<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended December 1, 2000 Commission File Number: 0-45
SHELDAHL, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0758073
--------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
Northfield, Minnesota 55057
--------------------------------------------------------------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (507) 663-8000
-----------------------------
As of December 1, 2000, 12,069,550 shares of the Registrant's common stock were
outstanding. Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] [ ] NO
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SHELDAHL, INC. AND SUBSIDIARY
FORM 10-Q
INDEX
PART I: Financial Information
Item 1. Financial Statements
Consolidated Statements of Operations -
Three months ended December 1, 2000 and
November 26, 1999 ...........................................3
Consolidated Balance Sheets -
December 1, 2000 and September 1, 2000.......................4
Consolidated Statements of Cash Flows -
Three months ended December 1, 2000 and
November 26, 1999 ...........................................5
Notes to consolidated financial statements .........................6-9
Item 2. Management's Discussion and Analysis of Consolidated
Operating Results and Financial Condition ...............10-16
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ................................................16
PART II: Other Information
Item 2. Changes in Securities and Use of Proceeds...................17
Item 5. Other Information...........................................17
Item 6. Exhibits and Reports on Form 8-K ...........................18
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------
December 1, November 26,
(in thousands, except for per share data) 2000 1999
----------- ------------
<S> <C> <C>
Net sales $ 30,613 $ 34,811
Cost of sales 29,484 30,054
-------- --------
Gross profit 1,129 4,757
-------- --------
Expenses:
Sales and marketing 2,187 2,091
General and administrative 2,164 2,231
Research and development 812 921
Interest 1,379 916
-------- --------
Total expenses 6,542 6,159
-------- --------
Loss before income taxes (5,413) (1,402)
Income tax provision -- --
-------- --------
Net loss before preferred dividends (5,413) (1,402)
Convertible preferred stock dividends (528) (508)
-------- --------
Net loss applicable to common shareholders $ (5,941) $ (1,910)
======== ========
Net loss per common share - Basic and Diluted $ (0.49) $ (0.16)
======== ========
Number of shares outstanding - Basic and Diluted 12,070 11,613
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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SHELDAHL, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
unaudited
(In thousands) December 1, September 1,
2000 2000
----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,436 $ 1,132
Accounts receivable, net 20,254 22,253
Inventories 21,036 17,325
Other current assets 1,534 1,359
-------- --------
Total current assets 44,260 42,069
-------- --------
Construction in progress 1,702 1,249
Land and buildings 28,690 28,662
Machinery and equipment 131,330 130,981
Less: accumulated depreciation (96,613) (92,539)
-------- --------
Net plant and equipment 65,109 68,353
-------- --------
Other assets 529 640
-------- --------
$109,898 $111,062
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current maturities of long-term debt $ 3,468 $ 3,468
Accounts payable 12,944 11,477
Accrued salaries 1,151 1,234
Other accrued liabilities 5,810 3,681
Restructuring reserves 787 915
-------- --------
Total current liabilities 24,160 20,775
-------- --------
Long-term debt 33,156 31,537
Restructuring reserves 1,459 1,605
Other non-current liabilities 2,569 2,650
-------- --------
Shareholders' investment:
Convertible preferred stock 42 42
Common stock 3,017 3,017
Additional paid-in capital 113,440 113,440
Retained earnings (67,945) (62,004)
-------- --------
Total shareholders' investment 48,554 54,495
-------- --------
$109,898 $111,062
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
(in thousands) December 1, November 26,
2000 1999
----------- ------------
<S> <C> <C>
Operating activities:
Net loss applicable to common shareholders $ (5,941) $ (1,910)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 4,075 4,201
Preferred stock dividends 528 508
Net change in other operating activities:
Accounts receivable 1,999 (3,946)
Inventories (3,711) 185
Other current assets (175) (248)
Other assets 111 (129)
Accounts payable and accrued liabilities 2,985 1,574
Restructuring reserves (274) (705)
Other non-current liabilities (81) (13)
-------- --------
Net cash used in operating activities (484) (528)
-------- --------
Capital expenditures, net (831) (722)
-------- --------
Financing activities:
