fiscal year 2000, with the exception of Mr. Wieser, directors
who are not employees of the Company (currently all directors except Mr.
Lundstrom) were paid an annual retainer of $18,000 and a fee of $800 for each
day of meetings of the Board of Directors or any committee attended in person
and $400 for those attended telephonically. Mr. Wieser, as an employee and
representative of Molex, does not receive the annual retainer nor fee (See Item
13 below). Effective September 1, 1999, the Board fixed the compensation paid to
Mr. Donaghy for acting as Chairman of the Board at an additional $2,000 per
month. In addition to the annual retainer and meeting fee, Board members serving
as Committee Chairmen received an extra $2,000 during fiscal 2000 for their
services. Pursuant to the Company's Supplemental Executive Retirement Program,
Directors have the ability to defer their fees paid during any fiscal year.
Pursuant to the terms of the Company's Target Grant Program, each non-employee
director has received options to purchase 25,000 shares (the "Target Level").
Upon exercise of such options, each non-employee director will automatically
receive replacement options to maintain his Target Level. The replacement
options will vest over three years and will have an option exercise price equal
to the fair market value on the date of grant.
On December 17, 1998, the Board of Directors of the Company elected
Kenneth J. Roering to be Vice Chairman of the Company. In connection with his
serving as Vice Chairman of the Company, Mr. Roering receives an aggregate of
$5,000 per month.
The Company and Mr. Donaghy entered into a Supplementary Executive
Retirement Plan Agreement during fiscal year 1997 which provides Mr. Donaghy
upon his retirement or other termination of his employment with an annual
retirement pension benefit equal to $137,500, less an amount equal to the sum of
(i) the aggregate of twelve monthly payments received by Mr. Donaghy and/or his
spouse under pension or deferred compensation plans established by Mr. Donaghy's
former employer; and (ii) an amount which equals an annual joint and survivor
annuity that could be purchased with the principal in Mr. Donaghy's retirement
accounts at the date of retirement provided from all retirement contributions by
the Company. Based on the above formula, the Company expects its obligations
under the Agreement to be approximately $50,000 per annum increasing to
approximately $80,000 per annum in the event Mr. Donaghy predeceases his spouse.
All benefits are payable for Mr. Donaghy's life and, after his death, if he is
survived by his spouse, his spouse shall continue to receive such benefits for
the duration of her life. The Agreement also restricts Mr. Donaghy from
competitive employment and disclosure of trade secrets and confidential
information.
Mr. Miller received no fees relating to international consulting work
performed on behalf of the Company during fiscal year 2000. Mr. Magnuson, former
Secretary of the Company, received $5,000 during fiscal year 2000 for his
services as Secretary.
In fiscal year 1982, the Company established a retirement program for
directors not covered by another retirement plan of the Company which provides
for the payment of an annual benefit equal to the annual retainer paid to
directors during the full fiscal year preceding retirement. The retirement
benefit, which is payable to directors who have served five years or more, will
commence at the later of the time of retirement or when the director becomes 65
years old and will be subject to proportionate reduction if the director has
served the Company less than 15 years. The maximum number of years that the
benefit is payable is ten years.
32
<PAGE> 33
EMPLOYMENT AND OTHER AGREEMENTS
The Company has entered into employment agreements with all of its
executive officers. The employment agreements provide, among other things, for a
lump sum cash severance payment to such individuals equal to (i) 2.99 times the
individual's average annual compensation over the preceding five years plus
certain fringe benefits under certain circumstances following a change in
control of the Company if the change in control is not formally approved by the
Board of Directors and 1.5 times that compensation amount if the change in
control is approved by the Board of Directors and the officer continues in the
employ of the Company for a period of at least one year following the change in
control or (ii) a greater amount, if any, payable under the Company's Severance
Pay Plan, which provides generally for a payment based on length of service of
up to two times an employee's base pay in effect on the date of termination if
an employee is terminated at the Company's initiative and such employee's
employment is in good standing at the time of such termination. In general, a
"change in control" would include a change resulting from the acquisition of 20%
or more of the Company's outstanding voting stock by any person, except by Molex
Incorporated for which the acquisition threshold is 22%, a change in the current
members of the Board of Directors or their successors elected or nominated by
such members whereby they cease to be a majority of the Board of Directors, or
the Company disposing of 75% or more of its assets (or substantially all of the
assets of a division or business unit if the executive officer's employment is
terminated as a result of such sale), other than to an entity owned 50% or more
by the Company or one of its subsidiaries. If a change in control which was not
approved by the Board of Directors had occurred at the end of fiscal year 2000,
the following individuals would have received the approximate payment indicated
pursuant to the employment agreements: Mr. Lundstrom, $750,227; Ms. Burchill,
$599,130; Mr. Havener, $541,851; Mr. Closser, $448,733; Ms. Edwards $447,869;
and all current executive officers as a group, $3,137,810.
In connection with her hiring as the Company's Chief Financial Officer,
Ms. Burchill entered into a Letter Agreement with the Company establishing her
base salary and granting an initial $50,000 bonus, and a $50,000 retention bonus
provided she remains employed with the Company through September 1, 2000. In
addition, the Letter Agreement provides for the award of a Target Option at a
75,000 share level and Ms. Burchill's participation in the Company's incentive
compensation and severance plans. The Letter Agreement provides that any fiscal
year 2000 incentive pay will be reduced by the retention bonus. On September 1,
2000, Ms. Burchill received her $50,000 retention bonus.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table includes information as of November 15, 2000
concerning the beneficial ownership of Common Stock of the Company by (i) the
only shareholders known to the Company to hold more than five percent of the
Common Stock of the Company, (ii) each of the directors of the Company, (iii)
each executive officer named in the table in Item 11, and (iv) all officers and
directors of the Company as a group. Unless otherwise indicated, all beneficial
owners have sole voting and investment power over the shares held.
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT OF CLASS
------------------------------------ -------------- --------
<S> <C> <C>
Molex Incorporated 2,895,441 (1) 23.67%
2222 Wellington Court
Lisle, IL 60532
Dimensional Fund Advisors (2) 660,050 5.47%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Irwin L. Jacobs(3) 713,100 5.91%
100 South Fifth Street
Suite 2500
Minneapolis, MN 55402
James E. Donaghy(6)(7) 255,097 (4) 2.08%
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C> <C>
John G. Kassakian(6) 54,424 (1)(4)(5) *
Gerald E. Magnuson(6) 37,758 (4) *
William B. Miller(6)(8) 126,622 (4)(5) 1.05%
Kenneth J. Roering(6) 94,151 (1)(4)(5) *
Raymond C. Wieser(6)(8)(9) 19,666 (4) *
Edward L. Lundstrom(6)(10) 195,967 (1)(4) 1.60%
Jill D. Burchill(10) 27,578 (4) *
Greg D. Closser (10) 84,919 (4) *
James Havener(10) 81,004 (4) *
Michele Edwards (10) 66,476 (4)(5) *
All Officers and Directors 1,094,506 (1)(4)(5) 8.52%
as a Group (11 persons)
</TABLE>
---------------------------
* Less than one percent.
(1) Includes shares which may be issued upon conversion of the Company's
Series D Convertible Preferred Stock in the amount of 1,960,784 shares
for Molex, Incorporated, 16,340 shares for Mr. Kassakian, 32,680 shares
for Mr. Roering, 8,170 shares for Mr. Lundstrom, and 57,190 shares for
all officers and directors as a group, and shares which may be issued
upon the exercise of warrants issued in connection with the Series D
Convertible Preferred Stock in the amount of 120,661 shares for Molex,
Incorporated, 1,006 shares for Mr. Kassakian, 2,011 shares for Mr.
Roering, 503 shares for Mr. Lundstrom, and 3,520 shares for all
officers and directors as a group.
(2) Based upon information filed with the Securities and Exchange
Commission on Schedule 13G on February 3, 2000.
(3) Based upon information filed with the Securities and Exchange
Commission on Schedule 13D/A on September 14, 2000.
(4) Includes shares which may be purchased within sixty days from the date
hereof upon exercise of outstanding stock options in the amount of
200,000 shares for Mr. Donaghy, 23,000 shares for each of Messrs.
Kassakian, Magnuson, Miller and Roering, 16,666 shares for Mr. Weiser,
171,448 shares for Mr. Lundstrom, 25,000 shares for Ms. Burchill,
75,000 shares for Mr. Closser, 75,000 shares for Mr. Havener, 44,335
for Ms. Edwards, and 761,116 shares for all officers and directors as a
group.
(5) Includes shares which may be issued upon conversion of the Company's
Series E Convertible Preferred Stock in the amount of 4,000 shares for
Mr. Kassasian; 8,000 shares for Mr. Roering; and 12,000 shares for all
officers and directors as a group, and shares which may be issued upon
the exercise of warrants issued in connection with the Series E
Convertible Preferred Stock in the amount of 250 shares for Mr.
Kassasian; 5,000 shares for Mr. Miller; 500 shares for Mr. Roering; and
5,750 shares for all officers and directors as a group.
(6) Serves as a director of the Company.
(7) Includes 44,701 shares held by the Donaghy Limited Partnership, of
which Mr. Donaghy is the General Partner, 8,586 shares held by the
Donaghy Living Trust, of which Mr. Donaghy is the trustee, and 40
shares held by Mr. Donaghy's spouse, as custodian for grandchildren.
(8) Includes 81,622 shares held in a custodial account with RBSTB Nominees
Limited.
(9) Mr. Wieser is an officer of Molex Incorporated and disclaims beneficial
ownership of any shares held by Molex Incorporated.
(10) Serves as an executive officer of the Company.
34
<PAGE> 35
INSERT 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Molex Incorporated ("Molex") is a customer of the Company's with
purchases in fiscal 2000 of approximately $7.8 million, representing 5.7% of the
Company's gross revenues. On July 28, 1998, Company and Molex formed a joint
venture to design, market and assemble modular interconnect systems to replace
wiring harnesses primarily in the automotive market (the "Joint Venture"). The
new company was named Modular Interconnect Systems, L.L.C. and it is a Delaware
limited liability company ("Modular Interconnect"). Modular Interconnect will
utilize proprietary flexible products developed by the Company and proprietary
connectors developed by Molex in the development of the new modular interconnect
system as an alternative to conventional automotive wiring harnesses and flex
circuit assemblies. The Company and Molex will supply their respective products
to Modular Interconnect pursuant to long-term supply contracts. Modular
Interconnect is managed by five managers, three of whom are designated by Molex
and two by Sheldahl. Certain transactions require the approval of the majority
of managers designated by each party.
On July 30, 1998, the Company completed a private placement of shares
of its Series D Convertible Preferred Stock (the "Series D Stock"). This private
offering resulted in gross proceeds to the Company of $32,917,000 and the
issuance to accredited investors of 32,917 shares of the Series D Stock at a
price of $1,000 per share. As one of the investors in the Series D offering,
Molex purchased from the Company $12,000,000 of the total shares of the Series D
Stock. Given the current conversion price of $6.12 per share, Molex's Series D
Stock is convertible into 1,960,784 shares of the Company's Common Stock and
carries warrants to purchase an additional 120,661 shares of Common Stock. As of
the date of the closing of the Series D offering, Molex also owned 340,000
shares of the Company's Common Stock.
In connection with the formation of the Joint Venture and the
investment by Molex in the Series D offering, Molex was granted the right to
nominate one person to the Sheldahl Board of Directors, a right of first refusal
in the event of a sale of Sheldahl, and certain preemptive rights. On October
20, 1998 the Board of Directors of Sheldahl elected Raymond C. Wieser, a
Corporate Vice President of Molex, as a director.
