-----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, SPAzu70PgjJ1RyaSGGwuVdupTOWTJDf5a3d7vsGpCHcvd3/OYcVbkMeu1vzGI2IX 7i2YMCzMZBC540QKabeKUw== 0000950124-01-000201.txt : 20010123 0000950124-01-000201.hdr.sgml : 20010123 ACCESSION NUMBER: 0000950124-01-000201 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001201 FILED AS OF DATE: 20010116 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: 1509304 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 c59579e10-q.txt FORM 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 December 1, 2000 Commission File Number: 0-45 SHELDAHL, INC. (Exact name of registrant as specified in its charter) Minnesota 41-0758073 - -------------------------------------------------------------------------------- (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) Northfield, Minnesota 55057 - -------------------------------------------------------------------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code (507) 663-8000 ----------------------------- As of December 1, 2000, 12,069,550 shares of the Registrant's common stock were outstanding. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] [ ] NO 2 SHELDAHL, INC. AND SUBSIDIARY FORM 10-Q INDEX PART I: Financial Information Item 1. Financial Statements Consolidated Statements of Operations - Three months ended December 1, 2000 and November 26, 1999 ...........................................3 Consolidated Balance Sheets - December 1, 2000 and September 1, 2000.......................4 Consolidated Statements of Cash Flows - Three months ended December 1, 2000 and November 26, 1999 ...........................................5 Notes to consolidated financial statements .........................6-9 Item 2. Management's Discussion and Analysis of Consolidated Operating Results and Financial Condition ...............10-16 Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................................16 PART II: Other Information Item 2. Changes in Securities and Use of Proceeds...................17 Item 5. Other Information...........................................17 Item 6. Exhibits and Reports on Form 8-K ...........................18 2 3 PART I: FINANCIAL INFORMATION Item 1. Financial Statements SHELDAHL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
Three Months Ended ------------------------------------ December 1, November 26, (in thousands, except for per share data) 2000 1999 ----------- ------------ Net sales $ 30,613 $ 34,811 Cost of sales 29,484 30,054 -------- -------- Gross profit 1,129 4,757 -------- -------- Expenses: Sales and marketing 2,187 2,091 General and administrative 2,164 2,231 Research and development 812 921 Interest 1,379 916 -------- -------- Total expenses 6,542 6,159 -------- -------- Loss before income taxes (5,413) (1,402) Income tax provision -- -- -------- -------- Net loss before preferred dividends (5,413) (1,402) Convertible preferred stock dividends (528) (508) -------- -------- Net loss applicable to common shareholders $ (5,941) $ (1,910) ======== ======== Net loss per common share - Basic and Diluted $ (0.49) $ (0.16) ======== ======== Number of shares outstanding - Basic and Diluted 12,070 11,613 ======== ========
The accompanying notes are an integral part of these statements. 3 4 SHELDAHL, INC. CONSOLIDATED BALANCE SHEETS ASSETS
unaudited (In thousands) December 1, September 1, 2000 2000 ----------- ------------ Current assets: Cash and cash equivalents $ 1,436 $ 1,132 Accounts receivable, net 20,254 22,253 Inventories 21,036 17,325 Other current assets 1,534 1,359 -------- -------- Total current assets 44,260 42,069 -------- -------- Construction in progress 1,702 1,249 Land and buildings 28,690 28,662 Machinery and equipment 131,330 130,981 Less: accumulated depreciation (96,613) (92,539) -------- -------- Net plant and equipment 65,109 68,353 -------- -------- Other assets 529 640 -------- -------- $109,898 $111,062 ======== ======== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Current maturities of long-term debt $ 3,468 $ 3,468 Accounts payable 12,944 11,477 Accrued salaries 1,151 1,234 Other accrued liabilities 5,810 3,681 Restructuring reserves 787 915 -------- -------- Total current liabilities 24,160 20,775 -------- -------- Long-term debt 33,156 31,537 Restructuring reserves 1,459 1,605 Other non-current liabilities 2,569 2,650 -------- -------- Shareholders' investment: Convertible preferred stock 42 42 Common stock 3,017 3,017 Additional paid-in capital 113,440 113,440 Retained earnings (67,945) (62,004) -------- -------- Total shareholders' investment 48,554 54,495 -------- -------- $109,898 $111,062 ======== ========
The accompanying notes are an integral part of these statements. 4 5 SHELDAHL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED
Three Months Ended ---------------------------------------- (in thousands) December 1, November 26, 2000 1999 ----------- ------------ Operating activities: Net loss applicable to common shareholders $ (5,941) $ (1,910) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 4,075 4,201 Preferred stock dividends 528 508 Net change in other operating activities: Accounts receivable 1,999 (3,946) Inventories (3,711) 185 Other current assets (175) (248) Other assets 111 (129) Accounts payable and accrued liabilities 2,985 1,574 Restructuring reserves (274) (705) Other non-current liabilities (81) (13) -------- -------- Net cash used in operating activities (484) (528) -------- -------- Capital expenditures, net (831) (722) -------- -------- Financing activities: Net borrowings under revolving credit facility 1,887 2,625 Repayments of long-term debt (268) (4,558) Proceeds from long-term debt -- 4,300 Stock options exercised -- 4 -------- -------- Net cash provided by financing activities 1,619 2,341 -------- -------- Net increase in cash and cash equivalents 304 1,091 Cash and cash equivalents at beginning of period 1,132 1,043 -------- -------- Cash and cash equivalents at end of period $ 1,436 $ 2,134 ======== ======== Supplemental cash flow information: Interest paid $ 1,404 $ 916 ======== ======== Income taxes paid $ -- $ 29 ======== ========
The accompanying notes are an integral part of these statements. 5 6 SHELDAHL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED These condensed and unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these condensed unaudited consolidated financial statements reflect all adjustments, of a normal and recurring nature, necessary for a fair statement of the interim periods, on a basis consistent with the annual audited financial statements. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although these disclosures should be considered adequate, the Company strongly suggests that these condensed unaudited financial statements be read in conjunction with the financial statements and summary of significant accounting policies and notes thereto included in the Company's latest annual report on Form 10-K. 1) Inventories, which are valued at the lower of first-in first-out cost or market, consists of (in thousands): December 1, 2000 September 1, 2000 ---------------- ----------------- Raw materials $ 9,360 $ 9,053 Work-in-process 6,713 3,812 Finished goods 4,963 4,460 ------- ------- $21,036 $17,325 ======= ======= 2) Liquidity and Going Concern Matters During the three-year period ended September 1, 2000, the Company incurred, principally at its Micro Products operations, cumulative net losses totaling approximately $75.7 million, including restructuring and other charges of $27.7 million. During this three-year period, the Company used cash of approximately $31.2 million supporting capital expenditures and approximately $9.7 million for net operating activities. The Company has financed these expenditures and losses principally through equity and debt financing. Cash requirements to fund restructuring charges taken during fiscal 1999 and 1998 are expected to be approximately $0.9 million in fiscal 2001 compared to $2.7 million and $5.0 million in fiscal 2000 and 1999, respectively. Fiscal 2001 capital expenditures for the Company were planned at approximately $12.0 million, compared with $2.4 million in fiscal 2000. Debt repayments for fiscal 2001 will be $5.5 million, including $2.5 million on the bank term facility, $2.0 million on the Morganthaler note and $1.0 million for various capital lease payments. The Company expects that fiscal 2001 operating losses, tight borrowing levels pursuant to its debt agreements and the uncertainty of the timing of sales growth from the Company's Micro Products business will place significant pressure on the cash reserves of the Company. Cash flow projections based on the Company's operating plan for fiscal 2001 reflect an increased level of cash flow requirements during the year as working capital expands to support projected sales growth. However, the inability of the Company to i) execute the sales orders received from Micro Products business customers; ii) improve operating results in the Micro Products business; iii) achieve operating performance from the Company's Core Business above fiscal 2000 levels; iv) achieve other cost or productivity improvements included in the Company's fiscal 2001 budget and v) maintain adequate liquidity to fund normal operations could result in the Company being out of compliance with certain of its debt covenants thereby allowing the Company's lenders to require full repayment of the outstanding borrowings under the Company's credit agreement 6 7 and/or leave the Company in a cash reserve position that would require additional capital to fund operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management has and will continue to implement operational measures designed to assist the Company in achieving its fiscal 2001 budget and cash flow objectives. Subsequent to quarter end, the Company completed the transactions discussed in Note 5. Management believes these transactions, which result in an equity infusion of approximately $25.0 million and subordinated debt financing of $6.5 million, will provide the Company's required cash flow to fund normal operations and alleviate liquidity constraints. 3) Restructuring Expenses As of December 1, 2000, approximately $5.4 million had been charged to the Company's restructuring reserves related to severance and early retirement salary costs, approximately $2.8 million related to medical, dental and other benefits and approximately $1.2 million for equipment disposal and other costs and by December 1, 2000, 312 employees have terminated employment with the Company related to the fiscal 1998 and 1999 restructuring actions. The remaining severance and early retirement costs are anticipated to be paid through fiscal 2002, and the remaining medical, dental and other benefits are anticipated to be paid through fiscal 2003. 4) Segment Reporting The following is a summary of certain financial information relating to the two segments for the three months ended as follows:
