-----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, IhsKQAB/UfJjdEsalWEeftGpB98k0gzFGVKMYDIN+IBnFa+/ez3zOs1BA1sRwTJn jOoc+RnetYuyo7ejOS+rDQ== 0001047469-98-042874.txt : 19981204 0001047469-98-042874.hdr.sgml : 19981204 ACCESSION NUMBER: 0001047469-98-042874 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19980828 FILED AS OF DATE: 19981203 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-K405 SEC ACT: SEC FILE NUMBER: 001-11861 FILM NUMBER: 98763310 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-K405 1 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED AUGUST 28, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER: 0-45 SHELDAHL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 41-0758073 (STATE OR OTHER JURISDICTION (IRS EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1150 SHELDAHL ROAD NORTHFIELD, MN 55057 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (507) 663-8000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE OF $0.25 PER SHARE PREFERRED STOCK PURCHASE RIGHTS (Title of Class) -------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of shares held by non-affiliates was approximately $67,470,936 on November 25, 1998, when the last sales price of the Registrant's Common Stock, as reported in the Nasdaq National Market System, was $7.00. As of November 25, 1998, the Company had outstanding 10,890,729 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE COMPANY'S DEFINITIVE PROXY STATEMENT FOR ITS ANNUAL MEETING TO BE HELD JANUARY 13, 1999, ARE INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K. 1 PART I ITEM 1. BUSINESS GENERAL Sheldahl creates and distributes thin, flexible laminates and their derivatives to worldwide markets. The Company's laminates are of two types: adhesive-based tapes and materials, and its patented adhesiveless material, NOVACLAD-Registered Trademark-. From these materials, Sheldahl fabricates high-value derivative products: single- and double-sided flexible interconnects and assemblies under the trade names FLEXBASE-Registered Trademark-, NOVAFLEX-Registered Trademark- HD and NOVAFLEX-Registered Trademark- VHD and substrates for silicon chip carriers under the trade names VIAARRAY-Registered Trademark- and VIATHIN-Registered Trademark-. The Company's high performance products - VIAARRAY, VIATHIN and NOVACLAD VHD - are based on the Company's patented NOVACLAD laminate. These products provide substantial benefits compared to traditional flexible circuits, including the capability for very fine circuit traces and very small holes, or vias, thus utilizing both sides of the laminate for circuit routing reducing size and cost per function. The Company has designed its NOVACLAD-based products to be used as a base material for high performance printed circuits and IC substrates. The Company has developed its VIATHIN to enable integrated circuit ("IC") manufacturers to package future generations of ICs economically by attaching the silicon die to a VIATHIN substrate manufactured by the Company or other circuitry manufacturers using the Company's NOVACLAD or VIAARRAY products. As ICs are becoming increasingly powerful, they produce more heat and require a greater number of connections to attach the silicon die, placing substantially greater demands on IC packaging materials. NOVACLAD VHD utilizes many of the product features of VIATHIN in applications other than IC packages. Over the past four fiscal years, the Company has made significant investments in its Longmont, Colorado facility. To date, operations from this facility have resulted in significant losses, which are expected to continue through fiscal 1999. The Company has financed its activities at Longmont primarily through the issuance of common stock, preferred stock and debt financing. The capital expenditure plan for fiscal 1999 has been significantly reduced from historical levels as sufficient manufacturing capacity is in place to meet market demand. Reduced capital spending, along with anticipated improving cash flow from operations, and funds available under its credit and security agreement are expected to provide adequate funds to meet the needs of the Company during fiscal 1999. However, the Company is in the process of seeking additional equity capital to ensure sufficient funds are available to support the ongoing operations of the Company, and to meet certain covenants under its credit and security agreement. (See Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition). There can be no assurance that the Company will be successful in its attempt to raise additional capital on terms acceptable to the Company. PRODUCTS NOVACLAD. NOVACLAD is a thin and flexible adhesiveless copper laminate used in the design and manufacture of flexible interconnects and high-density substrates. NOVACLAD consists of a polyimide film onto which copper has been vacuum deposited on both sides. After the vacuum deposition process, additional copper is plated onto the laminate to achieve a desired thickness of copper ranging from 5 microns to 35 microns (a micron is one-millionth of a meter). NOVACLAD provides a number of important benefits when compared to traditional adhesive-based laminates, including the capability for finer circuit traces (down to 1 mil, or .001 inch) and corresponding higher circuit density, greater heat tolerance and dissipation, improved signal speed and impedance control, increased dimensional stability, resistance to chemicals and greater durability. Because of these characteristics, the Company believes that NOVACLAD is a cost-effective, high-performance solution for a broad range of interconnect systems, especially high-density substrates for IC packages and multi-chip modules. In fiscal 1998, 1997, and 1996 the Company sold $25.2 million, $13.4 million, and $15.8 million, respectively, of NOVACLAD-based products, primarily for harsh, under-the-hood automotive applications where NOVACLAD'S heat tolerance and chemical resistance characteristics provide superior performance. VIAARRAY. VIAARRAY is a higher-value-added form of NOVACLAD with pre-drilled small holes, or vias, measuring down to 1 mil in diameter. VIAARRAY is coated with copper and enables the transmission of electrical currents between the two sides of the laminate. The combination of thin copper traces and very small vias permits the design of circuits that are up to six times denser than current flexible circuitry technology. Because of its adhesiveless character, VIAARRAY provides all of the benefits of NOVACLAD. The combination of these characteristics allows circuit fabricators the opportunity to eliminate several costly processing steps in the manufacture of printed circuits. The Company believes this product provides solutions for a variety of applications, including high density interconnects, IC packages and multi-chip modules. The Company believes there is also an opportunity for rigid printed circuit manufacturers to use VIAARRAY based circuits as an interlayer in multilayer circuit boards. 2 VIATHIN. The Company uses VIAARRAY in the manufacture of high-density substrates primarily for IC packages. Those high-density substrates are called VIATHIN. The material properties of VIAARRAY allow for very dense circuitry patterns which enable IC designers to improve the processing capabilities of ICs by increasing the number of connections to the silicon die, while reducing the cost per connection. VIATHIN enhances signal speed because its traces are very smooth and its dimensional stability is maintained. These features allow the Company's VIATHIN to be designed into ball grid array, pin grid array, and other high-density IC packages. The Company's strategy is to target the high-density segment of the market for IC packaging and multichip module applications where circuit density requirements as small as 1 mil traces and vias can be met using VIATHIN. As the market for high-density substrates develops, the Company will consider licensing the manufacturing process of its high-density substrates to increase the demand for its VIAARRAY product. In fiscal 1998, sales of VIATHIN substrates accounted for $1.3 million or 1% of the Company's total revenue. NOVAFLEX VHD. The Company also uses VIAARRAY in the manufacture of circuits that require the very fine features an application outside of IC packages, such as direct chip attach circuitry for high-end disk drives such as the Seagate 9LP Cheetah Drive and other such applications. NOVAFLEX VHD, introduced in September 1998, utilizes similar processes of the Company's ViaThin product in applications that require two layers of circuitry to provide an increased number of interconnection in a relatively small physical space. The Company is targeting this product to high-end disk drives, personal communications devices and unique medical applications. FLEXIBLE INTERCONNECTS. The Company manufactures flexible printed circuitry and interconnect systems using traditional adhesive-based and NOVACLAD laminates. The Company's flexible printed circuitry is typically manufactured in a roll-to-roll process from polyester or polyimide film to which copper is laminated. The laminate is processed through various imaging, etching, and plating processes and then selectively protected with a dielectric covering to produce a flexible printed circuit. Automated screen-printing and photo imaging processes produce single- and double-sided flexible circuits with lines and spaces down to 5 mils (.005 inch) in width. The Company uses its NOVACLAD laminate to produce high performance flexible circuits primarily for demanding under-the-hood automotive applications, which require greater circuit density, enhanced heat and chemical resistance, and dimensional stability. In fiscal 1998 and 1997, NOVACLAD-based interconnect products represented revenue of approximately $23.5 million and $13.0 million, respectively. All of the Company's flexible printed circuits are electrically tested prior to shipping. Additionally, the Company offers value-added processing, including surface mount assembly, wave soldering, connector and terminal staking, custom folding, stiffening, application of pressure-sensitive adhesive and hand soldering, in order to deliver a ready-to-use interconnect system to the end customer. The Company's targets applications where increased performance, reduced size and weight, ability to accommodate packaging contours or a reduction in the number of assembly steps is desired to reduce the customer's overall cost. Flexible printed circuitry and interconnect systems, including NOVACLAD-based products, accounted for $87.4 million, or 75%, of the Company's total revenue for fiscal 1998. MATERIALS. The Company's other materials products consist of adhesive-based tapes and other flexible laminates used in a variety of applications. Moisture barrier tape and flat cable is tape used in automobile air bag systems. Splicing tape is used in the manufacture of commercial and industrial sandpaper belts, and thermal insulating blankets are used primarily in the aerospace/defense market for satellites. The Company produces its materials using coating, laminating, and vacuum metalizing processes. Coating involves applying chemicals or adhesives to a thin flexible material. Laminating consists of combining two or more materials through applications of heat and pressure. Vacuum metalizing typically involves placing a metal onto a thin film, foil, or fabric by evaporation, sputtering, or pattern deposition. The Company's flexible laminates provide extended flexibility, strength, conductivity, durability and heat dissipation. The Company's materials provide extended flexibility, strength, conductivity, durability, and heat dissipation. The Company consumes approximately one-half of the material it produces in the manufacture of flexible printed circuitry and interconnect systems. In fiscal 1998, external sales of materials accounted for $28.6 million, or 24%, of the Company's total revenue. SALES AND CUSTOMER SUPPORT The Company's sales and customer support efforts are directed by product or market managers who are responsible for defining target markets and customers, strategic product planning and new product introduction. These product or market managers supervise a sales force of account managers, which are supported by engineers, technicians and customer service personnel. The Company employs a team approach led by account managers who work extensively with the Company's customers at the design stage, seeking to influence product designs and applications, particularly in the automotive and emerging datacommunications product areas. The Company believes that its close ties with customers at all stages of a project distinguish it from many competitors who manufacture products according to customer specifications without providing significant design, technical or consulting services. Account managers also coordinate appropriate design, research and development, engineering, order fulfillment and other personnel to support customer needs. To supplement its direct sales efforts, the Company uses domestic and international distributors. The 3 cornerstone of the Company's sales and customer support strategy is to provide superior customer service, from prompt and efficient technical support to rapid delivery of prototype and production orders through its electronic data interchange and just-in-time delivery capabilities. AUTOMOTIVE ELECTRONICS. In the automotive electronics market, the Company has enjoyed increasing sales through its strategy of working very closely with its customers beginning at the design stage. The Company's technical design and sales office in Detroit, Michigan is currently staffed with engineers, designers and sales personnel in order to provide automotive customers with comprehensive support. In fiscal 1998, 15.4%, 10.2% and 10.3% of the Company's net sales went to multiple sourcing locations of Motorola, Inc., Ford Motor Company, and Siemens, respectively. The Company also provides products, through first tier suppliers, to Chrysler and the U.S. operations of Honda and Toyota. INTERNATIONAL. The Company works with European manufacturers and suppliers and has had a sales presence in Europe since February 1992, including its current sales office in Frankfurt, Germany. The Company supplements its direct sales efforts with independent manufacturers' representatives and distributors in Europe and Asia, principally for flexible laminates. The Company's export sales during fiscal years 1998, 1997 and 1996 were $24.5 million, $15.0 million and $12.0 million, respectively. During fiscal 1998, the Company's exposure to foreign currency risk declined as two large programs were converted to the United States Dollar. The Company maintains a limited exposure to foreign currency risk with smaller sales contracted in British Sterling, German Marks and French Francs. These contracts and the exchange rate are reviewed periodically. As of August 28, 1998, the Company has no material contracts in any currency not mentioned above. Beginning January 1, 1999, the Euro, the new European currency, will be used commercially. As of August 28, 1998, none of the Company's customers or suppliers have suggested pricing any contracts in Euro. However, in order to remain competitive, the Company anticipates pricing certain contracts in Euro and has systems in place to support such contracts by converting foreign currency transactions to six decimal places. When warranted by the size of foreign currency contracts, the Company will use a variety of hedging techniques, including financial derivatives, to prudently reduce, but not eliminate, its exposure to foreign currency fluctuations. No such contracts existed as of August 28, 1998. MANUFACTURING The Company manufactures and assembles its products in Northfield, Minnesota; Britton, South Dakota; and Longmont, Colorado. The Company focuses on quality in its manufacturing efforts, and believes that its vertically integrated manufacturing capabilities enhance its ability to control product quality. The Company has been a qualified supplier to various automotive manufacturers for many years and has received QS9000/ISO9001 certification in its Minnesota and South Dakota facilities. The Company also employs contract manufacturing relationships for the assembly of products in Mexico and Canada. The Company uses a continuous roll-to-roll manufacturing process to efficiently produce a large volume of high-quality flexible laminates using coating, laminating, and vacuum metalizing techniques. The Company consumes approximately one-half of the flexible laminates it produces for the manufacture of circuitry and interconnect systems. The Company converts flexible laminates into circuits by using either photo exposing or screen printing to image the circuit patterns onto flexible laminates. The laminates then go through various etching and plating processes that result in copper patterns remaining on the laminate. The circuits are then protected with a dielectric covering. The Company processes certain of its flexible circuitry into interconnect systems. These process capabilities include surface-mount assembly, wave soldering, connector and terminal staking, custom folding, stiffening, application of pressure-sensitive adhesive, and hand soldering. These interconnect assembly functions are performed at the Company's facilities in Britton, South Dakota, or at Maquilladora Operations in Mexico and Canada. To manufacture its emerging NOVACLAD products, the Company constructed a 102,000 square foot building in Longmont, Colorado (the "Longmont Facility"). Manufacturing at the Longmont Facility includes a series of integrated roll-to-roll processes including via generation, metalization, plating, photoimaging, developing, selective etching, and electrical testing. The current annual production capacity of the Longmont Facility is approximately 4 million square feet of NOVACLAD and approximately 375,000 total square feet of VIAARRAY, VIATHIN and NOVACLAD VHD. The Longmont Facility has been designed to allow for expansion in increments of approximately 400,000 square feet of finished product, consisting of varying amounts of VIAARRAY, VIATHIN AND NOVAFLEX VHD and high-density substrates. The Company's investment to date in the Longmont Facility, including the site, building, and equipment purchased or leased by the Company, is approximately $65.6 million. 4 In August 1995, the Company entered into various agreements to form a joint venture in Jiujiang Jiangxi, China with Jiangxi Changjiang Chemical Plant and Hong Kong Wah Hing (China) Development Co., Ltd. Under the agreements, the Company licensed certain technology to the joint venture and provided certain technical support. The Company has received a 20% ownership interest in the joint venture and received cash payments totaling $900,000 upon completion of certain milestones. The joint venture is being established to manufacture flexible adhesive-based laminates and associated cover film tapes in China. Under the terms of the agreements, the joint venture will market these products in China, Taiwan, Hong Kong and Macau and the Company will market the products produced by the joint venture in all other markets. The Company expects manufacturing under this joint venture to commence in fiscal 1999. After manufacturing and sales have begun, the Company is to receive royalties based on a percent of sales. The percentage used is a sliding scale based on the dollar volume of sales and the royalty year as defined. The minimum royalty payment is $100,000 per royalty year. The Company does not expect to earn royalties in excess of $100,000 per royalty year until after fiscal year 2001. The agreements also require that the Company purchase fixed amounts of the joint venture's licensed product. This purchase commitment is estimated to be approximately $450,000 per year for three years beginning in fiscal 2000. RESEARCH AND DEVELOPMENT Sheldahl's recent research and development efforts have focused on opportunities presented by the demand for higher density and thinner packaging for electronic devices. The Company has also identified within its core technologies other opportunities for participation in the trend towards miniaturization within the electronics industry and has pursued these opportunities independently and through various consortia. Research and development expenses in fiscal 1999 are anticipated to decline as these opportunities are commercialized. In fiscal 1994, the ARPA Consortium was organized to develop a high-density, low-cost multichip module utilizing NOVACLAD as the base material. The ARPA Consortium is comprised of a vertically integrated team of non-competing companies, including four systems integrators (Silicon Graphics, Inc., Wireless Access, Inc., Hughes Missile Systems Company and Delco Electronics); a materials manufacturer (Sheldahl) and an assembly company (Jabil Circuit, Inc.). The ARPA Consortium has achieved various milestones, including validation of each of the essential processes for production of the Company's high-density substrates as a base material for low-cost multichip modules. In September 1995, ARPA agreed to extend its commitment to the consortium for the expansion of development of this technology using the Company's Z-LINK adhesive or other multilayering technologies. By 1997, the Company's Z-LINK adhesive was shown to be ineffective in high-density multichip modules. The Company is not expected to incur any future costs that will be reimbursed by ARPA, and the Company has completed its obligations under the consortium agreement. In addition to the ARPA Consortium, the Company also participated in various other consortia, including consortia managed by National Semiconductor and formed to develop (i) low-cost plastic packaging and (ii) an IC attachment technique for a silicon die without using wires, known as a "flip chip". The initial order for the Company's NOVAFLEX VHD is a flip chip application. In August 1994, Sheldahl acquired a minority ownership interest in Joint Stock Company Sidrabe ("Sidrabe"), a privatized vacuum deposition developmental company located in Riga, Latvia. Sidrabe historically was a developmental agency for the former Soviet Union's military and aerospace programs, specializing in the design and production of vacuum deposition equipment. With the Company's ownership position in Sidrabe, the Company received worldwide rights to some key elements of Sidrabe technology and the Company has access to Sidrabe's scientific and technical personnel with extensive product and process expertise. The Company has also purchased certain manufacturing equipment from Sidrabe. The Company is currently exploring certain joint product development opportunities with Sidrabe. To date, no definitive agreement has been reached. MOLEX JOINT VENTURE On July 28, 1998, the Company and Molex Incorporated ("Molex") formed a joint venture to design, market and assemble modular interconnect systems to replace wiring harnesses in primarily the automotive market. The new company was named Modular Interconnect Systems, L.L.C. and it is a Delaware limited liability company ("Origin"). Origin will utilize proprietary flexible products developed by the Company and proprietary connectors developed by Molex in the development of the new modular interconnect system as an alternative to conventional automotive wiring harnesses and flex circuit assemblies. The Company and Molex will supply their respective products to Origin pursuant to long-term supply contracts. The Company owns 40% and Molex owns 60% of Origin. Each party has a right of first refusal with respect to the other party's ownership interest. Origin is being funded by contributions from the Company and Molex. Certain development costs of those components to be designed and developed by Sheldahl for the new systems will also be reimbursed by Molex and other development costs may be funded by loans from Molex. Both the Company and Molex granted Origin a non-exclusive license to certain of their intellectual property for purposes of producing the new modular interconnect systems. Each license takes effect and is contingent upon a change of control of the Company or Molex and the purchase of such person's membership interest in Origin. The documents relating to the joint venture were filed as exhibits to the Company's Current Report on Form 8-K, filed August 28, 1998. 5 SUPPLIERS The Company qualifies strategic suppliers through a Vendor Certification Program, which limits the number of suppliers to those who provide the Company with the best total value and quality. The Company closely monitors product quality and delivery schedules of its supply base. Certain raw materials used by the Company in the manufacture of its products are currently obtained from single sources. The Company has not historically experienced significant problems in the delivery of these raw materials. The Company currently depends on one supplier for its polyimide supply, which serves as the base material for the Company's NOVACLAD family of products. This supplier currently manufacturers this polyimide film in the United States and Japan through multiple production lines. There have been no interruptions of supply from this vendor over the last three years. The Company continues to evaluate other sources of supply for polyimide film as well as other single sourced raw materials. The Company believes that other manufacturers' products are available, thus any interruption in supply from these vendors would not have a material adverse effect on the Company's operations. COMPETITION The Company's business is highly competitive with principal competitive factors being product quality, performance, price and service. The Company believes its vertical integration, which allows it to control product quality and manufacturing efficiencies better than many of its competitors, is a competitive advantage. Sheldahl's competitors include materials suppliers, flexible and rigid circuit manufacturers, as well as electronics manufacturers who produce their own materials and interconnect systems. Some of the Company's competitors have substantially greater financial and other resources than the Company. The Company's primary competitors with respect to its flexible printed circuitry and interconnect systems include Pressac Limited (a U.K. company) and Parlex Corp. in the automotive electronics market and Mektec Corp., Fujikura Ltd. (a Japanese company) and ADFlex Solutions, Inc. in the datacommunications market. The Company's primary competition for its flexible laminate products includes Rogers Corporation and GTS Flexible Materials, Ltd. (a U.K. company). The Company's NOVACLAD, VIAARRAY and high-density substrates compete with other substrates produced through several alternative processes. These competing products include single-sided, polyimide-based, etched copper laminate produced using various methods of production by Minnesota Mining and Manufacturing, Inc. and several Japanese companies. The Company believes the production processes required for each of these competing substrates, which include copper sputtering, manual drilling and traditional etching techniques, are inherently more expensive than the Company's method of production and result in products that are not as easily utilized as the Company's emerging products in the design and production of higher-density IC packages. The Company's emerging products also compete with ceramic packaging products produced by companies such as Coors Electronic and Kyocera of Japan, although the Company believes these products are more expensive than the Company's substrate products, and with resin-based substrates supplied by companies such as produced by Amkor Electronics and Tessera, which the Company believes are limited in their ability to accommodate increased circuit densities beyond current levels. The Company expects these and other competitors will continue to refine their processes or develop new products that will compete on the basis of cost and performance with the Company's emerging products. BACKLOG The Company's backlog consists of those orders for which the Company has delivery dates. Automotive customers typically provide for four to six weeks of committed shipments while datacommunications customers generally provide for up to eight weeks of committed shipments. The Company's backlog of unshipped orders as of August 28, 1998, and August 29, 1997, was approximately $23.5 million and $22.1 million, respectively. Generally, most orders in backlog are shipped during the following three months. Because of the Company's quick turn of orders to work-in-process, the timing of orders, delivery intervals, customer and product mix and the possibility of customer changes in delivery schedules, the Company's backlog at any particular date may not be representative of actual sales for any succeeding period. 6 PROPRIETARY TECHNOLOGY The Company owns three United States patents for NOVACLAD and the processes for making NOVACLAD and five additional applications are pending. Applications are pending for foreign patents on NOVACLAD in Japan, Canada and the European Patent Office. In addition, the Company has one United States patent and one Canadian patent relating to its Z-LINK adhesive product and has been informed that two additional United States patents relating to Z-Link have been allowed. Federal trademark registrations have been obtained on NOVACLAD-Registered Trademark-, VIAARRAY-Registered Trademark-, VIATHIN-Registered Trademark-, FLEXBASE-Registered Trademark-, NOVAFLEX-Registered Trademark-, NOVAFLEX HD-Registered Trademark- and Z-LINK-Registered Trademark-. In November 1998, the Company was awarded a patent for its SMARTHORN-Registered Trademark- horn switch technology. This technology provides design and assembly features that are targeted to improve the reliability of automotive horns and the amount of force required for horn actuation. Sheldahl also relies on internal security and secrecy measures and on confidentiality agreements for protection of trade secrets and proprietary know-how. There can be no assurance that Sheldahl's efforts to protect its intellectual property will be effective to prevent misappropriation or that others may not independently develop similar technology. The Company believes that it possesses adequate proprietary rights to the technology involved in its products and that its products, trademarks and other intellectual property rights do not infringe upon the proprietary rights of third parties. The Company's primary NOVACLAD patents expire between years 2009 and 2015. The Company was named as a defendant in a patent infringement matter regarding its NOVACLAD products which was dismissed for lack of jurisdiction in January 1994 and which has not been commenced elsewhere. There can be no assurance that this plaintiff or others will not bring other actions again the Company. The Company is also aware of a patent, which may cover certain plated through holes of the double-sided circuits made of the Company's NOVACLAD materials. Although no claims have been made against the Company under this patent, the owner of the patent may attempt to construe the patent broadly enough to cover certain NOVACLAD products manufactured currently or in the future by the Company. The Company believes that prior commercial art and conventional technology, including certain patents of the Company, exist which would allow the Company to prevail in the event any such claim is made under this patent. Any action commenced by or against the Company could be time consuming and expensive and could result in requiring the Company to enter into a license agreement or cease manufacture of any products ultimately determined to infringe such patent. ENVIRONMENTAL REGULATIONS The Company is subject to various federal, state and local environmental laws relating to the Company's operations. The Company's manufacturing and assembly facilities are registered with the U.S. Environmental Protection Agency and are licensed, where required, by state and local authorities. The Company has agreements with licensed hazardous waste transportation and disposal companies for transportation and disposal of its hazardous wastes generated at its facilities. The Longmont Facility has been specifically designed to reduce water usage in the manufacturing process and employs a sophisticated waste treatment system intended to substantially reduce discharge streams. Compliance with federal and state environmental laws and regulations did not have a material effect on the Company's capital expenditures, earnings or competitive position during fiscal 1998. Similarly, fiscal 1999 capital expenditures to comply with such laws and regulations are not expected to be material. The Company believes it is in material compliance with federal and state environmental laws and regulations. As of August 28, 1998, the Company was not involved in any significant specific action, legal or regulatory, regarding environmental regulations. EMPLOYEES As of October 30, 1998, the Company employed approximately 922 people in the United States and Europe, including 738 in production, 96 in sales, marketing, application engineering, and customer support, 32 in research and development and 53 in administration. The production staff consists principally of full-time workers employed in the Company's four currently operating manufacturing and assembly plants. In Northfield, Minnesota, production workers (approximately 399) are represented by the Union of Needletrade, Industrial and Textile Employees, which has been the bargaining agent since 1963. The Company has a one-year collective bargaining agreement with the Union, which expires in November 1999. The Company has never experienced a work stoppage and believes that its employee relations are good. ITEM 2. PROPERTIES. The Company owns two manufacturing facilities totaling 305,000 square feet and a 20,000 square foot administration and sales support office in Northfield, Minnesota. The Company also owns the 102,000 square foot facility in Longmont, Colorado. The Company leases a 30,000 square foot assembly facility in Aberdeen, South Dakota and owns a 30,000 square foot assembly facility in Britton, South Dakota. The Company also leases a 2,500 square foot technical sales and design office in Detroit, Michigan. Management believes that all facilities currently in use are generally in good condition, well maintained and adequate for their current operations. The Company also leases a production facility in Irvine, California which it has subleased. The Company is in the process of closing its Aberdeen, South Dakota facility and expects to vacate this property by the end of calendar year 1998. 7 ITEM 3. LEGAL PROCEEDINGS The Company's operations expose it to the risk of certain legal and environmental claims in the normal course of business. The Company believes that these general matters will not have a material adverse effect on the Company's results of operations or financial condition. On August 25, 1998, Sheldahl commenced suit against SDRC Operations, Inc., which also does business as Metaphase and Structural Dynamics Research, Inc., in the United States District Court for the District of Minnesota. Sheldahl alleges that SDRC breached a contract to provide certain software to Sheldahl, breached warranties in connection with the contract, and misrepresented the nature of the software and number of licenses needed. Sheldahl also alleges that it paid consulting fees to SDRC for preparation and delivery of a software implementation plan but that SDRC failed to deliver the plan. Sheldahl claims damages in excess of $100,000. SDRC has demanded that Sheldahl make payment to it of approximately $750,000 for the software at issue. The matter is in the pleadings stage. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS None ITEM 4A. EXECUTIVE OFFICERS The executive officers of the Company, who are appointed annually to serve one year terms, are as follows:
Name Age Date First Appointed Position ---- --- -------------------- -------- James S. Womack 70 1988 Chairman of the Board and Director James E. Donaghy 64 1991 Chief Executive Officer and Director Edward L. Lundstrom 48 1997 President and Board of Director nominee Beverly M. Brumbaugh 63 1991 Vice President - Human Resources and Corporate Excellence Gregory D. Closser 46 1991 Vice President - Interconnect Michele C. Edwards 34 1997 Vice President - Supply Chain Operations James L. Havener 55 1997 Vice President - Micro Products John V. McManus 51 1991 Vice President - Finance and Assistant Secretary Roger D. Quam 52 1991 Vice President - Materials Sidney J. Roberts 52 1997 Vice President - Research and Development Gerald E. Magnuson 67 1975 Secretary and Director
JAMES S. WOMACK joined the Company in 1956 and served as President of the Company from 1971 to 1988 and as Chief Executive Officer from 1971 to 1991. He became a director of the Company in 1968 and was elected Chairman of the Board in 1988. Mr. Womack is a director of Gemini, Inc. and General Securities, Inc. Mr. Womack will be retiring from the Company's Board of Directors effective January 13, 1999. JAMES E. DONAGHY joined the Company in 1988 as its President and Chief Operating Officer and became President and Chief Executive Officer in 1991. In September 1997, he passed the title of President to Ed Lundstrom. He remains a director of the Company since 1988. Prior to that time, he held various executive-level positions at DuPont Company in Wilmington, Delaware. Mr. Donaghy is a director of Hutchinson Technology, Inc., William Mitchell College of Law, and the Institute of Printed Circuitry. Mr. Donaghy will become the Company's Chairman of the Board effective January 13, 1999. 8 EDWARD L. LUNDSTROM was named President in September of 1997. Since joining the Company in 1976 as Corporate Tax Manager, he has held various positions with the Company: Executive Vice President, Vice President-Sales and Marketing, Vice President-Treasurer, Corporate Controller, Vice President-Interconnect, Vice President and Treasurer, President of the Sheldahl subsidiary, Symbolic Displays, Inc. (SDI), and Vice President, General Manager of the Northfield Circuit Division. Mr. Lundstrom is a director of Research Incorporated. Mr. Lundstrom will become the Company's President and Chief Executive Officer effective January 13, 1999. Mr. Lundstrom has been nominated to the Board of Directors. BEVERLY M. BRUMBAUGH joined the Company in 1961 and has served in several capacities since that time, including Director of Human Resources and Industrial Relations. He has been Vice President - Human Resources and Corporate Excellence since 1989. Mr. Brumbaugh is the former chairman of the American Electronics Association Minnesota Council for Quality. He is currently a member of the Manufactures Alliance where he serves on both the Human Resources and Quality Councils. Mr. Brumbaugh will retire on February 28, 1999. GREGORY D. CLOSSER joined the Company in 1978 and has served as Vice President - Flexible Interconnects since September 1995. From 1983 to 1989, he held the position of Quality Director. From 1989 to 1993, he was the General Manager of Interconnect Manufacturing. From 1993 to 1995 he was Vice President - Interconnect Operations. MICHELE EDWARDS was named to the position of Vice President, Supply Chain Operations in September 1997. She joined Sheldahl in 1989 as a Manufacturing Engineer in the Materials Business. JAMES L. HAVENER joined the Company in January of 1998 as Vice President, Business Manager of Micro Products. He was previously Business Manager, Strategic Planning and Advance Products Marketing for 3M Company's Electronic Products Division. JOHN V. MCMANUS joined the Company in 1972 and has served as Vice President - Finance and Assistant Secretary since 1991. From 1987 to 1991, he served as Corporate Controller. ROGER D. QUAM joined the Company in 1969 and has served in several capacities since that time, including Business Manager of Engineered Products and Vice President of Engineered products. He has served as Vice President - - Composite Materials since September 1995, previously serving as Vice President - Materials Operations and Aviation Products beginning in 1988. SIDNEY J. ROBERTS joined the Company in 1973 and has held various positions with the Company, including Director of Manufacturing and Engineering - Materials, Business Director - NOVACLAD, Manager of Research and Development - Materials and Interfacial Engineering, and Technical Director - Materials. He was named to his present position, Vice President of Research and Development, in November 1996. GERALD E. MAGNUSON has served as Secretary of the Company since 1962 and a director since 1975. Mr. Magnuson is a retired partner in the law firm of Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota, and a director of PremiumWear, Inc., Research, Incorporated, and Washington Scientific Industries, Inc. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Common Stock is listed on the Nasdaq National Market under the symbol "SHEL". The following table sets forth the high and low sales prices of the Common Stock for the period indicated, as reported on the Nasdaq National Market.