On January 11, 2000, the Company completed a private placement of
shares of its Series F Convertible Preferred Stock (the "Series F Stock"). This
private offering resulted in gross proceeds to the Company of $1,800,000 and the
issuance to accredited investors of 1,800 shares of the Series F Stock at a
price of $1,000 per share. As one of the investors in the Series F offering,
Molex purchased from the Company $1,500,000 of the total shares of the Series F
Stock. Given the current conversion price of $5.46 per share, Molex's Series F
Stock is convertible into 238,096 shares of the Company's Common Stock and
carries warrants to purchase an additional 40,300 shares of Common Stock.
On November 10, 2000, the Company and Molex agreed to certain
amendments to the parties' (i) Agreement Relating to Sheldahl dated November 18,
1998 (the "Sheldahl Agreement"), and (ii) the Limited Liability Company
Agreement of Modular Interconnect Systems, L.L.C., dated July 28, 1998 (the "LLC
Agreement").
The Sheldahl Agreement was amended to provide that Molex shall have the
right to participate in future equity offerings of the Company so that Molex
retains up to a 10% ownership interest in the Company on a fully diluted basis.
Also, the Sheldahl Agreement was amended to provide that Molex shall have the
right to participate in future issuances of the Company's equity securities in
connection with an acquisition so that Molex retains up to a 5% ownership
interest in the Company on a fully diluted basis. Lastly, the Sheldahl Agreement
was amended to provide Molex with a right of first refusal on any acquisitions
of the Company by three Identified Parties (the "Right of First Refusal"). The
Right of First Refusal terminates at the earlier of the end of the thirty month
period following the date of closing of the Merger or the execution of a
mutually acceptable supply and technology agreement between Molex and Sheldahl.
The LLC Agreement was amended to provide that all past defaults by
either party thereto, if any, would be waived currently and that the
Transactions would not trigger the Change of Control provisions in the LLC
Agreement.
35
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Form 10-K
Page Reference
--------------
(a) Documents filed as a part of the report:
1. Consolidated Financial Statements
Index to Consolidated Financial Statements F-1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of September 1, 2000 and
August 27, 1999 F-3
Consolidated Statements of Operations for the Fiscal Years
Ended September 1, 2000, August 27, 1999 and August 28,
1998 F-4
Consolidated Statements of Changes in Shareholders'
Investment for the Fiscal Years Ended September 1,
2000, August 27, 1999 and August 28, 1998 F-5
Consolidated Statements of Cash Flows for the Fiscal
Years Ended September 1, 2000, August 27, 1999 and
August 28, 1998 F-6
Notes to Consolidated Financial Statements F-7
2. Consolidated Financial Statement Schedules
Form 10-K
Page Reference
--------------
Description
Schedule II - Valuation and Qualifying Accounts S-1
(b) Reports on Form 8-K
The Company filed the following reports during the fourth quarter of
fiscal 2000: Current Reports on Form 8-K filed on August 8, 2000
(reporting Item 5 - Other Events) and August 24, 2000 (reporting Item 5
- Other Events).
(c) Exhibits and Exhibit Index
Exhibit No. Description
2.1 Agreement and Plan of Merger dated November 10, 2000 among the
Registrant, IFT West Acquisition Company, International Flex Holdings,
Inc., and the Stockholders of International Flex Holdings, Inc.,
incorporated by reference from Exhibit 2.0 of the Registrant's Form 8-K
filed November 13, 2000.
3.1 Amended and Restated Articles of Incorporation, incorporated by
reference from Exhibit 3.1 of the Registrant's Form 10-Q for the
quarter ended February 26, 1999.
3.2 Bylaws, as amended, incorporated by reference from Exhibit 3.2 of the
Registrant's Form 10-K for the fiscal year ended August 28, 1998.
4.3 Rights Agreement dated as of June 16, 1996 and amended July 25, 1998
between the Company and Norwest Bank Minnesota, N.A., is incorporated
by reference to Exhibit 1 to the Company's Form 8-A dated June 20, 1996
and Amendment No. 1 thereto dated July 30, 1998.
36
<PAGE> 37
4.4 Amendment No. 2 dated November 10, 2000 to Rights Agreement dated as of
June 16, 1996, and amended July 25, 1998 between Sheldahl, Inc. and
Norwest Bank Minnesota, N.A. now known as Wells Fargo Bank, N.A., is
incorporated by reference to Exhibit 1 to the Company's Amended Form
8-A filed on November 13, 2000.
4.5 Certificate of Designation, Preferences and Rights of Series A Junior
Participating Preferred Stock, incorporated by reference from Exhibit 1
of Registrant's Form 8-A dated June 20, 1996.
4.6 Convertible Preferred Stock Purchase Agreement among the Company and
the Series D Purchasers listed in Exhibit A thereto, incorporated by
reference from Exhibit 4.1 of the Registrant's Form 8-K filed August
18, 1998.
4.7 Certificate of Designation, Preferences and Rights of Series D
Convertible Preferred Stock, incorporated by reference from Exhibit 4.2
of the Registrant's Form 8-K filed August 18, 1998.
4.8 Form of Warrant issued to the Series D Purchasers, incorporated by
reference from Exhibit 4.3 of Registrant's Form 8-K filed August 18,
1998.
4.9 Registration Rights Agreement among the Company and the Series D
Purchasers listed in Exhibit A thereto, incorporated by reference from
Exhibit 4.4 of Registrant's Form 8-K filed August 18, 1998.
4.10 Convertible Preferred Stock Purchase Agreement among the Company and
the Series E Investors listed in Exhibit A thereto, incorporated by
reference from Exhibit 4.1 of the Registrant's Form 8-K filed March 9,
1999.
4.11 Certificate of Designation, Preferences and Rights of Series E
Convertible Preferred Stock, incorporated by reference from Exhibit 4.2
of the Registrant's Form 8-K filed March 9, 1999.
4.12 Form of Warrant issued to the Series E Investors, incorporated by
reference from Exhibit 4.3 of Registrant's Form 8-K filed March 9,
1999.
4.13 Registration Rights Agreement among the Company and the Series E
Investors listed in Exhibit A thereto, incorporated by reference from
Exhibit 4.4 of Registrant's Form 8-K filed March 9, 1999.
4.14 Convertible Preferred Stock Purchase Agreement among the Company and
the Series F Investors listed in Exhibit A thereto, incorporated by
reference from Exhibit 4.1 of the Registrant's Form 8-K filed January
11, 2000.
4.15 Certificate of Designation, Preferences and Rights of Series F
Convertible Preferred Stock, incorporated by reference from Exhibit 4.2
of the Registrant's Form 8-K filed January 11, 2000.
4.16 Form of Warrant issued to the Series F Investors, incorporated by
reference from Exhibit 4.3 of Registrant's Form 8-K filed January 11,
2000.
4.17 Registration Rights Agreement among the Company and the Series F
Investors listed in Exhibit A thereto, incorporated by reference from
Exhibit 4.4 of Registrant's Form 8-K filed January 11, 2000.
4.18 Stock Purchase Agreement dated November 10, 2000 among the Registrant
and the individuals and entities listed on Exhibit A thereto,
incorporated by reference from Exhibit 4.0 of Registrant's Form 8-K
filed November 13, 2000.
4.19 Form of Certificate of Designation, Preferences and Rights of Series G
Convertible Preferred Stock, incorporated by reference from Exhibit 4.1
of Registrant's Form 8-K filed November 13, 2000.
37
<PAGE> 38
4.20 Form of Registration Rights Agreement among the Registrant and the
individuals listed on Exhibit A thereto, incorporated by reference from
Exhibit 4.2 of Registrant's Form 8-K filed November 13, 2000.
4.21 Subordinated Notes and Warrant Purchase Agreement dated November 10,
2000 among the Registrant and the entities listed on Schedule I
thereto, incorporated by reference from Exhibit 4.3 of Registrant's
Form 8-K filed November 13, 2000.
4.22 Form of Note to Subordinated Notes and Warrant Purchase Agreement,
incorporated by reference from Exhibit 4.4 of Registrant's Form 8-K
filed November 13, 2000.
4.23 Form of Warrant to Subordinated Notes and Warrant Purchase Agreement,
incorporated by reference from Exhibit 4.5 of Registrant's Form 8-K
filed November 13, 2000.
4.24 Form of Governance Agreement among the Registrant and the individuals
and entities listed on the signature pages thereto, incorporated by
reference from Exhibit 4.6 of Registrant's Form 8-K filed November 13,
2000.
4.25 Agreement Relating to Sheldahl between Molex Incorporated and the
Registrant dated November 18, 1998, incorporated by reference from
Exhibit 4.1.3 of the Registrant's Form 10-K for the fiscal year ended
August 28, 1998.
4.26 Amended and Restated Agreement Relating to Sheldahl dated November 10,
2000 by and between the Registrant and Molex Incorporated, incorporated
by reference from Exhibit 4.8 of Registrant's Form 8-K filed November
13, 2000.
4.27 Form of Piper Jaffray Warrant, incorporated by reference from Exhibit
4.9 of Registrant's Form 8-K filed November 13, 2000.
10.1 1987 Stock Option Plan, incorporated by reference from Exhibit 10.1 of
the Registrant's Form 10-K for the fiscal year ended August 27, 1993.
10.2 1994 Stock Option Plan, as amended, incorporated by reference from
Exhibit 4.1 of the Registrant's Form S-8 dated August 1, 2000 (File No.
333-42724).
10.3 Employee Stock Purchase Plan, incorporated by reference from Exhibit
4.1 of the Registrant's Form S-8 filed November 21, 1997 (File No.
333-40719).
10.4 Credit and Security Agreement dated June 19, 1998, among the
Registrant, Norwest Bank Minnesota, N.A., Harris Trust and Savings
Bank, NBD Bank, N.A., and The CIT Group/Equipment Financing, Inc.,
incorporated by reference from Exhibit 10.1 of the Registrant's Form
S-3 dated July 1, 1998 (File No. 333-58307).
10.4.1 First Amendment to Credit and Security Agreement dated November 25,
1998, among the Registrant, Norwest Bank Minnesota, N.A., Harris Trust
and Savings Bank, NBD Bank, N.A., and the CIT Group/Equipment
Financing, Inc., incorporated by reference from Exhibit 10.4.1 of the
Registrant's Form 10-K filed December 3, 1998.
10.4.2 Second Amendment to the Credit and Security Agreement, dated March 4,
1999 between the Company and Norwest Bank Minnesota, N.A., Harris Trust
and Savings Bank, The First National Bank of Chicago, and The CIT
Group., incorporated by reference from Exhibit 10.1 of the Registrant's
Form 10-Q filed April 9, 1999.
10.4.3 Third Amendment to the Credit and Security Agreement, dated April 5,
1999 between the Company and Norwest Bank Minnesota, N.A., Harris Trust
and Savings Bank, The First National Bank of Chicago, and The CIT
Group., incorporated by reference from Exhibit 10.2 of the Registrant's
Form 10-Q filed April 9, 1999.
38
<PAGE> 39
10.4.4 Fourth Amendment to the Credit and Security Agreement, dated November
12, 1999 between the Company and Norwest Bank Minnesota, N.A., Harris
Trust and Savings Bank, The First National Bank of Chicago, and The CIT
Group., incorporated by reference from Exhibit 10.7.4 of the
Registrant's Form 10-K for the fiscal year ended August 27, 1999.
