SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended February 26, 1999 Commission File Number: 0-45
SHELDAHL, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0758073
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
Northfield, Minnesota 55057
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (507) 663-8000
As of March 25, 1999, 11,152,588 shares of the Registrant's common stock were
outstanding.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
PART I: FINANCIAL INFORMATION
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended
February 26, February 27,
(In thousands, 1999 1998
except for per share data)
Net sales $56,516 $56,743
Cost of sales 50,697 54,036
_______ _______
Gross profit 5,819 2,707
_______ _______
Expenses:
Sales and marketing 4,751 4,915
General and administrative 3,758 3,942
Research and development 1,253 2,002
Interest 987 1,122
Restructuring costs 3,100 4,000
_______ _______
Total expenses 13,849 15,981
_______ _______
Loss before income taxes and
cumulative effect of change in
method of accounting (8,030) (13,274)
Benefit for income taxes - 4,840
_______ _______
Net loss before cumulative effect
of change in method of accounting
for start-up costs (8,030) (8,434)
Cumulative effect of change in
method of accounting for
start-up costs - (5,206)
_______ _______
Net loss before preferred dividends (8,030) (13,640)
Convertible preferred stock dividends (1,072) (359)
_______ ________
Net loss applicable to common
shareholders $(9,102) $(13,999)
======= =======
Net loss per common share:
Basic -
Net loss before change in method
of accounting and after
convertible preferred stock dividends $ (0.84) $ (0.97)
Change in accounting method - (0.57)
_______ _______
Net loss per common share $ (0.84) $ (1.54)
======= =======
Diluted -
Net loss before change in method
of accounting and after
convertible preferred stock dividends $ (0.84) $ (0.97)
Change in accounting method - (0.57)
_______ _______
Net loss per common share $ (0.84) $ (1.54)
======= =======
Number of shares outstanding - Basic 10,772 9,084
Number of shares outstanding - Diluted 10,772 9,084
The accompanying notes are an integral part of these statements.
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
February 26, February 27,
(In thousands, 1999 1998
except for per share data)
Net sales $28,042 $27,751
Cost of sales 24,930 27,184
_______ _______
Gross profit 3,112 567
_______ _______
Expenses:
Sales and marketing 2,531 2,515
General and administrative 1,831 2,092
Research and development 679 1,070
Interest 664 609
Restructuring costs 3,100 4,000
_______ _______
Total expenses 8,805 10,286
_______ _______
Loss before income taxes (5,693) (9,719)
Benefit for income taxes - 3,465
_______ _______
Net loss before preferred dividends (5,693) (6,254)
Convertible preferred stock dividends (418) (172)
_______ _______
Net loss applicable to common
shareholders $(6,111) $(6,426)
======= =======
Net loss per common share:
Basic
Net loss per common share $ (0.55) $ (0.70)
======= =======
Diluted
Net loss per common share $ (0.55) $ (0.70)
======= =======
Number of shares outstanding - Basic 11,037 9,131
Number of shares outstanding - Diluted 11,037 9,131
The accompanying notes are an integral part of these statements.
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands) February 26, August 28,
1999 1998
(unaudited)
Current assets:
Cash $ 1,327 $ 1,005
Accounts receivable, net 19,100 15,727
Inventories 17,224 15,488
Other current assets 1,257 627
_______ _______
Total current assets 38,908 32,847
_______ _______
Construction in process 5,985 26,682
Land and buildings 28,555 28,255
Machinery and equipment 133,715 113,642
Less: accumulated depreciation (71,664) (66,322)
_______ _______
Net plant and equipment 96,591 102,257
_______ _______
Other assets 1,109 1,202
_______ _______
$136,608 $136,306
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 3,884 $ 4,296
Accounts payable 8,845 7,766
Accrued compensation 1,126 1,554
Other accruals 5,228 4,518
Restructuring reserves 5,166 5,494
_______ _______
Total current liabilities 24,249 23,628
Long-term debt 31,839 27,829
Restructuring reserves 1,638 2,131
Other long-term accruals 3,920 3,961
_______ _______
Total liabilities 61,646 57,549
_______ _______
Stockholders' Equity:
Convertible preferred stock 40 41
Common stock 2,788 2,415
Additional paid-in capital 106,381 99,751
Subscribed preferred stock (1,695) -
Accumulated deficit (32,552) (23,450)
_______ _______
Total shareholders' equity 74,962 78,757
_______ _______
$136,608 $136,306
======= =======
The accompanying notes are an integral part of these statements.
SHELDAHL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
(In thousands) February 26, February 27,
1999 1998
Operating activities:
Net loss $ (9,102) $(13,998)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 8,066 7,103
Preferred stock dividends 1,072 359
Deferred income taxes - (4,840)
Accounting method change - 5,206
Restructuring costs charged to operations 3,100 4,000
Restructuring payments made (3,427) -
Net change in other operating activities:
Accounts receivable (3,373) (998)
Inventories (1,736) (1,488)
Prepaid expenses and other current assets (630) (276)
Other assets 93 54
Accounts payable and accrued liabilities 1,700 2,406
Other non-current liabilities (41) (82)
_______ _______
Net cash used in operating activities (4,278) (2,554)
_______ _______
Investing activities:
Capital expenditures, net (3,642) (14,120)
_______ _______
Financing activities:
Net borrowings under revolving credit
facilities 5,980 10,486
Proceeds from other long-term debt - 2,334
Repayments of long-term debt (2,449) (475)
Costs and redemption of Series B
preferred stock (837) (300)
Net proceeds of Series E preferred stock 5,392 -
Stock options exercised 156 163
_______ _______
Net cash provided by financing
activities 8,242 12,208
_______ _______
Net increase (decrease) in cash
equivalents 322 (4,466)
Cash and cash equivalents at
beginning of period 1,005 5,567
_______ _______
Cash and cash equivalents at
end of period $ 1,327 $ 1,101
======= =======
Supplemental cash flow information:
Interest paid $ 1,662 $ 1,853
======= =======
Income taxes paid $ 69 $ 7
======= =======
The accompanying notes are an integral part of these statements.
