-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RqK5/h9tdE6uK9tfjrMYYXkXQRjQYCmzEzU1T/PxgspZIrTkGMPTA7HC5d7LXkPT X2yWA/xjsC4PP8grQQTkQg== 0000089615-97-000018.txt : 19971126 0000089615-97-000018.hdr.sgml : 19971126 ACCESSION NUMBER: 0000089615-97-000018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970829 FILED AS OF DATE: 19971125 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHELDAHL INC CENTRAL INDEX KEY: 0000089615 STANDARD INDUSTRIAL CLASSIFICATION: PRINTED CIRCUIT BOARDS [3672] IRS NUMBER: 410758073 STATE OF INCORPORATION: MN FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11861 FILM NUMBER: 97727546 BUSINESS ADDRESS: STREET 1: 1150 SHELDAHL RD CITY: NORTHFIELD STATE: MN ZIP: 55057 BUSINESS PHONE: 5076638000 MAIL ADDRESS: STREET 1: 1150 SHELDAHL ROAD CITY: NORTHFIELD STATE: MN ZIP: 55057-0170 FORMER COMPANY: FORMER CONFORMED NAME: SCHJELDAHL G T CO DATE OF NAME CHANGE: 19741017 10-K 1 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 August 29, 1997 [ ] 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) Minnesota 41-0758073 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 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 $172,000,000 on November 6, 1997, when the last sales price of the Registrant's Common Stock, as reported in the Nasdaq National Market System, was $19.00. As of November 6, 1997, the Company had outstanding 9,045,480 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's definitive proxy statement for its annual meeting to be held January 8, 1997, are incorporated by reference in Part III of this Form 10-K. PART I Item 1. Business _________________ General Sheldahl, Inc. (the "Company") creates thin flexible laminates and their derivatives and markets these products worldwide. The Company's laminates are of two types: adhesive based tapes and laminates and vacuum deposited materials, including its patented adhesiveless copper laminate - Novacladr. In addition to selling these materials globally, Sheldahl uses these materials to fabricate high value derivative products such as single- and double-sided flexible printed circuits and substrates for silicon dies. The Company's products are genetically linked to it's core competencies; vacuum deposition, laminating, via (hole) generation, imaging and plating. Products are marketed through Sheldahl's three business units - Materials, Interconnect, and Micro Products. The Company sells its products primarily to the automotive and datacom (computer and telecommunication) markets. The Company recently introduced three high performance products based on proprietary vacuum deposition technology: Novacladr, ViaGridr and ViaThinr. These emerging 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 its Novaclad and ViaGrid products to be used as a base material for high performance printed circuits. The Company has developed its ViaThin to enable integrated circuit ("IC") manufacturers to package future generations of ICs economically by attaching the silicon die to a ViaThin manufactured by the Company or other circuitry manufacturers using the Company's Novaclad or ViaGrid 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. 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 solution for a broad range of interconnect systems, especially high density substrates for IC packages and multi-chip modules. In fiscal 1997 and 1996, the Company sold $13.0 million and $15.6 million, respectively, of Novaclad-based flexible circuits, primarily for harsh, under-the-hood automotive applications where Novaclad's heat tolerance and chemical resistance characteristics provide superior performance. ViaGrid/ViaArray. ViaGrid and ViaArray are higher-value-added forms of Novaclad with pre-drilled small holes, or vias, measuring down to 1 mil in diameter. ViaGrid is designed to be sold in rolls or sheets to printed circuit manufacturers as a base material for the manufacture of high density substrates. Both products are coated with copper and enable 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 more dense than current flexible circuitry technology. Because of its adhesiveless character, ViaGrid and ViaArray provide all of the benefits of Novaclad. The combination of these characteristics allow circuit fabricators the opportunity to eliminate several costly processing steps in the manufacture of printed circuits. The Company believes These products provide 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 ViaGrid or ViaArray based circuits as an interlayer in multilayer circuit boards. 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 it's traces are very smooth and it's 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 densities 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 ViaGrid product. Materials. The Company's materials products consist of adhesive-based tapes and other flexible laminates used in a variety of applications. Moisture barrier tape and flat cable tape used in automobile air bag systems. Splicing tape is used in the manufacture of commercial and industrial sandpaper belts, and thermal insulating blankets are used primarily in the aerospace/defense market for satellites. 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 flexible laminates provide extended flexibility, strength, conductivity, durability and heat dissipation. The Company's materials provide extended flexibility, strength, conductivity, durability, and heat dissipation. The Company consumes approximately one-half of the material it produces in the manufacture of flexible printed circuitry and interconnect systems. In fiscal 1997, external sales of materials accounted for $27.9 million, or 27%, of the total Company revenue. Flexible Interconnects. The Company manufactures flexible printed circuitry and interconnect systems using traditional adhesive-based and Novaclad laminates. 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 with lines and spaces down to 5 mils (.005 inch) in width. The Company uses its Novaclad laminate to produce high performance flexible circuits primarily for demanding under-the-hood automotive applications which require greater circuit density, enhanced heat and chemical resistance, and dimensional stability. In fiscal 1997 and 1996, Novaclad-based products represented sales of approximately $13.0 million and $15.6 million, respectively. All of the Company's flexible printed circuits are electronically tested prior to shipping. Additionally, the Company offers value-added processing, including surface mount assembly, wave soldering, connector and terminal staking, custom folding, stiffening, application of pressure-sensitive adhesive and hand soldering, in order to deliver a ready-to-use interconnect system to the end customer. The Company's targets applications where increased performance, reduced size and weight, ability to accommodate packaging contours or a reduction in the number of assembly steps is desired to reduce the customer's overall cost. Flexible printed circuitry and interconnect systems, including Novaclad-based products, accounted for $71.0 million, or 73.2%, of the Company's net sales for fiscal 1997. Sales and Customer Support The Company's sales and customer support efforts are directed by product managers who are responsible for defining target markets and customers, strategic product planning and new product introduction. These product managers supervise a sales force of 15 account managers and over 60 engineers, technicians and customer support 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 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 processing and delivery of prototype and production orders through its electronic data interchange and just-in-time delivery capabilities. Automotive Electronics. In the automotive electronics market, the Company has enjoyed increasing sales through its strategy of working very closely with its customers beginning at the design stage. In 1989, the Company opened a technical design and sales office in Detroit, Michigan, which is currently staffed with 17 engineers, designers and sales personnel in order to provide automotive customers with comprehensive support. In fiscal 1997, 11.9%, 11.3% and 7.7% of the Company's net sales went to multiple sourcing locations of Ford Motor Company, Motorola, Inc., and Molex Corporation, respectively. The Company also provides products, through first tier suppliers, to Chrysler and the U.S. operation of Honda and Toyota. International. The Company works with European manufacturers and suppliers and has had a sales presence in Europe since February 1992, including its current sales office in Frankfurt, Germany. 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 1995, 1996 and 1997 were $11.1 million, $12.0 million, and $15.0 million, respectively. Manufacturing The Company manufactures and assembles its products in Northfield, Minnesota, Aberdeen and 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 ISO 9001 certification in our Minnesota facilities and ISO 9002 certification in our South Dakota facilities. 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 printed circuitry and interconnect systems. The Company converts flexible laminates into printed circuits by using either photo exposing process or screen printing process 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 flexible printed circuitry into interconnect systems. These process capabilities include surface mount assembly, wave soldering, connector and terminal staking, custom folding, stiffening, application of pressure- sensitive adhesive, and hand soldering. Substantially all of these interconnect assembly functions are performed at the Company's facilities in Aberdeen and Britton, South Dakota. To manufacture its emerging products, the Company constructed a 102,000 square foot building in Longmont, Colorado. Manufacturing at the Longmont facility includes a series of integrated roll-to-roll processes including via generation, metalization, plating, photoimaging, developing, selective etching, and electrical testing. The initial annual production capacity of the facility is expected to be approximately 2.0 million square feet of Novaclad, approximately 250,000 square feet of ViaGrid, and approximately 500,000 square feet of ViaThin. The facility has been designed to allow for expansion in increments of approximately 500,000 square feet of finished product, consisting of varying amounts of ViaGrid and high density substrates. The Company's investment to date in the Longmont facility, including the site, building, and equipment purchased or leased by the Company, is approximately $58 million. 