-----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, KbApvR84FmKfXzPy6aN3zSmvPqL0+syH+I4aCAKrwwBNAnvGo6IgQ5gUi59xevao hLh9nXbpz5M1cCcR4LHcnw== 0000089615-99-000012.txt : 19990412 0000089615-99-000012.hdr.sgml : 19990412 ACCESSION NUMBER: 0000089615-99-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990226 FILED AS OF DATE: 19990409 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-Q SEC ACT: SEC FILE NUMBER: 001-11861 FILM NUMBER: 99590642 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-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q (X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended February 26, 1999 Commission File Number: 0-45 SHELDAHL, INC. (Exact name of registrant as specified in its charter) Minnesota 41-0758073 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) Northfield, Minnesota 55057 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (507) 663-8000 As of March 25, 1999, 11,152,588 shares of the Registrant's common stock were outstanding. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO PART I: FINANCIAL INFORMATION SHELDAHL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Six Months Ended February 26, February 27, (In thousands, 1999 1998 except for per share data) Net sales $56,516 $56,743 Cost of sales 50,697 54,036 _______ _______ Gross profit 5,819 2,707 _______ _______ Expenses: Sales and marketing 4,751 4,915 General and administrative 3,758 3,942 Research and development 1,253 2,002 Interest 987 1,122 Restructuring costs 3,100 4,000 _______ _______ Total expenses 13,849 15,981 _______ _______ Loss before income taxes and cumulative effect of change in method of accounting (8,030) (13,274) Benefit for income taxes - 4,840 _______ _______ Net loss before cumulative effect of change in method of accounting for start-up costs (8,030) (8,434) Cumulative effect of change in method of accounting for start-up costs - (5,206) _______ _______ Net loss before preferred dividends (8,030) (13,640) Convertible preferred stock dividends (1,072) (359) _______ ________ Net loss applicable to common shareholders $(9,102) $(13,999) ======= ======= Net loss per common share: Basic - Net loss before change in method of accounting and after convertible preferred stock dividends $ (0.84) $ (0.97) Change in accounting method - (0.57) _______ _______ Net loss per common share $ (0.84) $ (1.54) ======= ======= Diluted - Net loss before change in method of accounting and after convertible preferred stock dividends $ (0.84) $ (0.97) Change in accounting method - (0.57) _______ _______ Net loss per common share $ (0.84) $ (1.54) ======= ======= Number of shares outstanding - Basic 10,772 9,084 Number of shares outstanding - Diluted 10,772 9,084 The accompanying notes are an integral part of these statements. SHELDAHL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended February 26, February 27, (In thousands, 1999 1998 except for per share data) Net sales $28,042 $27,751 Cost of sales 24,930 27,184 _______ _______ Gross profit 3,112 567 _______ _______ Expenses: Sales and marketing 2,531 2,515 General and administrative 1,831 2,092 Research and development 679 1,070 Interest 664 609 Restructuring costs 3,100 4,000 _______ _______ Total expenses 8,805 10,286 _______ _______ Loss before income taxes (5,693) (9,719) Benefit for income taxes - 3,465 _______ _______ Net loss before preferred dividends (5,693) (6,254) Convertible preferred stock dividends (418) (172) _______ _______ Net loss applicable to common shareholders $(6,111) $(6,426) ======= ======= Net loss per common share: Basic Net loss per common share $ (0.55) $ (0.70) ======= ======= Diluted Net loss per common share $ (0.55) $ (0.70) ======= ======= Number of shares outstanding - Basic 11,037 9,131 Number of shares outstanding - Diluted 11,037 9,131 The accompanying notes are an integral part of these statements. SHELDAHL, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS (In thousands) February 26, August 28, 1999 1998 (unaudited) Current assets: Cash $ 1,327 $ 1,005 Accounts receivable, net 19,100 15,727 Inventories 17,224 15,488 Other current assets 1,257 627 _______ _______ Total current assets 38,908 32,847 _______ _______ Construction in process 5,985 26,682 Land and buildings 28,555 28,255 Machinery and equipment 133,715 113,642 Less: accumulated depreciation (71,664) (66,322) _______ _______ Net plant and equipment 96,591 102,257 _______ _______ Other assets 1,109 1,202 _______ _______ $136,608 $136,306 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 3,884 $ 4,296 Accounts payable 8,845 7,766 Accrued compensation 1,126 1,554 Other accruals 5,228 4,518 Restructuring reserves 5,166 5,494 _______ _______ Total current liabilities 24,249 23,628 Long-term debt 31,839 27,829 Restructuring reserves 1,638 2,131 Other long-term accruals 3,920 3,961 _______ _______ Total liabilities 61,646 57,549 _______ _______ Stockholders' Equity: Convertible preferred stock 40 41 Common stock 2,788 2,415 Additional paid-in capital 106,381 99,751 Subscribed preferred stock (1,695) - Accumulated deficit (32,552) (23,450) _______ _______ Total shareholders' equity 74,962 78,757 _______ _______ $136,608 $136,306 ======= ======= The accompanying notes are an integral part of these statements. SHELDAHL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended (In thousands) February 26, February 27, 1999 1998 Operating activities: Net loss $ (9,102) $(13,998) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 8,066 7,103 Preferred stock dividends 1,072 359 Deferred income taxes - (4,840) Accounting method change - 5,206 Restructuring costs charged to operations 3,100 4,000 Restructuring payments made (3,427) - Net change in other operating activities: Accounts receivable (3,373) (998) Inventories (1,736) (1,488) Prepaid expenses and other current assets (630) (276) Other assets 93 54 Accounts payable and accrued liabilities 1,700 2,406 Other non-current liabilities (41) (82) _______ _______ Net cash used in operating activities (4,278) (2,554) _______ _______ Investing activities: Capital expenditures, net (3,642) (14,120) _______ _______ Financing activities: Net borrowings under revolving credit facilities 5,980 10,486 Proceeds from other long-term debt - 2,334 Repayments of long-term debt (2,449) (475) Costs and redemption of Series B preferred stock (837) (300) Net proceeds of Series E preferred stock 5,392 - Stock options exercised 156 163 _______ _______ Net cash provided by financing activities 8,242 12,208 _______ _______ Net increase (decrease) in cash equivalents 322 (4,466) Cash and cash equivalents at beginning of period 1,005 5,567 _______ _______ Cash and cash equivalents at end of period $ 1,327 $ 1,101 ======= ======= Supplemental cash flow information: Interest paid $ 1,662 $ 1,853 ======= ======= Income taxes paid $ 69 $ 7 ======= ======= The accompanying notes are an integral part of these statements. SHELDAHL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited These condensed and unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these condensed unaudited consolidated financial statements reflect all adjustments, of a normal and recurring nature, necessary for a fair statement of the interim periods, on a basis consistent with the annual audited financial statements. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although these disclosures should be considered adequate, the Company strongly suggests that these condensed unaudited financial statements be read in conjunction with the financial statements and summary of significant accounting policies and notes thereto included in the Company's latest annual report on Form 10-K. 1) Inventories, which are valued at the lower of first-in first-out cost or market, consists of (in thousands): February 26, 1999 August 28, 1998 Raw materials $ 5,717 $ 4,964 Work-in-process 5,207 4,742 Finished goods 6,300 5,782 _______ _______ $17,224 $15,488 ======= ======= 2) Equity Transactions. During February 1999, the Company issued 7,210 shares of Series E convertible preferred stock. As of February 26, 1999, the Company had received cash of $5,515,000 relating to the issuance of the stock and received the remaining $1,695,000 by March 5, 1999. By March 8, 1999, the Company had issued additional 1,350 shares of Series E convertible preferred stock and received the related proceeds of $1,350,000. The investors were also issued warrants to purchase a total of 85,600 shares of Common Stock of the Company at $7.8125 per share. The warrants are exercisable for a period of five years. During the three months ended February 26, 1999, 231,336 shares of common stock were issued upon the conversion of 1,097 shares of Series B convertible preferred stock. As of March 31, 1999, the Company's equity structure is summarized as follows: A) 11,152,588 common shares outstanding. B) $32,917,000 in stated value of Series D 5% convertible preferred stock, with a fixed conversion price of $6.15 per share and dividends payable in cash or in common stock annually on each July 1. Accrued but unpaid dividends are also due upon the conversion of such preferred shares. C) $8,560,000 in stated value of Series E 5% convertible preferred stock with a fixed conversion price of $6.25 per share and dividends payable in cash or in common stock annually on each March 1. Accrued but unpaid dividends are also due upon the conversion of such preferred shares. D) $167,000 in stated value of Series B 5% convertible preferred stock with a floating conversion price estimated to be $6.30 per share as of March 17, 1999 and dividends payable in cash or in common stock at conversion. On February 26, 1999, the Company had accrued approximately $990,000 in total dividends on these groups of preferred stock. 3) Restructuring Costs. In February 1999, the Company recorded a charge of $3.1 million to reserve for the separation costs incurred in reducing its salaried work force. The restructuring costs provide for approximately $1.7 million for severance and early retirement salary costs and approximately $1.4 million for medical, dental and other benefits being provided to the affected individuals. Approximately 53 people are affected by this action. These new restructuring costs are in addition to the $8.5 million of similar costs charged to operations in fiscal 1998 ($4.0 million in the second quarter ended February 27, 1998 and $4.5 million in the third quarter ended May 29, 1998). As of February 26, 1999, the Company had total remaining restructuring reserves of $6.8 million. Of this amount, approximately $6.3 million related to severance, wages and benefits and approximately $500,000 related to the remaining equipment disposal, facility closedown and other costs. In total, for all restructuring costs recorded at February 26, 1999, the Company expects to make cash outlays of $2.8 million during the last six months of fiscal 1999 and $2.6 million for all of fiscal 2000. The remaining $1.4 million of restructuring costs are expected to be paid out over the ten years beginning in fiscal 2001. During the six months ended February 26, 1999, the Company paid $3.4 million of restructuring expenses relating to reserves charged to operations in fiscal 1998. Also, the Company wrote off $494,000 of fixed assets relating to the Aberdeen, South Dakota facility and charged this amount to previously established reserves. 