SHELDAHL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
These condensed and unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, these
condensed unaudited consolidated financial statements reflect all adjustments,
of a normal and recurring nature, necessary for a fair statement of the
interim periods, on a basis consistent with the annual audited financial
statements. Certain information, accounting policies and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Although these disclosures should be
considered adequate, the Company strongly suggests that these condensed
unaudited financial statements be read in conjunction with the financial
statements and summary of significant accounting policies and notes thereto
included in the Company's latest annual report on Form 10-K.
1) Inventories, which are valued at the lower of first-in first-out cost or
market, consists of (in thousands):
February 26, 1999 August 28, 1998
Raw materials $ 5,717 $ 4,964
Work-in-process 5,207 4,742
Finished goods 6,300 5,782
_______ _______
$17,224 $15,488
======= =======
2) Equity Transactions.
During February 1999, the Company issued 7,210 shares of Series E
convertible preferred stock. As of February 26, 1999, the Company had
received cash of $5,515,000 relating to the issuance of the stock and
received the remaining $1,695,000 by March 5, 1999. By March 8, 1999, the
Company had issued additional 1,350 shares of Series E convertible
preferred stock and received the related proceeds of $1,350,000. The
investors were also issued warrants to purchase a total of 85,600 shares of
Common Stock of the Company at $7.8125 per share. The warrants are
exercisable for a period of five years. During the three months ended
February 26, 1999, 231,336 shares of common stock were issued upon the
conversion of 1,097 shares of Series B convertible preferred stock.
As of March 31, 1999, the Company's equity structure is summarized as
follows:
A) 11,152,588 common shares outstanding.
B) $32,917,000 in stated value of Series D 5% convertible preferred stock,
with a fixed conversion price of $6.15 per share and dividends payable
in cash or in common stock annually on each July 1. Accrued but unpaid
dividends are also due upon the conversion of such preferred shares.
C) $8,560,000 in stated value of Series E 5% convertible preferred stock
with a fixed conversion price of $6.25 per share and dividends payable
in cash or in common stock annually on each March 1. Accrued but unpaid
dividends are also due upon the conversion of such preferred shares.
D) $167,000 in stated value of Series B 5% convertible preferred stock with
a floating conversion price estimated to be $6.30 per share as of March
17, 1999 and dividends payable in cash or in common stock at conversion.
On February 26, 1999, the Company had accrued approximately $990,000 in
total dividends on these groups of preferred stock.
3) Restructuring Costs.
In February 1999, the Company recorded a charge of $3.1 million to reserve
for the separation costs incurred in reducing its salaried work force. The
restructuring costs provide for approximately $1.7 million for severance
and early retirement salary costs and approximately $1.4 million for
medical, dental and other benefits being provided to the affected
individuals. Approximately 53 people are affected by this action. These
new restructuring costs are in addition to the $8.5 million of similar
costs charged to operations in fiscal 1998 ($4.0 million in the second
quarter ended February 27, 1998 and $4.5 million in the third quarter ended
May 29, 1998).
As of February 26, 1999, the Company had total remaining restructuring
reserves of $6.8 million. Of this amount, approximately $6.3 million
related to severance, wages and benefits and approximately $500,000 related
to the remaining equipment disposal, facility closedown and other costs.
In total, for all restructuring costs recorded at February 26, 1999, the
Company expects to make cash outlays of $2.8 million during the last six
months of fiscal 1999 and $2.6 million for all of fiscal 2000. The
remaining $1.4 million of restructuring costs are expected to be paid out
over the ten years beginning in fiscal 2001.
During the six months ended February 26, 1999, the Company paid $3.4
million of restructuring expenses relating to reserves charged to
operations in fiscal 1998. Also, the Company wrote off $494,000 of fixed
assets relating to the Aberdeen, South Dakota facility and charged this
amount to previously established reserves.
4) Earnings Per Share
The basic loss per share amount is determined based on the weighted average
of common shares outstanding. Diluted loss per share is determined based
on the same figure, since the Company's potentially dilutive items,
convertible preferred stock, stock options and warrants, are anti-dilutive
in the periods presented.
SHELDAHL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED OPERATING RESULTS AND FINANCIAL CONDITION
Six Months Ended February 26, 1999, and February 27, 1998
Sales
The Company's net sales declined $226,000, or 0.4%, from $56.7 million for the
six months ended February 27, 1998 to $56.5 million for the six months ended
February 26, 1999. The automotive market sales for the six months ended
February 26, 1999 declined 3.5% to $38.7 million. This decline represents
weaker than anticipated orders during the mid-December 1998 to mid-January
1999 period plus continued price pressure with the industry.
