UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 28, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File Number: 0-45
SHELDAHL, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0758073
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1150 Sheldahl Road
Northfield, MN 55057
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (507) 663-8000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value of $0.25 per share
Preferred Stock Purchase Rights
(Title of Class)
____________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ____
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Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of shares held by non-affiliates was approximately
$5,447,000 on March 15, 2002, when the last sales price of the Registrant's
Common Stock, as reported in the Nasdaq National Market System, was $0.45. As of
March 15, 2002, the Company had outstanding 33,040,088 shares of Common Stock.
Documents Incorporated by Reference: Portions of the issuer's Proxy Statement
for the 2002 Annual Meeting of Shareholders are incorporated by reference into
Part III.
PART I
Item 1. Business
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General
On December 28, 2000, Sheldahl, Inc. ("Sheldahl") acquired all of the
outstanding securities of International Flex Holdings, Inc., a Delaware
corporation ("Holdings"), the sole shareholder of International Flex
Technologies Inc., a Delaware corporation ("IFT"), pursuant to a merger of a
newly formed subsidiary of Sheldahl with and into Holdings (the "Merger").
Although Sheldahl is the legal survivor in the merger and remains the registrant
with the Securities and Exchange Commission ("SEC") and a listed company under
Nasdaq, under United States generally accepted accounting principles, as a
result of the number of shares issued and sold in the transactions, Holdings is
considered the "acquiror" of Sheldahl for financial reporting purposes. Among
other matters, this requires Sheldahl to present the prior historical, financial
and other information of Holdings and IFT. Accordingly, unless otherwise
indicated to the contrary herein, the results of Holdings and IFT are presented
herein as the "Company" for all periods prior to December 28, 2000 without
inclusion of Sheldahl's results for the same period. For purposes of this
report, unless otherwise stated to the contrary, Company shall refer to
Sheldahl, Holdings and IFT on a combined basis for all periods on or after
December 28, 2000.
On January 5, 2001, the Board of Directors of the Company changed its
fiscal year to the Friday closest to December 31 of each year, beginning with
December 29, 2000. Therefore, fiscal 2000 consists of a transition period from
January 30, 2000, the beginning of Holdings' fiscal year.
The Company creates and distributes high-density substrates, quality
fine-line flexible printed circuitry, and thin, flexible laminates and their
derivatives to worldwide markets. The Company's laminates are of two types:
adhesive-based tapes and materials, and its patented adhesiveless material,
Novaclad(R). From these materials, the Company fabricates high-value derivative
products: single- and double-sided flexible interconnects and assemblies under
the trade names Flexbase(R), Novaflex(R) HD, Novaflex(R) VHD, FlexStrate,
DendriPlate(R) and substrates for silicon chip carriers under the trade name
ViaThin(R). The Company also manufactures a variety of electronic and specialty
materials including high frequency laminates for radio-frequency ("RF") and
microwave application, indium tin oxide ("ITO"), a transparent conductor coating
largely used in electronics display and signage for electroluminescent ("EL")
lighting, touch and flat panel applications, thermal materials for aerospace
application and flat cable tape for computer and automotive applications.
Sheldahl's leading technology products serve as the electronic interface between
the function of electronic-based products and their integrated circuits. The
Company targets specific OEMs and contract assemblers in the telecommunications,
computer, medical, automotive and aerospace markets in the drive to create
electronic-based products that require increased functionality.
The Company operates in two business divisions identified as the
Materials and Flex Interconnect Division (MFI), and the International Flex
Technologies Division ("IFT Division"). The MFI business division, which
consists of Materials and Flexible Interconnect Business Units, specializes in
high quality, roll-to-roll flexible circuits and specialty materials for the
automotive, communications, computer and aerospace markets. The IFT Division
consists of fine-line, roll-to-roll flexible circuits including substrates for
silicon chip carriers manufactured in Endicott, New York and Longmont, Colorado.
These products target the telecommunications, computer and medical markets.
The Company's high performance products - FlexStrate, ViaThin(R),
Novaflex(R) HD and Novaflex(R) VHD provide substantial benefits compared to
traditional flexible circuits, including the capability for very fine circuit
traces and very small holes, or vias, thus utilizing both sides of the laminate
for circuit routing reducing size and cost per function. The Company has
developed its ViaThin(R) to enable Interconnect (IC) manufacturers to package
future generations of ICs economically by attaching the silicon die to a
ViaThin(R) substrate manufactured by the Company or other circuitry
manufacturers using the Company's Novaclad(R) products. As ICs are becoming
increasingly powerful, they produce more heat and require a greater number of
connections to attach the silicon die, placing substantially greater demands on
IC packaging materials. The Company's substrates for silicon chip carriers offer
high-end thermal, electrical and quality attributes.
Sheldahl, Inc. was incorporated under the laws of the State of
Minnesota in 1955. Its principal executive offices are located at 1150 Sheldahl
Road, Northfield, Minnesota 55057 and its telephone number is 507-663-8000.
1
IFT and Holdings were established in 1999 to acquire IBM Corporation's Fine-Line
Flexible Circuit Business. Certain products are developed, manufactured and sold
through IFT.
Products
Materials and Flex Interconnect Division (MFI)
Novaclad(R). Novaclad(R) is a thin and flexible adhesiveless copper
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laminate used in the design and manufacture of flexible interconnects and
high-density substrates. Novaclad(R) consists of a polyimide film onto which
copper has been vacuum deposited on both sides. After the vacuum deposition
process, additional copper is plated onto the laminate to achieve a desired
thickness of copper ranging from 5 microns to 35 microns (a micron is
one-millionth of a meter). Novaclad(R) provides a number of important benefits
when compared to traditional adhesive-based laminates, including the capability
for finer circuit traces (down to 1 mil, or .001 inch) and corresponding higher
circuit density, greater heat tolerance and dissipation, improved signal speed
and impedance control, increased dimensional stability, resistance to chemicals
and greater durability. Because of these characteristics, the Company believes
that Novaclad(R) is a cost-effective, high-performance material solution for a
broad range of interconnect systems, especially high-density substrates for IC
packages and increasingly dense circuitry for personal communication devices and
computers and high-end disc drives.
Novaflex(R) VHD. Novaflex VHD is a unique combination of the Company's
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Novaclad(R) adhesiveless material, laser generated microvias and ultra fine-line
photo imaging created for high volume, high performance applications.
Novaflex(R) VHD, introduced in September 1998, utilizes similar processes to the
Company's ViaThin(R) product in applications that require two layers of
circuitry to provide an increased number of interconnection in a relatively
small physical space. The Company is targeting this product to manufacturers of
high speed internet connectors, medical instrumentation, personal communications
devices and various other miniaturized electronic devices.
Novaflex(R) HD. The Company uses its Novaclad(R) as the base material
--------------
for flexible interconnect circuits and assemblies that, based on their end-use,
require a combination of circuit density and operating characteristics that
withstand harsh environments such as cell phone and pager technologies, computer
and peripheral interconnects and under-the-hood automotive applications.
Flexbase(R) Flexible Interconnects. The Company uses its adhesive-based
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laminates, which are marketed under the trade name Flexbase(R), as the base
material for a line of traditional flexible printed circuitry. The Company's
flexible printed circuitry is typically manufactured in a roll-to-roll process
from polyester or polyimide film to which copper is laminated. The laminate is
processed through various imaging, etching, and plating processes and then
selectively protected with a dielectric covering to produce a flexible printed
circuit. Automated screen-printing and photo imaging processes produce single-
and double-sided flexible circuits.
Additionally, through internal capabilities and contract assemblers the
Company offers value-added processing, including surface mount assembly, wave
soldering, connector and terminal staking, custom folding, stiffener attachment,
application of pressure-sensitive adhesive and hand soldering, in order to
deliver ready-to-use products to the end customer. The Company targets
applications where increased performance, reduced size and weight, circuitry
density, ability to accommodate packaging contours or a reduction in the number
of assembly steps is desired to reduce the customer's overall cost and enhances
the value of its product lines.
Laminate Materials. The Company's materials products consist of
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adhesive-based tapes, laminates, and composite material made through vacuum
processes. Moisture barrier tape and flat cable tape are used in computer
cables, clock spring cables and automobile air bag systems. Splicing tape is
used in the manufacture of commercial and industrial sandpaper belts. Thermal
insulating materials are used primarily in the aerospace/defense market for
satellites. Accentia(TM) is a relatively new product line of conductive coatings
on optically clear films. The applications for the Accentia(TM) product line are
electroluminescent lighting, touch panels, and flat panel displays. ComClad(TM),
also a relatively new product, provides a low cost, high frequency laminate
designed to meet the electrical performance demands of Microwave and RF
applications.
The Company produces its materials using coating, laminating, and
vacuum metalizing processes. Coating involves applying chemicals or adhesives to
a thin flexible material. Laminating consists of combining two or more
2
materials through applications of heat and pressure. Vacuum metalizing typically
involves placing a metal onto a thin film, foil, or fabric by evaporation,
sputtering, or pattern deposition. The Company's materials provide extended
flexibility, strength, conductivity, durability, and heat dissipation.
International Flex Technologies Division (IFT Division)
Tape Ball Grid Array (TBGA), ViaThin(R) and Related Products. The
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Company maufactures high-density substrates primarily for IC packages. Those
high-density substrates are called ViaThin(R). The material properties allow for
very dense circuitry patterns which enable IC designers to improve the
processing capabilities of ICs by increasing the number of connections to the
silicon die, while reducing the cost per connection. ViaThin(R) enhances signal
speed because its traces are very smooth and its dimensional stability is
maintained. These features allow the Company's ViaThin(R) to be designed into
tape ball grid array (TBGA), pin grid array, and other high-density IC packages.