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. Providing 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, and a royalty on products sold by the joint venture. The joint venture is being 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. The Company expects manufacturing under this joint venture to commence in late fiscal 1998. Research and Development Sheldahl's recent research and development efforts, through its 42- person research and development team, 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. In fiscal 1994, the ARPA Consortium was organized to develop a high- density, low-cost multichip module utilizing Novaclad as the base material. The ARPA Consortium is comprised of a vertically-integrated team of non- competing companies, including four systems integrators (Silicon Graphics, Inc., Wireless Access, Inc., Hughes Missile Systems Company and Delco Electronics), a materials manufacturer (Sheldahl) and an assembly company (Jabil Circuit, Inc.). The ARPA Consortium has achieved various milestones, including validation of each of the essential processes for production of the Company's high-density substrates as a base material for low-cost multichip modules. In September 1995, ARPA agreed to extend its commitment to the consortium for the expansion of development of this technology using the Company's Z-Link adhesive or other multilayering technologies. In addition to the ARPA Consortium, the Company also participates in various other consortia, including consortia managed by National Semiconductor and formed to develop (i) low-cost plastic packaging and (ii) an IC attachment technique for a silicon die without using wires, known as a "flip chip". In August 1994, Sheldahl acquired a minority ownership interest in Sidrabe Joint Stock Company ("Sidrabe"), a newly 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. 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. During the last five years, the Company has not experienced significant shortages of raw materials. The Company currently depends, however, on one supplier for the polyimide film which serves as a base for the Company's Novaclad, ViaGrid and high density substrate products. This supplier currently manufactures this polyimide film at a single manufacturing facility. In addition, the Company has experienced delays in delivery of certain laser via generation equipment currently available from only one supplier. Certain other materials and plating processes used by the Company in the manufacture of its products are currently obtained from single sources. 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 product 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 ADFlex Solutions, Inc. in the datacommunications market. The Company's primary competition for its flexible laminate products include Rogers Corporation and GTS Flexible Materials, Ltd. (a U.K. company). The Company's Novaclad, ViaGrid and high density substrates compete with 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., International Business Machines Corporation and several Japanese companies. The Company believes the production processes required for each of these competing substrates, which include copper sputtering, manual 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 produced by Amkor Electronics and Tessera, 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. 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 August 29, 1997, and August 30, 1996, was approximately $22.1 million and $26.1 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, Canada and the European Patent Office. In addition, the Company has one United States patent and one Canadian patent relating to its Z-Link adhesive product and has been informed that two additional United States patents relating to Z-Link have been allowed. Federal trademark registrations have been obtained on Novacladr, ViaGridr, ViaThinr, Flexbaser, Novaflexr, Novaflex HDrand Z-Linkr. 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 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 again the Company. The Company is also aware of a patent which may cover certain plated through holes of 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 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. 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 1997. Similarly, fiscal 1998 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. Employees As of October 1997, the Company employed approximately 1,129 people in the United States and Europe, including 939 in production, 87 in sales, marketing, application engineering, and customer support, 42 in research and development and 61 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, production workers (approximately 401) are represented by the Union of Needletrade, Industrial and Textile Employees, which has been the bargaining agent since 1963. The Company has a one-year collective bargaining agreement with the Union which expires in November 1998. 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 the 102,000 square foot facility in Longmont, Colorado. The Company leases a 30,000 square foot assembly facility in Aberdeen, South Dakota and owns a 30,000 square foot assembly facility in Britton, South Dakota. The Company also leases a 3,000 square foot technical sales and design office in Detroit, Michigan. Management believes that all facilities currently in use are generally in good condition, well-maintained and adequate for their current operations. The Company also leases a production facility in Irvine, California which is has subleased. 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 matters will not have a material adverse effect on the Company's results of operations or financial condition. Item 4. Submission of Matters to a Vote of Securities Holders ____________________________ None Item 4A. Executive Officers ____________________________ The executive officers of the Company are as follows: Name Age Position James S. Womack 69 Chairman of the Board and Director James E. Donaghy 63 Chief Executive Officer and Director Edward L. Lundstrom 47 President John V. McManus 50 Vice President - Finance and Assistant Secretary Beverly M. Brumbaugh 62 Vice President - Human Resources and Corporate Excellence Keith L. Casson 58 Vice President - Micro Products Gregory D. Closser 45 Vice President - Interconnect Michele C. Edwards 33 Vice President - Supply Chain Operations William R. Miller 50 Vice President - Information Systems Roger D. Quam 51 Vice President - Materials Sidney J. Roberts 51 Vice President - Research and Development Gerald E. Magnuson 66 Secretary and Director James S. Womack joined the Company in 1956 and served as President of the Company from 1971 to 1988 and as Chief Executive Officer from 1971 to 1991. He became a director of the Company in 1968 and was elected Chairman of the Board in 1988. Mr. Womack is a director of Gemini, Inc.; General Securities, Inc.; and Zytec Corp. James E. Donaghy joined the Company in 1988 as its President and Chief Executive Officer. In September 1997, he handed off the title of President to Ed Lundstrom. He remains a director of the Company since 1988. Prior to that time, he held various executive-level positions at DuPont Company in Wilmington, Delaware. Mr. Donaghy is a director of Hutchinson Technology, Inc.; William Mitchell College of Law; and the Institute of Printed Circuitry. Edward L. Lundstrom was named President in September of this year. 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, and Corporate Controller; Vice President-Interconnect; Vice President and Treasurer and 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, Inc. John V. McManus joined the Company in 1972 and has served as Vice President - Finance and Assistant Secretary since 1991. From 1987 to 1991, he served as Corporate Controller. Beverly M. Brumbaugh joined the Company in 1961 and has served in several capacities since that time, including Director of Human Resources and Industrial Relations. He has been Vice President - Human Resources and Corporate Excellence since 1989. Mr. Brumbaugh is the former chairman of the American Electronics Association Minnesota Council for Quality. He is currently a member of the Manufactures Alliance where he serves on both the Human Resources and Quality Councils. Keith L. Casson joined the Company in 1968 and has served as Vice President - Micro Products since September 1996. He has served as Vice President - Research and Development since September 1993, with responsibility since September 1995 for deployment of the emerging products in the Longmont facility. Prior to September 1993, he held various positions with the Company, including Automotive/Consumer Market Manager, Director of Business Development and Director of Interconnect Systems Research and Development. Mr. Casson is a member of the Institute of Printed Circuitry, the International Micro Electronic and Packaging Society, and the Society of Automotive Engineers. Gregory D. Closser joined the Company in 1978 and has served as Vice President - Flexible Interconnects since September 1995. 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. William R. Miller joined the Company in February 1996 as Corporate Director of Information Technology. Prior to joining the Company, bill was Vice President, Telecommunications Development for Norwest Technical Services (Norwest Bank). He also held management posts in telecommunications at Control Data Corporation and at the Chesapeake & Potomac Telephone Companies of Maryland and Washington, DC. He was named to his current position, Vice President of Information Technology, in January 1997. Roger D. Quam joined the Company in 1969 and has served in several capacities since that time, including Business Manager of Engineered Products and Vice President of Engineered products. He has served as Vice President - Composite Materials since September 1995, previously servicing as Vice President - Materials Operations and Aviation Products beginning in 1988. 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 of Research and Development, in November 1996. Sid is active in the Institute for Interconnecting and Packaging Circuits (IPC), the International Society for Hybrid Microelectronics (ISHM), and the American Institute of Aeronautics and Astronautics (AIAA), and is a member of the University of Minnesota's Mechanical Engineering Advisory Council. He holds holds two patents and has a patent pending for the production of pre-formed vias in multichip module substrates. Gerald E. Magnuson has served as Secretary of the Company since 1962 and a director since 1975. Mr. Magnuson is Of Counsel to the law firm of Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota, and a director of Premium Wear, Inc.; Research, Inc.; and Washington Scientific Industries, Inc. 