Sales to the datacom market increased 39.2% to $9.2 million for the six months
ended February 26, 1999. Sales of the Company's new Novaflexr VHD product
accounted for approximately $2 million of the increase. Additionally, sales
for the Company's ViaThinr substrates for IC packages also increased $167,000
during this period. Sales to the aerospace defense market consisting
principally of various laminate materials declined $1.1 million or 24%
reflecting the typical order pattern of this market.
The chart below details the Company's sales by market during the period (in
thousands):
Six Months Ended Six Months Ended
Market Feb 26, 1999 Feb 27, 1998 Gross Change % Change
Automotive $ 38,702 $ 40,092 $ (1,390) (3.5%)
Datacom 9,225 6,628 2,597 39.2%
Industrial 3,683 3,718 (35) (.9%)
Consumer 1,402 1,673 (271) (16.1%)
Aerospace/Defense 3,504 4,632 (1,128) (24.3%)
_______ _______ _______ _______
Total $ 56,516 $ 56,743 $ (227) .4%
======= ======= ======= =======
Gross Profit
Gross profit increased to 10.3% of sales, or $5.8 million, for the six months
ended February 26, 1999. As reflected in the table below, Micro Products
grossed a $6.7 million loss. The combined Materials and Interconnect business
units' gross profit increased $3.1 million to $12.5 million, or 22.4%, of
sales. The improved performance is due to savings realized in production
labor as well as more effective cost management of factory costs.
Six Months Fiscal 1999 Six Months Fiscal 1998
Interconnect Micro Total Interconnect Micro Total
& Material Products Company & Materials Products Company
(In millions)
Sales $55,881 $ 635 $56,516 $56,275 $ 468 $56,743
Cost of
sales 43,361 7,336 50,697 46,864 7,172 54,036
Gross
profit 12,520 (6,701) 5,819 9,411 (6,704) 2,707
% of sales 22.4% N/A 10.3% 16.7% N/A 4.8%
Sales and marketing expense decreased $164,000, or 3.3%, from $4.9 million for
the six months ended February 27, 1998, to $4.8 million for the six months
ended February 26, 1999. Decreases in travel, advertising and other expenses
accounted for the decline in expenses.
General and administrative expenses decreased $184,000, or 4.7%, from $3.9
million for the six months ended February 27, 1998, to $3.8 million for the
six months ended February 26, 1999. Increases in staff salaries and
depreciation expense related to the new computer based systems were more than
offset by a decrease in expenditures for consulting, communications and
software.
Research and development expenses decreased $749,000, or 37.4%, from $2.0
million for the six months ended February 27, 1998, to $1.3 million for the
six months ended February 26, 1999. This decline relates to the transition of
resources out of research and development to direct support production in the
Company's Longmont facility. A decline in salaries, research materials and
supplies plus travel account for the major portion of the reduction.
Interest costs and activities for the noted periods are detailed below (in
thousands):
Six Months Ended Six Months Ended
February 26, 1999 February 27, 1998 Change
Gross interest expense $ 1,719 $ 1,922 $ (203)
Capitalized interest (732) (800) 68
_______ _______ _______
Net interest $ 987 $ 1,122 $ (135)
======= ======= =======
During the current six months, lower borrowings accounted for the decrease in
gross interest costs. At February 27, 1998, total borrowings were $54.0
million, while at February 26, 1999 total borrowings were reduced to $35.7
million. Higher interest rates charged by the Company's lenders prevented
greater cost savings.
In February 1999, the Company recorded a charge of $3.1 million to reserve for
the separation costs incurred in reducing its salaried work force. The
Company continues to realize benefits from streamlining its business
processes. The restructuring costs provide for approximately $1.7 million for
severance costs and approximately $1.4 million for medical, dental and other
benefits being provided to the affected individuals. Approximately 53 people
are affected by this action. These new restructuring costs are in addition to
the $8.5 million of similar costs charged to operations in fiscal 1998 ($4.0
million in the second quarter ended February 27, 1998 and $4.3 million in the
third quarter ended May 29, 1998).
In February 1998, a restructuring charge of $4.0 million was recorded related
to the culmination of the Company's business process design initiative that
began two years ago. Due to significant productivity benefits resulting from
the initiative, the Company reduced the size of its salaried workforce. The
resulting workforce reduction involved layoffs, early retirement offerings,
reassignments and reclassifications of positions. The restructuring costs
provided for approximately $2.5 million for severance and early retirement
salary costs, approximately $1.3 million for medical, dental and other
benefits being provided to the affected individuals, and approximately $0.2
million for outplacement and other costs.
As of February 26, 1999, the Company's restructuring reserve was $6.8 million.
In total, for all restructuring costs recorded at February 26, 1999, the
Company expects to make cash outlays of $2.8 million during the last six
months of fiscal 1999 and $2.6 million for all of fiscal 2000. The remaining
$1.4 million of restructuring costs are expected to be paid out over the ten
years beginning in fiscal 2001. During the six months ended February 26,
1999, the Company paid $3.4 million of restructuring expenses relating to
reserves charged to operations in fiscal 1998.
Income taxes were applied at 34% in the six months ended February 27, 1998.
No income taxes were applied in the current period as the Company provides
allowances for all of its net deferred tax assets. Dividends on preferred
stock were $1.1 million for the six months ended February 26, 1999, up
$713,000 from the $359,000 figure for the six months ended February 27, 1998.