HIGH LOW ---- --- FISCAL YEAR ENDED AUGUST 28, 1998: First Quarter 24 5/8 15 1/4 Second Quarter 18 12 15/16 Third Quarter 17 3/4 8 5/8 Fourth Quarter 10 1/8 4 15/16 FISCAL YEAR ENDED AUGUST 29, 1997: First Quarter 19 1/4 14 7/8 Second Quarter 26 3/4 18 Third Quarter 24 3/4 18 1/2 Fourth Quarter 24 1/8 18
On November 18, 1998, the last reported sales price of the Common Stock was $7 3/4. As of this date, there were approximately 2,000 record holders of the Company's Common Stock and an estimated additional 3,000 shareholders who held beneficial interests in shares of Common Stock registered in nominee names of banks and brokerages houses. Pursuant to its current credit and security agreement, the Company is restricted from declaring or paying cash dividends without the consent of the Company's lenders. The Company has never declared or paid any dividends on its Common Stock. The Company currently intends to retain any earnings for use in its operations and expansion of its business and therefore does not anticipate paying any cash dividends in the foreseeable future. RECENT SALES OF UNREGISTERED SECURITIES PREFERRED STOCK. On July 2, 1998, the Board of Directors of the Company authorized a private placement of its newly created Series D Convertible Preferred Stock, $1.00 par value per share, and warrants (the "Warrants") to purchase shares of the Company's common stock, $.25 par value per share (the "Preferred Stock"), to a group of accredited investors (the "Investors"). On July 25, 1998 the Board approved the pricing for the private placement. The Board also authorized granting the Investors certain registration rights with regard to the shares of Common Stock underlying the Preferred Stock and the Warrants. The closing of the private placement occurred on July 30, 1998. Based on the manner of sale and representations of the Investors, the Company believes that pursuant to Rule 506 of Regulation D, the private placement was a transaction not involving any public offering within the meaning of section 4(2) of the Securities Act of 1933, as amended, and was, therefore, exempt from the registration requirements thereof. The Company sold an aggregate of 32,917 shares of the Preferred Stock to the Investors for an aggregate purchase price of $32,917,000, pursuant to a Convertible Preferred Stock Purchase Agreement among the Company and the Investors (the "Agreement"). The Preferred Stock is entitled to 5% dividends, payable upon conversion, in shares of Common Stock or cash, at the option of the Company. The Preferred Stock is convertible into shares of the Company's Common Stock at any time. Each holder of Preferred Stock is entitled to convert each share of Preferred Stock into that number of shares of Common Stock that equals $1,000 plus accrued dividends divided by the conversion price. The conversion price is fixed at $6.15 per share. The conversion price is subject to adjustment for certain dilution and market price events. The Company may require holders of Preferred Stock to convert to Common Stock provided that the Company's Common Stock trades at certain pre-set price levels. The Agreement between the Company and the Investors, and the Certificate of Designation for the Preferred Stock, are incorporated herein by reference as Exhibits 4.1 and 4.2 to the Company's current report on Form 8-K filed August 18, 1998. 10 In connection with the sale of the Preferred Stock, on July 25, 1998, the Company's Board of Directors amended the Company's Rights Plan to increase the threshold percentage from fifteen (15%) to twenty-two (22%), subject to certain conditions with respect to one of the Investors, Molex Incorporated ("Molex") and also approved Molex's acquisition under the Minnesota Business Combination Act ("MBCA"). The MBCA precludes certain business combinations with interested shareholders whose acquisition of beneficial ownership of 10% or more is not approved by a committee of disinterested directors. WARRANTS. In connection with the issuance of the Preferred Stock, the Company also granted to each Investor a Warrant to purchase shares of the Company's Common Stock. The aggregate amount of shares of Common Stock the Company is obligated to issue under the Warrants is 329,170 at an exercise price of $7.6875 per share. The form of Warrant issued by the Company to the Investors is incorporated herein by reference as Exhibit 4.3 to the Company's Current Report on Form 8-K filed August 18, 1998. REGISTRATION RIGHTS. The Company granted the Investors certain registration rights. The registration rights cover all shares of Common Stock issuable to the Investors upon conversion of the Preferred Stock and upon exercise of the Warrants. The Company is obligated to file a shelf Registration Statement on Form S-3 within twenty-five (25) days of July 30, 1998. The Registration Rights Agreement between the Company and the Investors specifying the terms of the registration rights is incorporated herein by reference as Exhibit 4.4 to the Company's Current Report on Form 8-K filed August 18, 1998. ADDITIONAL AGREEMENTS. In connection with the transactions contemplated by the Agreement, the Company granted Molex the right to select one representative for nomination to the Board of Directors of the Company, a right of first refusal to purchase the Company in the event that the Board of Directors elects to sell the Company and certain preemptive rights with respect to future equity or debt offerings. NEW BANK AGREEMENT. In June 1998, in connection with executing its new credit facility, the Company issued to its lenders five-year warrants to purchase in the aggregate 100,000 shares of its Common Stock at a price of $6.92 per share. Based on the representations of the lenders and their accredited status, the issuance of these warrants, pursuant to Rule 506 of Regulation D, 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. USE OF PROCEEDS. The proceeds from the private placement were used by the Company to repay a $19 million bridge facility and to improve the Company's liquidity position. The Company will not receive any proceeds from the resale of the shares of Common Stock issuable to the Investors upon conversion of the Preferred Stock. If the warrants issued to the Investors are exercised in full, the Company will receive approximately $2,530,494. If the Warrants issued to the Company's lenders are exercised in full, the Company will receive approximately $692,000. Such amounts are intended to be used by the Company for working capital purposes. There can be no assurance, however, that any of the warrants will be exercised. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere herein the "Management's Discussion and Analysis of Financial Condition and Results of Operations". The consolidated statements of operations data presented below as of and for the fiscal years ended August 30, 1996, August 29, 1997, and August 28, 1998, and the consolidated balance sheet data as of August 29, 1997, and August 28, 1998, have been derived from the Company's Consolidated Financial Statements included elsewhere in this report, which have been audited by Arthur Andersen LLP, independent public accountants. The statements of operations data set forth below for the years ended September 2, 1994 and September 1, 1995, and the balance sheet data set forth below at September 2, 1994, September 1, 1995, and August 30, 1996, are derived from audited financial statements not included herein. 11 Fiscal Years Ended (in thousands, except per share data)
September 2, September 1, August 30, August 29, August 28, Statements of Operations Data: 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- Net sales $ 88,346 $ 95,216 $ 114,120 $ 105,266 $ 117,045 Cost of sales 69,273 74,752 89,171 94,933 109,143 ------ ------ ------ ------ ------- Gross profit 19,073 20,464 24,949 10,333 7,902 ------ ------ ------ ------ ------- Expenses: Sales and marketing 8,014 9,090 9,254 9,560 9,861 General and administrative 4,153 3,895 5,129 6,839 8,152 Research and development 2,366 2,270 2,755 4,705 3,881 Restructuring costs - - - - 8,500 Impairment charges - - - - 3,300 Interest 946 875 539 1,298 2,547 ------ ------ ------ ------ ------- Total expenses 15,479 16,130 17,677 22,402 36,241 ------ ------ ------ ------ ------- Income (loss) before provision for income taxes and cumulative effect of change in method of accounting 3,594 4,334 7,272 (12,069) (28,339) Provision (benefit) for income taxes 800 1,200 2,500 (4,100) 2,952 ------ ------ ------ ------ ------- Net income (loss) before cumulative effect of change in method of accounting 2,794 3,134 4,772 (7,969) (31,291) Cumulative effect of change in method of accounting(4) - - - - (5,206) ------ ------ ------ ------ ------- Net income (loss) before convertible preferred stock dividends 2,794 3,134 4,772 (7,969) (36,497) Convertible preferred stock dividends - - - - (689) ------ ------ ------ ------ ------- Net income (loss) applicable to common shareholders $ 2,794 $ 3,134 $ 4,772 $ (7,969) $ (37,186) ------ ------ ------ ------ ------- ------ ------ ------ ------ ------- Net income (loss) per common share - basic $ 0.54 $ 0.47 $ 0.57 $ (0.89) $ (3.97) ------ ------ ------ ------ ------- ------ ------ ------ ------ ------- - diluted $ 0.52 $ 0.45 $ 0.55 $ (0.89) $ (3.97) ------ ------ ------ ------ ------- ------ ------ ------ ------ ------- Weighted average common shares outstanding - basic 5,155 6,692 8,414 8,967 9,364 ------ ------ ------ ------ ------- ------ ------ ------ ------ ------- - diluted 5,418 6,925 8,686 8,967 9,364 ------ ------ ------ ------ ------- ------ ------ ------ ------ ------- Balance Sheet Data: Working capital, net $ 15,942 $ 16,332 $ 22,051 $ 22,943 $ 9,219 Total assets 60,320 94,186 115,887 139,367 136,306 Long-term debt, excluding current portion 7,963 33,864 21,858 40,869 27,829 Total shareholders' investment 36,482 40,952 75,337 82,932 78,757 Supplemental Business Unit Data(1) - Combined Materials and Interconnect: Revenues $ 84,793 $ 91,600 $ 113,955 $ 104,908 $ 116,002 Gross profit 17,931 20,231 28,847 21,376 21,810 Pretax operating income(3) 2,743 4,874 13,291 3,400 2,838 Micro Products: Revenues $ - $ - $ 165 $ 358 $ 1,043 Gross profit (loss)(2) 719 (214) (3,898) (11,043) (13,908) Pretax operating income (loss)(3) 719 (731) (6,019) (15,469) (19,377)
- -------------------- 12 (1) Does not include aviation components, a product line sold in 1995 (2) Net of ARPA funding in 1994, 1995 and 1996 (3) Fiscal 1998 does not include restructuring costs or impairment changes (4) The Company adopted the provisions of SOP 98-5, "Reporting on the Costs of Start-up Activities" effective August 30, 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PROFILE Sheldahl creates and distributes thin, flexible laminates and their derivatives to worldwide markets. The Company's laminates are of two types: adhesive-based tapes and materials, and its patented adhesiveless material, NOVACLAD. From these materials, Sheldahl fabricates high-value derivative products: single- and double-sided flexible interconnects and assemblies under the trade names FLEXBASE, NOVAFLEX HD and NOVAFLEX VHD and substrates for silicon chip carriers under the trade names VIAARRAY and VIATHIN. BACKGROUND In 1989, the Company developed a business strategy focused on achieving leadership in supplying the automotive electronics market with flexible printed circuits based on the Company's core materials technologies. Management believed the automotive market provided growth opportunities due to increasing electronic content of automobiles as manufacturers focused on enhancing vehicle performance while reducing weight and overall vehicle costs. The Company targets specific automotive customers that it has identified as leaders in the drive to increase the electronic content of automobiles. Since 1989, automotive market sales increased from $13.9 million to $80.4 million and represent 69% of the Company's net sales in fiscal 1998. Concurrent with the Company's strategic shift to focus on the automotive electronics market in 1989, Sheldahl began to focus its research and development expenditures on new opportunities. As a result, in 1992 the Company patented its NOVACLAD high-performance adhesiveless flexible laminate. The features of NOVACLAD allow circuitry designers to increase circuit density for integrated circuit (IC) packaging and other interconnect solutions. Over the past four years, the Company has introduced high performance products based on proprietary thin film laminate technology: VIAARRAY and VIATHIN (high-density substrates). VIAARRAY, a higher-value form of NOVACLAD, has predrilled small holes (vias) that allow printed circuit manufacturers to produce interconnects to meet the changing need of the market. The Company uses VIAARRAY to manufacture chip-carrier substrates (VIATHIN) primarily for IC packages. These NOVACLAD-based products provide substantial benefits compared to traditional flexible circuits, including the capability for very fine circuit traces (down to 1 mil, or .001 inch) as well as greater heat tolerance and dissipation. The Company has designed these products to enable IC manufacturers to package future generations of ICs economically by attaching the silicon die to VIATHIN or high-density substrates manufactured by other circuitry manufacturers using the Company's NOVACLAD or VIAARRAY products. As ICs are becoming increasingly powerful, they produce more heat and require a greater number of connections to attach the silicon die, placing substantially greater demands on IC packaging materials. These products support the industry's drive for increasing functional performance at a decreasing cost per function. Additionally, NOVACLAD is used to manufacture the Company's NOVAFLEX VHD and NOVACLAD HD product lines. NOVACLAD and NOVACLAD-based products accounted for $25.2 million or 21.5% of the Company's net sales in fiscal 1998. Through August 28, 1998, the Company had invested approximately $65.6 million in an advanced new production facility in Longmont, Colorado to produce VIAARRAY and VIATHIN products in commercial volumes. As of November 1995, the Company anticipated investing approximately $38 million in the Longmont Facility. Changes in the product characteristics of high density substrates relating to precious metal plating, solder mask overcoat and testing, plus the installation of assembly equipment not originally anticipated, significantly increased the original investment to bring the Longmont Facility on line. Recent purchases of land and equipment needed to increase originally anticipated capacity also contributed to the total investment in the Longmont Facility. The Company originally expected to commence production in the Longmont Facility in April 1996. However, the realization of full volume production has been delayed, initially due to late deliveries of certain production equipment as a result of financial difficulties of a supplier, Micro Plating Systems, Inc., as well as a longer than anticipated installation period and more recently due to a far more rigorous and lengthy process qualification and product acceptance (validation) by the Company's customers and their customers. During the last eighteen months, the Company has identified additional equipment suppliers so that the design and delivery of future key production equipment can be improved. As of the date hereof, Texas Instruments and Vitesse Semiconductor have qualified VIATHIN substrates for their operations. Shipments of small volume production orders have begun and 13 the Company expects that their initial orders will lead to larger orders from these and other customers as demonstrated by new designs and prototype orders currently in process from these and other customers. The adverse financial impact with respect to developing the Micro Products business has been and will continue to be significant. In 1998, the Micro Products business resulted in a pretax loss prior to restructuring costs and impairment charges of $19.4 million as compared with a $15.5 million and $6.0 million loss in 1997 and 1996, respectively. Such significant losses are expected to continue until efficient volume production and related sales revenue is achieved. As of October 30, 1998, the Longmont Facility is operating at less than 5% of stated production capacity with projected breakeven at 45% of factory utilization or some $24 million to $26 million of annual revenue of ViaThin and ViaArray products. Breakeven volume at Longmont is not expected until the fourth quarter of fiscal 1999 at the earliest, and the fourth quarter of fiscal 2000 at the latest. During this lengthy qualification period, the Company has been working with leading customers, including original equipment manufacturers - Hewlett Packard, Texas Instruments, Motorola, and Vitesse Semiconductor and IC package assemblers - ASAT, Hana, Amkor and Abpak in the design, manufacture, assembly and qualification of both ball-grid array and chip scale packages. The Company believes that the market drive for increased electronic interconnections will continue and Sheldahl's product offering and production capacity is well positioned to grow with this market. RECENT DEVELOPMENTS SERIES B PREFERRED CONVERSION AND REDEMPTION. On August 27, 1997, the Company entered into an agreement with five accredited investors for the issuance of $30 million of 5% cumulative convertible preferred stock. The $30 million 5% cumulative preferred stock private placement consisted of two tranches of $15 million each. The first tranche, Series B, was closed August 29, 1997. The second tranche, Series C, was not funded. The Series B Preferred Stock consisted of 15,000 shares at a stated value of $1,000 per share. The conversion price of each share was at the lower of 110% of the closing bid price ($25.34), on August 27, 1997, or 101% of the lowest five-day average bid price on the Company's Common Stock in the 30 trading days immediately prior to conversion. Proceeds of the Series B Preferred Stock were applied principally towards the development of the Longmont Facility for the Company's Micro Products business. At August 28, 1998, 7,350 of the 15,000 Series B Preferred shares and related accrued dividends had been converted into 575,149 shares of common stock. The accrued dividends due at conversion were paid to the holders in shares of Common Stock at the applicable conversion price. The average conversion price through August 28, 1998 was $13.08 per share. Subsequent to year-end and through October 30, 1998, the Company received conversion notices representing 6,737 shares of Series B Preferred Stock. These conversions were handled as follows: 5,762 Series B Preferred shares plus accrued dividends were converted into 1,230,178 shares of the Company's Common Stock; 623 preferred shares were redeemed with cash payments totaling $837,000, including accrued dividends; and 352 Series B Preferred shares require shareholder approval before the Company can issue the related shares of Common Stock. This is due to certain Nasdaq rules stating that the Company is not permitted to issue greater than 20% of the then outstanding shares of the Company's Common Stock at the time of issuance of the Series B Preferred without shareholder approval. The Company is seeking shareholder approval at its annual meeting to convert these shares. As of October 30, 1998, the Company has 10,890,792 shares of Common Stock, 352 shares of Series B Preferred Stock awaiting shareholder approval for conversion into related shares of Common Stock and 913 additional shares of Series B Preferred Stock outstanding. The estimated redemption value as of October 30, 1998 of the 913 Series B Shares outstanding is $2.0 million. The Company will be seeking shareholder approval via its proxy statement at its annual shareholder meeting on January 13, 1999 to allow it to issue additional shares of Common Stock for future conversions of the outstanding Series B shares. MARKET ACTIVITY IN COMPANY STOCK. On September 21, 1998, a group of investors comprised of Irwin L. Jacobs, Daniel T. Lindsay, Dennis M. Mathisen and Marshall Financial Group, Inc. (the "Reporting Persons") filed with the Securities and Exchange Commission a Schedule 13D reporting their beneficial ownership of an aggregate of 780,100 shares of the Company's Common Stock, 292,683 shares of Common Stock issuable upon conversion of the Company's Series D Preferred Stock and 18,000 shares of Common Stock issuable upon exercise of warrants, in aggregate representing approximately 10.94% of the outstanding shares of the Company's Common Stock. Item 4 of the Schedule 13D states that the Reporting Persons acquired the Common Stock described above in order to obtain an equity position in the Company. In addition, the Schedule 13D states that the Reporting Persons intend to monitor the Company's performance and may explore the feasibility of, and strategies for, seeking control of the Company through various different means. Any activity in the Company's Common Stock, such as that described above is subject to the anti-takeover provisions in the Company's Articles of Incorporation and the Minnesota Business Corporation Act as well as the Company's Rights Agreement. On October 20, 1998, the Company announced that it had named Dennis Mathisen, Chairman, President and CEO of Marshall Financial Group, to its Board of Directors. Further, Mr. Mathisen and the members of the original 13D filing group have now agreed to support the Company's management in the implementation of its business plan and pursuit of business opportunities, and have indicated they have no intent to pursue the control actions of the September 13D filing. As a result of Mr. Mathisen's board appointment, Mr. Jacobs and Mr. Lindsay have removed themselves from the 13D filing group by amendment. 14 EXECUTIVE MANAGEMENT RESTRUCTURING. On September 17, 1998, the Company announced effective January 13, 1999, that the Board of Directors has elected James E. Donaghy as Chairman and Edward L. Lundstrom, President, to the additional position of Chief Executive Officer. Mr. Donaghy will replace James S. Womack, who will leave the Board in accordance with the Company retirement policy for directors. Mr. Lundstrom is also a nominee to the Board of Directors. INTRODUCTION OF NOVAFLEX VHD. On September 2, 1998, the Company introduced its new NOVACLAD-based Novaflex VHD (very high density) product, a new flexible circuit technology that allows product designs that accommodate the electronics industry's drive toward miniaturization, which requires circuitry with ever-smaller vias (holes) and spaces for the greatest possible density and performance. Novaflex VHD, which is available in prototype and production quantities, can be provided with industry standard soldermask materials and surface finishes to accommodate all end products and assembly needs. Novaflex VHD is leading-edge technology that meets the needs of several market segments including computers, disc drives, LCDs, telecommunications, and medical. Novaflex VHD will be manufactured in part at the Company's Longmont, Colorado and Northfield, Minnesota facilities. On October 6, 1998, the Company received its first volume order for Novaflex VHD from Seagate Technology. The initial applications are utilized in Seagate's award winning Cheetah disc drive, for which the Company has received a long-term production contract which is expected to be worth $10 million per year in revenue by fiscal 2000. GENERAL MOTORS STRIKE. The strike and work stoppages by General Motors workers during fiscal 1998 has had a material adverse effect generally on the automotive industry and the suppliers thereto. The Company estimates that the strike has reduced its fiscal 1998 fourth quarter revenue by approximately $2.0 million. SERIES D PREFERRED STOCK AGREEMENT. On July 30, 1998, the Company issued 32,917 shares of Series D Convertible Preferred Stock with a total stated value of $32,917,000. This Series D Preferred Stock carried a 5% dividend rate and is convertible to approximately 5.4 million shares of Common Stock at a fixed rate of $6.15. The holders of the Preferred Shares were also issued 329,170 Warrants to purchase the Company's Common Stock at a price of $7.6875 per share. These Warrants expire July 29, 2001. Net proceeds from the Series D Preferred Stock were $32,409,000. The proceeds were used to repay various debt obligations and provide needed liquidity. NEW BANK AGREEMENT. In June 1998, the Company executed a new credit agreement, which completely replaces the Company's prior credit facilities. The new agreement provides three separate facilities: a revolver facility of up to $25 million based on the Company's working capital; a term facility for $16 million based on the appraised value of the Company's unencumbered equipment; and a bridge facility for $19 million. The bridge facility was repaid in full on July 31, 1998 with part of the net proceeds from the Series D Preferred Stock. Interest on the revolver and the term facility is charged at the base rate, which was 8.5% as of August 28, 1998. As of August 28, 1998, the amount available to borrow on the revolver was $10.5 million based on a $16.6 million borrowing base on the working capital revolver. Under the agreement, the Company issued 5-year warrants to purchase in the aggregate 100,000 shares at a price of $6.92 per share. The term loan calls for interest only payments until January 1, 1999, when monthly principal payments of $205,000 begin. All unamortized term facility amounts are due May 31, 2001. The revolving facility requires monthly interest payments and is due May 31, 2001. The agreement contains certain covenants that restrict the payments of cash dividends, capital expenditures, redemption of preferred stock, maintenance of certain levels of net worth and net income, maintenance of certain levels of cash flows from operations and requires the Company to raise additional equity capital. The Company is required to raise additional equity capital of $5 million by February 26, 1999 and another $5 million of equity capital by August 27, 1999. In the event the Company is unable to raise the capital, the Company would be in technical default under its credit and security agreement enabling the Company's lenders to require immediate repayment of the borrowings under the credit and security agreement. SECURED REAL ESTATE MORTGAGE. As of November 25, 1998, the Company amended the terms and conditions of its note payable loan to an insurance company. The amended agreement requires principal payments of $500,000 due December 1, 1998, $250,000 due January 1, 1999, $250,000 due February 1, 1999 and $60,000 each month beginning March 1, 1999. The interest rate charged on this note will be 10% effective December 1, 1998 and will increase monthly to 15% effective May 1, 1999. The agreement requires certain covenants that restrict the payment of cash dividends, total corporate debt, sales of corporate assets, capital expenditures and requires the Company to maintain certain levels of net worth and cash flows. 15 RESULTS OF OPERATIONS Fiscal 1998 was the most difficult year in the Company's history. The Micro Products business has yet to achieve a sufficient market position to effectively utilize the Company's Longmont Facility. Continued product qualification issues with our customers delayed production at Longmont and anticipated business, which did not come to fruition, combined with strikes in the automotive industry, also hampered sales growth and performance of the Company. During the second and third quarters of fiscal 1998, as part of implementing changes due to the culmination of a business process redesign, or business re-engineering, and as an assessment of the Company's production capacity, the Company recorded $8.5 million in restructuring charges: $4.0 million to eliminate over 73 salaried positions from the corporate workforce in Northfield, Minnesota, and $4.5 million to reduce 76 production positions from Northfield, Minnesota and 160 production positions from Aberdeen, South Dakota, and to close the Company's Aberdeen, South Dakota assembly facility. Also during the third quarter, the Company recorded $3.3 million of impairment charges relating primarily to equipment at the Longmont Facility which is no longer expected to contribute to the Company's future cash flows. The Company's income statement also reflected the early adoption of Statement of Position 98-5, "Reporting on the Costs of Start up Activities" resulting in a charge of $5.2 million. The Company also provided a $3.0 million allowance for the Company's deferred tax assets. The following table shows the percentage of net sales represented by certain line items from the Company's consolidated statements of operations excluding the aforementioned restructuring asset impairment, cumulative effect of change in method of accounting and tax provision of a deferred tax valuation allowance for the periods indicated:
Fiscal Years Ended August 28, August 29, August 30, 1998 1997 1996 ---- ---- ---- Net sales 100.0% 100.0% 100.0% Cost of sales 93.2% 90.2% 78.1% ------ ------ ------ Gross profit 6.8% 9.8% 21.9% ------ ------ ------ Expenses: Sales and marketing 8.4% 9.1% 8.1% General and administrative 7.0% 6.5% 4.5% Research and development 3.3% 4.5% 2.4% Interest 2.2% 1.2% .5% ------ ------ ------ Total expenses 20.9% 21.3% 15.5% ------ ------ ------ Income (loss) before income taxes, restructuring costs, impairment charges, and cumulative effect of change in method of accounting (14.1%) (11.5%) 6.4% ------- ------- ---- ------- ------- ----
The table below shows, for the periods indicated, the Company's sales to various markets (in thousands):