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 August 30, 1996: First Quarter 21 1/4 14 3/4 Second Quarter 23 3/8 16 1/4 Third Quarter 31 1/8 18 1/8 Fourth Quarter 28 1/2 15 7/8 Fiscal Year Ended August 29, 1997: First Quarter 19 1/4 14 7/8 Second Quarter 26 3/4 18 Third Quarter 24 3/4 18 1/2 Fourth Quarter 24 1/8 18 On November 6, 1997, the last reported sales price of the Common Stock was $19. As of this date, there were approximately 2,000 record holders of the Company's Common Stock and an estimated additional 3,000 shareholders who held beneficial interests in shares of Common Stock registered in nominee names of banks and brokerages houses. Pursuant to its current credit 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 September 1, 1995, August 30, 1996 and August 29, 1997, and the consolidated balance sheet data as of August 30, 1996 and August 29, 1997, 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 statements of operations data set forth below for the years ended August 27, 1993 and September 2, 1994 and the balance sheet data set forth below at August 27, 1993, September 2, 1994, and September 1, 1995, are derived from audited financial statements not included herein. Fiscal Years Ended (in thousands, except per share data) Aug. 27, Sep. 2, Sep. 1, Aug. 30, Aug. 29, 1993 1994 1995 1996 1997 ______ ______ ______ ______ ______ Statements of Operations Data: Net sales $82,102 $88,346 $95,216 $114,120 $105,266 Cost of sales 66,360 69,273 74,752 89,171 94,933 ______ ______ ______ ______ ______ Gross profit 15,742 19,073 20,464 24,949 10,333 ______ ______ ______ ______ ______ Expenses: Sales and marketing 7,274 8,014 9,090 9,254 9,560 General and administrative 4,029 4,153 3,895 5,129 6,839 Research and development 1,929 2,366 2,270 2,755 4,705 Interest 1,023 946 875 539 1,298 ______ ______ ______ ______ ______ Total expenses 14,255 15,479 16,130 17,677 22,402 ______ ______ ______ ______ ______ Income (loss) from continuing operations before provision for income taxes 1,487 3,594 4,334 7,272 (12,069) Provision (benefit) for income taxes 50 800 1,200 2,500 (4,100) ______ ______ ______ ______ ______ Income (loss) from continuing operations $ 1,437 $ 2,794 $ 3,134 $ 4,772 $(7,969) ====== ====== ====== ====== ====== Net income (loss) per common share $0.29 $0.52 $0.45 $0.55 $(0.89) ====== ====== ====== ====== ====== Weighted average common shares and common share equivalents outstanding 4,950 5,418 6,925 8,686 8,967 ====== ====== ====== ====== ====== Balance Sheet Data: Working capital $11,314 $15,942 $16,332 $22,051 $23,216 Total assets 44,783 60,320 94,186 115,887 139,367 Long-term debt, excluding current portion 11,433 7,963 33,864 21,858 40,869 Total shareholders' investment 19,448 36,482 40,952 75,337 82,367 Supplemental Business Unit Data(1) - Combined Materials and Interconnect: Revenues $77,353 $84,793 $91,600 $113,955 $104,908 Gross profit 14,692 17,931 20,231 28,847 21,376 Pretax operating income 805 2,743 4,874 13,291 3,400 Income from core businesses 778 2,133 3,521 8,721 2,242 Micro Products: Revenues $ - $ - $ - $ 165 $ 358 Gross profit(2) - 719 (214) (3,898) (11,043) Pretax operating income (loss) - 719 (731) (6,019) (15,469) ______ ______ ______ ______ ______ Income (loss) from Micro Products - 559 (526) (3,949) (10,211) ====== ====== ====== ====== ====== ____________________ (1) does not include aviation components (2) net of ARPA funding 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, and substrates for silicon chip carriers. Background - In 1989, the Company developed a business strategy focused on achieving leadership in supplying the automotive electronics market with flexible interconnects based on the Company's core materials technologies. Management believed the automotive market provided growth opportunities due to increasing electronic content of automobiles as manufacturers focused on enhancing vehicle performance while reducing weight and overall vehicle costs. The Company targets specific automotive customers that it has identified as leaders in the drive to increase the electronic content of automobiles. While 1997 marked the first time in ten years that the Company's sales to automotive customers declined, this strategy has been successful. Since 1989, automotive market sales increased from $13.9 million to $71.0 million and represent 67% of the Company's revenue. Concurrent with the Company's strategic shift to focus on the automotive electronics market in 1989, Sheldahl began to focus its research and development expenditures on new opportunities. As a result, in 1992 the Company patented its Novaclad high-performance adhesiveless flexible laminate. The features of Novaclad allow circuitry designers to increase circuit density for integrated circuit (IC) packaging and other interconnect solutions. The Company also developed ViaGrid, a higher-value form of Novaclad with predrilled small holes (vias) that allow printed circuit manufacturers to produce flexible interconnects that are up to six times more dense than current technology. The Company uses ViaGrid to manufacture chip-carrier substrates (ViaThin) primarily for IC packages. In fiscal 1994, a consortium was organized through the Advanced Research Projects Agency (ARPA) of the U.S. Department of Commerce to develop a high- density, low-cost multichip module utilizing Novaclad as the substrate material. The ARPA consortium, comprised of a vertically integrated team of non-competing companies, has achieved various milestones, including validation of each of the essential processes for production of the Company's chip- carrier substrates as the base material for low-cost multichip modules. In June 1994, with the assistance of funding from ARPA, the Company established a prototype production facility, and late in calendar year 1994, began construction of its new manufacturing facility in Longmont, Colorado, for the production of Novaclad-based products in commercial quantities. The Company has experienced a variety of delays, including delays in equipment delivery, product specification, full qualification, and in-place assembly capacity. Volume production is expected to begin in fiscal 1998. During the delay, the Company has been working with leading customers, including Motorola, Texas Instruments, and ASAT, Inc., in design, manufacture, and qualification of both chip-scale and ball-grid array packages. The adverse financial impact of the production delay at the Micro Products facility has been and will continue to be significant. In 1997, the Micro Products operation resulted in a pretax loss of $15.5 million as compared with a $6.0 million loss in 1996. These losses are expected to continue until efficient volume production and related sales revenue are achieved. The Company expects to continue to make substantial investments in production capabilities to support its strategy of increasing penetration of the automotive electronics market and commercializing its Novaclad and chip- carrier substrate production for the datacommunications market. During fiscal years 1995, 1996, and 1997, the Company made capital expenditures of approximately $29.7 million to increase the production capabilities of its current operations. Through fiscal 1997, the Company made capital expenditures exceeding $58.1 million in connection with the Company's Longmont manufacturing facility. On September 5, 1995, the Company sold its aviation lighting product line to The B.F. Goodrich Company for approximately $2.6 million, enabling the Company to focus on its emerging products, flexible interconnects, and flexible laminates operations. The aviation lighting product line generated sales of $3.6 million in fiscal year 1995 and was insignificant to the overall operations of the Company. During October 1997, the Company signed a memorandum of understanding with longtime technical partner, Sumitomo Bakelite Co., Ltd., Tokyo, Japan. This memorandum documents the intention of both parties to enter into a cooperative development to produce and sell chip-scale integrated circuit packages based on the Company's Novaclad substrates. If the market for chip- scale packages develops as anticipated, the Company expects to sell significant quantities of ViaThin material to Sumitomo in Japan. Eventually after market demand increases, the Company and Sumitomo intend to form a joint venture that will manufacture ViaThin material in Asia for sale to integrated circuit manufacturers and assemblers. Results of Operations - Fiscal 1997 reflects two major situations - inventory adjustments and strikes in the automotive sector throughout the year - as well as a longer- than-anticipated qualification cycle in the Company's Micro Products operation. Each event was responsible for about half of the decline in earnings in 1997 from those of 1996. The following table shows the percentage of net sales represented by certain line items from the Company's consolidated statements of operations for the periods indicated: Fiscal Years Ended August 29, August 30, September 1, 1997 1996 1995 Net sales 100.0% 100.0% 100.0% Cost of sales 90.2% 78.1% 78.5% ______ ______ ______ Gross profit 9.8% 21.9% 21.5% ______ ______ ______ Expenses: Sales and marketing 9.1% 8.1% 9.5% General and administrative 6.5% 4.5% 4.1% Research and development 4.5% 2.4% 2.4% Interest 1.2% .5% .9% ______ ______ ______ Total expenses 21.3% 15.5% 16.9% ______ ______ ______ Income (loss) before income taxes (11.5%) 6.4% 4.6% Provision (benefit) for income taxes (3.9%) 2.2% 1.3% ______ ______ ______ Net income (loss) (7.6%) 4.2% 3.3% ====== ====== ====== The table below shows, for the periods indicated, the Company's sales to various markets (in thousands): Fiscal Years Ended Aug. 29, 1997 Aug. 30, 1996 Sep. 1, 1995 Amount % Amount % Amount % ______ ____ ______ ____ ______ _____ Automotive $71,026 67.5% $78,984 69.2% $51,919 54.5% Datacom 12,529 11.9% 11,193 9.8% 16,860 17.7% Aerospace/Defense 9,201 8.7% 10,585 9.3% 12,150 12.8% Industrial 8,046 7.6% 8,843 7.7% 8,221 8.6% Consumer 4,464 4.3% 4,515 4.0% 6,066 6.4% ______ ____ ______ ____ ______ ____ Net sales $105,266 100.0% $114,120 100.0% $95,216 100.0% ====== ==== ====== ==== ====== ==== The Company's net sales decreased $8.9 million, or 7.8%, in fiscal 1997. The decrease is reflected in automotive market sales, which were adversely affected by inventory adjustments related to last fall's automotive industry collective bargaining negotiations. The impact to the Company was realized by above normal shipments in Quarter IV of fiscal 1996 and a sharp reduction in shipments in late Quarter I and early Quarter II as inventory levels were adjusted. Additionally, there have been numerous automotive industry work stoppages that have impacted the Company's sales of automotive laminate and flex circuitry products. The growth in the automotive market sales for fiscal 1996 and 1995 was due to the Company's efforts to penetrate the automotive market through the use of creatively designed flexible interconnects and laminate materials. The Company enjoys a favorable position in targeted segments of the automotive market, including modular assembly, engineering control, and instrumentation, and has increased sales revenue in that market at an average annual compounded rate of over 22% since 1989. Automotive market sales represented 67.5% of Company sales in 1997 compared to 69.2% in 1996. Datacommunications market sales increased $1.3 million, or 12%, from $11.2 million in fiscal 1996 to $12.5 million in fiscal 1997. This was due to increased sales of laminate materials and flexible circuit products. In recent years, the Company focused its attention on the automotive market as the Company's adhesive based laminates were more suited to automotive applications. However, interconnect systems made with high-density Novaflex, originally sold for engine control units in the automotive market meet the requirements for computer and telecommunication applications. Therefore, the Company targets significant growth in datacom market from not only Micro Products as the Longmont, Colorado, facility begins volume production, but also Interconnect as high-density Novaflex is sold to meet the demands of this market. The Company's sales to the aerospace/defense market decreased $1.4 million, or 13%, from $10.6 million in fiscal 1996 to $9.2 million in fiscal 1997. Lower sales of insulation blankets for the NASA space station program as well as reduced sales to commercial satellites account for this decline. Increases in 1995 and 1996 were due to an increased demand for multilayer insulation blankets for satellites. Annual fluctuations of demand in this market are natural, since production cycles often extend more than one year. The aerospace/defense sales reflect the use of the Company's core materials technology in vacuum deposition and material handling. Industrial and consumer market sales for 1997 declined slightly, from $13.4 million in fiscal 1996 to $12.5 million in fiscal 1997. 