December 1, November 26, 2000 1999 ----------- ------------ Total sales by segment: Core Business $ 27,385 $ 33,591 Micro Products 3,228 1,220 -------- -------- Total company sales 30,613 34,811 -------- -------- Operating Profit (loss) by segment: CORE BUSINESS: ------------- Before corporate allocation 2,309 4,339 Corporate cost allocation 1,637 1,836 Interest expense 1,131 751 -------- -------- Total (459) 1,752 -------- -------- MICRO PRODUCTS: -------------- Before corporate allocation (4,347) (2,583) Corporate cost allocation 359 406 Interest expense 248 165 -------- -------- Total (4,954) (3,154) -------- -------- Total segments operating losses (5,413) (1,402) ======== ======== Sales by product line: Laminate material $ 6,120 $ 8,638 ViaThin 3,228 1,220 Novaflex HD 9,653 9,842 Novaflex VHD 500 1,514 Flexbase interconnects 11,112 13,597 -------- -------- $ 30,613 $ 34,811 ======== ========
7 8 5) Subsequent Events Transaction Summary The merger with International Flex Holdings, Inc. and the injection of $31.5 million in additional funds for Sheldahl on December 28, 2000, is described below. Merger On December 28, 2000, Sheldahl, Inc., a Minnesota corporation ("Sheldahl" or the "Company"), acquired all of the outstanding securities of International Flex Holdings, Inc. ("Holdings") for approximately 9.7 million shares of Sheldahl's common stock, $.25 par value ("Common Stock") under the terms of a previously announced definitive merger agreement, as amended, (the "Merger Agreement") by and among Sheldahl, IFT West Acquisition Company, a newly formed subsidiary of Sheldahl ("West"), Holdings, the sole shareholder of International Flex Technologies, Inc. ("IFT") the operating company, and the stockholders of Holdings (the "Stockholders"). Under the terms of the Merger Agreement, West merged with and into Holdings, with Holdings surviving and becoming a wholly-owned subsidiary of Sheldahl (the "Merger"). As consideration for the Merger, holders of outstanding shares of Holdings' common stock, Class A Stock, Class B Stock and Series A Preferred Stock received shares of Sheldahl Common Stock. Holdings' option holders and warrant holder received equivalent options and a warrant to purchase shares of Sheldahl Common Stock. Common Stock and Series G Investment Concurrent with consummating the Merger, Sheldahl completed the previously announced equity investment pursuant to an amended stock purchase agreement (the "Stock Purchase Agreement") by and among Sheldahl, and three accredited investors including Morgenthaler Venture Partners V, L.P. ("Morgenthaler V"), and Ampersand IV Limited Partnership and Ampersand IV Companion Fund Limited Partnership (collectively the "Ampersand Funds"). Under the terms of the Stock Purchase Agreement, Morgenthaler V and the Ampersand Funds (the "Investors") collectively invested an aggregate of $25.0 million in equity capital in exchange for approximately 9.8 million shares of Sheldahl Common Stock and 11,303 shares of a newly created 11.06% Series G Convertible Preferred Stock of Sheldahl, par value $1.00 per share (the "Series G Stock"), such shares being convertible in the aggregate into approximately 8.1 million shares of Sheldahl Common Stock (the "Equity Investment"). The cash used by the Investors to complete the Equity Investment came from the liquid assets of the Investors. The Series G Stock is convertible into shares of the Company's Common Stock at any time. Each holder of the Series G Stock is entitled to convert each share of Series G Stock into that number of shares of Common Stock that equals $1,000 plus accrued dividends divided by the Conversion Price. The Conversion Price is $1.40 per share and is subject to adjustment from time-to-time under certain customary anti-dilution provisions. The Series G Stock is entitled to 11.06% dividends, payable annually. For a period of twenty-four (24) months from the date of issuance, Sheldahl is obligated to pay the dividend in shares of its Common Stock at a Dividend Conversion Price of $1.625, as adjusted from time-to-time under customary anti-dilution provisions. Thereafter, Sheldahl may pay the dividend in shares of its Common Stock, or, at its option, cash. One year of dividends at the Dividend Conversion Price would equate to approximately 769,300 shares. The Series G Stock is subordinate to the Company's Series D, E and F Convertible Preferred Stock with regard to payment of dividends and proceeds upon liquidation. Upon a liquidation of all of the assets of Sheldahl, the holders of the Series G Stock would be entitled to receive $25.0 million plus any accrued but unpaid dividends less the market value of the shares of Common Stock 8 9 purchased under the Stock Purchase Agreement and retained by the holders of the Series G Stock following the adoption of a plan of liquidation, provided that any shares of Common Stock purchased under the Stock Purchase Agreement may be turned into the Company for cancellation at the election of the holders of the Series G Stock. The Company may require holders of the Series G Stock to convert to Common Stock provided that the Company's Common Stock trades at certain pre-set price levels. Subordinated Notes and Warrant Purchase Investment Concurrent with consummating the Merger and Equity Investment, Sheldahl consummated the previously announced debt investment pursuant to an amended and restated subordinated notes and warrant purchase agreement (the "Debt Agreement") by and among Sheldahl, Morgenthaler V, the Ampersand Funds and Molex Incorporated, Sheldahl's largest shareholder ("Molex"). Under the terms of the Debt Agreement, Morgenthaler V, the Ampersand Funds and Molex (the "Purchasers") purchased $6.5 million of 12% Senior Subordinated Notes ("Notes") and related warrants (the "Warrants") (the "Debt Investment"). In addition, the Purchasers collectively received Warrants to purchase 1,526,814 shares of Sheldahl Common Stock. The Warrants issued under the Debt Agreement are exercisable at $.01 per share and are exercisable for seven years from the date of issuance. The cash used by the Purchasers to complete the Debt Investment came from the liquid assets of the Purchasers. Post Transactions Ownership After completion of the Merger, Equity Investment and Debt Investment ("the Transactions"), the parties that acquired securities in the Transactions (the "Parties") collectively hold securities representing ownership of approximately 60% of Sheldahl's currently outstanding common stock and 60% of Sheldahl on a fully diluted basis (assuming conversion of all Sheldahl convertible securities). Transactions' Effect on Financial Statements In the Merger, as described above, Sheldahl acquired all of the outstanding securities of Holdings resulting in Holdings becoming a wholly-owned operating subsidiary of Sheldahl. Although Sheldahl is the legal survivor in the Merger and remains the registrant of the Securities and Exchange Commission ("SEC") and a listed company on Nasdaq, under US Generally Accepted Accounting Principles, due to the shares issued in the Transactions, Holdings is considered the "acquirer" of Sheldahl for financial reporting purposes. Among other matters, this will require Sheldahl in all of its future financial and informational filings with the SEC to present the prior historical financial and other information of Holdings. Post-Transactions Business Reorganization and Fiscal Year End Change Subsequent to the consummation of the Transactions, Sheldahl reorganized its business and created two business units for their operations. Sheldahl's Micro Products operations have been combined with the former IFT operations in Endicott, New York and will be called the International Flex Technologies ("IFT"). The second business unit consisting primarily of Sheldahl's Northfield operations will be called the Sheldahl Materials and Flex Interconnect ("MFI"). Subsequent to the Merger of IFT and Sheldahl, on January 5, 2001, Sheldahl's Board of Directors determined that it would be in the best interests of the Company to change its fiscal year end to the Friday closest to December 31 of each year, beginning with December 29, 2000. Accordingly, Sheldahl will be filing a Form 10-K within 90 days of December 29, 2000 for such transition. 9 10 Item 2. SHELDAHL, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED OPERATING RESULTS AND FINANCIAL CONDITION THREE MONTHS ENDED DECEMBER 1, 2000 AND NOVEMBER 26, 1999 SALES The Company's net sales decreased by $4.2 million, or 12.1%, to $30.6 million for the three months ended December 1, 2000, as compared to the same period one year ago. Core Business sales decreased $6.2 million, or 18.5%, to $27.4 million while Micro Products sales increased $2.0 million, or 165% when compared to the first quarter of fiscal 2000. The Core Business sales were impacted by weaker than expected sales to the Automotive industry due largely to the product life cycle ending for a key program and to the continued emphasis on design changes that reduce overall sales to our most price competitive accounts. The Company expects new programs to replace these sales during fiscal 2001. Core Business sales for the three months ended December 1, 2000 to the Automotive market decreased 20.1% to $16.6 million and represents 54.2% of total Company sales. Datacom sales for the same period increased $0.9 million, or 9.9%, to $10.4 million. Datacom sales represent 34.0% of total Company sales of which $7.2 million is from the Core Business segment and $3.2 million is from the Micro Products segment. Sales to the Company's other markets totaled $3.6 million, or 11.8%, of total Company revenue, reflecting a decrease of $1.0 million, or 21.7%, from the same period one year ago. The table below summarizes the Company's sales by market.