4) Earnings Per Share The basic loss per share amount is determined based on the weighted average of common shares outstanding. Diluted loss per share is determined based on the same figure, since the Company's potentially dilutive items, convertible preferred stock, stock options and warrants, are anti-dilutive in the periods presented. SHELDAHL, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED OPERATING RESULTS AND FINANCIAL CONDITION Six Months Ended February 26, 1999, and February 27, 1998 Sales The Company's net sales declined $226,000, or 0.4%, from $56.7 million for the six months ended February 27, 1998 to $56.5 million for the six months ended February 26, 1999. The automotive market sales for the six months ended February 26, 1999 declined 3.5% to $38.7 million. This decline represents weaker than anticipated orders during the mid-December 1998 to mid-January 1999 period plus continued price pressure with the industry. Sales to the datacom market increased 39.2% to $9.2 million for the six months ended February 26, 1999. Sales of the Company's new Novaflexr VHD product accounted for approximately $2 million of the increase. Additionally, sales for the Company's ViaThinr substrates for IC packages also increased $167,000 during this period. Sales to the aerospace defense market consisting principally of various laminate materials declined $1.1 million or 24% reflecting the typical order pattern of this market. The chart below details the Company's sales by market during the period (in thousands): Six Months Ended Six Months Ended Market Feb 26, 1999 Feb 27, 1998 Gross Change % Change Automotive $ 38,702 $ 40,092 $ (1,390) (3.5%) Datacom 9,225 6,628 2,597 39.2% Industrial 3,683 3,718 (35) (.9%) Consumer 1,402 1,673 (271) (16.1%) Aerospace/Defense 3,504 4,632 (1,128) (24.3%) _______ _______ _______ _______ Total $ 56,516 $ 56,743 $ (227) .4% ======= ======= ======= ======= Gross Profit Gross profit increased to 10.3% of sales, or $5.8 million, for the six months ended February 26, 1999. As reflected in the table below, Micro Products grossed a $6.7 million loss. The combined Materials and Interconnect business units' gross profit increased $3.1 million to $12.5 million, or 22.4%, of sales. The improved performance is due to savings realized in production labor as well as more effective cost management of factory costs. Six Months Fiscal 1999 Six Months Fiscal 1998 Interconnect Micro Total Interconnect Micro Total & Material Products Company & Materials Products Company (In millions) Sales $55,881 $ 635 $56,516 $56,275 $ 468 $56,743 Cost of sales 43,361 7,336 50,697 46,864 7,172 54,036 Gross profit 12,520 (6,701) 5,819 9,411 (6,704) 2,707 % of sales 22.4% N/A 10.3% 16.7% N/A 4.8% Sales and marketing expense decreased $164,000, or 3.3%, from $4.9 million for the six months ended February 27, 1998, to $4.8 million for the six months ended February 26, 1999. Decreases in travel, advertising and other expenses accounted for the decline in expenses. General and administrative expenses decreased $184,000, or 4.7%, from $3.9 million for the six months ended February 27, 1998, to $3.8 million for the six months ended February 26, 1999. Increases in staff salaries and depreciation expense related to the new computer based systems were more than offset by a decrease in expenditures for consulting, communications and software. Research and development expenses decreased $749,000, or 37.4%, from $2.0 million for the six months ended February 27, 1998, to $1.3 million for the six months ended February 26, 1999. This decline relates to the transition of resources out of research and development to direct support production in the Company's Longmont facility. A decline in salaries, research materials and supplies plus travel account for the major portion of the reduction. Interest costs and activities for the noted periods are detailed below (in thousands): Six Months Ended Six Months Ended February 26, 1999 February 27, 1998 Change Gross interest expense $ 1,719 $ 1,922 $ (203) Capitalized interest (732) (800) 68 _______ _______ _______ Net interest $ 987 $ 1,122 $ (135) ======= ======= ======= During the current six months, lower borrowings accounted for the decrease in gross interest costs. At February 27, 1998, total borrowings were $54.0 million, while at February 26, 1999 total borrowings were reduced to $35.7 million. Higher interest rates charged by the Company's lenders prevented greater cost savings. In February 1999, the Company recorded a charge of $3.1 million to reserve for the separation costs incurred in reducing its salaried work force. The Company continues to realize benefits from streamlining its business processes. The restructuring costs provide for approximately $1.7 million for severance costs and approximately $1.4 million for medical, dental and other benefits being provided to the affected individuals. Approximately 53 people are affected by this action. These new restructuring costs are in addition to the $8.5 million of similar costs charged to operations in fiscal 1998 ($4.0 million in the second quarter ended February 27, 1998 and $4.3 million in the third quarter ended May 29, 1998). In February 1998, a restructuring charge of $4.0 million was recorded related to the culmination of the Company's business process design initiative that began two years ago. Due to significant productivity benefits resulting from the initiative, the Company reduced the size of its salaried workforce. The resulting workforce reduction involved layoffs, early retirement offerings, reassignments and reclassifications of positions. The restructuring costs provided for approximately $2.5 million for severance and early retirement salary costs, approximately $1.3 million for medical, dental and other benefits being provided to the affected individuals, and approximately $0.2 million for outplacement and other costs. As of February 26, 1999, the Company's restructuring reserve was $6.8 million. In total, for all restructuring costs recorded at February 26, 1999, the Company expects to make cash outlays of $2.8 million during the last six months of fiscal 1999 and $2.6 million for all of fiscal 2000. The remaining $1.4 million of restructuring costs are expected to be paid out over the ten years beginning in fiscal 2001. During the six months ended February 26, 1999, the Company paid $3.4 million of restructuring expenses relating to reserves charged to operations in fiscal 1998. Income taxes were applied at 34% in the six months ended February 27, 1998. No income taxes were applied in the current period as the Company provides allowances for all of its net deferred tax assets. Dividends on preferred stock were $1.1 million for the six months ended February 26, 1999, up $713,000 from the $359,000 figure for the six months ended February 27, 1998. The $32.9 million Series D preferred stock issued in July of 1998 accounted for this increase. As a result, net loss to common shareholders for the six months ended February 26, 1999 was $9.1 million, or $0.84 per share. This compares with a loss per share before changes of method of accounting of $0.97 for the six months ended February 27, 1998. SHELDAHL, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED OPERATING RESULTS AND FINANCIAL CONDITION Three Months Ended February 26, 1999 and February 27, 1998 Sales The Company's net sales increased $291,000, or 1.1%, from $27.8 million for the three months ended February 27, 1998 to $28.0 million for the three months ended February 26, 1999. The automotive market sales for the three months ended February 26, 1999 decreased 6% to $18.6 million. This decline represents weaker than anticipated orders during the mid-December 1998 to mid-January 1999 period plus continued price pressure within the industry. Sales to the datacom market increased $2.2 million, or 73%, for the three months ended February 26, 1999 to $5.3 million. Sales of the Company's new Novaflexr VHD product accounted for $1.5 million of the increase. Sales to all other markets reflect a decrease of 16%, or $780,000. The table below details the Company's sales by market for the period (in thousands): Three Months Ended Three Months Ended Market February 26, 1999 February 27, 1998 Gross Change % Change Automotive $ 18,621 $ 19,795 $ (1,174) (5.9%) Datacom 5,303 3,058 2,245 73.4% Industrial 1,559 1,678 (119) (7.1%) Consumer 646 1,090 (444) (40.7%) Aerospace/Defense 1,913 2,130 (217) (10.2%) _______ _______ _______ _______ Total $ 28,042 $ 27,751 $ 291 1.1% ======= ======= ======= ======= Gross Profit Gross profit increased to 11.1% of sales, or $3.1 million for the three months ended February 26, 1999. As reflected in the table below, the Micro Products business gross loss decreased by 10%, or $359,000, to $3.0 million. Less depreciation and salaried expenses are the primary cause of this improvement. The combined Materials and Interconnect business units' gross profit increased to $6.1 million, or 22.3% of sales. The improved performance is due to savings realized in production labor as well as more effective cost management of factory costs. Three Months Fiscal 1999 Three Months Fiscal 1998 Interconnect Micro Total Interconnect Micro Total & Material Products Company & Materials Products Company (In millions) Sales $27,551 $ 491 $28,042 $27,507 $ 244 $27,751 Cost of sales 21,411 3,519 24,930 23,553 3,631 27,184 Gross profit 6,140 (3,028) 3,112 3,954 (3,387) 567 % of sales 22.3% N/A 11.1% 14.4% N/A 2% Sales and marketing expenses remained level at $2.5 million for the three months ended February 26, 1999 compared to the same period one year ago. Increases in outsourced computer design expenses were offset by declines in salaries and travel. General and administrative expenses decreased $261,000, or 12%, from $2.1 million for the three months ended February 27, 1998, to $1.8 million for the three months ended February 26, 1999. Increases in depreciation were offset by declines in salaries, consulting expense and office expense. Research and development expenses decreased $391,000, or 36%, from $1.1 million for the three months ended February 27, 1998, to $679,000 for the three months ended February 26, 1999. This decline relates to the transition of resources out of research and development to direct support production in the Company's Longmont facility. A decline in salaries, research materials and supplies, and travel account for a major portion of the reduction. Interest costs and activities for the noted period are detailed below (in thousands): Three Months Ended Three Months Ended February 26, 1999 February 27, 1998 Change Gross interest expense $ 921 $ 1,062 $ (141) Capitalized interest (257) (453) 196 _______ _______ _______ Net interest $ 664 $ 609 $ 55 ======= ======= ======= During the current quarter, lower borrowings accounted for the decrease in gross interest costs. At February 27, 1998, total borrowings were $54.0 million, while at February 26, 1999, total borrowings were $35.7 million. Higher interest rates charged by the Company's primary lenders prevented greater cost reduction in interest expense. Fewer projects in process account for the decline in capitalized interest. In February 1999, the Company recorded a charge of $3.1 million to reserve for the separation costs incurred in reducing its salaried work force. The Company continues to realize benefits from streamlining its business processes. The restructuring costs provide for approximately $1.7 million for severance and early retirement salary costs, approximately $1.4 million for medical, dental and other benefits being provided to the affected individuals. Approximately 53 people are affected by this action. These new restructuring costs are in addition to the $8.5 million of similar costs charged to operations in fiscal 1998 ($4.0 million in the second quarter ended February 27, 1998 and $4.3 million in the third quarter ended May 29, 1998). As of February 26, 1999, the Company had remaining restructuring reserves of $6.8 million. In total, for all restructuring