1995 sales were $14.3 million. Although Sheldahl has not specifically focused on these markets, the Company's laminate materials and flexible interconnect products have developed small, well-established market niches for specific applications. The table below shows, for period indicated, the Company's sales by business units (in thousands): Fiscal Years Ended Aug. 29, 1997 Aug. 30, 1996 Sep. 1, 1995 Amount % Amount % Amount % ______ ____ ______ ____ ______ ____ Interconnects $77,004 73.2% $86,145 75.6% $64,398 67.6% Materials 45,760 43.5% 47,185 41.3% 38,628 40.6% Micro Products 358 .3% 165 .1% - -% Aviation components - -% - -% 3,616 3.8% Intercompany eliminations (17,856) (17.0%) (19,375) (17.0%) (11,426) (12.0%) ______ ______ ______ ______ ______ ______ Net sales $105,266 100.0% $114,120 100.0% $95,216 100.0% ====== ====== ====== ====== ====== ====== Due to the decline in automotive market sales as previously discussed, Interconnect sales declined $9.1 million, or 10.6%, from $86.1 million in fiscal 1996 to $77.0 million in fiscal 1997. The Company's sales growth in fiscal 1996 reflects a $21.7 million, or 34%, increase in Interconnect sales. Materials sales declined $1.4 million, or 3%, from $47.1 million in fiscal 1996 to $45.7 million in 1997, reflecting a decline in shipments to the Interconnect business. Micro Products sales totaled $358,000 in fiscal 1997 and $165,000 in fiscal 1996, reflecting sales of prequalification product. Cost of Sales/Gross Profit. During fiscal 1997, the Company's gross profit declined $14.6 million, or 59%, from $24.9 million in fiscal 1996 to $10.3 million in fiscal 1997. The Company's Micro Products operation accounted for $7.1 million of this decline and the Company's other businesses accounted for $7.5 million. Increased factory expenses at the Longmont, Colorado, facility accounted for $7.1 million of the decrease in gross profit. Depreciation increased $2.8 million and salaries and other operating expenses increased $4.3 million as the Micro Products business continued to improve its production processes and make ready for full production. Gross margin for the core businesses declined $7.5 million. Lower sales, unfavorable product mix, and higher factory expenses accounted for the change. Depreciation and other equipment-related costs account for the increase in expenses. Funding received by the Company from the ARPA consortium is reflected as a reduction to cost of sales and totaled $75,000, $1.8 million, and $3.8 million in fiscal years 1997, 1996, and 1995, respectively. The awarding of these funds was based on the completion of various milestones, including process validation for each essential process in the production of chip- carrier substrates for IC packages using the Company's patented Novaclad material. The Company is not expected to incur any future costs that will be reimbursed by ARPA, and the Company had completed its obligations under the consortium agreement. Sales and Marketing Expenses. Sales and marketing expenses increased $306,000, or 3%, in fiscal 1997 and $164,000, or 2%, in fiscal 1996. As a percentage of net sales, sales and marketing expenses were 9% in fiscal 1997, 8% in fiscal 1996, and 10% in fiscal 1995. Staffing increases for the interconnect business, as well as professional fees and travel costs associated with the Company's joint ventures in China, account for the 1997 increase in expenses. General and Administrative Expenses. Gross general and administrative expenses increased $1.4 million, or 27%, to $6.8 million in fiscal 1997 and $836,000, or 18%, to $5.4 million in fiscal 1996. ARPA credits applied to general and administrative expenses were $265,000, and $663,000 in fiscal years 1996 and 1995. In 1997, no ARPA credits were offset against general and administrative expenses. This resulted in net general and administrative expenses of $6.8 million, $5.1 million, and $3.9 million in fiscal years 1997, 1996, and 1995, respectively. The table below shows, for the periods indicated, the Company's general and administrative expenses (in thousands): Fiscal Years Ended August 29, August 30, September 1, 1997 1996 1995 ____ ____ ____ Gross expense $6,839 $5,394 $4,558 ARPA funding - (265) (663) ______ ______ ______ Net expense $6,839 $5,129 $3,895 ====== ====== ====== Percent of sales 6.5% 4.5% 4.1% In 1997, an increase in general and administrative expenses was due to unfavorable currency fluctuations, increased staffing, and related expenditures working to enhance the Company's information technology. Fiscal 1996 expenses reflect increases in professional services, miscellaneous employee benefits, and incentive compensation expense. Increases in the Company's general and administrative expenses are expected to continue for two more years. The Company has committed significant resources to completely renewing its information technology systems, converting from mainframe technologies to open-architecture client/server technologies. This strategic change is being driven by anticipated gains from information technology improvements needed to manage the significant growth that lies just ahead. The Company is aware of computer programming problems associated with the "Year 2000" and has selected to install "Year 2000" compliant systems. Therefore the Company will not incur any significant additional costs related to the "Year 2000" problem associated with programming codes existing in obsolete computer systems. Research and Development Expenses. Gross research and development expenses increased $1.2 million, or 30%, in fiscal 1997 to $5.2 million. This was on top of a $1.1 million, or 39%, increase in fiscal 1996. ARPA credits applied to research and development expenses were $509,000, $1.3 million, and $611,000 in fiscal years 1997, 1996, and 1995. This resulted in net research and development expenses of $4.7 million, $2.8 million, and $2.3 million in fiscal years 1997, 1996, and 1995, respectively. The table below shows, for the periods indicated, the Company's research and development expenses (in thousands): Fiscal Years Ended August 29, August 30, September 1, 1997 1996 1995 ____ ____ ____ Gross expense $5,214 $4,010 $2,881 ARPA funding (509) (1,255) (611) ______ ______ ______ Net expense $4,705 $2,755 $2,270 ====== ====== ====== Percent of sales 4.5% 2.4% 2.4% The increase in gross research and development expenses in these periods was due to additional staffing, material testing, travel, and consulting and professional costs supporting the start-up of the Company's Micro Products business and related ARPA consortium milestones. No additional ARPA funding is expected because consortium objectives have been met. Also, the Company does expect its research and development expenses to level off in fiscal 1998 since resources supporting Micro Products are now in place. Interest Expense. Gross interest expense increased to $3.0 million in fiscal 1997 from $2.4 million in fiscal 1996, and $2.1 million in fiscal 1995, as the Company increased borrowings to support capital expenditures. The following shows a breakdown of interest expense for the fiscal years indicated (in thousands): Fiscal Years Ended August 29, August 30, September 1, 1997 1996 1995 ____ ____ ____ Gross interest $3,033 $2,388 $2,090 Capitalized interest (1,735) (1,605) (1,215) Investment income - (244) - ______ ______ ______ Net expense $1,298 $ 539 $ 875 ====== ====== ====== Percent of sales 1.2% .5% .9% Capitalized interest increased to $1.7 million in fiscal 1997 from $1.6 million in fiscal 1996 and $1.2 million in fiscal 1995. On November 21, 1995, the Company completed a secondary public offering of common stock from which it received net proceeds of $29.0 million. The net proceeds were used to reduce outstanding indebtedness, with the remainder invested in high-grade, short-term interest-bearing debt securities resulting in investment income of $244,000 in fiscal 1996. Income Taxes. The Company's effective tax rate was 34%, 34%, and 28% for fiscal years 1997, 1996, and 1995, respectively. The increase in effective tax rate resulted from the elimination of the research and development tax credits from July 1995 through June 1996 and lower foreign sales corporation (FSC) tax benefits. In 1995, these rates differed from the federal statutory rate primarily because of state income taxes, benefits from research and development credits, and FSC benefits. Liquidity and Capital Resources - Net working capital increased $892,000 in fiscal 1997, resulting in a current ratio of 2.8. This compares with a current ratio of 2.6 in fiscal 1996. Net capital expenditures in fiscal 1997, 1996, and 1995 were $30.7 million, $24.9 million, and $32.2 million, respectively, of which $58 million was for building and equipping the new Longmont manufacturing facility. The remaining capital expenditures were used to expand manufacturing capacity in the Company's laminate materials and flexible interconnect operations as well as to improve corporate information systems. Over the past three fiscal years, the Company has financed its capital expenditures through equity proceeds of $32 million from public offerings of common stock and stock option exercises, $14.3 million from preferred stock, debt financing of $5.5 million, and cash flow from operations of $14.9 million. The Company expects capital expenditures in fiscal 1998 to be approximately $30 million. The Company believes that its cash flow from operations, funds available under its current revolving credit agreement, and additional preferred stock proceeds will be sufficient to meet its operating and investment needs through fiscal 1998. During fiscal 1997, the Company had a $35.0 million revolving credit agreement, secured by the Company's inventories, accounts receivable, real estate, and equipment. Commitment fees are charged at 