Three Months Ended ----------------------------------- December 1, November 26, Gross % Market 2000 1999 Change Change ------ ---- ---- ------ ------ Automotive $16,553 $20,716 $(4,163) (20.1%) Datacom 10,430 9,487 943 9.9% Aerospace/Defense 1,622 1,837 (215) (11.7%) Industrial 1,576 1,785 (209) (11.7%) Consumer 432 986 (554) (56.2%) ------- ------- ------- ------ $30,613 $34,811 $(4,198) (12.1%) ======= ======= ======= ======
GROSS PROFIT (LOSS) Gross profit decreased $3.6 million to 3.7% of sales for the three months ended December 1, 2000 compared to the same period one year ago. As reflected in the chart below, Micro Products gross loss increased to $3.5 million compared to $1.9 million for the same period one year ago. Increased sales, higher direct material usage in relation to sales and increased fixed costs negatively impacted Micro Product's gross loss. The Core Business gross profit decreased $1.9 million resulting in a gross profit percent to sales of 17.0% compared to 19.7% for the same period one year ago. Decreased sales and increased indirect and direct labor costs, and freight cost as a percent to sales negatively impacted the Core Business's gross loss. 10 11
December 1, 2000 November 26, 1999 -------------------------------------- ------------------------------------ Core Micro Total Core Micro Total Business Products Company Business Products Company -------- -------- ------- -------- -------- ------- Sales $27,385 $ 3,228 $30,613 $33,591 $ 1,220 $34,811 Cost of sales 22,735 6,749 29,484 26,980 3,074 30,054 Gross profit 4,650 (3,521) 1,129 6,611 (1,854) 4,757 % of sales 17.0% N/A 3.7% 19.7% N/A 13.7%
OTHER EXPENSES The Company's other expenses, excluding interest, remained flat at $5.2 million for the quarter ended December 1, 2000 as compared to the three months ended November 26, 1999. A slight decrease in general administration and research and development cost was offset by an increase in sales and marketing expenses. During the quarter, increased borrowings and higher interest rates on the Company's credit and security agreement with its bank group increased gross interest expense $0.4 million. Reflecting reduced capital spending, capitalized interest declined nearly $0.1 million for the three months ended December 1, 2000 when compared to the same period one year ago. As a result, net interest expense rose $0.5 million or 50.5% to $1.4 million compared to the period ended November 26, 1999. Interest costs and activities for the noted period are detailed below:
Three Months Ended Three Months Ended December 1, 2000 November 26, 1999 Change ---------------- ----------------- ------ (in thousands) Gross interest expense $ 1,391 $ 985 $ 406 Capitalized interest (12) (69) 57 -------- ------ ------ Net interest $ 1,379 $ 916 $ 463 ======== ====== ======
INCOME TAXES In May 1998, based upon restructuring charges, write-offs and continued losses at the Company's Longmont, Colorado facility, management provided a valuation allowance for its net deferred tax assets. This resulted in a $3.0 million charge to income during fiscal 1998. Since that time, the Company has not and will not reflect in immediate future periods any tax provision or benefit until such net deferred tax assets are offset by reported pretax profits or that the degree of certainty increases as to the future profit performance of the Company to allow for the reversal of the valuation allowance. FINANCIAL CONDITION The Company's credit agreement with a group of its two remaining lenders led by Wells Fargo, N.A., as agent, consists of a working capital revolver of $25 million based on levels of working capital and a term facility of $16 million based on the Company's fixed assets. The term facility of $16 million has an outstanding balance as of December 1, 2000 of $11.2 million with monthly repayments of $205,000 through December 2001. Under the $25 million working capital revolver, the Company has the ability to borrow based on the levels of accounts receivable and inventory, which establishes a borrowing base. In November 1999, the Company's borrowings available under the working capital portion of its 1998 credit facility was reduced. This change was initiated by the Company's lenders in conjunction with a waiver issued by the lenders related to the Company's failure to achieve certain financial ratios and the Company's current level of borrowing under the working capital revolver related to its events of non-compliance. Effective November 1999, in connection with the waiving of covenant non-compliance, the Company's lenders increased the interest rate to prime plus 2% and required the Company to establish a liquidity reserve of $2.5 million. In June 2000, the Company's lenders agreed to amend the credit agreement to extend its maturity date to December 1, 2001 and to reduce the liquidity 11 12 reserve from $2.5 million to $1.5 million. As of September 1, 2000, the amount available to borrow on the revolver was approximately $8.2 million, which reflects the $1.5 million liquidity reserve. In November 2000 the Company's lenders removed the $1.5 million liquidity reserve. In December 2000, the Company's lenders extended the maturity date of the credit facility to June 1, 2002, reinstated a liquity reserve at $5 million and reset certain covenants related to net income, capital spending, cash flow and debt service ratios based on the new company's combined fiscal 2001 projected results. Actual borrowing under this working capital revolver as of December 1, 2000 was $16.8 million and the amount available to borrow was $3.9 million (see Capital Reserves). The applicable interest rate on the loan effective September 1, 2000 and December 1, 2000 was 11.5% and 11.5%, respectively. Capital Reserves. Since fiscal 1995, the Company has invested significantly in new plant and equipment providing manufacturing capacity to deliver its patented Novaclad(R)-based line of products to both existing and new customers. This included building and equipping a facility in Longmont, Colorado, to manufacture substrates for IC packages. These capital expenditures were funded by a series of equity offerings commencing in June 1994 through February 2000, raising $102.3 million. The longer than expected period of time to achieve full product and market acceptance has resulted in greater losses generated from an under-utilized manufacturing facility and its supporting workforce. At the Longmont facility, the Company manufactures ViaArray(R) and ViaThin(R) - both Novaclad-based substrates for IC packages, plus the Company's Novaflex(R) VHD product targeted at the high-end disk drive market. Sheldahl received its initial volume order for the VHD product line in October 1998. The Company's fiscal 2000 sales volume from Novaflex VHD was $4.1 million. Additionally, the base material for the Company's Novaflex HD is also produced in the Longmont facility. For fiscal 2000, $42.5 million of Novaclad based product was produced all or in part at the Longmont facility. As of December 1, 2000, the Longmont facility was operating at approximately 30% of stated production capacity with projected breakeven at 40% - - 60% of factory utilization or approximately $25 - $29 million of annual revenue of ViaThin and ViaArray products plus related volume of the Novaflex HD and VHD product lines. Breakeven volume at the Longmont facility is not expected until the second half of fiscal 2001 at the earliest. During the three-year period ended September 1, 2000, the Company incurred, principally at its Micro Products operations, cumulative net losses totaling approximately $75.7 million, including restructuring and other charges of $27.7 million. During this three-year period, the Company used cash of approximately $31.2 million supporting capital expenditures and approximately $9.7 million for net operating activities. The Company has financed these transactions principally through equity and debt financing. Cash requirements to fund restructuring charges taken during fiscal 1999 and 1998 are expected to be approximately $0.9 million in fiscal 2001 compared to $2.7 million and $5.0 million in fiscal 2000 and 1999, respectively. Fiscal 2001 capital expenditures for the Company were initially planned at approximately $12.0 million, compared with $2.4 and $5.5 million in fiscal 2000 and 1999, respectively. Debt repayments for fiscal 2001 will be $5.5 million, including $2.5 million on the bank term facility, $2.0 million on the Morganthaler note and $1.0 million for various capital lease payments. For the three month period ended December 1, 2000, the Company's cash flow from operations excluding restructuring payments was a negative $0.2 million and the Company did not meet financial covenants established by its bank group. Waivers were obtained for the financial covenant violations. Capital spending for the three months ended December 1, 2000 was $0.8 million or $0.1 million above the same period one year ago. Net working capital decreased to $20.0 million from $21.3 million at September 1, 2000. The Company's accounts receivable decreased by approximately $2.0 million which was offset by an increase in the Company's inventory. In addition, the Company's current liabilities increased by approximately $3.4 million driven by increased accruals related to the pending Transaction described in Subsequent Events below. 