The Company's strategy is to target the high-density segment of the market for
IC packaging and multichip module applications where circuit density
requirements as small as 1 mil traces and vias can be met using ViaThin(R). As
the market for high-density substrates develops, the Company will consider
licensing the manufacturing process of its high-density substrates to increase
the demand for its product.
FlexStrate Flexible Circuits. The Company uses its own base material
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for its fine-line (to 25 micron), single- and double-sided flexible interconnect
circuits, called FlexStrate. The combination of adhesiveless construction, and
small copper traces and vias permit circuit designs to be extremely dense,
operate at high temperatures, and possess dynamic flex capability. Other
benefits include high signal propagation, high electrical and thermal
performance and customized circuitization with varying copper plating
thicknesses. The Company is targeting this product to manufacturers of high-end
computer systems, unique medical applications and fiber optic applications.
DendriPlate. The Company uses its own base material and adds palladium
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dendrites with a proprietary electro-plating process to create its DendriPlate
product. Miniature palladium dendritic spikes on flexible circuit substrates
provide highly reliable, high-density connector contacts used for pad-on-pad
connectors in module-to-card, or card-to-card attachments. The dendrites create
an interface between mating surfaces that reduce contact impedance and improve
performance of the connection in high frequency and high-speed applications.
This state-of-the-art connection method provides excellent contamination
tolerance and reliability with very low contact force. The Company is targeting
this product to manufacturers of high-end computer systems in need of high
performance connections.
In February 2002 the Company announced IFT would close its Endicott,
New York facility in May 2002. The Company's Endicott facility is the primary
location where the IFT Division products have been made. And with few
exceptions, the Company expects to cease manufacture of these IFT Division
products. Accordingly, the Company has informed its customers who purchase the
IFT Division products that the IFT Division products will no longer be produced.
The Company expects to begin using its Longmont, Colorado facility for the
manufacture of products sold in its MFI segment and will continue to manufacture
a few products formerly made in the Endicott facility.
Revenue by Product
The following table shows the revenue of the Company by product for the
twelve months ended December 28, 2001 and on a pro forma combined basis for the
eleven months ended December 29, 2000:
Pro Forma
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Fiscal Year 2001 Fiscal Year 2000
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Amount % Amount %
------ - ------ -
MFI Division Sales:
Novaflex(R) VHD $ 1.1 1.0% $ 2.7 1.9%
Novaflex(R) HD 18.7 17.2% 36.2 26.3%
Flexbase(R) Flexible Interconnects 42.5 39.2% 46.3 33.6%
Laminate Materials 21.2 19.5% 23.8 17.3%
3
IFT Division Sales:
TBGA and ViaThin(R) $ 22.0 20.3% 25.1 18.2%
FlexStrate Flexible Circuits 1.6 1.5% 1.5 1.1%
DendriPlate 1.4 1.3% 2.1 1.6%
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Total: $ 108.5 100.0% $ 137.7 100.0%
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Sales and Customer Support
Materials and Flex Interconnect Division (MFI)
In the Company's MFI division, sales are directed by product or market
managers who are responsible for defining target markets and customers,
strategic product planning and new product introduction. These product or market
managers supervise a sales force of highly skilled account managers, who are
supported by engineers, technicians and customer service personnel. The Company
employs a team approach led by the account manager. The account manager works
extensively with the Company's customers from the design stage through the
completion of the program. The goal is to ensure that every customer has access
to a process predicated on excellence and embodies the disciplines required for
new product development and manufacturablilty. Whether it is simply a concept
that evolves into production or the re-engineering of an existing product, the
Company provides a seamless transition beginning with design, through prototype,
to production. The Company believes that its close ties with customers at all
stages of a project are a distinct differentiating factor distinguishing it from
many competitors who principally manufacture products according to customer
specifications without providing significant design, technical or consulting
services. To supplement its direct sales efforts, the Company uses domestic and
international distributors. The cornerstone of the Company's sales and customer
support strategy is to provide superior customer service, from prompt and
efficient technical support to rapid delivery of prototype and production orders
through its electronic data interchange and just-in-time delivery capabilities.
International Flex Technologies Division (IFT Division)
In the Company's IFT Division, the cornerstone of the sales and
customer support strategy is providing superior flexible based packaging
solutions and excellent customer service. This includes efficient technical
expertise and rapid delivery of prototype and production orders. The Company
employs a team approach to sales and customer support lead by an applications
engineer/account manager and includes a sales engineer, design and process
engineers, quality engineering, and the customer service representative. The
team develops a partnership with each customer as they work through design and
manufacturing issues. The Company recognizes this partnership with customers as
a strength and a key differentiator from competitors. To supplement its direct
sales efforts, the Company uses domestic and international manufacturers'
representatives.
As a result of the scheduled closure of the Endicott, New York facility
in May 2002, the Company has employed its sales team to consult with IFT
Division customers to provide an adequate supply of the IFT Division products
prior to ceasing production at the Endicott facility.
International
MFI Division. To capitalize on the rapidly growing international
------------
market, the Company works with European and Asian manufacturers' and suppliers
and has established sales offices in France, Germany, and Singapore. The Company
is further extending its global footprint by supplementing its direct sales
efforts with independent manufacturers' representatives and distributors in both
Europe and Asia, principally for flexible laminates.
IFT Division. The Company uses a direct sales force in Europe. The
------------
Company supplements its direct sales efforts with independent manufacturers'
representatives in Taiwan, Singapore and Korea. The Company is in the process of
converting the sales activities of the IFT Division to sales of the MFI Division
due to the end of life status of the IFT Division products.
The Company's export sales during fiscal years 2001 and 2000 were $35.8
and $1.1 million, respectively ($40.8 million on a pro forma combined basis
including IFT and Sheldahl in fiscal year 2000).
4
The Company's preference is to minimize foreign currency translation
risk by conducting business in US currency. The Company has a limited exposure
to foreign currency risk with smaller sales contracted in British Sterling and
Euros. These contracts and the exchange rate are reviewed periodically. As of
December 28, 2001, the Company had no material sales contracts in any currency
not mentioned above. When warranted by the size of foreign currency denominated
sales contracts, the Company may use a variety of hedging techniques, including
financial derivatives, to prudently reduce its exposure to foreign currency
fluctuations. No such contracts existed as of December 28, 2001.
Manufacturing
The Company manufactures and assembles its products in Northfield,
Minnesota; Longmont, Colorado and Endicott, New York. In February 2002, the
Company announced IFT would close IFT's Endicott, New York facility and
discontinue manufacture of products produced at that location. The Company
focuses on quality in its manufacturing efforts, and believes that its
vertically integrated manufacturing capabilities enhance its ability to control
product quality. The Company has been a qualified supplier to various automotive
manufacturers for many years and has received QS9000/ISO9001 certification in
its Minnesota facilities. The Company also employs contract-manufacturing
relationships for the assembly of products in Mexico, Canada and the
Philippines.
The Company uses a continuous roll-to-roll manufacturing process to
efficiently produce a large volume of high-quality flexible laminates using
coating, laminating, and vacuum metalizing techniques. The Company consumes
approximately one-half of the flexible laminates it produces for the manufacture
of a family of derivative products (see Products). The Company converts various
flexible laminates into circuits by using either photo exposing or screen
printing to image the circuit patterns onto flexible laminates. The laminates
then go through various etching and plating processes that result in copper
patterns remaining on the laminate. The circuits are then protected with a
dielectric covering. The Company processes certain of its derivative products
into value-added assemblies. These assembly process capabilities include
surface-mount assembly, wave soldering, connector and terminal staking, custom
folding, stiffener attachments, application of pressure-sensitive adhesive, and
hand soldering. These operations are performed at subcontractor facilities in
Mexico, Canada and the Philippines.
In August 1995, Sheldahl entered into various agreements to form a
joint venture in Jiujiang Jiangxi, China with Jiangxi Changjiang Chemical Plant
and Hong Kong Wah Hing (China) Development Co., Ltd. Under the agreements,
Sheldahl licensed certain technology to the joint venture and provided certain
technical support. The Company has received a 20% ownership interest in the
joint venture and received cash payments totaling $900,000 upon completion of
certain milestones. The joint venture has been established to manufacture
flexible adhesive-based laminates and associated cover film tapes in China.
Under the terms of the agreements, the joint venture will market these products
in China, Taiwan, Hong Kong and Macau, and the Company will market the products
produced by the joint venture in all other markets. Manufacturing under this
joint venture commenced in fiscal 1999. As of December 28, 2001, the Company's
investment in and the impact of accounting for its investment in Jiujiang
Jiangxi under the equity method has not been material.
Research and Development
Sheldahl's recent research and development efforts have focused on
opportunities presented by the demand for higher density and thinner packaging
for electronic devices. The Company has also identified within its core
technologies other opportunities for participation in the trend towards
miniaturization within the electronics industry and has pursued these
opportunities independently and through various consortia. While Sheldahl
expects to take advantage of these opportunities, research and development
expenses are anticipated to decrease in fiscal 2002.
In August 1994, Sheldahl acquired a minority ownership interest in
Joint Stock Company Sidrabe ("Sidrabe"), a privatized vacuum deposition
developmental company located in Riga, Latvia. Sidrabe historically was a
developmental agency for the former Soviet Union's military and aerospace
programs, specializing in the design and production of vacuum deposition
equipment. With the Company's ownership position in Sidrabe, the Company
received worldwide rights to some key elements of Sidrabe technology and the
Company has access to Sidrabe's scientific and technical personnel with
extensive product and process expertise. The Company has also purchased certain
manufacturing equipment from Sidrabe.