0.25% of the unused portion of the line of credit. Interest accrues at rates based on the prime or LIBOR rates. During fiscal 1997, the weighted average interest rate under revolving credit agreements was 8.4%. As of August 29, 1997, borrowings were $32.5 million at a weighted average interest rate of 8.42% and $2.5 million was unused and available. The revolving credit agreement expires December 31, 1998. During fiscal 1997, the Company obtained a separate revolving note for up to $12.0 million from the Company's lenders. Except for expiring on December 31, 1997, all terms and conditions of this "extended" facility are the same as those of the primary revolving facility. No borrowings were outstanding under this extended facility as of August 29, 1997, and $12.0 million was available. During fiscal 1997, maximum borrowings under both notes were $44.0 million. Preferred Stock - On August 28, 1997, the Company entered into an agreement with five qualified investors for the issuance of $30 million of 5% cumulative convertible preferred stock. As of August 29, 1997, the Company had 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. The Company has an option to issue 15,000 additional shares of cumulative convertible preferred stock (Series C) for an additional $15 million. Both series of preferred stock are convertible to common stock and carry a 5% cumulative dividend, payable upon conversion and payable in common stock or cash, at the Company's option. The 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 the average of the lowest consecutive five-day closing price on the common stock in the 30-day period immediately prior to conversion. The maximum conversion price on the Series C preferred stock will be computed at the closing of the second tranche. Holders of the 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 elect 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. These warrants expire on August 27, 2000. Financial Derivatives - The Company has foreign currency risks from certain international sales. Major contracts have "risk-sharing" arrangements with the customer, allowing repricing in the event of long-term and/or significant foreign currency fluctuations. To deal with short-term fluctuations, the Company will use a variety of hedging techniques, including financial derivatives, to prudently reduce, but not eliminate, its exposure to foreign currency fluctuations. The Company expects its foreign currency exposure to increase during fiscal 1998 and may increase its hedging activities accordingly. New Accounting Pronouncements - In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 changes the standards for computing and presenting earnings per share (EPS) and supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share." SFAS 128 simplifies the standards for computing earnings per share and replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. This statement requires restatement of all prior-period EPS data presented. The Company will adopt SFAS 128 beginning in the second quarter of fiscal 1998. Following is the pro forma effect of adoption of SFAS 128 on the Company's earnings per share: Fiscal Years Ended August 29, August 30, September 1, 1997 1996 1995 ____ ____ ____ Primary EPS $(.89) $ .55 $ .45 Effect of SFAS 128 - .02 .02 ______ ______ ______ Basic EPS $(.89) $ .57 $ .47 ====== ====== ====== Fully diluted EPS $(.89) $ .55 $ .45 Effect of SFAS 128 - - - ______ ______ ______ Diluted EPS $(.89) $ .55 $ .45 ====== ====== ====== During 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which defines a fair value based method of accounting for employee stock options and similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by Accounting Principles Board Opinion No. 25 (APB 25). Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in SFAS 123 had been adopted. The Company has elected to account for its stock-based compensation plans under APB 25 and the pro forma disclosures are contained in Footnote 5 to the financial statements. 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 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; (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; and (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. 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 ________________________________________________ No applicable. 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 1996 and 1997 is set forth in Note 11 to the Consolidated Financial Statements included with this report. Item 9. Changes in and Disagreements with Accountants _________________________________________________ None PART III Pursuant to General Instruction G(3) Registrant omits Part III, Items 10 (Directors and Executive Officers of Registrant), 11 (Executive Compensation), 12 (Security Ownership of Certain Beneficial Owners and Management) and 13 (Certain Relationships and Related Transactions), except that portion of Item 10 relating to Executive Officers of the Registrant, which is set forth in Part I of this report as a definitive proxy statement will be filed with the Commission pursuant to Regulation 14(a) within 120 days after August 29, 1997, and such information required by such items is incorporated herein by reference from the proxy statement. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ____________________________________________________ (a) Documents filed as a part of the report: Form 10-K Page Reference 1. Consolidated Financial Statements Index to Consolidated Financial Statements F-1 Report of Independent Public Accountans F-2 Consolidated Statements of Operations for the Fiscal Years Ended August 29, 1997, August 30, 1996, and September 1, 1995 F-3 Consolidated Balance Sheets as of August 29, 1997, and August 30, 1996 F-4 Consolidated Statements of Changes in Shareholders' Investment for the Fiscal Years August 29, 1997, August 30, 1996, and September 1, 1995 F-5 Consolidated Statements of Cash Flows for the Fiscal Years Ended August 30, 1996, September 1, 1995 and September 2, 1994 F-6 Notes to Consolidated Financial Statements F-7 2. Consolidated Financial Statement Schedules Form 10-K Description Page Reference Schedule II - Valuation and Qualifying Accounts S-1 (b) Reports on Form 8-K Form 8-K filed September 10, 1997, reporting Item 5 (sale of preferred stock). (c) Exhibits and Exhibit Index Exhibit No. Description ___________ ______________ 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 December 2, 1994. 3.2 Bylaws, as amended, incorporated by reference from Exhibit 3.2 of the Registrant's Registration Statement on form S-2 (File No. 33-79266). 4.1 Stock Purchase Agreement Relating to Purchase of Sheldahl Stock dated March 12, 1987 between the Registrant and Sumitomo Bakelite Co., Ltd., as amended through January 9, 1991, incorporated by reference from Exhibit C(4) of Registrant's Form 8-K filed January 22, 1991. 4.2 Amendment No. 4 to Stock Purchase Agreement Relating to Purchase of Sheldahl Stock dated January 3, 1994, incorporated by reference from Exhibit 4.2 of the Registrant's Registration Statement on Form S-2 (File No. 33-79266). 4.3 Rights Agreement dated as of June 16, 1996 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. 4.4 Convertible Preferred Stock Purchase Agreement dated August 27, 1997, among the Registrant and Southbrook International investments, Ltd., HBK Cayman LP, HBK Offshore Fund Ltd., and Brown Simpson Strategic Growth Fund LP, incorporated by reference from Exhibit 4.1 of the Registrant's Form 8-K filed September 10, 1997. 4.5 Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock dated August 27, 1997, incorporated by reference from Exhibit 4.2 of the Registrant's Form 8-K filed September 10, 1997. 4.6 Form of Warrant dated August 25, 1997, incorporated by reference from Exhibit 4.3 of the Registrant's Form 8-K filed September 10, 1997. 4.7 Registration Rights Agreement dated August 27, 1997, among the Registrant and Southbrook International investments, Ltd., HBK Cayman LP, HBK Offshore Fund Ltd., and Brown Simpson Strategic Growth Fund LP, incorporated by reference from Exhibit 4.4 of the Registrant's Form 8-K filed September 10, 1997. 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 September 9, 1997 (File No. 333-36267). 10.3 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. 10.4 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. 10.5 Employment (change of control) Agreement between James E. Donaghy and the Registrant dated March 1, 1988, as amended August 21, 1996, incorporated by reference from Exhibit 10.5 of the Registrant's Form 10-K for the fiscal year ended August 30, 1996. 10.6 Sales Agreement Relating to Japanese Sales dated March 12, 1987 between the Registrant and Sumitomo Bakelite Co., Ltd., incorporated by reference from Exhibit C(2) of the registrant's Form 8-K filed March 25, 1987. 10.7 Sales Agreement Relating to United States Sales dated March 12, 1987 between the Registrant and Sumitomo Bakelite Co., Ltd., incorporated by reference from Exhibit C(3) of the Registrant's Form 8-K filed March 25, 1987. 10.8 Amendment Number One to Sales Agreement Relating to Japanese Sales dated January 9, 1991 between the Registrant and Sumitomo Bakelite Co., Ltd., incorporated by reference from Exhibit C(2) of the Registrant's Form 8-K filed January 22, 1991. 10.9 Amendment Number One to Sales Agreement Relating to United States Sales dated January 9, 1991 between Sheldahl, Inc. and Sumitomo Bakelite Co., Ltd., incorporated by reference from Exhibit C(3) of the Registrant's Form 8-K filed January 22, 1991. 10.10 Amended and Restated Cross License Agreement dated November 1, 1993 between the Registrant and Sumitomo Bakelite Co., Ltd. incorporated by reference from Exhibit 10.5 of the Registrant's Form 10-K for the fiscal year ended September 2, 1994. 10.11 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. 10.13 Amended and Restated Credit and Security Agreement dated November 24, 1993 among the Registrant, Norwest Bank Minnesota, N.A., and Harris Trust and Savings Bank, incorporated by reference from Exhibit 4.1 of the Registrant's Form 10-K for the fiscal year ended August 27, 1993. 10.14 Second Amendment to Amended and Restated Credit and Security Agreement dated May 12, 1994 among the Registrant, Norwest Bank Minnesota, N.A., Harris Trust and Savings Bank, incorporated by reference from Exhibit 10.1 of the Registrant's Form 10-Q for the second quarter ended March 3, 1995. 10.15 Third Amendment to Amended and Restated Credit and Security Agreement dated January 24, 1995 among the Registrant, Norwest Bank Minnesota, N.A., Harris Trust and Savings Bank, and NBD Bank, N.A., incorporated by reference from Exhibit 10.2 of the Registrant's Form 10-Q for the quarter ended March 3, 1995. 10.16 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. 10.17 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. 10.18 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. 10.19 Note Purchase Agreement dated as of August 31, 1995 between the Registrant and Northern Life Insurance Company, incorporated by reference to Exhibit 10.19 to Registrant's Form 10-K for the fiscal year ended September 1, 1995. 