10.4.5 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., incorporated by reference from Exhibit
10.1 of the Registrant's Form 10-Q filed July 10, 2000.
10.4.6 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., incorporated by reference from Exhibit
10.2 of the Registrant's Form 10-Q filed July 10, 2000.
10.4.7 Seventh Amendment to the Credit and Security Agreement, dated November
7, 2000 between the Company and Wells Fargo Bank, N.A. and The CIT
Group/Equipment Financing, Inc.
10.5 Form of Warrant issued in connection with Credit and Security Agreement
dated June 19, 1998, among the Registrant, Norwest Bank Minnesota,
N.A., Harris Trust and Savings Bank, NBD Bank, N.A., and The CIT
Group/Equipment Financing, Inc., incorporated by reference from Exhibit
10.2 of the Registrant's Form S-3 dated July 1, 1998 (File No.
333-58307).
10.6 Deed of Trust and Security Agreement by and between Sheldahl Colorado
LLC, the Registrant, the Public Trustee of Boulder County, Colorado and
Morgan Guaranty Trust Company of New York dated November 16, 1999,
incorporated by reference from Exhibit 10.4 of the Registrant's Form
10-K for the fiscal year ended August 27, 1999.
10.7 Fixed Rate Note between the Registrant as the sole member of Sheldahl
Colorado LLC and Morgan Guaranty Trust Company of New York dated
November 16, 1999, incorporated by reference from Exhibit 10.5 of the
Registrant's Form 10-K for the fiscal year ended August 27, 1999.
10.8 Guaranty by the Registrant to Morgan Guaranty Trust Company of New York
dated November 16, 1999, incorporated by reference from Exhibit 10.6 of
the Registrant's Form 10-K for the fiscal year ended August 27, 1999.
10.9(*) Limited Liability Company Agreement of Modular Interconnect Systems,
L.L.C., dated July 28, 1998, without exhibits, incorporated by
reference from Exhibit 10.1 of the Registrant's Form 8-K filed August
28, 1998.
10.9.1 First Amendment to Limited Liability Company Agreement of Modular
Interconnect Systems, L.L.C. dated November 10, 2000, incorporated by
reference from Exhibit 10.0 of the Registrant's Form 8-K filed November
13, 2000.
10.10 Loan Agreement, dated February 26, 1998, between the Company and
Relational Funding Corporation, incorporated by reference from Exhibit
10.1 of the Company's Report on Form 10-Q filed April 13, 1998.
10.11 Promissory Note dated February 26, 1998, between the Company and
Relational Funding Corporation, incorporated by reference from Exhibit
10.2 of the Company's Report on Form 10-Q filed April 13, 1998.
10.12 Form of Employment (change of control) Agreement for Executive Officers
of the Registrant, incorporated by reference from Exhibit 10.4 of the
Registrant's Form 10-K for the fiscal year ended August 30, 1996.
39
<PAGE> 40
10.12.1 Form of Amendment No. 1 to Employment (change of control) Agreement for
Executive Officers of the Registrant, incorporated by reference from
Exhibit 10.10.1 of the Registrant's Form 10-K filed for the fiscal year
ended August 28, 1998.
10.12.2 Form of Amendment No. 2 to Employment (change of control) Agreement for
Executive Officers of the Registrant, incorporated by reference from
Exhibit 10.12.2 of the Registrant's Form 10-K filed for the fiscal year
ended August 27, 1999.
10.13 Supplementary Executive Retirement Plan Agreement between the
Registrant and James E. Donaghy dated November 5, 1996, incorporated by
reference from Exhibit 10.12 of the Registrant's Form 10-K for the
fiscal year ended August 28, 1998.
10.14 Letter Agreement between John V. McManus and the Registrant dated
October 15, 1999, incorporated by reference from Exhibit 10.14 of the
Registrant's Form 10-K for the fiscal year ended August 27, 1999.
10.15 Abstract of Agreement between the Union of Needletrades Industrial and
Textile Employees and the Registrant dated November 12, 1999,
incorporated by reference from Exhibit 10.15 of the Registrant's Form
10-K for the fiscal year ended August 27, 1999.
10.16 Lease dated June 15, 1989 between Aberdeen Development Corporation and
the Registrant, incorporated by reference from Exhibit 10.13 of the
Registrant's Form 10-K for the fiscal year ended August 27, 1993.
10.17 Loan Authorization dated October 1, 1994 between South Dakota Board of
Economic Development Registrant, incorporated by reference from Exhibit
10.1 of the Registrant's Form 10-Q for the quarter ended February 25,
1994.
10.18 Agreement Relating to Employment dated October 1, 1994 between the
South Dakota Board of Economic Development and the Registrant,
incorporated by reference from Exhibit 10.2 of the Registrant's Form
10-Q for the quarter ended February 25, 1994.
10.19 Promissory Note dated October 4, 1993 due to the South Dakota Board of
Economic Development, incorporated by reference from Exhibit 10.3 of
the Registrant's Form 10-Q for the quarter ended February 25, 1994.
10.20 Agreement dated January 10, 1994 between the MCM-L Consortium and the
Advanced Projects Research Agency, incorporated by reference from
Exhibit 10.4 of the Registrant's Form 10-Q for the quarter ended
February 25, 1994.
10.21 Articles of Collaboration dated November 30, 1993 for the MCM-L
Consortium, incorporated by reference from Exhibit 10.5 of the
Registrant's Form 10-Q for the quarter ended February 25, 1994.
10.22 Agreement relating to Joint Venture dated August 1, 1995 between
Registrant, Jiangxi Changjiang Chemical Plant, Hong Kong Wah Hing
(China) Development Co., Ltd. and Jiujiang Flex Co., Ltd., incorporated
by reference from Exhibit 10.23 of the Registrant's Form 10-K for the
fiscal year ended September 1, 1995.
10.23 Agreement relating to payments dated August 1, 1995 between Registrant
and Jiangxi Changjiang Chemical Plant, Hong Kong Wah Hing (China)
Development Co., Ltd. and Jiujiang Flex Co., Ltd., incorporated by
reference from Exhibit 10.24 of the Registrant's Form 10-K for the
fiscal year ended September 1, 1995.
10.24 Manufacturing Agreement dated August 1, 1995 between Registrant and
Jiujiang Flex Co., Ltd., incorporated by reference from Exhibit 10.25
of the Registrant's Form 10-K for the fiscal year ended September 1,
1995.
40
<PAGE> 41
10.25 Marketing and License Agreement dated August 1, 1995 between Registrant
and Jiujiang Flex Co., Ltd., incorporated by reference from Exhibit
10.26 of the Registrant's Form 10-K for the fiscal year ended September
1, 1995.
10.26 Technology Development Agreement dated August 15, 1995 between Low Cost
Flip Chip Consortium and the Advanced Projects Research Agency,
incorporated by reference from Exhibit 10.27 of the Registrant's Form
10-K for the fiscal year ended September 1, 1995.
10.27 Articles of Collaboration dated July 10, 1995 for the Low Cost Flip
Chip Consortium, incorporated by reference from Exhibit 10.28 of the
Registrant's Form 10-K for the fiscal year ended September 1, 1995.
10.28 Technology Development Agreement dated March 23, 1995 between Plastic
Packaging Consortium and the Advanced Projects Research Agency,
incorporated by reference from Exhibit 10.29 of the Registrant's Form
10-K for the fiscal year ended September 1, 1995.
10.29 Articles of Collaboration dated March 17, 1995 for the Plastic
Packaging Consortium, incorporated by reference from Exhibit 10.30 of
the Registrant's Form 10-K for the fiscal year ended September 1, 1995.
10.30 License Agreement dated June 20, 1994 between Sidrabe and Registrant,
incorporated by reference from Exhibit 10.31 of the Registrant's Form
10-K for the fiscal year ended September 1, 1995.
10.30.1 Amendment No. 1 to License Agreement dated June 20, 1994 between
Sidrabe and the Registrant, incorporated by reference from Exhibit
10.28.1 of the Registrant's Form 10-K for the fiscal year ended August
28, 1998.
10.31 Promissory Note dated August 15, 2000 between the Registrant and
Morgenthaler Venture Partners V, L.P., incorporated by reference from
Exhibit 99.2 of the Registrant's Form 8-K filed August 24, 2000.
10.31.1 Letter Amendment dated November 9, 2000 amending the Promissory Note
dated August 15, 2000 between the Registrant and Morgenthaler Venture
Partners V, L.P., incorporated by reference from Exhibit 99.0 of the
Registrant's Form 8-K filed November 13, 2000.
10.32 Subordination Agreement by Morgenthaler Venture Partners V, L.P. in
favor of Wells Fargo Bank Minnesota, N.A., as agent, dated as of August
15, 2000, incorporated by reference from Exhibit 99.3 of the
Registrant's Form 8-K filed August 24, 2000.
10.33 Consulting Agreement dated August 17, 1988 between James S. Womack and
Sheldahl, Inc. incorporated by reference from Exhibit 10.2 of the
Registrant's Form 10-K for the fiscal year ended August 27, 1993.
10.34 Sheldahl, Inc. Supplemental Executive Retirement Program effective as
of January 1, 1995.
10.34.1 First Amendment to the Sheldahl, Inc. Supplemental Executive Retirement
Plan effective as of October 14, 1997.
10.34.2 Second Amendment to the Sheldahl, Inc. Supplemental Executive
Retirement Plan effective as of September 16, 1998.
10.35 Sheldahl, Inc. Retirement Benefit Program for Directors
22 Subsidiaries of Registrant.
23 Consent of Independent Public Accountants.
----------------
(*) Certain portions of this Exhibit have been deleted and filed separately
with the Commission pursuant to a request for confidential treatment
under Rule 24b-2. Spaces corresponding to the deleted portions are
represented by brackets with asterisks.
41
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: November 30, 2000 SHELDAHL, INC.
By: /s/ Edward L. Lundstrom
--------------------------------------
President and Chief Executive Officer
By: /s/ Jill D. Burchill
--------------------------------------
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant on November 30, 2000 and in the capacities indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints
Edward L. Lundstrom and Jill D. Burchill as such person's true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubmission, for such person and in such person's name, place and stead, in
any and all capacities, to sign any of all amendments to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, each acting alone, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as
such person might or could do in person, hereby ratifying and confirming all
said attorneys-in-fact an agents, each acting alone, or such person's substitute
or substitutes may lawfully do or cause to be done by virtue thereof.