5
On July 28, 1998, Sheldahl and Molex Incorporated ("Molex") formed a
joint venture called Origin Modular Interconnects (f/k/a Modular Interconnect
Systems, L.L.C.) to design, market and assemble modular interconnect systems to
replace wiring harnesses in primarily the automotive market. On June 6, 2001,
that joint venture was dissolved. Under the terms of the Termination Agreement,
the Company and Molex each agreed that all patents, copyrights, trademarks,
trade secrets and other intellectual property rights owned by Origin Modular
Interconnects as of the date of dissolution will be jointly owned by both the
parties.
Suppliers
The Company qualifies strategic suppliers through a Vendor
Certification Program, which limits the number of suppliers to those who provide
the Company with the best total value and quality. The Company closely monitors
product quality and delivery schedules of its supply base. Certain raw materials
used by the Company in the manufacture of its products are currently obtained
from single sources. The Company has not historically experienced significant
problems in the delivery of these raw materials.
Competition
The Company's business is highly competitive. Its advanced engineering
design capabilities, IC packaging expertise, and materials technologies are key
competitive advantages - helping the customer to design new products reliably,
cost effectively and with a key time-to-market advantage. This vertical
integration advantage also allows the customer to achieve manufacturing
efficiencies, providing a total manufacturing solution, from material design
ideas to full program assembly.
The competitors include materials suppliers, flexible and rigid circuit
manufacturers, as well as electronics manufacturers who produce their own
materials and interconnect systems. Some of the Company's competitors have
substantially greater financial and other resources than the Company. The
Company's primary competitors with respect to its flexible printed circuitry and
interconnect systems include Pressac Limited (a U.K. company) and Parlex Corp.
in the automotive electronics market and Mektec Corp., Fujikura Ltd. (a Japanese
company) and Innovex, Inc. in the computer and telecommunications market. The
Company's primary competition for its flexible laminate products includes Rogers
Corporation, E.I. DuPont de Nemours, Gould Corporation and GTS Flexible
Materials, Ltd. (a U.K. company).
The Company's Novaclad(R)-based and ViaThin(R) and FlexStrate and
DendriPlate products compete with other substrates produced through several
alternative processes. These competing products include single- and
double-sided, polyimide-based, etched copper laminate produced using various
methods of production by Minnesota Mining and Manufacturing, Inc. ("3M"),
Japanese companies like Hitachi Cable and Nitto Denko, Korean companies like
Samsung, and Compass Technology Company in Hong Kong. The Company believes the
production processes required for each of these competing substrates, which
includes subtractive plating and traditional etching techniques, are inherently
less reliable and more expensive than the Company's method of production and
result in products that are not as easily utilized as the Company's products in
the design and production of higher-density IC packages. The Company's
substrates for silicon chip carrier products also compete with ceramic packaging
products produced by companies such as Kyocera of Japan, although the Company
believes these products are more expensive than the Company's substrate
products. The Company expects these and other competitors will continue to
refine their processes or develop new products that will compete on the basis of
cost and performance with the Company's emerging products.
Liquidity and Going Concerns Matters
As discussed in Note 2, Holdings began operations on February 1, 1999,
and has incurred operating losses, excluding asset impairment charges of
approximately $56.7 million during the three fiscal years ended December 28,
2001. On a pro-forma basis, including the operations of Sheldahl, the Company
has incurred losses of approximately $128 million during the same period. In
addition, the Company's loss in fiscal year 2001 was $81.3 million, inclusive of
a non-cash asset impairment charge of $39.0 million. These losses have been
principally financed through equity and debt financing.
6
The loss in fiscal year 2001 of $81.3 million breaks down as follows:
(millions)
Earnings before interest, taxes, depreciation,
amortization and asset impairment $ 16.9
Asset impairment 39.0
Depreciation and amortization 16.7
Interest, preferred dividends and taxes 8.7
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Net loss $ 81.3
=======
Fiscal 2002 capital expenditures for the Company are planned at
approximately $3.4 million. Scheduled debt repayments for fiscal 2002 (excluding
amounts under the Credit Agreement, the note payable to IBM and all the
Subordinated Notes that could be called by the lenders due to non-compliance
with associated debt covenants or payment default provisions - see Note 6 to the
Consolidated Financial Statements) will be approximately $2.3 million.
The Company experienced substantial softening of sales orders during
2001, particularly in the second half of 2001, and consequently disappointing
operating performance. The Company responded by reducing expenses significantly,
including the reduction in the number of employees by approximately 40%. These
expense cuts significantly reduced losses from operations. As a result, the
Company's Earnings Before Interest, Depreciation and Amortization ("EBITDA"),
excluding the asset impairment charge (see Note 5 to the Consolidated Financial
Statements), in the fourth fiscal quarter ended December 28, 2001 was
approximately $(0.2) million and represented a significant improvement over the
negative EBITDA of approximately $16.5 million incurred in the prior three
fiscal quarters. EBITDA is a key financial measure but should not be construed
as an alternative to operating income (loss) or cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles in the U.S.). The Company believes EBITDA is a useful supplement to
net loss and other statement of operations data in understanding cash flows
generated from operations that are available for taxes, debt service and capital
expenditures. However, the Company's method of computation may not be comparable
to other similarly titled measures of other companies. The Company is continuing
to develop a combined operational and financial plan for the Company. In the
first fiscal quarter of 2002, the Company has implemented additional cost
reductions designed to improve operating performance at the current level of
revenues. However, the Company anticipates that it will be out of compliance
with certain of its debt covenants during the first fiscal quarter of 2002 (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations") and the amounts borrowed under its Credit and Security Agreement
dated as of July 19, 1998, as amended, with the lenders party thereto and Wells
Fargo Bank, National Association f/k/a Norwest Bank Minnesota, National
Association (the "Credit Agreement") are due in June 2002. The inability of the
Company to: i) obtain waivers for anticipated events of non-compliance under its
Credit Agreement; ii) negotiate new covenants or agreements with lenders; iii)
control operating costs; iv) achieve profitable execution of the sales orders
received for its Longmont, Colorado business; v) achieve operating performance
from the MFI division business above 2001 levels; (vi) achieve other cost or
productivity improvements; and (vii) maintain adequate liquidity to fund normal
operations; (viii) complete and fund the trade credit program as described in
the Current Report on Form 8-K filed on February 27, 2002, and (ix) successfully
negotiate with IBM to settle litigation relating to IFT's lease in Endicott, New
York 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 short 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 address the Company's operational and
cash flow objectives. Should any of the adverse matters discussed above
ultimately occur, management will attempt to take one or all of the following
actions; i) seek continuing waivers of lenders covenants; ii) obtain new equity
capital; iii) issue new debt; and/or iv) significantly restructure the Company's
operations. However, there can be no assurance that the Company will be
successful in obtaining waivers of lenders covenants, negotiating new covenants
or debt agreements, negotiating a credit facility to replace the Credit
Agreement or at all, achieving positive operating results, excluding non-cash
operating expenses during fiscal 2002, obtaining additional debt or raising
additional capital on terms acceptable to the Company, or in the event of the
failure of the foregoing, successfully take the actions described above.
The asset impairment charge recorded in 2001 is a result of
management's review of the carrying amount of certain of its assets in light of
the current operating environment, specifically the Company reviewed the
carrying amount of its goodwill, fixed assets and certain intangible assets
given the changes in the economic environment, the Company's industry, business
strategy and projected future operating results and cash flows. As a result of
these
7
changes, the Company prepared analyses in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," to determine if there was impairment of recorded goodwill and
other long-lived assets. Based upon the anticipated undiscounted cash flows from
these analyses, the Company determined that goodwill resulting from the merger
discussed in Note 2 was impaired and thus written down. In addition, the Company
identified other long-lived assets which no longer had sufficient anticipated
undiscounted cash flows to support their carrying amounts and were written down
to fair value. Fair value was based on discounting estimated future cash flows
for assets grouped at the lowest level for which there were identifiable cash
flows at a discount rate commensurate with the risks involved. As a result of
the impairment analysis, the Company recorded a charge during the fourth quarter
of 2001 of approximately $39.0 million related to the impairment of goodwill,
intangibles and plant and equipment. Considerable management judgment was
necessary to estimate fair value and determination of future cash flows.
Ultimate results could vary significantly from management's estimates.
Backlog
The Company's backlog consists of those orders for which the Company
has delivery dates. Automotive customers typically provide for four to six weeks
of committed shipments while data communications customers generally provide for
up to eight weeks of committed shipments. The Company's backlog of unshipped
orders as of December 28, 2001 and December 29, 2000 was approximately $10.0
million and $10.3 million ($27.4 on a pro forma combined basis including
Sheldahl and IFT as of December 29, 2000), respectively. Generally, most orders
in backlog are shipped during the following three months except for the tape
ball grid array orders which are contracted for the fiscal year. Because of the
Company's quick turn of orders to work-in-process, the timing of orders,
delivery intervals, customer and product mix and the possibility of customer
changes in delivery schedules, the Company's backlog at any particular date may
not be indicative of actual sales for any succeeding period.
Proprietary Technology
The Company owns five United States patents for Novaclad(R) laminate
product and the processes for making Novaclad(R) laminate product. Foreign
patents have been granted on Novaclad(R) technology in Canada, Germany, Japan
and Korea, with other patent applications pending. The European Patent was
awarded in April 2000. Federal trademark registrations have been obtained on
Novaclad(R), ViaThin(R), Flexbase(R), Novaflex(R), Novaflex(R) HD and VHD.