Net borrowings under revolving credit facility 1,887 2,625
Repayments of long-term debt (268) (4,558)
Proceeds from long-term debt -- 4,300
Stock options exercised -- 4
-------- --------
Net cash provided by financing activities 1,619 2,341
-------- --------
Net increase in cash and cash equivalents 304 1,091
Cash and cash equivalents at beginning of period 1,132 1,043
-------- --------
Cash and cash equivalents at end of period $ 1,436 $ 2,134
======== ========
Supplemental cash flow information:
Interest paid $ 1,404 $ 916
======== ========
Income taxes paid $ -- $ 29
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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SHELDAHL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
These condensed and unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, these condensed unaudited
consolidated financial statements reflect all adjustments, of a normal and
recurring nature, necessary for a fair statement of the interim periods, on a
basis consistent with the annual audited financial statements. Certain
information, accounting policies and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. Although these disclosures should be considered adequate, the
Company strongly suggests that these condensed unaudited financial statements be
read in conjunction with the financial statements and summary of significant
accounting policies and notes thereto included in the Company's latest annual
report on Form 10-K.
1) Inventories, which are valued at the lower of first-in first-out cost or
market, consists of (in thousands):
December 1, 2000 September 1, 2000
---------------- -----------------
Raw materials $ 9,360 $ 9,053
Work-in-process 6,713 3,812
Finished goods 4,963 4,460
------- -------
$21,036 $17,325
======= =======
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 were
planned at approximately $12.0 million, compared with $2.4 million in
fiscal 2000. Debt repayments for fiscal 2001 will be $5.5 million,
including $2.5 million on the bank term facility, $2.0 million on the
Morganthaler note and $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. However, the
inability of the Company to i) execute the sales orders received from
Micro Products business customers; ii) improve operating results in the
Micro Products business; iii) achieve operating performance from the
Company's Core Business above fiscal 2000 levels; iv) achieve other cost
or productivity improvements included in the Company's fiscal 2001
budget and v) maintain adequate liquidity to fund normal operations
could 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
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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. Subsequent to quarter end, the Company completed
the transactions discussed in Note 5. Management believes these
transactions, which result in an equity infusion of approximately $25.0
million and subordinated debt financing of $6.5 million, will provide
the Company's required cash flow to fund normal operations and alleviate
liquidity constraints.
3) Restructuring Expenses
As of December 1, 2000, approximately $5.4 million had been charged to
the Company's restructuring reserves related to severance and early
retirement salary costs, approximately $2.8 million related to medical,
dental and other benefits and approximately $1.2 million for equipment
disposal and other costs and by December 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.
4) Segment Reporting
The following is a summary of certain financial information relating to
the two segments for the three months ended as follows:
<TABLE>
<CAPTION>
December 1, November 26,
2000 1999
----------- ------------
<S> <C> <C>
Total sales by segment:
Core Business $ 27,385 $ 33,591
Micro Products 3,228 1,220
-------- --------
Total company sales 30,613 34,811
-------- --------
Operating Profit (loss) by segment:
CORE BUSINESS:
-------------
Before corporate allocation 2,309 4,339
Corporate cost allocation 1,637 1,836
Interest expense 1,131 751
-------- --------
Total (459) 1,752
-------- --------
MICRO PRODUCTS:
--------------
Before corporate allocation (4,347) (2,583)
Corporate cost allocation 359 406
Interest expense 248 165
-------- --------
Total (4,954) (3,154)
-------- --------
Total segments operating losses (5,413) (1,402)
======== ========
Sales by product line:
Laminate material $ 6,120 $ 8,638
ViaThin 3,228 1,220
Novaflex HD 9,653 9,842
Novaflex VHD 500 1,514
Flexbase interconnects 11,112 13,597
-------- --------
$ 30,613 $ 34,811
======== ========
</TABLE>
7
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5) Subsequent Events
Transaction Summary
The merger with International Flex Holdings, Inc. and the injection of
$31.5 million in additional funds for Sheldahl on December 28, 2000, is
described below.