Fiscal Years Ended August 28, 1998 August 29, 1997 August 30, 1996 --------------- --------------- --------------- Amount % Amount % Amount % ------ - ------ - ------ - Automotive $80,365 68.7% $71,026 67.5% $78,984 69.2% Datacom 15,463 13.2% 12,529 11.9% 11,193 9.8% Aerospace/Defense 10,030 8.5% 9,201 8.7% 10,585 9.3% Industrial 7,451 6.4% 8,046 7.6% 8,843 7.7% Consumer 3,736 3.2% 4,464 4.3% 4,515 4.0% ------- ------ ------- ------ ------- ------ Net sales $117,045 100.0% $105,266 100.0% $114,120 100.0% -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
16 The Company's net sales increased $11.8 million, or 11.2%, from $105.3 million in fiscal year 1997 to $117.0 million in fiscal year 1998. Sales to the automotive market recovered from the 1997 decline but were impacted by the General Motors strike. The Company estimates that lost sales due to the strike was $2.0 million in the fourth quarter of fiscal 1998. Sales to the datacom market increased $2.9 million, or 23%, from $12.5 million in fiscal 1997 to $15.5 million in fiscal 1998. The increased sales was due to more HD NOVAFLEX products being shipped to these customers from the Company's Northfield circuit operation, as well as a $685,000, or 291%, increase in Micro Products VIATHIN shipments. In recent years, the Company focused its attention on the automotive market as the Company's adhesive based laminates were more suited to automotive applications. However, interconnect systems made with high-density NOVAFLEX, originally sold for engine control units in the automotive market, meet the requirements for computer and telecommunication applications. Therefore, the Company targets significant growth in the datacom market from not only its Micro Products VIAARRAY and VIATHIN, but also its Interconnect products, high-density NOVAFLEX HD and VHD, which is sold to meet the demands of this market. Fiscal 1998 marked the beginning of this marketing development. The recent announcement of the Seagate Cheetah program for high-end disc drives supports this trend for increased sales of these product lines into the datacom market. The Company's other markets in total declined marginally from $21.7 million in fiscal 1997 to $21.2 million in fiscal 1998. The table below shows, for period indicated, the Company's sales by business units (in thousands):
Fiscal Years Ended August 28, 1998 August 29, 1997 August 30, 1996 --------------- --------------- --------------- Amount % Amount % Amount % ------ - ------ - ------ - Interconnects $87,407 74.7% $77,004 73.2% $86,146 75.6% Materials 28,595 24.4% 27,904 26.5% 27,809 24.3% Micro Products 1,043 .9% 358 .3% 165 .1% ------- ------ ------- ------ ------- ------ Net sales $117,045 100.0% $105,266 100.0% $114,120 100.0% -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Interconnect sales increased $10.4 million, or 13.5%, due to more shipments of HD Novaflex products to the automotive and datacom markets. HD NOVAFLEX products account for sales of $23.5 million, $13.0 million, and $13.3 million in fiscal years 1998, 1997, 1996, respectively. In fiscal 1998, Material sales increased $691,000 over fiscal 1997 as shipments of vacuum deposited materials improved. For 1998, Micro Products sales were $1 million, representing small production shipments and sales of pre-qualification product of the Company's VIATHIN IC substrate product. COST OF SALES/GROSS PROFIT. During fiscal 1998, the Company's gross profit declined $2.4 million, or 23%, from $10.3 million in fiscal 1997 to $7.9 million in fiscal 1998. Although sales increased $11 million, gross margin for the Company's Northfield operations increased only $426,000, impacted by product mix and higher factory expenses. Higher factory costs were incurred in expectation of significant additional business. This additional expected business did not materialize when Compaq Computer acquired Digital Equipment and the Company's order was placed on hold. Offsetting these gains in gross margin was a $2.9 million increase in Longmont's factory expenses. Depreciation and other fixed costs accounted for this increase. During fiscal 1997, gross profit declined $14.6 million, or 59%, from $24.9 million in fiscal 1996 to $10.3 million in fiscal 1997. The Company's Micro Products operation accounted for $7.1 million of this decline and the Company's other businesses accounted for $7.5 million. Increased factory expenses at the Micro Products facility accounted for $7.1 million of the decrease in gross profit. Depreciation increased $2.8 million and salaries and other operating expenses increased $4.3 million as the Micro Products business continued to improve its production processes and make ready for full production. Gross margin for the core businesses declined $7.5 million. Lower sales, less favorable product mix, and higher factory expenses accounted for the change. Depreciation and other equipment-related costs account for the increase in expenses. Funding received by the Company from the ARPA consortium is reflected as a reduction to cost of sales and totaled $0, $75,000 and $1.8 million in fiscal years 1998, 1997 and 1996, respectively. The awarding of these funds was based on the completion of various milestones, including process validation for each essential process in the production of chip-carrier substrates for IC packages using the Company's patented NOVACLAD material. The Company is not expected to incur any future costs that will be reimbursed by ARPA, and the Company has completed its obligations under the consortium agreement. 17 SALES AND MARKETING EXPENSES. Sales and marketing expenses increased $301,000, or 3%, in fiscal 1998 and $306,000, or 3%, in fiscal 1997. As a percentage of net sales, sales and marketing expenses were 8% in fiscal 1998, 9% in fiscal 1997, and 8% in fiscal 1996. Staffing increases for the Micro Products business, as well as professional fees and travel costs associated with the Company's foreign marketing efforts and the establishment of a Hong Kong branch, account for the 1998 increase in expenses. GENERAL AND ADMINISTRATIVE EXPENSES. Gross general and administrative expenses increased $1.3 million, or 19%, to $8.2 million in fiscal 1998 and $1.4 million, or 27%, to $6.8 million in fiscal 1997. ARPA credits applied to general and administrative expenses were $265,000 in fiscal year 1996. In 1997 and 1998, no ARPA credits were offset against general and administrative expenses. This resulted in net general and administrative expenses of $8.2 million, $6.8 million and $5.1 million in fiscal years 1998, 1997 and 1996, respectively. In 1998, the increase in general and administrative expenses was due to depreciation and maintenance expense of the computer network systems. In 1997, the increase in general and administrative expenses was due to increased staffing and related expenditures working to enhance the Company's information technology. Fiscal 1996 expenses reflect increases in professional services, miscellaneous employee benefits, and incentive compensation expense. The Company's general and administrative expenses should increase in fiscal 1999 reflecting the depreciation on the Company's new Enterprise Resource Planning (ERP) system. The Company has committed significant resources to completely renewing its information technology systems, converting from mainframe technologies to open-architecture client/server technologies. This strategic change is being driven by anticipated gains from information technology improvements needed to manage the Company's expected sales growth and, secondarily, to address Year 2000 compliance issues. RESEARCH AND DEVELOPMENT EXPENSES. Gross research and development expenses declined $1.1 million, or 21%, in fiscal 1998 to $4.1 million. ARPA credits applied to research and development expenses were $227,000, $509,000 and $1.3 million in fiscal years 1998, 1997 and 1996. This resulted in net research and development expenses of $3.9 million, $4.7 million and $2.8 million in fiscal years 1998, 1997 and 1996, respectively. The table below shows, for the periods indicated, the Company's research and development expenses (in thousands):
Fiscal Years Ended August 28, August 29, August 30, 1998 1997 1996 ---- ---- ---- Gross expense $ 4,108 $ 5,214 $ 4,010 ARPA funding (227) (509) (1,255) ------- ------- ------- Net expense $ 3,881 $ 4,705 $ 2,755 ------- ------- ------- ------- ------- ------- Percent of sales 3.3% 4.5% 2.4%
Fiscal 1998's decline in research and development expense was due to completing the Company's research effort in support of the Company's VIAARRAY and VIATHIN products. The 1997 increase in gross research and development expenses in these periods was due to additional staffing, material testing, travel, and consulting and professional costs supporting the start-up of the Company's Micro Products business and related ARPA consortium milestones. No additional ARPA funding is expected because consortium objectives have been met. Also, the Company does expect its research and development expenses to decline further in fiscal 1999. INTEREST EXPENSE. Gross interest expense increased to $4.5 million in fiscal 1998 from $3.0 million in fiscal 1997 and $2.4 million in fiscal 1996, as the Company increased borrowings to support capital expenditures and to fund operating losses. 18 The following shows a breakdown of interest expense for the fiscal years indicated (in thousands):
Fiscal Years Ended August 28, August 29, August 30, 1998 1997 1996 ---- ---- ---- Gross interest $ 4,450 $ 3,033 $ 2,388 Capitalized interest (1,903) (1,735) (1,605) Investment income - - (244) ------- ------- ------- Net expense $ 2,547 $ 1,298 $ 539 ------- ------- ------- ------- ------- ------- Percent of sales 2.2% 1.2% .5%
Capitalized interest increased to $1.9 million in fiscal 1998 from $1.7 million in fiscal 1997 and $1.6 million in fiscal 1996. The Company anticipates lower capitalized interest in fiscal 1999 as it completes current capital programs and reduces capital spending. RESTRUCTURING COSTS. In February 1998, a restructuring charge of $4.0 million was recorded related to the culmination of the Company's business process, or business re-engineering, initiative that began two years ago. Due to significant productivity benefits resulting from the initiative, the Company is reducing the size of its salaried workforce. The resulting workforce reduction involves layoffs, early retirement offerings, reassignments and reclassifications of positions. The restructuring costs provide for approximately $2.5 million for severance and early retirement salary costs, approximately $1.3 million for medical, dental and other benefits being provided to the affected individuals, and approximately $0.2 million for outplacement and other costs. Approximately 73 jobs will be affected. In May 1998, an additional restructuring charge of $4.5 million was recorded. This restructuring charge relates to the closing of the Company's Aberdeen, South Dakota assembly facility and reducing its Northfield production workforce. The restructuring costs provide for approximately $1.5 million for severance costs, approximately $0.4 million for medical, dental and other benefits being provided to the affected individuals and approximately $2.6 million for equipment disposal, losses related to the closure of the Aberdeen facility, outplacement and other costs. Approximately 236 jobs will be affected. Both restructuring charges were related to the Company's efforts to decrease cost and increase throughput. As of August 28, 1998, approximately $875,000 had been charged to the Company's restructuring reserves and by October 1, 1998, 270 employees have terminated employment with the Company. IMPAIRMENT CHARGES. During May 1998, a non-cash impairment charge of $3.3 million was recorded against the Company's statement of operations. This charge relates to equipment, located principally at the Company's Longmont, Colorado facility which, based upon analysis by management and anticipated production processes, is not expected to contribute to the Company's future cash flows. INCOME TAXES. In May 1998, based upon recent restructuring, 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. As a result, the Company 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. CHANGE IN METHOD OF ACCOUNTING. In fiscal 1998, the Company adopted Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities," which requires the expensing of these items as incurred, versus capitalizing and expensing them over a period of time. Start-up activities are broadly defined and include one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer or beneficiary, initiating a new process in an existing facility, commencing some new operation, and organizing a new entity. The adoption of this statement resulted in a cumulative effect of a change in method of accounting of approximately $5.2 million, primarily related to costs capitalized by the Company from its Longmont, Colorado facility. The adoption of this statement was applied retroactively to the beginning of fiscal 1998, and the Company's first and second quarters have been restated to reflect this change in method of accounting, in accordance with the provisions of SOP 98-5 and APB 20. The Company's depreciation and amortization expense is reduced by almost $0.5 million per quarter as a result of the adoption of reporting for start-up costs and the related write down of certain capitalized items, which was noted above. 19 FINANCIAL CONDITION. On June 19, 1998, the Company executed a new credit agreement, replacing the Company's prior credit facilities, with a group of lenders lead by Norwest Bank, N.A. as agent. The new agreement provides three separate facilities: a revolver facility of up to $25 million based on the Company's working capital; a term facility for $16 million based on the appraised value of the Company's unencumbered equipment; and a bridge facility for $19 million. The bridge loan was paid in full on July 31, 1998 from the proceeds of the Series D Preferred Stock Private Placement. Interest on the revolver and the term facility will be charged at the base rate. The agreement also calls for the issuance of 5-year warrants to purchase in the aggregate 100,000 shares of the Company's Common Stock at a price of $6.92 per share. The agreement contains certain covenants that restrict the payments of cash dividends, capital expenditures, maintain certain levels of net worth and net income, and maintain certain levels of cash flows from operations as defined. The Company is also required to raise additional equity capital of $5 million by February 26, 1999 and another $5 million of equity capital by August 27, 1999. In the event the Company is unable to raise the capital, the Company would be in technical default under its credit and security agreement enabling the Company's lenders to require immediate repayment of the borrowings under the credit and security agreement. As of August 28, 1998, the interest rate on the credit facility was 8.5% and the amount available to borrow was $10.5 million. As of November 25, 1998, the interest rate on the credit facility was 8.25% and the amount available to borrow was $5.3 million. As of November 25, 1998, the Company amended the terms and conditions of its note payable loan to an insurance company. The amended agreement requires principal payments of $500,000 due December 1, 1998, $250,000 due January 1, 1999, $250,000 due February 1, 1999 and $60,000 each month beginning March 1, 1999. The interest rate charged on this note will be 10% effective December 1, 1998 and will increase monthly to 15% effective May 1, 1999. The agreement requires certain covenants that restrict the payment of cash dividends, total corporate debt, sales of corporate assets, capital expenditures and requires the Company to maintain certain levels of net worth and cash flows. On July 30, 1998, the Company issued 32,917 shares of Series D Preferred Stock with a total stated value of $32,917,000. This Series D Preferred Stock carries a 5% dividend rate and is convertible to nearly 5.4 million Common Shares at a fixed rate of $6.15. The holders of the Preferred Shares were also issued 329,170 warrants to purchase the Company's Common Stock at a price of $7.6875 per share. Net proceeds from the Series D Preferred Stock were $32,409,000. The proceeds were used to repay the aforementioned $19 million bridge facility and other debt obligations, while improving the overall liquidity of the Company. On August 29, 1997, the Company issued to a group of investors (the "Investors") 15,000 shares of Series B Convertible Preferred Stock (the "Series B Preferred Stock") resulting in gross proceeds to the Company of $15,000,000. The Board of Directors authorized the sale of the Series B Preferred Stock in order to raise proceeds which were applied principally towards the development of the Longmont Facility for the Company's MicroProducts Business. The Series B Preferred Stock may be converted into shares of common stock from time to time at a conversion price equal to the lesser of (i) 110% of the average closing bid price for the five consecutive trading days immediately preceding August 29, 1997 (which was $25.34) and (ii) 101% of the average of the lowest closing bid prices for five consecutive trading days during the 30 consecutive trading days immediately preceding the date of conversion of the Series B Preferred Stock. In addition, the shares of Series B Preferred Stock accrue dividends at an annual rate of 5% which, at the Company's option, may be paid either in cash or in shares of common stock. As part of the investment, the investors also agreed to purchase shares of the Company's Series C Preferred Stock at an aggregate price of $15,000,000 such purchase to be made at the Company's option, provided the Company's stock traded above $12.00 per share through August 28, 1998. This option has expired without any shares of Series C Preferred Stock being purchased. Copies of the relevant documents for the sale of the Series B Preferred Stock were filed as exhibits to the Company's Report on Form 8-K on September 10, 1997. Rule 4460(i) of the Nasdaq Stock Market, Inc. (the "Nasdaq Rule") requires shareholder approval of the sale or issuance by a company listed on the Nasdaq National Market "of Common Stock (or securities convertible into or exercisable for Common Stock) equal to 20% or more of the Common Stock or 20% or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock." On August 29, 1997, the date the Series B Preferred Stock was issued (the "Closing Date"), there were 9,026,682 shares of the Company's Common Stock outstanding and one share less than 20% of such number of shares is 1,805,335. On the Closing Date, the Series B Preferred Stock was convertible into 651,155 shares of Common Stock, which was equal to 7.2% of the Company's then outstanding shares. Given the initial conversion price of the Series B Preferred Stock and the then current trading price of the Common Stock, the Company was not required to obtain shareholder approval for the issuance of the Series B Preferred Stock. Because the conversion price was a floating price, however, the conversion right of the Investors was structured so that at any time a conversion would comply with the Nasdaq Rule. 20 Accordingly, the Certificate of Designation (the "Certificate") governing the rights and preferences of the Series B Preferred Stock prohibits any conversion if the conversion price then in effect is such that the aggregate number of shares of Common Stock that would then be issuable upon conversion of all outstanding shares of the Series B Preferred Stock, not just those submitted for conversion by an Investor, when aggregated with all prior or concurrent conversions, would result in the issuance to all Investors of shares of Common Stock equal to 20% or more of the shares of the Company's Common Stock outstanding on the Closing Date. In other words, the Certificate requires the Company to look at any conversion as if all remaining shares of the Series B Preferred Stock are being converted and only then may the Company determine whether shareholder approval under the Nasdaq Rule is required. For this reason, one Investor could submit a conversion notice for a small number of shares and yet still trigger the overall 20% limitation of the Nasdaq Rule. In such an event, the terms of the Certificate provide that the Company may issue to any Investor submitting a conversion notice only its pro rata portion of the shares allowed to be issued pursuant to the Nasdaq Rule. With respect to any shares not issuable to an Investor submitting a conversion notice, the terms of the Certificate provide that the Company is obligated, at the option of the Investors, to either (i) obtain shareholder approval for the remaining unconverted shares of Series B Preferred Stock as contemplated by the Nasdaq Rule or (ii) redeem for cash that portion of the Series B Preferred Stock that could not be converted because of the limitation. During February 1998, the Investors collectively converted 7,350 shares of Series B Preferred Stock into 575,149 shares of Common Stock, including dividends payable in Common Stock. These conversions left 1,230,186 shares of Common Stock available for future conversions of the remaining 7,650 shares of the Series B Preferred Stock in compliance with the Nasdaq Rule. During September and October 1998, the Company received additional notices from all four of the remaining Investors requesting conversion of 6,114 shares of the Series B Preferred Stock in the aggregate. Because of substantial declines in the market price of the Company's Common Stock, the applicable conversion price for such conversions was reduced to approximately $4.91. Pursuant to the terms of the Certificate described above, in order to determine whether it could satisfy the conversions, the Company was required to calculate how many shares were issuable upon conversion at the $4.91 conversion price of all of the remaining 7,650 shares of the Series B Preferred Stock, not just of the 6,114 shares for which it received conversion notices. This calculation showed that the Company would need to issue to the Investors 1,642,063 additional shares in the aggregate to cover the remaining Series B conversions, including dividends payable in Common Stock, which would exceed the 1,230,186 shares available. Because of the limits of the Nasdaq Rule, the Company issued to the Investors only a portion of the shares for which they requested conversion. Three of the four investors have requested that the Company seek and obtain shareholder approval to issue the additional shares issuable from their conversion notices as well as for future conversions. In the event that the shareholders do not approve the issuance of such shares, the Company will be obligated to redeem such shares and pay interest on the redemption amount at an annual rate of 12%, dating back to the dates of the original conversion notices. The fourth Investor decided on October 20, 1998 to force the Company to redeem its 623 inconvertible shares of the Series B Preferred Stock resulting in a cash payment by the Company to such Investor of $836,997 on October 29, 1998. The redemption price for any inconvertible shares of the Series B Preferred Stock is a cash amount equal to (i) the highest average closing bid price for any five consecutive trading days during the period commencing on the date of conversion and ending on the date of payment by the Company of the full redemption price, multiplied by (ii) the ratio of the stated value of any shares of Series B Preferred Stock, including dividends accrued thereon, to the conversion price on the date notice of conversion is given. In the event that the Company fails for any reason to pay the redemption price on the conversion date, the Company will pay interest on such amount at an annual rate of 12%. Because the redemption price depends on the date on which the Company pays the redemption amount in full and such date is not known, the Company cannot determine at this time the amount it may have to pay to redeem any inconvertible shares of the Series B Preferred Stock. Under the redemption price calculation, however, any redemptions will be at a premium to the prevailing market price of the Company's Common Stock. Were it to use any of its available liquidity to redeem the inconvertible shares of the Series B Preferred Stock, the Company would not only take cash away from Company operations, but would also violate a covenant under the terms of the agreements the Company has with its lenders. Such violation of this covenant would result in a technical default enabling the Company's lenders to require immediate repayment of the borrowings under the credit and security agreement. In the event shareholder approval is not received, the Company will be required to redeem all of the outstanding preferred shares plus those shares converted but for which Common Stock has not been issued. The estimated redemption value as of October 30, 1998 is $2.0 million. The Company is requesting shareholder approval to issue the additional shares needed for the current and future conversions of the Series B Preferred Stock at its next annual meeting to be held on January 13, 1999. 21 CAPITAL RESERVES. Since fiscal 1995, the Company has invested significantly in new plant and equipment providing manufacturing capacity to deliver its patented NOVACLAD-Registered Trademark-based line of products to both existing and new customers. This included building and equipping a state-of-the-art facility in Longmont, Colorado, to manufacture substrates for integrated circuit (IC) packages. This capital expenditure was funded by a series of equity offerings commencing in June 1994 through August 1998, raising $92 million. The greater than expected period of time to achieve full product and market acceptance has generated greater losses from an under-utilized manufacturing facility and its supporting workforce. At the Longmont Facility, the Company manufactures VIAARRAY-Registered Trademark- and VIATHIN-Registered Trademark - both NOVACLAD-based substrates for IC packages, plus the Company's NOVAFLEX-Registered Trademark- VHD product targeted at the high-end disc drive market. Sheldahl received its initial volume order for the VHD product line from Seagate in October 1998. The Company expects the sales volume from NOVAFLEX-Registered Trademark- VHD, of which Seagate is a major customer, to exceed $5 million in fiscal 1999. As of October 30, 1998, the Longmont Facility is operating at less than 5% of stated production capacity with projected breakeven at 45% of factory utilization or some $24 million to $26 million of annual revenue of VIATHIN and VIAARRAY products. Breakeven volume at Longmont is not expected until the fourth quarter of fiscal 1999, at the earliest and the fourth quarter of fiscal 2000 at the latest. Overall, the Longmont manufacturing operation is estimated to have a $3.5 million negative impact on operating cash flow in fiscal 1999. Capital expenditures for the Company in fiscal 1999 are planned at $7 million, significantly reduced from past levels as production capacity is in place to meet customer and market demand. These expenditures will be principally for capital projects initiated late in fiscal 1997 including additional via-generation equipment, plating capacity and information system upgrades. Cash flow requirements to fund restructuring charges taken during fiscal 1998 are expected to be approximately $5.5 million in fiscal 1999 as employee severance and plant shut down costs are paid. Therefore, the overall cash flow from operations is expected to be minimal or negative over the first half of fiscal 1999 with borrowing levels increasing under the existing credit facility to fund both operations and the reduced levels of capital expenditures. During the second half of fiscal 1999, sales levels are projected to increase as greater production volume is generated at the Longmont facility covering an increasing portion of fixed costs and increasing cash flow thus reducing the growth in debt financing. There can be no assurance that the projected sales level during the second half of fiscal 1999 will be achieved. The new three-year credit agreement with a group of lenders lead by Norwest Bank, 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. As of August 28, 1998, the amount available to borrow on the revolver was $10.5 million based on a $16.6 million borrowing base on the working capital revolver. This borrowing base is expected to increase with sales growth and working capital expansion. The term facility of $16 million is fully borrowed as of the end of the fiscal year with monthly repayments of $205,000 starting January 1999. The interest rate on this facility was 8.5% at year-end. As of November 25, 1998, the interest rate on the credit facility was 8.25% and the amount available to borrow was $5.3 million. The impact of improving performance from the Company's Northfield operations along with reduced capital spending, a strengthened balance sheet from the new credit facility, and the proceeds from the Series D Preferred Stock should provide adequate liquidity to fund operations over the next nine to twelve months. Liquidity would significantly deteriorate if the anticipated improvement in the Company's Northfield operations is not realized or the ramp up of revenue from Micro Products extends beyond the third quarter of fiscal 1999. Management believes with planned operating improvements that the Company has adequate liquidity to provide uninterrupted support for its business operations during fiscal 1999. Nevertheless, the Company is in the process of seeking additional debt or equity capital to ensure the necessary capital to support the ongoing operations of the Company. This is based on the uncertainty of achieving expected improved operating results, including realizing significant sales growth in fiscal 1999 from the Company's Micro Products business, and is necessary to meet the covenants under the Company's credit and security agreement. The Company is required to raise additional equity capital of $5 million by February 26, 1999 and another $5 million of equity capital by August 27, 1999. In the event the Company is unable to raise the capital, the Company would be in technical default under its credit and security agreement enabling the Company's lenders to require immediate repayment of the borrowings under the credit and security agreement. If the Company does not achieve its projected operating results and/or it does not have borrowings available under its current credit and security agreement, management believes that it has options available to obtain necessary additional new capital, including the issuance of additional new debt or additional new equity financing. There can be no assurance that the Company will be successful in its attempt to issue additional debt or to raise additional capital on terms acceptable to the Company. Net working capital declined to $9.2 million in 1998 from $22.9 million in 1997. A decrease in the Company's cash holdings, combined with accruals for restructuring charges, and increased current maturities of long-term debt account for this decline. 