Sheldahl also relies on internal security and secrecy measures and on
confidentiality agreements for protection of trade secrets and proprietary
know-how. There can be no assurance that Sheldahl's efforts to protect its
intellectual property will be effective to prevent misappropriation or that
others may not independently develop similar technology. The Company believes
that it possesses adequate proprietary rights to the technology involved in its
products and that its products, trademarks and other intellectual property
rights do not infringe upon the proprietary rights of third parties. The
Company's primary Novaclad(R), patents expire between years 2009 and 2015.
International Flex Technologies Inc. ("IFT"), was acquired from IBM
Corporation in 1999. As part of the acquisition from IBM, IFT gained licenses to
intellectual property, proprietary equipment and processes, and numerous trade
secrets required to produce single- and double-sided flexible circuits and
DendriPlate connectors. Licenses to 33 patents, 32 from IBM Corporation and 1
from Gould Corporation were obtained. In addition, IFT has one application for
patent pending and a second patent which has been approved, and on which the
Company is waiting for a patent number to be issued, both of which patents are
for circuitization process techniques. IFT also relies on internal security and
confidentiality agreements for protection of trade secrets and proprietary
know-how. As explained in Note 6 to the Company's Financial Statements, the
Company has not made required payments with respect to IBM licensed technology
and while no default has been declared by IBM, a default could result in the
loss of rights to use the IBM intellectual property.
Sheldahl was named as a defendant in a patent infringement matter
regarding its Novaclad(R) products which was dismissed for lack of jurisdiction
in January 1994 and which has not been commenced elsewhere. There can be no
assurance that this plaintiff or others will not bring other actions against the
Company. The Company is also aware of the existence of a patent which may cover
certain plated through holes of the double-sided circuits made of the Company's
Novaclad(R) materials. Although no claims have been made against the Company
under this patent, the owner of the patent may attempt to construe the patent
broadly enough to cover certain Novaclad(R) products manufactured currently or
in the future by the Company. The Company believes that prior commercial art and
conventional technology, including certain patents of the Company, exist which
would allow the Company to prevail
8
in the event any such claim is made under this patent. Any action commenced by
or against the Company could be time consuming and expensive and could result in
requiring the Company to enter into a license agreement or cease manufacture of
any products ultimately determined to infringe such patent.
See also the discussion related to the Lemelson Foundation in "Legal
Proceedings," Item 3 of Part I of this Form 10-K.
Environmental Regulations
The Company is subject to various federal, state and local
environmental laws relating to the Company's operations. The Company's
manufacturing and assembly facilities are registered with the U.S. Environmental
Protection Agency and are licensed, where required, by state and local
authorities. The Company has agreements with licensed hazardous waste
transportation and disposal companies for transportation and disposal of its
hazardous wastes generated at its facilities. The Company's Longmont facility
has been specifically designed to reduce water usage in the manufacturing
process and employs a sophisticated waste treatment system intended to
substantially reduce discharge streams. The Company's Endicott facility is
leased from IBM. Pursuant to the lease, IBM provides certain services with
respect to receiving, storing and handling of the Company's chemicals.
Compliance with federal and state environmental laws and regulations did not
have a material effect on the Company's capital expenditures, earnings or
competitive position during fiscal 2001. Similarly, fiscal 2002 capital
expenditures to comply with such laws and regulations are not expected to be
material. The Company believes it is in material compliance with federal and
state environmental laws and regulations. As of December 28, 2001, the Company
was not involved in any significant specific action, legal or regulatory,
regarding environmental regulations.
Employees
As of December 28, 2001, the Company employed 601 people in the United
States, Europe and Asia including 519 in production, 38 in sales, marketing,
application engineering, and customer support, 7 in research and development and
37 in administration. The production staff consists principally of full-time
workers employed in the Company's four currently operating manufacturing and
assembly plants. In Northfield, Minnesota, approximately 252 production workers
are represented by the Union of Needletrade, Industrial and Textile Employees
(the "Union"), which has been the bargaining agent for these workers since 1963.
The Company has a one-year collective bargaining agreement with the Union, which
expires on October 31, 2002. As part of this agreement, the Company agrees that
if a decision is made to sell the Company, either in whole or in part, the Union
shall be notified and, upon execution of a confidentiality agreement, shall be
given the necessary information as an interested buyer and shall be given the
opportunity to make bids on an equivalent basis and time period as other
parties. The Company also agreed with the Union that the Company will consider
employee-ownership options if any sale of the Company or its parts is
considered. The Company has never experienced a work stoppage and believes that
it has good employee relations.
On February 15, 2002, the Company announced that its wholly owned
subsidiary, International Flex Technologies Inc. ("IFT"), will cease operations
in its Endicott, New York facility by the end of May 2002. The facility, which
employs 115 individuals, manufactures fine-line, flexible circuits for use in
the computer, data communications and medical markets and is the primary
location where IFT products have been made. IFT is working with area employers
and New York State officials to assist affected workers in job placement. In
addition, IFT is providing severance packages and outplacement services. In
compliance with the federal Worker Adjustment and Re-training Notification Act,
IFT has given appropriate notice to affected employees.
Item 2. Properties
- -------------------
The Company owns two manufacturing facilities totaling 305,000 square
feet and a 20,000 square foot administration and sales support office in
Northfield, Minnesota. The Company also owns a 102,000 square foot facility in
Longmont, Colorado. The Company owns a 30,000 square foot assembly facility in
Britton, South Dakota which facility has been idle since September 2001. IFT
also leases a 98,400 square foot office and manufacturing facility in Endicott,
New York; this facility will be closed in May 2002. The Company also leases
technical sales space in Singapore. Management believes that all facilities
currently in use are generally in good condition, well maintained and adequate
for their current operations.
9
Item 3. Legal Proceedings
- --------------------------
The nature of the Company's operations expose it to the risk of certain
legal and environmental claims in the normal course of business. The Company
believes that these general matters will not have a material adverse effect on
the Company's results of operations or financial condition.
As is typical in the electronics industry, the Company has from time to
time received, and may in the future receive, communications from third parties
asserting patents or copyrights on certain of the Company's equipment, products
and technologies. A number of users of machine-vision technology, including the
Company, have received notice of alleged patent infringement from, and/or have
been sued by, the Lemelson Medical, Education and Research Foundation Limited
Partnership ("Lemelson Foundation") alleging that equipment used in the
manufacture of electronic devices infringes certain patents issued to Jerome H.
Lemelson relating to "machine vision" or "barcode reader" technologies. Although
the Company has not fully evaluated the alleged infringement claims nor has it
been named a defendant in any related lawsuit, the Company believes that if any
liability for infringement exists, such liability would not be born by the
Company but rather would be born by the Company's machine-vision equipment
manufacturers. Accordingly, the Company has given those manufacturers notice
that it intends to seek indemnification from them for any damages and expenses
resulting from this matter if the Company is found liable or if it settles the
claims. The Company cannot predict the outcome of this or any similar claim or
its effect upon the Company, and there can be no assurance that any such
litigation or claim would not have a material adverse effect upon the Company's
financial condition or results of operations.
Pioneer Engineering Technology Co., Ltd, a Taiwan company ("Pioneer")
in November of 2000 filed an action against the company seeking payment of
approximately $555,000 in unpaid contract payments. The Company filed a
counterclaim against Pioneer for breach of contract and breach of various
warranties. On December 21, 2001 the parties reached a mediated settlement
whereby the Company agreed to pay the sum of $90,000 in three installments.
Because of the settlement, the court action has been dismissed with prejudice.
On or about July 9, 2001, the Company was served with a summons and
complaint by Banc of America Securities, LLC ("BAS"). The complaint was filed
with the Circuit Court of Cook County, Illinois. In its complaint, BAS alleges
that pursuant to an Engagement Agreement dated April 5, 2000 with IFT, BAS is
owed an investment banking fee arising out of the December 2000 Merger between
Sheldahl, Holdings and IFT. BAS is seeking $1.75 million, plus pre-judgement
interest from the Company for what it claims is the amount of its investment
banking fee under the Engagement Agreement. The Company filed a Joint Answer on
behalf of Sheldahl and IFT on September 14, 2001, and amended on October 25,
2001, denying that BAS was entitled to any investment banking fee arising from
the Merger and asserting various defenses to BAS's claims. Sheldahl and IFT
further requested that the court dismiss all BAS's claims with prejudice. The
parties are currently in the discovery stage of litigation.
In November 2001, W.M. Hague Company, Inc. commenced an action against
the Company in the First Judicial District of the State of Minnesota seeking
payment of approximately $72,000 for equipment purchased by the Company. W.M.
Hague Company, Inc. is seeking to amend its complaint to increase its claimed
damages to approximately $170,000.
Electro Scientific Industries, Inc. ("ESI") and the Company are
presently in arbitration before the American Arbitration Association in
Portland, Oregon. ESI is seeking payment of approximately $1,000,000 in unpaid
contact payments and costs. The Company is in the process of attempting to
negotiate a settlement with ESI.
The City of Britton has commenced an action against Sheldahl, Inc., in
the Circuit Court of the County of Marshall in the State of South Dakota seeking
payment of approximately $450,000 on two separate notes related to the Company's
Britton, South Dakota facility. The Company ceased operations at this facility
in September 2001.
On March 22, 2002, the Company's subsidiary, International Flex
Technologies Inc., received notice of default from International Business
Machines Corporation ("IBM") with respect to a Lease dated January 25, 1999 for
IFT's Endicott, New York facility. On March 29, 2002, IBM filed a Petition to
Recover Possession of Real Property against IFT in the Town of Union Justice
Court. In the Petition, IBM seeks to evict IFT from the Endicott, New York
facility and recover a money judgment of $686,137, representing rent IBM claims
is past due. A hearing relating to the Petition is scheduled for April 9, 2002.