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 Joint Marketing Agreement dated June 14, 1995 between the Registrant and Mentor Graphics Corporation incorporated by reference from Exhibit 10.22 of the Registrant's Form 10-K for the fiscal year ended September 1, 1995. 10.23 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. 10.24 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. 10.25 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. 10.26 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. 10.27 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. 10.28 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. 10.29 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. 10.30 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. 10.31 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. 10.32 Amendment One to License Agreement dated September 14, 1994 between Sidrabe and Registrant incorporated by reference from Exhibit 10.32 of the Registrant's Form 10-K for the fiscal year ended September 1, 1995. 10.33 Fourth Amendment to Amended and Restated Credit and Security Agreement dated January 29, 1996, among the Registrant, Norwest Bank Minnesota, N.A., Harris Trust and Savings Bank, and NBD Bank, N.A., incorporated by reference from Exhibit 10.2 of the Registrant's Form 10-Q for the quarter ended March 3, 1995. 10.34 Fifth Amendment to Amended and Restated Credit and Security Agreement dated March 1, 1996, among the Registrant, Norwest Bank Minnesota, N.A., Harris Trust and Savings Bank, and NBD Bank, N.A., incorporated by reference from Exhibit 10.2 of the Registrant's Form 10-Q for the quarter ended March 3, 1995. 10.35 Sixth Amendment to Amended and Restated Credit and Security Agreement dated November 1, 1996, among the Registrant, Norwest Bank Minnesota, N.A., Harris Trust and Savings Bank, and NBD Bank, N.A., incorporated by reference from Exhibit 10.2 of the Registrant's Form 10-Q for the quarter ended March 3, 1995. 10.36 Seventh Amendment to Amended and Restated Credit and Security Agreement dated April 4, 1997, among the Registrant, Norwest Bank Minnesota, N.A., Harris Trust and Savings Bank, and NBD Bank, N.A., incorporated by reference from Exhibit 10.2 of the Registrant's Form 10-Q for the quarter ended March 3, 1995. 11 Statement Regarding Computation of Per Share Earnings. 22 Subsidiary of Registrant. 23 Consent of Independent Public Accountants. 27 Financial Data Schedule 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 10, 1997 SHELDAHL, INC. By:/s/James E. Donaghy James E. Donaghy Chief Executive Officer By:/s/Edward L. Lundstrom Edward L. Lundstrom President 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 5, 1996 and in the capacities indicated. (Power of Attorney) Each person whose signature appears below constitutes and appoints James E. Donaghy and John V. McManus 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 S. Womack Chairman of the Board and Director James S. Womack By /s/James E. Donaghy Chief Executive Officer and James E. Donaghy Director (principal executive officer) By /s/Edward L. Lundstrom President Edward L. Lundstrom By /s/John V. McManus Vice President - Finance John V. McManus (principal financial and accounting officer) 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/Richard S. Wilcox Director Richard S. Wilcox By /s/Beekman Winthrop Director Beekman Winthrop Index to Consolidated Financial Statements Report of Independent Public Accountants F-2 Consolidated Balance Sheets as of August 29, 1997, and August 30, 1996 F-3 Consolidated Statements of Operations for the Fiscal Years Ended August 29, 1997, August 30, 1996, and September 1, 1995 F-4 Consolidated Statements of Changes in Shareholders' Investment for the Fiscal Years Ended August 29, 1997, August 30, 1996, and September 1, 1995 F-5 Consolidated Statements of Cash Flows for the Fiscal Years Ended August 29, 1997, August 30, 1996, and September 1, 1995 F-6 Notes to Consolidated Financial Statements F-7 F-1 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 August 29, 1997, and August 30, 1996, 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 August 29, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. 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 August 29, 1997, and August 30, 1996, and the results of their operations and their cash flows for each of the three fiscal years in the period ended August 29, 1997, in conformity with generally accepted accounting principles. 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. ARTHUR ANDERSEN LLP Minneapolis, Minnesota November 19, 1997 F-2 Sheldahl, Inc. and Subsidiary Consolidated Balance Sheets (in thousands, except share and per share data) Assets August 29, August 30, 1997 1996 Current assets: Cash and cash equivalents $ 5,567 $ 904 Accounts receivable, net of allowances of $225 in 1997 and $244 in 1996 15,880 21,091 Inventories 13,078 11,525 Deferred taxes 765 1,660 Prepaid expenses and other current assets 406 390 ______ ______ Total current assets 35,696 35,570 ______ ______ Plant and equipment: Land and buildings 26,467 24,718 Machinery and equipment 112,071 64,754 Construction in progress 19,303 37,650 Accumulated depreciation (57,036) (47,630) ______ ______ Net plant and equipment 100,805 79,492 ______ ______ Deferred taxes 2,187 - ______ ______ Other assets 679 825 ______ ______ $139,367 $115,887 ====== ====== Liabilities and Shareholders' Investment Current liabilities: Current maturities of long-term debt $ 818 $ 466 Accounts payable 7,309 9,824 Accrued salaries 1,606 1,390 Other accrued liabilities 3,020 1,839 ______ ______ Total current liabilities 12,753 13,519 ______ ______ Long-term debt 40,869 21,858 ______ ______ Other non-current liabilities 2,813 2,269 ______ ______ Deferred taxes - 2,904 ______ ______ Commitments and contingencies (Notes 4, 5, 6 and 8) - - Shareholders' investment: Preferred stock, $1 par value, 500,000 shares authorized; Series B convertible preferred, 15,000 shares issued and outstanding(stated value $15 million) 15 - Common stock, $.25 par value, 20,000,000 shares authorized; 9,031,371 and 8,912,695 shares outstanding 2,258 2,228 Additional paid-in capital 66,923 51,404 Retained earnings 13,736 21,705 ______ ______ Total shareholders' investment 82,932 75,337 ______ ______ $139,367 $115,887 ======= ======= The accompanying notes are an integral part of these consolidated balance sheets F-3 Sheldahl, Inc. and Subsidiary Consolidated Statements of Operations (in thousands, except per share data) For The Fiscal Years Ended August 29, August 30, September 1, 1997 1996 1995 Net sales $105,266 $114,120 $95,216 Cost of sales 94,933 89,171 74,752 ______ ______ ______ Gross profit 10,333 24,949 20,464 ______ ______ ______ Expenses: Sales and marketing 9,560 9,254 9,090 General and administrative 6,839 5,129 3,895 Research and development 4,705 2,755 2,270 Interest 1,298 539 875 ______ ______ ______ Total expenses 22,402 17,677 16,130 ______ ______ ______ Income (loss) before income taxes (12,069) 7,272 4,334 Provision (benefit) for income taxes (4,100) 2,500 1,200 ______ ______ ______ Net income (loss) $(7,969) $ 4,772 $ 3,134 ======= ======= ======= Net income (loss) per common share $ (.89) $ .55 $ .45 ======= ======= ======= Weighted average common shares and common share equivalents outstanding 8,967 8,686 6,925 ======= ======= ======= The accompanying notes are an integral part of these consolidated financial statements. F-4 Sheldahl, Inc. and Subsidiary Consolidated Statements of Changes in Shareholders' Investment For The Fiscal Years Ended (in thousands, except share data) August 29, August 30, September 1, 1997 1996 1995 Series B Convertible Preferred Stock: Balance at beginning of period $ - $ - $ - Proceeds from stock issuance 15 - - ______ ______ ______ Balance at end of period 15 - - Common Stock: Balance at beginning of period 2,228 1,708 1,648 Exercise of stock options 30 17 60 Proceeds from stock issuance - 503 - ______ ______ ______ Balance at end of period 2,258 2,228 1,708 Additional Paid-In Capital: Balance at beginning of period 51,404 22,311 21,035 Exercise of stock options 1,234 599 1,276 Net proceeds from stock issuance 14,285 28,494 - ______ ______ ______ Balance at end of period 66,923 51,404 22,311 Retained Earnings: Balance at beginning of period 21,705 16,933 13,799 Net income (loss) (7,969) 4,772 3,134 ______ ______ ______ Balance at end of period 13,736 21,705 16,933 ______ ______ ______ Total Shareholders' Investment $82,932 $75,337 $40,952 ====== ====== ====== The accompanying notes are an integral part of these consolidated financial statements. F-5 Sheldahl, Inc. and Subsidiary Consolidated Statements of Cash Flows (in thousands) For The Fiscal Years Ended August 29, August 30, September 1, 1997 1996 1995 Operating activities: Net income (loss) $ (7,969) $ 4,772 $ 3,134 Adjustments to reconcile net income to Net cash provided by operating activities: Depreciation and amortization 10,650 6,783 4,845 Deferred income taxes (4,196) 1,846 1,008 Net change in other operating activities: Accounts receivable 5,211 (3,454) (3,174) Inventories (1,553) 984 (1,941) Prepaid expenses and other current assets (16) 342 (254) Other assets 146 734 (635) Accounts payable and accrued liabilities (1,118) (708) (481) Other non-current liabilities 544 (414) (188) ______ ______ ______ Net cash provided by operating activities 1,699 10,885 2,314 ______ ______ ______ Investing activities: Capital expenditures, net (30,729) (24,920) (32,182) Net cash flow used in discontinued operation - - (489) ______ ______ ______ Net cash used in investing activities (30,729) (24,920) (32,671) ______ ______ ______ Financing activities: Net borrowings (repayments) under revolving credit facility 17,275 (15,290) 10,533 Proceeds from long-term debt 1,452 - 23,466 Repayments of long-term debt (598) (429) (5,941) Net proceeds from common stock - 28,997 - Net proceeds from convertible preferred stock 14,300 - - Net proceeds from stock option exercises 1,264 616 1,336 ______ ______ ______ Net cash provided by financing activities 33,693 13,894 29,394 ______ ______ ______ Net increase (decrease) in cash and cash equivalents 4,663 (141) (963) ______ ______ ______ Cash and cash equivalents at beginning of period 904 1,045 2,008 ______ ______ ______ Cash and cash equivalents at end of period $5,567 $ 904 $1,045 ====== ====== ====== Supplemental cash flow information: Interest paid $3,078 $2,221 $2,204 ====== ====== ====== Income taxes paid (refunded) $ (68) $ 131 $ 114 ====== ====== ====== The accompanying notes are an integral part of these consolidated financial statements. F-6 Sheldahl, Inc. and Subsidiary Notes to Consolidated Financial Statements (1) Business Description and Fiscal Year: Sheldahl, Inc. (the Company) creates thin, flexible laminates and markets these products worldwide. The Company's laminates are of two types, adhesive-based tapes and materials, and its patented adhesiveless material, Novaclad. From these materials, Sheldahl also fabricates high-value derivative products: single- and double-sided interconnect and semiconductor substrates. (2) Summary of Significant Accounting Policies: Basis of Presentation - The consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles and include the accounts of the Company and its subsidiary. All significant intercompany accounts have been eliminated. 