costs recorded at February 26, 1999, the Company expects to make cash outlays of $2.8 million during the last six months of fiscal 1999 and $2.6 million for all of fiscal 2000. The remaining $1.4 million of restructuring costs are expected to be paid out over the ten years beginning in fiscal 2001. In February 1998, a restructuring charge of $4.0 million was recorded related to the culmination of the Company's business process design initiative that began two years ago. Due to significant productivity benefits resulting from the initiative, the Company reduced the size of its salaried workforce. The resulting workforce reduction involved layoffs, early retirement offerings, reassignments and reclassifications of positions. The restructuring costs provide for approximately $2.5 million for severance and early retirement salary costs, approximately $1.3 million for medical, dental and other benefits being provided to the affected individuals, and approximately $0.2 million for outplacement and other costs. No taxes were applied in the three months ended February 26, 1999 as allowances against all of the Company's net deferred tax assets have been recorded. Last year, income taxes were applied at 34% reflecting a tax benefit of $3.5 million. Convertible preferred stock dividends increased to $418,000 for the three months ended February 26, 1999. This increase is due to the Series D preferred stock issued in July of 1998. As a result, net loss to common shareholders for the three months ended February 26, 1999, was $6.1 million, or $0.55 per share. This compares to a net loss of $6.4 million, or $0.36 per share, for the three months ended February 27, 1998. Financial Condition and Cash Flow Since the end of fiscal 1998, the Company's financial condition has strengthened. The Company's Interconnect and Materials businesses have registered improved operating results while the Micro Products business has managed costs and is vigorously pursuing volume orders. In February of 1999, the liquidity of the Company was enhanced with the $8.56 million preferred stock equity placement. As a result, the Company's lenders have removed the requirement that the Company raise additional equity funds as part of its Credit and Security Agreement. As of March 26, 1999, the Company had $10.1 million outstanding on its revolving credit note and had an additional $8.6 million available to borrow. The Company expects, with anticipated growth in revenue during the third and fourth quarters of fiscal 1999, to generate sufficient cash flow from operations to fund restructuring payments ($2.8 million), term debt obligations ($2.0 million) and modest capital spending ($1.5 million to $2.0 million per quarter). These are all within the borrowing limits of the existing Credit and Security Agreement with its lenders. For the first six months of fiscal 1999, operations consumed cash of $4.3 million. Net of $3.4 million of restructuring payments, operations generated a negative cash flow of $0.9 million, an improvement of $1.7 million over the six months ended February 27, 1998. This improvement was due to increased gross profits offset by increased inventories and accounts receivables. The increase in receivables is attributable to increased sales during the last four weeks of the current period. Inventories increased to support a higher level of customer orders in the coming quarter. Equity Transactions During February 1999, the Company issued 7,210 share of Series E convertible preferred stock. As of February 26, 1999, the Company had received cash of $5,515,000 relating to the issuance of the stock and the Company received the remaining $1,695,000 by March 5, 1999. By March 8, 1999, the Company had issued additional 1,350 shares of Series E convertible preferred stock and received the related proceeds of $1,350,000. The investors were also issued warrants to purchase a total of 85,600 shares of Common Stock of the Company at $7.8125 per share. The warrants are exercisable for a period of five years. Additionally, during the quarter ended February 26, 1999, 231,336 shares of common stock were issued upon the conversion of 1,097 shares of Series B convertible preferred stock. As of March 31, 1999, the Company's equity structure is summarized as follows: A. 11,152,588 common shares outstanding. B. $32,917,000 in stated value of Series D 5% convertible preferred stock, with a fixed conversion price of $6.15 per share and dividends payable in cash or in common stock annually on each July 1. Accrued but unpaid dividends are also due upon the conversion of such preferred shares. C. $8,560,000 in stated value of Series E 5% convertible preferred stock with a fixed conversion price of $6.25 per share and dividends payable in cash or in common stock annually on each March 1. Accrued but unpaid dividends are also due upon the conversion of such preferred shares. D. $167,000 in stated value of Series B 5% convertible preferred stock with a floating conversion price estimated to be $6.30 per share as of March 17, 1999 and dividends payable in cash or in common stock at conversion. On February 26, 1999, the Company had accrued approximately $990,000 in total dividends on these groups of preferred stock. Year 2000 Update The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company's computer equipment, software, devices and products with imbedded technology that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a shut down in the Company's manufacturing operations, a temporary inability to process transactions, send invoices or engage in similar normal business activities. State of Readiness. The Company has undertaken various initiatives to evaluate the Year 2000 readiness of the products sold by the Company ("Products"), the information technology systems used in the Company's operations ("IT Systems"), its non-IT systems, such as power to its facilities, HVAC systems, building security, voicemail and other systems, as well as the readiness of its customers and suppliers. The Company has identified eleven Year 2000 target areas that cover the entire scope of the Company's business and has internally established teams committed to completing an 8-step Compliance Validation Process ("CVP") for each target area. Each team is expected to fully complete this process on or before September 1, 1999. The table below identifies the Company's target areas as well as the 8-step CVP with its expected timeline. Sheldahl's Y2K teams are either complete or near complete with Phase 1 of this process and progressing with Phase 2 remediation activities. Year 2000 Target Areas _______________ 1. Business Computer Systems 2. Technical Infrastructure 3. End-User Computing 4. Manufacturing Equipment 5. Test Lab 6. Telecommunications 7. Research and Development 8. Logistics 9. Facilities 10. Customers 11. Suppliers/Key Service Providers Compliance Validation Process: Phase 1 - Expected Completion April 30, 1999 _______________ 1. Team Formation 2. Inventory Assessment 3. Compliance Assessment 4. Risk Assessment Phase 2 - Expected Completion September 1, 1999 _______________ 1. Resolution/Remediation 2. Validation 3. Contingency Plan 4. Sign-Off Acceptance With respect to the Company's relationships with third parties, the Company relies both domestically and internationally upon various vendors, governmental agencies, utility companies, telecommunications service companies, delivery service companies and other service providers. Although these service providers are outside the Company's control, the Company has mailed letters to those with whom it believes its relationships are material and has verbally communicated with some of its strategic customers to determine the extent to which interfaces with such entities are vulnerable to Year 2000 issues and whether products and services purchased from or by such entities are Year 2000 ready. In February 1999 the Company initiated a Business Partner Assessment Program focused on evaluating customers and suppliers Year 2000 readiness to identify third parties that imposed significant risk on Sheldahl. The Company intends to complete follow-up activities, including but not limited to site surveys, phone surveys, mailings and remediation assistance, with identified third parties as part of the Phase 2 validation. Costs to Address Year 2000 Issues. To date, the Company has not incurred any material expenditures in connection with identifying or evaluating Year 2000 compliance issues. The Company has incurred the majority of its costs from the recent installation of a business computer system consisting primarily of the Enterprise Requirements Planning (ERP) System as well as the opportunity cost of time spent by employees of the Company evaluating Year 2000 compliance matters generally. Because the Company did not accelerate the installation of the ERP System, it does not consider the costs related thereto to be charges for Year 2000 compliance. Presently, the Company estimates for the cost of Year 2000 upgrades and enhancements to its IT Systems and non-IT Systems to be less than $100,000. The Company anticipates that these costs will be contained within the Company's fiscal 1999 budget. At this time, the Company does not possess information necessary to estimate the potential financial impact of Year 2000 compliance issues relating to its vendors, customers and other third parties. Such impact, including the effect of a Year 2000 business disruption, could have a material adverse impact on the Company's financial condition and results of operations. Risks of Year 2000 Issues. Because the Company is still in the discovery and evaluation phase of assessing its overall Year 2000 exposure, it cannot at this time state with certainty that the Year 2000 issues will not have a material adverse impact on its financial condition, results of operations and liquidity. Although the Company considers them unlikely, the Company believes that the following several situations, not in any particular order, make up the Company's "most reasonably likely worst case Year 2000 scenarios": 1. Disruption of a Significant Customer's Ability to Accept Products or Pay Invoices. The Company's significant customers are large, well-informed customers, mostly in the automotive field, who are disclosing information to their vendors that indicates they are well along the path toward Year 2000 compliance. These customers have demonstrated their awareness of the Year 2000 issue by issuing requirements of their suppliers and indicating the stages of identification and remediation which they consider adequate for progressive calendar quarters leading up to the century mark. The Company's significant customers, moreover, are substantial companies that the Company believes would be able to make adjustments in their processes as required to cause timely payment of invoices. Because of lengthy lead times in the industry, disruption of orders from the Company is not likely a problem. Any deliveries occurring in the first half of 2000 will be those resulting from orders placed in 1999, while any disruptions of the order process early in 2000 will concern deliveries made many months later, with adequate opportunity for correction (or manual handling) of the order process before the timing becomes critical. 