The $32.9 million Series D preferred stock issued in July of 1998 accounted
for this increase. As a result, net loss to common shareholders for the six
months ended February 26, 1999 was $9.1 million, or $0.84 per share. This
compares with a loss per share before changes of method of accounting of $0.97
for the six months ended February 27, 1998.
SHELDAHL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED OPERATING RESULTS AND FINANCIAL CONDITION
Three Months Ended February 26, 1999 and February 27, 1998
Sales
The Company's net sales increased $291,000, or 1.1%, from $27.8 million for
the three months ended February 27, 1998 to $28.0 million for the three months
ended February 26, 1999. The automotive market sales for the three months
ended February 26, 1999 decreased 6% to $18.6 million. This decline represents
weaker than anticipated orders during the mid-December 1998 to mid-January
1999 period plus continued price pressure within the industry.
Sales to the datacom market increased $2.2 million, or 73%, for the three
months ended February 26, 1999 to $5.3 million. Sales of the Company's new
Novaflexr VHD product accounted for $1.5 million of the increase. Sales to
all other markets reflect a decrease of 16%, or $780,000.
The table below details the Company's sales by market for the period (in
thousands):
Three Months Ended Three Months Ended
Market February 26, 1999 February 27, 1998 Gross Change % Change
Automotive $ 18,621 $ 19,795 $ (1,174) (5.9%)
Datacom 5,303 3,058 2,245 73.4%
Industrial 1,559 1,678 (119) (7.1%)
Consumer 646 1,090 (444) (40.7%)
Aerospace/Defense 1,913 2,130 (217) (10.2%)
_______ _______ _______ _______
Total $ 28,042 $ 27,751 $ 291 1.1%
======= ======= ======= =======
Gross Profit
Gross profit increased to 11.1% of sales, or $3.1 million for the three months
ended February 26, 1999. As reflected in the table below, the Micro Products
business gross loss decreased by 10%, or $359,000, to $3.0 million. Less
depreciation and salaried expenses are the primary cause of this improvement.
The combined Materials and Interconnect business units' gross profit increased
to $6.1 million, or 22.3% of sales. The improved performance is due to
savings realized in production labor as well as more effective cost management
of factory costs.
Three Months Fiscal 1999 Three Months Fiscal 1998
Interconnect Micro Total Interconnect Micro Total
& Material Products Company & Materials Products Company
(In millions)
Sales $27,551 $ 491 $28,042 $27,507 $ 244 $27,751
Cost of
sales 21,411 3,519 24,930 23,553 3,631 27,184
Gross
profit 6,140 (3,028) 3,112 3,954 (3,387) 567
% of sales 22.3% N/A 11.1% 14.4% N/A 2%
Sales and marketing expenses remained level at $2.5 million for the three
months ended February 26, 1999 compared to the same period one year ago.
Increases in outsourced computer design expenses were offset by declines in
salaries and travel.
General and administrative expenses decreased $261,000, or 12%, from $2.1
million for the three months ended February 27, 1998, to $1.8 million for the
three months ended February 26, 1999. Increases in depreciation were offset
by declines in salaries, consulting expense and office expense.
Research and development expenses decreased $391,000, or 36%, from $1.1
million for the three months ended February 27, 1998, to $679,000 for the
three months ended February 26, 1999. This decline relates to the transition
of resources out of research and development to direct support production in
the Company's Longmont facility. A decline in salaries, research materials
and supplies, and travel account for a major portion of the reduction.
Interest costs and activities for the noted period are detailed below (in
thousands):
Three Months Ended Three Months Ended
February 26, 1999 February 27, 1998 Change
Gross interest expense $ 921 $ 1,062 $ (141)
Capitalized interest (257) (453) 196
_______ _______ _______
Net interest $ 664 $ 609 $ 55
======= ======= =======
During the current quarter, lower borrowings accounted for the decrease in
gross interest costs. At February 27, 1998, total borrowings were $54.0
million, while at February 26, 1999, total borrowings were $35.7 million.
Higher interest rates charged by the Company's primary lenders prevented
greater cost reduction in interest expense. Fewer projects in process account
for the decline in capitalized interest.
In February 1999, the Company recorded a charge of $3.1 million to reserve for
the separation costs incurred in reducing its salaried work force. The
Company continues to realize benefits from streamlining its business
processes. The restructuring costs provide for approximately $1.7 million for
severance and early retirement salary costs, approximately $1.4 million for
medical, dental and other benefits being provided to the affected individuals.
Approximately 53 people are affected by this action. These new restructuring
costs are in addition to the $8.5 million of similar costs charged to
operations in fiscal 1998 ($4.0 million in the second quarter ended February
27, 1998 and $4.3 million in the third quarter ended May 29, 1998).
As of February 26, 1999, the Company had remaining restructuring reserves of
$6.8 million. In total, for all restructuring costs recorded at February 26,
1999, the Company expects to make cash outlays of $2.8 million during the last
six months of fiscal 1999 and $2.6 million for all of fiscal 2000. The
remaining $1.4 million of restructuring costs are expected to be paid out over
the ten years beginning in fiscal 2001.