Merger
On December 28, 2000, Sheldahl, Inc., a Minnesota corporation
("Sheldahl" or the "Company"), acquired all of the outstanding
securities of International Flex Holdings, Inc. ("Holdings") for
approximately 9.7 million shares of Sheldahl's common stock, $.25 par
value ("Common Stock") under the terms of a previously announced
definitive merger agreement, as amended, (the "Merger Agreement") by and
among Sheldahl, IFT West Acquisition Company, a newly formed subsidiary
of Sheldahl ("West"), Holdings, the sole shareholder of International
Flex Technologies, Inc. ("IFT") the operating company, and the
stockholders of Holdings (the "Stockholders"). Under the terms of the
Merger Agreement, West merged with and into Holdings, with Holdings
surviving and becoming a wholly-owned subsidiary of Sheldahl (the
"Merger"). As consideration for the Merger, holders of outstanding
shares of Holdings' common stock, Class A Stock, Class B Stock and
Series A Preferred Stock received shares of Sheldahl Common Stock.
Holdings' option holders and warrant holder received equivalent options
and a warrant to purchase shares of Sheldahl Common Stock.
Common Stock and Series G Investment
Concurrent with consummating the Merger, Sheldahl completed the
previously announced equity investment pursuant to an amended 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") collectively invested an aggregate of $25.0 million in
equity capital in exchange for approximately 9.8 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 8.1 million shares of Sheldahl Common Stock (the
"Equity Investment"). The cash used by the Investors to complete the
Equity Investment came 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 $1.40 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 $1.625, 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 769,300 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
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<PAGE> 9
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.
Subordinated Notes and Warrant Purchase Investment
Concurrent with consummating the Merger and Equity Investment, Sheldahl
consummated the previously announced debt investment pursuant to an
amended and restated 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") purchased $6.5 million of
12% Senior Subordinated Notes ("Notes") and related warrants (the
"Warrants") (the "Debt Investment"). In addition, the Purchasers
collectively received Warrants to purchase 1,526,814 shares of Sheldahl
Common Stock. The Warrants issued under the Debt Agreement are
exercisable at $.01 per share and are exercisable for seven years from
the date of issuance. The cash used by the Purchasers to complete the
Debt Investment came from the liquid assets of the Purchasers.
Post Transactions Ownership
After completion of the Merger, Equity Investment and Debt Investment
("the Transactions"), the parties that acquired securities in the
Transactions (the "Parties") collectively hold securities representing
ownership of approximately 60% of Sheldahl's currently outstanding
common stock and 60% of Sheldahl on a fully diluted basis (assuming
conversion of all Sheldahl convertible securities).
Transactions' Effect on Financial Statements
In the Merger, as described above, Sheldahl acquired all of the
outstanding securities of Holdings resulting in Holdings becoming a
wholly-owned operating subsidiary of Sheldahl. Although Sheldahl is the
legal survivor in the Merger and remains the registrant of the
Securities and Exchange Commission ("SEC") and a listed company on
Nasdaq, under US Generally Accepted Accounting Principles, due to the
shares issued in the Transactions, Holdings is considered the "acquirer"
of Sheldahl for financial reporting purposes. Among other matters, this
will require Sheldahl in all of its future financial and informational
filings with the SEC to present the prior historical financial and other
information of Holdings.
Post-Transactions Business Reorganization and Fiscal Year End Change
Subsequent to the consummation of the Transactions, Sheldahl reorganized
its business and created two business units for their operations.
Sheldahl's Micro Products operations have been combined with the former
IFT operations in Endicott, New York and will be called the
International Flex Technologies ("IFT"). The second business unit
consisting primarily of Sheldahl's Northfield operations will be called
the Sheldahl Materials and Flex Interconnect ("MFI").