By /s/ James E. Donaghy Chairman of the Board
--------------------------------------
James E. Donaghy
By /s/ Edward L. Lundstrom President and CEO
-------------------------------------- (principal executive officer)
Edward L. Lundstrom
By /s/ Jill D. Burchill Vice President and CFO
-------------------------------------- (principal accounting officer)
Jill D. Burchill
By /s/ John G. Kassakian Director
--------------------------------------
John G. Kassakian
By /s/ Gerald E. Magnuson Director
--------------------------------------
Gerald E. Magnuson
By /s/ William B. Miller Director
--------------------------------------
William B. Miller
By /s/ Kenneth J. Roering Director
--------------------------------------
Kenneth J. Roering
By /s/ Raymond C. Wieser Director
--------------------------------------
Raymond C. Wieser
42
<PAGE> 43
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Report of Independent Public Accountants.....................................................................F-2
Consolidated Balance Sheets as of September 1, 2000 and August 27, 1999......................................F-3
Consolidated Statements of Operations for the Fiscal Years Ended September 1, 2000,
August 27, 1999 and August 28, 1998........................................................................F-4
Consolidated Statements of Changes in Shareholders' Investment for the Fiscal
Years Ended September 1, 2000, August 27, 1999 and August 28, 1998.........................................F-5
Consolidated Statements of Cash Flows for the Fiscal Years Ended September 1, 2000
August 27, 1999 and August 28, 1998........................................................................F-6
Notes to Consolidated Financial Statements...................................................................F-7
Schedule II: Valuation and Qualifying Accounts..............................................................S-1
</TABLE>
F-1
<PAGE> 44
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Sheldahl, Inc.:
We have audited the accompanying consolidated balance sheets of
Sheldahl, Inc. (a Minnesota corporation) and Subsidiary as of September 1, 2000
and August 27, 1999 and the related consolidated statements of operations,
changes in shareholders' investment and cash flows for each of the three fiscal
years in the period ended September 1, 2000. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Sheldahl, Inc. and
Subsidiary as of September 1, 2000 and August 27, 1999 and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended September 1, 2000, in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and is unable to ascertain whether it will have sufficient liquidity available
under its current credit agreement to fund operations or whether the Company
will meet various covenant requirements contained in its credit agreement. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 2. The accompanying financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
As discussed in Note 3 to the financial statements, effective August
30, 1997, the Company changed its method of accounting for start-up costs.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
November 3, 2000
F-2
<PAGE> 45
Sheldahl, Inc. and Subsidiary
Consolidated Balance Sheets
(in thousands, except share and per share data)
Assets
<TABLE>
<CAPTION>
September 1, August 27,
2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,132 $ 1,043
Accounts receivable, net of allowances of $864 and $339 22,253 19,908
Inventories 17,325 18,746
Prepaid expenses and other current assets 1,359 593
--------- ---------
Total current assets 42,069 40,290
--------- ---------
Plant and equipment:
Land and buildings 28,662 28,560
Machinery and equipment 130,981 127,377
Construction in progress 1,249 3,399
Accumulated depreciation (92,539) (76,491)
--------- ---------
Net plant and equipment 68,353 82,845
--------- ---------
Other assets 640 795
--------- ---------
$ 111,062 $ 123,930
========= =========
Liabilities and Shareholders' Investment
Current liabilities:
Current maturities of long-term debt $ 3,468 $ 4,142
Accounts payable 11,477 10,493
Accrued salaries 1,234 1,323
Other accrued liabilities 3,681 4,682
Restructuring reserves 915 2,713
--------- ---------
Total current liabilities 20,775 23,353
Long-term debt, less current maturities 31,537 29,284
Restructuring reserves 1,605 2,484
Other non-current liabilities 2,650 3,477
--------- ---------
Total liabilities 56,567 58,598
--------- ---------
Commitments and contingencies (Notes 2,4,5,6,7,8, and 10)
Shareholders' investment:
Preferred stock, $1 par value, 500,000 shares authorized;
Series B, D, E and F 5% cumulative convertible preferred,
0, 32,353, 8,060, and 1,800; and 167, 32,417, 8,060 and 0 shares
issued and outstanding 42 40
Common stock, $.25 par value, 50,000,000 shares authorized;
11,610,356 and 9,660,614 shares issued and outstanding 3,017 2,903
Additional paid-in capital 113,440 109,407
Accumulated deficit (62,004) (47,018)
--------- ---------
Total shareholders' investment 54,495 65,332
--------- ---------
$ 111,062 $ 123,930
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 46
Sheldahl, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(in thousands, except per share data) For The Fiscal Years Ended
September 1, August 27, August 28,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Net sales $ 136,741 $ 122,086 $ 117,045
Cost of sales 124,677 109,157 109,143
--------- --------- ---------
Gross profit 12,064 12,929 7,902
--------- --------- ---------
Expenses:
Sales and marketing 8,657 9,666 9,861
General and administrative 9,159 8,742 8,152
Research and development 3,083 2,825 3,881
Restructuring costs - 3,050 8,500
Impairment charges - 7,635 3,300
Interest 4,060 2,499 2,547
--------- --------- ---------
Total expenses 24,959 34,417 36,241
--------- --------- ---------
Loss before income taxes and cumulative
effect of change in method of accounting (12,895) (21,488) (28,339)
Provision for income taxes - - 2,952
--------- --------- ---------
Loss before cumulative effect
of change in method of accounting (12,895) (21,488) (31,291)
Cumulative effect of change in method of
accounting - - (5,206)
--------- --------- ---------
Loss before convertible preferred
stock dividends (12,895) (21,488) (36,497)
Convertible preferred stock dividends (2,091) (2,080) (689)
--------- --------- ---------
Loss applicable to common
shareholders $ (14,986) $ (23,568) $ (37,186)
========= ========= =========
Loss per common share:
Basic and diluted -
Loss before cumulative effect of
change in method of accounting and after
convertible preferred stock dividends $ (1.28) $ (2.15) $ (3.41)
Cumulative effect of change in method
of accounting - - (0.56)
--------- --------- ---------
Loss per common share $ (1.28) $ (2.15) $ (3.97)
========= ========= =========
Weighted average number of shares
outstanding - basic and diluted 11,753 10,987 9,364
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 47
Sheldahl, Inc. and Subsidiary
Consolidated Statements of Changes in Shareholders' Investment
<TABLE>
<CAPTION>
For The Fiscal Years Ended
(in thousands) September 1, August 27, August 28,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Series B convertible preferred stock:
Balance at beginning of period - $ 8 $ 15
Preferred stock redemption - (6) -
Conversion to common stock - (2) (7)
--------- --------- ---------
Balance at end of period $ - $ - $ 8
========= ========= =========
Series D convertible preferred stock:
Balance at beginning of period $ 32 $ 33 $ -
Proceeds from stock issuance - - 33
Conversion to common stock - (1) -
--------- --------- ---------
Balance at end of period $ 32 $ 32 $ 33
========= ========= =========
Series E convertible preferred stock:
Balance at beginning of period $ 8 $ - $ -
Proceeds from stock issuance - 9 -
Conversion to common stock - (1) -
--------- --------- ---------
Balance at end of period $ 8 $ 8 $ -
========= ========= =========
Series F convertible preferred stock:
Balance at beginning of period $ - $ - $ -
Proceeds from stock issuance 2 - -
--------- --------- ---------
Balance at end of period $ 2 $ - $ -
========= ========= =========
Common stock:
Balance at beginning of period $ 2,903 $ 2,415 $ 2,258
Conversion of Series B preferred stock 9 366 144
Conversion of Series D preferred stock 3 21 -
Conversion of Series E preferred stock - 30 -
Proceeds from stock purchase plan transactions 20 15 5
Proceeds from stock options exercised - - 8
Common stock issued for preferred stock dividends 82 66 -
--------- --------- ---------
Balance at end of period $ 3,017 $ 2,903 $ 2,415
========= ========= =========
Additional paid-in capital:
Balance at beginning of period $ 109,407 $ 99,751 $ 66,923
Issuance (cost) of Series B convertible preferred stock - - (316)
Conversion of Series B preferred stock 13 24 38
Conversion of Series D preferred stock - 1 -
Conversion of Series E preferred stock - (10) -
Redemption of Series B preferred stock - (623) -
Fair value of warrants issued with
credit agreement - - 377
Proceeds from stock purchase plan transactions 281 280 135
Proceeds from stock options exercised 4 - 218
Issuance (cost) of Series D preferred stock - (23) 32,376
Issuance of Series E preferred stock - 8,452 -
Issuance of Series F preferred stock 1,798 - -
Common stock issued for preferred stock dividends 1,937 1,555 -
--------- --------- ---------
Balance at end of period $ 113,440 $ 109,407 $ 99,751
========= ========= =========
Retained earnings (accumulated deficit):
Balance at beginning of period $ (47,018) $ (23,450) $ 13,736
Net loss (14,986) (23,568) (37,186)
--------- --------- ---------
Balance at end of period $ (62,004) $ (47,018) $ (23,450)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 48
Sheldahl, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
For The Fiscal Years Ended
September 1, August 27, August 28,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Operating activities:
Net loss $(14,986) $(23,568) $(37,186)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 16,848 17,069 14,382
Deferred income taxes - - 2,952
Restructuring costs - 3,050 8,500
Impairment charges - 7,635 3,300
Change in method of accounting - - 5,206
Net change in other operating activities:
Accounts receivable (2,345) (4,181) 153
Inventories 1,421 (3,258) (2,410)
Prepaid expenses and other current assets (766) (34) (221)
Other assets 155 407 (523)
Accounts payable and accrued liabilities 1,938 4,495 1,903
Restructuring reserves (2,677) (4,985) (875)
Other non-current liabilities (827) (484) 251
-------- -------- --------
Net cash used in operating activities (1,239) (3,854) (4,568)
-------- -------- --------
Investing activities:
Capital expenditures, net (2,356) (5,541) (23,268)
-------- -------- --------
Financing activities:
Net borrowings (repayments) under revolving
credit and bridge facilities 2,590 5,674 (26,456)
Proceeds from term facility and warrants, net - - 16,000
Proceeds from other long-term debt 6,300 - 2,335
Repayments of long-term debt (7,311) (4,373) (1,064)
Redemption of Series B preferred stock - (623) -
Proceeds from preferred stock, net 1,800 8,460 32,093
Proceeds from stock options and stock purchase plan 305 295 366
-------- -------- --------
Net cash provided by financing activities 3,684 9,433 23,274
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 89 38 (4,562)
-------- -------- --------
Cash and cash equivalents at beginning of period 1,043 1,005 5,567
-------- -------- --------
Cash and cash equivalents at end of period $ 1,132 $ 1,043 $ 1,005
======== ======== ========
Supplemental cash flow information:
Interest paid $ 4,212 $ 3,489 $ 4,423
======== ======== ========
Income taxes paid $ 79 $ 173 $ 36
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 49
Sheldahl, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(1) Business Description
Sheldahl creates and distributes thin, flexible laminates and their
derivatives to worldwide markets. The Company's laminates are of two
types: adhesive-based tapes and materials, and its patented
adhesiveless material, Novaclad(R). From these materials, Sheldahl
fabricates high-value derivative products: single- and double-sided
flexible interconnects and assemblies under the trade names
Flexbase(R), Novaflex(R) HD and Novaflex(R) VHD and integrated
circuit substrates under the trade name ViaArray(R) and ViaThin(R).
The Company operates in two business segments identified as the
Company's Core Business and the Micro Products business. The Core
Business segment consists of flexible laminates and derivative
products, principally flexible interconnect circuits and assemblies.
These products are targeted across all markets served by the Company
with the automotive market generating 57.6% of fiscal 2000 sales for
this segment. The Micro Products business segment is a developing
business that targets the integrated circuit (IC) industry of the
electronics market. The Company's ViaArray and ViaThin products are
marketed and sold through this segment and are exclusively reflected
in the Company's datacom market sales.
The Company's manufacturing and assembly sites with their related
assets are used to manufacture specific product offerings of the
Company regardless of business segment. For instance, the Longmont
facility today contributes to the manufacture of all Novaclad-based
products. These products, including Novaflex HD and VHD, are sold
through the Core Business and ViaThin is sold through Micro
Products. The Company allocates its shared production assets based
on an appropriate percentage of asset utilization with unused
capacity being assigned to the segment originating the investment.