12 13 Cash flow projections based on the Company's operating plan for fiscal 2001 reflect an increased level of cash flow requirements during the year as working capital expands to support projected sales growth. The Company believes that the Transactions discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Subsequent Events" will alleviate the Company's cash flow and liquidity constraints and provide the needed cash flow to continue to fund normal operations. The new financial covenants contained in the Company's amended bank agreement require the Company to meet certain levels of net income, cash flow, debt service ratios, and capital spending. The continued inability of the Company to i) execute the sales orders received from the Micro Products business customers; ii) improve operating results in the Micro Products business; iii) achieve operating performance from the Company's Core Business above fiscal 2000 levels; and iv) achieve other cost or productivity improvements included in the Company's fiscal 2001 budget; would result in the Company being out of compliance with certain of its debt covenants thereby allowing the Company's lenders to require full repayment of the outstanding borrowings under the Company's credit agreement and/or leave the Company in a cash reserve position that would require additional capital to fund operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management has and will continue to implement operational measures designed to assist the Company in achieving its fiscal 2001 budget and cash flow objectives, including the restructuring of operations discussed in Subsequent Events below. SUBSEQUENT EVENTS Transactions Summary The merger with International Flex Holdings, Inc. and the injection of $31.5 million in additional funds for Sheldahl on December 28, 2000, is described below. Merger On December 28, 2000, Sheldahl, Inc., a Minnesota corporation ("Sheldahl" or the "Company"), acquired all of the outstanding securities of International Flex Holdings, Inc. ("Holdings") for approximately 9.7 million shares of Sheldahl's common stock, $.25 par value ("Common Stock") under the terms of a previously announced definitive merger agreement, as amended, (the "Merger Agreement") by and among Sheldahl, IFT West Acquisition Company, a newly formed subsidiary of Sheldahl ("West"), Holdings, the sole shareholder of International Flex Technologies, Inc. ("IFT") the operating company, and the stockholders of Holdings (the "Stockholders"). Under the terms of the Merger Agreement, West merged with and into Holdings, with Holdings surviving and becoming a wholly-owned subsidiary of Sheldahl (the "Merger"). As consideration for the Merger, holders of outstanding shares of Holdings' common stock, Class A Stock, Class B Stock and Series A Preferred Stock received shares of Sheldahl Common Stock. Holdings' option holders and warrant holder received equivalent options and a warrant to purchase shares of Sheldahl Common Stock. Common Stock and Series G Investment Concurrent with consummating the Merger, Sheldahl completed the previously announced equity investment pursuant to an amended stock purchase agreement (the "Stock Purchase Agreement") by and among Sheldahl, and three accredited investors including Morgenthaler Venture Partners V, L.P. ("Morgenthaler V"), and Ampersand IV Limited Partnership and Ampersand IV Companion Fund Limited Partnership (collectively the "Ampersand Funds"). Under the terms of the Stock Purchase Agreement, Morgenthaler V and the Ampersand Funds (the "Investors") collectively invested an aggregate of $25.0 million in equity capital in exchange for approximately 9.8 million shares of Sheldahl 13 14 Common Stock and 11,303 shares of a newly created 11.06% Series G Convertible Preferred Stock of Sheldahl, par value $1.00 per share (the "Series G Stock"), such shares being convertible in the aggregate into approximately 8.1 million shares of Sheldahl Common Stock (the "Equity Investment"). The cash used by the Investors to complete the Equity Investment came from the liquid assets of the Investors. The Series G Stock is convertible into shares of the Company's Common Stock at any time. Each holder of the Series G Stock is entitled to convert each share of Series G Stock into that number of shares of Common Stock that equals $1,000 plus accrued dividends divided by the Conversion Price. The Conversion Price is $1.40 per share and is subject to adjustment from time-to-time under certain customary anti-dilution provisions. The Series G Stock is entitled to 11.06% dividends, payable annually. For a period of twenty-four (24) months from the date of issuance, Sheldahl is obligated to pay the dividend in shares of its Common Stock at a Dividend Conversion Price of $1.625, as adjusted from time-to-time under customary anti-dilution provisions. Thereafter, Sheldahl may pay the dividend in shares of its Common Stock, or, at its option, cash. One year of dividends at the Dividend Conversion Price would equate to approximately 769,300 shares. The Series G Stock is subordinate to the Company's Series D, E and F Convertible Preferred Stock with regard to payment of dividends and proceeds upon liquidation. Upon a liquidation of all of the assets of Sheldahl, the holders of the Series G Stock would be entitled to receive $25.0 million plus any accrued but unpaid dividends less the market value of the shares of Common Stock purchased under the Stock Purchase Agreement and retained by the holders of the Series G Stock following the adoption of a plan of liquidation, provided that any shares of Common Stock purchased under the Stock Purchase Agreement may be turned into the Company for cancellation at the election of the holders of the Series G Stock. The Company may require holders of the Series G Stock to convert to Common Stock provided that the Company's Common Stock trades at certain pre-set price levels. Subordinated Notes and Warrant Purchase Investment Concurrent with consummating the Merger and Equity Investment, Sheldahl consummated the previously announced debt investment pursuant to an amended and restated subordinated notes and warrant purchase agreement (the "Debt Agreement") by and among Sheldahl, Morgenthaler V, the Ampersand Funds and Molex Incorporated, Sheldahl's largest shareholder ("Molex"). Under the terms of the Debt Agreement, Morgenthaler V, the Ampersand Funds and Molex (the "Purchasers") purchased $6.5 million of 12% Senior Subordinated Notes ("Notes") and related warrants (the "Warrants") (the "Debt Investment"). In addition, the Purchasers collectively received Warrants to purchase 1,526,814 shares of Sheldahl Common Stock. The Warrants issued under the Debt Agreement are exercisable at $.01 per share and are exercisable for seven years from the date of issuance. The cash used by the Purchasers to complete the Debt Investment came from the liquid assets of the Purchasers. POST TRANSACTIONS OWNERSHIP After completion of the Merger, Equity Investment and Debt Investment ("the Transactions"), the parties that acquired securities in the Transactions (the "Parties") collectively hold securities representing ownership of approximately 60% of Sheldahl's currently outstanding common stock and 60% of Sheldahl on a fully diluted basis (assuming conversion of all Sheldahl convertible securities). TRANSACTIONS' EFFECT ON FINANCIAL STATEMENTS In the Merger, as described above, Sheldahl acquired all of the outstanding securities of IFT resulting in IFT becoming a wholly-owned operating subsidiary of Sheldahl. Although Sheldahl is the legal survivor in the Merger and remains the registrant of the Securities and Exchange Commission ("SEC") and a listed company on Nasdaq, under US. Generally Accepted Accounting Principles, due to the shares issued in the Transactions, IFT is considered the "acquirer" of Sheldahl for financial reporting purposes. Among other matters, this will require Sheldahl in all of its future financial and informational filings with the SEC to present the prior historical financial and other information of IFT. 14 15 POST-TRANSACTIONS BUSINESS REORGANIZATION AND FISCAL YEAR END CHANGE Subsequent to the consummation of the Transactions, Sheldahl reorganized its business and created two business units for their operations. Sheldahl's Micro Products operations have been combined with the former IFT operations in Endicott, New York and will be called International Flex Technologies ("IFT"). The second business unit consisting primarily of Sheldahl's Northfield operations will be called Sheldahl Materials and Flex Interconnect ("MFI"). Subsequent to the Merger of IFT and Sheldahl, on January 5, 2001, Sheldahl's Board of Directors determined that it would be in the best interests of the Company to change its fiscal year end to the Friday closest to December 31 of each year, beginning with December 29, 2000. Accordingly, Sheldahl will be filing a Form 10-K within 90 days of December 29, 2000 for such transition. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. Special accounting for qualifying hedges allow a derivative's gains or losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company adopted SFAS No. 133 at the beginning of fiscal 2001 and did not experience a material impact to its results of operations or financial position. CAUTIONARY STATEMENT Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations, in the letter to shareholders, elsewhere in this Form 10-K, in the Company's annual report, and in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases, and oral statements made with the approval of an authorized executive officer that are not historical, or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Certain risks and uncertainties could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect the Company's actual financial performance and cause it to differ materially from that expressed in any forward-looking statement: (i) the Company's ability to begin full volume production at its Micro Products facility is dependent upon final qualification by the Company's customers and, in some cases, their customers, of ViaThin as well as the ability of its production equipment to produce sufficient quantities of product at acceptable quality levels; (ii) delays in achieving full volume production at the Micro Products facility will have a material adverse impact on the Company's results of operations and liquidity position; (iii) a general downturn in the automotive market, the Company's principal market, could have a material adverse effect on the demand for the electronic components supplied by the Company to its customers; (iv) the Company's ability to continue to make significant capital expenditures for equipment, expansion of operations, and research and development is dependent upon funds generated from operations and the availability of capital from other sources; (v) the extremely competitive conditions that currently exist in the automotive and data communications markets are expected to continue, including development of new technologies, the introduction of new products, and the reduction of prices; (vi) the Company fails to achieve levels of sales growth and operational performance that sustains sufficient cash flow to operate 15 16 the business and satisfy existing covenants with the Company's lenders; and (vii) the ability of Sheldahl to integrate its Longmont operations with the former IFT operations. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect the events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's Credit Agreement carries interest rate risk. Amounts borrowed under this Agreement are subject to interest charges at a rate equal to the lender's prime rate + 2.0%, which as of December 1, 2000 was 11.5%. Should the lender's base rate change, the Company's interest expense will increase or decrease accordingly. As of December 1, 2000, the Company had borrowed approximately $27.2 million subject to the interest rate risk. On this amount, a 1% increase would cost the Company $272,000 in additional gross interest on an annual basis. 16 17 PART II - OTHER INFORMATION SHELDAHL, INC. AND SUBSIDIARY FORM 10-Q Item 2. Changes in Securities and Use of Proceeds ISSUANCE OF SECURITIES On December 21, 2000, the Board of Directors of Sheldahl approved a series of Transactions as described above in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Subsequent Events". As part of these Transactions, Sheldahl issued shares of its common stock, $.25 par value per share ("Common Stock"), shares of its newly created Series G Convertible Preferred Stock, $1.00 par value per share (the "Preferred Stock"), and Warrants (the "Warrants") to purchase shares of the Company's Common Stock, to two accredited investors (the "Investors"). The Board also authorized granting the Investors certain registration rights with regard to the shares of Common Stock underlying the Preferred Stock and the Warrants. The closing of the investment of $11,303,000 occurred on December 28, 2000. Based on the manner of sale and representations of the Investors, all of which were accredited, the Company believes that pursuant to Rule 506 of Regulation D, the private placement was a transaction not involving any public offering within the meaning of section 4(2) of the Securities Act of 1933, as amended, and was, therefore, exempt from the registration requirements thereof. Sheldahl will use the proceeds from the sale of the securities involved in the Transactions for working capital purposes. EXERCISE PRICE AND SHARE ADJUSTMENTS When the Company issued securities in connection with the Transactions described above in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Subsequent Events", the terms of the Company's bank warrant required an adjustment to the warrant's exercise price and underlying share amount. As a result, as of December 28, 2000, the Company's bank warrant is exercisable at a per share price of $3.00960 for 229,890 shares. Item 5. Other Information POST-TRANSACTIONS BUSINESS REORGANIZATION AND FISCAL YEAR END CHANGE In connection with the consummation of the Transactions, Edward L. Lundstrom and Jill D. Burchill resigned their position with the Company. Donald R. Friedman, former Chief Executive Officer of IFT, was appointed Chief Executive Officer ("CEO") of Sheldahl and Peter Duff, former Chief Financial Officer of IFT, was appointed Vice President - Finance of Sheldahl. In addition, three members of Sheldahl's Board of Directors, James E. Donaghy, Gerald E. Magnuson and Edward L. Lundstrom resigned their positions as directors and were replaced by John D. Lutsi (Chairman), Stuart A. Auerbach and Donald R. Friedman. Subsequent to the consummation of the Transactions, Sheldahl reorganized its business and created two business units for their operations. Sheldahl's Micro Products operations have been combined with the former IFT operations in Endicott, New York and will be called the International Flex Technologies ("IFT"). The second business unit consisting primarily of Sheldahl's Northfield operations will be called the Sheldahl Materials and Flex Interconnect ("MFI"). Subsequent to the Merger of IFT and Sheldahl, on January 5, 2001 Sheldahl's Board of Directors determined that it would be in the best interests of the Company going forward to change its fiscal year end to the Friday closest to December 31 of each year, beginning with December 29, 2000. Accordingly, Sheldahl will be filing a Form 10-K within 90 days of December 29, 2000 for such transition. 17 18 Item 6. Exhibits and Reports on Form 8-K A) Exhibits 10.1 Eighth Amendment to the Credit and Security Agreement, dated December 26, 2000 between the Company and Wells Fargo Bank, N.A. and the CIT Group/Equipment Financing, Inc. B) Reports on Form 8-K See Current Report on Form 8-K filed on November 13, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SHELDAHL, INC. (Registrant) Dated January 15, 2001 By /s/ Donald R. Friedman --------------------------------- ----------------------------- President and Chief Executive Officer Dated January 15, 2001 By /s/ Peter Duff --------------------------------- ----------------------------- Vice President - Finance 18 EX-10.1 2 c59579ex10-1.txt EIGHT AMENDMENT TO THE CREDIT & SECURITY AGREEMENT 1 EIGHTH AMENDMENT TO CREDIT AND SECURITY AGREEMENT AND WAIVER OF DEFAULTS This Amendment, dated as of December 26, 2000, is made by and among SHELDAHL, INC., a Minnesota corporation (the "Borrower"), WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION f/k/a Norwest Bank Minnesota, National Association, a national banking association ("Wells Fargo"; 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, a Second Amendment to Credit and Security Agreement dated as of March 31, 1999, a Third Amendment to Credit and Security Agreement dated as of April 5, 1999, a Fourth Amendment to Credit and Security Agreement dated as of November 9, 1999, a Fifth Amendment to Credit and Security Agreement dated as of June 16, 2000, a Sixth Amendment to Credit and Security Agreement dated as of June 27, 2000, and a Seventh Amendment to Credit and Security Agreement dated as of November 7, 2000 (as so amended, the "Credit Agreement"). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified. The Borrower has requested that the Lenders and the Agent consent to certain transactions, waive certain Events of Default and that certain amendments be made to the Credit Agreement. The Agent and the Lenders are willing to grant the Borrower's requests pursuant to the terms and conditions set forth herein. NOW, THEREFORE, 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. In addition, Section 1.1 of the Credit Agreement is amended by adding or amending, as the case may be, the following definitions: "`Accounts', of any Person, means all accounts owned by that Person, as such term is defined in the UCC, including without limitation the aggregate unpaid obligations of customers and other account debtors to that Person arising out of the sale or lease of goods or rendition of services by that Person on an open account or deferred payment basis." 2 "`Cash Flow Available for Debt Service' as of a given date means the sum of (i) Pre-tax Net Income, (ii) Interest Expense, (iii) depreciation and amortization, (iv) operating lease payments, and (v) Net Equity Proceeds, less (v) Capital Expenditures not financed with long-term debt, determined on a consolidated basis, for the fiscal year-to-date period ending on such date." "`Debt Service' as of a given date means the sum of (i) all payments of principal on Debt of the Borrower, whether scheduled or unscheduled, (ii) Interest Expense, (iii) operating lease payments, (iv) cash paid for restructuring charges or against restructuring reserves, and (v) all installments of rent under capitalized lease obligations of the Borrower (determined in accordance with GAAP on consolidated basis) incurred during the fiscal year-to-date period ending on such date." "`Debt Service Coverage Ratio' means the ratio of (i) Cash Flow Available for Debt Service to (ii) Debt Service determined on a consolidated basis." "`Eligible Accounts' means all unpaid Accounts owed to the Borrower or IFT, net of any credits, except the following shall not in any event be deemed Eligible Accounts: (i) that portion of Accounts (other than dated Accounts) unpaid 60 days or more after the due date, and that portion of dated Accounts unpaid 30 days or more after the stated due date or 120 days or more after the shipping date; (ii) that portion of Accounts that is disputed or subject to a claim of offset or a contra account; (iii) that portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by the Borrower or IFT to the customer; (iv) Accounts owed by any unit of government, whether foreign or domestic (provided, however, that there shall be included in Eligible Accounts that portion of Accounts owed by such units of government for which the Borrower or IFT (as applicable) has provided evidence satisfactory to the Agent that (A) the Agent has a first priority perfected security interest and (B) such Accounts may be enforced by the Agent directly against such unit of government under all applicable laws); (v) Accounts owed by an account debtor located outside the United States which are not backed by a bank letter of credit assigned to the Agent (if such assignment is required by the Agent), in the possession of the Agent and acceptable to the Agent in all respects, in its sole discretion; provided, -2- 3 however, that, Accounts due and owing from Siemens, Bosch, Delco, Ford, Texas Instruments, Polaroid, 3M, Hewlett Packard and Motorola which satisfy all other requirements of this definition (including without limitation clause (xiii)), shall not be deemed ineligible because of this clause; (vi) Accounts owed by an account debtor that is insolvent, the subject of bankruptcy proceedings or has gone out of business; (vii) Accounts owed by a shareholder, Subsidiary, Affiliate, officer or employee of the Borrower or IFT; (viii) Accounts not subject to a duly perfected security interest in the Agent's favor or which are subject to any lien, security interest or claim in favor of any Person other than the Agent including without limitation any payment or performance bond; (ix) Accounts owned by IFT until the Agent has received evidence satisfactory to it of the perfection and priority of its security interest in such Accounts; (x) that portion of Accounts that has been restructured, extended, amended or modified; (xi) that portion of Accounts that constitutes advertising, finance charges, service charges or sales or excise taxes; (xii) Accounts owed by an account debtor, regardless of whether otherwise eligible, if 10% or more of the total amount due under Accounts from such debtor is ineligible under clauses (i), (ii) or (x) above, provided, however, that the Agent may from time to time in its sole discretion exclude from the operation of this clause (xii) those Accounts that the Agent designates; and; (xiii) Accounts, or portions thereof, otherwise deemed ineligible by the Agent in its sole discretion." "`Eligible Equipment' means all Equipment owned by the Borrower or IFT for which the Agent has evidence satisfactory to it that such Equipment is free and clear of any other lien, security interest or encumbrance other than the Security Interest in favor of the Agent and the security interest granted by IFT." "`Eligible Inventory' means all Inventory of the Borrower or IFT, at the lower of cost or market value as determined in accordance with GAAP; provided, however, that the following shall not in any event be deemed Eligible Inventory: -3- 4 (i) Inventory that is: in-transit (provided that goods in transit in the ordinary course of business between the Borrower's facilities in Brown and Marshall Counties, South Dakota, its facilities in Rice and Dakota Counties, Minnesota and Boulder County, Colorado shall not be excluded by this clause); located at any warehouse, job site or other premises not approved by the Agent in writing; located outside of the states, or localities, as applicable, in which the Agent has filed financing statements to perfect a first priority security interest in such Inventory; covered by any negotiable or non-negotiable warehouse receipt, bill of lading or other document of title not in the Agent's possession; on consignment from or to any Person or subject to any bailment; (ii) Supplies, packaging, maintenance parts or sample Inventory; (iii) Inventory that is damaged, obsolete, slow moving or not currently saleable in the normal course of the Borrower's or IFT's operations; (iv) Inventory that the Borrower or IFT has returned, has attempted to return, is in the process of returning or intends to return to the vendor thereof; (v) Inventory that is perishable or live; (vi) Inventory manufactured by the Borrower or IFT pursuant to a license unless the applicable licensor has agreed in writing to permit the Agent to exercise its rights and remedies against such Inventory; provided, however, that all Inventory manufactured using Sidrabe Technology shall not be deemed ineligible under this clause (vi) until the 91st day after the date of this Agreement or such later date as the Agent may agree to in its sole discretion; (vii) Inventory that is subject to a security interest in favor of any Person other than the Agent; (viii) Inventory owned by IFT until the Agent has received evidence satisfactory to it of the perfection and priority of its security interest in such Inventory; and (ix) Inventory otherwise deemed ineligible by the Agent in its sole discretion." "`Equipment', of any Person, means all of that Person's equipment, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies, and including specifically (without limitation) the goods -4- 5 described in any equipment schedule or list herewith or hereafter furnished to the Agent by that Person." "`IFT' means International Flex Technologies, Inc. a [_Delaware_] corporation." "`Income Tax Expense' means the Borrower's consolidated state and federal income tax liability." "`Inventory', of any Person, means all inventory owned by that Person, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located." "`Liquidity Reserve' means $5,000,000." "`Margin' means two percent (2.0%) unless the Borrower's audited financial statements show that the Borrower has achieved Pre-Tax Net Income of $5,000,000 for the fiscal year ended December 31, 2001, in which case, effective as of the first day of first month following acceptance of such financing statements by the Agent, "Margin" means one percent (1.0%)." "`Maturity Date' means June 1, 2002." "`Merger' has the meaning given in Paragraph 2(a)(i) of the Eighth Amendment." "`Note Purchase Agreement' has the meaning given in Paragraph 2(a)(iv) of the Eighth Amendment." "Pre-tax Net Income" as of a given date means consolidated fiscal year-to-date net income from operations inclusive of charges incurred for restructuring and before Income Tax Expenses. "`Revolving Floating Rate' means an annual rate equal to the Prime Rate plus the Margin, which rate shall change when and as the Prime Rate changes." "`Term Floating Rate' means an annual rate equal to the Prime Rate plus the Margin, which rate shall change when and as the Prime Rate changes." "`UCC' means the Uniform Commercial Code as in effect from time to time (including after July 1, 2001) in the state designated in Section 10.17 of the Credit -5- 6 Agreement as the state whose laws shall govern this Agreement, or in any other state whose laws are held to govern this Agreement or any portion hereof." 