Subsequent to the Merger of IFT and Sheldahl, on January 5, 2001,
Sheldahl's Board of Directors determined that it would be in the best
interests of the Company to change its fiscal year end to the Friday
closest to December 31 of each year, beginning with December 29, 2000.
Accordingly, Sheldahl will be filing a Form 10-K within 90 days of
December 29, 2000 for such transition.
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Item 2.
SHELDAHL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED OPERATING RESULTS AND FINANCIAL CONDITION
THREE MONTHS ENDED DECEMBER 1, 2000 AND NOVEMBER 26, 1999
SALES
The Company's net sales decreased by $4.2 million, or 12.1%, to $30.6
million for the three months ended December 1, 2000, as compared to the same
period one year ago. Core Business sales decreased $6.2 million, or 18.5%, to
$27.4 million while Micro Products sales increased $2.0 million, or 165% when
compared to the first quarter of fiscal 2000. The Core Business sales were
impacted by weaker than expected sales to the Automotive industry due largely to
the product life cycle ending for a key program and to the continued emphasis on
design changes that reduce overall sales to our most price competitive accounts.
The Company expects new programs to replace these sales during fiscal 2001.
Core Business sales for the three months ended December 1, 2000 to the
Automotive market decreased 20.1% to $16.6 million and represents 54.2% of total
Company sales. Datacom sales for the same period increased $0.9 million, or
9.9%, to $10.4 million. Datacom sales represent 34.0% of total Company sales of
which $7.2 million is from the Core Business segment and $3.2 million is from
the Micro Products segment.
Sales to the Company's other markets totaled $3.6 million, or 11.8%, of
total Company revenue, reflecting a decrease of $1.0 million, or 21.7%, from the
same period one year ago.
The table below summarizes the Company's sales by market.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
December 1, November 26, Gross %
Market 2000 1999 Change Change
------ ---- ---- ------ ------
<S> <C> <C> <C> <C>
Automotive $16,553 $20,716 $(4,163) (20.1%)
Datacom 10,430 9,487 943 9.9%
Aerospace/Defense 1,622 1,837 (215) (11.7%)
Industrial 1,576 1,785 (209) (11.7%)
Consumer 432 986 (554) (56.2%)
------- ------- ------- ------
$30,613 $34,811 $(4,198) (12.1%)
======= ======= ======= ======
</TABLE>
GROSS PROFIT (LOSS)
Gross profit decreased $3.6 million to 3.7% of sales for the three
months ended December 1, 2000 compared to the same period one year ago. As
reflected in the chart below, Micro Products gross loss increased to $3.5
million compared to $1.9 million for the same period one year ago. Increased
sales, higher direct material usage in relation to sales and increased fixed
costs negatively impacted Micro Product's gross loss. The Core Business gross
profit decreased $1.9 million resulting in a gross profit percent to sales of
17.0% compared to 19.7% for the same period one year ago. Decreased sales and
increased indirect and direct labor costs, and freight cost as a percent to
sales negatively impacted the Core Business's gross loss.
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<TABLE>
<CAPTION>
December 1, 2000 November 26, 1999
-------------------------------------- ------------------------------------
Core Micro Total Core Micro Total
Business Products Company Business Products Company
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Sales $27,385 $ 3,228 $30,613 $33,591 $ 1,220 $34,811
Cost of sales 22,735 6,749 29,484 26,980 3,074 30,054
Gross profit 4,650 (3,521) 1,129 6,611 (1,854) 4,757
% of sales 17.0% N/A 3.7% 19.7% N/A 13.7%
</TABLE>
OTHER EXPENSES
The Company's other expenses, excluding interest, remained flat at $5.2
million for the quarter ended December 1, 2000 as compared to the three months
ended November 26, 1999. A slight decrease in general administration and
research and development cost was offset by an increase in sales and marketing
expenses.
During the quarter, increased borrowings and higher interest rates on
the Company's credit and security agreement with its bank group increased gross
interest expense $0.4 million. Reflecting reduced capital spending, capitalized
interest declined nearly $0.1 million for the three months ended December 1,
2000 when compared to the same period one year ago. As a result, net interest
expense rose $0.5 million or 50.5% to $1.4 million compared to the period ended
November 26, 1999.
