-----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, RKhInoUeOkS+JhwSi/XVQSD4lJTQxcybwCeS7GiBiYvD2lXiECnfQqtWFYZhCfg7 YM7zwywhBJKAxxs5FMpvZA== 0001045969-02-001517.txt : 20020829 0001045969-02-001517.hdr.sgml : 20020829 20020829162315 ACCESSION NUMBER: 0001045969-02-001517 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020628 FILED AS OF DATE: 20020829 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: 1229 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11861 FILM NUMBER: 02752903 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 d10q.txt FROM 10-Q 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 June 28, 2002 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) 1150 Sheldahl Road Northfield, Minnesota 55057 - -------------------------------------------------------------------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code (507) 663-8000 ----------------------------- As of August 20, 2002, 33,659,896 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 --- --- SHELDAHL, INC. AND SUBSIDIARIES FORM 10-Q INDEX PART I: Financial Information Item 1. Financial Statements Condensed Consolidated Statements of Operations - Six months ended June 28, 2002 and June 29, 2001 .......... 3 Condensed Consolidated Statements of Operations - Three months ended June 28, 2002 and June 29, 2001 ........ 4 Condensed Consolidated Balance Sheets - As of June 28, 2002 and December 28, 2001 ................. 5 Condensed Consolidated Statements of Cash Flows - Six months ended June 28, 2002 and June 29, 2001 .......... 6 Notes to condensed consolidated financial statements ...............7-9 Item 2. Management's Discussion and Analysis of Consolidated Operating Results and Financial Condition ............... 9-14 Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................................... 14 PART II: Other Information Item 3. Default Upon Senior Securities ............................ 15 Item 6. Exhibits and Reports on Form 8-K .......................... 15 2 PART I: FINANCIAL INFORMATION Item 1. Financial Statements SHELDAHL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited Six Months Ended ---------------------- June 28, June 29, (in thousands, except for per share data) 2002 2001 -------- -------- Net sales $ 46,300 $ 58,498 Cost of sales 38,502 63,871 -------- -------- Gross profit (loss) 7,798 (5,373) Expenses: Sales and marketing 2,813 4,230 Research and development 1,973 3,237 General and administrative 4,360 5,879 Interest 5,149 2,493 -------- -------- Total expenses 14,295 15,839 Loss before income taxes (6,497) (21,212) Income tax provision 36 -- -------- -------- Net loss before preferred dividends (6,533) (21,212) Convertible preferred stock dividends (1,741) (1,681) -------- -------- Net loss applicable to common shareholders $ (8,274) $(22,893) ======== ======== Net loss per common share - Basic and Diluted $ (0.25) $ (.74) ======== ======== Number of shares outstanding - Basic and Diluted 32,814 30,742 ======== ======== The accompanying notes are an integral part of these statements. 3 SHELDAHL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited Three Months Ended ---------------------- June 28, June 29, (in thousands, except for per share data) 2002 2001 -------- -------- Net sales $ 22,056 $ 30,103 Cost of sales 18,944 31,175 -------- -------- Gross profit (loss) 3,112 (1,072) Expenses: Sales and marketing 1,305 1,715 Research and development 860 1,437 General and administrative 1,403 3,255 Interest 2,033 1,478 -------- -------- Total expenses 5,601 7,885 Loss before income taxes (2,489) (8,957) Income tax provision 18 -- -------- -------- Net loss before preferred dividends (2,507) (8,957) Convertible preferred stock dividends (841) (840) -------- -------- Net loss applicable to common shareholders $ (3,348) $ (9,797) ======== ======== Net loss per common share - Basic and Diluted $ (0.10) $ (.32) ======== ======== Number of shares outstanding - Basic and Diluted 33,106 30,769 ======== ======== The accompanying notes are an integral part of these statements. 4 SHELDAHL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS Unaudited