(2) Liquidity and Going Concern Matters
During the three-year period ended September 1, 2000, the Company
incurred, principally at its Micro Products operations, cumulative
net losses totaling approximately $75.7 million, including
restructuring and other charges of $27.7 million. During this
three-year period, the Company used cash of approximately $31.2
million supporting capital expenditures and approximately $9.7
million for net operating activities. The Company has financed these
expenditures and losses principally through equity and debt
financing.
Cash requirements to fund restructuring charges taken during fiscal
1999 and 1998 are expected to be approximately $0.9 million in
fiscal 2001 compared to $2.7 million and $5.0 million in fiscal 2000
and 1999, respectively. Fiscal 2001 capital expenditures for the
Company are planned at approximately $12.0 million, compared with
$2.4 million in fiscal 2000. Debt repayments for fiscal 2001 will be
approximately $3.5 million, including approximately $2.5 million on
the bank term facility and approximately $1.0 million for various
capital lease payments.
The Company expects that fiscal 2001 operating losses, tight
borrowing levels pursuant to its debt agreements and the uncertainty
of the timing of sales growth from the Company's Micro Products
business will place significant pressure on the cash reserves of the
Company. Cash flow projections based on the Company's operating plan
for fiscal 2001 reflect an increased level of cash flow requirements
during the year as working capital expands to support projected
sales growth. The Company believes that the transactions discussed
in Note 13 will alleviate the Company's cashflow and liquidity
constraints and provide the needed cashflow to continue to fund
normal operations. However, the inability of the Company to i)
consummate the transactions described in Note 13 or raise additional
debt or equity of at least $5.0 million during the first half of
fiscal 2001; ii) execute the sales orders received from Micro
Products business customers; iii) improve operating results in the
Micro Products business; iv) achieve operating performance from the
Company's Core Business above fiscal 2000 levels; v) achieve other
cost or productivity improvements included in the Company's fiscal
2001 budget and vi) maintain adequate liquidity to fund normal
operations would result in the Company being out of compliance with
certain of its debt covenants thereby allowing the Company's lenders
to require full repayment of the outstanding borrowings under the
Company's credit agreement and/or leave the Company in a cash
reserve position
F-7
<PAGE> 50
that would require additional capital to fund operations. These
matters raise substantial doubt about the Company's ability to
continue as a going concern. Management has and will continue to
implement operational measures designed to assist the Company in
achieving its fiscal 2001 budget and cash flow objectives. Should
any of the adverse matters discussed above ultimately occur,
management will attempt to take one or all of the following actions:
(i) obtain new equity capital, (ii) issue new debt, and/or (iii)
significantly restructure the Company's operations. However, there
can be no assurance that the Company will be successful in closing
the transactions described in Note 13, in achieving its projected
operating results for fiscal 2001, in meeting its quarterly debt
covenants during fiscal 2001, in its attempt to issue additional
debt or to raise additional capital on terms acceptable to the
Company, or in the event of the failure of the foregoing,
successfully take the actions described above.
(3) Summary of Significant Accounting Policies
Basis of Presentation -
The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States and include the accounts of the Company and its
wholly-owned subsidiary. All significant intercompany transactions
have been eliminated. The Company's fiscal year ends on the Saturday
closest to August 31. Fiscal year 2000 consisted of 53 weeks. Fiscal
years 1999 and 1998 consisted of 52 weeks.
Use of Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
sales and expenses during the reporting period. Ultimate results
could differ from those estimates.
Fair Value of Financial Instruments -
The carrying amounts reported in the balance sheet for accounts
receivable and accounts payable approximate fair value because of
the immediate or short-term maturity of these financial instruments.
The carrying amount for long-term debt under the Company's credit
agreement approximates its fair value because of the variable rate
feature and because the related interest rates are comparable to
rates currently available to the Company for debt with similar
terms. The fair value of the Company's note payable to insurance
company, based on the present values of the underlying cashflows
discounted at the Company's incremental borrowing rate, approximated
$3.6 million as of September 1, 2000. The fair value of the
Company's unsecured note payable to Morganthaler approximates fair
value due to its recent issuance and pricing terms (See Note 5).
Significant Customers -
The Company's two largest customers accounted for sales of
$12,615,000 and $12,051,000 in fiscal 2000, the Company's two
largest customers in fiscal 1999 accounted for sales of $13,607,000
and $12,917,000, and the Company's three largest customers in fiscal
1998 accounted for sales of $18,100,000, $12,100,000 and
$11,700,000. No other customers accounted for more than 10% of net
sales in any of the last three fiscal years.
Export Sales -
The Company had export sales of $43,056,000 in 2000, $29,984,000 in
1999 and $24,501,000 in 1998.
Revenue Recognition -
The Company recognizes revenue principally as products are shipped.
In addition, the Company grants credit to customers and generally
does not require collateral or any other security to support amounts
due.
F-8
<PAGE> 51
Inventories -
Inventories are stated at the lower of cost or market, with cost
determined on the first-in, first-out (FIFO) method. Cost includes
the cost of materials, direct labor, and applicable manufacturing
overhead.
The components of inventories are as follows (in thousands):
<TABLE>
<CAPTION>
September 1, August 27,
2000 1999
---- ----
<S> <C> <C>
Raw material $ 9,053 $ 6,635
Work-in-process 3,812 7,751
Finished goods 4,460 4,360
------- -------
Total $17,325 $18,746
======= =======
</TABLE>
Plant and Equipment -
Plant and equipment are stated at cost and include expenditures that
increase the useful lives of existing plant and equipment. The cost
of major plant and equipment additions includes interest capitalized
during the acquisition period. Interest capitalized totaled $122,000
in 2000, $990,000 in 1999 and $1,903,000 in 1998. Maintenance,
repairs and minor renewals are charged to operations as incurred.
When plant and equipment are disposed of, the related cost and
accumulated depreciation are removed from the respective accounts
and any gain or loss is reflected in the results of operations.
For financial reporting purposes, plant and equipment are
depreciated principally on a straight-line basis over the estimated
useful lives of 20 to 40 years for buildings and 3 to 15 years for
machinery and equipment. For income tax reporting purposes,
straight-line and accelerated depreciation methods are used.
Income Taxes -
Deferred income taxes are provided for temporary differences between
the financial reporting basis and tax basis of the Company's assets
and liabilities at currently enacted tax rates. Beginning in fiscal
1998, the Company began providing a valuation allowance against the
Company's net deferred tax assets (see Note 9).
Earnings per Share -
The Company follows the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share". Basic earnings
per share are computed using the weighted average number of shares
of common stock outstanding for the period. Diluted earnings per
share is computed using the weighted average number of shares of
common stock, the dilutive common equivalent shares related to stock
options outstanding during the period and the equivalent common
shares of convertible preferred stock, if those equivalent shares
are dilutive. During fiscal 2000, 1999 and 1998 stock options and
convertible preferred stock equivalents are anti-dilutive and,
therefore, are not included in the computation of diluted earnings
per share.
New Accounting Pronouncements -
Effective in the year ended August 27, 1999, the Company adopted
SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 131 superseded SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS
No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual
financial statements and requires that those enterprises report
selected information about operating segments in interim financial
reports. SFAS No. 131 also establishes standards for related
disclosures about products and services,
F-9
<PAGE> 52
geographic areas and major customers. The adoption of SFAS No. 131
did not affect results of operations or financial position (see Note
12).
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," effective for fiscal years beginning after June 15,
2000. SFAS No. 133 establishes accounting and reporting standards
requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded in
the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains or losses to offset related
results on the hedged item in the income statement and requires that
a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The
Company will adopt SFAS No. 133 at the beginning of fiscal 2001 and
does not expect the adoption to materially impact its results of
operations or financial position.
Start-up Costs -
In fiscal 1998, the Company adopted Statement of Position No. 98-5,
"Reporting on the Costs of Start-Up Activities," which requires the
expensing of these items as incurred, versus capitalizing and
expensing them over a period of time. Start-up activities are
broadly defined and include one-time activities related to opening a
new facility, introducing a new product or service, conducting
business in a new territory, conducting business with a new class of
customer or beneficiary, initiating a new process in an existing
facility, commencing some new operation, and organizing a new
entity. The adoption of this statement resulted in a cumulative
effect of a change in method of accounting of approximately $5.2
million, primarily related to costs capitalized by the Company from
its Longmont, Colorado facility.
(4) Restructuring and Impairment Charges
In February 1999, the Company recorded a charge of $3.1 million for
separation costs incurred in reducing its salaried work force. This
charge was increased by $0.5 million in August 1999. The
restructuring costs provide for approximately $2.0 million for
severance and early retirement salary costs and approximately $1.6
million for medical, dental and other benefits being provided to the
affected individuals. Approximately 43 people were affected by this
action.
In February 1998, a restructuring charge of $4.0 million was
recorded related to the culmination of the Company's business
re-engineering initiative that began in 1996. Due to significant
productivity benefits resulting from the initiative, the Company
reduced the size of its salaried workforce. The resulting workforce
reduction involved layoffs, early retirement offerings,
reassignments and reclassifications of positions. The restructuring
costs provided for approximately $2.5 million for severance and
early retirement salary costs, approximately $1.3 million for
medical, dental and other benefits being provided to the affected
individuals, and approximately $0.2 million for outplacement and
other costs. Approximately 73 people were affected by this action.
In May 1998, an additional restructuring charge of $4.5 million was
recorded and subsequently reduced by $0.5 million in May 1999. This
restructuring charge related to the closing of the Company's
Aberdeen, South Dakota assembly facility and reducing its Northfield
production workforce. The restructuring costs provided for
approximately $1.4 million for severance costs, approximately $0.4
million for medical, dental and other benefits being provided to the
affected individuals and approximately $2.2 million for equipment
disposal, losses related to the closure of the Aberdeen facility,
outplacement and other costs. Approximately 196 people were affected
by this action.
As of September 1, 2000, approximately $5.3 million had been charged
to the Company's restructuring reserves related to severance and
early retirement salary costs, approximately $1.4 million related to
medical, dental and other benefits and approximately $2.4 million
for equipment disposal and other costs and by November 1, 2000, 312
employees have terminated employment with the Company related to the
fiscal 1998 and 1999 restructuring actions. The remaining severance
and early retirement costs are anticipated to be paid through fiscal
2002, and the remaining medical, dental and other benefits are
anticipated to be paid through fiscal 2003.
F-10
<PAGE> 53
The Company periodically evaluates whether events and circumstances
have occurred which may affect the estimated useful life or the
recoverability of the remaining balance of its long-lived assets. If
such events or circumstances were to indicate that the carrying
amount of these assets would not be recoverable, the Company would
estimate the future cash flows expected to result from the use of
the assets and their eventual disposition. If the sum of the
expected future cash flows (undiscounted and without interest
charges) were less than the carrying amount of the long-lived
assets, the Company would recognize an impairment charge. During
1999 and 1998, the Company recorded non-cash impairment charges of
$7.6 million and $3.3 million, respectively, related to equipment
located principally at its Longmont, Colorado facility and certain
computer software and equipment, which, based upon analysis by
management and anticipated production processes, these items were
not expected to contribute to the Company's future cash flows.
F-11
<PAGE> 54
(5) Financing
<TABLE>
<CAPTION>
Long-term debt consisted of the following (in thousands): September 1, August 27,
2000 1999
---- ----
<S> <C> <C>
Revolving facility $ 14,327 $ 11,737
Term facility, net 11,591 14,119
Note payable to insurance company, secured by real estate
mortgage. Interest at 8.53% with monthly payments of $48,
including principal and interest through December 2009 4,266 -
Note payable to insurance company, secured by real estate
mortgage, repaid in November 1999 - 3,787
Unsecured note payable to Morgenthaler, interest at
8.0% with principal and interest due in December 2001 2,000 -
Capitalized lease obligations payable to an investment company
secured by computer equipment and software. Interest
at 10.17% with monthly payments of $40, including principal
and interest through July 2002 808 1,190
Capitalized lease obligation payable to a bank, secured by
computer, communications equipment and related software.