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 revenues and expenses during the reporting period. Ultimate results could differ from those estimates. Significant Customers - The Company's two largest customer accounted for sales of $12,052,000 and $11,143,000 in 1997, $15,549,000 and $13,944,000 in 1996 and $15,053,000 and $6,167,000 in 1995. No other customers accounted for more than 10% of net sales. Export Sales - The Company had export sales of $15,040,000 in 1997, $11,968,000 in 1996, and $11,100,000 in 1995. 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. Inventories - Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out (FIFO) method. Cost include the cost of materials, direct labor, and applicable manufacturing overhead. During the fourth quarter of fiscal 1996, the Company changed its method of accounting for inventories from the last-in, first-out (LIFO) method to the FIFO method. Management believes that the change in accounting for inventories is preferable because it will more accurately measure operating results by reflecting the effect of productivity improvements in cost of sales. The impact of the change was not material to the Company. The components of inventories are as follows (in thousands): August 29, August 30, 1997 1996 ____ ____ Raw material $ 3,069 $ 2,599 Work-in-process 6,484 5,572 Finished goods 3,525 3,354 ______ ______ Total $13,078 $11,525 ====== ====== 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 $1,735,000 in 1997, $1,605,000 in 1996, and $1,215,000 in 1995. 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. Earnings Per Share - Earnings per share is computed based on the weighted average number of common and equivalent shares outstanding during each period presented, as applicable. New Accounting Pronouncement - In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 changes the standards for computing and presenting earnings per share (EPS) and supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share." SFAS 128 simplifies the standards for computing earnings per share and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. SFAS 128 requires restatement of all prior- period EPS data presented. The Company will adopt SFAS 128 beginning in the second quarter of fiscal 1998. Following is the pro forma effect of adoption of SFAS 128 on the Company's earnings per share: Fiscal Years Ended August 29, August 30, September 1, 1997 1996 1995 ____ ____ ____ Primary EPS as reported $ (.89) $ .55 $ .45 Effect of SFAS 128 - .02 .02 ______ ______ ______ Basic EPS $ (.89) $ .57 $ .47 ====== ====== ====== Fully diluted EPS $ (.89) $ .55 $ .45 Effect of SFAS 128 - - - ______ ______ ______ Diluted EPS $ (.89) $ .55 $ .45 ====== ====== ====== Reclassifications - Reclassifications of certain prior period balances have been made to conform with the current method of presentation. (3) Financing: Long-term debt consisted of the following (in thousands): August 29, August 30, 1997 1996 ____ ____ Revolving credit agreement $32,519 $15,243 Note payable to insurance company, secured by real estate mortgage. Interest at 8.3% with monthly payments of $52, Including principal and interest remaining balance due September 1, 2002 5,383 5,555 Capitalized lease obligation 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 1,870 - 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 690 - Note payable to Economic Development Agency, secured by $825 standby letter of credit, interest at 2.0% with monthly payments of $9, including principal and interest, remaining balance due October 1998 624 728 Other 601 798 ______ ______ 41,687 22,324 Less-current maturities (818) (466) ______ _______ $40,869 $21,858 ====== ====== The Company has a $35.0 million revolving credit agreement, secured by the Company's inventories, accounts receivable, real estate, and equipment. Commitment fees are charged at 0.25% of the unused portion of the line of credit. Interest rates are based on the prime or LIBOR rates. During fiscal 1997, the weighted average interest rate under this agreement was 8.4%. As of August 29, 1997, borrowings were $32.5 million at a weighted average interest rate of 8.42% and $2.5 million was unused and available. The revolving credit agreement expires December 31, 1998. During fiscal 1997, the Company obtained a separate revolving note for up to $12.0 million from the Company's lenders. Except for expiring on December 31, 1997, all terms and conditions of this "extended" facility are the same as those of the primary revolving facility. No borrowings were outstanding under this extended facility as of August 29, 1997, and $12.0 million was available. During fiscal 1997, the maximum borrowings under both notes were $44.0 million. The Company's debt agreements contain various restrictive covenants which, among other things, require the Company to maintain defined consolidated net worth levels, financial ratios and minimum coverage ratios, and call for the pledging of certain assets. These agreements also restrict additional indebtedness, capital expenditures and cash dividends. The Company was in compliance with these covenants for the fiscal year ended August 29, 1997. Future maturities of debt are as follows (in thousands): Fiscal 1998 $ 818 Fiscal 1999 33,761 Fiscal 2000 737 Fiscal 2001 807 Fiscal 2002 853 Thereafter 4,711 _______ $41,687 ======= (4) Preferred Stock: On August 28, 1997, the Company entered into an agreement with five qualified investors for the issuance of $30 million of 5% cumulative convertible preferred stock. As of August 29, 1997, the Company had 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. The Company has an option to issue 15,000 additional shares of cumulative convertible preferred stock (Series C) for an additional $15 million. Both series of preferred stock are convertible to common stock and carry a 5% cumulative dividend, payable upon conversion and payable in common stock or cash, at the Company's option. The 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 the average of the lowest consecutive five-day closing price on the common stock in the 30-day period immediately prior to conversion. The maximum conversion price on the Series C preferred stock will be computed at the closing of the second tranche. Holders of the 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 elect 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. These warrants expires on August 27, 2000. (5) 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 2,000 non-qualified stock options to each non-employee director of the Company on the date that each such director is elected or re-elected to the Board of Directors, and expire, to the extent not already exercised, thirty days after termination of service as a Director. As of August 29, 1997, the Plans authorize the future granting of options to purchase up to 176,000 shares of common stock. Stock option transactions during 1995, 1996 and 1997 are summarized as follows: Shares Price per Share ______ _______________ Outstanding at September 2, 1994 755,977 $4.875 to $12.000 Granted 84,777 $13.000 to $16.500 Exercised (271,046) $5.000 to $12.000 ________ Outstanding at September 1, 1995 569,708 $4.875 to $16.500 Granted 475,090 $16.500 to $22.125 Exercised (68,888) $4.875 to $16.500 Lapsed (5,000) $18.375 ________ Outstanding at August 30, 1996 970,910 $5.000 to $22.125 Granted 424,049 $15.375 to $22.000 Exercised (119,103) $5.00 to $22.125 Lapsed (87,076) $15.375 to $22.125 ________ Outstanding at August 29, 1997 1,188,780 $5.000 to $22.125 ======== Options exercisable were 669,562 as of August 29, 1997, 569,660 as of August 30, 1996, and 391,931 as of September 1, 1995. The options outstanding as of August 29, 1997, expire five or ten years after the grant date as follows: Number of Options Fiscal Years That Expire ____________ ______________ 1998 8,729 1999 22,000 2000 27,412 2001 49,718 2002 100,000 2003 56,524 2004 107,488 2005 58,474 2006 345,000 2007 413,435 During 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) which defines a fair value based method of accounting for employee stock options and similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by Accounting Principles Board Opinion No. 25 (APB 25). Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in SFAS 123 had been adopted. The Company has elected to account for its stock-based compensation plans under APB 25; however, the Company has computed, for pro forma disclosure purposes, the value of all stock options granted during 1997 and 1996 using the Black-Scholes option pricing model as prescribed by SFAS 123, using the following weighted average assumptions: Fiscal Years Ended August 29, August 30, 1997 1996 ____ ____ Risk-free interest rate 6.21 - 6.63% 5.50 - 6.61% Expected lives 7 years 4.5 - 7 years Expected volatility 48.75 - 65.44% 45.45 - 51.46% Using the Black-Scholes methodology, the total value of stock options granted during 1997 and 1996 was $4,958,000 and $5,608,000, respectively, which would be amortized on a pro forma basis over the vesting period of the options (typically ranging from six months to four years). The weighted average fair value of options granted during 1997 and 1996 was $11.96 per share and $11.93 per share, respectively. If the Company had accounted for its stock-based compensation plans in accordance with SFAS 123, the Company's net income (loss) and earnings (loss) per share would have been as follows: Fiscal Years Ended August 29, 1997 August 30, 1996 (in thousands, except per share data) As Reported Pro Forma As Reported Pro Forma ___________ _________ ___________ _________ Net income (loss) $ (7,969) $ (9,887) $ 4,772 $ 4,224 Earnings (loss) per share $ (.89) $ (1.10) $ .55 $ .49 The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to September 1, 1995, and additional awards are anticipated to be granted in future years. (6) Commitments and Contingencies: Lease Commitments - The Company has non-cancelable operating lease commitments for certain manufacturing facilities and equipment which expire at various dates through 2002. Minimum rent commitments under operating leases are $2,497,000 in 1998 and 1999, $1,351,000 in 2000, $369,000 in 2001, and $13,000 in 2002. 