2. Consent to Transaction. (a) The Borrower has requested that the Lenders and the Agent amend their consent given in the Seventh Amendment and consent to: (i) the merger of Holdings and Merger Sub with Holdings being the survivor, pursuant to the Acquisition Agreement (the "Merger"); (ii) the issuance by the Borrower of approximately 9,691,978 million shares of its common stock in connection with the Merger; (iii) the issuance by the Borrower of approximately 8,073,571 shares of its Series G preferred stock and approximately 9,783,571 of its common stock for $25,000,000 pursuant to a Stock Purchase Agreement (the "Series G Agreement") by and among the Borrower, Ampersand, Ampersand Companion and Morgenthaler (the "Series G Issuance"); and (iv) the issuance by the Borrower of $6,500,000 of promissory notes (the "Morgenthaler Notes") and warrants to purchase up to approximately 1,526,814 shares of its common stock, pursuant to an Amended and Restated Subordinated Notes and Warrant Purchase Agreement (the "Note Purchase Agreement") by and among, the Borrower, Morgenthaler, Ampersand and Ampersand Companion; (b) The Lenders and the Agent hereby consent to the events described in Subparagraph (a) on the following conditions: (i) Unless the Agent and the Required Lenders otherwise consent, the documents finally executed and delivered by the Borrower and its Subsidiaries in connection with the transactions described in Subparagraph (a) shall not be materially different from the drafts of such documents delivered to the Agent before the date of this Amendment. The Agent shall receive copies of all fully executed documents promptly after their execution and delivery. (ii) Not later than simultaneously with the occurrence of the Merger, Holdings and each of its Subsidiaries shall execute and deliver to the Agent for the benefit of the Lenders, an unlimited guaranty of the Obligations, a security agreement granting the Agent a security interest over all of its personal property assets and such financing statements as the Agent may reasonably request to perfect such security interest. -6- 7 (iii) Unless the Agent and the Required Lenders otherwise so consent in advance and in writing, the Morgenthaler Notes shall at all times be unsecured. (iv) Not later than simultaneously with the first issuance of any Morgenthaler Notes, the holders of such notes (the "Holders") and the Agent shall execute and deliver a subordination agreement pursuant to which, among other things, the Holders agree: (A) that the Morgenthaler Notes shall at all times remain unsecured; (B) that any financial covenants imposed by the Holders on the Borrower shall be no more restrictive than those imposed by the Credit Agreement; (C) that the Holders will notify the Agent of the occurrence of any Event of Default (as defined in the Note Purchase Agreement) not later than simultaneously with notice given to the Borrower; (D) that the Holders will notify the Agent of their intent to exercise any rights or remedies under the Note Purchase Agreement at least ten (10) days before any such exercise; (E) that upon receipt of notice from the Agent, the Holders will not exercise any right or remedy they may otherwise be able to exercise for a period of 180 days including any right to accelerate, provided that only one such notice may be delivered in any period of 365 days; (F) that, except as provided in clause (E), if the Lenders accelerate the Obligations, the Holders may accelerate the Morgenthaler Notes; (G) that the Holders shall have the ability to vote their interests in a bankruptcy of the Borrower; (H) that the Holders shall not be obligated to pay over to the Lenders any amounts received on account of the Morgenthaler Notes in a bankruptcy of the Borrower; and (I) that such subordination agreement shall run in favor of the Agent, the Lenders and any other lender or group of lenders providing a senior secured credit facility to the Borrower. -7- 8 (v) That the sources and uses of cash in connection with the transactions described in Subparagraph (a) are as set forth on Exhibit B to this Amendment. 3. Consent to Change of Fiscal Year End. The Lenders and the Agent consent to the Borrower's changing its fiscal year end to December 31st. 4. Payment of Term Notes. Section 2.10 of the Credit Agreement is amended to read as follows: Section 2.10 Payment of Term Notes. The principal of the Term Notes will be payable in aggregate equal monthly installments of $205,130 beginning January 1, 1999 and on the first day of each month thereafter until the Termination Date at which time the outstanding principal balance of the Term Notes and all interest accrued thereon shall be due and payable in full. In addition, the Agent shall obtain, at the Borrower's expense, an appraisal of the Eligible Equipment and all equipment owned by all Subsidiaries of the Borrower following the Merger (the "Combined Equipment"). If the aggregate outstanding principal balance of the Term Notes exceeds 75% of the orderly liquidation value of the Combined Equipment as shown on such appraisal, upon demand by the Agent, the Borrower shall immediately prepay the Term Notes in the amount of such excess together with any prepayment fee owed pursuant to Section 2.16. 5. Prepayment Fees. Section 2.16 of the Credit Agreement is amended to read as follows: Section 2.16 Termination, Facility Amount Reduction and Prepayment Fees; Waiver of Termination, Prepayment and Facility Amount Reduction Fees. (a) TERMINATION AND REVOLVING FACILITY AMOUNT REDUCTION FEES. If the Borrower or the Lenders (during a Default Period) terminates the Credit Facility as of a date other than the Maturity Date, or the Borrower reduces the Revolving Facility Amount of any Lender, the Borrower shall pay the affected Lender(s) a fee in an amount equal to one percent of the Revolving Facility Amounts (or the reduction, as the case may be). (b) PREPAYMENT FEES - TERM FACILITY. If the Term Notes are prepaid, the Borrower shall pay to the Lenders a fee in an amount equal to one percent of the amount so prepaid. -8- 9 6. Financial Covenants. Sections 6.18 through 6.21 and 7.12 of the Credit Agreement are amended to read as set forth below. "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 Minimum Cash Flow or about Available for Debt Service ------------------------ -------------------------- March 31, 2001 $12,600,000 June 30, 2001 $12,900,000 September 30, 2001 $13,900,000 December 31, 2001 $17,000,000 "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 Minimum Debt Service or about Coverage Ratio ------------------------ -------------------- March 31, 2001 1.5 to 1.00 June 30, 2001 1.5 to 1.00 September 30, 2001 1.1 to 1.00 December 31, 2001 1.1 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 the fiscal quarter described below, of not less than the amount set forth opposite such fiscal quarter: Fiscal Quarter Ending on Minimum Pre-tax or about Net Income ------------------------ --------------- March 31, 2001 $(4,000,000) June 30, 2001 $(8,225,000) September 30, 2001 $(11,675,000) December 31, 2001 $(12,400,000) "Section 6.21 - Deleted" "Section 7.12 Capital Expenditures. The Borrower will not, and will not permit any Subsidiary to, expend or contract to expend, in the aggregate, for Capital Expenditures during the fiscal quarters described below, amounts in excess of the -9- 10 amount set forth opposite such quarter in the table below. This limitation will not apply to the conversion of any existing operating leases to capital leases." Fiscal Quarter Ending on Maximum Capital or about Expenditures ------------------------ --------------- March 31, 2001 $5,000,000 June 30, 2001 $10,000,000 September 30, 2001 $16,000,000 December 31, 2001 $16,000,000 7. New Compliance Certificate. Exhibit F to the Credit Agreement is hereby amended in its entirety and replaced by Exhibit A to this Amendment. 