22 Net capital expenditures for 1998, 1997 and 1996 were $23.3 million, $30.7 million and $24.9 million, respectively. During the three years, the Company invested approximately $34.4 million in Longmont's production equipment and facilities; $25.7 million in core business equipment and facilities; and $18.8 million in new technology systems benefiting all business groups. FOREIGN CURRENCY RISK. During fiscal 1998, the Company's exposure to foreign currency risk declined as two large programs were converted to the United States Dollar. The Company maintains a limited exposure to foreign currency risk with smaller programs contracted in British Sterling, German Marks and French Francs. These contracts and the exchange rate are reviewed periodically. As of August 28, 1998, the Company has no material contracts in any currency not mentioned above. Beginning January 1, 1999, the Euro, the new European currency, will be used commercially. As of August 28, 1998, none of the Company's customers or suppliers have suggested pricing any contracts in Euro. However, in order to remain competitive, the Company anticipates pricing certain contracts in Euro and has systems in place to support such contracts by converting foreign currency transactions to six decimal places. When warranted by the size of foreign currency contracts, the Company will use a variety of hedging techniques, including financial derivatives, to prudently reduce, but not eliminate, its exposure to foreign currency fluctuations. No such contracts existed as of August 28, 1998. NEW ACCOUNTING PRONOUNCEMENTS. During June 1997, the Financial Accounting Standards Board released SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires disclosure of business and geographic segments in the consolidated financial statements of the Company. The Company will adopt SFAS No. 131 in fiscal 1999 and is currently analyzing the impact it will have on the disclosures in its financial statements. During February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for fiscal years beginning after December 31, 1997. SFAS No. 132 revises certain of the disclosure requirements, but does not change the measurement or recognition of those plans. The adoption of SFAS No. 132 will result in revised and additional disclosures, but will have no effect on the financial position, results of operations, or liquidity of the Company. The Company will adopt SFAS No. 132 in fiscal 1999 and is currently analyzing the impact it will have on the disclosures in its financial statements. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and hedging Activities," effective for years beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. Special accounting for qualifying hedges allow a derivative's gains or losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified the impacts of adopting SFAS No. 133 and has not yet determined the timing or method of adoption. YEAR 2000 DISCLOSURE. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company's computer equipment, software, devices and products with imbedded technology that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a shut down in the Company's manufacturing operations, a temporary inability to process transactions, send invoices or engage in similar normal business activities. STATE OF READINESS. The Company has undertaken various initiatives to evaluate the Year 2000 readiness of the products sold by the Company ("Products"), the information technology systems used in the Company's operations ("IT Systems"), its non-IT systems, such as power to its facilities, HVAC systems, building security, voicemail and other systems, as well as the readiness of its customers and suppliers. The Company has identified eleven Year 2000 target areas that cover the entire scope of the Company's business and has internally established teams committed to completing an 8-step Compliance Validation Process ("CVP") for each target area. Each team is expected to fully complete this process on or before September 1, 1999. The table below identifies the Company's target areas as well as the 8-step CVP with its expected timeline. Although some Phase 2 remediation activities have been started or completed, most team activity is currently focused towards the process of completing Phase 1. 23
- ------------------------------------------------------------------------------------------------------------- YEAR 2000 TARGET AREAS COMPLIANCE VALIDATION PROCESS - ------------------------------------------------------------------------------------------------------------- 1. Business Computer Systems PHASE 1 2. Technical Infrastructure ------- 3. End-User Computing 1. Team Formation Expected Completion: 4. Manufacturing Equipment 2. Inventory Assessment 5. Test Lab 3. Compliance Assessment End of Q2 Fiscal 1999 6. Telecommunications 4. Risk Assessment 7. Research & Development 8. Logistics 9. Facilities 10. Customers 11. Suppliers/Key Service Providers ------------------------------------------------------------------- PHASE 2 ------- 5. Resolution/Remediation Expected Completion: 6. Validation 7. Contingency Plan End of Q4 Fiscal 1999 8. Sign-Off Acceptance - -------------------------------------------------------------------------------------------------------------
With respect to the Company's relationships with third parties, the Company relies both domestically and internationally upon various vendors, governmental agencies, utility companies, telecommunications service companies, delivery service companies and other service providers. Although these service providers are outside the Company's control, the Company has mailed letters to those with whom it believes its relationships are material and has verbally communicated with some of its strategic customers to determine the extent to which interfaces with such entities are vulnerable to Year 2000 issues and whether products and services purchased from or by such entities are Year 2000 ready. The Company is currently evaluating the sufficiency of the responses received from these third parties. The Company intends to complete follow-up activities, including but not limited to site surveys, phone surveys and mailings, with significant vendors and service providers as part of the Phase 2 validation. COSTS TO ADDRESS YEAR 2000 ISSUES. To date, the Company has not incurred any material expenditures in connection with identifying or evaluating Year 2000 compliance issues. The Company has incurred the majority of its costs from the recent installation of a business computer system consisting primarily of the Enterprise Requirements Planning (ERP) System as well as the opportunity cost of time spent by employees of the Company evaluating Year 2000 compliance matters generally. Because the Company did not accelerate the installation of the ERP System, it does not consider the costs related thereto to be charges for Year 2000 compliance. Presently, the Company does not have specific estimates for the cost of other upgrades and enhancements to its IT Systems but will provide such by the completion of Phase 1 when they are expected to be available. The Company does anticipate that these estimates will be reasonable and presently expects such to be within the Company's fiscal 1999 budget. At this time, the Company does not possess information necessary to estimate the potential financial impact of Year 2000 compliance issues relating to its non-IT Systems, Products, vendors, customers and other third parties. Such impact, including the effect of a Year 2000 business disruption, could have a material adverse impact on the Company's financial condition and results of operations. RISKS OF YEAR 2000 ISSUES. Because the Company is still in the discovery and evaluation phase of assessing its overall Year 2000 exposure, it cannot at this time state with certainty that the Year 2000 issues will not have a material adverse impact on its financial condition, results of operations and liquidity. Although the Company considers them unlikely, the Company believes that the following several situations, not in any particular order, make up the Company's "most reasonably likely worst case Year 2000 scenarios": 1. DISRUPTION OF A SIGNIFICANT CUSTOMER'S ABILITY TO ACCEPT PRODUCTS OR PAY INVOICES. The Company's significant customers are large, well-informed customers, mostly in the automotive field, who are disclosing information to their vendors that indicates they are well along the path toward Year 2000 compliance. These customers have demonstrated their awareness of the Year 2000 issue by issuing requirements of their suppliers and indicating the stages of identification and remediation which they consider adequate for progressive calendar quarters leading up to the century mark. The Company's significant customers, moreover, are substantial companies that the Company believes would be able to make adjustments in their processes as required to cause timely payment of invoices. Because of lengthy lead times in the industry, disruption of orders from the Company is not likely a problem. Any deliveries occurring in the first half of 2000 will be those resulting from orders placed in 1999, while any disruptions of the order process early in 2000 will concern deliveries made many months later, with adequate opportunity for correction (or manual handling) of the order process before the timing becomes critical. 24 2. DISRUPTION OF SUPPLY MATERIALS. Several months ago, the Company began an ongoing process of surveying its vendors with regard to their Year 2000 readiness and is now in the process of assessing and cataloging the first responses to the survey. Having revised its methods of inquiry in recent weeks, the Company is hopeful of receiving adequate responses from critical vendors and many non-critical vendors within the first two quarters of fiscal 1999. The Company expects to work with vendors that show a need for assistance or that provide inadequate responses, and in many cases expects that survey results will be refined significantly by such work. Where ultimate survey results show that the need arises, the Company will arrange for back-up vendors before the changeover date. 3. DISRUPTION OF THE COMPANY'S IT SYSTEMS. The Company is proceeding with a scheduled upgrade of its current hardware and software IT systems to state-of-the-art systems and such process has required Year 2000 compliance in the various invitations for proposals. Year 2000 testing is occurring as upgrades proceed and, in addition, will occur after all upgrades are complete, sometime during fiscal 1999. For this reason, the Company considers that disruption of its IT Systems is unlikely. 4. DISRUPTION OF THE COMPANY'S NON-IT SYSTEMS. The Company is currently conducting a comprehensive assessment of all non-IT systems, including among other things its manufacturing systems and operations, with respect to both embedded processors and obvious computer control. For some systems, upgrades are already scheduled and it is expected that the Phase 1 assessments will highlight by the end of the second quarter of fiscal 1999 any further remediation needs. Considering the nature of the equipment and systems involved, the Company expects that the timing of assessment to be such that it will be able to complete any remediation efforts on a reasonably short schedule, and in any case before arrival of the Year 2000. The Company also believes that, after such assessment and remediation, if any disruptions do occur, such will be dealt with promptly and will be no more severe with respect to correction or impact than would be an unexpected breakdown of well-maintained equipment. 5. DE-LISTING OF COMPANY AS A VENDOR TO CERTAIN CUSTOMERS. Several of the Company's principal customers, through the intermediary of an automotive industry information agency, have required updated reports in the form of answers to an extensive multiple-choice survey on the Company's Year 2000 compliance efforts. According to these customers, failure to reply to the readiness survey would have led to de-listing as a supplier at the present time, resulting in possible current inability to bid on procurements requiring deliveries two years or more in the future. Although the Company did respond to these reports on a timely basis, the substance of the Company's answers to the readiness surveys have placed it in a "red" or "danger" zone with respect to those customers' guidelines. One of the Company's two largest customers involved in the efforts of the independent audit agency had also already presented a survey directly to the Company, and as a result had arranged at its own expense for an independent audit of the Company's Year 2000 readiness. The independent audit agency had reported, in the third quarter of fiscal 1998, that although the Company's level of readiness placed it in the "red" or "danger" category, the Company (i) was proceeding rapidly with its evaluation and remediation efforts, (ii) was expected to reach the ultimate compliance goals of the survey in adequate time, and (iii) should not be considered a risk to the customer's sources of supply. As a result, the Company has not been de-listed as a supplier to that customer. Rather, the customer has merely scheduled monitoring meetings in the first and second quarters of fiscal 1999. The Company expects but cannot guarantee that responses from other customers will be similar. In addition, the Company does not know whether other customers' expectations will or will not be as stringent as those referred to above and whether the Company's current schedule will meet or exceed such expectations. CONTINGENCY PLANS. While the Company recognizes the need for contingency planning, it has not yet developed any specific contingency plans for potential Year 2000 disruptions. The aforementioned 8-step Compliance Validation Process, however, does include contingency planning by each team and such plans, as developed, will be carefully reviewed by the Company. The Company does anticipate developing contingency plans for its most critical areas, but details of such plans will depend on the Company's final assessment of the problem as well as the evaluation and success of its remediation efforts. Future disclosures will include contingency plans as they become available. 25 CHANGES IN PERSONNEL. A vice president of the Company who was responsible for the Company's Year 2000 compliance efforts, among other matters, left the Company in the fourth quarter of fiscal 1998. With respect to covering the Company's Year 2000 issues, the Company has replaced this former employee with a senior-level manager with an engineering background who is familiar with the technological issues and challenges involved with the Year 2000 and who has accepted both responsibility and authority for all aspects of the Company's compliance. Regarding the Year 2000, the Company's new Director of Information Technology, who serves as the Company's Year 2000 Compliance Manger, reports directly to the Company's Chief Financial Officer and works closely with legal and, where needed, technical advisors. 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 datacommunications markets are expected to continue, including development of new technologies, the introduction of new products, and the reduction of prices; (vi) the Company's ability to raise additional equity capital of $5 million by February 26, 1999 and another $5 million of equity capital by August 27, 1999 as required by its lenders; and (vii) interruptions in the Company's operations or those of any of its suppliers or major customers as such may be caused by problems arising from the Year 2000. The foregoing list should not be construed as exhaustive and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect the events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's Credit and Security Agreement described in Footnote 3 to the financial statements as well as in the Management Discussion and Analysis carries interest rate risk. Amounts borrowed under this Agreement are subject to interest charges at a rate equal to the lender's base rate. This is generally the prime rate. Should the lenders base rate change, the Company's interest expense will increase or decrease accordingly. As of August 28, 1998, the Company had borrowed approximately $22 million subject to interest rate risk. On this amount, a 1% increase in the interest rate would cost the Company $220,000 in additional gross interest cost on an annual basis. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements are listed under Item 14 of this report. Unaudited quarterly financial data for fiscal 1998 and 1997 is set forth in Note 11 to the Consolidated Financial Statements included with this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS None PART III Pursuant to General Instruction G(3) Registrant omits Part III, Items 10 (Directors and Executive Officers of Registrant), 11 (Executive Compensation), 12 (Security Ownership of Certain Beneficial Owners and Management) and 13 (Certain Relationships and Related Transactions), except that portion of Item 10 relating to Executive Officers of the Registrant, which is set forth in Part I of this report as a definitive proxy statement will be filed with the Commission pursuant to Regulation 14(a) within 120 days after August 28, 1998, and such information required by such items is incorporated herein by reference from the proxy statement. 26 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as a part of the report:
Form 10-K Page Reference -------------- 1. Consolidated Financial Statements Index to Consolidated Financial Statements F-1 Report of Independent Public Accountants F-2 Consolidated Balance Sheets as of August 28, 1998 and August 29, 1997 F-3 Consolidated Statements of Operations for the Fiscal Years Ended August 28, 1998, August 29, 1997, and August 30, 1996 F-4 Consolidated Statements of Changes in Shareholders' Investment for the Fiscal Years Ended August 28, 1998, August 29, 1997, and August 30, 1996 F-5 Consolidated Statements of Cash Flows for the Fiscal Years Ended August 28, 1998, August 29, 1997, and August 30, 1996 F-6 Notes to Consolidated Financial Statements F-7 2. Consolidated Financial Statement Schedules Form 10-K Description Page Reference - ----------- -------------- Schedule II - Valuation and Qualifying Accounts S-1
(b) Reports on Form 8-K The following documents or portions of documents heretofore filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are incorporated herein by reference: (1) Current Report on Form 8-K filed on August 18, 1998 and (2) Current Report on Form 8-K Filed on August 28, 1998. (c) Exhibits and Exhibit Index
Exhibit No. Description - ----------- ----------- 3.1 Amended and Restated Articles of Incorporation, incorporated by reference from Exhibit 3.1 of the Registrant's Form 10-Q for the quarter ended December 2, 1994. 3.2 Bylaws, as amended. 4.3 Rights Agreement dated as of June 16, 1996 and amended July 25, 1998 between the Company and Norwest Bank Minnesota, N.A., is incorporated by reference to Exhibit 1 to the Company's Form 8-A dated June 20, 1996 and Amendment No. 1 thereto dated July 30, 1998. 4.4 Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock, incorporated by reference from Exhibit 1 of Registrant's Form 8-A dated June 20, 1996. 27 4.5 Convertible Preferred Stock Purchase Agreement dated August 27, 1997, among the Registrant and Southbrook International investments, Ltd., HBK Cayman LP, HBK Offshore Fund Ltd., and Brown Simpson Strategic Growth Fund LP, incorporated by reference from Exhibit 4.1 of the Registrant's Form 8-K filed September 10, 1997. 4.6 Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock dated August 27, 1997, incorporated by reference from Exhibit 4.2 of the Registrant's Form 8-K filed September 10, 1997. 4.7 Form of Warrant dated August 25, 1997, incorporated by reference from Exhibit 4.3 of the Registrant's Form 8-K filed September 10, 1997. 4.8 Registration Rights Agreement dated August 27, 1997, among the Registrant and Southbrook International investments, Ltd., HBK Cayman LP, HBK Offshore Fund Ltd., and Brown Simpson Strategic Growth Fund LP, incorporated by reference from Exhibit 4.4 of the Registrant's Form 8-K filed September 10, 1997. 4.9 Convertible Preferred Stock Purchase Agreement among the Company and the Purchasers listed in Exhibit A thereto, incorporated by reference from Exhibit 4.1 of the Registrant's Form 8-K filed August 18, 1998. 4.10 Certificate of Designation, Preferences and Rights of Series D Convertible Preferred Stock, incorporated by reference from Exhibit 4.2 of the Registrant's Form 8-K filed August 18, 1998. 4.11 Form of Warrant issued to the Purchasers, incorporated by reference from Exhibit 4.3 of Registrant's Form 8-K filed August 18, 1998. 4.12 Registration Rights Agreement among the Company and the Purchasers listed in Exhibit A thereto, incorporated by reference from Exhibit 4.4 of Registrant's Form 8-K filed August 18, 1998. 4.13 Agreement Relating to Sheldahl between Molex Incorporated and the Registrant dated November 18, 1998. 10.1 1987 Stock Option Plan, incorporated by reference from Exhibit 10.1 of the Registrant's Form 10-K for the fiscal year ended August 27, 1993. 10.2 1994 Stock Option Plan, as amended, incorporated by reference from Exhibit 4.1 of the Registrant's Form S-8 dated March 2, 1998 (File No. 333-47183). 10.3 Employee Stock Purchase Plan, incorporated by reference from Exhibit 4.1 of the Registrant's Form S-8 filed November 21, 1997 (File No. 333-40719). 10.4 Credit and Security Agreement dated June 19, 1998, among the Registrant, Norwest Bank Minnesota, N.A., Harris Trust and Savings Bank, NBD Bank, N.A., and The CIT Group/Equipment Financings, Inc., incorporated by reference from Exhibit 10.1 of the Registrant's Form S-3 dated July 1, 1998 (File No. 333-58307). 10.4.1 First Amendment to Credit and Security Agreement dated November 25, 1998, among the Registrant, Norwest Bank Minnesota, N.A., Harris Trust and Savings Bank, NBD Bank, N.A., and the CIT Group/Equipment Financing, Inc. 10.5 Form of Warrant issued in connection with Credit and Security Agreement dated June 19, 1998, among the Registrant, Norwest Bank Minnesota, N.A., Harris Trust and Savings Bank, NBD Bank, N.A., and The CIT Group/Equipment Financings, Inc., incorporated by reference from Exhibit 10.2 of the Registrant's Form S-3 dated July 1, 1998 (File No. 333-58307). 10.6(*) Limited Liability Company Agreement of Modular Interconnect Systems, L.L.C., dated July 28, 1998, without exhibits, incorporated by reference from Exhibit 10.1 of the Registrant's Form 8-K filed August 28, 1998. 10.7 Loan Agreement, dated February 26, 1998, between the Company and Relational Funding Corporation, incorporated by reference from Exhibit 10.1 of the Company's Report on Form 10-Q filed April 13, 1998. 10.8 Promissory Note dated February 26, 1998, between the Company and Relational Funding Corporation, incorporated by reference from Exhibit 10.2 of the Company's Report on Form 10-Q filed April 13, 1998. 28 10.9 Consulting Agreement dated August 17, 1988 between James S. Womack and Sheldahl, Inc. incorporated by reference from Exhibit 10.2 of the Registrant's Form 10-K for the fiscal year ended August 27, 1993. 10.10 Form of Employment (change of control) Agreement for Executive Officers of the Registrant, incorporated by reference from Exhibit 10.4 of the Registrant's Form 10-K for the fiscal year ended August 30, 1996. 10.10.1 Form of Amendment No. 1 to Employment (change of control) Agreement for Executive Officers of the Registrant. 10.11 Employment (change of control) Agreement between James E. Donaghy and the Registrant dated March 1, 1988, as amended August 21, 1996, incorporated by reference from Exhibit 10.5 of the Registrant's Form 10-K for the fiscal year ended August 30, 1996. 10.12 Supplementary Executive Retirement Plan Agreement between the Registrant and James E. Donaghy dated November 5, 1996. 10.13 Lease dated June 15, 1989 between Aberdeen Development Corporation and the Registrant, incorporated by reference from Exhibit 10.13 of the Registrant's Form 10-K for the fiscal year ended August 27, 1993. 10.14 Loan Authorization dated October 1, 1994 between South Dakota Board of Economic Development Registrant, incorporated by reference from Exhibit 10.1 of the Registrant's Form 10-Q for the quarter ended February 25, 1994. 10.15 Agreement Relating to Employment dated October 1, 1994 between the South Dakota Board of Economic Development and the Registrant, incorporated by reference from Exhibit 10.2 of the Registrant's Form 10-Q for the quarter ended February 25, 1994. 10.16 Promissory Note dated October 4, 1993 due to the South Dakota Board of Economic Development, incorporated by reference from Exhibit 10.3 of the Registrant's Form 10-Q for the quarter ended February 25, 1994. 10.17 Note Purchase Agreement dated as of August 31, 1995 between the Registrant and Northern Life Insurance Company, incorporated by reference to Exhibit 10.19 to Registrant's Form 10-K for the fiscal year ended September 1, 1995. 10.17.1 Waiver and Amendment with Addendum to the Note Purchase Agreement between the Registrant and Northern Life Insurance Company dated November 25, 1998. 10.18 Agreement dated January 10, 1994 between the MCM-L Consortium and the Advanced Projects Research Agency, incorporated by reference from Exhibit 10.4 of the Registrant's Form 10-Q for the quarter ended February 25, 1994. 10.19 Articles of Collaboration dated November 30, 1993 for the MCM-L Consortium, incorporated by reference from Exhibit 10.5 of the Registrant's Form 10-Q for the quarter ended February 25, 1994. 10.20 Agreement relating to Joint Venture dated August 1, 1995 between Registrant, Jiangxi Changjiang Chemical Plant, Hong Kong Wah Hing (China) Development Co., Ltd. and Jiujiang Flex Co., Ltd. incorporated by reference from Exhibit 10.23 of the Registrant's Form 10-K for the fiscal year ended September 1, 1995. 10.21 Agreement relating to payments dated August 1, 1995 between Registrant and Jiangxi Changjiang Chemical Plant, Hong Kong Wah Hing (China) Development Co., Ltd. and Jiujiang Flex Co., Ltd. incorporated by reference from Exhibit 10.24 of the Registrant's Form 10-K for the fiscal year ended September 1, 1995. 10.22 Manufacturing Agreement dated August 1, 1995 between Registrant and Jiujiang Flex Co., Ltd. incorporated by reference from Exhibit 10.25 of the Registrant's Form 10-K for the fiscal year ended September 1, 1995. 10.23 Marketing and License Agreement dated August 1, 1995 between Registrant and Jiujiang Flex Co., Ltd. incorporated by reference from Exhibit 10.26 of the Registrant's Form 10-K for the fiscal year ended September 1, 1995. 10.24 Technology Development Agreement dated August 15, 1995 between Low Cost Flip Chip Consortium and the Advanced Projects Research Agency incorporated by reference from Exhibit 10.27 of the Registrant's Form 10-K for the fiscal year ended September 1, 1995. 29 10.25 Articles of Collaboration dated July 10, 1995 for the Low Cost Flip Chip Consortium incorporated by reference from Exhibit 10.28 of the Registrant's Form 10-K for the fiscal year ended September 1, 1995. 10.26 Technology Development Agreement dated March 23, 1995 between Plastic Packaging Consortium and the Advanced Projects Research Agency incorporated by reference from Exhibit 10.29 of the Registrant's Form 10-K for the fiscal year ended September 1, 1995. 10.27 Articles of Collaboration dated March 17, 1995 for the Plastic Packaging Consortium incorporated by reference from Exhibit 10.30 of the Registrant's Form 10-K for the fiscal year ended September 1, 1995. 10.28 License Agreement dated June 20, 1994 between Sidrabe and Registrant incorporated by reference from Exhibit 10.31 of the Registrant's Form 10-K for the fiscal year ended September 1, 1995. 10.28.1 Amendment No. 1 to License Agreement dated June 20, 1994 between Sidrabe and the Registrant. 11 Statement Regarding Computation of Per Share Earnings. 22 Subsidiary of Registrant. 23 Consent of Independent Public Accountants. 27 Financial Data Schedule (*) Certain portions of this Exhibit have been deleted and filed separately with the Commission pursuant to a request for confidential treatment under Rule 24b-2. Spaces corresponding to the deleted portions are represented by brackets with asterisks.