Interest costs and activities for the noted period are detailed below:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 1, 2000 November 26, 1999 Change
---------------- ----------------- ------
(in thousands)
<S> <C> <C> <C>
Gross interest expense $ 1,391 $ 985 $ 406
Capitalized interest (12) (69) 57
-------- ------ ------
Net interest $ 1,379 $ 916 $ 463
======== ====== ======
</TABLE>
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.
FINANCIAL CONDITION
The Company's credit agreement with a group of its two remaining lenders
led 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 outstanding balance as of December 1, 2000 of $11.2 million with monthly
repayments of $205,000 through December 2001. 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. In
November 1999, the Company's borrowings 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. 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
liquidity
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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 the Company's
lenders removed the $1.5 million liquidity reserve. In December 2000, the
Company's lenders extended the maturity date of the credit facility to June 1,
2002, reinstated a liquity reserve at $5 million and reset certain covenants
related to net income, capital spending, cash flow and debt service ratios based
on the new company's combined fiscal 2001 projected results. Actual borrowing
under this working capital revolver as of December 1, 2000 was $16.8 million and
the amount available to borrow was $3.9 million (see Capital Reserves). The
applicable interest rate on the loan effective September 1, 2000 and December 1,
2000 was 11.5% and 11.5%, respectively.
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 December 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.
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 were initially 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 $5.5 million,
including $2.5 million on the bank term facility, $2.0 million on the
Morganthaler note and $1.0 million for various capital lease payments.
For the three month period ended December 1, 2000, the Company's cash
flow from operations excluding restructuring payments was a negative $0.2
million and the Company did not meet financial covenants established by its bank
group. Waivers were obtained for the financial covenant violations. Capital
spending for the three months ended December 1, 2000 was $0.8 million or $0.1
million above the same period one year ago.
Net working capital decreased to $20.0 million from $21.3 million at
September 1, 2000. The Company's accounts receivable decreased by approximately
$2.0 million which was offset by an increase in the Company's inventory. In
addition, the Company's current liabilities increased by approximately $3.4
million driven by increased accruals related to the pending Transaction
described in Subsequent Events below.
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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 - Subsequent Events" will
alleviate the Company's cash flow and liquidity constraints and provide the
needed cash flow to continue to fund normal operations. The new financial
covenants contained in the Company's amended bank agreement require the Company
to meet certain levels of net income, cash flow, debt service ratios, and
capital spending. The continued inability of the Company to i) execute the sales
orders received from the Micro Products business customers; ii) improve
operating results in the Micro Products business; iii) achieve operating
performance from the Company's Core Business above fiscal 2000 levels; and iv)
achieve other cost or productivity improvements included in the Company's fiscal
2001 budget; 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, including the restructuring of operations
discussed in Subsequent Events below.
SUBSEQUENT EVENTS
Transactions Summary
The merger with International Flex Holdings, Inc. and the injection of $31.5
million in additional funds for Sheldahl on December 28, 2000, is described
below.
Merger
On December 28, 2000, Sheldahl, Inc., a Minnesota corporation
("Sheldahl" or the "Company"), acquired all of the outstanding securities of
International Flex Holdings, Inc. ("Holdings") for approximately 9.7 million
shares of Sheldahl's common stock, $.25 par value ("Common Stock") under the
terms of a previously announced definitive merger agreement, as amended, (the
"Merger Agreement") by and among Sheldahl, IFT West Acquisition Company, a newly
formed subsidiary of Sheldahl ("West"), Holdings, the sole shareholder of
International Flex Technologies, Inc. ("IFT") the operating company, and the
stockholders of Holdings (the "Stockholders"). Under the terms of the Merger
Agreement, West merged with and into Holdings, with Holdings surviving and
becoming a wholly-owned subsidiary of Sheldahl (the "Merger"). As consideration
for the Merger, holders of outstanding shares of Holdings' common stock, Class A
Stock, Class B Stock and Series A Preferred Stock received shares of Sheldahl
Common Stock. Holdings' option holders and warrant holder received equivalent
options and a warrant to purchase shares of Sheldahl Common Stock.