In February 1998, a restructuring charge of $4.0 million was recorded related
to the culmination of the Company's business process design initiative that
began two years ago. Due to significant productivity benefits resulting from
the initiative, the Company reduced the size of its salaried workforce. The
resulting workforce reduction involved layoffs, early retirement offerings,
reassignments and reclassifications of positions. The restructuring costs
provide for approximately $2.5 million for severance and early retirement
salary costs, approximately $1.3 million for medical, dental and other
benefits being provided to the affected individuals, and approximately $0.2
million for outplacement and other costs.
No taxes were applied in the three months ended February 26, 1999 as
allowances against all of the Company's net deferred tax assets have been
recorded. Last year, income taxes were applied at 34% reflecting a tax
benefit of $3.5 million. Convertible preferred stock dividends increased to
$418,000 for the three months ended February 26, 1999. This increase is due
to the Series D preferred stock issued in July of 1998. As a result, net loss
to common shareholders for the three months ended February 26, 1999, was $6.1
million, or $0.55 per share. This compares to a net loss of $6.4 million, or
$0.36 per share, for the three months ended February 27, 1998.
Financial Condition and Cash Flow
Since the end of fiscal 1998, the Company's financial condition has
strengthened. The Company's Interconnect and Materials businesses have
registered improved operating results while the Micro Products business has
managed costs and is vigorously pursuing volume orders. In February of 1999,
the liquidity of the Company was enhanced with the $8.56 million preferred
stock equity placement. As a result, the Company's lenders have removed the
requirement that the Company raise additional equity funds as part of its
Credit and Security Agreement. As of March 26, 1999, the Company had $10.1
million outstanding on its revolving credit note and had an additional $8.6
million available to borrow. The Company expects, with anticipated growth in
revenue during the third and fourth quarters of fiscal 1999, to generate
sufficient cash flow from operations to fund restructuring payments ($2.8
million), term debt obligations ($2.0 million) and modest capital spending
($1.5 million to $2.0 million per quarter). These are all within the
borrowing limits of the existing Credit and Security Agreement with its
lenders.
For the first six months of fiscal 1999, operations consumed cash of $4.3
million. Net of $3.4 million of restructuring payments, operations generated
a negative cash flow of $0.9 million, an improvement of $1.7 million over the
six months ended February 27, 1998. This improvement was due to increased
gross profits offset by increased inventories and accounts receivables. The
increase in receivables is attributable to increased sales during the last
four weeks of the current period. Inventories increased to support a higher
level of customer orders in the coming quarter.
Equity Transactions
During February 1999, the Company issued 7,210 share of Series E convertible
preferred stock. As of February 26, 1999, the Company had received cash of
$5,515,000 relating to the issuance of the stock and the Company received the
remaining $1,695,000 by March 5, 1999. By March 8, 1999, the Company had
issued additional 1,350 shares of Series E convertible preferred stock and
received the related proceeds of $1,350,000. The investors were also issued
warrants to purchase a total of 85,600 shares of Common Stock of the Company
at $7.8125 per share. The warrants are exercisable for a period of five
years. Additionally, during the quarter ended February 26, 1999, 231,336
shares of common stock were issued upon the conversion of 1,097 shares of
Series B convertible preferred stock.
As of March 31, 1999, the Company's equity structure is summarized as follows:
A. 11,152,588 common shares outstanding.
B. $32,917,000 in stated value of Series D 5% convertible preferred stock,
with a fixed conversion price of $6.15 per share and dividends payable in
cash or in common stock annually on each July 1. Accrued but unpaid
dividends are also due upon the conversion of such preferred shares.
C. $8,560,000 in stated value of Series E 5% convertible preferred stock with
a fixed conversion price of $6.25 per share and dividends payable in cash
or in common stock annually on each March 1. Accrued but unpaid dividends
are also due upon the conversion of such preferred shares.
D. $167,000 in stated value of Series B 5% convertible preferred stock with a
floating conversion price estimated to be $6.30 per share as of March 17,
1999 and dividends payable in cash or in common stock at conversion.
On February 26, 1999, the Company had accrued approximately $990,000 in
total dividends on these groups of preferred stock.
Year 2000 Update
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
equipment, software, devices and products with imbedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a shut down
in the Company's manufacturing operations, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
State of Readiness. The Company has undertaken various initiatives to
evaluate the Year 2000 readiness of the products sold by the Company
("Products"), the information technology systems used in the Company's
operations ("IT Systems"), its non-IT systems, such as power to its
facilities, HVAC systems, building security, voicemail and other systems, as
well as the readiness of its customers and suppliers. The Company has
identified eleven Year 2000 target areas that cover the entire scope of the
Company's business and has internally established teams committed to
completing an 8-step Compliance Validation Process ("CVP") for each target
area. Each team is expected to fully complete this process on or before
September 1, 1999. The table below identifies the Company's target areas as
well as the 8-step CVP with its expected timeline. Sheldahl's Y2K teams are
either complete or near complete with Phase 1 of this process and progressing
with Phase 2 remediation activities.