30 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: November 25, 1998 SHELDAHL, INC. By: /s/ James E. Donaghy ----------------------------------------- James E. Donaghy, Chief Executive Officer By: /s/ Edward L. Lundstrom ----------------------------------------- Edward L. Lundstrom, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant on November 25, 1996 and in the capacities indicated. (Power of Attorney) Each person whose signature appears below constitutes and appoints James E. Donaghy and John V. McManus as such person's true and lawful attorneys-in-fact and agents, each acting alone, with full power of substitution and resubmission, for such person and in such person's name, place and stead, in any and all capacities, to sign any of all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, each acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all said attorneys-in-fact an agents, each acting alone, or such person's substitute or substitutes may lawfully do or cause to be done by virtue thereof. By /s/ James S. Womack Chairman of the Board and Director ------------------------------ James S. Womack By /s/ James E. Donaghy Chief Executive Officer and Director ------------------------------ (principal executive officer) James E. Donaghy By /s/ Edward L. Lundstrom President ------------------------------ Edward L. Lundstrom By /s/ John V. McManus Vice President - Finance ------------------------------ (principal financial and accounting officer) John V. McManus By /s/ John G. Kassakian Director ------------------------------ John G. Kassakian By /s/ Gerald E. Magnuson Director ------------------------------ Gerald E. Magnuson By /s/ Dennis M. Mathisen Director ------------------------------ Dennis M. Mathisen By /s/ William B. Miller Director ------------------------------ William B. Miller By /s/ Kenneth J. Roering Director ------------------------------ Kenneth J. Roering By /s/ Raymond C. Wieser Director ------------------------------ Raymond C. Wieser By /s/ Beekman Winthrop Director ------------------------------ Beekman Winthrop
31 Index to Consolidated Financial Statements Report of Independent Public Accountants...................................................F-2 Consolidated Balance Sheets as of August 28, 1998, and August 29, 1997.....................F-3 Consolidated Statements of Operations for the Fiscal Years Ended August 28, 1998, August 29, 1997, and August 30, 1996..................................................F-4 Consolidated Statements of Changes in Shareholders' Investment for the Fiscal Years Ended August 28, 1998, August 29, 1997, and August 30, 1996.....................F-5 Consolidated Statements of Cash Flows for the Fiscal Years Ended August 28, 1998, August 29, 1997, and August 30, 1996..................................................F-6 Notes to Consolidated Financial Statements.................................................F-7 Schedule II: Valuation and Qualifying Accounts............................................S-1
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Sheldahl, Inc.: We have audited the accompanying consolidated balance sheets of Sheldahl, Inc. (a Minnesota corporation) and Subsidiary as of August 28, 1998, and August 29, 1997, and the related consolidated statements of operations, changes in shareholders' investment and cash flows for each of the three fiscal years in the period ended August 28, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sheldahl, Inc. and Subsidiary as of August 28, 1998, and August 29, 1997, and the results of their operations and their cash flows for each of the three fiscal years in the period ended August 28, 1998, in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. As discussed in Note 2 to the financial statements, effective August 30, 1997, the Company changed its method of accounting for start-up costs. ARTHUR ANDERSEN LLP Minneapolis, Minnesota October 12, 1998 F-2 Sheldahl, Inc. and Subsidiary Consolidated Balance Sheets (in thousands, except share and per share data) Assets
August 28, August 29, 1998 1997 ---- ---- Current assets: Cash and cash equivalents $ 1,005 $ 5,567 Accounts receivable, net of allowances of $225 15,727 15,880 Inventories 15,488 13,078 Deferred taxes - 765 Prepaid expenses and other current assets 627 406 --------- --------- Total current assets 32,847 35,696 --------- --------- Plant and equipment: Land and buildings 28,255 26,467 Machinery and equipment 113,642 112,071 Construction in progress 26,682 19,303 Accumulated depreciation (66,322) (57,036) --------- --------- Net plant and equipment 102,257 100,805 --------- --------- Other assets 1,202 2,866 --------- --------- $ 136,306 $ 139,367 --------- --------- --------- --------- Liabilities and Shareholders' Investment Current liabilities: Current maturities of long-term debt $ 4,296 $ 818 Accounts payable 7,766 7,309 Accrued salaries 1,554 1,606 Other accrued liabilities 4,518 3,020 Restructuring reserves 5,494 - --------- --------- Total current liabilities 23,628 12,753 --------- --------- Long-term debt, less current maturities 27,829 40,869 Restructuring reserves 2,131 - Other non-current liabilities 3,961 2,813 --------- --------- Commitments and contingencies (Notes 3, 4, 5, 6, 7, 9 and 11) - - Shareholders' investment: Preferred stock, $1 par value, 500,000 shares authorized; Series B and D 5% cumulative convertible preferred, 40,567 and 15,000 shares issued and outstanding 41 15 Common stock, $.25 par value, 20,000,000 shares authorized; 9,660,614 and 9,031,371 shares issued and outstanding 2,415 2,258 Additional paid-in capital 99,751 66,923 Retained earnings (deficit) (23,450) 13,736 --------- --------- Total shareholders' investment 78,757 82,932 --------- --------- $ 136,306 $ 139,367 --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated balance sheets. F-3 Sheldahl, Inc. and Subsidiary Consolidated Statements of Operations
(in thousands, except per share data) For The Fiscal Years Ended August 28, August 29, August 30, 1998 1997 1996 ---- ---- ---- Net sales $ 117,045 $ 105,266 $ 114,120 Cost of sales 109,143 94,933 89,171 --------- --------- --------- Gross profit 7,902 10,333 24,949 --------- --------- --------- Expenses: Sales and marketing 9,861 9,560 9,254 General and administrative 8,152 6,839 5,129 Research and development 3,881 4,705 2,755 Restructuring costs 8,500 - - Impairment charges 3,300 - - Interest 2,547 1,298 539 --------- --------- --------- Total expenses 36,241 22,402 17,677 --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in method of accounting (28,339) (12,069) 7,272 Provision (benefit) for income taxes 2,952 (4,100) 2,500 --------- --------- --------- Net income (loss) before cumulative effect of change in method of accounting (31,291) (7,969) 4,772 Cumulative effect of change in method of accounting (5,206) - - --------- --------- --------- Net income (loss) before convertible preferred stock dividends (36,497) (7,969) 4,772 Convertible preferred stock dividends (689) - - --------- --------- --------- Net income (loss) applicable to common shareholders $ (37,186) $ (7,969) $ 4,772 --------- --------- --------- Net income (loss) per common share: Basic - Net income (loss) before cumulative effect of change in method of accounting and after convertible preferred stock dividends $ (3.41) $ (0.89) $ 0.57 Cumulative effect of change in method of accounting (0.56) - - --------- --------- --------- Net income (loss) per common share $ (3.97) $ (0.89) $ 0.57 --------- --------- --------- Diluted - Net income (loss) before cumulative effect of change in method of accounting and after convertible preferred stock dividends $ (3.41) $ (0.89) $ 0.55 Cumulative effect of change in method of accounting (0.56) - - --------- --------- --------- Net income (loss) per common share $ (3.97) $ (0.89) $ 0.55 --------- --------- --------- --------- --------- --------- Number of shares outstanding - basic 9,364 8,967 8,414 Number of shares outstanding - diluted 9,364 8,967 8,686
The accompanying notes are an integral part of these consolidated financial statements. F-4 Sheldahl, Inc. and Subsidiary Consolidated Statements of Changes in Shareholders' Investment
For The Fiscal Years Ended (in thousands) August 28, August 29, August 30, 1998 1997 1996 ---- ---- ---- Series B convertible preferred stock: Balance at beginning of period $ 15 $ - $ - Proceeds from stock issuance - 15 - Conversion to common stock (7) - - -------- -------- ------- Balance at end of period $ 8 $ 15 $ - -------- -------- ------- -------- -------- ------- Series D convertible preferred stock: Balance at beginning of period $ - $ - $ - Proceeds from stock issuance 33 - - -------- -------- ------- Balance at end of period $ 33 $ - $ - -------- -------- ------- -------- -------- ------- Common stock: Balance at beginning of period $ 2,258 $2,228 $ 1,708 Conversion of series B preferred stock 144 - - Proceeds from issuance of common stock, net - - 503 Proceeds from stock purchase plan transactions 5 - - Proceeds from stock options exercised 8 30 17 -------- -------- ------- Balance at end of period $ 2,415 $2,258 $ 2,228 -------- -------- ------- -------- -------- ------- Additional paid-in capital: Balance at beginning of period $ 66,923 $ 51,404 $22,311 Issuance (cost) of series B convertible preferred stock (316) 14,285 - Conversion of series B preferred stock 38 - - Proceeds from issuance of common stock, net - - 28,494 Fair value of warrants issued with credit and security agreement 377 - - Proceeds from stock purchase plan transactions 135 - - Proceeds from stock options exercised 218 1,234 599 Proceeds from series D convertible preferred stock issuance, net 32,376 - - -------- -------- ------- Balance at end of period $ 99,751 $ 66,923 $51,404 -------- -------- ------- -------- -------- ------- Retained earnings (deficit): Balance at beginning of period $ 13,736 $ 21,705 $16,933 Net income (loss) (37,186) (7,969) 4,772 -------- -------- ------- Balance at end of period $(23,450) $ 13,736 $21,705 --------- -------- ------- --------- -------- -------
The accompanying notes are an integral part of these consolidated financial statements. F-5 Sheldahl, Inc. and Subsidiary Consolidated Statements of Cash Flows (in thousands)
For The Fiscal Years Ended August 28, August 29, August 30, 1998 1997 1996 ---- ---- ---- Operating activities: Net income (loss) $(37,186) $ (7,969) $ 4,772 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,382 10,650 6,783 Deferred income taxes 2,952 (4,196) 1,846 Restructuring costs 8,500 - - Impairment charges 3,300 - - Accounting method change 5,206 - - Net change in other operating activities: Accounts receivable 153 5,211 (3,454) Inventories (2,410) (1,553) 984 Prepaid expenses and other current assets (221) (16) 342 Other assets (523) 146 734 Accounts payable and accrued liabilities 1,903 (1,118) (708) Restructuring reserves (875) - - Other non-current liabilities 251 544 (414) -------- -------- -------- Net cash provided by (used in) operating activities (4,568) 1,699 10,885 -------- -------- -------- Investing activities: Capital expenditures, net (23,268) (30,729) (24,920) -------- -------- -------- Financing activities: Net borrowings (repayments) under revolving credit and bridge facilities (26,456) 17,275 (15,290) Proceeds from term facility and warrants, net 16,000 - - Proceeds from other long-term debt 2,335 1,452 - Repayments of long-term debt (1,064) (598) (429) Issuance of preferred stock, net 32,093 14,300 - Issuance of common stock - - 28,997 Stock options exercised 366 1,264 616 -------- -------- -------- Net cash provided by financing activities 23,274 33,693 13,894 -------- -------- -------- Net increase (decrease) in cash and cash equivalents (4,562) 4,663 (141) -------- -------- -------- Cash and cash equivalents at beginning of period 5,567 904 1,045 -------- -------- -------- Cash and cash equivalents at end of period $ 1,005 $ 5,567 $ 904 -------- -------- -------- -------- -------- -------- Supplemental cash flow information: Interest paid $ 4,423 $ 3,078 $ 2,221 -------- -------- -------- -------- -------- -------- Income taxes paid (refunded) $ 36 $ (68) $ 131 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. F - 6 Sheldahl, Inc. and Subsidiary Notes to Consolidated Financial Statements (1) Business Description Sheldahl creates and distributes thin, flexible laminates and their derivatives to worldwide markets. The Company's laminates are of two types: adhesive-based tapes and materials, and its patented adhesiveless material, NOVACLAD-Registered Trademark-. From these materials, Sheldahl fabricates high-value derivative products: single- and double-sided flexible interconnects and assemblies under the trade names FLEXBASE-Registered Trademark-, NOVAFLEX-Registered Trademark- HD and NOVAFLEX-Registered Trademark- VHD and substrates for silicon chip carriers under the trade name VIAARRAY-Registered Trademark- and VIATHIN-Registered Trademark-. During the two year period ended August 28, 1998, the Company has incurred cumulative net losses totaling approximately $45.2 million, including restructuring and other charges of $17.0 million. As a result of these losses and the investment the Company has made in its Longmont, Colorado facility and in other capital assets, the Company has used cash of approximately $54.0 million supporting capital expenditures and $2.9 million supporting operating losses in the two-year period ended August 28, 1998. The Company has financed these transactions principally through debt and equity financing. During 1999, the Company anticipates reducing capital expenditures to approximately $7 million. Operating results are expected to improve in fiscal 1999 as a result of the recent restructuring initiatives undertaken by the Company and increased production at the Company's Longmont, Colorado facility; however, operating losses are expected to continue, but at a lower level than fiscal 1998. The Company anticipates financing the capital expenditures and operating activities from borrowings under its current credit and security agreement. Management believes with planned operating improvements that the Company has adequate liquidity to provide uninterrupted support for its business operations during fiscal 1999. Nevertheless, the Company is in the process of seeking additional debt or equity capital to further ensure the ongoing operations of the Company. This is based on the uncertainty of achieving expected improved operating results, including realizing significant sales growth in fiscal 1999 from the Company's Micro Products business, and to meet the covenants under the Company's credit and security agreement. The Company is required to raise additional equity capital of $5 million by February 26, 1999 and another $5 million of equity capital by August 27, 1999. In the event the Company is unable to raise the capital, the Company would be in technical default under its credit and security agreement enabling the Company's lenders to require immediate repayment of the borrowings under the credit and security agreement. If the Company does not achieve its projected operating results and/or it does not have borrowings available under its current credit and security agreement, management believes that it has options available to obtain necessary additional new capital, including the issuance of additional new debt or additional new equity financing. There can be no assurance that the Company will be successful in its attempt to issue additional debt or to raise additional capital on terms acceptable to the Company. (2) Summary of Significant Accounting Policies BASIS OF PRESENTATION - The consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the Company and its subsidiary. All significant intercompany transactions have been eliminated. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Ultimate results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts reported in the balance sheet for accounts receivable and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. The carrying amount for long-term debt approximates its fair value because of the variable rate feature and because the related interest rates are comparable to rates currently available to the Company for debt with similar terms. F - 7 SIGNIFICANT CUSTOMERS - The Company's three largest customers accounted for sales of $18,100,000, $12,100,000, and $11,700,000 in 1998. The Company's two largest customers accounted for sales of $12,052,000 and $11,143,000 in 1997 and $15,549,000 and $13,944,000 in 1996. No other customers accounted for more than 10% of net sales. EXPORT SALES - The Company had export sales of $24,501,000 in 1998; $15,040,000 in 1997; and $11,968,000 in 1996. REVENUE RECOGNITION - The Company recognizes revenue principally as products are shipped. In addition, the Company grants credit to customers and generally does not require collateral or any other security to support amounts due. INVENTORIES - Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out (FIFO) method. Cost includes the cost of materials, direct labor, and applicable manufacturing overhead. The components of inventories are as follows (in thousands):
August 28, August 29, 1998 1997 ---- ---- Raw material $ 4,964 $ 3,069 Work-in-process 4,742 6,484 Finished goods 5,782 3,525 -------- -------- Total $ 15,488 $ 13,078 -------- -------- -------- --------
PLANT AND EQUIPMENT - Plant and equipment are stated at cost and include expenditures that increase the useful lives of existing plant and equipment. The cost of major plant and equipment additions includes interest capitalized during the acquisition period. Interest capitalized totaled $1,903,000 in 1998, $1,735,000 in 1997, and $1,605,000 in 1996. Maintenance, repairs and minor renewals are charged to operations as incurred. When plant and equipment are disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is reflected in the results of operations. For financial reporting purposes, plant and equipment are depreciated principally on a straight-line basis over the estimated useful lives of 20 to 40 years for buildings and 3 to 15 years for machinery and equipment. For income tax reporting purposes, straight-line and accelerated depreciation methods are used. INCOME TAXES - Deferred income taxes are provided for temporary differences between the financial reporting basis and tax basis of the Company's assets and liabilities at currently enacted tax rates. During fiscal 1998, a valuation allowance was provided for the Company's net deferred tax assets (see note 8). F - 8 EARNINGS PER SHARE - The Company follows the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). Basic earnings per share is computed using the weighted average number of shares of common stock outstanding for the period. Diluted earnings per share is computed using the weighted average number of shares of common stock, the dilutive common equivalent shares related to stock options outstanding during the period and the equivalent common shares of convertible preferred stock, if those equivalent shares are dilutive. During fiscal 1998 and 1997, stock options and convertible preferred stock equivalents are anti-dilutive and, therefore, are not included in the computation of diluted earnings per share. NEW ACCOUNTING PRONOUNCEMENTS - During June 1997, the Financial Accounting Standards Board released SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires disclosure of business and geographic segments in the consolidated financial statements of the Company. The Company will adopt SFAS No. 131 in 1998 and is currently analyzing the impact it will have on the disclosures in its financial statements. During February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," effective for fiscal years beginning after December 31, 1997. SFAS No. 132 revises certain of the disclosure requirements, but does not change the measurement or recognition of those plans. The adoption of SFAS No. 132 will result in revised and additional disclosures, but will have no effect on the financial position, results of operations, or liquidity of the Company. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and hedging Activities," effective for years beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. Special accounting for qualifying hedges allow a derivative's gains or losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified the impacts of adopting SFAS No. 133 and has not yet determined the timing or method of adoption. START-UP COSTS - In fiscal 1998, the Company adopted Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities," which requires the expensing of these items as incurred, versus capitalizing and expensing them over a period of time. Start-up activities are broadly defined and include one-time activities related to opening a new facility, introducing a new product or service, conducting business in a new territory, conducting business with a new class of customer or beneficiary, initiating a new process in an existing facility, commencing some new operation, and organizing a new entity. The adoption of this statement resulted in a cumulative effect of a change in method of accounting of approximately $5.2 million, primarily related to costs capitalized by the Company from its Longmont, Colorado facility. The adoption of this statement was applied retro-actively to the beginning of fiscal 1998, and the Company's first and second quarters have been restated to reflect this change in method of accounting, in accordance with the provisions of SOP 98-5 and APB 20. (3) Restructuring Costs During fiscal 1998, the Company recorded liabilities of $8.5 million relating to the voluntary and involuntary termination of certain employees as well as exiting activities at the Company's Aberdeen, South Dakota assembly facility. All such liabilities were charged to restructuring costs on the Company's statement of operations. In total, 309 employees have been affected and consisted of Northfield salaried, Northfield production and Aberdeen production staff. The Company has provided $5.7 million of termination benefits for these 309 employees of which $735,000 was paid on or before August 28, 1998. As of October 1, 1998, 270 of the 309 affected employees have terminated employment with the Company. F - 9 Exit costs of $2.8 million have been recorded for the Aberdeen facility and consist primarily of equipment disposal costs, certain rental and other obligations. As of August 28, 1988, the Company has paid $140,000 of such exit costs. (4) Financing
Long-term debt consisted of the following (in thousands): August 28, August 29, 1998 1997 ---- ---- Revolving facility $ 6,062 $32,519 Term facility, net 15,623 - Note payable to insurance company, secured by real estate mortgage. Varying interest rates and principal payments through September 1, 2002 5,195 5,383 Capitalized lease obligations payable to an investment company secured by computer equipment and software. Interest at 10.17% with monthly payments of $40, including principal and interest through July 2002 1,534 1,870 Capitalized lease obligation payable to a bank, secured by computer, communications equipment and related software interest at 7.8% with monthly payments of $14, including principal and interest through October 2003 572 690 Installment note due a finance company secured by computer hardware and software, interest at 9.69% with monthly payments of $49, including principal and interest, due January 2003 2,099 - Note payable to Economic Development Agency, secured by $550 standby letter of credit, interest at 2.0% with monthly payments of $9, including principal and interest, remaining balance paid October 1998 533 624 Other 507 601 ------- ------- 32,125 41,687 Less-current maturities (4,296) (818) ------- ------- $27,829 $40,869 ------- ------- ------- -------
In fiscal 1998, the Company executed a new credit agreement, which completely replaces the Company's prior credit facilities. The new agreement provides three separate facilities: a revolver facility of up to $25 million based on the Company's working capital; a term facility for $16 million based on the appraised value of the Company's unencumbered equipment; and a bridge facility for $19 million. The bridge facility was repaid in full on July 31, 1998 with part of the net proceeds from the Series D Preferred Stock. Interest on the revolver and the term facility is charged at the base rate, which was 8.5% as of August 28, 1998. As of August 28, 1998, the amount available to borrow on the revolver was $10.5 million based on a $16.6 million borrowing base on the working capital revolver. Under the agreement, the Company issued 5-year warrants to purchase in the aggregate 100,000 shares of common stock at a price of $6.92 per share (101.5% of the Company's common stock price at date of issuance), exercisable anytime through July 2003. The fair value of the warrants of approximately $377,000 was determined on their date of issuance using the Black-Scholes methodology, has been recorded as a reduction of the term facility in the accompanying financial statements, and will be accreted as interest expense over the term of the associated credit and security agreement. The agreement requires certain covenants that restrict the payments of cash dividends, capital expenditures, redemption of preferred stock, and require the Company to maintain certain levels of net worth and net income, maintain certain levels of cash flows from operations, and requires the Company to raise additional equity capital of $5 million by February 26, 1999 and another $5 million of equity F - 10 capital by August 27, 1999, as defined (see Note 1). All borrowings under the agreement are secured by the Company's tangible and intangible assets. The term facility requires monthly repayments of $205,000 beginning January 1999. The revolving credit facility is due on May 31, 2001. As of August 28, 1998, the Company has complied with or has obtained waivers for all debt covenants. Subsequent to year end, the Company amended the terms and conditions of its note payable to an insurance company. The amended agreement requires principal payments of $500,000 due December 1, 1998, $250,000 due January 1, 1999, $250,000 due February 1, 1999 and $60,000 due each month thereafter beginning March 1, 1999. The interest rate charged will be 10% effective December 1, 1998 and will increase monthly to 15% effective May 1, 1999. The agreement requires certain covenants that restrict the payment of cash dividends, total corporate debt, sales of corporate assets, capital expenditures and maintain certain levels of net worth and cash flows. The table below reflects the changes required by the amended credit agreement. Future maturities of debt are as follows (in thousands): Fiscal 1999 $ 4,296 Fiscal 2000 4,239 Fiscal 2001 19,627 Fiscal 2002 1,816 Fiscal 2003 2,157 Thereafter 367 ------- $32,502 ------- -------
(5) Preferred Stock On July 30, 1998, the Company issued 32,917 shares of Series D convertible preferred stock with a total stated value of $32,917,000. This Series D preferred stock carried a 5% dividend rate and is convertible to nearly 5.4 million shares at a fixed rate of $6.15 per share. The holders of the Series D preferred stock were also issued 329,170 warrants to purchase the Company's common stock at a price of $7.6875 per share. These warrants expire July 29, 2001. Net proceeds from the Series D preferred stock were $32,409,000. On August 27, 1997, the Company entered into an agreement with five qualified investors for the issuance of $30 million of 5% cumulative convertible preferred stock. As of August 29, 1997, the Company had issued 15,000 shares of Series B cumulative convertible preferred stock with a stated value of $1,000 per share for a total of $15 million. Series B preferred stock is convertible to common stock and carries a 5% cumulative dividend, payable upon conversion and payable in common stock or cash, at the Company's option. The Series B preferred stock conversion price is the lower of 110% of the five-day average closing price of the Company's common stock preceding the issuance of the preferred shares ($25.34), or 101% of the lowest consecutive five-day average closing price of the common stock in the 30-day period immediately prior to conversion. Holders of the Series B preferred stock may convert to common stock of the Company at any time, subject to certain limitations. Under certain circumstances, the Company may require the holders to convert to common stock. Under certain circumstances, the Company may be required to redeem the preferred stock. Along with the Series B preferred stock, the investors received warrants to purchase 67,812 additional common shares at $27.65 per share. These warrants expire on August 27, 2000. During February of 1998, the Company received a conversion notice for $7,350,000 in stated value of Series B preferred stock. In accordance with the agreement, the Company issued 575,149 shares of common stock (including accrued dividends) at a conversion price of approximately $13 per share (see note 12). (6) Stock Based Compensation The shareholders of the Company have approved stock option plans (the Plans) for officers, other full-time key salaried employees, and non-employee directors of the Company to reward outstanding performance and enable the Company to attract and retain key personnel. Under the Plans, options are granted at an exercise price equal to the fair market value of the Company's common stock at the date of grant and are generally exercisable for five or ten years. The Plans also provide for automatic grants of 25,000 target grant replacement stock options to each non-employee director of the Company on the date that each such director is first elected to the Board of Directors, and expire, to the extent not already expired, one year after termination of service as a Director. As of August 28, 1998, the Plans authorize the future granting of options to purchase up to 176,000 shares of common stock. F - 11 Stock option transactions during 1996, 1997, and 1998 are summarized as follows:
Shares Price per Share ------ --------------- Outstanding at September 1, 1995 569,708 $4.875 to $16.500 Granted 475,090 $16.500 to $22.125 Exercised (68,888) $4.875 to $16.500 Lapsed (5,000) $18.375 --------- Outstanding at August 30, 1996 970,910 $5.000 to $22.125 Granted 424,049 $15.375 to $22.000 Exercised (119,103) $5.00 to $22.125 Lapsed (87,076) $15.375 to $22.125 --------- Outstanding at August 29, 1997 1,188,780 $5.000 to $22.125 Granted 425,723 $5.250 to $20.375 Exercised (54,678) $5.000 to $16.875 Lapsed (87,012) $11.500 to $22.125 --------- Outstanding at August 28, 1998 1,472,813 $5.00 to $22.125 ---------
Options exercisable were 946,710 as of August 28, 1998, 669,562 as of August 29, 1997, and 569,660 as of August 30, 1996. The options outstanding as of August 28, 1998, expire five or ten years after the grant date as follows:
Number of Options Fiscal Years That Expire ------------ ----------- 1999 66,855 2000 25,413 2001 48,718 2002 100,000 2003 34,454 2004 92,604 2005 53,645 2006 313,750 2007 401,606 2008 335,768
During 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) which defines a fair value based method of accounting for employee stock options and similar equity instruments and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by Accounting Principles Board Opinion No. 25 (APB 25). Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in SFAS 123 had been adopted. The Company has elected to account for its stock-based compensation plans under APB 25; however, the Company has computed, for pro forma disclosure purposes, the value of stock options granted using the Black-Scholes option pricing model as prescribed by SFAS 123, using the following weighted average assumptions: F - 12
Fiscal Years Ended August 28, August 29, August 30, 1998 1997 1996 ---- ---- ---- Risk-free interest rate 5.07 - 6.18% 6.21 - 6.63% 5.50 - 6.61% Expected lives 7 years 7 years 4.5 to 7 years Expected volatility 49.17 - 70.46% 48.75 - 65.44% 45.45 - 51.46%
Using the Black-Scholes option pricing model, the total value of stock options granted during 1998, 1997 and 1996 was $2,645,000, $4,958,000 and $5,608,000 respectively, which would be amortized on a pro forma basis over the vesting period of the options (typically ranging from six months to four years). The weighted average fair value of options granted during 1998, 1997 and 1996 was $6.86 per share, $11.96 per share and $11.93 per share, respectively. If the Company had accounted for its stock-based compensation plans in accordance with SFAS 123, the Company's net income (loss) and earnings (loss) per share would have been as follows:
Fiscal Years Ended August 28, 1998 August 29, 1997 August 30, 1996 (in thousands, --------------- --------------- --------------- except per share data) As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma ----------- --------- ----------- --------- ----------- --------- Net income (loss) $(37,186) $(41,134) $(7,969) $(9,887) $4,772 $4,224 Earnings (loss) per share-basic $(3.97) $(4.39) $(0.89) $(1.10) $0.57 $0.50 Earnings (loss) per share-diluted $(3.97) $(4.39) $(0.89) $(1.10) $0.55 $0.49
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to September 1, 1995, and additional awards are anticipated to be granted in future years. (7) Commitments and Contingencies LEASE COMMITMENTS - The Company has non-cancelable operating lease commitments for certain manufacturing facilities and equipment, which expire at various dates through 2004. Minimum rent commitments under operating leases are $2,658,000 in 1999, $1,662,000 in 2000, $843,000 in 2001, $293,000 in 2002, $271,000 in 2003, and $94,000 in 2004. In accordance with the terms of the lease agreements, the Company is required to pay maintenance and property taxes related to the leased property. Operating lease expense was $2,816,000 in 1998, $2,721,000 in 1997, and $2,353,000 in 1996. The Company has entered into various capital lease arrangements for the purchase of certain communication and computer equipment and related software totaling $2.7 million. Amortization expense relating to these capital leases was $140,000 in 1998. The following is a schedule by year of future gross minimum capital lease payments (in thousands): Fiscal 1999 $ 653 Fiscal 2000 653 Fiscal 2001 653 Fiscal 2002 653 Fiscal 2003 24 ------- $ 2,636 Less amount representing interest (530) ------- Present value of net minimum capital lease payments $ 2,106 ------- -------
F - 13 EMPLOYMENT AGREEMENTS - The Company has employment and consulting agreements with various officers which are renewable in successive one-year terms after August 21, 1999, requiring minimum severance benefits following a change in control of the Company, as defined. LITIGATION - The nature of the Company's operations exposes it to the risk of certain legal and environmental claims in the normal course of business. Although the outcome of these matters cannot be determined, management believes, based upon the advice and consultations with its legal counsel, that final disposition of these matters will not have a material adverse effect on the Company's operating results or financial condition. (8) Income Taxes The provision (benefit) for income taxes consisted of the following (in thousands):
August 28, August 29, August 30, 1998 1997 1996 ---- ---- ---- Currently payable $ - $ 96 $ 654 Deferred 2,952 (4,196) 1,846 ------ -------- ------ Provision (benefit) for income taxes $2,952 $(4,100) $2,500 ------ -------- ------ ------ -------- ------
A reconciliation from the provision (benefit) for income taxes using the statutory federal income tax rate to the provision (benefit) for income taxes is as follows (in thousands):
August 28, August 29, August 30, 1998 1997 1996 ---- ---- ---- Federal statutory rates $(11,404) $(4,100) $ 2,472 Research and experimentation tax credits (356) - - Tax benefit of foreign sales corporation - - (182) State income taxes, net of federal benefit (908) 96 90 Change in valuation allowance 15,389 - - Other 231 (96) 120 -------- -------- ------- $ 2,952 $(4,100) $ 2,500 -------- -------- ------- -------- -------- -------
As of August 28, 1998, the Company had federal net operating loss carryforwards of $40.5 million and federal income tax credit carry forwards of approximately $1.3 million that expire through 2012. Future use of these federal tax benefits are dependent upon profitability of the Company. The future use of federal tax benefits may be subject to limitation under Internal Revenue Code Section 382, in the event a change in control occurs. F - 14 Temporary differences and carryforwards which result in net deferred income tax assets as of August 28, 1998, and August 29, 1997, were as follows (in thousands):
August 28, August 29, 1998 1997 ---- ---- Deferred tax assets: Net operating loss carryforwards $ 14,045 $ 6,819 Restructuring reserves 2,942 - Income tax credit carryforwards 1,333 977 Postretirement benefits 752 644 Deferred compensation 580 630 Inventories 508 178 Medical reserves 239 247 Vacation reserve 186 155 Bad debt reserve 83 83 Other 117 130 -------- -------- Deferred tax assets 20,785 9,863 Deferred tax liabilities: Depreciation (5,191) (6,706) Valuation allowance (15,594) (205) -------- -------- Net deferred taxes $ - $ 2,952 -------- -------- -------- --------
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. During 1998, the Company established a full valuation allowance for its net deferred tax assets due to the uncertainty related to their ultimate realization. The Company arrived at such a decision considering several factors, including but not limited to, historical cumulative losses incurred by the Company and anticipated continued operating losses. The Company will continue to evaluate the need for the valuation allowance, and at such time it is determined that it is more likely than not that such deferred tax assets will be realized, the valuation allowance, or a portion thereof, will be reversed. (9) Pension and Postretirement Benefits DEFINED BENEFIT PLAN - The Company sponsors a defined benefit pension plan covering substantially all hourly employees of the Company's Northfield, Minnesota, facility (the Northfield Plan). Pension costs are funded in compliance with the Employee Retirement Income Security Act of 1974. Net periodic pension cost is as follows (in thousands):
August 28, August 29, August 30, 1998 1997 1996 ---- ---- ---- Service cost $ 200 $ 177 $ 184 Interest cost on projected benefit obligation 382 350 337 Return on plan assets (1,069) (862) (606) Net amortization and deferral 659 556 385 ------- ------ ------ Net periodic pension cost $ 172 $ 221 $ 300 ------- ------ ------ ------- ------ ------
F - 15 Funding information with respect to the Northfield Plan is as follows (in thousands):
August 28, August 29, 1998 1997 ---- ---- Actuarial present value of - Vested benefit obligation $6,376 $4,764 ------ ------ ------ ------ Accumulated benefit obligation $6,491 $4,847 ------ ------ ------ ------ Projected benefit obligation $6,491 $4,847 ------ ------ ------ ------ Plan assets at fair value $6,234 $5,317 ------ ------ ------ ------ Projected benefit obligation in excess of (less than) plan assets $ 257 $(470) Unrecognized transition amount - (50) Unrecognized prior service cost - (659) Unrecognized net gain - 1,400 ------ ------ Net pension liability $ 257 $ 221 ------ ------ ------ ------
The accumulated benefit obligation is the actuarial present value of all vested and non-vested benefits for employee service before July 1, 1998. The projected benefit obligation is the accumulated benefit obligation increased to include expected increases in the plan's flat dollar benefit. The projected benefit obligation is determined using an assumed discount rate of 7% in 1998 and 8% in 1997. The assumed long-term rate of return for assets is 8% in both 1998 and 1997. Plan assets consist principally of cash equivalents, bonds, and common stock. EMPLOYEE SAVINGS PLAN - The Company has an employee savings plan covering all employees who meet certain age and service requirements and who are not participants in the Northfield Plan. The Company's contribution to the employee savings plan equals 2% of the participant's salary. The Company also matches participants' voluntary contributions to the plan. This matching contribution is subject to Company earnings on a quarterly basis and is limited to 4% of each participant's salary. The Company's expense related to the employee savings plan was $448,000 in 1998, $475,000 in 1997, and $1,014,000 in 1996. POSTRETIREMENT BENEFITS - The Company recognizes expense for the expected cost of providing post retirement benefits other than pensions to its employees. The expected cost of providing these benefits is charged to expense during the years that the employees renders service. The Company's plan, which is unfunded, provides medical and life insurance benefits for select employees. These employees, who retire after age 40 with 20 years or more service, have access to the same medical plan as active employees. Net periodic postretirement benefit cost is as follows (in thousands):
August 28, August 29, August 30, 1998 1997 1996 ---- ---- ---- Service cost $ 36 $ 35 $ 33 Interest cost on accumulated benefit obligation 64 71 66 ----- ----- ----- ----- ----- Net periodic postretirement benefit cost $ 100 $ 106 $ 99 ----- ----- ----- ----- ----- -----
F - 16 Funding information related to the Company's plan is as follows (in thousands):
August 28, August 29, August 30, 1998 1997 1996 ---- ---- ---- Accumulated benefit obligation $ 2,050 $ 1,756 $ 1,347 Plan assets at fair value - - - ------- ------- ------- Projected benefit obligation in excess of plan assets 2,050 1,756 1,347 Unrecognized net gain - - - ------- ------- ------- Accrued postretirement benefits $ 2,050 $ 1,756 $ 1,347 ------- ------- ------- ------- ------- -------
A 10.5% annual rate of increase in the health care cost trend rate was assumed with rates decreasing gradually to 5.5% by 2007, and remaining at that level thereafter. The health care cost trend rate assumption has an effect on the amounts reported. Increasing the assumed health care cost trend rate assumption by one percentage point would increase the accumulated postretirement benefit obligation by $63,000 and the net periodic postretirement benefit cost by $2,000 each year. The discount rate used in determining the accumulated postretirement benefit obligation was 7% for 1998 and 8% for 1997. (10) Consortium for the Development of Multichip Modules On January 10, 1994, the Company entered into a consortium agreement sponsored by the Advanced Projects Research Agency (ARPA), a United States Government Agency. The purpose of the consortium is to accelerate the development and commercialization of the Company's chip-carrier substrates for multi-chip modules (MCMs). As a consortium member, the Company received approximately $12.2 million in funding through August of 1998 from ARPA to further test, design, and develop the manufacturing processes for the Company's NOVACLAd-based substrates, which are used in constructing MCMs. The Company incurred $257,000 in 1998, $584,000 in fiscal 1997, and $3,235,000 in 1996 in costs related to this project. As of August 28, 1998, the consortium has reimbursed substantially all of these costs and the Company will no longer incur costs that will be reimbursed by ARPA. (11) Joint Ventures On July 28, 1998, the Company and Molex Incorporated ("Molex") formed a joint venture to design, market and assemble modular interconnect systems to replace wiring harnesses in primarily the automotive market. The new company was named Modular Interconnect Systems, L.L.C. and it is a Delaware limited liability company ("Origin"). Origin will utilize proprietary flexible products developed by the Company and proprietary connectors developed by Molex in the development of the new modular interconnect system as an alternative to conventional automotive wiring harnesses and flex circuit assemblies. The Company and Molex will supply their respective products to Origin pursuant to long-term supply contracts. The Company owns 40% and Molex owns 60% of Origin. Each party has a right of first refusal with respect to the other party's ownership interest. Origin is being funded by contributions from the Company and Molex. Certain development costs of those components to be designed and developed by Sheldahl for the new systems will also be reimbursed by Molex and other development costs may be funded by loans from Molex. Both the Company and Molex granted Origin a non-exclusive license to certain of their intellectual property for purposes of producing the new modular interconnect systems. Each license takes effect and is contingent upon a change of control of the Company or Molex and the purchase of such person's membership interest in Origin. As of August 28, 1998, the Company's investment in and the impact of accounting for its investment in Origin under the equity method has not been material. In August 1995, the Company entered into various agreements to form a joint venture in Juijiang Jiangxi China with Jiangxi Changjiang Chemical Plant and Hong Kong Wah Hing (China) Development Co., Ltd. Under the agreements, the Company has licensed certain technology to the joint venture and is providing certain technical support. In return, the Company received a 20% ownership interest in the joint venture, $900,000 in cash over a three-year period, subject to completion of certain milestones; and royalties, based upon a percentage of products sold by the joint venture. The percentage used is a sliding scale based on the dollar volume of sales and the royalty year as defined. The minimum royalty payment is $100,000 per royalty year. The agreements also require that the Company purchase fixed amounts of the joint venture's licensed product. This purchase F - 17 commitment is estimated to be approximately $450,000 per year for three years beginning in fiscal 2000. The joint venture was established to manufacture flexible adhesive-based copperclad laminates (Flexbase) and associated cover film tapes in China. Under the terms of the agreements, the joint venture will market these products in China, Taiwan, Hong Kong and Macau. The Company accounts for its investment in this joint venture under the cost method, and the impact thereof has not been material. (12) Events Subsequent to the Date of Report of Independent Public Accountants (Unaudited) Subsequent to year-end and through October 30, 1998, the Company received conversion notices representing 6,737 shares of Series B Preferred Stock. These conversions were handled as follows: 5,762 preferred shares plus accrued dividends were converted into 1,230,178 shares of the Company's common stock; 623 preferred shares were redeemed with cash payments totaling $837,000, including accrued dividends; 352 preferred shares require shareholder approval before the Company can issue the related common shares. As of October 30, 1998, the Company has 10,890,792 shares of common stock, 352 shares of Series B Preferred Stock awaiting shareholder approval for conversion, and 913 additional shares of Series B Preferred Stock outstanding. (13) Quarterly Results of Operations (Unaudited) The consolidated results of operations for the four quarters of 1998 and 1997 are as follows (in thousands, except per share data):
Fiscal 1998 ----------- First(1) Second(1) Third Fourth ----- ------ ----- ------ Net sales $28,992 $ 27,751 $ 31,891 $ 28,411 Cost of sales and other expenses 32,547 33,470 35,321 32,246 Restructuring costs - 4,000 4,500 - Impairment charges - - 3,300 - -------- -------- --------- -------- Pretax operating loss (3,555) (9,719) (11,230) (3,835) Income taxes 1,375 3,465 (7,792) - Change in method of accounting (5,206) - - - Preferred dividends (187) (172) (96) (234) -------- -------- --------- -------- Net loss to common shareholders $(7,573) $(6,426) $(19,118) $(4,069) -------- -------- --------- -------- -------- -------- --------- -------- Net loss per common share - basic and diluted $ (0.84) $ (0.70) $ (1.98) $ (0.42) -------- -------- --------- -------- -------- -------- --------- -------- Weighted average common shares Outstanding - basic and diluted 9,038 9,131 9,634 9,653 -------- -------- --------- -------- -------- -------- --------- --------
(1) First and second quarters of fiscal 1998 have been restated for retroactive adoption of SOP 98-5 during the third quarter of fiscal 1998.