See Note 15 to the Consoldated Financial Statements.
10
Item 4. Submission of Matters to a Vote of Securities Holders
- --------------------------------------------------------------
None.
Item 4A. Executive Officers of Registrant.
- -------------------------------------------
The executive officers of the Company as of the filing date who are
appointed annually to serve one year terms, are as follows:
Name Age Position
Benoit Pouliquen 40 Director, CEO and President
Peter J. Duff 56 Vice President - Finance
Sidney J. Roberts 55 Vice President- Materials
Benoit Pouliquen has served as President and Chief Executive Officer
and Director since September 4, 2001. Previously, he served as President and
Chief Operating Officer at BMC Industries for a period of approximately 2 years.
Prior to that he served in a variety of senior management positions at Johnson
Matthey PLC for a period of more than 5 years. He has had extensive experience
in the circuitry and manufacturing industries for more than 15 years.
Peter J. Duff has served as Vice President - Finance since the Merger
was completed on December 28, 2000. Prior to that he served as Chief Financial
Officer of International Flex Technologies since its inception in January 1999.
During his previous 10 years with U.S. Industries he served as Executive Vice
President of EJ Footwear, then as Group Chief Financial Officer for several
other USI companies, followed by Chief Operating Officer of Sunlite Casual
Furniture. His international experience includes positions with
PriceWaterhouseCoopers, Deloitte & Touche, John Labatts, and Pfizer.
Sidney J. Roberts joined the Company in 1973 and has held various
positions with the Company, including Director of Manufacturing and
Engineering-Materials, Business Director-Novaclad(R), Manager of Research and
Development-Materials and Interfacial Engineering, and Technical
Director-Materials. He was named as Vice President-Research and Development in
November 1996 and Vice President-Materials in April 2001.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
The Common Stock is listed on the Nasdaq National Market under the
symbol "SHEL". The following table sets forth the high and low sales prices of
the Common Stock for the period indicated, as reported on the Nasdaq National
Market.
High Low
------- -------
Twelve Months Ended December 28, 2001:
First Quarter $ 4.000 $ 1.688
Second Quarter 2.950 1.030
Third Quarter 1.900 0.960
Fourth Quarter 1.110 0.220
Eleven Months Ended December 29, 2000:
First Quarter $ 8.625 $ 4.000
Second Quarter 6.375 3.875
Third Quarter 4.750 2.000
Fourth Quarter (1) 4.188 1.000
(1) Fourth quarter consists of two months as the Company changed its
year-end (see Note 2 to Consolidated Financial Statements included with
this report).
11
On March 15, 2002, the last reported sales price of the Common Stock was
$0.45. As of this date, there were approximately 1,510 record holders of the
Company's Common Stock and an estimated additional 3,931 shareholders who held
beneficial interests in shares of Common Stock registered in nominee names of
banks and brokerages houses.
Pursuant to its Credit Agreement, the Company is restricted from declaring
or paying cash dividends without the consent of the Company's lenders. The
Company has never declared or paid any dividends on its Common Stock. The
Company currently intends to retain any earnings for use in its operations and
expansion of its business and therefore does not anticipate paying any cash
dividends in the foreseeable future.
Recent Sales of Unregistered Securities
On September 4, 2001 the Company issued a three year warrant to Heidrick &
Struggles, Inc. ("H&G"), an executive level search and consulting firm, for the
right to purchase 304,933 shares of common stock at an exercise price of $1.37
per share. The warrant was issued in connection with the satisfaction of a
Letter Agreement between the Company and H&G upon the employment of Benoit
Pouliquen as Chief Executive Officer of the Company. The Company believes this
issuance of securities is exempt from registration under Section 4(2) of the
Securities Act of 1933.
In October 2001, the Company completed the issuance of $7.0 million of 17%
Senior Subordinated Notes to Morgenthaler Partners VII, L.P., Ampersand IV
Limited Partnership and Molex Incorporated. These Notes are due and payable in
October 2006 or earlier upon certain issuances of capital stock or the sale of
assets by the Company after first applying proceeds to existing debt under the
Company's current Credit Agreement and the 12% Senior Subordinated Notes issued
in May 2001. In addition, the purchasers were issued seven-year warrants for an
aggregate of approximately 3.13 million shares of the Company's common stock at
an exercise price of $0.01 per share of common stock. The warrants are
exercisable at $0.01 per share for a period of seven years. Additionally, for
each year for which any portion of these Notes remain outstanding, the Company
will issue additional warrants to purchase an aggregate of 261,010 shares of the
Company's common stock at an exercise price of $0.01 per share. The Notes are
secured by all of the non-real property assets of the Company and its
subsidiaries, International Flex Technologies Inc. and International Flex
Holdings, Inc. The Notes are subordinate to the Company's obligations to the
lenders under the Credit Agreement. The Company believes this issuance of
securities is exempt from registration under Section 4(2) of the Securities Act
of 1933.
In August 2001, the Company completed the issuance of $3.0 million of 12%
Senior Subordinated Notes to Morgenthaler Venture Partners V, L.P. and Molex
Incorporated. These Notes are due upon the earlier of the following events:
August 2006, certain issuances of capital stock or the sale of assets by the
Company after first applying proceeds to existing debt under the Company's
current Credit Agreement, the 22% Senior Subordinated Notes and the 17% Senior
Subordinated Notes discussed below. In addition, each purchaser was issued
warrants to purchase 351,000 shares of the Company's common stock. The seven-
year warrants are exercisable at $0.01 per share of common stock. The Notes are
subordinate to the Company's obligations to the lenders under the Credit
Agreement. The Company believes this issuance of securities is exempt from
registration under Section 4(2) of the Securities Act of 1933.
In May 2001, the Company completed the issuance of $5.0 million of 22%
Senior Subordinated Notes to Morgenthaler Venture Partners V, L.P., Ampersand IV
Limited Partnership and Molex Incorporated. These notes are due at such time
that the Company repays the obligations under its current Credit Agreement, or
earlier upon certain issuance of capital stock or the sale of assets by the
company after first applying proceeds to existing debt under the Credit
Agreement. The Notes are secured by all of the non-real property assets of the
Company and its subsidiaries. The Notes are subordinate to the obligations of
the Company to the lenders under the Credit Agreement. The Company believes this
issuance of securities is exempt from registration under Section 4(2) of the
Securities Act of 1933.
In December 2000, the Board of Directors of Sheldahl approved a series of
transactions as described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Recent Developments". As part of these
transactions, Sheldahl issued shares of its Common Stock, $0.25 par value per
shares (the "Common Stock"), to two accredited investors (the "Stockholders") in
connection with the Merger. In addition, Sheldahl issued shares of Common Stock
and its newly created Series G Convertible Preferred Stock, $1.00 par value per
share (the
12
"Preferred Stock") and Warrants (the "Series G Warrants") to purchase shares of
the Company's Common Stock to three accredited investors (the "Investors") who
collectively invested an aggregate of $25 million. Sheldahl also completed the
issuance of $6.5 million of subordinated notes to four accredited investors (the
"Purchasers"), and in connection with such issuance, the Purchasers received
Warrants (the "Subdebt Warrants") to purchase shares of Sheldahl common stock.
The Board also authorized granting the Stockholders, Investors and Purchasers
certain registration rights with respect to the shares of Common Stock and the
Common Stock underlying the Preferred Stock, the Series G Warrants and the
Subdebt Warrants issued in the transactions. The closing of the investment of
$25 million, the subdebt investment and the Merger occurred on December 28,
2000. Based on the manner of sale and representations of the Investors,
Stockholders and Purchasers, all of which were accredited, the Company believes
that pursuant to Rule 506 of Regulation D, the private placement was a
transaction not involving any public offering within the meaning of Section 4(2)
of the Securities Act of 1933, as amended, and was, therefore, exempt from the
registration requirements thereof.
Sheldahl used the proceeds from the sale of the securities involved in the
above transactions for working capital purposes.
Item 6. Selected Financial Data
- -------------------------------
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere herein and the "Management's Discussion and Analysis
of Financial Condition and Results of Operations". The consolidated statements
of operations data presented below as of and for the twelve months ended
December 28, 2001, the eleven months ended December 29, 2000 and the
consolidated balance sheet data as of December 28, 2001 and December 29, 2000
have been derived from the Company's Consolidated Financial Statements included
elsewhere in this report. The consolidated balance sheet data as of January 29,
2000 is derived from the Company's Consolidated Financial Statements not
included in this report. The unaudited pro-forma consolidated statement of
operations data and consolidated balance sheet data as of and for the eleven
months ended December 29, 2000 presents the results of the Company as if the
Merger discussed in Item 5 of this report would have occurred at the beginning
of the period. The unaudited pro forma consolidated financial information does
not purport to represent what the Company's financial position or results of
operations would actually have been if the Merger had occurred at such date or
to project the Company's future results of operations. The financial statements
as of and for the year ended December 28, 2001 and the eleven months ended
December 29, 2000 have been audited by Arthur Andersen LLP. The financial
statements as of and for the twelve months ended January 29, 2000 have been
audited by Ernst & Young LLP.
