SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 Form 10-Q (X)		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 	OR ( )		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 	For Quarter Ended February 25, 2000	Commission File Number: 0-45 SHELDAHL, INC. (Exact name of registrant as specified in its charter) 	Minnesota 	41-0758073 	(State or other jurisdiction of 	(IRS Employer Identification Number) 	incorporation or organization) 	Northfield, Minnesota	 55057 	(Address of principal 	 (Zip Code) 	executive offices) Registrant's telephone number, including area code: (507) 663-8000 As of April 1, 2000, 11,762,111 shares of the Registrant's common stock were outstanding. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO PART I: FINANCIAL INFORMATION SHELDAHL, INC. AND SUBSIDIARY 	CONSOLIDATED STATEMENTS OF OPERATIONS 	(Unaudited) 	Six Months Ended 	(In thousands, except for per share data) 	February 25, 	February 26, 2000 	 1999 Net sales	 	$66,842 	$56,516 Cost of sales 	57,993 	50,697 			_______	 _______ Gross profit	 8,849	 5,819 			_______	 _______ Expenses: Sales and marketing 	3,951 	4,751 General and administrative 	4,506 	3,758 Research and development 	1,582 	1,253 Interest 	1,806 	987 Restructuring costs 	- 	 3,100 		_______	 _______ Total expenses	 11,845	 13,849 	_______	 _______ Loss before income taxes 	(2,996) 	(8,030) Income taxes	 - 	 - 			_______	 _______ Net loss before preferred dividends 	(2,996) 	(8,030) Convertible preferred stock dividends (1,028) 	 (1,072) 	 		_______	 _______ Net loss applicable to common shareholders 	$ (4,024) 	$ (9,102) 			=======	 ======= Net loss after convertible preferred stock dividends - - basic and diluted 	$ (0.35) 	$ (0.84) 			=======	 ======= Weighted average number of shares outstanding - - basic and diluted 	11,638 	10,772 			=======	 ======= The accompanying notes are an integral part of these statements. SHELDAHL, INC. AND SUBSIDIARY 	CONSOLIDATED STATEMENTS OF OPERATIONS 	(Unaudited) 	Three Months Ended 	(In thousands, except for per share data) 	February 25, 	February 26, 	2000 	1999 Net sales 		$32,030 	$28,042 Cost of sales	 27,937	 24,930 			_______	 _______ Gross profit	 4,093 	 3,112 			_______	 _______ Expenses: Sales and marketing 	1,861	 2,531 General and administrative 	2,274	 1,831 Research and development 	662 	679 Interest	 890	 664 Restructuring costs 	 - 	 3,100 		_______	 _______ Total expenses	 5,687 	 8,805 	_______	 _______ Loss before income taxes 	(1,594) 	(5,693) Income taxes	 -	 - 			_______	 _______ Net loss before preferred dividends 	(1,594)	 (5,693) Convertible preferred stock dividends	 (520)	 (418) 			_______	 _______ Net loss applicable to common shareholders	 $ (2,114)	 $ (6,111) 	 		=======	 ======= Net loss per common share - - basic and diluted 	$ (0.18) 	$ (0.55) 			=======	 ======= Weighted average number of shares outstanding - - basic and diluted 	11,663 	11,037 			=======	 ======= The accompanying notes are an integral part of these statements. SHELDAHL, INC. 	CONSOLIDATED BALANCE SHEETS 	ASSETS 	(Unaudited) (In thousands)	 February 25, 	August 27, 	2000	 1999 Current assets: Cash and cash equivalents 	$ 1,201 	$ 1,043 Accounts receivable, net	 21,459	 19,908 Inventories 	20,987	 18,746 Other current assets 	911	 593 		_______	 _______ Total current assets	 44,558	 40,290 _______ 	_______ Construction in progress 	1,091 	3,399 Land and buildings	 28,567	 28,560 Machinery and equipment 	130,288	 127,377 Less: accumulated depreciation	 (84,095) 	(76,491) 		_______	 _______ Net plant and equipment	 75,851 	 82,845 	_______	 _______ Other assets	 851 	795 		_______	 _______ 			$121,260	 $123,930 			======= 	======= 	LIABILITIES AND SHAREHOLDERS INVESTMENT Current liabilities: Current maturities of long-term debt 	$ 3,468	 $ 4,142 Accounts payable	 10,388	 10,493 Accrued salaries 	 1,272	 1,323 Other accrued liabilities 	5,106 	4,682 Restructuring reserves 	 1,368	 2,713 		_______	 _______ Total current liabilities	 21,602 	 23,353 	_______	 _______ Long-term debt 	30,745	 29,284 Restructuring reserves 	2,303	 2,484 Other non-current liabilities 	 3,341 	 3,477 		_______	 _______ 	Total liabilities	 36,389	 58,598 			_______ 	_______ Shareholders' investment: Convertible preferred stock 	42 	40 Common stock	 2,924	 2,903 Additional paid-in capital 	111,345 	109,407 Accumulated deficit	 (51,042) 	 (47,018) 	_______	 _______ Total shareholders' investment 	63,269	 65,332 	_______	 _______ 	$121,260 	$123,930 	=======	 ======= The accompanying notes are an integral part of these statements. SHELDAHL, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 		Six Months Ended (In thousands) 	February 25, 	February 26, 	2000 	1999 Operating activities: Net loss		 $ (4,024)	 $ (9,102) 	Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 	8,281 	8,066 Preferred stock dividends 	1,028 	1,072 Deferred income taxes 	- 	- Restructuring costs charged to operations 	- 	3,100 Net change in other operating activities: Accounts receivable	 (1,551)	 (3,373) Inventories 	(2,241) 	(1,736) Prepaid expenses and other current assets 	(195)	 (630) Other assets 	(56) 	93 Accounts payable and accrued liabilities	 (713) 	1,700 Restructuring payments made	 (1,550)	 (3,427) Other non-current liabilities 	(137)	 (41) 	_______	 _______ 	Net cash used in operating activities	 (1,158)	 (4,278) 			_______ 	_______ Investing activities: Capital expenditures, net	 (1,410) 	 (3,642) 		_______	 _______ Financing activities: Net borrowings under revolving credit facilities 	1,900 	5,980 Proceeds from other long-term debt 	4,300 	- Repayments of long-term debt	 (5,412) 	(2,449) Costs and redemption of Series B preferred stock 	- 	(837) Net proceeds of Series E preferred stock	 - 	5,392 Net proceeds of Series F preferred stock	 1,800	 - Stock options exercised 	138 	156 		_______	 _______ 		Net cash provided by financing activities 	 2,726 	 8,242 			_______	 _______ Net increase in cash equivalents	 158 	322 Cash and cash equivalents at beginning of period	 1,043	 1,005 			_______	 _______ Cash and cash equivalents at end of period	 $ 1,201	 $ 1,327 			=======	 ======= Supplemental cash flow information: Interest paid $ 1,806	 $ 1,662 		=======	 ======= Income taxes paid	 $ 29 	$ 69 		=======	 ======= 	The accompanying notes are an integral part of these statements. SHELDAHL, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited 	These condensed and unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, these condensed unaudited consolidated financial statements reflect all adjustments, of a normal and recurring nature, necessary for a fair statement of the interim periods, on a basis consistent with the annual audited financial statements. Certain information, accounting policies and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although these disclosures should be considered adequate, the Company strongly suggests that these condensed unaudited financial statements be read in conjunction with the financial statements and summary of significant accounting policies and notes thereto included in the Company's latest annual report on Form 10-K. 1) Inventories, which are valued at the lower of first-in first-out cost or market, consist of (in thousands): 	February 25, 2000 	August 27, 1999 Raw materials 	$10,173	 $ 6,635 Work-in-process	 6,197	 7,751 Finished goods	 4,617 	4,360 	_______	 _______ 	$20,987	 $18,746 	=======	 ======= 2) Liquidity and Going Concern Matters Cash requirements to fund restructuring charges taken during fiscal 1999 and 1998 were $1.6 million in the first half of fiscal 2000 and are expected to be approximately $1.1 million in the second half of fiscal 2000, compared to $5.0 million in total for fiscal 1999. Fiscal 2000 capital expenditures for the Company are planned at approximately $5.0 million compared with $5.5 million in fiscal 1999. Debt repayments for fiscal 2000, including refinancing of the Longmont facility, will be $3.8 million including $2.5 million on the bank term facility and $1.0 million for various capital lease payments. The impact of operating losses incurred during the first six months of fiscal 2000 and anticipated operating losses during the second half of fiscal 2000, tighter borrowing levels for the third and fourth quarters of fiscal 2000 pursuant to the Company's amended debt agreements and the continued uncertainty of the timing of sales growth of the Company's Micro Products business places significant pressure on the cash reserves of the Company. While the Company executed its plans during the first six months of fiscal 2000, it decreased its cash position by approximately $1.2 million when compared to fiscal year end 1999. The Company's cash position was improved by the issuance of the Series F Convertible Preferred Stock with gross proceeds totaling $1.8 million during the second quarter. Cash flow projections based on the Company's operating plan for the second half of fiscal 2000 reflect an increased demand for cash as Micro Product sales are anticipated to be at a level comparable with the first two quarters of fiscal 2000. As a result of the projected Micro Product sales, there will be intervals of time where borrowing capacity under the Company's debt agreements will be severely reduced. The inability of the Company to i) obtain sufficient production orders and sales for Micro Product's ViaThin in the range of $2 to $3 million for the remainder of fiscal 2000; ii) improve operating results in Micro Products for the remainder of fiscal 2000; iii) achievement of the sales acceleration in the Core Business during the second half of fiscal 2000 at levels necessary to offset any Micro Product losses resulting from an inability to obtain Micro Product sales in the range stated; iv) achieve the spending targets projected for the second half of fiscal 2000; and v) maintain adequate liquidity to fund normal operations, would result in the Company being out of compliance with certain of its debt covenants thereby allowing the Company's lenders to require full repayment of the outstanding borrowings under the Company's credit agreement and/or leave the Company in a cash reserve position that would require additional capital to fund operations. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management has and will continue to implement operational measures designed to assist the Company in achieving its remaining fiscal 2000 budget and cash flow objectives. Should any of the matters discussed above ultimately occur, management may not be able to obtain the necessary additional new capital to fund operations. There can be no assurance that the Company will be successful in achieving its projected operating results for the remaining six months of fiscal 2000, in meeting its quarterly debt covenants or in any attempt to raise additional capital to fund operations on terms acceptable to the Company. 3) Restructuring Expenses and Impairment Charges In February 1999, the Company recorded a charge of $3.1 million for separation costs incurred in reducing its salaried work force. This charge was increased by $0.5 million in August 1999. The restructuring costs provide for approximately $2.0 million for severance and early retirement salary costs and approximately $1.6 million for medical, dental and other benefits being provided to the affected individuals. Approximately 46 people were affected by this action. The fiscal 1999 restructuring costs are in addition to the $8.5 million of similar costs charged to operations in fiscal 1998. As of February 25, 2000, approximately $1.3 million has been charged to the aforementioned restructuring reserve and by February 25, 2000, 45 employees had terminated employment with the Company. In February 1998, a restructuring charge of $4.0 million was recorded related to the culmination of the Company's business re-engineering initiative that began two years ago. Due to significant productivity benefits resulting from the initiative, the Company reduced the size of its salaried workforce. The resulting workforce reduction involved layoffs, early retirement offerings, reassignments and reclassifications of positions. The restructuring costs provided for approximately $2.5 million for severance and early retirement salary costs, approximately $1.3 million for medical, dental and other benefits being provided to the affected individuals, and approximately $0.2 million for outplacement and other costs. Approximately 73 jobs were affected by this action. In May 1998, an additional restructuring charge of $4.5 million was recorded and subsequently reduced by $0.5 million in May 1999. 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 $1.4 million for severance costs, approximately $0.4 million for medical, dental and other benefits being provided to the affected individuals and approximately $2.2 million for equipment disposal, losses related to the closure of the Aberdeen facility, outplacement and other costs. Approximately 196 jobs were affected by this action. 	Both 1998 aforementioned restructuring charges were related to the Company's efforts to decrease cost and increase throughput. As of February 25, 2000, approximately $6.6 million had been charged to the Company's restructuring reserves and by November 1999, 269 employees had terminated employment with the Company related to the fiscal 1998 restructuring actions. 	In August 1999 and May 1998, non-cash impairment charges of $7.6 million and $3.3 million were recorded against the Company's statement of operations. These charges relate to equipment located principally at the Company's Longmont, Colorado facility and certain computer software which, based upon analysis by management and anticipated production processes, is not expected to contribute to the Company's future cash flows. 4)	Segment Reporting 	The following is a summary of certain financial information relating to the two segments for the six months ended as follows: 	February 25, 	February 26, 	2000 	1999 	Total sales by segment: 	Core Business	 $ 64,432 	$ 55,881 	Micro Products	 2,410	 635 		_______	 _______ 	Total company sales 	$ 66,842 	$ 56,516 		=======	 ======= 	Operating Profit (loss) by segment: 	Core Business: 	Before corporate allocation 	$ 8,715 	$ 8,278 	Corporate cost allocation	 3,677 	3,012 	Interest expense	 1,481 	968 		_______	 _______ 	Total	 $ 3,557 	$ 4,298 	 	=======	 ======= 	Micro Products: 	Before corporate allocation	 $ (5,414) 	$ (8,269) 	Corporate cost allocation 	814 	762 	Interest expense 	325 	197 		_______	 _______ 	Total 	$ (6,553)	 $ (9,228) 		=======	 ======= 	Total segments operating losses	 $ (2,996)	 $ (4,930) 		=======	 ======= 	Sales by product line: 	Laminate material 	$ 16,270 	$ 12,749 	ViaThin 	2,410 	635 	Novaflex HD	 20,902 	14,867 	Novaflex VHD 	2,273 	2,830 	Flexbase interconnects	 24,987 	 25,435 		_______	 _______ 	 	$ 66,842	 $ 56,516 		=======	 ======= 	The following is a summary of certain financial information relating to the two segments for the three months ended as follows: 	February 25,	 February 26, 	2000 	1999 	Total sales by segment: 	Core Business	 $ 30,840 	$ 27,551 	Micro Products	 1,190	 491 		_______	 _______ 	Total company sales 	$ 32,030 	$ 28,042 		=======	 ======= 	Operating Profit (loss) by segment: 	Core Business: 	Before corporate allocation 	$ 4,376 	$ 3,723 	Corporate cost allocation 	1,840 	1,475 	Interest expense 	730	 531 	_______ 	_______ 	Total 	$ 1,806	 $ 1,717 		=======	 ======= 	Micro Products: 	Before corporate allocation 	$ (2,833) 	$ (3,802) 	Corporate cost allocation 	407 	375 	Interest expense	 160 	133 		_______	 _______ 	Total	 $ (3,400) 	$ (4,310) 		=======	 ======= 	Total segments operating losses	 $ (1,594) 	$ (2,593) 		======= 	======= 	Sales by product line: 	Laminate material 	$ 7,632 	$ 6,530 	ViaThin 	1,191 	491 	Novaflex HD 	11,059 	6,979 	Novaflex VHD	 758 	1,641 	Flexbase interconnects 	 11,390 	 12,401 		_______	 _______ 		$ 32,030	 $ 28,042 		=======	 ======= SHELDAHL, INC. AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED OPERATING RESULTS AND FINANCIAL CONDITION Six Months Ended February 25, 2000 and February 26, 1999 SALES The Company's net sales increased $10.3 million, or 18.3%, from $56.5 million for the six months ended February 26, 1999 to $66.8 million for the six months ended February 25, 2000. Core Business sales increased $8.5 million, or 15.3%, to $64.4 million while Micro Products sales increased $1.8 million, or 280%, when compared to the first six months of fiscal 1999. The increased sales were principally realized from the Company's family of Novacladr products - ViaThinr, Novaflexr HD and VHD - for applications serving the datacom market. Core Business sales for the six months ended February 25, 2000 to the automotive market increased 2.7% to $39.8 million and represents 59.5% of total Company sales. Datacom sales for the same period increased $8.9 million, or 95.8%, to $18.1 million, driving mainly by new customers in the computer segment. Datacom sales represent 27% of total Company sales of which $15.7 million is from the Core Business segment and $2.4 million is from the Micro Products segment. Sales to the Company's other markets totaled $9.0 million, or 13.5%, of total Company revenue reflecting a modest increase of $0.4 million, or 5%, from the same period one year ago. The chart below details the Company's sales by market during the period (in thousands): 		Six Month Ended	 Six Months Ended 	Market	 February 25, 2000 	February 26, 1999 	Inc (Dec) 	% Change Automotive 	$ 39,760 	$ 38,702 	$ 1,058 	2.7% Datacom	 18,066	 9,225 	8,841 	95.8% Industrial	 3,391	 3,683 	(292) 	(7.9%) Consumer 	1,866 	1,402	 464 	33.1% Aerospace/Defense 	3,760 	3,504 	256 	7.3% 	_______	 _______	 _______	 _______ Total	 $ 66,842 	$ 56,516 	$ 10,326	 18.3% 	=======	 =======	 =======	 ======= GROSS PROFIT Gross profit increased to 13.2% of sales, or $8.8 million, for the six months ended February 25, 2000 compared to $5.8 million the same period one year ago. As reflected in the table below, increased sales volume and improved manufacturing operations reduced Micro Products gross loss to $4.0 million compared to $6.7 million for the same period one year ago. Core Business gross profit increased $0.3 million to $12.8 million, or 19.9%, of sales. This reflected a less profitable sales mix with higher material costs as a percent of sales. Additionally, conversion costs consisting of direct labor and factory cost of sales for the Core Business product lines increased $1.4 million when compared to the same period one year ago with freight costs being a major part of the increase. 	Six Months Fiscal 2000	Six Months Fiscal 1999 	 Core	 Micro	 Total	 Core	 Micro	 Total 	Business	 Products 	Company 	Business 	Products 	Company (In millions) Sales	 $64,432	 $ 2,410	 $66,842	 $55,881	 $ 635	 $56,516 Cost of sales 51,593	 6,400 	 57,993 	 43,361 	 7,336 	 50,697 	_______	 _______	 _______	 _______	 _______	 _______ Gross profit 	$12,839	 $(3,990)	 $ 8,849	 $12,520	 $(6,701)	 $ 5,819 	======	 =======	 =======	 =======	 =======	 ======= % of sales	 19.9%	 N/A	 13.2%	 22.4%	 N/A	 10.3% OTHER EXPENSES The Company's expenses excluding interest and restructuring charges increased $0.3 million, or 2.8%, from $9.7 million for the six months ended February 26, 1999 to $10.0 million for the six months ended February 25, 2000. Increased depreciation expenses for the Company's information technology upgrade fully deployed in the second half of fiscal 1999 was partially offset by declines in salaries. During the quarter, higher interest rates on the Company's credit and security agreement with its bank group increased gross interest expense $0.2 million. Reflecting reduced capital spending, capitalized interest declined nearly $0.6 million for the six months ended February 25, 2000 when compared to the same period one year ago. As a result, net interest expense rose $0.8 million, or 83%, to $1.8 million compared to the same period one year ago. Interest costs and activities for the noted period are detailed below: 	Six Months 	Six Months 	February 25, 2000 	February 26, 1999 	Change Gross interest expense	 $ 1,905 	 $ 1,719 	$ 186 Capitalized interest (99)	 (732) 	633 	_______	 _______	 _______ Net interest	 $ 1,806	 $ 987 	$ 819 	=======	 =======	 ======= INCOME TAXES In May 1998, based upon restructuring charges, write-offs and continued losses at the Company's Longmont, Colorado facility, management provided a valuation allowance for its net deferred tax assets. This resulted in a $3.1 million charge to income during fiscal 1998. Since that time, the Company has not and will not reflect in immediate future periods any tax provision or benefit until such net deferred tax assets are offset by reported pretax profits or that the degree of certainty increases as to the future profit