2. Disruption of Supply Materials. Recently, the Company began a process of surveying its vendors for public disclosures in regards to their Year 2000 readiness and is now in the process of assessing and cataloging these disclosures. The Company expects to work with vendors that provide inadequate disclosures or show a need for remediation assistance. Where ultimate survey results show that the need arises, the Company will arrange for back-up vendors before the changeover date. 3. Disruption of the Company's IT Systems. The Company is proceeding with a scheduled upgrade of its current hardware and software IT systems to state-of-the-art systems and such process has required Year 2000 compliance in the various invitations for proposals. Year 2000 testing is occurring as upgrades proceed and, in addition, will occur after all upgrades are complete, sometime during fiscal 1999. For this reason, the Company considers that disruption of its IT Systems is unlikely. 4. Disruption of the Company's Non-IT Systems. The Company is completing a comprehensive assessment of all non-IT systems, including among other things its manufacturing systems and operations, with respect to both embedded processors and obvious computer control. For some systems, upgrades are already completed or scheduled, and the remaining non-compliant systems remediation needs are being planned. Considering the nature of the equipment and systems involved, the Company expects to complete any remediation efforts on a reasonably short schedule, and in any case before arrival of the Year 2000. The Company also believes that, after such assessment and remediation, if any disruptions do occur, such will be dealt with promptly and will be no more severe with respect to correction or impact than would be an unexpected breakdown of well-maintained equipment. 5. De-Listing of Company as a Vendor to Certain Customers. Several of our principal customers, through the intermediary of an automotive industry information agency, have required updated reports in the form of answers to an extensive multiple-choice survey on our Year 2000 compliance efforts. According to these customers, failure to reply to the readiness survey would have led to de-listing as a supplier at the present time, resulting in possible current inability to bid on procurements requiring deliveries two years or more in the future. Although we did respond to these reports on a timely basis, the substance of our answers to the readiness surveys have placed Sheldahl in a "red" or "danger" zone with respect to those customers' guidelines. One of our two largest customers involved in the efforts of the independent audit agency had also already presented a survey directly to Sheldahl, and as a result had arranged at its own expense for an independent audit of our Year 2000 readiness. The independent audit agency had reported, in the third quarter of fiscal 1998, that although Sheldahl's level of readiness placed us in the "red" or "danger" category, we (i) were proceeding rapidly with its evaluation and remediation efforts, (ii) were expected to reach the ultimate compliance goals of the survey in adequate time, and (iii) should not be considered a risk to the customer's sources of supply. In December 1998, Sheldahl was re-audited by a Remediation Assistance Program consultant on behalf of this customer. At the conclusion of this audit the consultant recommended that Sheldahl's Year 2000 Readiness be upgraded to a "medium level of risk" from the previous high level of risk ("red zone"). Furthermore, the consultant noted that in reviewing Sheldahl's "Y2K plan against the goals of the remediation assistance process, the assessor could not find any gaps or areas of recovery that were not covered or considered." We expect but cannot guarantee that responses from other customers will be similar. In addition, we do not know whether other customers' expectations will or will not be as stringent as those referred to above and whether our current schedule will meet or exceed such expectations. Contingency Plans. While we recognize the need for contingency planning, we have not yet developed any specific contingency plans for potential Year 2000 disruptions. The aforementioned 8-step Compliance Validation Process, however, does include contingency planning by each team and we will review such plans as developed. We do anticipate developing contingency plans for our most critical areas, but details of such plans will depend on our final assessment of the problem as well as the evaluation and success of our remediation efforts. Future disclosures will include contingency plans as they become available. Foreign Currency Exposure During fiscal 1998, the Company's exposure to foreign currency risk declined as two large programs were converted to the United States Dollar. The Company maintains a very limited exposure to foreign currency risk with smaller programs contracted in British Sterling, German Marks and French Francs. These contracts and the exchange rate are reviewed periodically. Beginning January 1, 1999, the Euro, the new European currency, will be used commercially. As of February 26, 1999, none of the Company's customers or suppliers has suggested pricing any contracts in Euro. However, in order to remain competitive, the Company anticipates pricing certain contracts in Euro and has systems in place to support such contracts by converting foreign currency transactions to six decimal places. When warranted by the size of foreign currency contracts, the Company will use a variety of hedging techniques, including financial derivatives, to prudently reduce, but not eliminate, its exposure to foreign currency fluctuations. No such contracts existed as of February 26, 1999. New Accounting Pronouncements During June 1997, the Financial Accounting Standards Board released SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires disclosure of business and geographic segments in the consolidated financial statements of the Company. The Company will adopt SFAS No. 131 in its fiscal 1999 Form 10-K and is currently analyzing the impact it will have on the disclosures in its financial statements. During February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for fiscal years beginning after December 31, 1997. SFAS No. 132 revises certain of the disclosure requirements, but does not change the measurement or recognition of those plans. The adoption of SFAS No. 132 will result in revised and additional disclosures, but will have no effect on the financial position, results of operations, or liquidity of the Company. The Company will adopt SFAS No. 132 in fiscal 1999 and is currently analyzing the impact it will have on the disclosures in its financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and hedging Activities," effective for years beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. Special accounting for qualifying hedges allow a derivative's gains or losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified the impacts of adopting SFAS No. 133 and has not yet determined the timing or method of adoption. Cautionary Statement The statements included herein which are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Reform Act of 1995. Factors which could cause actual results to differ materially from those anticipated by some of the statements made herein include, but are not limited to, the Company's ability to achieve full volume production at its Micro Products facility and other factors detailed from time to time in the Company's SEC reports, including the report on Form 10-K for the year ended August 27, 1998. PART II - OTHER INFORMATION SHELDAHL, INC. AND SUBSIDIARY FORM 10-Q Item 2. Changes in Securities and Use of Proceeds On February 17, 1999, the Board of Directors of Sheldahl, Inc., a Minnesota corporation (the "Company"), ratified and approved a private placement of its newly created Series E Convertible Preferred Stock, $1.00 par value per share, and Warrants (the "Warrants") to purchase shares of the Company's Common Stock, $0.25 par value per share (the "Preferred Stock"), to a group of accredited investors (the "Investors"). The Board also authorized granting the Investors certain registration rights with regard to the shares of Common Stock underlying the Preferred Stock and the Warrants. The closing of the private placement of $7,210,000 occurred on February 26, 1999, with an additional $1,350,000 funded on March 8, 1999. Based on the manner of sale and representations of the Investors, all of which were accredited, the Company believes that pursuant to Rule 506 of Regulation D, the private placement was a transaction not involving any public offering within the meaning of section 4(2) of the Securities Act of 1933, as amended, and was, therefore, exempt from the registration requirements thereof. The Company sold an aggregate of 8,560 shares of the Preferred Stock to the Investors for an aggregate purchase price of $8,560,000 pursuant to the Convertible Preferred stock Purchase Agreement among the Company and the Investors (the "Agreement"). The Preferred Stock is entitled to 5% dividends, payable annually, in shares of Common Stock or cash, at the option of the Company. The Preferred Stock is convertible into shares of the Company's Common Stock at any time. Each holder of Preferred Stock is entitled to convert shares of the Company's Preferred Stock into that number of shares of Common Stock that equals $1,000 plus accrued dividends divided by the Conversion Price. The Conversion Price is $6.25 per share. The Conversion Price is subject to adjustment for certain dilution and market price events. The Company may require holders of Preferred Stock to convert to Common Stock provided that the Company's Common Stock trades at certain pre-set price levels. The Agreement between the Company and the Investors, and the Certificate of Designation for the Preferred Stock, are incorporated herein by reference as Exhibits 4.1 and 4.2 to the Company's Current Report on Form 8-K filed March 9, 1999. Warrants In connection with the issuance of the Preferred Stock, the Company also granted to each Investor a Warrant to purchase shares of the Company's Common Stock. The aggregate amount of shares of Common Stock the Company is obligated to issue under the Warrants is 85,600 at an exercise price of $7.8125 per share. The Warrants are exercisable for a period of five years. The form of Warrant issued by the Company to the Investors is incorporated herein by reference as Exhibit 4.3 to the Company's Current Report on Form 8-K filed March 9, 1999. Registration Rights The Company granted the Investors certain registration rights. The registration rights cover all shares of Common Stock issuable to the Investors (i) upon conversion of shares of the Preferred Stock, (ii) as accrued dividends on the Preferred Stock, and (iii) upon exercise of the Warrants. The Company is obligated to file a shelf Registration Statement on Form S-3. The Registration Rights Agreement between the Company and the Investors specifying the terms of the registration rights is incorporated herein by reference as Exhibit 4.4 to the Company's Current Report on Form 8-K filed March 9, 1999. Use of Proceeds The proceeds from the private placement were used by the Company to improve the Company's liquidity position. The Company will not receive any proceeds from the resale of the shares of Common Stock issuable to the Investors upon conversion of the Preferred Stock. If the Warrants issued to the Investors are exercised in full, the Company will receive $668,750. Such amount is intended to be used by the Company for working capital purposes. There can be no assurance, however, that the Warrants will be exercised. Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of the shareholders of Sheldahl, Inc. was held on January 13, 1999. There were 10,890,792 shares of common stock entitled to vote at the meeting and a total of 9,637,084 shares were represented at the meeting. 