Year 2000 Target Areas
_______________
1. Business Computer Systems
2. Technical Infrastructure
3. End-User Computing
4. Manufacturing Equipment
5. Test Lab
6. Telecommunications
7. Research and Development
8. Logistics
9. Facilities
10. Customers
11. Suppliers/Key Service Providers
Compliance Validation Process:
Phase 1 - Expected Completion April 30, 1999
_______________
1. Team Formation
2. Inventory Assessment
3. Compliance Assessment
4. Risk Assessment
Phase 2 - Expected Completion September 1, 1999
_______________
1. Resolution/Remediation
2. Validation
3. Contingency Plan
4. Sign-Off Acceptance
With respect to the Company's relationships with third parties, the Company
relies both domestically and internationally upon various vendors,
governmental agencies, utility companies, telecommunications service
companies, delivery service companies and other service providers. Although
these service providers are outside the Company's control, the Company has
mailed letters to those with whom it believes its relationships are material
and has verbally communicated with some of its strategic customers to
determine the extent to which interfaces with such entities are vulnerable to
Year 2000 issues and whether products and services purchased from or by such
entities are Year 2000 ready. In February 1999 the Company initiated a
Business Partner Assessment Program focused on evaluating customers and
suppliers Year 2000 readiness to identify third parties that imposed
significant risk on Sheldahl. The Company intends to complete follow-up
activities, including but not limited to site surveys, phone surveys, mailings
and remediation assistance, with identified third parties as part of the Phase
2 validation.
Costs to Address Year 2000 Issues. To date, the Company has not incurred any
material expenditures in connection with identifying or evaluating Year 2000
compliance issues. The Company has incurred the majority of its costs from
the recent installation of a business computer system consisting primarily of
the Enterprise Requirements Planning (ERP) System as well as the opportunity
cost of time spent by employees of the Company evaluating Year 2000 compliance
matters generally. Because the Company did not accelerate the installation of
the ERP System, it does not consider the costs related thereto to be charges
for Year 2000 compliance. Presently, the Company estimates for the cost of
Year 2000 upgrades and enhancements to its IT Systems and non-IT Systems to be
less than $100,000. The Company anticipates that these costs will be contained
within the Company's fiscal 1999 budget. At this time, the Company does not
possess information necessary to estimate the potential financial impact of
Year 2000 compliance issues relating to its vendors, customers and other third
parties. Such impact, including the effect of a Year 2000 business
disruption, could have a material adverse impact on the Company's financial
condition and results of operations.
Risks of Year 2000 Issues. Because the Company is still in the discovery and
evaluation phase of assessing its overall Year 2000 exposure, it cannot at
this time state with certainty that the Year 2000 issues will not have a
material adverse impact on its financial condition, results of operations and
liquidity. Although the Company considers them unlikely, the Company believes
that the following several situations, not in any particular order, make up
the Company's "most reasonably likely worst case Year 2000 scenarios":
1. Disruption of a Significant Customer's Ability to Accept Products or
Pay Invoices.
The Company's significant customers are large, well-informed customers,
mostly in the automotive field, who are disclosing information to their
vendors that indicates they are well along the path toward Year 2000
compliance. These customers have demonstrated their awareness of the
Year 2000 issue by issuing requirements of their suppliers and
indicating the stages of identification and remediation which they
consider adequate for progressive calendar quarters leading up to the
century mark. The Company's significant customers, moreover, are
substantial companies that the Company believes would be able to make
adjustments in their processes as required to cause timely payment of
invoices. Because of lengthy lead times in the industry, disruption of
orders from the Company is not likely a problem. Any deliveries
occurring in the first half of 2000 will be those resulting from orders
placed in 1999, while any disruptions of the order process early in 2000
will concern deliveries made many months later, with adequate
opportunity for correction (or manual handling) of the order process
before the timing becomes critical.
2. Disruption of Supply Materials.
Recently, the Company began a process of surveying its vendors for
public disclosures in regards to their Year 2000 readiness and is now in
the process of assessing and cataloging these disclosures. The Company
expects to work with vendors that provide inadequate disclosures or show
a need for remediation assistance. Where ultimate survey results show
that the need arises, the Company will arrange for back-up vendors
before the changeover date.
3. Disruption of the Company's IT Systems.
The Company is proceeding with a scheduled upgrade of its current
hardware and software IT systems to state-of-the-art systems and such
process has required Year 2000 compliance in the various invitations for
proposals. Year 2000 testing is occurring as upgrades proceed and, in
addition, will occur after all upgrades are complete, sometime during
fiscal 1999. For this reason, the Company considers that disruption of
its IT Systems is unlikely.
4. Disruption of the Company's Non-IT Systems.
The Company is completing a comprehensive assessment of all non-IT
systems, including among other things its manufacturing systems and
operations, with respect to both embedded processors and obvious
computer control. For some systems, upgrades are already completed or
scheduled, and the remaining non-compliant systems remediation needs are
being planned. Considering the nature of the equipment and systems
involved, the Company expects to complete any remediation efforts on a
reasonably short schedule, and in any case before arrival of the Year
2000. The Company also believes that, after such assessment and
remediation, if any disruptions do occur, such will be dealt with
promptly and will be no more severe with respect to correction or impact
than would be an unexpected breakdown of well-maintained equipment.
5. De-Listing of Company as a Vendor to Certain Customers.
Several of our principal customers, through the intermediary of an
automotive industry information agency, have required updated reports in
the form of answers to an extensive multiple-choice survey on our Year
2000 compliance efforts. According to these customers, failure to reply
to the readiness survey would have led to de-listing as a supplier at
the present time, resulting in possible current inability to bid on
procurements requiring deliveries two years or more in the future.