Common Stock and Series G Investment
Concurrent with consummating the Merger, Sheldahl completed the
previously announced equity investment pursuant to an amended 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") collectively invested an aggregate of $25.0 million in
equity capital in exchange for approximately 9.8 million shares of Sheldahl
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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 8.1 million
shares of Sheldahl Common Stock (the "Equity Investment"). The cash used by the
Investors to complete the Equity Investment came 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 $1.40 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 $1.625, 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
769,300 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.
Subordinated Notes and Warrant Purchase Investment
Concurrent with consummating the Merger and Equity Investment, Sheldahl
consummated the previously announced debt investment pursuant to an amended and
restated 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")
purchased $6.5 million of 12% Senior Subordinated Notes ("Notes") and related
warrants (the "Warrants") (the "Debt Investment"). In addition, the Purchasers
collectively received Warrants to purchase 1,526,814 shares of Sheldahl Common
Stock. The Warrants issued under the Debt Agreement are exercisable at $.01 per
share and are exercisable for seven years from the date of issuance. The cash
used by the Purchasers to complete the Debt Investment came from the liquid
assets of the Purchasers.
POST TRANSACTIONS OWNERSHIP
After completion of the Merger, Equity Investment and Debt Investment ("the
Transactions"), the parties that acquired securities in the Transactions (the
"Parties") collectively hold securities representing ownership of approximately
60% of Sheldahl's currently outstanding common stock and 60% of Sheldahl on a
fully diluted basis (assuming conversion of all Sheldahl convertible
securities).
TRANSACTIONS' EFFECT ON FINANCIAL STATEMENTS
In the Merger, as described above, Sheldahl acquired all of the
outstanding securities of IFT resulting in IFT becoming a wholly-owned operating
subsidiary of Sheldahl. Although Sheldahl is the legal survivor in the Merger
and remains the registrant of the Securities and Exchange Commission ("SEC") and
a listed company on Nasdaq, under US. Generally Accepted Accounting Principles,
due to the shares issued in the Transactions, IFT is considered the "acquirer"
of Sheldahl for financial reporting purposes. Among other matters, this will
require Sheldahl in all of its future financial and informational filings with
the SEC to present the prior historical financial and other information of IFT.
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POST-TRANSACTIONS BUSINESS REORGANIZATION AND FISCAL YEAR END CHANGE
Subsequent to the consummation of the Transactions, Sheldahl reorganized
its business and created two business units for their operations. Sheldahl's
Micro Products operations have been combined with the former IFT operations in
Endicott, New York and will be called International Flex Technologies ("IFT").
The second business unit consisting primarily of Sheldahl's Northfield
operations will be called Sheldahl Materials and Flex Interconnect ("MFI").
Subsequent to the Merger of IFT and Sheldahl, on January 5, 2001,
Sheldahl's Board of Directors determined that it would be in the best interests
of the Company to change its fiscal year end to the Friday closest to December
31 of each year, beginning with December 29, 2000. Accordingly, Sheldahl will be
filing a Form 10-K within 90 days of December 29, 2000 for such transition.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," effective
for years beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge criteria are met. Special accounting
for qualifying hedges allow a derivative's gains or losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. The Company adopted SFAS No. 133 at the beginning
of fiscal 2001 and did not experience a material impact to 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
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 data communications
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
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the business and satisfy existing covenants with the Company's lenders; and
(vii) the ability of Sheldahl to integrate its Longmont operations with the
former IFT operations. 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 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's Credit Agreement carries interest rate risk. Amounts
borrowed under this Agreement are subject to interest charges at a rate equal to
the lender's prime rate + 2.0%, which as of December 1, 2000 was 11.5%. Should
the lender's base rate change, the Company's interest expense will increase or
decrease accordingly. As of December 1, 2000, the Company had borrowed
approximately $27.2 million subject to the interest rate risk. On this amount, a
1% increase would cost the Company $272,000 in additional gross interest on an
annual basis.