(In thousands, except per share data)
Unaudited
Pro-forma
Twelve Months Eleven Months Eleven Months Twelve Months
Ended Ended Ended Ended
Statements of Operations Data: 12/28/01 12/29/00 12/29/00 1/29/00
------------- ------------- ------------- -------------
Net sales $ 108,494 $ 137,673 $ 20,417 $ 24,081
Cost of sales 115,772 128,735 16,333 17,051
------------- ------------- ------------- -------------
Gross profit (loss) (7,278) 8,938 4,084 7,030
------------- ------------- ------------- -------------
Expenses:
Sales and marketing 7,463 9,445 1,337 804
General and administrative 12,922 11,999 3,373 4,879
Research and development 5,904 5,454 2,888 2,060
Asset impairment 39,035 - - -
Interest 5,656 4,820 1,203 960
------------- ------------- ------------- -------------
Total expenses 70,980 31,718 8,801 8,703
------------- ------------- ------------- -------------
Loss before income tax (78,258) (22,780) (4,717) (1,673)
------------- ------------- ------------- -------------
Benefit for income taxes 311 197 197 550
13
Convertible preferred dividends 3,346 3,116 - -
------------- ------------- ------------- -------------
Loss applicable to common shareholders $ (81,293) $ (25,699) $ (4,520) $ (1,123)
============= ============= ============= =============
Net loss per common share
- basic and diluted $ (2.60) $ (0.84) $ (0.51) $ (0.13)
============= ============= ============= =============
Weighted average common shares
outstanding - basic and diluted 31,279 30,590 8,802 8,737
============= ============= ============= =============
Balance Sheet Data:
Working capital (deficit), net $ (37,213) $ (3,437) $ (3,437) $ 3,030
Total assets 57,575 129,362 129,362 25,760
Long-term debt, excluding
current portion 4,541 10,640 10,640 9,873
Total shareholders' equity (deficit) (19,606) 56,868 56,868 8,877
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
Profile
On December 28, 2000, Sheldahl, Inc. ("Sheldahl") acquired all of the
outstanding securities of International Flex Holdings, Inc., a Delaware
corporation ("Holdings"), the sole shareholder of International Flex
Technologies Inc., a Delaware corporation ("IFT"), pursuant to a merger of a
newly formed subsidiary of Sheldahl with and into Holdings (the "Merger").
Although Sheldahl was the legal survivor in the Merger and remains the
registrant with the Securities and Exchange Commission and a listed company
under Nasdaq, under United States generally accepted accounting principles, as a
result of the number of shares issued and sold in the transactions, Holdings was
considered the "acquiror" of Sheldahl for financial reporting purposes. Among
other matters, this required Sheldahl, in this report and all of its future
financial and informational filings with the SEC, to present the prior
historical, financial and other information of Holdings and IFT. Accordingly,
unless otherwise indicated to the contrary herein, the results of Holdings and
IFT will be presented herein as the "Company" for all periods prior to December
28, 2000 without inclusion of Sheldahl's results for the same period. See
"Merger" below and the Company's consolidated financial statements and notes
thereto included elsewhere herein. For purposes of this report, unless otherwise
stated to the contrary, Company shall refer to Sheldahl, Holdings and IFT on a
combined basis for all periods on or after December 28, 2000.
On January 5, 2001, the Board of Directors of the Company changed its
fiscal year to the Friday closest to December 31 of each year, beginning with
December 29, 2000. Therefore, for purposes of this report, fiscal 2000 consists
of a transition period from January 30, 2000, the beginning of Holding's fiscal
year.
The Company creates and distributes high-density substrates, high-quality
flexible printed circuitry, and thin, flexible laminates and their derivatives
to worldwide markets. The Company's laminates are of two types: adhesive-based
tapes and materials, and its patented adhesiveless material, Novaclad(R). From
these materials, the Company fabricates high-value derivative products: single-
and double-sided flexible interconnects and assemblies under the trade names
Flexbase(R), Novaflex(R) HD, Novaflex(R) VHD, FlexStrate, DendriPlate(R) and
substrates for silicon chip carriers under the trade name ViaThin(R). Management
believes that Sheldahl's leading technology products serve the electronic
interface between the function of electronic-based products and their integrated
circuits. The Company targets specific OEMs and contract assemblers in the
telecommunications, computer, medical, automotive and aerospace markets in the
drive to create electronic-based products that require increased functionality.
The Company operates in two business divisions identified as the Materials
and Flex Interconnect Division (MFI), and the International Flex Technologies
Division ("IFT Division"). The MFI business division, which consists of
Materials and Flexible Interconnect Business Units, specializes in high quality,
roll-to-roll flexible circuits and specialty materials for the automotive,
communications, computer and aerospace markets. The IFT Division consists of
fine-line, roll-to-roll flexible circuits including substrates for silicon chip
carriers manufactured
14
in Endicott, New York and Longmont, Colorado. These products target the
telecommunications, computer and medical markets.
The Company's high performance products -FlexStrate, ViaThin(R),
Novaflex(R) HD and Novaflex(R) VHD provide substantial benefits compared to
traditional flexible circuits, including the capability for very fine circuit
traces and very small holes, or vias, thus utilizing both sides of the laminate
for circuit routing reducing size and cost per function. The Company has
developed its ViaThin(R) to enable Interconnect ("IC") manufacturers to package
future generations of ICs economically by attaching the silicon die to a
ViaThin(R) substrate manufactured by the Company or other circuitry
manufacturers using the Company's Novaclad(R) products. As ICs are becoming
increasingly powerful, they produce more heat and require a greater number of
connections to attach the silicon die, placing substantially greater demands on
IC packaging materials. The Company's substrates for silicon chip carriers offer
high-end thermal, electrical and quality attributes.
Merger
On December 28, 2000, Sheldahl acquired all of the outstanding securities
of International Flex Holdings, Inc. (Holdings) for approximately 8.7 million
shares of Sheldahl's common stock, plus shares issuable under stock options and
warrants of approximately 1.0 million shares, pursuant to a merger agreement as
amended, (the "Merger Agreement") by and among Sheldahl, IFT West Acquisition
Company, a newly formed subsidiary of Sheldahl ("West"), Holdings, the sole
shareholder of International Flex Technologies Inc., the operating company
("IFT"), and the stockholders of Holdings (the "Stockholders"). Under the terms
of the Merger Agreement, West merged with and into Holdings, with Holdings
surviving and becoming a wholly-owned subsidiary of Sheldahl (the "Merger"). As
consideration for the Merger, holders of outstanding shares of Holdings' common
stock, Class A Stock, Class B Stock and Series A Preferred Stock received shares
of Sheldahl Common Stock. Holdings' option holders and warrant holder received
equivalent options and a warrant to purchase shares of Sheldahl Common Stock.
The total number of shares of Sheldahl Common Stock issued, including shares to
be issued upon exercise of options and warrants, was approximately 9.7 million.
Common Stock and Series G Investment
Concurrent with consummating the Merger, Sheldahl completed an equity
placement pursuant to an amended stock purchase agreement (the "Stock Purchase
Agreement") by and among Sheldahl, and three accredited investors, Morgenthaler
Venture Partners V, L.P. ("Morgenthaler V"), and Ampersand IV Limited
Partnership and Ampersand IV Companion Fund Limited Partnership (collectively
the "Ampersand Funds"). Under the terms of the Stock Purchase Agreement,
Morgenthaler V and the Ampersand Funds (the "Investors") collectively invested
an aggregate of $25.0 million in equity capital in exchange for approximately
9.8 million shares of Sheldahl Common Stock and 11,303 shares of a newly created
11.06% Series G Convertible Preferred Stock of Sheldahl, par value $1.00 per
share (the "Series G Stock"), such shares being convertible at $1.40 per share
in the aggregate into approximately 8.1 million shares of Sheldahl Common Stock
(the "Equity Investment"). The cash used by the Investors to complete the Equity
Investment came from the liquid assets of the Investors.
Subordinated Notes and Warrant Purchase Investment
Concurrent with consummating the Merger and Equity Investment, Sheldahl
consummated a debt investment pursuant to an amended and restated subordinated
notes and warrant purchase agreement (the "Debt Agreement") by and among
Sheldahl, Morgenthaler V, the Ampersand Funds and Molex Incorporated ("Molex").
Under the terms of the Debt Agreement, Morgenthaler V, the Ampersand Funds and
Molex (the "Purchasers") purchased $6.5 million of 12% Senior Subordinated Notes
("Notes") and related warrants (the "Warrants") (the "Debt Investment"). In
addition, the Purchasers collectively received Warrants to purchase 1,526,814
shares of Sheldahl Common Stock. The Warrants issued under the Debt Agreement
are exercisable at $0.01 per share and are exercisable for seven years from the
date of issuance. The cash used by the Investors to complete the Debt Investment
came from the liquid assets of the Investors.
Governance Agreement
Concurrent with the closing of the Merger, the Equity Investment and the
Debt Investment (collectively, the "Transactions"), Sheldahl entered into a
governance agreement by and among it and Morgenthaler V, the Ampersand
15
Funds and Sound Beach Technology Partners, LLC, a former IFT stockholder ("Sound
Beach") (collectively, the "Parties") establishing the terms and conditions
regarding (i) future purchases and sales of the Company's securities, and (ii)
the Parties' relationship with the Company (the "Governance Agreement"). Donald
Friedman, the Company's former Chief Executive Officer, is a significant
shareholder and officer of Sound Beach. Molex is not a party to the Governance
Agreement.
Under the terms of the Governance Agreement, until the third anniversary of
the closing of the Transactions, the Parties and their respective affiliates are
restricted from beneficially owning any Sheldahl securities in excess of that
issued or issuable (i) in the Merger, (ii) under the Stock Purchase Agreement,
(iii) upon conversion of the Series G Stock, (iv) issuable in respect of
dividends due on the Series G Stock, and (v) upon exercise of the Warrants
issued under the Debt Agreement. The Parties are also restricted from doing a
business combination or proxy solicitation during the same period. This
restriction does not include, however, acquiring securities directly from the
Company or making business combination or tender offer proposals to the Company
or conducting a proxy solicitation in response to the same made by third
parties.