Although we did respond to these reports on a timely basis, the
substance of our answers to the readiness surveys have placed Sheldahl
in a "red" or "danger" zone with respect to those customers'
guidelines. One of our two largest customers involved in the efforts of
the independent audit agency had also already presented a survey
directly to Sheldahl, and as a result had arranged at its own expense
for an independent audit of our Year 2000 readiness. The independent
audit agency had reported, in the third quarter of fiscal 1998, that
although Sheldahl's level of readiness placed us in the "red" or
"danger" category, we (i) were proceeding rapidly with its evaluation
and remediation efforts, (ii) were expected to reach the ultimate
compliance goals of the survey in adequate time, and (iii) should not be
considered a risk to the customer's sources of supply. In December 1998,
Sheldahl was re-audited by a Remediation Assistance Program consultant
on behalf of this customer. At the conclusion of this audit the
consultant recommended that Sheldahl's Year 2000 Readiness be upgraded
to a "medium level of risk" from the previous high level of risk
("red zone"). Furthermore, the consultant noted that in reviewing
Sheldahl's "Y2K plan against the goals of the remediation assistance
process, the assessor could not find any gaps or areas of recovery that
were not covered or considered." We expect but cannot guarantee that
responses from other customers will be similar. In addition, we do not
know whether other customers' expectations will or will not be as
stringent as those referred to above and whether our current schedule
will meet or exceed such expectations.
Contingency Plans. While we recognize the need for contingency
planning, we have not yet developed any specific contingency plans for
potential Year 2000 disruptions. The aforementioned 8-step Compliance
Validation Process, however, does include contingency planning by each team
and we will review such plans as developed. We do anticipate developing
contingency plans for our most critical areas, but details of such plans will
depend on our final assessment of the problem as well as the evaluation and
success of our remediation efforts. Future disclosures will include
contingency plans as they become available.
Foreign Currency Exposure
During fiscal 1998, the Company's exposure to foreign currency risk declined
as two large programs were converted to the United States Dollar. The Company
maintains a very limited exposure to foreign currency risk with smaller
programs contracted in British Sterling, German Marks and French Francs.
These contracts and the exchange rate are reviewed periodically.
Beginning January 1, 1999, the Euro, the new European currency, will be used
commercially. As of February 26, 1999, none of the Company's customers or
suppliers has suggested pricing any contracts in Euro. However, in order to
remain competitive, the Company anticipates pricing certain contracts in Euro
and has systems in place to support such contracts by converting foreign
currency transactions to six decimal places. When warranted by the size of
foreign currency contracts, the Company will use a variety of hedging
techniques, including financial derivatives, to prudently reduce, but not
eliminate, its exposure to foreign currency fluctuations. No such contracts
existed as of February 26, 1999.
New Accounting Pronouncements
During June 1997, the Financial Accounting Standards Board released SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
requires disclosure of business and geographic segments in the consolidated
financial statements of the Company. The Company will adopt SFAS No. 131 in
its fiscal 1999 Form 10-K and is currently analyzing the impact it will have
on the disclosures in its financial statements.
During February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," effective for fiscal years beginning after December 31, 1997.
SFAS No. 132 revises certain of the disclosure requirements, but does not
change the measurement or recognition of those plans. The adoption of SFAS
No. 132 will result in revised and additional disclosures, but will have no
effect on the financial position, results of operations, or liquidity of the
Company. The Company will adopt SFAS No. 132 in fiscal 1999 and is currently
analyzing the impact it will have on the disclosures in its financial
statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and hedging Activities," effective
for years beginning after June 15, 1999. SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge criteria are met.
Special accounting for qualifying hedges allow a derivative's gains or losses
to offset related results on the hedged item in the income statement and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The Company has
not yet quantified the impacts of adopting SFAS No. 133 and has not yet
determined the timing or method of adoption.
Cautionary Statement
The statements included herein which are not historical or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of
the Private Securities Reform Act of 1995. Factors which could cause actual
results to differ materially from those anticipated by some of the statements
made herein include, but are not limited to, the Company's ability to achieve
full volume production at its Micro Products facility and other factors
detailed from time to time in the Company's SEC reports, including the report
on Form 10-K for the year ended August 27, 1998.
PART II - OTHER INFORMATION
SHELDAHL, INC. AND SUBSIDIARY
FORM 10-Q
Item 2. Changes in Securities and Use of Proceeds
On February 17, 1999, the Board of Directors of Sheldahl, Inc., a
Minnesota corporation (the "Company"), ratified and approved a private
placement of its newly created Series E Convertible Preferred Stock,
$1.00 par value per share, and Warrants (the "Warrants") to purchase
shares of the Company's Common Stock, $0.25 par value per share (the
"Preferred Stock"), to a group of accredited investors (the
"Investors"). The Board also authorized granting the Investors
certain registration rights with regard to the shares of Common Stock
underlying the Preferred Stock and the Warrants. The closing of the
private placement of $7,210,000 occurred on February 26, 1999, with an
additional $1,350,000 funded on March 8, 1999. Based on the manner of
sale and representations of the Investors, all of which were accredited,
the Company believes that pursuant to Rule 506 of Regulation D, the
private placement was a transaction not involving any public offering
within the meaning of section 4(2) of the Securities Act of 1933, as
amended, and was, therefore, exempt from the registration requirements
thereof.