ASSETS June 28, December 28, (In thousands) 2002 2001 -------- ------------ Current assets: Cash and cash equivalents $ 3,359 $ 197 Accounts receivable, net 11,640 14,018 Inventories 11,896 15,905 Other current assets 5,602 1,373 -------- -------- Total current assets 32,497 31,493 -------- -------- Land and buildings 10,650 10,488 Machinery and equipment 14,854 15,158 Construction in progress 463 268 Less: accumulated depreciation (824) -- -------- -------- Net plant and equipment 25,143 25,914 -------- Other assets 181 168 -------- -------- $ 57,821 $ 57,575 ======== ======== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Current maturities of long-term debt $ 41,339 $ 42,571 Accounts payable 20,304 13,600 Accrued salaries 2,317 1,346 Other accrued liabilities 12,101 11,189 -------- -------- Total current liabilities 76,061 68,706 -------- -------- Long-term debt 4,339 4,541 Other non-current liabilities 3,413 3,934 -------- -------- Total liabilities 83,813 77,181 -------- -------- Shareholders' investment: Convertible preferred stock 50 53 Common stock 8,415 8,014 Additional paid-in capital 60,773 59,283 Accumulated Deficit (95,230) (86,956) -------- -------- Total shareholders' investment (25,992) (19,606) -------- -------- $ 57,821 $ 57,575 ======== ========
The accompanying notes are an integral part of these statements. 5 SHELDAHL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited
Six Months Ended ---------------------- June 28, June 29, (in thousands) 2002 2001 -------- -------- Operating activities: Net loss applicable to common shareholders $ (8,274) $(22,893) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 824 8,250 Preferred stock dividends 1,981 1,681 Net change in other operating activities: Accounts receivable 2,378 1,669 Inventories 4,409 4,143 Prepaid expenses and other assets (3,604) (269) Other assets (13) 71 Accounts payable and accrued liabilities 6,699 (8,440) Other non-current liabilities (134) (404) -------- -------- Net cash provided by (used in) operating activities 4,266 (16,192) -------- -------- Capital expenditures, net (53) (1,882) -------- -------- Financing activities: Net borrowings under revolving credit facility 391 5,022 Issuance of senior subordinated notes -- 5,000 Repayments of other debt (1,442) (1,804) Stock options exercised -- 155 -------- -------- Net cash provided by financing activities (1,051) 8,373 -------- -------- Net increase (decrease) in cash and cash equivalents 3,162 (9,701) Cash and cash equivalents at beginning of period 197 9,701 -------- -------- Cash and cash equivalents at end of period $ 3,359 $ -- ======== ======== Supplemental cash flow information: Interest paid $ 1,022 $ 2,493 ======== ======== Income taxes paid $ 36 $ -- ======== ========
The accompanying notes are an integral part of these statements. 6 SHELDAHL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) ON APRIL 30, 2002 THE COMPANY FILED A VOLUNTARY PETITION FOR REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. EFFECTIVE MAY 17, 2002, THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANT TERMINATED ITS ENGAGEMENT WITH THE COMPANY AND THE COMPANY HAS NOT ENGAGED A REPLACEMENT FIRM TO SERVE AS ITS INDEPENDENT AUDITOR. AS A RESULT, THIS FORM 10-Q HAS NOT BEEN REVIEWED BY AN INDEPENDENT PUBLIC ACCOUNTING FIRM AS REQUIRED BY RULE 10-01(d) OF REGULATION S-X. THERE IS NO ASSURANCE THAT A REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS WOULD NOT HAVE RESULTED IN CHANGES TO THIS FORM 10-Q. 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 accounting principles generally accepted in the United States 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. On December 28, 2000, Sheldahl, Inc. ("Sheldahl") acquired all of the outstanding securities of International Flex Holdings, Inc., a Delaware corporation ("Holdings"), the sole shareholder of International Flex Technologies, Inc., a Delaware corporation ("IFT"), pursuant to a merger of a newly formed subsidiary of Sheldahl with and into Holdings (the "Merger"). Although Sheldahl was the legal survivor in the Merger and remains the registrant with the Securities and Exchange Commission ("SEC") and a listed company under Nasdaq, under United States generally accepted accounting principles, as a result of the number of shares issued and sold in these transactions, Holdings was considered the "acquiror" of Sheldahl for financial reporting purposes. Among other matters, this required Sheldahl, in this report and all of its future financial and informational filings with the SEC, to present the prior historical, financial and other information of Holdings and IFT. Accordingly, unless otherwise indicated to the contrary herein, the results of Holdings and IFT will be presented herein as the "Company" for all periods prior to December 28, 2000 without inclusion of Sheldahl's results for the same period. For purposes of this report, unless otherwise stated to the contrary, Company shall refer to Sheldahl, Holdings and IFT on a combined basis for all periods on or after December 28, 2000. On January 