Also under the terms of the Governance Agreement, for one year from the
date of the closing of the Transactions, the Parties are restricted from
transferring any of their shares of Common Stock, Series G Stock and Warrants,
other than to their Affiliates or Associates. At any time prior to the third
anniversary of the closing of the Transactions, any transferees of such parties,
other than a partner or a member of a Party, must become a signatory to the
Governance Agreement. After one year, any of the Parties that is an investment
fund may distribute its shares to its partners and members.
The terms of the Governance Agreement required that the initial composition
of Board of Directors of Sheldahl as of the closing of the Transactions be
comprised of (i) three continuing directors from Sheldahl (each a "Continuing
Director"), (ii) the director appointed by Molex (the "Molex Director"), and
(iii) three directors nominated by Morgenthaler V, the Ampersand Funds and Sound
Beach. With respect to the election of directors following the closing of the
Transactions, Morgenthaler V, the Ampersand Funds and Sound Beach together shall
be entitled to nominate three directors. The number of directors which may be
nominated by Morgenthaler V, the Ampersand Funds and Sound Beach will be reduced
as their collective ownership in the Company is reduced. The terms of the
Governance Agreement require that the identity of directors to stand for
election by the Company's shareholders or to fill vacancies on the Board of
Directors be determined by a nominating committee of the Board of Directors (the
"Nominating Committee").
In the event the Company desires to enter into a transaction with any of
the holders of the Series G Stock or their affiliates, the Governance Agreement
requires that such transaction must be approved by a majority vote of the Board
of Directors, excluding any Series G Director who is a party to or otherwise has
an interest in the transaction.
Without the consent of Morgenthaler V and the Ampersand Funds, the Company
may not authorize or enter into any agreement relating to a merger, sale or
lease of substantially all of the Company's assets, set the number of directors
at a number other than seven (7), or repurchase or redeem any equity securities
of the Company, as long as such Party continues to hold at least 15% of the
shares of Common Stock issued or issuable to it pursuant to the Transactions.
Voting Agreement
In connection with the Transactions, Morgenthaler V, the Ampersand Funds
and Sound Beach together executed a voting agreement, as amended (the "Voting
Agreement"). The Company is not a party to this Voting Agreement. Under the
terms of the Voting Agreement, Morgenthaler V, the Ampersand Funds and Sound
Beach have agreed how they will designate individuals to be nominated for
election as directors as provided under the Governance Agreement. Additionally,
provided the parties hold a certain level of ownership in the Company,
Morgenthaler V, the Ampersand Funds and Sound Beach agree to vote their shares
in favor of such nominees to the Company's Board of Directors. Lastly, the
Voting Agreement restricts the ability of Sound Beach to dispose of certain of
its shares provided Morgenthaler V and the Ampersand Funds maintain ownership of
at least 60% of the securities received in the Transactions.
16
Molex Transactions
In connection with execution of the Merger Agreement, the Stock Purchase
Agreement and the Debt Agreement, the Company and Molex agreed to certain
amendments to the parties' (i) Agreement Relating to Sheldahl dated November 18,
1998 (the "Sheldahl Agreement"), and (ii) the Limited Liability Company
Agreement of Modular Interconnect Systems, L.L.C., dated July 28, 1998 (the "LLC
Agreement"). The LLC Agreement was made in connection with a joint venture
between Sheldahl and Molex. When the joint venture was terminated on June 6,
2001, the LLC Agreement was also terminated. See "Item 1: Business-Research and
Development."
The Sheldahl Agreement was amended to provide that Molex shall have the
right to participate in future equity offerings of the Company so that Molex
retains up to a 10% ownership interest in the Company on a fully diluted basis.
Also, the Sheldahl Agreement was amended to provide that Molex shall have the
right to participate in future issuances of the Company's equity securities in
connection with an acquisition so that Molex retains up to a 5% ownership
interest in the Company on a fully diluted basis. Lastly, the Sheldahl Agreement
was amended to provide Molex with a right of first refusal on any acquisitions
of the Company by three Identified Parties (the "Right of First Refusal"). The
Right of First Refusal terminates at the earlier of the end of the thirty month
period following the date of closing of the Merger or the execution of a
mutually acceptable supply and technology agreement between Molex and Sheldahl.
Recent Developments
Facility Closure
----------------
On February 15, 2002, the Company announced that its wholly owned
subsidiary, International Flex Technologies Inc. (IFT), will cease operations in
its Endicott, New York facility in May 2002. The facility, which employs 115
individuals, manufactures fine-line, flexible circuits for use in the computer,
data communications and medical markets and is the primary location where IFT
products have been made. The Company made this decision after experiencing
diminished demand for the specialized products manufactured in Endicott, is not
anticipating demand levels to return, and with few exceptions, the Company
expects to cease manufacture of these IFT products. As a result of these
conditions and as part of the Company's ongoing efforts to reduce costs, the
action was taken to permanently close the Endicott facility. The Company expects
to begin using its Longmont, Colorado facility for the manufacture of products
sold in its MFI segment and will continue to manufacture a few products formerly
made in the Endicott facility.
17
Listing on Nasdaq National Market
---------------------------------
The Company received notice from Nasdaq that it does not meet the
requirements for continued listing under the Nasdaq Market Place Rules in that
the Company has not maintained a $5,000,000 minimum market value of its publicly
held common shares and the closing bid price of the Company's common stock was
less than $1.00 per share for 30 consecutive trading days. The Company has until
May 15, 2002 to meet the minimum bid price requirement and until June 20, 2002
to meet the minimum market value of publicly held shares requirement In order to
achieve compliance with the bid price requirement, the bid price of the
Company's common stock must close at $1.00 per share or more for a minimum of
ten consecutive trading days. If the Company is not able to regain compliance
with the Nasdaq Market Place Rules, the Company's common stock may be delisted
from the Nasdaq National Market. As an alternative to meeting the requirements
for continued listing for the Nasdaq National Market, the Company may apply for
listing on the Nasdaq SmallCap Market. If the Company's common stock were
delisted, the Company's common stock may be traded on the Nasdaq OTC Bulletin
Board. The Company is currently exploring the Nasdaq listing requirements and
the Company's ability to comply with the requirements of either the Nasdaq
National Market or SmallCap Market listing.
Under the terms governing the Company's Series D and E Convertible
Preferred Stock, the delisting of the Company's common stock from the Nasdaq
National Market would require that all dividends to the Series D and E
Convertible Preferred Stock holders be paid in cash, rather than in shares of
common stock. However, the Company is prohibited from paying any cash dividend
by the terms of its Credit Agreement and each of the subordinated notes
agreements. Further, in the event that there are accrued but unpaid dividends,
the Company would be prohibited from paying any dividend on any junior series of
preferred stock until the more senior series of preferred stock is fully paid.
Foreign Accounts Receivable Financing
-------------------------------------
On December 28, 2001, the Company entered into a Factoring and Security
Agreement with Greenfield Commercial Credit, L.L.C. ("Purchaser"). This facility
provides an 80% advance on the Company's U.S. dollar denominated accounts
receivable from companies incorporated outside the United States. The Purchaser
establishes a limit on the foreign accounts receivable it will purchase for each
customer company and an overall limit of $4,000,000. The Company may be required
to re-purchase any accounts receivable purchased by the Purchaser which remain
unpaid 90 days after invoice date. As a result, the Company will continue to
report such accounts receivable on its financial statements and the factored
amount as current debt. The Company pays a fee of 0.75% for each 10 day period
or portion thereof that the purchased amount is outstanding for the first ninety
days. As of December 28, 2001 and March 22, 2002 the Company had $0 and
$1,457,000 outstanding under this facility, respectively.
Results of Operations
Since its inception on February 1, 1999, International Flex Technologies
Inc. ("IFT") received strong demand for its existing product line of thermal
compression bond Tape Ball Grid Array (TBGA), DendriPlate connectors and flex
products. The Company expanded its product lines to include a wire bond version
of TBGA along with a flex product line to support the new and emerging medical
and optical markets. A significant part of the Company's first fiscal year ended
January 29, 2000 was spent developing the process and material sets associated
with these new product lines. During the fiscal year ended December 29, 2000,
the first qualification and production orders for these new products were
achieved. However, longer than anticipated customer qualification, installation
of new tool sets and acceptance by customers of this new technology impacted
revenue for both fiscal years.
By the end of the fiscal year ended December 29, 2000, the Company was
experiencing customer demand increases across the entire new product line. A
production ramp-up schedule was put in place and was implemented in fiscal 2001.
The opportunity for additional capacity, particularly at the Company's Longmont,
Colorado facility was assumed to be an opportunity as a result of the Merger.
However, revenues in the IFT segment decreased significantly in the second half
of fiscal year 2001 and the Company was unable to make use of the additional
capacity provided by the Merger. This decrease was partially due to reduced
orders from those forecast by IFT's customers which the Company attributes to
the economic effects of a recession in the technology industry. Furthermore, the
Company determined certain of IFT's core products were being replaced with
competing products at a lower price and competitive performance level at an
increasing rate. As a result, in early 2002 the Company
18
decided to close its Endicott, New York facility and with few exceptions, the
Company expects to cease manufacture of these IFT products. The Company expects
to begin using its Longmont, Colorado facility for the manufacture of products
sold in its MFI segment and will continue to manufacture a few products formerly
made in the Endicott facility.