performance of the Company to allow for the reversal of the valuation allowance. Three Months Ended February 25, 2000 and February 26, 1999 SALES The Company's net sales increased $4.0 million, or 14.2%, from $28.0 million for the three months ended February 26, 1999 million for the three months ended February 25, 2000. Core Business sales increased $3.3 million, or 11.9%, to $30.8 million while Micro Products sales increased $0.7 million, or 142%, when compared to the second Quarter of fiscal 1999. The increased sales were principally realized from the Company's family of Novacladr products - ViaThinr, Novaflexr HD and VHD - for applications serving the datacom market. Core Business sales for the three months ended February 25, 2000 to the automotive market increased 2.3% to $19.0 million and represents 59.5% of total Company sales. Datacom sales for the same period increased $3.3 million, or 61.8%, to $8.6 million. Datacom sales represent 26.8% of total Company sales of which $7.4 million is from the Core Business segment and $1.2 million is from the Micro Products segment. Sales to the Company's other markets totaled $4.4 million, or 13.7%, of total Company revenue reflecting a modest increase of $0.3 million, or 7%, from the same period one year ago. The table below details the Company's sales by market for the period (in thousands): 	Three Months	 Three Months Market	 February 25, 2000	 February 26, 1999	 Gross Change	 % Change Automotive 	$ 19,043 	$ 18,621 	$ 422 	2.3% Datacom 	8,580	 5,303	 3,277	 61.8% Industrial	 1,605	 1,559	 46	 3.0% Consumer	 880	 646	 234 	36.2% Aerospace/Defense 	1,922	 1,913	 9	 .5% 	_______	 _______	 _______	 _______ Total	 $ 32,030	 $ 28,042	 $ 3,988	 14.2% 	======= 	======= 	=======	 ======= GROSS PROFIT Total gross profit increased $1.0 million to 12.8% of sales for the three months ended February 25, 2000 compared to the same period one year ago. As reflected in the chart below, Micro Products gross loss decreased by 29.5% to $2.1 million compared to $3.0 million for the same period one year ago. Increased sales, reduced direct material usage in relation to sales and reduced fixed costs positively impacted gross loss. The Core Business gross profit increased $0.1 million resulting in a gross profit percent to sales of 20.2% compared to 22.3% for the same period one year ago. This reflected a less profitable sales mix with higher material costs as a percent of sales. 	 Three Months Fiscal 2000	 Three Months Fiscal 1999 	Core 	Micro	 Total	 Core	 Micro	 Total 	 Business 	Products	 Company	 Business 	Products 	Company (In millions) Sales 	$30,840	 $ 1,190	 $32,030 	$27,551	 $ 491 	$28,042 Cost of sales	 24,612 	 3,325 	 27,937 	 21,411 	 3,519 	 24,930 	_______	 _______	 _______	 _______	 _______	 _______ Gross profit	 $ 6,228	 $(2,135)	 $ 4,093	 $ 6,140 	$(3,028) 	$ 3,112 	=======	 =======	 =======	 =======	 =======	 ======= % of sales	 20.2%	 N/A	 12.8%	 22.3% 	N/A 	11.1% OTHER EXPENSES The Company's expenses excluding interest and restructuring charges decreased $0.2 million, or 4.9%, from $5.0 million for the three months ended February 26, 1999 to $4.8 million for the quarter ended February 25, 2000. A decline in salaries was the principle area contributing to this decrease. During the quarter, gross interest expense was unchanged from the same period one year ago. Reflecting reduced capital spending, capitalized interest declined $0.2 million for the three months ended February 25, 2000 when compared to the same period one year ago. As a result, net interest expense rose $0.2 million, or 34%, to $0.9 million compared to the same period one year ago. Interest costs and activities for the noted period are detailed below: 	Three Months 	Three Months 	February 25, 2000 	February 26, 1999	 Change Gross interest expense	 $ 920	 $ 921 	$ (1) Capitalized interest 	(30) 	(257) 	227 	_______	 _______	 _______ Net interest 	$ 890 	$ 664 	$ 226 	=======	 =======	 ======= FINANCIAL CONDITION On November 16, 1999, the Company refinanced its outstanding secured real estate loan. The new $4.3 million, ten-year secured real estate mortgage carries an interest rate of 8.53% and requires the Company to meet certain reporting requirements. Annual principal payments and interest under the new secured loan will be $417,000 versus $1.3 million on the previous loan. Concurrent with the closing of this refinancing, the Company fully satisfied the $3.6 million secured real estate loan plus accrued and unpaid interest that was outstanding to the lender. The net effect of this refinancing enhanced fiscal 2000 liquidity by $0.9 million by reducing debt payments by approximately $0.4 million and interest payments by approximately $0.5 million. The Company's 1998 three-year credit agreement with Norwest Bank, N.A. and C.I.T. 