Fiscal 1997 ----------- First Second Third Fourth ----- ------ ----- ------ Net sales $ 24,301 $ 26,379 $ 27,593 $ 26,993 Cost of sales and other expenses 26,934 28,685 30,184 31,532 -------- -------- -------- -------- Pretax operating loss (2,633) (2,306) (2,591) (4,539) Income taxes (900) (780) (880) (1,540) -------- -------- -------- -------- Net loss $(1,733) $(1,526) $(1,711) $(2,999) -------- -------- -------- -------- -------- -------- -------- -------- Net loss per common share - basic and diluted $ (0.19) $ (0.17) $ (0.19) $ (0.33) -------- -------- -------- -------- -------- -------- -------- -------- Weighted average common shares Outstanding - basic and diluted 8,913 8,956 8,989 9,011 -------- -------- -------- -------- -------- -------- -------- --------
F - 18 Sheldahl, Inc. and Subsidiary Schedule II: Valuation and Qualifying Accounts ALLOWANCE FOR DOUBTFUL ACCOUNTS: The transactions in the allowance for doubtful accounts for the fiscal years ending August 28, 1998, August 29, 1997, and August 30, 1996, were as follows:
1998 1997 1996 ---- ---- ---- Balance, beginning of year $224,704 $243,472 $267,412 Recoveries (accounts charged off), net 296 (18,768) (23,940) -------- -------- -------- Balance, end of year $225,000 $224,704 $243,472 -------- -------- -------- -------- -------- --------
RESTRUCTURING RESERVES: The transactions in the restructuring reserves for the fiscal years ending August 28, 1998, August 29, 1997 and August 30, 1996 were as follows (in thousands):
1998 1997 1996 ---- ---- ---- Balance, beginning of year $ - $ - $ - Amounts charged to operations 8,500 - - Cash payments made (875) - - -------- ------ ------ Balance, end of year $ 7,625 $ - $ - -------- ------ ------ -------- ------ ------
S - 1 EX-3.2 2 EXHIBIT 3.2 BYLAWS OF SHELDAHL, INC. ---------- ARTICLE I SHAREHOLDERS SECTION 1. The Annual Meeting of the Shareholders of this corporation shall be held on the second Wednesday in January of each year, at such time and place as may be designated therefor by the Board of Directors. A notice setting out the time and place of the annual meeting shall be mailed, postage prepaid, to each shareholder of record at his address as it appears on the records of the corporation, or if no such address appears, at his last known address, at least ten days prior to the annual meeting, but any shareholder may waive such notice either before, at, or after such meeting by a signed waiver in writing. SECTION 2. At the annual meeting, the shareholders shall elect directors of the corporation and shall transact such other business as may properly come before them. To be properly brought before the meeting, business must be of a nature that is appropriate for consideration at an annual meeting and must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a shareholder. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, each such notice must be given, either by personal delivery or by United States mail, postage prepaid, to the secretary of the corporation, not less than 45 days nor more than 60 days prior to a meeting date corresponding to the previous year's annual meeting. Each such notice to the secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (w) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (x) the name and address of record of the shareholders proposing such business, (y) the class or series (if any) and number of shares of the corporation which are owned by the shareholder, and (z) any material interest of the shareholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be transacted at the annual meeting except in accordance with the procedures set forth in this Article; provided, however, that nothing in this Article shall be deemed to preclude discussion by any shareholder of any business properly brought before the annual meeting, in accordance with these Bylaws. SECTION 3. A special meeting of the shareholders may be called at any time by the chief executive officer or chief financial officer of the corporation, and shall be called by the president or the secretary upon the request in writing, or by vote of, two or more directors or upon the request in writing of shareholders of record owning one-tenth of the outstanding shares of common stock. Such meeting shall be called by mailing a notice thereof as above provided in the case of the annual meeting of shareholders, which notice shall state the purpose or purposes of the meeting. SECTION 4. At any shareholders meeting, each shareholder shall be entitled to one vote for each share of stock standing in his name on the books of the corporation as of the date of the meeting. Any shareholder may vote either in person or by proxy. The presence in person or by proxy of the holders of a majority of the shares of stock entitled to vote at any shareholders meeting shall constitute a quorum for the transaction of business. If no quorum be present at any meeting, the shareholders present in person or by proxy may adjourn the meeting to such future time as they shall agree upon without further notice other than by announcement at the meeting at which such adjournment is taken. ARTICLE II DIRECTORS SECTION 1. The Board of Directors shall have the general management and control of all business and affairs of the corporation and shall exercise all the powers that may be exercised or performed by the corporation under the statutes, its Articles of Incorporation, and its Bylaws. SECTION 2. The Board of Directors of this corporation shall consist of nine (9) directors and a majority of the directors then holding office shall constitute a quorum. SECTION 3. Each Director elected at the Annual Meeting of Shareholders shall be elected for a term of one year, and shall hold office for that term and until his successor is elected and qualified. If a vacancy in the Board occurs by reason of death, resignation, or otherwise, then the vacancy may be filled for the unexpired portion of the term in which it occurs by a majority vote of the remaining Directors. Each Director elected by the Board of Directors to fill a newly created directorship resulting from an increase in the authorized number of Directors by action of the Board of Directors shall hold office until his successor is elected by the shareholders. The shareholders may make such election at their next Annual Meeting or at a special meeting duly called for that purpose. Each newly created directorship shall be filled by a vote of two-thirds of the Directors serving on the Board at the time the Bylaws are amended by action of the Board of Directors to increase the number of directorships. SECTION 4. The Board of Directors may meet regularly at such time and place as it shall fix by resolution and no notice of regular meetings shall be required. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President or any two Directors by giving at least three days notice to each of the other Directors by mail, telephone, telegraph, or in person, provided that such notice may be waived either before, at, or after a meeting by any Director by a signed waiver in writing. 2 SECTION 5. Any action which might have been taken at a meeting of the Board of Directors may be taken without a meeting if done in writing, signed by all of the Directors, and any such action shall be as valid and effective in all respects as if taken by the Board at a regular meeting. SECTION 6. The Board of Directors shall fix and change as it may from time to time determine by a majority vote the compensation to be paid the officers of the corporation, and, if deemed appropriate, the members of the Board of Directors. SECTION 7. Subject to the provisions of applicable laws and its Articles of Incorporation, the Board of Directors shall have full power to determine whether any, and if any, what part of any, funds legally available for the payment of dividends shall be declared in dividends and paid to the shareholders; the division of the whole or any part of such funds of this corporation shall rest wholly within the discretion of the Board of Directors, and it shall not be required at any time, against such discretion, to divide or pay any part of such funds among or to the stockholders as dividends or otherwise. SECTION 8. Except as otherwise provided in Article III of these Bylaws, the Board of Directors may, in its discretion, by the affirmative vote of a majority of the Directors, appoint committees which shall have and may exercise such powers as may be conferred or authorized by the resolutions appointing them. A majority of any such committee, if the committee be composed of more than two members, may determine its action and fix the time and place of its meetings, unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any time to fill vacancies in, to change the membership of, or to discharge any such committee. SECTION 9. Subject to the rights of holders of any class or series of stock having a preference over the common shares as to dividends or upon liquidation, nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any shareholder entitled to vote generally in the election of directors. However, any shareholder entitled to vote generally in the election of directors may nominate one or more persons for election as directors at a meeting only if written notice of such shareholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the secretary of the corporation not less than 45 days nor more than 60 days prior to a meeting date corresponding to the previous year's annual meeting. Each such notice to the secretary shall set forth: (i) the name and address of record of the shareholder who intends to make the nomination; (ii) a representation that the shareholder is a holder of record of shares of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) the name, age, business and residence addresses, and principal occupation or employment of such nominee; (iv) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (v) such other information regarding each nominee proposed by such 3 shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (vi) the consent of each nominee to serve as a director of the corporation is so elected. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. The presiding officer of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE III EXECUTIVE COMMITTEE The Board of Directors may by unanimous affirmative action of the entire Board designate two or more of their number to constitute an Executive Committee which, to the extent determined by unanimous affirmative action of the Board, shall have and exercise the authority of the Board in the management of the business of the corporation. Such Executive Committee shall act only in the interval between meetings of the Board and shall be subject at all times to the control and direction of the Board. ARTICLE IV OFFICERS SECTION 1. The officers of this corporation shall be a Chairman of the Board, a President, one or more Vice Presidents (any one of which may be designated as Executive Vice President or Senior Vice President in the discretion of the Directors), a Treasurer, a Secretary, a Controller, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other and further officers as may be deemed necessary from time to time by the Board of Directors, each of whom shall be elected by the Board of Directors. SECTION 2. The Chairman of the Board shall preside at all meetings of the Board of Directors and of the shareholders, shall be responsible for the functions and activities of the Board of Directors subject to the control of the Board of Directors, shall make such reports to the Board of Directors and the shareholders as may from time to time be required, and shall have such other powers and shall perform such other duties as may be from time to time assigned to him by the Board of Directors. SECTION 3. The duties and responsibilities of the Chairman of the Board set forth in Article IV, Section 2 of these Bylaws shall be performed, in the absence of the Chairman of the Board, by the President. SECTION 4. The President shall make such reports to the Board of Directors, as may from time to time be required, and shall have such powers and shall perform such other duties as may be from time to time assigned to him by the Board of Directors. 4 SECTION 5. The Vice Presidents of the Corporation shall each have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred by the Board of Directors. In case of the death, resignation or disability of the President, the Vice President designated as Executive Vice President, or if none, the Vice President designated as Senior Vice President, or if neither, the Vice President who has held that office for the longest continuous period of time, shall assume the duties and responsibilities of the President until further action by the Board of Directors. SECTION 6. The Secretary shall keep a record of the meetings and proceedings of the Directors and shareholders, have custody of the corporate seal and of other corporate records not specifically entrusted to some other official by these Bylaws or by direction of the Board of Directors, and shall give notice of such meetings as are required by these Bylaws or by the Directors. SECTION 7. The Treasurer shall keep accounts of all monies and assets of the corporation received or disbursed, shall deposit all funds in the name of and to the credit of the corporation in such banks or depositories or with such custodians as may be authorized to receive the same by these Bylaws or the Board of Directors, and shall render such accounts thereof as may be required by the Board of Directors, the President, or the shareholders. SECTION 8. All other officers of the corporation elected or appointed by the Board of Directors shall have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred upon them by the Board of Directors. ARTICLE V FISCAL YEAR The fiscal year of this corporation shall end each year on the Friday closest to August 31. ARTICLE VI OFFICE The principal office of this corporation shall be at Northfield, Minnesota. The corporation may also have an office or offices at such other places and in such other states as the Board of Directors may from time to time authorize and establish. ARTICLE VII SEAL The corporation shall have a corporate seal which shall bear the name of the corporation and the name of the state of incorporation and the words "corporate seal." It shall be in such form and bear such other inscription as the Board of Directors may determine or approve. 5 ARTICLE VIII GENERAL PROVISIONS SECTION 1. Shares of stock in this corporation not exceeding the authorized number thereof as specified in the Articles of Incorporation may be issued, and certificates therefor shall be authenticated by the Chairman of the Board, President or any Vice President and the Secretary or Treasurer upon authorization by the Board of Directors and receipt by the corporation of such consideration for such shares as shall be specified by the Board of Directors. In the event that a bank, trust company or other similarly qualified corporation is designated and agrees to act as the registrar and/or transfer agent for the corporation, then the signatures of the officers specified above and the seal of the corporation may be imprinted upon the stock certificates by facsimile and said certificates may be authenticated by signature of an authorized agent of the said registrar and/or transfer agent. The officers of the corporation may delegate to such transfer agent and/or registrar such of the duties relating to the recording and maintenance of records relating to the shares of stock and shareholders of the corporation as may be deemed expedient and convenient and as are assumed by said registrar and/or transfer agent. SECTION 2. The Board of Directors may establish reasonable regulations for recording of transfers of shares of stock in this corporation, and may establish a date, not earlier than 60 days prior to any shareholders meeting, as of which the shareholders entitled to vote and participate in any shareholders meeting shall be determined. SECTION 3. From time to time as it may deem appropriate and advantageous to the best interests of this corporation, the Board of Directors may establish such bonus, pension, profit sharing, stock bonus, stock purchase, stock option, or other employee incentive plans, as and for the benefit of such of the corporation's employees as it in its sole discretion shall determine. SECTION 4. No certificate for shares of stock in this corporation, or any other security issued by this corporation shall be issued in place of any certificate alleged to have been lost, destroyed or stolen, except on production of such evidence of such loss, destruction, or theft and on delivery to the corporation, if the Board of Directors shall so require, of a bond of indemnity in such amount (not exceeding twice the value of the shares represented by such certificate), upon such terms and secured by such surety as the Board of Directors may in its discretion require. SECTION 5. Any person who at any time shall serve, or shall have served, as a director, officer, or employee of this corporation, or of any other enterprise at the request of this corporation, and the heirs, executors and administrators of such person, shall be indemnified by this corporation in accordance with, and to the fullest extent provided by, the provisions of the Minnesota Business Corporation Act as it may from time to time be amended. 6 ARTICLE IX ADOPTION AND AMENDMENT SECTION 1. These Bylaws shall become and remain effective until amended or superseded as hereinafter provided when they shall have been adopted by the Board of Directors named in the Articles of Incorporation, or in the absence of such adoption, by the shareholders. SECTION 2. The Board of Directors may alter or may amend these Bylaws and may make or adopt additional Bylaws, subject to the power of the shareholders to change or repeal the Bylaws, except that the Board of Directors shall not make or alter any Bylaw relating to the qualifications or terms of office of the Directors. The Board of Directors may make, adopt, alter or amend any Bylaw to increase, but not to decrease, the number of Directors. SECTION 3. The shareholders may alter or amend these Bylaws and may make or adopt additional Bylaws by a majority vote at any annual meeting of the shareholders or at any special meeting called for that purpose. 7 EX-4.13 3 EXHIBIT 4.13 AGREEMENT RELATING TO SHELDAHL This Agreement Relating to Sheldahl (the "Agreement") is made as of this 18th day of November, 1998 between Sheldahl, Inc., a Minnesota corporation ("Sheldahl") and Molex Incorporated, a Delaware corporation ("Molex"). A. The parties have executed and delivered a Convertible Preferred Stock Purchase Agreement (the "Purchase Agreement") pursuant to which Molex will acquire shares of Series D Convertible Preferred Stock of Sheldahl. B. The parties have executed a Limited Liability Company Agreement to form Modular Interconnect Systems, L.L.C. (the "Joint Venture"). C. In connection with Molex's purchase of the Preferred Shares and participation in the Joint Venture, the parties have agreed to certain matters relating to Sheldahl as set forth in this Agreement. NOW, THEREFORE, the parties hereby agree as follows: SECTION 1 RIGHT OF FIRST REFUSAL 1.1 "ACQUISITION" shall mean (i) a transaction including a merger, consolidation, tender offer or exchange offer involving Sheldahl (other than transactions solely between Sheldahl and its subsidiaries or between Sheldahl and Molex) following which any person (as such term is used in Rule 13d-5 of the Securities and Exchange Commission under the Securities Exchange Act of 1934 (the "1934 Act") or group (as such term is defined in Section 13(d) of the 1934 Act) becomes or would become the "Beneficial Owner" (as such term is defined in Rule 13d-3 of the 1934 Act) of (x) a majority of the common stock, or (y) securities representing a majority of the combined voting power of all Voting Securities of Sheldahl, or following which persons who were Beneficial Owners of the common stock and Voting Securities of Sheldahl immediately before such transaction do not, after such transaction, beneficially own, directly or indirectly, a majority of the common stock and combined voting power of the Voting Securities of Sheldahl; or (ii) the disposition, by sale, exchange or otherwise, of substantially all of the assets of Sheldahl. "VOTING SECURITIES" shall mean securities of Sheldahl that are entitled to vote in the election of directors of Sheldahl. 1.2 In the event the Board of Directors of Sheldahl receives a bona fide offer (which the Board of Directors of Sheldahl is willing to accept) from a third party for an Acquisition, Sheldahl will advise Molex in writing of the terms and conditions of such offer (the "NOTICE"). 1.3 Molex shall, within thirty (30) days following its receipt of the Notice, advise Sheldahl in writing whether it is willing to consummate the Acquisition with Sheldahl upon substantially the same terms and conditions described in the Notice (but in any event on terms not less favorable to Sheldahl than those described in the Notice), and shall provide Sheldahl evidence of its ability to finance the Acquisition. 1.4 If Molex advises Sheldahl that it is willing to consummate the Acquisition with Sheldahl upon substantially the same terms and conditions described in the Notice (but in any event on terms not less favorable than those described in the Notice), Sheldahl and Molex shall, subject to the fiduciary duties of the Board of Directors of Sheldahl determined in consultation with Sheldahl's counsel, proceed in good faith to consummate the Acquisition within ninety (90) days of the date on which Molex advised Sheldahl that it was willing to consummate the Acquisition upon substantially the same terms and conditions described in the Notice. 1.5 If Molex advises Sheldahl that it is not willing to consummate the Acquisition with Sheldahl upon substantially the same terms and conditions described in the Notice, or fails to advise Sheldahl of its intentions within the 30-day period referred to in Section 1.3 above, or Molex fails to proceed in good faith to consummate the Acquisition within the 90-day period referred to in Section 1.4 above, Sheldahl shall be free to consummate an Acquisition with any third party upon terms and conditions that are not more favorable to the third party than those described in the Notice. 1.6 If Sheldahl wishes to solicit interests for an Acquisition, Sheldahl shall advise Molex in writing of the terms and conditions upon which it is willing to consummate the Acquisition ("SHELDAHL NOTICE"). 1.7 Molex shall, within thirty (30) days following its receipt of the Sheldahl Notice, advise Sheldahl in writing whether it is willing to consummate the Acquisition with Sheldahl upon substantially the same terms and conditions described in the Sheldahl Notice (but in any event on terms not less favorable to Sheldahl than those described in the Sheldahl Notice) and shall provide Sheldahl with evidence of its ability to finance the Acquisition. 1.8 If Molex advises Sheldahl that it is willing to consummate the Acquisition with Sheldahl upon substantially the same terms and conditions described in the Sheldahl Notice (but in any event on terms not less favorable to Sheldahl than those described in the Sheldahl Notice), Sheldahl and Molex shall, subject to the fiduciary duties of the Board of Directors of Sheldahl determined in consultation with Sheldahl's counsel, proceed in good faith to consummate the Acquisition within ninety (90) days of the date on which Molex advised Sheldahl that it was willing to consummate the Acquisition upon substantially the same terms and conditions described in the Sheldahl Notice. 1.9 Notwithstanding the terms of Sections 1.2, 1.3, 1.4 and 1.5, if Molex advises Sheldahl that it is not willing to consummate the Acquisition with Sheldahl upon substantially the same terms and conditions described in the Sheldahl Notice, or fails to advise Sheldahl of its intentions within the 30-day period referred to in Section 1.7 above, or Molex fails to proceed in 2 good faith to consummate the Acquisition within the 90-day period referred to in Section 1.8 above, Sheldahl shall be free to solicit for and consummate the Acquisition with a third party upon terms and conditions that are not more favorable to the third party than those described in the Sheldahl Notice, subject to the terms of Section 1.11. 1.10 In the event any third party advises Sheldahl, after the date of a Notice or a Sheldahl Notice pursuant to which Molex has advised Sheldahl that it is willing to consummate an Acquisition with Sheldahl, that the third party is willing to enter into an Acquisition with Sheldahl on terms and conditions more favorable to Sheldahl than those described in the Notice or the Sheldahl Notice (the "SECOND OFFER"), Sheldahl shall advise Molex in writing of the terms and conditions of such Second Offer (the "SECOND NOTICE"). Molex shall, within five (5) business days following its receipt of the Second Notice, advise Sheldahl in writing whether it is willing to consummate the Acquisition with Sheldahl upon substantially the same terms and conditions described in the Second Notice (but in any event on terms not less favorable to Sheldahl than those described in the Second Notice) and shall provide Sheldahl with evidence of its ability to finance the Acquisition. If Molex advises Sheldahl that it is willing to consummate the Acquisition with Sheldahl upon substantially the same terms and conditions described in the Second Notice (but in any event on terms not less favorable to Sheldahl than those described in the Second Notice), Sheldahl and Molex shall, subject to the fiduciary duties of the Board of Directors of Sheldahl determined in consultation with Sheldahl's counsel, proceed in good faith to consummate the Acquisition within ninety (90) days of the date on which Molex advised Sheldahl that it was willing to consummate the Acquisition upon substantially the same terms and conditions of the Second Notice. If Molex advises Sheldahl that it is not willing to consummate the Acquisition upon substantially the same terms and conditions of the Second Notice, or fails to advise Sheldahl of its intentions within the five business day period referred to in this section, or Molex fails to proceed in good faith to consummate the Acquisition within ninety (90) days, Sheldahl shall be free to consummate an Acquisition with any third party upon terms and conditions that are not more favorable to the third party than those described in the Second Notice. 1.11 If Sheldahl shall receive offers from (i) any third party as provided in Section 1.9; or (ii) any third party subsequent to the date of the Second Offer that are more favorable to Sheldahl or its shareholders than the Second Offer, Sheldahl shall advise Molex in writing of the terms and conditions of such additional offers prior to accepting any such further offer and, with respect to clause (i) above, Molex shall receive such notice at least five business days prior to Sheldahl accepting any such offer. However, in light of the fiduciary duties of the Board of Directors of Sheldahl in such a situation, Sheldahl shall be free to accept that offer which the Board of Directors of Sheldahl determines is most favorable to Sheldahl or its shareholders. Sheldahl's decision as to which party's terms are most favorable shall be final and binding. 