Interest at 7.8% with monthly payments of $14, including
principal and interest through October 2003 304 444
Installment note due a finance company, secured by computer
hardware and software, interest at 9.69% with monthly
payments of $49, including principal and interest, due
January 2003 1,259 1,699
Note payable to Economic Development Agency, interest at
3.0% with monthly interest only payments of $1 until October 2001
due August 2009 450 450
-------- --------
35,005 33,426
Less-current maturities (3,468) (4,142)
-------- --------
$ 31,537 $ 29,284
======== ========
</TABLE>
The Company's credit agreement provides three separate facilities: a
revolver facility of up to $25 million based on the Company's adjusted
working capital; a term facility for $16 million based on the appraised
value of the Company's unencumbered equipment; and a bridge facility
for $19 million. The bridge facility was repaid in full on July 31,
1998 with part of the net proceeds from the Series D Preferred Stock.
Interest on the revolver and the term facility is charged at the prime
rate, which was 9.5% as of September 1, 2000, 8.25% as of August 27,
1999 and 8.5% as of August 28, 1998. As of September 1, 2000, the
amount available to borrow on the revolver was approximately $8.2
million, which reflects a $1.5 million reduction by the Company's
lenders for a liquidity reserve taken as part of waiving prior events
of covenant non-compliance. Effective November 1999, in connection with
the waiving of covenant non-compliance, the Company's lenders increased
the interest rate to prime plus 2%. All borrowings under the agreement
are secured by the Company's tangible and intangible assets. The term
facility requires monthly repayments of $205,000, which started in
January 1999. The revolving credit facility is due on December 1, 2001.
In November 2000, the Company's lenders removed the $1.5 million
liquidity reserve. Under the credit agreement, the Company issued to
its lenders 5-year warrants to purchase in the aggregate 100,000 shares
F-12
<PAGE> 55
of common stock at a price of $6.92 per share (101.5% of the Company's
common stock price at date of issuance), exercisable through July 2003.
The fair value of the warrants of approximately $377,000 was determined
on their date of issuance using the Black-Scholes methodology, has been
recorded as a reduction of the term facility in the accompanying
financial statements, and will be accreted as interest expense over the
term of the associated credit and security agreement.
The agreement requires certain covenants including restricting the
payments of cash dividends, capital expenditures and the redemption of
preferred stock, and requires the Company to maintain certain levels of
net worth, net income and to maintain certain levels of cash flows from
operations. As of September 1, 2000, the Company was not in compliance
with its minimum level of net worth, minimum level of net
(loss)/income, level of cash flow available for debt service and debt
service coverage ratio covenants under the credit agreement. The
Company received waivers for these events of non-compliance for the
fiscal year ended September 1, 2000.
Future maturities of debt as of September 1, 2000 are as follows (in
thousands):
<TABLE>
<S> <C>
Fiscal 2001 3,468
Fiscal 2002 26,610
Fiscal 2003 398
Fiscal 2004 126
Fiscal 2005 131
Thereafter 4,272
---------
$ 35,005
---------
</TABLE>
In August 2000, the Company borrowed $2.0 million, unsecured, from
Morgenthaler Venture Partners, V L.P (Morgenthaler) with interest at
8.0%. If the transaction discussed in Note 13 is consummated, this note
payable will be converted into subordinated debt upon closing of such
transaction. If the transaction discussed in Note 13 is not
consummated, this note payable is due December 31, 2001; at which time
Morgenthaler has the option of converting the note payable into shares
of the Company's common stock at a conversion rate that is dependent on
the Company's financial performance.
In November 1999, the Company refinanced its outstanding secured real
estate loan with an insurance company. The new $4.3 million, ten-year
secured real estate mortgage carries an interest rate of 8.53%. Annual
principal payments and interest under the new secured loan will
approximate $417,000. Concurrent with the closing of this refinancing,
the Company fully satisfied the $3.6 million secured real estate loan,
plus accrued and unpaid interest that was outstanding to the insurance
company.
(6) Preferred Stock
In January, 2000, the Company issued 1,800 shares of Series F
Convertible Preferred Stock with a total stated value of $1,800,000.
This Series F preferred stock earns a 5% dividend rate, payable
annually in shares of common stock or cash at the Company's option, and
is convertible into nearly 330,000 shares at a fixed rate of $5.46 per
share. The purchasers of the Series F preferred stock were also issued
55,800 warrants to purchase the Company's Common Stock at a price of
$5.46 per share. These warrants expire in January, 2005. Net proceeds
from the Series F preferred stock were approximately $1,800,000. As of
September 1, 2000, 1,800 shares of Series F preferred stock were
outstanding. Accrued dividends of $56,000 are included in accounts
payable in the accompanying 2000 consolidated balance sheet.
In February and March of 1999, the Company issued 8,560 shares of
Series E Convertible Preferred Stock with a total stated value of
$8,560,000. This Series E preferred stock earns a 5% dividend rate,
payable annually in shares of common stock or cash at the Company's
option, and is convertible into nearly 1.4 million shares at a fixed
rate of $6.25 per share. The purchases of the Series E preferred stock
were also issued 85,600 warrants to purchase the Company's common stock
at a price of $7.8125 per share. These warrants expire in February
2004. Net proceeds from the Series E preferred stock were approximately
$8,460,000. As of September 1, 2000, 8,060 shares of Series E
convertible preferred stock were outstanding. Dividends of $403,000
were declared during fiscal 2000 and paid in shares of common stock.
Accrued dividends of $202,000 are included in accounts payable in the
accompanying 2000 consolidated balance sheet.
F-13
<PAGE> 56
In July, 1998, the Company issued 32,917 shares of Series D convertible
preferred stock with a total stated value of $32,917,000. This Series D
preferred stock carried a 5% dividend rate, payable annually in shares
of common stock or cash at the Company's option, and is convertible
into nearly 5.4 million shares at a fixed rate of $6.15 per share. The
holders of the Series D preferred stock were also issued 329,170
warrants to purchase the Company's common stock at a price of $7.6875
per share. These warrants expire in July 2001. Net proceeds from the
Series D preferred stock were $32,409,000. As of September 1, 2000,
32,353 shares of Series D Convertible Stock were outstanding. Dividends
of $1,618,000 were declared during fiscal 2000 and paid in shares of
common stock. Accrued dividends of $135,000 are included in accounts
payable in the accompanying 2000 consolidated balance sheet.
In August, 1997, the Company issued 15,000 shares of Series B
cumulative convertible preferred stock with a stated value of $1,000
per share for a total of $15 million. Series B preferred stock is
convertible to common stock and carries a 5% cumulative dividend,
payable upon conversion and payable in common stock or cash, at the
Company's option. The Series B preferred stock conversion price is the
lower of 110% of the five-day average closing price of the Company's
common stock preceding the issuance of the preferred shares ($25.34),
or 101% of the lowest consecutive five-day average closing price of the
common stock in the 30-day period immediately prior to conversion.
Holders of the Series B preferred stock may convert to common stock of
the Company at any time, subject to certain limitations. Under certain
circumstances, the Company may require the holders to convert to common
stock. Under certain circumstances, the Company may be required to
redeem the preferred stock. Along with the Series B preferred stock,
the investors received warrants to purchase 67,812 additional common
shares at $27.65 per share, which expired in August, 2000. Dividends of
$14,000 were declared during fiscal 2000 and paid in shares of common
stock. As of September 1, 2000, all of the Series B preferred stock had
been redeemed or converted to common stock.
(7) Stock Based Compensation
The shareholders of the Company have approved stock option plans (the
Plans) for officers, other full-time key salaried employees, and
non-employee directors of the Company to reward outstanding performance
and enable the Company to attract and retain key personnel. Under the
Plans, options are granted at an exercise price equal to the fair
market value of the Company's common stock at the date of grant and are
generally exercisable for five or ten years. The Plans also provide for
automatic grants of 25,000 target grant replacement stock options to
each non-employee director of the Company on the date that each such
director is first elected to the Board of Directors, and expire, to the
extent not already expired, one year after termination of service as a
Director. As of September 1, 2000, the Plans authorize the future
granting of options to purchase up to 224,000 shares of common stock.
Stock option transactions during 1998, 1999 and 2000 are summarized as
follows:
<TABLE>
<CAPTION>
Shares Price per Share
---------- ---------------
<S> <C> <C>
Outstanding at August 29, 1997 1,188,780 $ 5.000 to $ 22.125
Granted 425,723 $ 5.250 to $ 20.375
Exercised (54,678) $ 5.000 to $ 16.875
Lapsed (87,012) $11.500 to $ 22.125
----------
Outstanding at August 28, 1998 1,472,813 $ 5.00 to $ 22.125
Granted 207,215 $ 5.125 to $ 7.4375
Lapsed (126,062) $11.50 to $ 22.125
----------
Outstanding at August 27, 1999 1,553,966 $ 5.00 to $ 22.125
Granted 78,252 $ 4.0625 to $ 6.438
Lapsed (193,498) $ 5.00 to $ 22.00
Exercised (834) $ 5.25 to $ 5.25
----------
Outstanding at September 1, 2000 1,437,886 $ 4.0625 to $ 22.125
==========
</TABLE>
F-14
<PAGE> 57
Options exercisable were 1,137,044 as of September 1, 2000, 1,054,653
as of August 27, 1999 and 946,710 as of August 28, 1998. The options
outstanding as of September 1, 2000, expire five or ten years after the
grant date as follows:
<TABLE>
<CAPTION>
Number of Options
Fiscal Years That Expire
------------ -----------
<S> <C>
2001 40,575
2002 100,000
2003 128,208
2004 96,836
2005 39,280
2006 252,500
2007 240,352
2008 354,951
2009 110,266
2010 74,918
</TABLE>
As provided for in Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", the Company continues to
measure compensation cost for its plans using the method of accounting
prescribed by Accounting Principles Board Opinion No. 25. Entities
electing to remain with the accounting in APB 25 must make pro forma
disclosures of net income (loss) and, if presented, earnings per share,
as if the fair value based method of accounting defined in SFAS No. 123
had been followed.
The following weighted average assumptions were utilized by the
Company:
<TABLE>
<CAPTION>
Fiscal Years Ended
September 1, August 27, August 28,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 6.05 - 6.62% 4.84 - 6.11% 5.07 - 6.18%
Expected lives 7 years 7 years 7 years
Expected volatility 46.13 - 48.88% 49.13 - 55.16% 49.17 - 70.46%
</TABLE>
Using the Black-Scholes option pricing model, the total value of stock
options granted during 2000, 1999 and 1998 was $223,000, $777,000 and
$2,645,000, respectively, which would be amortized on a pro forma basis
over the vesting period of the options (typically ranging from six
months to three years). The weighted average fair value of options
granted during 2000, 1999 and 1998 was $2.85 per share, $3.71 per share
and $6.86 per share, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net loss per share (basic
and diluted) would have been as follows:
<TABLE>
<CAPTION>
Fiscal Years Ended
(in thousands, September 1, 2000 August 27, 1999 August 28, 1998
----------------- --------------- ---------------
except per share data) As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(14,986) $(18,302) $(23,568) $ (27,630) $(37,186) $ (41,134)
Loss per share $ (1.28) $ (1.56) $ (2.15) $ (2.51) $ (3.97) $ (4.39)
</TABLE>
F-15
<PAGE> 58
(8) Commitments and Contingencies
Lease Commitments -
The Company has non-cancelable operating lease commitments for certain
manufacturing equipment, which expire at various dates through fiscal
2003. Minimum commitments as of September 1, 2000 under operating
leases are $2,772,497 in 2001, $956,451 in 2002, and $101,513 in 2003.