The Company sold an aggregate of 8,560 shares of the Preferred Stock to
the Investors for an aggregate purchase price of $8,560,000 pursuant to
the Convertible Preferred stock Purchase Agreement among the Company and
the Investors (the "Agreement").
The Preferred Stock is entitled to 5% dividends, payable annually, in
shares of Common Stock or cash, at the option of the Company. The
Preferred Stock is convertible into shares of the Company's Common Stock
at any time. Each holder of Preferred Stock is entitled to convert
shares of the Company's Preferred Stock into that number of shares of
Common Stock that equals $1,000 plus accrued dividends divided by the
Conversion Price. The Conversion Price is $6.25 per share. The
Conversion Price is subject to adjustment for certain dilution and
market price events.
The Company may require holders of Preferred Stock to convert to Common
Stock provided that the Company's Common Stock trades at certain pre-set
price levels.
The Agreement between the Company and the Investors, and the Certificate
of Designation for the Preferred Stock, are incorporated herein by
reference as Exhibits 4.1 and 4.2 to the Company's Current Report on
Form 8-K filed March 9, 1999.
Warrants
In connection with the issuance of the Preferred Stock, the Company also
granted to each Investor a Warrant to purchase shares of the Company's
Common Stock. The aggregate amount of shares of Common Stock the
Company is obligated to issue under the Warrants is 85,600 at an
exercise price of $7.8125 per share. The Warrants are exercisable for a
period of five years. The form of Warrant issued by the Company to the
Investors is incorporated herein by reference as Exhibit 4.3 to the
Company's Current Report on Form 8-K filed March 9, 1999.
Registration Rights
The Company granted the Investors certain registration rights. The
registration rights cover all shares of Common Stock issuable to the
Investors (i) upon conversion of shares of the Preferred Stock, (ii) as
accrued dividends on the Preferred Stock, and (iii) upon exercise of the
Warrants. The Company is obligated to file a shelf Registration
Statement on Form S-3.
The Registration Rights Agreement between the Company and the Investors
specifying the terms of the registration rights is incorporated herein
by reference as Exhibit 4.4 to the Company's Current Report on Form 8-K
filed March 9, 1999.
Use of Proceeds
The proceeds from the private placement were used by the Company to
improve the Company's liquidity position. The Company will not receive
any proceeds from the resale of the shares of Common Stock issuable to
the Investors upon conversion of the Preferred Stock. If the Warrants
issued to the Investors are exercised in full, the Company will receive
$668,750. Such amount is intended to be used by the Company for working
capital purposes. There can be no assurance, however, that the Warrants
will be exercised.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of the shareholders of Sheldahl, Inc. was held on
January 13, 1999. There were 10,890,792 shares of common stock entitled
to vote at the meeting and a total of 9,637,084 shares were represented
at the meeting.
1. A proposal was made to ratify and approve the issuance of Common
Stock upon conversion of shares of the Company's Series B Convertible
Preferred Stock in compliance with the rules of the Nasdaq National
Market. Shares were voted as follows:
For Against Abstain Broker Non-Vote
5,008,004 138,952 26,626 4,463,502
2. A proposal was made to ratify and approve an amendment to the
Company's Amended and Restated Articles of Incorporation to increase
the Company's authorized shares of Common Stock from 20,000,000 to
50,000,000. Shares were voted as follows:
For Against Abstain
9,288,134 316,400 32,549
3. Nine directors were elected at the meeting to serve for one year or
until their successors are elected and qualified. Shares were voted
as follows:
For Against
James E. Donaghy 9,431,509 205,574
John G. Kassakian 9,490,741 146,343
Edward L. Lundstrom 9,484,864 152,220
Gerald E. Magnuson 9,486,570 150,514
Dennis M. Mathisen 9,493,668 143,415
William B. Miller 9,487,407 149,677
Kenneth J. Roering 9,491,605 145,479
Raymond C. Wieser 9,489,967 147,117
Beekman Winthrop 9,490,457 146,627
4. A proposal was made to approve the selection of the Company's
independent public accountants for the current fiscal year. Shares
were voted as follows:
For Against Abstain
9,577,655 24,946 34,481
Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
3.1 Amended and Restated Articles of Incorporation of
Sheldahl, Inc.
10.1 Second Amendment to the Credit and Security Agreement,
dated March 4, 1999 between the Company and Norwest Bank
Minnesota, N.A., Harris Trust and Savings Bank, The First
National Bank of Chicago, and The CIT Group.
10.2 Third Amendment to the Credit and Security Agreement,
dated April 5, 1999 between the Company and Norwest Bank
Minnesota, N.A., Harris Trust and Savings Bank, The First
National Bank of Chicago, and The CIT Group.
10.3 Consulting Agreement, dated December 31, 1998, between
the Company and James E. Donaghy.
10.4 Waiver and Amendment with Addendum to the note Purchase
Agreement between the Registrant and Northern Life
Insurance Company dated March 31, 1999.
27 Financial Data Schedule
B) Reports on Form 8-K
Form 8-K filed on January 15, 1999 regarding Item 5, Other
Events.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHELDAHL, INC.
(Registrant)
Dated: April 9, 1999 By /s/ Edward L. Lundstrom
President and Chief Executive Officer
Dated: April 9, 1999 By /s/ Jill D. Burchill
Vice President
Chief Financial Officer
Dated: April 9, 1999 By /s/ John V. McManus
Vice President Finance