8. 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. 9. Defaults. The following Events of Default exist (the "Existing Defaults"): - -------------------------------------------------------------------------------- CREDIT AGREEMENT REQUIRED AS OF ACTUAL AS OF SECTION/COVENANT 11/30/2000 11/30/2000 - -------------------------------------------------------------------------------- ss.6.18 Minimum Cash Flow Not less than $716,000 $(187,000) Available for Debt Service - -------------------------------------------------------------------------------- ss.6.19 Minimum Debt Service Not less than 0.23 to 1.00 (0.6) to 1.00 Coverage Ratio - -------------------------------------------------------------------------------- ss.6.20 Pre-Tax Net Income Not less than $(2,938,000) $(5,413,000) - -------------------------------------------------------------------------------- ss.6.21 Minimum Net Worth Not less than $52,000,000 $49,082,000 - -------------------------------------------------------------------------------- Upon the terms and subject to the conditions set forth in this Amendment, the Lenders hereby waives the Existing Defaults. This waiver shall be effective only in this specific instance and for the specific purpose for which it is given, and this waiver shall not entitle the Borrower to any other or further waiver in any similar or other circumstances. 10. Amendment Fee. The Borrower shall pay the Agent as of the date hereof a fully earned, non-refundable fee in the amount of $200,000 in consideration of the Lenders' execution of this Amendment. 11. Conditions Precedent. This Amendment, and the waiver set forth in Paragraph 9 hereof, shall be effective when the Agent shall have received an executed original hereof and payment of the fee described in Paragraph 10. -10- 11 12. Representations and Warranties. The Borrower hereby represents and warrants to the Lenders as follows: (a) The Borrower has all requisite corporate 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 constitutes 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. 13. 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. 14. No Other Waiver. Except as set forth in Paragraph 9, 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. 15. 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 -11- 12 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. 16. 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, including without limitation the fee owed under Paragraph 10. 17. 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. -12- 13 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. WELLS FARGO BANK MINNESOTA, SHELDAHL, INC. NATIONAL ASSOCIATION, as Agent By /s/ Perry T. Larson By /s/ Jill Burchill ------------------------------- ------------------------------- Perry T. Larson Jill Burchill Its Vice President Its Chief Financial Officer WELLS FARGO BANK MINNESOTA, THE CIT GROUP/EQUIPMENT NATIONAL ASSOCIATION FINANCING, INC. By /s/ Perry T. Larson By /s/ Danny Nichols ------------------------------- ------------------------------- Perry T. Larson Danny Nichols Its Vice President Its Assistant Vice President -13- 14 DRAFT 1/15/01 Exhibit A to Eighth Amendment to Amended and Restated Credit and Security Agreement COMPLIANCE CERTIFICATE TO: Perry T. Larson Wells Fargo Bank Minnesota, National Association DATE: , --------------------- ------- SUBJECT: Financial Statements Dear Mr. Larson: I am the duly qualified and acting Chief Financial Officer of Sheldahl, Inc. (the "Borrower") and I am familiar with the financial statements and financial affairs of the Borrower. I am authorized to execute this Compliance Certificate on behalf of the Borrower. Pursuant to Section 6.1 of the Credit and Security Agreement dated as of June 19, 1998, by and among the Borrower, Wells Fargo Bank Minnesota, National Association, as agent ("Wells Fargo"; herein in such capacity, together with any party which may become the successor Agent under such Credit and Security Agreement, the "Agent"), and each of the financial institutions which are now or may hereafter become parties to such Credit and Security Agreement, as amended to date and as the same may be further amended, supplemented or restated from time to time, the "Credit Agreement"), enclosed are an unaudited balance sheet and statements of income and retained earnings of the Borrower, as of ___________, ____ (the "Reporting Date"), and for the year-to-date period ending on the Reporting Date. All terms used in this Compliance Certificate shall have the meanings given in the Credit Agreement. The balance sheet and statements of income and retained earnings fairly present the financial condition of the Borrower as of the date thereof. They have been prepared in accordance with GAAP. I hereby certify to the Lenders as follows: [ ] The undersigned does not have knowledge of the occurrence of a Default or Event of Default under the Credit Agreement. 15 [ ] The undersigned has knowledge of the occurrence of a Default or Event of Default under the Credit Agreement and attached hereto is a statement of the facts with respect thereto. I further certify to the Lenders as follows: 1. Minimum Cash Flow Available for Debt Service. Pursuant to Section 6.18 of the Credit Agreement, as of the Reporting Date, the Borrower's Cash Flow Available for Debt Service was $_____________, which [ ] satisfies [ ] does not satisfy the requirement that such amount be no less than $_____________________ as set forth in the table below: Fiscal Quarter Ending on Minimum Cash Flow or about Available for Debt Service ------------------------ -------------------------- March 31, 2001 $12,600,000 June 30, 2001 $12,900,000 September 30, 2001 $13,900,000 December 31, 2001 $17,000,000 2. Minimum Debt Service Coverage Ratio. Pursuant to Section 6.19 of the Credit Agreement, as of the Reporting Date, the Borrower's Debt Service Coverage Ratio was _____ to 1.00 which [ ] satisfies [ ] does not satisfy the requirement that such ratio be no less than ______ to 1.00 on the Reporting Date as set forth in table below: Fiscal Quarter Ending on Minimum Debt Service or about Coverage Ratio ------------------------ -------------------- March 31, 2001 1.5 to 1.00 June 30, 2001 1.5 to 1.00 September 30, 2001 1.1 to 1.00 December 31, 2001 1.1 to 1.00 3. Minimum Pre-tax Net Income. Pursuant to Section 6.20 of the Credit Agreement, the Borrower's Pre-tax Net Income as of the Reporting Date, was $____________, which [ ] satisfies [ ] does not satisfy the requirement that such amount be not less than $_____________ during such period as set forth in table below: -2- 16 Fiscal Quarter Ending on Minimum Pre-tax or about Net Income ------------------------ --------------- March 31, 2001 $(4,000,000) June 30, 2001 $(8,225,000) September 30, 2001 $(11,675,000) December 31, 2001 $(12,400,000) 4. Capital Expenditures. Pursuant to Section 7.12 of the Credit Agreement, for the fiscal quarter ending on the Reporting Date, the Borrower and its Subsidiaries have expended or contracted to expend for Capital Expenditures, $__________________ in the aggregate, excluding the conversion of any existing operating leases to capital leases, which [ ] satisfies [ ] does not satisfy the requirement that such expenditures not exceed in the aggregate the amount set forth below for such fiscal quarter: Fiscal Quarter Ending on Maximum Capital or about Expenditures ------------------------ --------------- March 31, 2001 $5,000,000 June 30, 2001 $10,000,000 September 30, 2001 $16,000,000 December 31, 2001 $16,000,000 Attached hereto are all relevant facts in reasonable detail to evidence, and the computations of the financial covenants referred to above. These computations were made in accordance with GAAP. SHELDAHL, INC. By -------------------------------------- Its Chief Financial Officer -3- 17 Exhibit B to Eighth Amendment to Amended and Restated Credit and Security Agreement SOURCES AND USES OF CASH The table below sets out the sources and uses of cash in connection with the transaction described in Paragraph 2(a) of the Eighth Amendment to the Credit Agreement. - ---------------------------------------|---------------------------------------- SOURCES | USES - --------------------|------------------|--------------------|------------------- | | | - --------------------|------------------|--------------------|------------------- | | | - --------------------|------------------|--------------------|------------------- | | | - --------------------|------------------|--------------------|------------------- [to be completed by Borrower] -----END PRIVACY-ENHANCED MESSAGE-----