5, 2001, the Board of Directors of the Company changed its fiscal year to the Friday closest to December 31 of each year, beginning with December 29, 2000. The Company has operated in two business divisions identified as the Materials and Flex Interconnect Division (MFI), and the International Flex Technologies Division (IFT). IFT's operations ceased May 31, 2002. The MFI business division specializes in high quality, roll-to-roll flexible circuits and specialty materials for the automotive, communications, and aerospace markets. The IFT business division consisted of fine-line, roll-to-roll flexible circuits including substrates for silicon chip carriers. These products targeted the telecommunications, computer and medical markets. 1) (a) Inventories, which are valued at the lower of first-in first-out cost or market, consist of (in thousands): June 28, 2002 December 28, 2001 ------------- ----------------- Raw materials $ 5,675 $ 6,167 Work-in-process 2,882 5,164 Finished goods 3,339 4,574 ------- ------- $11,896 $15,905 ======= ======= 7 (b) Petition for relief under Chapter 11 of U.S. Bankruptcy Court and Liquidity On April 30, 2002, Sheldahl, Inc. filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Minnesota. ("Court") the case number assigned is 02-31674. The Debtor claimed total assets of $33,764,000 and total debts of $81,930,000. On May 7, 2002 the Court approved an interim order authorizing Sheldahl to incur post-petition debt as a debtor in possession ("DIP" financing) and to grant security to the lenders, Morgenthaler VII, L.P., Ampersand IV Limited Partnership and Molex Incorporated (together "Lenders"). The Terms of the DIP financing provide for advances of up to $1,500,000 at an initial rate of 11% and a subsequent rate of 14%, payable quarterly, in arrears. Principal is payable upon the sale of substantially all the assets of the Company. Advances under this facility are secured and subordinate to the existing security under the pre-petition loans provided under the Credit and Security Agreement with Wells Fargo Bank. As of the date of this report the Company has no DIP financing outstanding nor did it make any draws under the DIP financing facility during the fiscal period. The total pre-petition debt outstanding to Wells Fargo is approximately $15,660,000. In addition, the Court approved an interim order authorizing Sheldahl to continue its factoring agreement with Greenfield Commercial Credit, Inc. As of April 30, 2002 and June 28, 2002 the Company had approximately $1,050,000 and $750,000, respectively, outstanding under this facility. Accompanying the announcement of the Chapter 11 petition, the Company announced the intention of the group described above as the Lenders to make an offer to acquire substantially all the assets of the Company subject to approval of the Court. On August 15, 2002 the Bankruptcy court approved the sale of the continuing operating assets of the Company as defined in the Asset Purchase Agreement ("APA"), previously filed with the Bankruptcy Court. The investors are Morgenthaler VII, L.P., Ampersand IV Limited Partnership and Molex Incorporated (together "Buyers") who have formed a company by the name of Northfield Acquisition Co. to purchase these assets. The assets to be sold are described in detail in the APA but include all the Company's operations in Northfield, Minnesota. The terms of the sale allow the senior secured creditors, principally, Wells Fargo Bank Minnesota, National Association, to be paid in full. Changes to the APA made in the August 15, 2002 hearing include (i) an increase from $750,000 to $927,000 in the amount payable to the Company's creditors described in paragraph 2.1.1 of the APA, and (ii) the identification of assets to remain in the bankruptcy estate including principally the Longmont, CO facility and approximately 30 pieces of equipment. Northfield Acquisition Co. agreed to put $1,000,000 in escrow to assure the realization of at least $1,500,000 on the sale of these Colorado assets. As a result, the Company expects there will be insufficient proceeds to fully pay the unsecured creditors and no proceeds are allocated to preferred and common stockholders. Under most circumstances, the subordinated creditors have agreed not to participate in any claims of the creditors. The Company expects to close the sale of substantially all of its assets as contemplated by the APA within 30 days following its August 26, 2002 announcement that the Bankruptcy Court had approved the sale. 2) Segment Reporting The following is a summary of certain financial information relating to the two segments for the three and six months ended as follows:
Three months ended Six months ended June 28, June 29, June 28, June 29, 2002 2001 2002 2001 -------- -------- -------- -------- Total sales by segment: MFI $ 18,633 $ 22,312 $ 38,195 $ 42,729 IFT 3,423 7,791 8,105 15,769 -------- -------- -------- -------- Total company sales $ 22,056 $ 30,103 $ 46,300 $ 58,498 ======== ======== ======== ========
8
Operating Profit (loss) by segment: MFI: --- Before general and administrative expenses $ 2,187 $ 110 3,744 (3,964) General and administrative expenses 1,426 2,055 3,077 3,459 Interest expense 1,766 1,048 4,279 1,746 -------- -------- -------- -------- Total (1,005) (2,993) (3,612) (9,169) -------- -------- -------- -------- IFT: --- Before general and administrative expenses (1,240) (4,334) (732) (8,876) General and administrative expenses (23) 1,200 1,283 2,420 Interest expense 267 430 870 747 -------- -------- -------- -------- Total (1,484) (5,964) (2,885) (12,043) -------- -------- -------- -------- Total segments operating losses $ (2,489) $ (8,957) $ (6,497) $(21,212) ======== ======== ======== ========
3) Reclassifications Certain amounts previously reported in 2001 have been reclassified to conform to the 2002 presentation. Item 2. Management's discussion and analysis of financial condition and results of operations ON APRIL 30, 2002 THE COMPANY FILED A VOLUNTARY PETITION FOR REORGANIZATION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. EFFECTIVE MAY 17, 2002, THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANT TERMINATED ITS ENGAGEMENT WITH THE COMPANY AND THE COMPANY HAS NOT ENGAGED A REPLACEMENT FIRM TO SERVE AS ITS INDEPENDENT AUDITOR. AS A RESULT, THIS FORM 10-Q HAS NOT BEEN REVIEWED BY AN INDEPENDENT PUBLIC ACCOUNTING FIRM AS REQUIRED BY RULE 10-01(d) OF REGULATION S-X. THERE IS NO ASSURANCE THAT A REVIEW BY INDEPENDENT PUBLIC ACCOUNTANTS WOULD NOT HAVE RESULTED IN CHANGES TO THIS FORM 10-Q. Results of Operations The consolidated financial statements that accompany this discussion show the operating results from operations of the Company for the quarters ended June 28, 2002 and June 29, 2001. The following tables shows sales, cost of sales, gross profit, sales, research and development and general and administration and operating profit before interest by segment (in thousands) for the three and six month periods ending June 28, 2002 compared to June 29, 2001: 9
Three months ended June 28, 2002 June 29, 2001 - ------------------ ------------------------------------- -------------------------------------- Total Total MFI IFT Company MFI IFT Company -------- -------- -------- -------- -------- -------- Sales $ 18,633 $ 3,423 $ 22,056 $ 22,312 $ 7,791 $ 30,103 Cost of sales 14,511 4,433 18,944 20,215 10,960 31,175 Gross profit (loss) 4,122 (1,010) 3,112 2,097 (3,169) (1,072) % of sales 22.1% (29.5%) 14.1% 9.4% (40.7%) (3.6%) Sales, marketing, research & development expense 1,935 230 2,165 1,987 1,165 3,152 % of sales 10.4% 6.7% 9.8% 8.9% 15.0% 10.5% Profit before general administration and interest $ 2,187 $ (1,240) $ 947 $ 110 $ (4,334) $ (4,224) General administration $ 1,426 $ 23 $ 1,403 $ 2,055 $ 1,200 $ 3,255 Operating profit before interest $ 761 $ (1,217) $ (456) $ (1,945) $ (5,534) $ (7,479)
Six months ended June 28, 2002 June 29, 2001 - ---------------- ------------------------------------- -------------------------------------- Total Total MFI IFT Company MFI IFT Company -------- -------- -------- -------- -------- -------- Sales $ 38,195 $ 8,105 $ 46,300 $ 42,729 $ 15,769 $ 58,498 Cost of sales 30,427 8,075 38,502 42,266 21,605 63,871 Gross profit (loss) 7,768 30 7,798 463 (5,836) (5,373) % of sales 20.3% 0.4% 16.8% 1.1% (37.0%) (9.2%) Sales, marketing, research & development expense 4,024 762 4,786 4,427 3,040 7,467 % of sales 10.5% 9.4% 10.3% 10.4% 19.3% 12.8% Profit before general administration and interest $ 3,744 $ (732) $ 3,012 $ (3,964) $ (8,876) $(12,840) General administration $ 3,077 $ 1,283 $ 4,360 $ 3,459 $ 2,420 $ 5,879 Operating profit before interest $ 687 $ (2,015) $ (1,348) $ (7,423) $(11,296) $(18,719)