1. A proposal was made to ratify and approve the issuance of Common Stock upon conversion of shares of the Company's Series B Convertible Preferred Stock in compliance with the rules of the Nasdaq National Market. Shares were voted as follows: For Against Abstain Broker Non-Vote 5,008,004 138,952 26,626 4,463,502 2. A proposal was made to ratify and approve an amendment to the Company's Amended and Restated Articles of Incorporation to increase the Company's authorized shares of Common Stock from 20,000,000 to 50,000,000. Shares were voted as follows: For Against Abstain 9,288,134 316,400 32,549 3. Nine directors were elected at the meeting to serve for one year or until their successors are elected and qualified. Shares were voted as follows: For Against James E. Donaghy 9,431,509 205,574 John G. Kassakian 9,490,741 146,343 Edward L. Lundstrom 9,484,864 152,220 Gerald E. Magnuson 9,486,570 150,514 Dennis M. Mathisen 9,493,668 143,415 William B. Miller 9,487,407 149,677 Kenneth J. Roering 9,491,605 145,479 Raymond C. Wieser 9,489,967 147,117 Beekman Winthrop 9,490,457 146,627 4. A proposal was made to approve the selection of the Company's independent public accountants for the current fiscal year. Shares were voted as follows: For Against Abstain 9,577,655 24,946 34,481 Item 6. Exhibits and Reports on Form 8-K A) Exhibits 3.1 Amended and Restated Articles of Incorporation of Sheldahl, Inc. 10.1 Second Amendment to the Credit and Security Agreement, dated March 4, 1999 between the Company and Norwest Bank Minnesota, N.A., Harris Trust and Savings Bank, The First National Bank of Chicago, and The CIT Group. 10.2 Third Amendment to the Credit and Security Agreement, dated April 5, 1999 between the Company and Norwest Bank Minnesota, N.A., Harris Trust and Savings Bank, The First National Bank of Chicago, and The CIT Group. 10.3 Consulting Agreement, dated December 31, 1998, between the Company and James E. Donaghy. 10.4 Waiver and Amendment with Addendum to the note Purchase Agreement between the Registrant and Northern Life Insurance Company dated March 31, 1999. 27 Financial Data Schedule B) Reports on Form 8-K Form 8-K filed on January 15, 1999 regarding Item 5, Other Events. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SHELDAHL, INC. (Registrant) Dated: April 9, 1999 By /s/ Edward L. Lundstrom President and Chief Executive Officer Dated: April 9, 1999 By /s/ Jill D. Burchill Vice President Chief Financial Officer Dated: April 9, 1999 By /s/ John V. McManus Vice President Finance EX-27 2
5 This schedule contains summary financial information extracted from the February 26, 1999 financial statements and is qualified in its entirety by reference to such financial statements. 3-MOS 6-MOS AUG-27-1999 AUG-27-1999 FEB-26-1999 FEB-26-1999 1327 1327 0 0 19100 19100 0 0 17224 17224 38908 38908 168255 168255 71664 71664 136608 136608 24249 24249 0 0 0 0 40 40 2788 2788 72134 72134 136608 136608 28042 56516 28042 56516 24830 50697 8141 12862 0 0 0 0 664 987 5693 8030 0 0 0 0 0 0 0 0 0 0 6111 9102 .55 .84 .55 .84
EX-3 3 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF SHELDAHL, INC. ARTICLE I The name of this corporation shall be Sheldahl, Inc. ARTICLE II The registered office of this corporation shall be 1150 Sheldahl Road, Northfield, Minnesota 55057. ARTICLE III The authorized capital stock of this corporation shall be Fifty Million (50,000,000) shares of Common Stock of the par value of twenty-five cents ($.25) per share (the "Common Stock") and Five Hundred Thousand (500,000) shares of Preferred Stock of the par value of One Dollar ($1.00) per share (the "Preferred Stock"). The relative voting rights, preferences and other privileges of such capital stock, shall be as follows: (a) Common Stock. Each share of Common Stock shall entitle the holder thereof to one vote; all such shares of Common Stock shall be equal in all respects and shall confer equal rights upon the holders thereof. (b) Preferred Stock. Each share of Preferred Stock shall entitle the holder thereof to such rights, voting power, dividends, redemption rights or privileges, rights on liquidation or dissolution, conversion rights and privileges, sinking or purchase fund rights and other preferences, privileges and restrictions as may be fixed by the Board of Directors by resolution thereof filed in accordance with Chapter 302A of the Minnesota Statutes. ARTICLE IV A. In addition to any affirmative vote required by law or these Amended and Restated Articles of Incorporation, and except as otherwise expressly provided in Section B of this Article IV, a Business Combination (as hereinafter defined) shall require the affirmative vote of not less than seventy-five percent (75%) of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock (as hereinafter defined), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage or separate class vote may be specified, by law or by any other provision of these Amended and Restated Articles of Incorporation or in any agreement with any national securities exchange or otherwise. B. The provisions of Section A of this Article IV shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote, if any, as is required by law or by any other provision of these Amended and Restated Articles of Incorporation or in any agreement with any national securities exchange or otherwise, if the conditions specified in either of the following Paragraphs 1 or 2 are met: 1. The Business Combination shall have been approved by a majority of the Continuing Directors (as hereinafter defined). 2. All of the following conditions shall have been met: a. The aggregate amount of cash and the Fair Market Value (as hereinafter defined) as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of Common Stock in such Business Combination shall be at least equal to the higher amount determined under clauses (i) and (ii) below: (i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Shareholder (as hereinafter defined) for any share of Common Stock in connection with the acquisition by the Interested Shareholder of beneficial ownership of shares of Common Stock (a) within the two-year period immediately prior to the date of the first public announcement of the proposed Business Combination (the "Announcement Date") or (b) in the transaction in which it became an Interested Shareholder, whichever is higher; and (ii) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such latter date being referred to herein as the "Determination Date"), whichever is higher. b. The aggregate amount of cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class or series of outstanding Capital Stock (as hereinafter defined), other than Common Stock, shall be at least equal to the highest amount determined under clauses (i), (ii) and (iii) below: (i) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by or on behalf of the Interested Shareholder for any share of such class or series of Capital Stock in connection with the acquisition by the Interested Shareholder of beneficial ownership of shares of such class or series of Capital Stock (a) within the two-year period immediately prior to the Announcement Date or (b) in the transaction in which it became an Interested Shareholder, whichever is higher; (ii) the Fair Market Value per share of such class or series of Capital Stock on the Announcement Date or on the Determination Date, whichever is higher; and (iii) (if applicable) the highest preferential amount per share to which the holders of shares of such class or series of Capital Stock would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the corporation, regardless of whether the Business Combination to be consummated constitutes such an event. The provisions of this Paragraph 2.b shall be required to be met with respect to every class or series of outstanding Capital Stock, whether or not the Interested Shareholder has previously acquired beneficial ownership of any shares of a particular class or series of Capital Stock. c. The consideration to be received by holders of a particular class or series of outstanding Capital Stock shall be in cash or in the same form as previously has been paid by or on behalf of the Interested Shareholder in connection with its direct or indirect acquisition of beneficial ownership of shares of such class or series of Capital Stock. If the consideration so paid for shares of any class or series of Capital Stock varied as to form, the form of consideration for such class or series of Capital Stock shall be either cash or the form used to acquire beneficial ownership of the largest number of shares of such class or series of Capital Stock previously acquired by the Interested Shareholder. The price determined in accordance with Paragraphs 2.a and 2.b of Section B of this Article IV shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. d. After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (i) there shall have been no failure to declare and pay at the regular date therefor any full quarterly or other required periodic dividends (whether or not cumulative) payable in accordance with the terms of any outstanding Capital Stock having a preference over the Common Stock as to dividends, or upon liquidation, except as approved by a majority of the Continuing Directors; (ii) there shall have been no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any stock dividend, stock split, combination of shares or similar event), except as approved by a majority of the Continuing Directors; (iii) there shall have been an increase in the annual rate of dividends paid on the Common Stock as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of Common Stock, unless the failure to increase such annual rate is approved by a majority of the Continuing Directors; and (iv) except as approved by a majority of the Continuing Directors, such Interested Shareholder shall not have become the beneficial owner of any additional shares of Capital Stock except as part of the transaction that results in such Interested Shareholder becoming an Interested Shareholder and except in the transaction that, after giving effect thereto, would not result in any increase in the Interested Shareholder's percentage beneficial ownership of any class or series of Capital Stock. e. After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder of the corporation), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the corporation, whether in anticipation of or in connection with such Business Combination or otherwise. f. A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 (the "Act") and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to all shareholders of the corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to the Act or subsequent provisions). The proxy or information statement shall contain on the first page thereof, in a prominent place, any statement as to the advisability (or inadvisability) of the Business Combination that a majority of the Continuing Directors may choose to make and, if deemed advisable by a majority of the Continuing Directors as to the fairness (or lack of fairness) of the terms of the Business Combination from a financial point of view to the holders of the outstanding shares of Capital Stock other than the Interested Shareholder and its Affiliates (as hereinafter defined) or Associates (as hereinafter defined). g. Such Interested Shareholder shall not have made or caused to be made any major change in the corporation's business or equity capital structure without the approval of a majority of the Continuing Directors. C. For the purpose of this Article IV: 1. The term "Business Combination" shall mean: a. any merger, consolidation or statutory exchange of shares of the corporation or any Subsidiary (as hereinafter defined) with (i) any Interested Shareholder or (ii) any other