In accordance with the terms of the lease agreements, the Company is
required to pay maintenance and property taxes related to the leased
property. Operating lease expense was $2,158,000 in 2000, $2,489,000 in
1999 and $2,816,000 in 1998.
The Company has entered into various capital lease arrangements for the
purchase of certain communication and computer equipment and related
software totaling approximately $2.7 million. Amortization expense
relating to these capital leases was $448,000 in fiscal 2000, $448,000
in fiscal 1999 and $140,000 in fiscal 1998. The following is a schedule
of future gross minimum capital lease payments (in thousands):
<TABLE>
<S> <C>
Fiscal 2001 $ 548
Fiscal 2002 648
Fiscal 2003 24
-------
$ 1,220
Less amount representing interest (108)
-------
Present value of net minimum capital lease payments $ 1,112
=======
</TABLE>
Employment Agreements -
The Company has employment agreements with various officers which are
renewable in successive one-year terms after September 1, 2000,
requiring $3.1 million in severance benefits following a change in
control of the Company not approved by the Company's board of
directors, $1.6 million in severance benefits if the change of control
is approved by the Company's board of directors and the various
officers continue employment with the Company for at least one year
following the change in control, or a greater amount, if any, payable
under the Company's severance pay plan, which provides generally for
payment based on length of service of up to two times an employees base
pay in effect on the date of termination if an employee is terminated
at the Company's initiative and such employee's employment is in good
standing at the time of such termination.
Litigation -
The nature of the Company's operations exposes it to the risk of
certain legal and environmental claims in the normal course of
business. Although the outcome of these matters cannot be determined,
management believes, based upon the advice and consultations with its
legal counsel, that final disposition of these matters will not have a
material adverse effect on the Company's operating results or financial
condition.
F-16
<PAGE> 59
(9) Income Taxes
The provision for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
September 1, August 27, August 28,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Currently payable $ - $ - $ -
Deferred - - 2,952
---------- ---------- -------
Provision for income taxes $ - $ - $ 2,952
========== ========== =======
</TABLE>
Reconciliation from the provision for income taxes using the statutory
federal income tax rate to the provision for income taxes is as
follows:
<TABLE>
<CAPTION>
September 1, August 27, August 28,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Federal statutory rates $ (4,384) $ (7,306) $(11,404)
Research and experimentation tax credits - - (356)
State income taxes, net of federal benefit (349) (582) (908)
Change in valuation allowance 4,746 7,433 15,389
Other (13) 455 231
--------- -------- --------
$ - $ - $ 2,952
========= ======== ========
</TABLE>
As of September 1, 2000, the Company had federal net operating loss
carryforwards of approximately $70 million and federal income tax
credit carry forwards of approximately $1.0 million that expire through
2020. Future uses of these federal tax benefits are dependent upon
profitability of the Company. The future use of federal tax benefits
are subject to limitation under Internal Revenue Code Section 382 due
to a change in control as defined by Internal Revenue Code Section 382.
Temporary differences and carryforwards which result in net deferred
income tax assets as of September 1, 2000 and August 27, 1999 were as
follows:
<TABLE>
<CAPTION>
September 1, August 27,
2000 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 24,763 $ 18,397
Restructuring reserves 900 2,066
Income tax credit carryforwards 976 976
Postretirement benefits 701 825
Deferred compensation 557 727
Inventories 951 713
Medical reserves 250 250
Vacation reserve 106 144
Bad debt reserve 317 124
Other 169 193
-------- --------
Deferred tax assets 29,690 24,415
Deferred tax liabilities:
Depreciation (1,917) (1,388)
Valuation allowance (27,773) (23,027)
-------- --------
Net deferred taxes $ - $ -
======== ========
</TABLE>
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. The
Company established a full valuation allowance for its net deferred tax
assets due to the uncertainty related to their ultimate realization.
The Company arrived at such a decision considering several factors,
including but not limited to, historical cumulative losses incurred by
the Company and anticipated continued operating losses. The Company
will continue to evaluate the need for the valuation allowance, and at
such time it is determined that it is more likely than not that such
deferred tax assets will be realized, the valuation allowance, or a
portion thereof, will be reversed.
F-17
<PAGE> 60
(10) Pension and Postretirement Benefits
Defined Benefit Plan -
The Company sponsors a defined benefit pension plan covering
substantially all hourly employees of the Company's Northfield,
Minnesota, facility (the Northfield Plan). During 2000 the pension plan
was amended to reflect certain benefit level changes negotiated in
connection with the Company's union contract. Pension costs are funded
in compliance with the Employee Retirement Income Security Act of 1974.
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
September 1, 2000 August 27, 1999
----------------- ---------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 6,309,136 $ 6,491,198
Service cost 237,148 258,687
Interest cost 519,016 449,119
Plan amendments 711,877 -
Benefits paid (225,706) (188,275)
Actuarial (gain) loss (542,047) (701,593)
----------- -----------
Benefit obligation at end of year $ 7,009,424 $ 6,309,136
=========== ===========
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year $ 7,399,100 $ 6,233,723
Actual return on plan assets 720,265 1,132,652
Employer contributions 69,964 221,000
Benefits paid (225,700) (188,275)
----------- -----------
Fair value of plan assets at end of year $ 7,963,629 $ 7,399,100
=========== ===========
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
September 1, 2000 August 27, 1999
----------------- ---------------
<S> <C> <C>
RECONCILIATION OF FUNDED STATUS
Funded status $ 954,205 $ 1,089,964
Unrecognized actuarial gain (2,738,017) (2,180,913)
Unrecognized transition obligation 20,051 30,083
Unrecognized prior service cost 1,281,940 666,592
----------- -----------
Accrued benefit cost $ (481,821) $ (394,274)
=========== ===========
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
September 1, 2000 August 27, 1999
----------------- ---------------
<S> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate 8.00% 7.50%
Expected long-term rate of
return on plan assets 8.50% 8.00%
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
September 1, 2000 August 27, 1999 August 28, 1998
----------------- --------------- ---------------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 237,148 $ 258,687 $ 200,234
Interest cost 519,016 449,119 382,495
Expected return on plan assets (625,063) (541,476) (422,346)
Amortization of prior service cost 96,529 64,274 50,429
Amortization of transitional obligation 10,029 10,029 10,029
Recognized actuarial gain (80,145) (21,676) (48,356)
--------- --------- ---------
Net periodic benefit cost $ 157,514 $ 218,957 $ 172,485
========= ========= =========
</TABLE>
F-18
<PAGE> 61
Employee Savings Plan -
The Company has an employee savings plan covering all employees who
meet certain age and service requirements and who are not participants
in the Northfield Plan.
The Company's contribution to the employee savings plan equals 2% of
the participant's salary. The Company also matches participants'
voluntary contributions to the plan. This matching contribution is
subject to Company earnings on a quarterly basis and is limited to 4%
of each participant's salary. The Company's expense related to the
employee savings plan was $354,000 in 2000, $389,000 in 1999 and
$448,000 in 1998. Effective September 1, 2000 the Company amended the
employee savings plan requiring the Company to make a matching
contribution of 100% of the first 2% of compensation of each
participant contributed to the employee savings plan as an elective
contribution.
Postretirement Benefits -
The Company recognizes expense for the expected cost of providing post
retirement benefits other than pensions to its employees. The expected
cost of providing these benefits is charged to expense during the years
that the employees renders service.
The Company's plan, which is unfunded, provides medical and life
insurance benefits for select employees. These employees, who retire
after age 40 with 20 years or more service, have access to the same
medical plan as active employees.
The change in benefit obligation and plan assets consisted of the
following:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended
September 1, 2000 August 27, 1999
----------------- ---------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 775,262 $ 986,906
Service cost 33,581 46,058
Interest cost 56,940 68,162
Actuarial loss (gain) (2,733) (282,494)
Benefits paid (51,101) (43,370)
--------- ---------
Benefits obligation at end of year $ 811,949 $ 775,262
========= =========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ - $ -
Employer contributions 51,101 43,370
Participant contributions 37,582 35,214
Benefits paid (88,683) (78,584)
--------- ---------
Fair value of plan assets at end of year $ - $ -
========= =========
RECONCILIATION OF FUNDED STATUS
Funded status $(811,949) $(775,262)
Unrecognized actuarial loss (gain) (177,738) (186,846)
--------- ---------
Accrued benefit cost (989,687) (962,108)
Employer contribution after measurement date 35,563 6,992
--------- ---------
Accrued benefit cost $(954,124) $(955,116)
========= =========
WEIGHTED AVERAGE ASSUMPTION:
Discount rate 8.00% 7.50%
Expected return on plan assets 9.00% 9.50%
</TABLE>
For measurement purposes, a 9 percent annual rate of increase in the per capita
cost of covered health care benefits was assumed for the fiscal year ended
September 1, 2000. The rate was assumed to decrease gradually to 5.5 percent for
fiscal 2007 and remain at that level thereafter.
F-19
<PAGE> 62
The components of net periodic benefit costs are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
September 1, 2000 August 27, 1999 August 28, 1998
----------------- --------------- ---------------
<S> <C> <C> <C>
Service cost $ 33,581 $ 46,058 $ 35,311
Interest cost 56,940 68,162 64,387
Recognized actuarial loss (11,841) 6,858 673
--------- ---------- ----------
Net periodic benefit cost $ 78,680 $ 121,078 $ 100,371
========= ========== ==========
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for post retirement medical benefit plans. A one percentage
point change in assumed health care cost trend rates would not have a material
impact or total service and interest cost components or on the post retirement
benefit obligations.
(11) Joint Ventures
On July 28, 1998, the Company and Molex Incorporated ("Molex") formed a
joint venture to design, market and assemble modular interconnect
systems to replace wiring harnesses in primarily the automotive market.
The new company was named Modular Interconnect Systems, L.L.C. and it
is a Delaware limited liability company ("Origin"). Origin will utilize
proprietary flexible products developed by the Company and proprietary
connectors developed by Molex in the development of the new modular
interconnect system as an alternative to conventional automotive wiring
harnesses and flex circuit assemblies. The Company and Molex will
supply their respective products to Origin pursuant to long-term supply
contracts. The Company owns 40% and Molex owns 60% of Origin. Each
party has a right of first refusal with respect to the other party's
ownership interest. Origin is being funded by contributions from the
Company and Molex. Both the Company and Molex granted Origin a
non-exclusive license to certain of their intellectual property for
purposes of producing the new modular interconnect systems. Each
license takes effect and is contingent upon a change of control of the
Company or Molex and the purchase of such person's membership interest
in Origin. As of September 1, 2000, the Company's investment in and the
impact of accounting for its investment in Origin under the equity
method has not been material.
In August 1995, the Company entered into various agreements to form a
joint venture in Juijiang Jiangxi China with Jiangxi Changjiang
Chemical Plant and Hong Kong Wah Hing (China) Development Co., Ltd.