1.12 If the Acquisition contemplates payment of consideration (including any tax deferral benefits and other non-cash items) to Sheldahl or its shareholders other than cash, and Molex is not able to pay or deliver to Sheldahl or its shareholders the same form of non-cash 3 consideration, Molex shall, in its notice to Sheldahl to express its intention to consummate an Acquisition, set forth in detail the form of consideration Molex is offering in the Acquisition (the "SUBSTITUTE CONSIDERATION"). Such Substitute Consideration shall be substantially equivalent in value from a financial point of view to Sheldahl or its shareholders when compared to the original consideration offered to Sheldahl by a third party or solicited by Sheldahl from a third party, as the case may be. If Molex and Sheldahl disagree whether the Substitute Consideration offered by Molex is "substantially equivalent in value from a financial point of view," the final determination shall be made by a reputable investment bank mutually acceptable to Sheldahl and Molex which has not performed services for either Sheldahl or Molex in the past twelve (12) months, which determination shall be binding upon Molex and Sheldahl; provided, however, that the Board of Directors of Sheldahl, after consultation with its counsel, shall be satisfied in good faith that it has fulfilled its fiduciary duties by accepting the determination of the investment bank. In the event it is determined that Molex's Substitute Consideration is not "substantially equivalent in value from a financial point of view," Sheldahl shall provide written notice to Molex reasonably describing such deficiency (the "DEFICIENCY NOTICE"), in which event Molex may provide a modified offer providing Substitute Consideration which is "substantially equivalent in value from a financial point of view" in writing within five (5) business days of Sheldahl's Deficiency Notice. In the event Molex does not provide the modified offer as provided above within the time period provided above, Sheldahl shall be entitled to accept the third party offer free of any rights of Molex under this Agreement. SECTION 2 PREEMPTIVE RIGHTS 2.1 Except for (i) grants of options to acquire Sheldahl Common Stock under Sheldahl's employee and consultant benefit plans adopted by Sheldahl and except for Sheldahl Common Stock issued upon exercise of such options granted pursuant to such plans; (ii) shares of Sheldahl Common Stock issued upon conversion of the 15,000 shares of Series B Convertible Preferred Stock of Sheldahl and upon payment of dividends with respect to such shares; (iii) shares of preferred stock, Common Stock or rights of Sheldahl issued pursuant to Sheldahl's Rights Agreement dated June 16, 1996 with Norwest Bank Minnesota, N.A., as amended, (the "RIGHTS AGREEMENT"); (iv) shares of Series D Convertible Preferred Stock of Sheldahl and shares of Sheldahl Common Stock issued upon conversion thereof and upon payment of dividends with respect to such preferred stock; and (v) shares issued upon exercise of warrants outstanding on the date of this Agreement (including all warrants issued or to be issued with respect to the Series D Convertible Preferred Stock), Sheldahl will give Molex written notice of its intention to issue additional Sheldahl Common Stock or securities or debt convertible into, or exercisable or exchangeable for, shares of Sheldahl Common Stock, including options and warrants (the "CONVERTIBLE SECURITIES"), in a private or public equity or debt offering. If such notice is given by Sheldahl, Molex shall have the right to purchase a portion of such Sheldahl Common Stock or Convertible Securities in such number which, when combined with the Sheldahl Common Stock owned beneficially by Molex, will equal the percentage of the issued and outstanding Sheldahl Common Stock after such purchase which Molex beneficially owned immediately prior to the 4 issuance of such additional Sheldahl Common Stock or Convertible Securities (and including solely for the purpose of determining the number of shares Molex beneficially owned immediately prior to such issuance the number of shares issued by Sheldahl during the term of this Agreement in transactions described in Section 2.4 below which Molex would have been entitled to purchase as a result of such transaction (and which were not purchased under the second or fifth sentence of Section 2.4) if the rights in this Section 2.1 would have applied to such issuance); in no event, however, shall (i) Molex's ownership following any purchase under this Section 2.1 exceed 15% of the issued and outstanding Sheldahl Common Stock (as determined pursuant to Section 4.1); or (ii) Molex's Beneficial Ownership (as defined in the Rights Agreement) following such purchase result in Molex being an "Acquiring Person" (as defined in the Rights Agreement). 2.2 EXERCISE OF PREEMPTIVE RIGHTS. In order to exercise its purchase rights hereunder, Molex must within ten business days after receipt of written notice from Sheldahl describing in reasonable detail the stock or securities being offered, the purchase price thereof, the payment and other terms and conditions thereof and Molex's percentage allotment, deliver a written notice to Sheldahl describing its election hereunder. 2.3 EXPIRATION OF OFFERING PERIOD. Upon the expiration of the ten-day period described above, Sheldahl shall be entitled to sell such Sheldahl Common Stock or Convertible Securities which Molex has not elected to purchase for a period of 90 days following such expiration on substantially the same terms and conditions as those offered to Molex. 2.4 NO RIGHTS IN CERTAIN TRANSACTIONS. Notwithstanding the foregoing, Molex shall not be entitled to the preemptive rights set forth in Section 2.1 above in connection with an issuance by Sheldahl of its Common Stock or Convertible Securities in an acquisition of assets or the business of a third party where Sheldahl is the continuing or surviving entity, but where such transaction is not an Acquisition. For a period of two years from the date hereof, in the event Sheldahl issues shares of Common Stock or Convertible Securities in a transaction described in this Section 2.4, it shall offer Molex the right to purchase a number of shares of Sheldahl Common Stock necessary to allow Molex to beneficially own, after giving effect to such transaction described in this Section 2.4, the lesser of (i) the percentage of issued and outstanding Sheldahl Common Stock which Molex beneficially owned on the date immediately prior to such transaction; or (ii) 15% of the issued and outstanding Sheldahl Common Stock (as determined pursuant to Section 4.1). The purchase price for such shares shall be at a price equivalent to the value of the Sheldahl Common Stock received by the third party or shareholders of the third party to such transaction. Molex shall exercise this right within ten business days after receipt of written notice from Sheldahl and, notwithstanding clause (ii) in the first sentence of Section 4.1, this Agreement shall not terminate in the event Molex has exercised such right prior to the termination of such ten business day period. Notwithstanding clause (ii) in the first sentence of Section 4.1, after the two-year period described above, this Agreement shall not terminate in the event an issuance of Common Stock or Convertible Securities resulting from an event described in this Section 2.4 causes Molex to beneficially own less than 5% of the 5 issued and outstanding Sheldahl Common Stock (a "Termination Event") if either (i) Sheldahl provides Molex with the right to purchase shares of Sheldahl's Common Stock or Convertible Securities in an amount necessary to allow Molex to beneficially own 5% of the issued and outstanding Sheldahl Common Stock after such issuance and Molex exercises such purchase rights within ten business days after receipt of written notice from Sheldahl describing the stock or securities to be offered and the purchase price thereof; or (ii) Molex purchases shares in the market to increase its beneficial ownership of Sheldahl Common Stock to 5% or more within 90 days of the Termination Event. SECTION 3 BOARD REPRESENTATION 3.1 BOARD REPRESENTATION. At least fifteen (15) days prior to the meeting of the Board of Directors of Sheldahl establishing the slate of directors for the next scheduled Annual Meeting of Shareholders of Sheldahl, Sheldahl shall provide Molex with a notice of such meeting. Prior to the date of such directors' meeting, Molex shall give the nominating committee of Sheldahl's Board of Directors, in writing, the names of two director candidates selected from Molex's executive management team. Sheldahl will nominate and solicit proxies for the election of one such candidate submitted by Molex as a member of the Board of Directors of Sheldahl at that Annual Meeting of Shareholders and at each succeeding Annual Meeting of Shareholders of Sheldahl; provided, however, that after termination of this Agreement pursuant to Section 4, Sheldahl shall no longer be obligated to nominate and solicit proxies for the election of such designee of Molex as a director of Sheldahl and such nominee shall, if requested by the Board of Directors of Sheldahl, resign from the Sheldahl Board of Directors. At the first meeting of the Board of Directors after the date of this Agreement, Molex's designee (as described above) shall be appointed by the Board of Directors as a Board member. SECTION 4 MISCELLANEOUS 4.1 TERM AND TERMINATION. This Agreement shall terminate and Molex shall have no further rights under this Agreement on the earliest to occur of the following: (i) when Molex first ceases to beneficially own at least 75% of the number of shares of Sheldahl Common Stock owned beneficially by Molex as of the date of this Agreement, as indicated on Exhibit A; (ii) subject to Section 2.4, when Molex first ceases to beneficially own at least 5% of the issued and outstanding Sheldahl Common Stock; or (iii) completion of an Acquisition. For purposes of this Agreement, when determining the issued and outstanding Sheldahl Common Stock or the Sheldahl Common Stock owned beneficially by Molex, (i) all issued and outstanding shares of Series B Convertible Preferred Stock and Series D Convertible Preferred Stock shall be deemed converted to Common Stock; (ii) all warrants to purchase Common Stock outstanding on the date of this Agreement (and not subsequently exercised) shall be deemed issued and outstanding until they terminate; and (iii) all subsequently issued and outstanding Convertible Securities (other than options granted to employees or directors and Convertible Securities that are out of 6 the money) shall be deemed converted to Common Stock. With respect to (i) and (iii) immediately above, the number of shares of Sheldahl Common Stock to be issued upon conversion shall be determined as of the date a determination is to be made pursuant to this Agreement. A determination of the issued and outstanding Sheldahl Common Stock as of July 30, 1998 is set forth on Exhibit A. 4.2 GOVERNING LAW. This Agreement shall be governed in all respects by the laws of the State of Minnesota as applied to contracts entered into solely between residents of, and to be performed entirely within, such state. 4.3 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. This Agreement may not be assigned by a party without the prior written consent of the other party. 4.4 ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subject matter hereof and thereof and supersedes all prior agreements and understandings among the parties relating to the subject matter hereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the party against which enforcement of any such amendment, waiver, discharge or termination is sought. 4.5 NOTICES AND DATES. Any notice or other communication given under this Agreement shall be sufficient if in writing and sent by registered or certified mail, return receipt requested, postage prepaid, by facsimile, by hand delivery or overnight mail to a party at its address set forth below (or at such other address as shall be designated for such purpose by such party in a written notice to the other party hereto): if to Sheldahl: Sheldahl, Inc. 1150 Sheldahl Road Northfield MN 55057 Attention: James E. Donaghy Fax: 507-663-8326 with a copy to: Lindquist & Vennum P.L.L.P. 4200 IDS Center 80 South 8th Street Minneapolis MN 55042 Attention: Charles P. Moorse Fax: 612-371-3207 7 if to Molex: Molex Incorporated 2222 Wellington Court Lisle IL 60532 Attention: Frederick A. Krehbiel Fax: 630-512-8632 With a copy to: Sonnenschein Nath & Rosenthal 8000 Sears Tower Chicago IL 60603 Attention: Michael Froy Fax: 312-876-7934 All such notices and communications shall be effective when received by the addressee. In the event that any date provided for in this Agreement falls on a Saturday, Sunday or legal holiday, such date shall be deemed extended to the next business day. 4.6 SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restriction of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 4.7 COSTS AND EXPENSES. Each party hereto shall pay its own costs and expenses incurred in connection herewith, including the fees of its counsel, auditors and other representatives, whether or not the transactions contemplated herein are consummated. 4.8 NO THIRD PARTY RIGHTS. Nothing in this Agreement shall create or be deemed to create any rights in any person or entity not a party to this Agreement. 4.9 REMEDIES. Sheldahl and Molex acknowledge that a breach of this Agreement by one party could cause the other party damage which may not be adequately compensated by damages at law. Therefore, Sheldahl and Molex agree that, in addition to other relief afforded by law, seeking an injunction for specific performance shall be a proper mode of relief for violations of this Agreement. 8 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective authorized officers as of the date aforesaid. SHELDAHL, INC. By /s/ Edward L. Lundstrom -------------------------------- Its President ------------------------------- MOLEX INCORPORATED By /s/ Thomas S. Lee -------------------------------- Its Vice President New Ventures & Acquisitions --------------------------------------------- 9 EXHIBIT A BENEFICIAL OWNERSHIP OF SHELDAHL, INC. BY MOLEX INCORPORATED As of July 30, 1998
Common Shares ------------- Common Shares Issued and Outstanding 9,660,615 Series B Preferred (including dividends converted at $6.01 through 7/30/98) 1,330,795 Outstanding Warrants 167,812 Series D Warrants 329,170 Series D Preferred (converted at $6.15) 5,352,358 ---------- Total Sheldahl Common Stock (per Section 3.1) 16,840,750 ---------- ---------- Molex Incorporated 340,000 Series D Warrants 120,000 Series D Preferred $12.0M 1,951,219 ---------- Molex Incorporated Ownership 2,411,219 ---------- ---------- Molex Incorporated Percentage Ownership 14.32%
EX-10.4-1 4 EXHIBIT 10.4.1 FIRST AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Amendment, dated as of November 25, 1998, is made by and among Sheldahl, Inc., a Minnesota corporation (the "Borrower"), NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national banking association ("Norwest"; in its separate capacity as administrative agent for the Lenders, the "Agent"), and each of the financial institutions appearing on the signature pages hereof. Recitals The Borrower, the Agent and the Lenders are parties to a Credit and Security Agreement dated as of June 19, 1998 (the "Credit Agreement"). Capitalized terms used in these recitals and in the preamble have the meanings given to them in the Credit Agreement unless otherwise specified. On July 31, 1998, the Borrower paid the Bridge Notes in full and no Additional Warrants were issued. The Borrower is presently in default of various financial covenants and has requested that the Lenders waive such defaults and agree to make certain amendments to the Credit Agreement. The Agent is 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: "'Borrowing Base' means, at any time, the lesser of: (a) the aggregate Revolving Facility Amounts of the Lenders, or (b) subject to change from time to time in the sole discretion of all the Lenders, the sum of: (i) eighty-five percent (85%) of Eligible Accounts, plus (ii) the lesser of $4,000,000 or sixty percent (60%) of Eligible Raw Materials Inventory, plus (iii) the lesser of $4,000,000 or fifty percent (50%) of Eligible Finished Goods Inventory, plus (iv) the lesser of $2,000,000 or twenty percent (20%) of Eligible Other Inventory, LESS (v) $1,000,000." "'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, 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) incurred during the fiscal year-to- date period ending on such date." "'First Amendment' means the First Amendment to Credit and Security Agreement by and among the Borrower, the Lenders and the Agent dated as of November 25, 1998." "'First Amendment Effective Date' means the date all conditions set forth in Section 8 of the First Amendment are satisfied." "'Net Equity Proceeds" means the net cash proceeds actually received by the Borrower from sale of additional common or preferred stock or convertible instruments in the Borrower on or after the First Amendment Effective Date. "'Revolving Floating Rate' means, effective as of November 20, 1998, an annual rate equal to (i) from November 20, 1998 through the date the Borrower receives not less than $4,900,000 in Net Equity Proceeds, the sum of the Base Rate plus one half of one percent (0.5%), and (ii) after such amount is received, the Base Rate, which rate shall change when and as the Base Rate changes." "'Term Floating Rate' means, effective as of November 20, 1998, an annual rate equal to (i) from November 20, 1998 through the date the Borrower receives not less than $4,900,000 in Net Equity Proceeds, the sum of the Base Rate plus one half of one percent (0.5%), and (ii) after such amount is received, the Base Rate, which rate shall change when and as the Base Rate changes." 2 2. FINANCIAL COVENANTS. Sections 6.17 through 6.21 and Section 7.12 of the Credit Agreement are amended to read as follows and a new Section 6.22 is added immediately after Section 6.21: "Section 6.17 RESERVED. "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 MINIMUM CASH FLOW ON OR ABOUT AVAILABLE FOR DEBT SERVICE 11/30/98 $(300,000) 2/28/99 $5,500,000 5/31/99 $10,300,000 8/31/99 $21,100,000
"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 MINIMUM DEBT SERVICE ON OR ABOUT COVERAGE RATIO 2/28/99 0.70 to 1.00 8/31/99 1.50 to 1.00
"Section 6.20 MINIMUM PRE-TAX NET INCOME. The Borrower will achieve Pre-tax Net Income, determined as of the end of each fiscal quarter described below, of not less than the amount set forth opposite such fiscal quarter:
FISCAL QUARTER ENDING ON MINIMUM PRE-TAX NET OR ABOUT INCOME 11/30/98 $(2,710,000) 2/28/99 $(5,050,000) 5/31/99 $(4,985,000) 8/31/99 $(4,210,000)
"Section 6.21 MINIMUM NET WORTH. The Borrower will maintain its Net Worth, determined as at the end of each fiscal quarter described below, of not less than the amount set forth opposite such fiscal quarter: 3
FISCAL QUARTER ENDING ON MINIMUM NET WORTH OR ABOUT 11/30/98 $74,200,000 2/28/99 $76,400,000 5/31/99 $76,000,000 8/31/99 $81,300,000
"Section 6.22 NEW COVENANTS. Within 60 days after each fiscal year end of the Borrower, the Borrower and the Required Banks shall agree on new covenant levels for Sections 6.18 through 6.21 for periods after such fiscal year end. The new covenant levels will be based on the Borrower's projections for such periods and shall be no less stringent than the present levels. "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 each fiscal quarter described below, amounts in excess of the amount set forth opposite such quarter:
FISCAL QUARTER ENDING CAPITAL EXPENDITURES ON OR ABOUT 11/30/98 $2,500,000 2/28/99 $2,200,000 5/31/99 $1,400,000 8/31/99 $1,500,000
PROVIDED, HOWEVER, that amounts not expended during any fiscal quarter listed above (other than the last) may be carried forward and expended through August 31, 1999." 3. PAYMENTS ON DEBT. The following new Section 7.21 is added to the Credit Agreement immediately after Section 7.20: "Section 7.21 PAYMENTS ON DEBT OWED TO THIRD PARTIES. The Borrower shall not make any payments on Debt owed to Persons other than the Banks except: (i) regularly scheduled payments of principal and interest pursuant to the terms of Debt instruments satisfactory to the Agent; and (ii) prepayments of Debt owed to ReliaStar in the amount of $500,000 on December 1, 1998, $250,000 on January 1, 1999 and $250,000 on February 1, 1999." 4. EVENTS OF DEFAULT. Section 8.1(q) of the Credit Agreement is amended to read as follows: 4 "(q) Failure of the Borrower to receive Net Equity Proceeds of at least $4,900,000 by February 28, 1999, and at least $4,900,000 by August 30, 1999." 5. COMPLIANCE CERTIFICATE. Exhibit F to the Credit Agreement is replaced by Exhibit A to this First Amendment. 6. 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. 7. WAIVER OF DEFAULTS. The Borrower is in default of the following provisions of the Credit Agreement as of August 28, 1998 (collectively, the "Defaults"):
COVENANT REQUIRED ACTUAL Section 6.18 Cash Flow Available for Debt Not less than $(3,398,000) Service $(3,403,000) Section 6.20 Minimum Pre-tax Net Income Not less than $(36,497,000) $(36,000,000) Section 6.21 Minimum Net Worth Not less than $78,380,000 $78,533,000 Section 7.12 Capital Expenditures Not more than $5,504,000 $5,170,000
Also, the Borrower has borrowed money from Boeing Capital Corporation in violation of Section 7.2 of the Credit Agreement and redeemed 623 shares of Series B Preferred stock held by Southbrook, Inc. in violation of Section 7.5 of the Credit Agreement. Upon the terms and subject to the conditions set forth in this Amendment, the Lenders hereby waives the 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. 8. CONDITIONS PRECEDENT. This Amendment, and the waiver set forth in Paragraph 7 hereof, shall be effective when the Lenders shall have received an executed original hereof, together with each of the following, each in substance and form acceptable to the Lenders in its sole discretion: (a) A Certificate of the Secretary of the Borrower certifying as to (i) the resolutions of the board of directors of the Borrower approving the execution and delivery of this Amendment, (ii) the fact that the articles of incorporation and bylaws of the Borrower, which were certified and delivered to the Lenders pursuant to the 5 Certificate of Authority of the Borrower's secretary or assistant secretary dated as of June 19, 1998 in connection with the execution and delivery of the Credit Agreement continue in full force and effect and have not been amended or otherwise modified except as set forth in the Certificate to be delivered, and (iii) certifying that the officers and agents of the Borrower who have been certified to the Lenders, pursuant to the Certificate of Authority of the Borrower's secretary or assistant secretary dated as of June 19, 1998, as being authorized to sign and to act on behalf of the Borrower continue to be so authorized or setting forth the sample signatures of each of the officers and agents of the Borrower authorized to execute and deliver this Amendment and all other documents, agreements and certificates on behalf of the Borrower. (b) Such other matters as the Lenders may require. 9. REPRESENTATIONS AND WARRANTIES. The Borrower hereby represents and warrants to the Lenders as follows: (a) The Borrower has all requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrower and constitute the legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms. (b) The execution, delivery and performance by the Borrower of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrower, or the articles of incorporation or by-laws of the Borrower, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected. (c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date. 10. 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. 11. NO OTHER WAIVER. Except as set forth in Paragraph 7 hereof, the execution of this Amendment and acceptance of any documents related hereto shall not be 6 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. 12. RELEASE. The Borrower hereby absolutely and unconditionally releases and forever discharges the Lenders, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which the Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown. 13. 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. 14. MISCELLANEOUS. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above. NORWEST BANK MINNESOTA, SHELDAHL, INC. NATIONAL ASSOCIATION, as Agent By /s/ Terry S. Jackson By /s/ John V. McManus ----------------------------- ----------------------------- Terry S. Jackson John V. McManus Its Vice President Its Vice President of Finance 7 NORWEST BANK MINNESOTA, HARRIS TRUST AND SAVINGS NATIONAL ASSOCIATION BANK By /s/ Terry S. Jackson By /s/ George Dluhy ----------------------------- ----------------------------- Terry S. Jackson George Dluhy Its Vice President Its Vice President NBD BANK THE CIT GROUP/EQUIPMENT FINANCING, INC. By /s/ Marguerite C. Gordy By /s/ William Hickey ----------------------------- ----------------------------- Marguerite C. Gordy William Hickey Its Vice President Its Assistant Vice President 8 Exhibit A to First Amendment to Credit and Security Agreement COMPLIANCE CERTIFICATE TO: Terry S. Jackson Norwest Bank Minnesota, National Association DATE: ____________________, 199__ SUBJECT: Financial Statements Dear Mr. Jackson: I am the duly qualified and acting [Vice President of Finance] [assistant corporate controller] 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, Norwest Bank Minnesota, National Association, as agent ("Norwest"; 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 by the First Amendment to Credit and Security Agreement dated as of November ___, 1998 (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 ___________, 199__ (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. / / 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 to thereto. I further certify to the Lenders as follows: 1. MINIMUM CASH FLOW AVAILABLE FOR DEBT SERVICE. Pursuant to Section 6.18, 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 MINIMUM CASH FLOW ON OR ABOUT AVAILABLE FOR DEBT SERVICE 11/30/98 $(300,000) 2/28/99 $5,500,000 5/31/99 $10,300,000 8/31/99 $21,100,000
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 OR MINIMUM DEBT SERVICE ABOUT COVERAGE RATIO 2/28/99 0.70 to 1.00 8/31/99 1.50 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-
FISCAL QUARTER ENDING ON MINIMUM PRE-TAX NET INCOME OR ABOUT 11/30/98 $(2,710,000) 2/28/99 $(5,050,000) 5/31/99 $(4,985,000) 8/31/99 $(4,210,000)
4. MINIMUM BOOK NET WORTH. Pursuant to Section 6.21 of the Credit Agreement, as of the Reporting Date, the Borrower's Book Net Worth was $____________, which / / satisfies / / does not satisfy the requirement that the Borrower's Book Net Worth be not less than $_________________ on the Reporting Date as set forth below:
FISCAL QUARTER ENDING ON MINIMUM NET WORTH OR ABOUT 11/30/98 $74,200,000 2/28/99 $76,400,000 5/31/99 $76,000,000 8/31/99 $81,300,000
5. 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, which / / satisfies / / does not satisfy the requirement that such expenditures not exceed $__________ in the aggregate during such fiscal quarter as set forth below plus $_________________ which was carried forward from prior fiscal quarters in accordance with Section 7.12.