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 $2,721,000 in 1997, $2,353,000 in 1996, and $2,394,000 in 1995. During 1997, the Company entered into various capital lease arrangements for the purchase of certain communication and computer equipment and related software totaling $2.7 million. Amortization expense relating to these capital leases was $140,000 in 1997. The following is a schedule by year of future gross minimum capital lease payments (in thousands): Fiscal 1998 $ 653 Fiscal 1999 653 Fiscal 2000 653 Fiscal 2001 653 Fiscal 2002 653 Thereafter 24 $3,289 Less amount representing interest (729) ______ Present value of net minimum capital lease payments $2,560 ====== Employment Agreements - The Company has employment and consulting agreements with various officers which are renewable in successive one-year terms after August 21, 1999, requiring minimum severance benefits following a change in control of the Company, as defined. Litigation - The nature of the Company's operations expose 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 that final disposition of these matters will not have a material adverse effect on the Company's operating results or financial condition. (7) Income Taxes: The Company recognizes deferred income tax assets and liabilities based on differences between financial and income tax reporting bases of assets and liabilities based on enacted tax rates and laws. The provision (benefit) for income taxes consisted of the following (in thousands): August 29, August 30, September 1, 1997 1996 1995 ____ ____ ____ Currently payable $ 96 $ 654 $ 192 Deferred (4,196) 1,846 1,008 _______ _______ _______ Provision (benefit) for income taxes $(4,100) $2,500 $1,200 ======= ======= ======= A reconciliation from the provision (benefit) for income taxes using the statutory federal income tax rate to the provision (benefit) for income taxes is as follows (in thousands): August 29, August 30, September 1, 1997 1996 1995 ____ ____ ____ Federal statutory rates $(4,100) $ 2,472 $1,474 Tax benefit of foreign sales corporation - (182) (222) Research and development tax credits - - (200) State income taxes, net of federal benefit 96 90 37 Other (96) 120 111 _______ _______ _______ $(4,100) $ 2,500 $1,200 ======= ======= ======= As of August 29, 1997, the Company had net operating loss carryforwards of $23.2 million and income tax credit carry forwards of approximately $1.0 million that expire through 2012. Temporary differences and carryforwards which result in net deferred income tax assets as of August 29, 1997, and August 30, 1996, were as follows (in thousands): August 29, August 20, 1997 1996 ____ ____ Deferred tax assets: Net operating loss carryforwards $6,819 $ 102 Income tax credit carryforwards 977 1,309 Postretirement benefits 644 499 Deferred compensation 630 411 Medical reserves 247 170 Inventories 178 436 Vacation reserve 155 126 Bad debt reserve 83 100 Other 130 302 _______ _______ Deferred tax assets 9,863 3,455 _______ _______ Deferred tax liabilities: Depreciation (6,706) (4,494) _______ _______ Valuation allowance (205) (205) _______ _______ Net deferred taxes $2,952 $(1,244) ======= ======= 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 has established a valuation allowance for a portion of the net operating loss and income tax credit carryforwards and other items due to the uncertainty related to their ultimate realization. (8) 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). Pension costs are funded in compliance with the Employee Retirement Income Security Act of 1974. Net periodic pension cost is as follows (in thousands): August 29, August 30, September 1, 1997 1996 1995 ____ ____ ____ Service cost $ 177 $ 184 $ 164 Interest cost on projected benefit obligation 350 337 286 Return on plan assets (341) (282) (232) Net amortization and deferral 35 61 45 ______ ______ ______ Net periodic pension cost $ 221 $ 300 $ 263 ====== ====== ====== Funding information with respect to the Northfield Plan is as follows (in thousands): August 29, August 30, 1997 1996 ____ ____ Actuarial present value of - Vested benefit obligation $4,764 $4,217 ====== ====== Accumulated benefit obligation $4,847 $4,282 ====== ====== Projected benefit obligation $4,847 $4,451 ====== ====== Plan assets at fair value $5,317 $4,291 ====== ====== Projected benefit obligation in excess of (less than) plan assets $ (470) $ 160 Unrecognized transition amount (50) (60) Unrecognized prior service cost (659) (715) Unrecognized net gain 1,400 915 ______ ______ Net pension liability $ 221 $ 300 ====== ====== The accumulated benefit obligation is the actuarial present value of all vested and non-vested benefits for employee service before July 1, 1997. The projected benefit obligation is the accumulated benefit obligation increased to include expected increases in the plan's flat dollar benefit. The projected benefit obligation is determined using an assumed discount rate of 8% in both 1997 and 1996. The assumed long-term rate of return for assets is 8% in both 1997 and 1996. Plan assets consist principally of cash equivalents, bonds, and common stock. 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 4.0% of each participant's salary. The Company's expense related to the employee savings plan was $475,000 in 1997, $1,014,000 in 1996, and $900,000 in 1995. 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. Net periodic postretirement benefit cost is as follows (in thousands): August 29, August 30, 1997 1996 ____ ____ Service cost $ 35 $ 33 Interest cost on accumulated benefit obligation 71 66 _____ _____ Net periodic postretirement benefit cost $ 106 $ 99 ===== ===== Funding information related to the Company's plan is as follows (in thousands): August 29, August 30, 1997 1996 ____ ____ Accumulated benefit obligation $ 1,756 $ 1,347 Plan assets at fair value - - ______ ______ Projected benefit obligation in excess of plan assets 1,756 1,347 Unrecognized net gain - - ______ ______ Accrued postretirement benefits $ 1,756 $ 1,347 ====== ====== An 11.5% annual rate of increase in the health care cost trend rate was assumed with rates decreasing gradually to 6.0% by 2007, and remaining at that level thereafter. The health care cost trend rate assumption has an effect on the amounts reported. Increasing the assumed health care cost trend rate assumption by one percentage point would increase accumulated postretirement benefit obligation by 3.1% and the net periodic postretirement benefit cost by 2.1% each year. The discount rate used in determining the accumulated postretirement benefit obligation was 8% for both 1997 and 1996. (9) Consortium for the Development of Multichip Modules: On January 10, 1994, the Company entered into a consortium agreement sponsored by the Advanced Projects Research Agency (ARPA), a United States Government Agency. The purpose of the consortium is to accelerate the development and commercialization of the Company's chip-carrier substrates for multi-chip modules (MCMs). As a consortium member, the Company expects to receive approximately $12.2 million in funding through August of 1997 from ARPA to further test, design, and develop the manufacturing processes for the Company's Novaclad-based substrates, which are used in constructing MCMs. The Company incurred $584,000 in fiscal 1997, $3,235,000 in 1996, and $5,030,000 in 1995 in costs related to this project. As of August 29, 1997, substantially all of these costs have been reimbursed by the consortium and the Company will no longer incur costs that will be reimbursed by ARPA. (10) Joint Venture: 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, as defined. The joint venture is being 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 has received $765,000 in cash from the joint venture since its inception. (11) Quarterly Results of Operations (Unaudited): The consolidated results of operations for the four quarters of 1997 and 1996 are as follows (in thousands, except per share data): Fiscal 1997 First Second Third Fourth _____ _____ _____ _____ Net sales $24,301 $26,379 $27,593 $26,993 Cost of sales and expenses 26,934 28,685 30,184 31,532 Loss before income taxes (2,633) (2,306) (2,591) (4,539) Benefit for income taxes (900) (780) (880) (1,540) _______ _______ _______ _______ Net loss $(1,733) $(1,526) $(1,711) $(2,999) _______ _______ _______ _______ Net loss per share $ (0.19) $ (0.17) $ (0.19) $ (0.33) ======= ======= ======= ======= Weighted average common shares outstanding 8,913 8,956 8,989 9,011 ======= ======= ======= ======= Fiscal 1996 First Second Third Fourth _____ _____ _____ _____ Net sales $26,097 $28,954 $29,690 $29,379 Cost of sales and expenses 24,874 26,630 27,589 27,755 Income before income taxes 1,223 2,324 2,101 1,624 Provision for income taxes 365 700 630 805 _______ _______ _______ _______ Net income $ 858 $ 1,624 $ 1,471 $ 819 ======= ======= ======= ======= Net income per share $ .12 $ .18 $ .16 $ .09 ======= ======= ======= ======= Weighted average common shares outstanding 7,257 9,119 9,199 9,184 ======= ======= ======= ======= 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, 1995, August 30, 1996, and August 29, 1997 were as follows: 1995 1996 1997 ____ ____ ____ Balance, beginning of year $200,000 $267,412 $243,472 Recoveries (accounts charged off), net 67,412 (23,940) (18,768) _______ _______ _______ Balance, end of year $267,412 $243,472 $224,704 ======= ======= ======= S-1 EX-11 2 Exhibit 11 Sheldahl, Inc. and Subsidiary Statement Regarding Computation of Earnings Per Share (in thousands, except per share data) For the Fiscal Years Ended September 1, August 30, August 29, 1995 1996 1997 ____ ____ ____ Primary Earnings Per Share: Weighted average number of issued shares outstanding 6,692 8,414 8,967 Effect of exercise of stock options under the treasury stock method 233 272 - ______ ______ ______ Weighted average shares outstanding used to compute primary earnings per share 6,925 8,686 8,967 ====== ====== ====== Net income (loss) $3,134 $4,772 $(7,969) ====== ====== ====== New income (loss) per share $ 0.45 $ 0.55 $ (0.89) ====== ====== ====== Fully Diluted Earnings Per Share: Weighted average number of issued shares outstanding 6,692 8,414 8,967 Effect of exercise of stock options under the treasury stock method 279 223 - ______ ______ ______ Weighted average shares outstanding used to compute primary earnings per share 6,971 8,637 8,967 ====== ====== ====== Net income (loss) $3,134 $4,772 $(7,969) ====== ====== ====== New income (loss) per share $ 0.45 $ 0.55 $ (0.89) ====== ====== ====== EX-22 3 Exhibit 22 SUBSIDIARY OF REGISTRANT Sheldahl International Sales, Inc. a corporation organized under the laws of the Virgin Islands (Wholly-owned subsidiary of Sheldahl, Inc.) EX-23 4 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed Registration Statement Nos. 33-58549, 333-36153 and 333-36267. Arthur Andersen LLP Minneapolis, Minnesota November 19, 1997 EX-27 5
5 This schedule contains summary financial information extracted from the August 29, 1997, financial statements and is qualified in its entirety by reference to such financial statements. YEAR YEAR AUG-29-1997 AUG-30-1996 AUG-29-1997 AUG-30-1996 5567 904 0 0 15880 21091 0 0 13078 11525 35696 35570 157841 127122 57036 47630 139367 115887 12753 13519 0 0 0 0 15 0 2258 2228 66923 51404 139367 115887 105266 114120 105266 114120 94933 89171 21104 17138 0 0 0 0 1298 539 12069 7272 4100 2500 7969 4772 0 0 0 0 0 0 7969 4772 .89 .55 .89 .55
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