corporation (whether or not itself an Interested Shareholder) which is or after such merger, consolidation or statutory share exchange would be an Affiliate or Associate of an Interested Shareholder; provided, however, that the foregoing shall not include the merger of a wholly owned Subsidiary of the corporation into the corporation or the merger of two or more wholly owned Subsidiaries of the corporation; or b. any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with an Interested Shareholder or any Affiliate or Associate of any Interested Shareholder of any assets of the corporation or any Subsidiary equal to or greater than ten percent (10%) of the book value of the consolidated assets of the corporation; or c. any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with the corporation or any Subsidiary of any assets of any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder equal to or greater than ten percent (10%) of the book value of the consolidated assets of the corporation; or d. the issuance or transfer by the corporation or any Subsidiary (in one transaction or a series of transactions) to any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder of any securities of the corporation (except pursuant to stock dividends, stock splits, or similar transactions which would not have the effect, directly or indirectly, of increasing the proportionate share of any class or series of Capital Stock, or any securities convertible into Capital Stock or into equity securities of any Subsidiary, that is beneficially owned by any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder) or of any securities of a Subsidiary (except pursuant to a pro rata distribution to all holders of Common Stock of the corporation); or e. the adoption of any plan or proposal for the liquidation or dissolution of the corporation proposed by or on behalf of an Interested Shareholder or any Affiliate or Associate of any Interested Shareholder; or f. any transaction (whether or not with or otherwise involving an Interested Shareholder) that has the effect, directly or indirectly, of increasing the proportionate share of any class or series of Capital Stock, or any securities convertible into Capital Stock or into equity securities of any Subsidiary, that is beneficially owned by any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder, including, without limitation, any reclassification of securities (including any reverse stock split), or recapitalization of the corporation, or any merger, consolidation or statutory exchange of shares of the corporation with any of its Subsidiaries; or g. any agreement, contract or other arrangement or understanding providing for any one or more of the actions specified in the foregoing clauses (a) to (f). 2. The term "Capital Stock" shall mean all capital stock of the corporation authorized to be issued from time to time under Article III of these Amended and Restated Articles of Incorporation. The term "Voting Stock" shall mean all Capital Stock of the corporation entitled to vote generally in the election of directors of the corporation. 3. The term "person" shall mean any individual, firm, corporation or other entity and shall include any group comprised of any person and any other person or persons with whom such person or any Affiliate or Associate of such person has any agreement, arrangement or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of Capital Stock. 4. The term "Interested Shareholder" shall mean any person (other than the corporation or any Subsidiary and other than any profit- sharing, employee stock ownership or other employee benefit plan of the corporation or any Subsidiary or any trustee of or fiduciary with respect to any such plan when acting in such capacity) who (a) is the beneficial owner of Voting Stock representing ten percent (10%) or more of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock; or (b) is an Affiliate or Associate of the corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner of Voting Stock representing ten percent (10%) or more of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock; or (c) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by an Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 5. A person shall be a "beneficial owner" of any Capital Stock (a) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; (b) which such person or any of its Affiliates or Associates has, directly or indirectly, (i) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding, or (iii) the right to dispose or direct the disposition of, pursuant to any agreement, arrangement or understanding; or (c) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Capital Stock. For the purposes of determining whether a person is an Interested Shareholder pursuant to Paragraph 4 of this Section C, the number of shares of Capital Stock deemed to be outstanding shall include shares deemed beneficially owned by such person through application of this Paragraph 5, but shall not include any other shares of Capital Stock that may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, exchange rights, warrants or options, or otherwise. 6. The term "Affiliate," used to indicate a relationship with a specified person, shall mean a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified person. The term "Associate," used to indicate a relationship with a specified person, shall mean (a) any person (other than the corporation or a Subsidiary) of which such specified person is an officer or partner or is, directly or indirectly, the beneficial owner of ten percent (10%) or more of any class of equity securities, (b) any trust or other estate in which such specified person has a substantial beneficial interest or as to which such specified person serves as trustee or in a similar fiduciary capacity, (c) any relative or spouse of such specified person or any relative of such spouse, who has the same home as such specified person or who is a director or officer of the corporation or any Subsidiary, and (d) any person who is a director or officer of such specified person or any of its parents or subsidiaries (other than the corporation or a Subsidiary). 7. The term "Subsidiary" shall mean any corporation of which a majority of any class of equity security is beneficially owned, directly or indirectly, by the corporation; provided, however, that for the purposes of Paragraph 4 of this Section C, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is beneficially owned, directly or indirectly, by the corporation. 8. The term "Continuing Director" shall mean any member of the Board of Directors of the corporation, while such person is a member of the Board of Directors, who was a member of the Board of Directors prior to the time that the Interested Shareholder involved in the Business Combination in question became an Interested Shareholder, and any member of the Board of Directors, while such person is a member of the Board of Directors, whose election, or nomination for election by the corporation's shareholders, was approved by a vote of a majority of the Continuing Directors; provided, however, that in no event shall an Interested Shareholder involved in the Business Combination in question or any Affiliate, Associate or representative of such Interested Shareholder, be deemed to be a Continuing Director. 9. The term "Fair Market Value" shall mean (a) in the case of cash, the amount of such cash; (b) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for the New York Stock Exchange Listed Stocks, or, if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Act on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing sale or closing bid quotation (whichever is applicable) with respect to a share of such stock during the 30-day period immediately preceding the date in question of a share of such stock on the National Association of Securities Dealers, Inc. Automated Quotations System or any similar system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Continuing Directors in good faith; and (c) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined in good faith by a majority of the Continuing Directors. 10. In the event of any Business Combination in which the corporation survives, the phrase "consideration other than cash to be received" as used in Paragraphs 2.a and 2.b of Section B of this Article IV shall include the shares of Common Stock and/or the shares of any other class or series of Capital Stock retained by the holders of such shares. D. The Continuing Directors by majority vote shall have the power to determine for the purposes of this Article IV, on the basis of information known to them after reasonable inquiry, (a) whether a person is an Interested Shareholder, (b) the number of shares of Capital Stock (including Voting Stock) or other securities beneficially owned by any person, (c) whether a person is an Affiliate or Associate of another, (d) whether the assets that are the subject of any Business Combination equal or exceed ten percent (10%) of the book value of the consolidated assets of the corporation, (e) whether a proposed plan of dissolution or liquidation is proposed by or on behalf of an Interested Shareholder or any Affiliate or Associate of any Interested Shareholder, (f) whether any transaction has the effect, directly or indirectly, of increasing the proportionate share of any class or series of Capital Stock, or any securities convertible into Capital Stock or into equity securities of any Subsidiary, that is beneficially owned by an Interested Shareholder or any Affiliate or Associate of an Interested Shareholder, (g) whether any Business Combination satisfies the conditions set forth in Paragraph 2 of Section B of this Article IV, and (h) such other matters with respect to which a determination is required under this Article IV. Any such determination made in good faith shall be binding and conclusive on all parties. E. Nothing contained in this Article IV shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. F. The fact that any Business Combination complies with the provisions of Section B of this Article IV shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, or the Continuing Directors, or any of them, to approve such Business Combination or recommend its adoption or approval to the shareholders of the corporation, nor shall such compliance limit, prohibit or otherwise restrict in any manner the Board of Directors, or any member thereof, or the Continuing Directors, or any of them, with respect to evaluations of or actions and responses taken with respect to such Business Combination. G. Notwithstanding any other provisions of these Amended and Restated Articles of Incorporation (and notwithstanding the fact that a lesser percentage or separate class vote may be specified by law or these Amended and Restated Articles of Incorporation), the affirmative vote of the holders of not less than seventy five percent (75%) of the votes entitled to be cast by the holders of all then outstanding shares of Voting Stock, voting together as a single class, shall be required to amend or repeal, or adopt any provisions inconsistent with this Article IV. ARTICLE V No shareholder of this corporation shall have any preemptive rights to subscribe for, purchase, or acquire any shares of the corporation of any class, whether unissued or now or hereafter authorized, or any obligations or other securities convertible into or exchangeable for any such shares. ARTICLE VI The number of the directors of this corporation shall be fixed in the manner provided in the Bylaws. ARTICLE VII Any action required or permitted to be taken at a meeting of the Board of Directors of this corporation not