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PART II - OTHER INFORMATION
SHELDAHL, INC. AND SUBSIDIARY
FORM 10-Q
Item 2. Changes in Securities and Use of Proceeds
ISSUANCE OF SECURITIES
On December 21, 2000, the Board of Directors of Sheldahl approved a
series of Transactions as described above in "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Subsequent Events".
As part of these Transactions, Sheldahl issued shares of its common stock, $.25
par value per share ("Common Stock"), shares of its newly created Series G
Convertible Preferred Stock, $1.00 par value per share (the "Preferred Stock"),
and Warrants (the "Warrants") to purchase shares of the Company's Common Stock,
to two accredited investors (the "Investors"). The Board also authorized
granting the Investors certain registration rights with regard to the shares of
Common Stock underlying the Preferred Stock and the Warrants. The closing of the
investment of $11,303,000 occurred on December 28, 2000. Based on the manner of
sale and representations of the Investors, all of which were accredited, the
Company believes that pursuant to Rule 506 of Regulation D, the private
placement was a transaction not involving any public offering within the meaning
of section 4(2) of the Securities Act of 1933, as amended, and was, therefore,
exempt from the registration requirements thereof. Sheldahl will use the
proceeds from the sale of the securities involved in the Transactions for
working capital purposes.
EXERCISE PRICE AND SHARE ADJUSTMENTS
When the Company issued securities in connection with the Transactions
described above in "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Subsequent Events", the terms of the Company's bank
warrant required an adjustment to the warrant's exercise price and underlying
share amount. As a result, as of December 28, 2000, the Company's bank warrant
is exercisable at a per share price of $3.00960 for 229,890 shares.
Item 5. Other Information
POST-TRANSACTIONS BUSINESS REORGANIZATION AND FISCAL YEAR END CHANGE
In connection with the consummation of the Transactions, Edward L.
Lundstrom and Jill D. Burchill resigned their position with the Company. Donald
R. Friedman, former Chief Executive Officer of IFT, was appointed Chief
Executive Officer ("CEO") of Sheldahl and Peter Duff, former Chief Financial
Officer of IFT, was appointed Vice President - Finance of Sheldahl. In addition,
three members of Sheldahl's Board of Directors, James E. Donaghy, Gerald E.
Magnuson and Edward L. Lundstrom resigned their positions as directors and were
replaced by John D. Lutsi (Chairman), Stuart A. Auerbach and Donald R. Friedman.
Subsequent to the consummation of the Transactions, Sheldahl reorganized
its business and created two business units for their operations. Sheldahl's
Micro Products operations have been combined with the former IFT operations in
Endicott, New York and will be called the International Flex Technologies
("IFT"). The second business unit consisting primarily of Sheldahl's Northfield
operations will be called the Sheldahl Materials and Flex Interconnect ("MFI").
Subsequent to the Merger of IFT and Sheldahl, on January 5, 2001
Sheldahl's Board of Directors determined that it would be in the best interests
of the Company going forward to change its fiscal year end to the Friday closest
to December 31 of each year, beginning with December 29, 2000. Accordingly,
Sheldahl will be filing a Form 10-K within 90 days of December 29, 2000 for such
transition.
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Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
10.1 Eighth Amendment to the Credit and Security Agreement,
dated December 26, 2000 between the Company and Wells
Fargo Bank, N.A. and the CIT Group/Equipment
Financing, Inc.
B) Reports on Form 8-K
See Current Report on Form 8-K filed on November 13, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHELDAHL, INC.
(Registrant)
Dated January 15, 2001 By /s/ Donald R. Friedman
--------------------------------- -----------------------------
President and
Chief Executive Officer
Dated January 15, 2001 By /s/ Peter Duff
--------------------------------- -----------------------------
Vice President - Finance
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