FISCAL QUARTER ENDING ON CAPITAL EXPENDITURES OR ABOUT 11/30/98 $2,500,000 2/28/99 $2,200,000 5/31/99 $1,400,000 8/31/99 $1,500,000
-3- 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 [Vice President of Finance] [Assistant Corporate Controller] -4- EX-10.10-1 5 EXHIBIT 10.10.1 AMENDMENT TO EMPLOYMENT (CHANGE IN CONTROL) AGREEMENT This Amendment, made as of the 29th day of July, 1998 between Sheldahl, Inc., a Minnesota corporation (hereinafter called the "Company"), and _____________, an executive of the Company (hereinafter called the "Executive"). WHEREAS, the Company and Executive entered into an Employment (Change in Control) Agreement dated as of the ____ day of ________, 199__ (the "Change in Control Agreement"); and WHEREAS, the Company and Executive desire to amend the Change in Control Agreement as provided in this Amendment. NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth and for other good and valuable consideration, the parties hereby agree as follows: 1. Section 2(a)(i) of the Change in Control Agreement is hereby amended by adding the following at the end of such section: "Notwithstanding the foregoing, a Change in Control shall not be deemed to occur with respect to Molex Incorporated and its Affiliates and Associates until such time as any one of them becomes the beneficial owner of twenty-two percent (22%) or more of the voting power of the Company and references to "twenty percent (20%)" in this Agreement shall be deemed to refer to "twenty-two percent (22%)" when applied to Molex Incorporated and its Affiliates and Associates; provided that Common Stock received by Molex Incorporated as dividends paid or accrued on the Company's Series D Convertible Preferred Stock (the "Series D Preferred") shall be excluded from such beneficial ownership calculation for Molex Incorporated and its Affiliates and Associates so long as such beneficial ownership includes only shares of the Company's Common Stock owned as of the date hereof, shares of Series D Preferred, shares of Series D Preferred converted into Common Stock, Common Stock received as dividends paid or accrued on the Series D Preferred and Common Stock issued directly to Molex Incorporated after the date hereof by the Company." 2. All other terms of the Change in Control Agreement shall remain unchanged. IN WITNESS WHEREOF, the Company and the Executive have executed this Amendment as of the date first written above. SHELDAHL, INC. By _______________________________ Edward L. Lundstrom President __________________________________ [Executive] EX-10.12 6 EXHIBIT 10.12 SUPPLEMENTARY EXECUTIVE RETIREMENT PLAN AGREEMENT This Agreement, between Sheldahl, Inc., a Minnesota corporation ("Sheldahl"), and James E. Donaghy (the "Executive") is made and entered into this 5th day of November, 1996. WHEREAS, the Executive has, and is expected to provide, valuable services to Sheldahl as its Chief Executive Officer; and WHEREAS, Sheldahl desires to provide the Executive with a meaningful pension benefit upon his termination of employment with Sheldahl, taking into account the benefits to which the Executive is otherwise due from other sources; and WHEREAS, Sheldahl desires to encourage the Executive to continue his employment with Sheldahl. THEREFORE, Sheldahl and the Executive hereby agree as follows: 1. PURPOSE. The purpose of this Agreement is to provide an unfunded deferred compensation benefit for the Executive, who is a member of a select group of management employees of Sheldahl as that term is used in the Employee Retirement Income Security Act of 1974, as amended. 2. RETIREMENT PENSION BENEFIT. (a) If the Executive's employment with Sheldahl is terminated, whether voluntary or involuntary, (except in the event of Executive's death), he will be paid an annual retirement pension benefit equal to 50% of the average of the annual cash compensation (and excluding all non-cash compensation such as income recognized as a result of the exercise of stock options or the sale of stock so acquired) paid to Executive by Sheldahl for the five (5) calendar years preceding the calendar year which includes Executive's termination date but not less than $137,500, less the Reduction Amount (defined in Section 3). (b) If Executive's termination of employment occurs prior to his 65th birthday, he will be paid an annual pension benefit equal to $137,500, less the Reduction Amount. 3. The Reduction Amount for purposes of this Agreement shall mean an amount which for calculation purposes only equals the sum of (a) the aggregate of twelve (12) monthly payments received by Executive or/and Anne Donaghy under Executive's Dupont Employee Pension Plan or any other deferred compensation plan attributable to contributions by Dupont or its affiliates ("Dupont Plans") and (b) an amount which equals the one year value of a joint and 100% survivor annuity on the lives of Executive and Anne Donaghy which could be purchased with Executive's vested benefits attributable to (i) Company contributions in Company Sponsored Employee Plans and (ii) Executive's $15,600 automatic deferral (the "Automatic Deferral") to Company Sponsored Employee Plans as required under his Employment Agreement with Sheldahl dated March 1, 1988, calculated, in each case, as of the date of Executive's termination of employment. The following additional rules apply to the calculation of the Reduction Amount: (a) The monthly payments under the Dupont Plans shall be $4,583 ($55,000 annually) during Executive's life and $1,833 ($22,000 annually) upon his death. (b) The annuity valuation shall be based upon Executive's and Anne Donaghy's ages as of Executive's termination date, provided, however, that if Anne Donaghy is not surviving on such termination date, the annuity shall be a single life annuity on the life of Executive. (c) "Company Sponsored Employee Plans" shall include all qualified and non-qualified employee pension benefit plans, as defined in Section 3(2)(A) of the Employee Retirement Security Act of 1974. (d) For purposes of Section 3(b)(i), "Company contributions" shall not include any salary reduction or deferred compensation amounts elected by Executive or other contributions made by Executive. Nothing herein shall affect Executive's right to receive any amounts included in the Reduction Amount nor any elections made with respect to the receipt or deferral of such amounts. 4. PAYMENT OF RETIREMENT PENSION BENEFITS. Retirement pension benefits payable to Executive under Section 2(a) or 2(b) above shall continue for Executive's life and, after his death, if he is survived by his spouse, Anne Donaghy, shall continue to be paid to her for the duration of her life. All payments under this Agreement shall cease as of the date of the death of the survivor of Executive and Anne Donaghy. The annual pension benefits payable to Executive in any calendar year pursuant to Section 2(a) or 2(b) above shall be paid to Executive or to Anne Donaghy in twelve (12) equal monthly installments, commencing the first day of the calendar month following the date of Executive's termination of employment. 5. FORFEITURE OF BENEFITS. Notwithstanding anything herein to the contrary, no retirement pension benefits shall be payable to the Executive or his spouse or beneficiaries under this Agreement if Executive's employment is terminated for Cause, as defined in that certain employment agreement between Executive and Sheldahl dated March 1, 1988. 6. ASSIGNMENT OF BENEFITS. Neither the Executive, nor his spouse may assign or alienate benefits payable under this Agreement, whether voluntary or involuntary, or directly or 2 indirectly, except that the Executive may assign the retirement pension benefits payable under this Agreement to a trust or similar investment entity provided such trust or entity was established by the Executive and the sole beneficiaries thereunder during the Executive's lifetime are limited to the Executive and/or his immediate family (as defined in Code Section 267). 7. NO GUARANTY OF EMPLOYMENT. The existence of this Agreement does not constitute a guaranty or contract of employment between the Executive and Sheldahl and nothing in this Agreement shall modify or amend any employment agreement between the Executive and Sheldahl or to otherwise restrict or interfere with the right of Sheldahl to terminate the employment of Executive or the right of Executive to terminate his employment with Sheldahl in accordance with the terms of any employment agreement then in existence, or, in the absence of any such employment agreement, at any time at its or his will. 8. FUNDING OF PAYMENTS. In order to assure the performance by Sheldahl or its successor of its obligations under this Agreement, Sheldahl may deposit in trust an amount equal to the maximum payment that will be due Executive under the terms hereof. Under a written trust instrument, the Trustee shall be instructed to pay to Executive (or to Anne Donaghy, as the case may be) the amount to which Executive shall be entitled under the terms hereof, and the balance, if any, of the trust not so paid or reserved for payment shall be repaid to Sheldahl. If and to the extent there are not amounts in trust sufficient to pay Executive or Anne Donaghy under this Agreement, Sheldahl shall remain liable for any and all payments due to Executive or to Anne Donaghy. In accordance with the terms of such trust, at all times during the term of this Agreement Executive and Anne Donaghy shall have no rights, other than as unsecured general creditors of Sheldahl to any amounts held in trust and all trust assets shall be general assets of Sheldahl and subject to the claims of creditors of Sheldahl. 9. RESTRICTIONS ON COMPETITION. So long as payments are being made to Executive under this Agreement, Executive shall not, without the prior written consent of Sheldahl, accept employment or render service to any person, firm or corporation directly or indirectly in competition with Sheldahl or affiliate thereof, in the United States or any of its territories or possessions, or directly or indirectly enter into or in any manner take part in or lend his name, counsel or assistance to any venture, enterprise, business or endeavor, either as proprietor, principal, investor, partner, director, officer, employee, consultant, advisor, agent, independent contractor, or in any other capacity whatsoever for any purpose which would be competitive with the business of Sheldahl or any affiliate thereof, or any of their respective successors, provided, however, that the foregoing shall not be deemed to prohibit Executive from acquiring an equity interest not in excess of 5% in any company, the shares of which are listed on any national stock exchange or are traded and quoted on the National Association of Securities Dealers Automated Quotations System. 10. TITLE TO CERTAIN TANGIBLE PROPERTY. All tangible materials (whether original or duplicate) including, but not in any way limited to, equipment purchase agreements, file or data base materials in whatever form, books, manuals, sales literature, equipment price lists, training 3 materials, customer lists and records, customer files, correspondence, documents, contracts, orders, messages, memoranda, notes, agreements, invoices, receipts, lists, software listings or printouts, specifications, models, computer programs, and records of any kind in the possession or control of Executive which in any way relate or pertain to Sheldahl's business, including the business of the subsidiaries or affiliates of Sheldahl, whether furnished to Executive by Sheldahl or prepared, compiled or required by Executive during his employment with Sheldahl, shall be the sole property of Sheldahl. At any time upon request of Sheldahl, Executive shall deliver all such materials to Sheldahl. 11. TRADE SECRETS AND CONFIDENTIAL INFORMATION. Executive will not, without the express written consent of Sheldahl directly or indirectly communicate or divulge to, or use for his own benefit or the benefit of any other person, firm, association or corporation, any of Sheldahl's or its subsidiaries' or affiliates' trade secrets, proprietary data or other confidential information including, by way of illustration, the information described in Section 10, which trade secrets, proprietary data and other confidential information were communicated to or otherwise learned or acquired by Executive in the course of his employment with Sheldahl, except that Executive may disclose such matters to the extent that disclosure is required (a) in the course of his employment with Sheldahl or (b) by a court or other governmental agency of competent jurisdiction. As long as such matters remain trade secrets, proprietary data or other confidential information, Executive will not use such trade secrets, proprietary data or other confidential information in any way or in any capacity other than to further Sheldahl's interests. 12. THE COMPLETE AGREEMENT. This Agreement represents the complete Agreement between Sheldahl and Executive concerning the subject matter hereof and supersedes all prior agreements or understandings, written or oral. No attempted modification or waiver of any of the provisions hereof shall be binding on either party unless in writing and signed by both Executive and Sheldahl. 13. NOTICES. Any notice required or permitted to be given hereunder shall be in writing and shall be effective three business days after it is properly sent by registered or certified mail, if to Sheldahl to President, Sheldahl, Inc., 1150 Sheldahl Road, Northfield, Minnesota 55057, or if to Executive at his residence address, or to such other address as either party may from time to time designate by notice. 14. ASSIGNABILITY. This Agreement may not be assigned by either party without the prior written consent of the other party, except that no consent is necessary for Sheldahl to assign this Agreement to a corporation succeeding to substantially all the assets or business of Sheldahl whether by merger, consolidation, acquisition or otherwise, so long as such successor corporation expressly assumes all of the obligations of Sheldahl under this Agreement. This Agreement shall be binding upon Executive, his heirs and permitted assigns and Sheldahl, its successors and permitted assigns. 4 15. APPLICABLE LAW. It is the intention of the parties hereto that all questions with respect to the construction and performance of this Agreement and the rights and liabilities of the parties hereto shall be determined in accordance with the laws of the State of Minnesota. SHELDAHL, INC. By /s/ James S. Womack --------------------------------------- James S. Womack, Chairman of the Board /s/ James E. Donaghy --------------------------------------- James E. Donaghy 5 EX-10.17-1 7 EXHIBIT 10.17.1 WAIVER AND AMENDMENT November 25, 1998 Northern Life Insurance Company c/o ReliaStar Investment Research, Inc. 100 Washington Avenue South, Suite 800 Minneapolis, Minnesota 55401-2121 Reference is made to the Note Purchase Agreement dated as of August 31, 1995 (as amended, the "Note Purchase Agreement") between Sheldahl, Inc. (the "Company"), and Northern Life Insurance Company (the "Purchaser"), pursuant to which the Purchaser purchased the 8.32% Senior Secured Notes (collectively, the "Notes") of the Company dated August 31, 1995 in the original aggregate principal amount of $5,700,000. The Purchaser is the registered holder of 100% of the outstanding principal amount of the Notes as reflected in the Note Register required to be maintained by the Company pursuant to paragraph 11 of the Note Purchase Agreement. Capitalized terms used herein and not otherwise defined shall have the meaning set forth in the Note Purchase Agreement. The purpose of this letter is to request the Purchaser to waive compliance with and amend certain covenants of the Note Purchase Agreement. Accordingly, the Company requests the Purchaser's consent to the following: 1. VOLUNTARY PREPAYMENT OF THE NOTES. The Company requests that paragraph 2(a) of the Note Purchase Agreement be amended and restated in its entirety to read as follows: (a) VOLUNTARY PREPAYMENTS. The Company may, at its option, on any date, prepay the Notes, at par, in whole or in part (but if in part only in the aggregate amount of $100,000 or integral multiples thereof), upon 5 days' prior written notice to the holders of the Notes. 2. MINIMUM CONSOLIDATED TANGIBLE NET WORTH. The Company requests that the Purchaser waive any failure of the Company to comply with the requirements of paragraph 4(o) of the Note Purchase Agreement through August 28, 1998, and that paragraph 4(o) of the Note Purchase Agreement be amended and restated in its entirety to read as follows: (o) MINIMUM CONSOLIDATED TANGIBLE NET WORTH. At all times maintain Consolidated Tangible Net Worth in an amount not less than the sum of (i) $66,623,000, PLUS (ii) 50% of cumulative Consolidated Net Income, but, in each case, only if Consolidated Net Income is a positive number, for each completed fiscal quarter beginning with the fiscal quarter ended August 28, 1998, PLUS (iii) the aggregate amount of all increases in the Company's Consolidated Tangible Net Worth resulting from Net Equity Proceeds. 3. MAXIMUM CONSOLIDATED DEBT TO TANGIBLE NET WORTH RATIO. The Company requests that the Purchaser waive any failure by the Company to comply with the requirements of paragraph 4(p) of the Note Purchase Agreement through August 28, 1998, and that paragraph 4(p) of the Note Purchase Agreement be amended and restated in its entirety to read as follows: (p) MAXIMUM CONSOLIDATED INDEBTEDNESS TO TOTAL CAPITALIZATION RATIO AND CONSOLIDATED DEBT TO TANGIBLE NET WORTH RATIO. (i) At all times during the fiscal year of the Company ending August 27, 1999, maintain the ratio of Consolidated Indebtedness to Total Capitalization, calculated as at the end of each fiscal month, at not more than 0.40 to 1.00; and (ii) At all times during each fiscal year ending after August 27, 1999, maintain the ratio of Consolidated Debt to Consolidated Tangible Net Worth, calculated as at the end of each fiscal month, at not more than 1.25 to 1.00. 4. MINIMUM CONSOLIDATED INTEREST AND RENT COVERAGE RATIO. The Company requests that the Purchaser waive any failure by the Company to comply with the requirements of paragraph 4(q) of the Note Purchase Agreement through August 28, 1998, and that paragraph 4(q) of the Note Purchase Agreement be amended and restated in its entirety to read as follows: (q) QUARTERLY MINIMUM EBITDA AMOUNT AND MINIMUM CONSOLIDATED INTEREST AND RENT COVERAGE RATIO. (i) During the period commencing on September 1, 1998 and ending on each fiscal quarter set forth below, maintain EBITDA at least equal to the amount set forth below for each such period: 2
- ----------------------------------------------------------------------------- - ----------------------------------------------------------------------------- PERIOD BEGINNING MINIMUM SEPTEMBER 1, 1998 AND EBITDA --------------------- ------ ending on or about November 30, 1998 $1,500,000 ending on or about February 28, 1999 $2,800,000 ending on or about May 31, 1999 $4,700,000 ending on or about August 31, 1999 $5,900,000 - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
(ii) At all times after the fiscal year ending August 27, 1999, maintain its Consolidated Interest and Rent Coverage Ratio, calculated as at the end of each fiscal quarter of the Company and based upon the previous four fiscal quarters (including such fiscal quarter), at not less than 2.0 to 1.0. 5. MINIMUM FIXED CHARGE COVERAGE RATIO. The Company requests that the Purchaser waive any failure by the Company to comply with the requirements of paragraph 4(r) of the Note Purchase Agreement through August 27, 1999. 6. LIMITATION ON FUNDED DEBT. The Company requests that the Purchaser waive any failure by the Company to comply with the requirements of paragraph 5(a) of the Note Purchase Agreement through August 27, 1999. 7. SALE OF ASSETS. The Company requests that paragraph 5(e) of the Note Purchase Agreement be amended and restated in its entirety to read as follows: (e) SALE OF ASSETS. Sell, lease or otherwise dispose of all or any part of its assets, provided that (i) any Subsidiary may sell, lease or otherwise dispose of all or any part of its assets to the Company or other Subsidiary, (ii) the Company and any Subsidiary may sell inventory in the ordinary course of business, (iii) the Company and any Subsidiary may sell or otherwise dispose of assets which are obsolete, worn out or no longer useful in the conduct of their respective businesses, and (iv) the Company and any Subsidiary may sell or otherwise dispose of assets provided that the aggregate book value of all such assets sold or otherwise disposed of in any fiscal year of the Company shall not exceed 5% of the Consolidated Tangible Net Worth of the Company and its Subsidiaries as of the end of the immediately preceding fiscal year, unless the net proceeds of such sale or disposition which exceed 5% are used exclusively to make Voluntary Prepayments as described in paragraph 2(a) of the Note Purchase Agreement, as amended herein. 3 8. DIVIDEND RESTRICTIONS. The Company requests that the Purchaser waive any failure by the Company to comply with the requirements of paragraph 5(j) of the Note Purchase Agreement through November 26, 1998. 9. CAPITAL EXPENDITURES. The Company requests that the Purchaser waive any failure by the Company to comply with the requirements of paragraph 5(k) of the Note Purchase Agreement through August 28, 1998, and that paragraph 5(k) of the Note Purchase Agreement be amended and restated in its entirety to read as follows: (k) CAPITAL EXPENDITURES. (i) For the fiscal year of the Company ending August 27, 1999, expend or contract to expend Capital Expenditures in excess of (i) $3,000,000 for the fiscal quarter ending on or about November 30, 1998, (ii) $5,700,000 for the two fiscal quarters ending on or about February 28, 1999, (iii) $7,100,000 for the three fiscal quarters ending on or about May 31, 1999, (iv) $8,600,000 for the fiscal year ending on or about August 31, 1999. (ii) For each fiscal year ending after August 27, 1999, expend or contract to expend Capital Expenditures in excess of $10,000,000 during any fiscal year of the Company. 10. DEFINITIONS. (a) The Company requests that paragraph 15 of the Note Purchase Agreement be amended to include new definitions to read as follows: "CONSOLIDATED INDEBTEDNESS" shall mean all Indebtedness of the Company and its Subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles. "EBITDA" shall mean, for any period, the sum of (i) Consolidated Net Income for such period, (ii) Interest Expense for such period to the extent deducted in the computation of Consolidated Net Income, (iii) income tax expense for such period to the extent deducted in the computation of Consolidated Net Income, (iv) depreciation expense for such period to the extent deducted in the computation of Consolidated Net Income, and (v) amortization expense for such period to the extent deducted in the computation of Consolidated Net Income. "INDEBTEDNESS" shall mean (i) all obligations for borrowed money, (ii) all payment obligations constituting Capitalized Lease Obligations, (iii) all obligations which are secured by any lien existing on any asset or property whether or not the obligations secured thereby shall have been assumed, (iv) all obligations for the unpaid purchase price for goods, property or services acquired, except for trade accounts payable arising in the ordinary course of business that are not past due, (v) 4 all obligations to purchase goods, property or services where payment therefor is required regardless of whether delivery of such goods or property or the performance of such services is ever made or tendered (generally referred to as "take or pay contracts"), (vi) all obligations in respect of any interest rate or currency swap, rate cap or other similar transaction (valued in an amount equal to the highest termination payment, if any, that would be payable upon termination for any reason on the date of determination), and (vii) all obligations of others similar in character to those described in clauses (i) through (vi) of this definition creating contingent liability as obligor, guarantor, surety or in any other capacity, or in respect of which obligations assures a creditor against loss or agrees to take any action to prevent any such loss (other than endorsements of negotiable instruments for collection in the ordinary course of business), including without limitation all reimbursement obligations of such person in respect of letters of credit, surety bonds or similar obligations and all obligations of such person to advance funds to, or to purchase assets, property or services in order to maintain the financial condition of such other person. (b) The Company requests that the definition of "Net Equity Proceeds" be amended and restated in its entirety to read as follows: "NET EQUITY PROCEEDS" shall mean the net cash proceeds actually received by the Company from the sale of additional common or preferred stock in the Company on or after August 28, 1998, including cash received from the exercise of stock options. 11. PAYMENT OF INTEREST AND PRINCIPAL ON NOTES. As of the date hereof, the outstanding principal amount of the Note is $5,147,210.29, and interest has been paid through November 1, 1998. In consideration of the foregoing waivers and amendments, the Company agrees that, notwithstanding anything to the contrary in paragraph 1(a) of the Note Purchase Agreement or in the Note, the remaining principal amount of and interest on the Note shall be payable as follows: on December 1, 1998 a payment in the principal amount of $500,000, plus accrued interest at the rate hereinafter set forth; on January 1, 1999 a payment in the principal amount of $250,000, plus accrued interest at the rate hereinafter set forth; on February 1, 1999 a payment in the principal amount of $250,000, plus accrued interest at the rate hereinafter set forth; on March 1, 1999, and on the first day of each month thereafter, a payment in the principal amount of $60,000, plus accrued interest at the rate hereinafter set forth. The Notes shall bear interest (i) through November 30, 1998 at the rate of 8.32% per annum, (ii) from December 1, 1998 through January 31, 1998 at the rate of 10.00% per annum, (iii) from February 1, 1999 through February 28, 1998 at the rate of 12% per annum, (iv) from March 1, 1999 through March 31, 1999 at the rate of 13% per annum, (v) from April 1, 1999 to April 30, 1999 at the rate of 14% per annum, and (vi) from and after May 1, 1999 and continuing until payment in full of the principal amount thereof at the rate of 15% per annum (provided that solely for the purposes of determining the portion of annual interest allocable to any interest payment period, it shall be assumed that a year is comprised of 360 5 days and 12 30-day months). To evidence the foregoing amendments, the Company and the Purchaser shall execute an addendum to the Note in the form of Exhibit A hereto. 12. MISCELLANEOUS. Except as specifically set forth herein, all terms and provisions of the Note Purchase Agreement and the Notes, and all other documents and instruments related thereto, shall remain in full force and effect with no other modification or waiver. This Waiver and Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. [The remainder of this page is intentionally left blank.] 6 If you agree to the foregoing waivers and amendments of the provisions of the Note Purchase Agreement, please so indicate by executing the form of acknowledgment set forth below. The waivers and amendments shall then take effect as of the date hereof. Very truly yours, SHELDAHL, INC. By /s/ John V. McManus -------------------------------------- Its Vice President - Finance -------------------------------- Agreed to and accepted as of the date first-above mentioned: NORTHERN LIFE INSURANCE COMPANY By /s/ James V. Wittich ------------------------------------- Its Assistant Treasurer ------------------------------- [Signature page for Waiver and Amendment] 7 EXHIBIT A ADDENDUM TO THE 8.32% SENIOR SECURED NOTE OF SHELDAHL, INC. DATED AUGUST 31, 1995 This Addendum to the above-referenced Senior Secured Note (together with any note or notes issued in exchange therefor, the "Note") of Sheldahl, Inc. (the "Company") payable to Northern Life Insurance Company or registered assigns is made as of the 25th day of November 1998. The Company agrees as follows: 1. The principal amount of the Note outstanding on the date of this Addendum is $5,147,210.29, and interest has been paid through November 1, 1998. 2. Notwithstanding anything to the contrary contained in paragraph 1(a) of the Note Purchase Agreement or in the Note, the remaining principal amount of and interest on this Note shall be payable as follows: on December 1, 1998 a payment in the principal amount of $500,000, plus accrued interest at the rate hereinafter set forth; on January 1, 1999 a payment in the principal amount of $250,000, plus accrued interest at the rate hereinafter set forth; on February 1, 1999 a payment in the principal amount of $250,000, plus accrued interest at the rate hereinafter set forth; on March 1, 1999, and on the first day of each month thereafter, a payment in the principal amount of $60,000, plus accrued interest at the rate hereinafter set forth. This Note shall bear interest (i) through November 30, 1998 at the rate of 8.32% per annum, (ii) from December 1, 1998 through January 31, 1998 at the rate of 10.00% per annum, (iii) from February 1, 1999 through February 28, 1998 at the rate of 12% per annum, (iv) from March 1, 1999 through March 31, 1999 at the rate of 13% per annum, (v) from April 1, 1999 to April 30, 1999 at the rate of 14% per annum, and (vi) from and after May 1, 1999 and continuing until payment in full of the principal amount hereof at the rate of 15% per annum (provided that solely for the purposes of determining the portion of annual interest allocable to any interest payment period, it shall be assumed that a year is comprised of 360 days and 12 30-day-months). Upon execution and delivery by the Company and acceptance by the holder of the Note of this Addendum, this Addendum shall become part of the Note. All references to the Note in the Note, the Note Purchase Agreement, the Deed of Trust, and this Addendum shall hereinafter be deemed to references to the Note as amended by this Addendum. Except as expressly set forth herein, the Note shall remain in full force and effect without modification. This Addendum shall be governed by the laws of the State of Minnesota. SHELDAHL, INC. By /s/ John V. McManus ----------------------------------- Its Vice President-Finance -------------------------------- Agreed to and accepted as of the date first-above mentioned: NORTHERN LIFE INSURANCE COMPANY By /s/ James V. Wittich ---------------------------- Its Assistant Treasurer ------------------------- [Signature Page for Addendum to the Note] EX-10.28-1 8 EXHIBIT 10.28.1 AMENDMENT ONE TO LICENSE AGREEMENT This is an Amendment to an Agreement (the "Agreement") made as of 20 June, 1994 between SIDRABE, a Latvian corporation, having a principal place of business at Riga, Latvia, (the "Licensor"), and SHELDAHL, INC., a Minnesota corporation, having a principal place of business at Northfield, Minnesota, (the "Licensee") and is entered into as of September 14, 1994 by Licensor and Licensee. 1. Article II of the Agreement is amended by adding the following sections: "SECTION 2.3 FURTHER LICENSE GRANT. The Licensor further hereby grants to Licensee a nontransferable, exclusive, perpetual license to use Licensor's technical information and other technology existing at the date hereof to put metals with a thickness of 0.1 microns to 5 microns on flexible polymeric substrates in order to produce and sell products, including without limitation the ability to put active and passive electronic components on thin substrates. "Metals" as used in this Section 2.3 include, without limitation, copper, aluminum, chrome and lithium, and composites of one or more metals. "Products" as used in this Section 2.3 include, without limitation, flexible composites of metals and films, flexible printed circuits, Multichip Modules, single and several chip packages, batteries and displays for use within the electrical interconnect industry. SECTION 2.4 FUTURE DEVELOPMENTS. If Licensor shall develop new technical information and technology of the kind described in Section 2.3 (as distinguished from modifications and improvements of such technical information and technology existing at the date hereof), Licensor will first offer the right to License such technical information and technology to Licensee for use in the production and sale of products within the electrical interconnect industry. If within 90 days after Licensor has notified Licensee in writing of the new development Licensee advises Licensor of Licensee's interest in the further license, the parties will negotiate in good faith to agree upon a commercially reasonable License Agreement covering the new technical information and technology. SECTION 2.5 INTERCHANGE OF INFORMATION. To assure a continuous and free interchange of information concerning Licensor Improvements, Licensee Improvements and new technical information and technology developments, the parties hereby establish a Joint Technical Advisory Board made up of two technically trained and experienced employees from each party. The Joint Technical Advisory Board shall meet not less than two times each year. At those meetings the parties shall advise each other thoroughly regarding Licensor Improvements, Licensee Improvements and new technical information and technology improvements since the preceding meeting. Neither party shall be obligated to disclose information to the other party if (i) the information was provided by an independent third party subject to a nondisclosure or confidentiality agreement or (ii) restrictions on disclosure of the information exist by virtue of other agreements to which the party having the information is bound." 2. Section 4.0 of the Agreement is amended to read as follows: "SECTION 4.0 LUMP SUM PAYMENTS. In consideration of the Licensor's furnishing the Technical Information and services to the Licensee relating to the Licensed Products as set forth in Article III and for the licenses granted to the Licensee under Section 2.1 and as may be granted pursuant to Section 3.7, the Licensee shall pay to the Licensor an annual licensing fee of $50,000. For the year of 1994 this fee shall be payable at the rate of $10,000 per week for five weeks, the first payment of $10,000 being made upon the execution date of this Agreement with all subsequent annual payments of $50,000 being paid in a lump sum on each subsequent January 15, beginning on January 15, 1995, and continuing throughout the term of this Agreement. However, the entire License Fee will become immediately due and payable upon the Licensor's termination of this agreement under Article IX. In consideration of the Licensor's furnishing technical information and services to the Licensee relating to technical information and technology described in Section 2.3 and for the licenses granted to the Licensee under Section 2.3, the Licensee shall pay to Licensor the following licensing fees: $100,000 at the execution of this Amendment, receipt of which is acknowledged by Licensor; $50,000 on February 1, 1995; $50,000 on August 1, 1995; and An amount equal to 3% of the sales by Sheldahl of materials manufactured by Licensee using Licensor's technology described in Section 2.3, up to a maximum of $10,000,000 of such sales (a maximum of $300,000 in additional licensing fees). Payment of such amount shall be made annually on or before March 1 for sales made during the preceding calendar year. That license fees provided in this Section 4.0 shall be paid in United States currency by money transfer to the following account of the Licensor: UNIBANC A/S, STAUNINGS PLADS 1-3, COPENHAGEN, DK-1786 COPENHAGEN V, DENMARK FOR RIGA BANK ACCOUNT NO. 5005568953 IN FAVOR OF A/P "SIDRABE" ACCOUNT NO. 0700311." 3. The rights, obligations, representations and commitments of the parties relating to the Technical Information and Licensed Products set forth in Articles III, V, VI, VII and VIII of the Agreement shall in all respects extend to and be applicable to the license granted in, and the technical information and technology described in, Section 2.3. 4. Except as set forth in this Agreement, the Agreement shall continue in full force and effect. 2 EXECUTION In consideration of the foregoing terms and conditions, Licensor and Licensee have executed this Agreement as of the date first written above. SIDRABE By /s/ Edgar Yadin ------------------------------------ Its President ------------------------------------ SHELDAHL, INC. By /s/ Ross P. Miller ------------------------------------ Its Vice President - Europe ------------------------------------ 3 EX-11 9 EXHIBIT 11 Exhibit 11 SHELDAHL, INC. AND SUBSIDIARY STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE DATA)
For the Fiscal Years Ended August 30, 1996 August 29, 1997 August 28, 1998 --------------- --------------- --------------- Basic earnings per share: Weighted average number of issued shares outstanding used to compute basic earnings per share 8,414 8,967 9,364 -------- -------- -------- -------- -------- -------- Net income (loss) before convertible preferred stock dividends $ 4,772 $ (7,969) $(36,497) Convertible preferred stock dividends - - (689) -------- -------- -------- Net income (loss) applicable to common shareholders $ 4,772 $ (7,969) $(37,186) -------- -------- -------- -------- -------- -------- Net income (loss) per common share $ 0.57 $ (0.89) $ (3.97) -------- -------- -------- -------- -------- -------- Diluted earnings per share: Weighted average number of issued shares outstanding to compute basic earnings per share 8,414 8,967 9,364 Effect of exercise of stock options under the treasury stock method 272 - - -------- -------- -------- Weighted average number of issued shares outstanding used to compute diluted earnings per share 8,686 8,967 9,364 -------- -------- -------- -------- -------- -------- Net income (loss) before convertible preferred stock dividends $ 4,772 $ (7,969) $(36,497) Convertible preferred stock dividends - - (689) -------- -------- -------- Net income (loss) applicable to common shareholders $ 4,772 $ (7,969) $(37,186) -------- -------- -------- -------- -------- -------- Net income (loss) per common share $ 0.55 $ (0.89) $ (3.97) -------- -------- -------- -------- -------- --------
EX-22 10 EXHIBIT 22 Exhibit 22 SUBSIDIARY OF REGISTRANT Sheldahl International Sales, Inc. a corporation organized under the laws of the Virgin Islands (Wholly-owned subsidiary of Sheldahl, Inc.) EX-23 11 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed Registration Statement Nos. 33-58549, 333-36153, 333-36267, 333-40719, 333-47183, 333-58307 and 333-64273. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Minneapolis, Minnesota, November 30, 1998 EX-27 12 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUGUST 29, 1997 AND AUGUST 28, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR YEAR AUG-29-1997 AUG-28-1998 AUG-29-1997 AUG-28-1998 5,567 1,005 0 0 15,880 15,727 0 0 13,078 15,488 35,696 32,487 157,841 168,579 57,036 66,322 139,367 136,306 12,753 23,628 0 0 0 0 15 41 3,258 2,415 66,923 76,301 139,367 136,306 105,266 117,045 105,266 117,045 94,933 109,143 21,104 33,694 0 0 0 0 1,298 2,547 12,069 28,339 4,100 2,952 7,969 31,291 0 0 0 0 0 5,206 7,969 37,186 0.89 3.97 0.89 3.97
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