Under the agreements, the Company has licensed certain technology to
the joint venture and is providing certain technical support. In
return, the Company received a 20% ownership interest in the joint
venture, $900,000 in cash over a three-year period, subject to
completion of certain milestones; and royalties, based upon a
percentage of products sold by the joint venture. The joint venture was
established to manufacture flexible adhesive-based copperclad laminates
(Flexbase) and associated cover film tapes in China. Under the terms of
the agreements, the joint venture will market these products in China,
Taiwan, Hong Kong and Macau. The Company accounts for its investment in
this joint venture under the cost method, and the impact thereof has
not been material.
(12) Segment Information
The Company's revenue producing businesses are identified as the Core
Business and Micro Products. The Management Team, a group of operating
executives, is responsible for defining the strategies and directions
for the businesses. The Core Business segment consists of flexible
laminates and derivative products, principally flexible interconnect
circuits and assemblies. These products are targeted across all markets
served by the Company with the automotive market generating 57.5% of
fiscal 2000 sales for this segment. The Company's Novaclad, Novaflex HD
and VHD products are marketed and sold by this business. The Micro
Products business segment is a developing business that targets the
integrated circuit (IC) industry of the electronics market. The
Company's ViaArray and ViaThin products are marketed and sold through
this segment and are exclusively reflected in the Company's datacom
market sales.
F-20
<PAGE> 63
The Company markets and sells its products to major North American and
European automotive original equipment manufacturers (OEM's) and first
and second tier suppliers to the automotive industry. The Company also
markets and sells its products to the datacom (electronics) market in
areas that require dense electronic packaging such as integrated
circuit packages, laptop computers, high-end disc drives and portable
communication devices.
The Company's manufacturing and assembly sites with their related
assets are used to manufacture specific product offering of the Company
regardless of business segment. For instance, the Longmont facility
today contributes to the manufacture of all Novaclad-based products.
The Company allocates its shared production assets based on approximate
percentage of asset utilization with unused capacity being assigned to
the segment originating the investment. All of the Company's long-term
assets are located in and all of the Company's sales revenue is
generated from North America.
F-21
<PAGE> 64
The following is a summary of certain financial information relating to the two
segments for fiscal years ended:
<TABLE>
<CAPTION>
September 1, August 27, August 28,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Total sales by segment
Core Business $ 130,061 $ 120,556 $ 116,002
Micro Products 6,680 1,530 1,043
--------- --------- ---------
Total sales 136,741 122,086 117,045
--------- --------- ---------
Operating profit (loss) by segment
CORE BUSINESS:
Before corporate allocation 12,147 16,421 9,293
Corporate allocation 7,036 6,580 4,858
Interest 3,314 2,001 1,597
--------- --------- ---------
Total 1,797 7,840 2,838
--------- --------- ---------
MICRO PRODUCTS:
Before corporate allocation (12,402) (16,603) (16,427)
Corporate allocation 1,544 1,541 2,002
Interest 746 499 948
--------- --------- ---------
Total (14,692) (18,643) (19,377)
--------- --------- ---------
Total segments operating losses (12,895) (10,803) (16,539)
Restructuring costs - 3,050 8,500
Impairment charges - 7,635 3,300
--------- --------- ---------
Loss before income taxes and cumulative
effect of change in method accounting $ (12,895) $ (21,488) $ (28,339)
========= ========= =========
Long-term assets by segment
Core Business $ 24,795 $ 40,247 $ 48,082
Micro Products 31,148 27,568 36,790
--------- --------- ---------
Total identifiable assets 55,943 67,815 84,872
Corporate and other assets 12,410 15,030 17,385
--------- --------- ---------
Total assets $ 68,353 $ 82,845 $ 102,257
========= ========= =========
Depreciation and amortization by segment
Core Business $ 7,028 $ 8,662 $ 8,236
Micro Products 6,857 6,035 5,001
Corporate and other 2,963 2,372 1,145
--------- --------- ---------
Total depreciation and amortization $ 16,848 $ 17,069 $ 14,382
========= ========= =========
Capital expenditures by segment
Core Business $ 121 $ 1,511 $ 11,914
Micro Products 767 2,812 1,935
Corporate and other 1,468 1,218 9,419
--------- --------- ---------
Total capital expenditures $ 2,356 $ 5,541 $ 23,268
========= ========= =========
Sales by product line
Laminate material $ 32,323 $ 29,500 $ 28,595
ViaThin 6,680 1,530 1,043
Novaflex HD 42,483 33,700 23,500
Novaflex VHD 4,139 5,556 -
Flexbase interconnects 51,116 51,800 63,907
--------- --------- ---------
$ 136,741 $ 122,086 $ 117,045
========= ========= =========
</TABLE>
F-22
<PAGE> 65
(13) Events Subsequent to the Date of the Report of Independent Public
Accountants (Unaudited)
On November 10, 2000, the Company, Morgenthaler, Ampersand IV
Limited Partnership, Ampersand IV Companion Fund Limited
Partnership, (collectively the New Investors), International Flex
Technologies, Inc. (IFT), Sound Beach Technology Partners, LLC
(Sound Beach) and Molex agreed to the following series of
transactions (the Transactions), which are subject to various
approvals:
- The Company agreed to acquire IFT for approximately 7.6 million
shares of Company common stock, including stock issued for
outstanding options and warrants of IFT. IFT, located in Endicot,
New York, manufactures fine-line flexible circuits.
- New Investors would purchase from the Company, under the terms of a
Stock Purchase Agreement, approximately 4.9 million shares of common
stock for approximately $13.7 million and 11,303 shares of a new
series of convertible preferred stock of the Company (Series G
preferred stock) with a dividend rate of 11.06% for approximately
$11.3 million. The Series G preferred stock would be convertible
into approximately 4.1 million shares of common stock at a fixed
rate of $2.77 per share (the conversion price). The Company would be
required to pay the dividends on the Series G preferred stock in
shares of its common stock for twenty-four months from the date of
issuance at a stated value of approximately $3.54 per share.
Thereafter, the Company may pay the dividend in shares of its common
stock, or at its option, cash. The Series G preferred stock would be
subordinated to the Company's Series D, E, and F preferred stock
with regard to payment of dividends and proceeds upon liquidation.
Upon liquidation of all the assets of the Company, the holders of
the Series G preferred stock would be entitled to receive $25
million, provided that any shares of common stock purchased by the
New Investors as discussed above are turned into the Company for
cancellation. At any time after eighteen months following the sale
of the Series G preferred stock, the Company may, at its sole
option, convert all, but not less then all, of the issued and
outstanding Series G preferred stock at the conversion price,
provided certain conditions with respect to the current market price
and trading volume of the Company's common stock have been meet.
- The Company, the New Investors and Sound Beach will enter into a
Governance Agreement. Under the Governance Agreement, among other
matters, until the third anniversary of the consummation of the
Transactions, the New Investor and Sound Beach are restricted from
beneficially owning any Company securities in excess of that issued
or issuable (i) in the IFT acquisition, (ii) under the Stock
Purchase Agreement, (iii) upon conversion of the Series G preferred
stock, (iv) exercise of the warrants issued under the Subordinated
Note Purchase Agreement discussed below and (v) issuable in respect
of dividends due on the Series G preferred stock. They would also be
restricted from doing a business combination or proxy solicitation
during such period. Among other matters, the Governance Agreement
restricts the sale of the Company without the consent of the parties
to the Governance Agreement, and sets the initial composition of the
Board of Directors of the Company at (i) three continuing directors
from the Company, (ii) one director appointed by Molex, and (iii)
three directors nominated by the New Investors and Sound Beach. The
number of directors which may be nominated by the New Investors and
Sound Beach would be reduced and the approval therefrom for a sale
of the Company would be removed if their ownership in the Company
falls below a certain percentage.
- Molex and the New Investors agreed to purchase up to $15 million of
12% Senior Subordinated Notes (the Senior Notes) of the Company. At
closing, $6.5 million would be drawn-down with the Company having up
to nine-months after the consummation of these Transactions to
draw-down the remaining $8.5 million. Molex has the right to require
the Company to draw-down an additional $2.1 million. In addition, if
all of the Senior Notes are purchased, the Senior Note holders will
receive warrants to purchase approximately 2.3 million shares of the
Company's common stock at $.01 per share and are exercisable for
seven years. The Senior Notes would be due five years from issuance.
After completion of the Transaction, the New Investors and Sound
Beach will collectively hold securities representing ownership of
approximately 49% of the Company on a fully diluted basis (assuming
conversion of all of the Company's convertible securities).
F-23
<PAGE> 66
(14) Quarterly Results of Operations (Unaudited)
The consolidated results of operations for the four quarters of 2000 and
1999 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Fiscal 2000
-----------
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales $ 34,811 $ 32,030 $ 36,152 $ 33,748
Cost of sales and other expenses 36,213 33,624 39,819 39,979
-------- -------- -------- --------
Pre-tax Operating loss (1,402) (1,594) (3,667) (6,231)
Preferred dividends (508) (520) (528) (535)
-------- -------- -------- --------
Net loss to common shareholders $ (1,910) $ (2,114) $ (4,195) $ (6,766)
======== ======== ======== ========
Net loss per common share - basic and diluted $ (0.16) $ (0.18) $ (0.36) $ (0.57)
======== ======== ======== ========
Weighted average common shares
Outstanding - basic and diluted 11,613 11,663 11,760 11,975
======== ======== ======== ========
<CAPTION>
Fiscal 1999
-----------
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Net sales $ 28,474 $ 28,042 $ 32,575 $ 32,995
Cost of sales and other expenses 30,811 30,635 34,510 36,933
Restructuring costs - 3,100 (500) 450
Impairment charges - - - 7,635
-------- -------- -------- --------
Operating loss (2,337) (5,693) (1,435) (12,023)
Preferred dividends (654) (418) (521) (487)
-------- -------- -------- --------
Net loss to common shareholders $ (2,991) $ (6,111) $ (1,956) $(12,510)
======== ======== ======== ========
Net loss per common share - basic and diluted $ (0.29) $ (0.55) $ (0.18) $ (1.10)
======== ======== ======== ========
Weighted average common shares
Outstanding - basic and diluted 10,402 11,037 11,153 11,352
======== ======== ======== ========
</TABLE>
The sum of the quarterly net loss per share does not equal the total fiscal 1999
and 2000 loss per share amounts due to timing of common stock issued during the
years and its effect on the computation of weighted average number of shares
outstanding.
F-24
<PAGE> 67
Sheldahl, Inc. and Subsidiary
Schedule II: Valuation and Qualifying Accounts
Allowance for Doubtful Accounts:
The transactions in the allowance for doubtful accounts for the fiscal years
ending September 1, 2000, August 27, 1999 and August 28, 1998 were as follows:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 338,984 $ 225,000 $ 224,704
Recoveries (accounts charged off), net (54,882) 11,984 296
Additional allowance provided 579,500 102,000 -
--------- --------- ---------
Balance, end of year $ 863,602 $ 338,984 $ 225,000
========= ========= =========
</TABLE>
Restructuring Reserves:
The transactions in the restructuring reserves accounts for the fiscal years
ending September 1, 2000, August 27, 1999 and August 28, 1998 were as follows
(in thousands):
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 5,197 $ 7,625 $ -
Amounts charged to operations, net - 3,050 8,500
Cash payments made (2,677) (4,985) (875)
Other - (493) -
------- ------- -------
Balance, end of year $ 2,520 $ 5,197 $ 7,625
======= ======= =======
</TABLE>
S-1