Net Sales. For the three months and six months ended June 28, 2002, the Company's net sales decreased by approximately $8.0 million, or 26.7%, and $12.2 million or 20.9%, as compared to the same period in the prior year, respectively. IFT, which ceased operations at the end of May 2002, is responsible for $4.4 million and $7.7 million of the three and six month decline in net sales. Sales in the MFI segment declined $3.6 and $4.5 million for the three and six-month periods ended June 28, 2002. The Company attributes the decline in sales occurring primarily in the most recent three-month period primarily to the absence of high volume product sales and partially due to a slowdown in orders following the Company's bankruptcy filing in the first month of the fiscal quarter. Cost of Sales/Gross Profit. For the three months and six months ended June 28, 2002, the Company's gross profit increased approximately $4.2 million to 14.1% of sales and $13.2 million to 16.8%, as compared to the same period in the prior year, respectively. The improved gross profit is generally evenly split between the two segments as shown above. Depreciation expense declined nearly 10 $4.0 and $7.0 million in the three and six month periods in 2002 compared to 2001 as a result of the Company's asset impairment charge recorded in the fourth fiscal quarter of the fiscal year ended December 28, 2001. Depreciation expense declined as a result of the reduced carrying value of the assets affected by the asset impairment charge. The Company attributes substantially all of the remainder of the improvement in gross profit to the substantial cost reductions which occurred in May and September 2001. These reductions were primarily the result of a reduction in the number of employees. Sales and Marketing Expenses. For the three months and six months ended June 28, 2002, sales and marketing expenses decreased approximately $0.4 and $1.4 million compared to the same period in the prior year, respectively. The Company attributes the majority of this reduction in expense to the cost reductions referred to above. The majority of the reductions have occurred in the IFT segment as can be seen from the above segment table. Research and Development Expenses. For the three months and six months ended June 28, 2002, research and development expenses decreased approximately $0.6 and $1.3 million compared to the same period in the prior year, respectively. The Company attributes the majority of this reduction in expense to the cost reductions referred to above the majority of which occurred in the IFT segment. General and Administrative Expenses. For the three months and six months ended June 28, 2002, general and administrative expenses decreased approximately $1.9 and $1.5 million compared to the same period in the prior year, respectively. The decreases are largely related to decreases in the IFT segment. The Company's actual expenses related to the closing of the Endicott, NY facility were substantially lower than expected causing the Company to reduce the charge recorded in the first fiscal quarter 2002. In addition, the cost reductions referred to above contributed to a smaller portion of the decrease. Interest Expense. For the three months and six months ended June 28, 2002, interest expense increased approximately $0.6 and $2.7 million compared to the same period in the prior year, respectively. This increase is related to a net increase in debt of approximately $12.5 million. This increase is substantially due to the subordinated debt issues in August and October 2001 and the May 2001, which was outstanding for only a portion of the fiscal quarter ended June 29, 2001. These combineddebt issues carry an average rate of approximately 18%, a higher rate than the average interest rate on the senior debt. EBITDA. For the three and six months ended June 28, 2002, EBITDA, defined as earnings before interest, taxes, depreciation and amortization, was approximately $(0.2) and $(0.5) million compared to $(3.2) and $(10.5) million for the same period in the prior year, respectively. Excluding the IFT segment, MFI, which represents the segment being sold as a continuing operation, had EBITDA of approximately $1.0 and $1.5 million in the three and six months ended June 28, 2002. Both segments improved EBITDA as a result of the cost reductions referred to above. The negative EBITDA produced by the IFT segment has been eliminated from continuing operations. Financial Condition - ------------------- As a result of continuing decreases in sales in both the Company's MFI and IFT segments and a resulting lack of liquidity, on April 30, 2002, Sheldahl filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Minnesota (the "Court"). The case number is 02-31674. Sheldahl claimed total assets of $33,764,000 and total debts of $81,930,000. Under Chapter 11, Sheldahl is operating its business as a debtor-in-possession. As of the petition date, actions to collect pre-petition indebtedness are stayed and other contractual obligations against Sheldahl may not be enforced. In addition, under the Bankruptcy Code, Sheldahl may assume or reject executory contracts, including lease obligations. Parties affected by these rejections may file claims with the Court in accordance with the reorganization process. Substantially all pre-petition liabilities are subject to settlement under a plan of reorganization to be voted upon by creditors and equity holders and approved by the Court. 