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 27, 1999, the amount available to borrow on the revolver was approximately $6.6 million based on a $18.3 million borrowing base on the revolver. The term facility of $16 million had an outstanding balance as of the end of fiscal 1999 of $14.4 million with monthly repayments of $205,000 through May 2001. On November 8, 1999, the Company's borrowing available under the working capital portion of its 1998 credit facility was reduced. This change was initiated by the Company's lenders in conjunction with a waiver issued by the lenders related to (I) The Company's failure to achieve certain quarterly financial ratios and (II) The Company's then current level of borrowing under the working capital revolver related to its events of non-compliance. Under the $25 million working capital revolver, the Company has the ability to borrow based on the levels of accounts receivable and inventory, which establishes a borrowing base. As of March 9, 2000, the Company's reduced borrowing base was $16.2 million. Actual borrowing under this working capital revolver was $11.1 million as of March 9, 2000 and the amount available to borrow was $5.1 million (see Capital Reserves). The applicable interest rate for borrowings under the credit agreement at February 25, 2000 was at 10.75%. Capital Reserves. 	Since fiscal 1995, the Company has invested significantly in new plant and equipment providing manufacturing capacity to deliver its patented Novacladr-based line of products to both existing and new customers. This included building and equipping a 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 January 2000, raising $102.3 million. The longer than expected period of time to achieve full product and market acceptance has resulted in greater losses generated from an under-utilized manufacturing facility and its supporting workforce. At the Longmont facility, the Company manufactures ViaArrayr and ViaThin - both Novaclad-based substrates for IC packages, plus the Company's Novaflex VHD product targeted at the high-end disc drive market. Sheldahl received its initial volume order for the VHD product line in October 1998. The Company's fiscal 1999 sales volume from Novaflex VHD was $5.6 million. Additionally, the base material for the Company's Novaflex HD is also produced in the Longmont facility. For all of fiscal 1999, $40.8 million of Novaclad based product was sold, produced all or in part at the Longmont facility. For the first half of fiscal 2000, $25.6 million of Novaclad-based product was sold, produced all or in part at the Longmont facility. As of the end of fiscal 1999, the Longmont facility was operating at approximately 20% of stated production capacity with projected breakeven at 40% - 60% of factory utilization or approximately $24 - $26 million of annual revenue of ViaThin and ViaArray products plus related volume of the Novaflex HD and VHD product lines. There has been no material change in the utilization. Breakeven volume at the Longmont facility is not expected until the second half of fiscal 2001 at the earliest. During the three-year period ended August 27, 1999, the Company incurred, principally at its Micro Products operations, cumulative net losses totaling approximately $68.7 million, including restructuring and other charges of $27.7 million. During this three-year period, the Company used cash of approximately $59.5 million supporting capital expenditures and approximately $6.8 million for net operating activities. The Company has financed these transactions principally through equity and debt financing. Cash requirements to fund restructuring charges taken during fiscal 1999 and 1998 are expected to be approximately $2.7 million in fiscal 2000 compared to $5.0 million in fiscal 1999. Fiscal 2000 capital expenditures for the Company are planned at approximately $7.0 million, compared with $5.5 million in fiscal 1999. Debt repayments for fiscal 2000, including refinancing of the Longmont facility, will be $3.8 million including $2.5 million on the bank term facility and $1.0 million for various capital lease payments. For the six month period ended February 25, 2000, the Company improved its operating performance with cash flow from operations excluding restructuring cost payments with a positive $0.3 million and met the financial covenants established by its bank group. Capital spending for the six months ended February 25, 2000 was $1.4 million or $2.2 million below the same period one year ago. Net working capital increased to $23.0 million for the six months ended February 25, 2000 from $16.9 million as of August 27, 1999. An increase in the Company's accounts receivable of $1.6 million reflected greater sales growth in the first six months of fiscal 2000. One of the Company's major contract manufacturers is in the process of securing new financing. A failure to successfully complete such refinancing could cause disruption to the Company's operations and have a material adverse impact on the Company's financial condition and results of operations. YEAR 2000 DISCLOSURE As of March 23, 2000, the Company has not experienced any negative material event related to the Y2K issue. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," effective for years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. Special accounting for qualifying hedges allow a derivative's gains or losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company has not yet quantified the impacts of adopting SFAS No. 133 and has not yet determined the timing or method of adoption. CAUTIONARY STATEMENT The discussion above contains statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements by their nature involve substantial risks and uncertainties as described by Sheldahl's periodic filings. Actual results may differ materially depending on a variety of factors, including but not limited to the following: the achievement of Sheldahl's projected operating results, the ability of Sheldahl to successfully obtain waivers from its lenders for any defaults on its debt covenants, the achievement of efficient volume production and related sales revenue results at Longmont, the ability of the Company's major contract manufacturer to secure financing for its business operations, the ability of the Company to generate sufficient cash flow to fund operations, the ability of Sheldahl to identify and successfully pursue other business opportunities, Sheldahl not entering into an agreement with respect to a strategic transaction or any such transaction not being consummated and Sheldahl successfully defending and ultimately prevailing on the actions brought by Sheldahl shareholders. Additional information with respect to the risks and uncertainties faced by Sheldahl may be found in, and the prior discussion is qualified in its entirety by, the Risk Factors contained in the Company's filings with the Securities and Exchange Commission, including Sheldahl's Annual Report, Form 10-K for the fiscal year ended August 27, 1999, Form 10-Q for the quarter ended November 26, 1999 and other SEC filings. PART II - OTHER INFORMATION SHELDAHL, INC. AND SUBSIDIARY FORM 10-Q Item 1.	Legal Proceedings In late February and early March, five state court lawsuits were commenced against the Company, its directors and Molex Incorporated. The initial lawsuit was filed by Kelly Townsend, on behalf of herself and others similarly situated, in the Hennepin County District Court. That lawsuit was followed by similar lawsuits filed in the Rice County District Court by James Delmonte, John DeSchepper and Michael Miller, each on behalf of the named plaintiff and others similarly situated. A fifth lawsuit was filed by Irwin L. Jacobs, Daniel T. Lindsay, Dennis M. Mathisen and Marshall Financial Group, Inc. in the Rice County District Court. Each of the lawsuits claim that the consideration to be paid in a proposed transaction between the Company and Molex Incorporated, as announced by the Company on February 17, 2000, is unfair and inadequate for the Company's shareholders. Each of the Complaints, other than the Complaint filed by Irwin Jacobs, et al., requested certification as a class action. All of the Complaints seek injunctive relief and compensatory damages. Subsequent to the receipt of the Complaints by the Company, the plaintiffs sought temporary restraining orders and preliminary injunctions in both the Hennepin and Rice County Courts. Both Courts denied the plaintiffs' relief. On March 20, 2000, the Company announced that Molex Incorporated had notified the Company that it would not make a proposal to enter into an agreement to acquire the remaining equity interests of Sheldahl not currently owned by Molex. On March 22, 2000, Irwin Jacobs, et al. voluntarily dismissed their lawsuit. On April 5, 2000, Kelly Townsend, et al. and Michael Miller, et al. voluntarily dismissed their lawsuits. The Company has filed motions to dismiss the remaining lawsuits and expects that such motions will be granted. The Company has also requested that the two remaining plaintiffs voluntarily dismiss their lawsuits. Item 2. Changes in Securities and Use of Proceeds On January 4, 2000, the Board of Directors of the Company, ratified and approved a private placement of its newly created Series F 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 two accredited investors (the "Investors"). The Board also authorized granting the Investors certain registration rights with regard to the shares of Common Stock underlying the Preferred Stock and the Warrants. The closing of the private placement of $1,800,000 occurred on January 11, 2000. Based on the manner of sale and representations of the Investors, all of which were accredited, the Company believes that pursuant to Rule 506 of Regulation D, the private placement was a transaction not involving any public offering within the meaning of section 4(2) of the Securities Act of 1933, as amended, and was, therefore, exempt from the registration requirements thereof. The Company sold an aggregate of 1,800 shares of the Preferred Stock to the Investors for an aggregate purchase price of $1,800,000, pursuant to the Convertible Preferred Stock Purchase Agreement among the Company and the Investors (the "Agreement"). The Preferred Stock is entitled to 5% dividends, payable annually, in shares of Common Stock or, in limited circumstances, cash. 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 $5.46 per share. The Conversion Price is subject to adjustment for certain dilution and market price events. 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 January 11, 2000. 