needing approval by shareholders under Minnesota Statutes, Chapter 302A, may be taken in written action signed by the number of directors that would be required to take such action at a meeting of the Board of Directors at which all directors were present. ARTICLE VIII Except as otherwise provided in Article IV, the affirmative vote of the holders of a majority of the voting power of the shares represented and entitled to vote at a duly held meeting of shareholders of this corporation, voting together as a single class, shall be required for an action of the shareholders. ARTICLE IX No director of this Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its shareholders; (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; (iii) under Sections 302A.559 or 80A.23 of the Minnesota Statutes; (iv) for any transaction from which the director derived any improper personal benefit; or (v) for any act or omission occurring prior to the date when this provision becomes effective. The provisions of this Article shall not be deemed to limit or preclude indemnification of a director by the Corporation for any liability of a director which has not been eliminated by the provisions of this Article. If the Minnesota Statutes hereafter are amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of this Corporation shall be eliminated or limited to the fullest extent permitted by the Minnesota Statutes, as so amended. EX-10 4 SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Amendment, dated as of March 4, 1999, is made by and among Sheldahl, Inc., a Minnesota corporation (the "Borrower"), NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association ("Norwest"; in its separate capacity as administrative agent for the Lenders, the "Agent"), and each of the financial institutions appearing on the signature pages hereof. Recitals The Borrower, the Agent and the Lenders are parties to a Credit and Security Agreement dated as of June 19, 1998, as amended by a First Amendment to Credit and Security Agreement dated as of November 25, 1999 (the "Credit Agreement"). Capitalized terms used in these recitals and in the preamble have the meanings given to them in the Credit Agreement unless otherwise specified. The Borrower received Net Equity Proceeds of $8,000,000 on or before March 8, 1999, and has requested that the Lenders delete Section 8.1(q) of the Credit Agreement. The Required Lenders are willing to grant the Borrower's request subject to the terms of this Agreement. Accordingly, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Defined Terms. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein. 2. Section 8.1(q). Section 8.1(q) of the Credit Agreement is deleted. 3. Representations and Warranties. The Borrower hereby represents and warrants to the Lenders as follows: (a) The Borrower has all requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrower and constitute the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 4. References. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 5. No Other Waiver. The execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lenders, whether or not known to the Lenders and whether or not existing on the date of this Amendment. 6. Release. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lenders, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 7. Costs and Expenses. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lenders on demand for all costs and expenses incurred by the Lenders in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lenders for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lenders may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses. 8. Miscellaneous. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Agent By /s/ Terry S. Jackson Terry S. Jackson Its Vice President SHELDAHL, INC. By /s/ John V. McManus John V. McManus Its Vice President of Finance NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By /s/ Terry S. Jackson Terry S. Jackson Its Vice President HARRIS TRUST AND SAVINGS BANK By /s/ Cathy Ciolek Cathy Ciolek Its Vice President THE CIT GROUP/EQUIPMENT FINANCING, INC. By /s/ William Hickey William Hickey Its Assistant Vice President EX-10 5 THIRD AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Amendment, dated as of April 5, 1999, is made by and among Sheldahl, Inc., a Minnesota corporation (the "Borrower"), NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association ("Norwest"; in its separate capacity as administrative agent for the Lenders, the "Agent"), and each of the financial institutions appearing on the signature pages hereof. Recitals The Borrower, the Agent and the Lenders are parties to a Credit and Security Agreement dated as of June 19, 1998, as amended by a First Amendment to Credit and Security Agreement dated as of November 25, 1998 and as amended by a Second Amendment to Credit and Security Agreement dated as of March 4, 1999 (the "Credit Agreement"). Capitalized terms used in these recitals and in the preamble have the meanings given to them in the Credit Agreement unless otherwise specified. The Borrower is presently in default of various financial covenants and has requested that the Lenders waive such defaults and reset the financial covenants in the Credit Agreement. The Agent is willing to grant the Borrower's requests pursuant to the terms and conditions set forth herein. Accordingly, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows: 1. Default Fee. Section 2.22 of the Credit Agreement is hereby amended by adding the following new subsection (g): "(g) Default Fee. If a default occurs under Section 6.18, 6,19, 6.20, 6.21 or 7.12 during the Borrower's fiscal year-ending on or about August 31, 1999, the Borrower shall pay one default fee of $50,000, due and payable on the date that the Borrower's financial statement under Section 6.1(a) or 6.1(b), as applicable, is due. Such default fee will not cure such default or affect the Lenders' ability to impose the Default Rate under Section 2.13(e)." 2. Financial Covenants. Sections 6.18 through 6.21 of the Credit Agreement are amended to read as follows: "Section 6.18 Minimum Cash Flow Available for Debt Service. The Borrower will achieve Cash Flow Available for Debt Service, determined as at the end of each fiscal quarter, at not less than the amount set forth opposite such quarter: Fiscal Quarter Ending on or about Minimum Cash Flow Available for Debt Service 5/28/99 $10,300,000 8/27/99 $15,000,000 "Section 6.19 Minimum Debt Service Coverage Ratio. The Borrower will maintain its Debt Service Coverage Ratio, determined as at the end of each quarter, at not less than the ratio set forth opposite such quarter: Fiscal Quarter Ending on or about Minimum Debt Service Coverage Ratio 8/27/99 0.90 to 1.00 "Section 6.20 Minimum Pre-tax Net Income. The Borrower will achieve Pre-tax Net Income, determined as of the end of each fiscal quarter described below, of not less than the amount set forth opposite such fiscal quarter: Fiscal Quarter Ending on or about Minimum Pre-tax Net Income 5/28/99 $(9,500,000) 8/27/99 $(9,400,000) "Section 6.21 Minimum Net Worth. The Borrower will maintain its Net Worth, determined as at the end of each fiscal quarter described below, of not less than the amount set forth opposite such fiscal quarter: Fiscal Quarter Ending on or about Minimum Net Worth 5/28/99 $75,500,000 8/27/99 $76,500,000 3. No Other Changes. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder. 4. Waiver of Defaults. For the Borrower's second fiscal quarter ending on or about February 28, 1999, the Borrower is in default of the following provisions of the Credit Agreement (collectively, the "Defaults"): Covenant Required Actual Section 6.18 Cash Flow Available Not less than $4,224,000 for Debt Service $5,500,000 Section 6.19 Minimum Debt Service Not less than 0.53 to 1.00 Coverage Ratio 0.70 to 1.00 Section 6.20 Minimum Pre-tax Net Not less than $(8,030,000) Income $(5,050,000) Section 6.21 Minimum Net Worth Not less than $74,962,000 $76,400,000 Upon the terms and subject to the conditions set forth in this Amendment, the Agent hereby waives the Defaults. In addition, Section 6.1(a) of the Credit Agreement requires the Borrower to "within 90 days after the end of each fiscal year of the Borrower" deliver its audited financial statements to each Lender. The Borrower is in default of this Section as no audited financial statements have been delivered. So long as the audited financial statements are delivered to each Lender on or before April 30, 1999, the Agent waives this default. These waivers shall be effective only in this specific instance and for the specific purpose for which they are given, and these waivers shall not entitle the Borrower to any other or further waiver in any similar or other circumstances. 5. Amendment Fee. The Borrower shall pay the Lenders as of the date hereof a fully earned, non-refundable fee in the amount of $20,000 in consideration of the Lenders' execution of this Amendment. 6. Conditions Precedent. This Amendment, and the waiver set forth in Paragraph 4 hereof, shall be effective when the Agent shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to the Agent in its sole discretion: (a) Payment of the fee described in Paragraph 5. (b) Such other matters as the Lender may require. 7. Representations and Warranties. The Borrower hereby represents and warrants to the Lenders as follows: (a) The Borrower has all requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrower and constitute the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 8. References. All references in the Credit Agreement to "this Agreement" shall be deemed to refer to the Credit Agreement as amended hereby; and any and all references in the Security Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby. 9. No Other Waiver. Except as set forth in Paragraph 4 above, the execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lenders, whether or not known to the Lenders and whether or not existing on the date of this Amendment. 10. Release. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lenders, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 11. Costs and Expenses. The Borrower hereby reaffirms its agreement under the Credit Agreement to pay or reimburse the Lenders on demand for all costs and expenses incurred by the Lenders in connection with the Credit Agreement, the Security Documents and all other documents contemplated thereby, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrower specifically agrees to pay all fees and disbursements of counsel to the Lenders for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrower hereby agrees that the Lenders may, at any time or from time to time in its sole discretion and without further authorization by the Borrower, make a loan to the Borrower under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses and the fee required under paragraph 5 hereof. 12. Miscellaneous. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Agent By /s/ Terry S. Jackson Terry S. Jackson Its Vice President SHELDAHL, INC. By /s/ John V. McManus John V. McManus Its Vice President of Finance NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By /s/ Terry S. Jackson____________ Terry S. Jackson Its Vice President HARRIS TRUST AND SAVINGS BANK By /s/ Cathy Ciolek Cathy Ciolek Its Vice President NBD BANK By /s/ Dennis Saletta Dennis Saletta Its First Vice President THE CIT GROUP/EQUIPMENT FINANCING, INC. By /s/ William Hickey William Hickey Its Assistant Vice President EX-10 6 CONSULTING AGREEMENT THIS CONSULTING AGREEMENT (this "Agreement") is entered into this 31st day of December, 1998 by and between Sheldahl, Inc., a Minnesota corporation ("Company") and James E. Donaghy ("Donaghy"). W I T N E S S E T H: In consideration of the covenants and agreements herein set forth and of the mutual benefits accruing to Company and to Donaghy from the consulting relationship to be established between the parties by the terms of this Agreement, Company and Donaghy agree as follows: 1. Consulting Relationship. As of January 1, 1999, Company will retain Donaghy and Donaghy will be retained by Company, as an independent consultant and not as an employee, on the terms and conditions described herein. The consulting arrangement shall terminate on August 27, 1999, unless an earlier or later date is agreed upon by the parties in writing prior to that date. 2. Consulting Services. During the term of this Agreement, Donaghy will, with a reasonable degree of skill and care, perform such duties and execute the policies of Company as reasonably requested by its Board of Directors; provided, that said duties and policies will not be inconsistent with the nature of the duties performed by Donaghy during his active service with Company as an officer and employee thereof. Such duties shall include the following: (a) Establish new relationships with investment bankers and improve analyst coverage; (b) Develop market partners; (c) Identify a chip industry candidate for the Company's Board of Directors; (d) Continue to develop the Shinko, Hitachi, and Sumitomo Bakelite relationships; (e) Manage a transition with the Company's large investors; (f) Participate in the quarterly conference calls; and (g) Assist in capital raising. (h) Introduce management team to Institute of Printed Circuitry and manage appropriate transition. 3. Compensation. During the term of this Agreement, the Company agrees to pay Donaghy at an annual rate of One Hundred Seventy-Five Thousand Dollars ($175,000), payable in pro rata installments on the first and fifteenth day of each month, the first such payment due on January 15, 1999. 4. Restrictions on Competition. So long as payments are being made to Donaghy under this Agreement, Donaghy shall not, without the prior written consent of the Company, accept employment or render service to any person, firm or corporation directly or indirectly in competition with the Company or affiliate thereof, in the United States or any of its territories or possessions, or directly or indirectly enter into or in any manner take part in or lend his name, counsel or assistance to any venture, enterprise, business or endeavor, either as proprietor, principal, investor, partner, director, officer, employee, consultant, advisor, agent, independent contractor, or in any other capacity whatsoever for any purpose which would be competitive with the business of the Company or any affiliate thereof, provided, however, that the foregoing shall not be deemed to prohibit Donaghy from acquiring an equity interest not in excess of five percent (5%) in any company, the shares of which are listed on any national stock exchange or are traded and quoted on the National Association of Securities Dealers Automated Quotations System. 5. Title to Certain Tangible Property. All tangible materials (whether original or duplicate) including, but not in any way limited to, equipment purchase agreements, file or data base materials in whatever form, books, manuals, sales literature, equipment price lists, training materials, customer lists and records, customer files, correspondence, documents, contracts, orders, messages, memoranda, notes, agreements, invoices, receipts, lists, software listings or printouts, specifications, models, computer programs, and records of any kind in the possession or control of Donaghy which in any way relate or pertain to Company's business, including the business of the subsidiaries or affiliates of Company, whether furnished to Donaghy by Company or prepared, compiled or required by Donaghy during his consulting relationship with Company, shall be the sole property of Company. At any time upon request of Company, and in any event promptly upon termination of this Agreement, Donaghy shall deliver all such materials to Company. 6. Trade Secrets and Confidential Information. During the term of the Agreement or at any time thereafter, Donaghy will not, without the express written consent of Company directly or indirectly communicate or divulge to, or use for his own benefit or the benefit of any other person, firm, association or corporation, any of Company's or its subsidiaries' or affiliates' trade secrets, proprietary data or other confidential information including, by way of illustration, the information described in Section 5, which trade secrets, proprietary data and other confidential information were communicated to or otherwise learned or acquired by Donaghy in the course of the consulting relationship covered by this Agreement, except that Donaghy may disclose such matters to the extent that disclosure is required (a) in the course of the consulting relationship with Company, or (b) by a Court or other governmental agency of competent jurisdiction. As long as such matters remain trade secrets, proprietary data or other confidential information, Donaghy will not use such trade secrets, proprietary data or other confidential information in any way or in any capacity other than pursuant to this Agreement and to further the Company's interests. 7. The Complete Agreement. This Agreement represents the complete Agreement between Company and Donaghy concerning the subject matter hereof and supersedes all prior agreements or understandings, written or oral. No attempted modification or waiver of any of the provisions hereof shall be binding on either party unless in writing and signed by both Donaghy and Company. 8. General Provisions. (a) Notices. Any notice required or permitted to be given hereunder shall be in writing and shall be effective three business days after it is properly sent by registered or certified mail, if to the Company to President, Sheldahl, Inc., 1150 Sheldahl Road, Northfield, Minnesota 55057, or if to Donaghy at his resident address, or to such other address as either party may from time to time designate by notice. (b) Assignability. This Agreement may not be assigned by either party without the prior written consent of the other party, except that no consent is necessary for the Company to assign this Agreement to a corporation succeeding to substantially all of the assets or business of the Company whether by merger, consolidation, acquisition or otherwise, so long as such successor corporation expressly assumes all of the obligations of the Company under this Agreement. This Agreement shall be binding upon Donaghy, his heirs and permitted assigns and the Company, its successors and permitted assigns. (c) Independent Contractor. Donaghy is an independent contractor and not an employee, partner or co-venturer of, or in any other service relationship with, the Company, and the manner in which Donaghy's services are rendered shall be within Donaghy's sole control and discretion. Donaghy shall be responsible for all payroll and other taxes arising from compensation and other amounts paid under this Agreement. (d) Termination. Either the Company or Donaghy may terminate this Agreement at any time on thirty (30) days' prior written notice upon a material breach of the provisions of this Agreement if such breach has not been cured during such notice period. On termination of this Agreement Donaghy shall deliver to the Company all Company property and information in the possession of Donaghy or any of his employees, representatives or agents. (e) Damages. Donaghy acknowledges that a breach of any of the terms of Sections 4, 5 or 6 of this Agreement will render irreparable harm to the Company, and that a remedy at law for breach or threatened breach of the Agreement is inadequate, and that the Company shall therefore be entitled to any and all equitable relief, including, but not limited to, injunctive relief, and to any other remedy that may be available under any applicable law or agreement between the parties. (f) Acknowledgment. Donaghy acknowledges and agrees that the restrictions, covenants, agreements and obligations contained in this Agreement hereof are reasonable and necessary for the protection of the legitimate interests of the Company. Donaghy represents and warrants that Donaghy has not previously assumed any obligations inconsistent with those undertaken by Donaghy under this Agreement. (g) Waiver. The waiver by the Company of a breach of any provision of this Agreement by Donaghy shall not operate or be construed as a waiver of a subsequent breach by Donaghy. (h) Applicable Law. It is the intention of the parties hereto that all questions with respect to the construction and performance of this Agreement and the rights and liabilities of the parties hereto shall be determined in accordance with the laws of the State of Minnesota. SHELDAHL, INC. By /s/ Kenneth J. Roering Kenneth J. Roering Its Vice Chairman of the Board /s/ James E. Donaghy James E. Donaghy EX-10 7 WAIVER AND AMENDMENT March 31, 1999 Northern Life Insurance Company c/o ReliaStar Investment Research, Inc. 100 Washington Avenue South, Suite 800 Minneapolis, MN 55401-2121 Reference is made to the Note Purchase Agreement dated as of August 31, 1995 (as amended, the "Note Purchase Agreement") between Sheldahl, Inc. (the "Company"), and Northern Life Insurance Company (the "Purchaser"), pursuant to which the Purchaser purchased the 8.32% Senior Secured Notes (collectively, the "Notes") of the Company dated August 31, 1995 in the original aggregate principal amount of $5,700,000. The Purchaser is the registered holder of 100% of the outstanding principal amount of the Notes as reflected in the Note Register required to be maintained by the Company pursuant to paragraph 11 of the Note Purchase Agreement. Capitalized terms used herein and not otherwise defined shall have the meaning set forth in the Note Purchase Agreement. The purpose of this letter is to request the Purchaser to waive compliance with certain covenants of the Note Purchase Agreement. Accordingly, the Company requests the Purchaser's consent to the following: 1. Quarterly Minimum EBITDA Amount. The Company requests that the Purchaser waive any failure by the Company to comply with the requirements of paragraph 4(q)(i) of the Note Purchase Agreement through February 26, 1999. In addition, paragraph 4(q)(i) of the Note Purchase Agreement shall be amended by increasing the minimum EBITDA requirement for the period beginning on September 1, 1998, and ending on or about May 31, 1999, from $4,700,000 to $4,800,00, and increasing the minimum EBITDA requirement for the period beginning on September 1, 1998, and ending on or about August 31, 1999, from $5,900,000 to $10,000,000. 2. Miscellaneous. Except as specifically set forth herein, all terms and provisions of the Note Purchase Agreement and the Notes, and all other documents and instruments related thereto, shall remain in full force and effect with no other modification or waiver. This Waiver and Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. If you agree to the foregoing waivers and amendments of the provisions of the Note Purchase Agreement, please so indicate by executing the form of acknowledgement set forth below. The waivers and amendments shall then take effect as of the date hereof. Very truly yours, SHELDAHL, INC. By: /s/ John V. McManus John V. McManus Its: VP Finance Agreed to and accepted as of the Date first-above mentioned: NORTHERN LIFE INSURANCE COMPANY By: /s/ Christopher Patton Christopher Patton [Signature page for Waiver and Amendment] -----END PRIVACY-ENHANCED MESSAGE-----