11 On May 7, 2002 the Court approved an interim order authorizing Sheldahl to incur post petition debt as a debtor in possession ("DIP" financing) and to grant security to the lenders, Morgenthaler VII, L.P., Ampersand IV Limited Partnership and Molex Incorporated (together "Lenders"). The Terms of the DIP financing provide for advances of up to $1,500,000 at an initial rate of 11% and a subsequent rate of 14%, payable quarterly, in arrears. Principal is payable upon the sale of substantially all the assets of the Company. Advances under this facility are secured and subordinate to the existing security under the pre-petition loans provided under the Credit and Security Agreement with Wells Fargo Bank. The Company has not requested or received any draws under this DIP facility as of the date of this report. The total pre-petition debt outstanding to Wells Fargo is approximately $15,660,000. In addition, the Court approved an interim order authorizing Sheldahl to continue its factoring agreement with Greenfield Commercial Credit, Inc. As of April 30, and June 28, 2002 the Company had approximately $1,050,000 and $750,000, respectively, outstanding under this facility. Accompanying the announcement of the Chapter 11 petition, the Company announced the intention of the group described above as the Lenders to make an offer to acquire substantially all the assets of the Company subject to approval of the Court. Sheldahl anticipated that all proceeds of the sale of its assets would be used to pay creditors and that there would be no residual value for preferred or common shareholders. On August 15, 2002 the Bankruptcy Court approved the sale of substantially all the assets of the Company to a Buyers group consisting of the Lenders. During the fiscal quarter ending June 28, 2002 the Company closed its facility in Endicott, NY and sold all the equipment in this location. The Longmont, CO facility is in the process of being sold and the majority of the equipment at Longmont is being shipped to the Company's Northfield, MN facilities. The sale to the Buyers includes the facilities and operations in Minnesota and represents the Materials and Flex Interconnect ("MFI") operating segment. The Company expects to close the sale of substantially all of its assets as contemplated by the APA within 30 days following its August 26, 2002 announcement that the Bankruptcy Court had approved the sale. Cash Flows. Net cash generated by operating activities for the fiscal six months ended June 28, 2002 was approximately $4.3 million compared to approximately $(16.2) million used for such activities in the same period in the prior year. During the six months ended June 28, 2002 operating funds of approximately $5.5 million were used by the net loss prior to depreciation/amortization and other non-cash charges. Operating funds were generated by decreases in accounts receivable and inventories of approximately $6.8 million. Prepaid expenses and other assets used funds of approximately $3.6 million which was more than offset by the generation of funds from accounts payable and accrued expenses of approximately $6.7 million. Investments by the Company were approximately $0.05 million. Substantially all of these investments were in the form of capital expenditures. Cash was used by financing activities in the amount of approximately $1.0 million. Since the Company's bankruptcy filing, the Company has not received any advances under its debt facilities nor made any payments other than those from Greenfield Commercial Credit, Inc. pursuant to a factoring agreement for the Company's foreign accounts receivable. Liquidity and Capital Resources. Net working capital deficit was approximately $(43.6) million at June 28, 2002 up from approximately $(37.2) million at December 28, 2001. The increase in the working capital deficit of $6.4 million is primarily the result of an increase in current liabilities of approximately $7.4 million offset by an increase in current assets of approximately $1.0 million. The increase in current liabilities is primarily due to an increase in accounts payable and partially due to an increase in other accrued liabilities and accrued compensation. The increase in current assets is