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 55,800 at an exercise price of $5.46 per share. The Warrants are exercisable for a period of five years. The form of Warrant issued by the Company to the Investors is incorporated herein by reference as Exhibit 4.3 to the Company's Current Report on Form 8-K filed January 11, 2000. Registration Rights _______________ The Company granted the Investors certain registration rights. The registration rights cover all shares of Common Stock issuable to the Investors (i) upon conversion of shares of the Preferred Stock, (ii) as accrued dividends on the Preferred Stock, and (iii) upon exercise of the Warrants. Under the terms of the Agreement, the Company was obligated to file a shelf Registration Statement within sixty (60) days of January 11, 2000 on Form S-3 but has delayed such filing. 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 January 11, 2000. Special Covenants _______________ In addition to special covenants some of which have expired, in the event the Investors and the Company decide to pursue an additional purchase of Series F Convertible Preferred Stock and it is determined that shareholder approval of such additional investment is required, the Company agreed to use its best efforts to obtain shareholder approval of the potential additional investment, including a Board of Directors recommendation in favor of approval. Use of Proceeds _______________ The proceeds from the Series F private placement were used by the Company to improve the Company's liquidity position. The Company will not receive any proceeds from the resale of the shares of Common Stock issuable to the Investors upon conversion of the Preferred Stock. If the Warrants issued to the Investors are exercised in full, the Company will receive approximately $304,668. Such amount is intended to be used by the Company for working capital purposes. There can be no assurance, however, that the Warrants will be exercised. Conversion and Exercise Price Adjustments _______________ On February 26, 2000, the Company issued shares of its Common Stock in respect of a dividend owed to holders of its Series E Convertible Preferred Stock. Under the terms of the Company's Series D Convertible Preferred Stock (the "Series D") and warrants issued in connection therewith as well as under the terms of the Company's warrants outstanding to its lenders, the payment of the Common Stock dividend required adjustments to the Series D conversion price and the warrants' respective exercise prices. As a result, as of February 26, 2000, the Company's Series D is convertible at a per share price of $6.12, the warrants issued in connection with the Series D are exercisable at a per share price of $7.6454 for 330,983 shares and the Company's bank warrant is exercisable at a per share price of $6.78915 for 101,909 shares. Item 4. Submission to matters to a vote of securities holders a)	The Annual Meeting of the shareholders of Sheldahl, Inc. was held on January 12, 2000. b)	A proposal was made to ratify and approve an amendment to the Company's Bylaws to reduce the number of directors from nine to eight. Since a majority of all outstanding shares did not vote in favor of such amendment, as required in the Company's Bylaws, the proposal was not approved. Shares were voted as follows: 	For	Against 	Abstain	 Broker Non-Vote 	4,305,905 		690,539 		893,074 			0 c) Eight directors were elected at the meeting to serve for one year or until their successors are elected and qualified. Shares were voted as follows: 	For 	Withheld Authority 	James E. Donaghy 		4,108,400 			1,781,118 	John G. Kassakain		 3,792,200 			2,097,318 	Edward L. Lundstrom 	4,124,369 			1,765,149 Gerald E. Magnuson	 3,790,044 			2,099,474 	William B. Miller	 	4,129,512 			1,760,006 	Kenneth J. Roering	 3,794,299 			2,095,219 	Raymond C. Wieser	 	4,132,647 			1,756,871 	Beekman Winthrop	 	4,130,735 		1,758,783 d) A proposal was made to approve the selection of the Company's independent public accountants for the current fiscal year. The proposal was approved and shares were voted as follows: 	For	 Against	 Abstain 	5,335,731	 	153,323	 	400,464 Item 6. Exhibits and Reports on Form 8-K A)	Exhibits 27	Financial data schedule B)	Reports on Form 8-K Current Report on Form 8-K filed January 11, 2000, reporting the Company's Series F Preferred Stock private placement. Current Report on Form 8K filed February 17, 2000, reporting that the Company and Molex, Incorporated were engaged in discussion regarding a potential acquisition of the Company by Molex. Current Report on Form 8-K filed February 23, 2000, reporting that the Company was served with a Minnesota State court complaint by a Sheldahl shareholder against the Company, its directors and Molex Incorporated. Current Report on Form 8-K filed March 15, 2000, reporting that the Company and Molex remain in discussions. Current Report on Form 8-K filed March 20, 2000, reporting that Molex Incorporated had notified the Company that Molex would not make a proposal to enter into an agreement to acquire the remaining equity interests of the Company not currently owned by Molex. 	SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SHELDAHL, INC. (Registrant) Dated April 10, 2000 	By	/s/ Edward L. Lundstrom President and Chief Executive Officer Dated April 10, 2000 	By	/s/ Jill D. Burchill Vice President and Chief Financial Officer