primarily due to an increase in prepaid expenses and cash. Prepaid expenses increased primarily due to deposits required by the Company's vendors for cash in advance of shipping product to the Company. Accrued liabilities increased primarily due to accrued interest and preferred stock dividend accruals. During the first fiscal quarter ended March 29, 2002 the Company was out of compliance with certain terms of the Credit and Security Agreement with its primary financial institution, however, no event 12 of default was declared. And although no default was declared under the Company's note payable to IBM during the first fiscal quarter, the Company continued to withhold payment under this note payable. In addition, the Company was in non-payment status under two substantial master lease agreements. In April 2002 one of these two lessors, filed a lawsuit to collect payment. Due to the Company's Chapter 11 filing an automatic stay is in effect with regard to this lawsuit. The Company expects to pay all the amounts due under the Credit and Security Agreement upon sale of the assets to the Buyers group. In addition, the Company has negotiated settlement terms with the lessors of the two substantial master lease agreements. The Company settled the terms of its facilities lease with IBM in connection with the closing of the Endicott, NY operations and has ceased using the patents under the intellectual property agreement with IBM. Subsequent Events. On May 2, 2002, subsequent to the Company's Chapter 11 filing, the Company was notified by the NASD that the Company's common stock securities would be delisted from The Nasdaq Stock Market at the opening of business on May 10, 2002 due to the Chapter 11 filing. The Company took no action with respect to this notice. Effective May 17, 2002 Arthur Andersen LLP terminated its relationship as independent public accountants of Sheldahl, Inc. The Company originally intended to obtain the Bankruptcy Court's approval of payments to engage Arthur Andersen for additional post-petition services, however, the current status of the Minneapolis office of Arthur Andersen is such that the Company cannot expect continuity of professional staff from this office. and so elected not to seek the Court's approval to engage Arthur Andersen. As a result, the Company accepted termination of Arthur Andersen. On August 15, 2002 the Bankruptcy court approved the sale of the continuing operating assets of the Company as defined in the Asset Purchase Agreement ("APA"), previously filed with the Bankruptcy Court. The investors are Morgenthaler VII, L.P., Ampersand IV Limited Partnership and Molex Incorporated (together "Buyers") who have formed a company by the name of Northfield Acquisition Co. to purchase these assets. The assets to be sold are described in detail in the APA but include all the Company's operations in Northfield, Minnesota. The terms of the sale allow the senior secured creditors, principally, Wells Fargo Bank Minnesota, National Association to be paid in full. The $750,000 described in paragraph 2.1.1 of the APA was increased to $927,000 and the principal assets to remain in the bankruptcy estate were listed and mainly include the Longmont, CO facility and a specific list of approximately 30 pieces of equipment. Northfield Acquisition Co. agreed to put $1,000,000 in escrow to assure the realization of a certain amount of up to $1,500,000 on the sale of these Colorado assets. As a result there will be insufficient proceeds to fully pay the unsecured creditors and no proceeds are allocated to preferred and common stockholders. Under most circumstances, the subordinated creditors have agreed not to participate in any claims of the creditors. The Company expects to close the sale of substantially all of its assets as contemplated by the APA within 30 days following its August 26, 2002 announcement that the Bankruptcy Court had approved the sale. New Accounting Pronouncements In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 141, business combinations initiated after June 30, 2001 must be accounted for using the purchase method of accounting. Under SFAS No. 142, amortization of goodwill and indefinite-lived assets will cease, and the carrying value of these assets will instead be evaluated for impairment using a fair-value-based test, applied at least annually. The Company will adopt SFAS No. 142 in fiscal 2002. Management believes that the adoption of SFAS No.'s 141 and 142 will not have an impact on the Company's financial position or results of operations, because at the beginning of the fiscal 2002, the Company has no intangible assets or goodwill. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The Company will adopt the SFAS No. 143 on January 1, 2003. The Company does not expect the adoption of SFAS No. 143 will have a significant impact on its financial position or results of operations. 13 In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes previous guidance for financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. The Company will adopt the SFAS No. 144 standard on January 1, 2002. SFAS No. 144 is not expected to have a significant impact on its financial position or results of operations. The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," December 30, 2000. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains or losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The adoption of SFAS No. 133 did not have a material impact on the Company's results of operations or financial position. Cautionary Statement Statements included in this management's discussion and analysis of financial and results of operations condition, in the letter to shareholders, elsewhere in this Form 10-Q, 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 generate value for its creditors through the bankruptcy process is dependent upon completing a sale of Sheldahl's assets to the Lenders or any other buyer on terms acceptable to the Court and subject to review by creditors' committees; (ii) Certain customers and suppliers may be reluctant to deal with a company in reorganization under Chapter 11 and the Company's operations may suffer as a result; (iii) a continued 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) as a debtor-in-possession under the supervision of the Court, the Company may not engage in transactions outside the ordinary course of business without the approval of the Court, after notice and an opportunity for a hearing, which limit's management's flexibility in the operation of the Company's business; and (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. 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 and Security 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 plus six percent, which as of August 26, 2002 was 10.75%. Should the lenders base rate change, the Company's interest expense will increase or decrease accordingly. As of June 28, 2002, the Company had borrowed approximately $15.7 million subject to interest rate risk. On this amount, a 1% increase in the interest rate would cost the Company $157,000 in additional gross interest cost on an annual basis. 14 PART II - OTHER INFORMATION Item 3. Default Upon Senior Securities ------------------------------ The Company failed to meet all the financial covenants, particularly the level of pre-tax income (loss) for the months of February and March 2002 under the Credit and Security Agreement with the Company's senior credit facility ("Credit Agreement"). This constituted an event of default under the terms of the Credit Agreement. The lenders to this Credit Agreement did not issue a default notice nor did it take any actions allowed under the terms of the Credit Agreement as a result of this default. Item 6. Exhibits and Reports on Form 8-K -------------------------------- A) Exhibits None. B) Reports on Form 8-K Current Report on Form 8-K filed May 2, 2002 and dated April 30, 2002, reporting items 3 and 7. 15 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 August 29,2002 By /s/ Benoit Pouliquen --------------- President and Chief Executive Officer Dated August 29, 2002 By /s/ Owen Gohlke --------------- Chief Accounting Officer 16 Sheldahl, Inc. and Subsidiaries Schedule II: Valuation and Qualifying Accounts Allowance for Doubtful Accounts: - ------------------------------- The transactions in the allowance for doubtful accounts for the periods ending June 28, 2002 and December 28, 2001 were as follows: June 28, 2002 Dec. 28, 2001 ------------- ------------- Balance, beginning of period $ 1,118 $ 1,623 Write-offs (299) (530) Provision 208 484 Acquired in Merger -- (459) ------- ------- Balance, end of period $ 1,027 $ 1,118 ======= ======= Facility Consolidation Cost Reserves: - ------------------------------------ The transactions in the restructuring reserves accounts for the periods ending June 28, 2002 and December 28, 2001 were as follows: June 28, 2002 Dec. 28, 2001 ------------- ------------- Balance, beginning of period $ 990 $ 1,855 Reserves established in connection with Merger 31 683 Reserve utilized during the period (427) (1,548) ------- ------- Balance, end of period $ 594 $ 990 ======= ======= 17 -----END PRIVACY-ENHANCED MESSAGE-----