The following table shows the percentage of net sales represented by
certain line items from the Company's consolidated statements of operations:
Pro-forma
Twelve Months Eleven Months Eleven Months Twelve Months
Ended Ended Ended Ended
12/28/01 12/29/00 12/29/00 1/29/00
------------- ------------- ------------- -------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales (106.7)% 93.5% 80.0% 70.8%
------------- ------------- ------------- -------------
Gross profit (6.7)% 6.5% 20.0% 29.2%
------------- ------------- ------------- -------------
Expenses:
Sales and marketing 6.9% 6.9% 6.5% 3.3%
General and administrative 11.9% 8.7% 16.5% 20.2%
Research and development 5.4% 4.0% 14.2% 8.6%
Asset impairment charge 36.0% - - -
Interest 5.2% 3.5% 5.9% 4.0%
------------- ------------- ------------- -------------
Total expenses 65.4% 23.0% 43.1% 36.1%
------------- ------------- ------------- -------------
Loss before income taxes (72.1)% (16.5)% (23.1)% (6.9)%
============ ============= ============= =============
Net Sales. For the fiscal year ended December 28, 2001, sales were
---------
approximately $109 million compared to approximately $138 million on a pro-forma
basis and approximately $20 million on an actual basis in the prior eleven month
fiscal year. Sales decreased 21% compared to the pro-forma sales of the prior
fiscal period. This 21% reduction is related to a decrease in demand primarily
in the MFI segment of operations which experienced a sales decline of 23%. Sales
of the IFT segment declined 13% over the last 12 months; however, sales in the
IFT segment decreased 31% in the second half from the first half of 2001. In
general, the sales in the current fiscal year were negatively affected by
decreases in demand from the Company's customers which the Company attributes to
general economic conditions. This decrease is attributed to the effect of
general economic conditions in the MFI and IFT segments, as well as by a
technological shift in the IFT segment. During fiscal year 2001, IFT, in
particular, received cancellations of promised orders to a significant degree
from customers who experienced a drop in their expected business orders. The
technological shift was most evident in the shift from IFT's thermal bondproduct
line of TBGA to the newer wire bond version of TBGA. In the current fiscal year
the Company sold approximately 400,000 fewer pieces of the older, thermal bond,
version of TBGA than in the prior fiscal period ended December 29, 2000 while it
sold approximately 1,000,000 additional pieces of the newer wire bond version in
the respective fiscal periods. Furthermore, the price for the newer wire bond
version is substantially lower than the price for the older, thermal bond,
version. For the shorter fiscal year of 11 months ended December 29, 2000
compared to January 29, 2000, sales decreased approximately $3.7 million or
15.2% due to the reduction in demand for the older product line of TBGA and
Dendriplate coupled with the slower than planned ramp-up of the wire bond
version of TBGA. Tape Ball Grid Array sales declined $1.3 million or 7.2%,
Dendriplate sales declined $2.4 million or 52.2% and Flexible circuits sales
approximated the previous year.
The table below shows, for the periods indicated, the Company's sales and cost
of sales by segment (in thousands):
19
Pro-forma
Twelve Months Eleven Months Eleven Months Twelve Months
Ended Ended Ended Ended
12/28/01 12/29/00 12/29/00 1/29/00
------------- ------------- ------------- -------------
MFI Division sales $ 83,474 $ 108,955 $ - $ -
IFT Division sales 25,020 28,718 20,417 24,081
------------- ------------- ------------- -------------
Total Sales $ 108,494 $ 137,673 $ 20,417 $ 24,081
------------- ------------- ------------- -------------
MFI Segment cost of sales $ 77,938 $ 93,274 $ - $ -
As a percent of segment sales 93.4% 85.6% - -
IFT Segment cost of sales $ 37,834 $ 35,461 $ 16,333 $ 17,051
As a percent of segment sales 151.2% 123.5% 80.0% 70.8%
------------- ------------- ------------- -------------
Total cost of sales $ 115,772 $ 128,735 $ 16,333 17,051
Total as a percent of sales (106.7)% 93.5% 80.0% 70.8%
============= ============= ============= =============
Cost of Sales/Gross Profit For the fiscal year ended December 28, 2001,
--------------------------
gross profit decreased to approximately $(7.3) million or (6.7)% of sales. Gross
profit in the MFI segment was 6.6% in the current year compared to 14.4% on a
pro-forma basis for the period ended December 29, 2000. This decrease in gross
profit reflects the lower sales volume of the MFI segment which sales were
insufficient to cover the overhead expenses attributable to cost of sales.
Overhead attributable to cost of sales includes indirect labor and facility
expenses. MFI's reduced cost of sales measured in dollars in fiscal year 2001 is
primarily related to a reduction in direct costs such as materials which are
related to the level of sales and to a reduction of labor costs related to a
significant reduction in the number of factory employees. Gross profit in the
IFT segment was approximately (51.2)% of sales in the current year compared to
(23.5)% on a pro-forma basis for the period ended December 29, 2000. This
decrease in gross profit reflects a substantial increased volume of products
produced in the current year which were sold at a substantially lower sales
price compared to the previous period. Cost of sales and gross profit for the
fiscal year ended December 28, 2001 compared to actual cost of sales and gross
profit for the eleven month period ended December 29, 2000 reflect the inclusion
of Sheldahl activities as a result of the Merger. During the fiscal year ended
December 29, 2000 compared to the fiscal year ended January 29, 2000, gross
profit decreased to approximately $4.1 million or 20.0% of sales. This decrease
reflects the lower sales volume of the older Tape Ball Grid Array products and
the DendriPlate product and the increased expenses associated with the
development of the new wire bond version of the TBGA product line.
Sales and Marketing Expenses. For the fiscal year ended December 28, 2001,
----------------------------
sales and marketing expenses decreased to $7.5 million or 6.9% of sales compared
to $9.4 million or 6.9% of sales and $1.3 million or 6.5% of sales in the pro-
forma and actual fiscal period ended December 29, 2000, respectively. In
addition to commission expenses which are largely variable to sales, the Company
reduced sales support expenses in fiscal year 2001 in response to the decrease
in sales. In the fiscal period ended December 29, 2000 compared to January 29,
2000 sales and marketing expenses increased $0.5 million and as a percentage of
sales increased to 6.5% from 3.3% in the fiscal year ended January 29, 2000.
General and Administrative Expenses. For the fiscal year ended December 28,
-----------------------------------
2001, general and administrative expenses increased to $12.9 million or 11.9% of
sales, compared to $12.0 million or 8.7% of sales and $3.4 million or 16.5% of
sales in the pro-forma and actual fiscal period ended December 29, 2000. The
increase in fiscal year 2001 of $0.9 million compared to pro-forma fiscal period
2000 is substantially due to the fiscal year 2001 period of twelve months
compared to an eleven month period in fiscal year 2000. The increase in these
expenses compared to actual in the prior eleven month period reflects the
inclusion of Sheldahl's general and administrative expenses following the
Merger. General and administrative expenses measured as a percentage of sales is
traditionally lower at Sheldahl than at IFT primarily due to the effect of
Sheldahl's higher level of sales to cover general and administrative costs.
General and administrative expenses are relatively fixed compared to sales
levels. For the fiscal period ended December 29, 2000 compared to the fiscal
year ended January 29, 2000, general and administrative expenses decreased $1.5
million to 16.5% of sales. The decrease in expenses reflects $0.6 million from
the elimination of a transitional service agreement for information technology
services; $0.3 million savings in legal and accounting expense associated with
initial year organizational costs; and $0.3 million credit from a New York
Empire State development training grant for employee training.
Research and Development Expenses. For the fiscal year ended December 28,
---------------------------------
2001, research and development expenses increased to $5.9 million or 5.4% of
sales, compared to $5.5 million or 4.0% of sales and $2.9 million or 14.2% of
sales in the pro-forma and actual fiscal period ended December 29 2000. The
increase of $0.9 million in the fiscal year 2001 compared to the pro-forma
fiscal year ended December 29, 2000 is primarily due
20
to the extra month in the current fiscal year. The increase as a percent of
sales is primarily due to the approximate 21% decrease in sales in fiscal year
2001 compared to pro-forma sales in fiscal period 2000. The increase in these
expenses compared to actual in the prior eleven month period reflects the
inclusion of Sheldahl's research and development expenses in fiscal year 2001.
For the fiscal period ended December 29, 2000 compared to the fiscal year ended
January 29, 2000, research and development expenses increased $0.8 million. The
increase in expenses reflected the staffing and prototype costs associated with
new product development in the fiscal year ended December 29, 2000.
Asset Impairment. In the fourth fiscal quarter ended December 28, 2001
----------------
the Company recorded a charge of approximately $39.0 million as a result of an
assessment conducted according to Statement of Financial Accounting Standards
No. 121. This assessment and the charge to earnings is the result of the
continuing decline in demand for the Company's products which resulted in a
write-down of approximately $19.2 million of plant and equipment, $1.5 million
of intangibles and all of the goodwill associated with the Merger discussed in
Note 2 to the Consolidated Financial Statements. The assessment is based on the
anticipated undiscounted cash flows to support the carrying amounts of certain
assets in light of the current operating environment. Specifically, the
Company's goodwill, fixed assets and certain intangible assets were assessed
given the changes in the economic environment, the Company's industry, business
strategy and projected future operating results and cash flows. See also Note 5
to the Consolidated Financial Statements.
As a result of this write-down in plant and equipment and intangibles
including goodwill, the depreciation and amortization charges in 2002 will be
significantly reduced. The Company expects fiscal year 2002 depreciation and
amortization charges relating to assets owned as of the beginning of the year
will be approximately $1.6 million.
Interest Expense. Interest expense increased to $5.7 million for the
----------------
fiscal year ended December 28, 2001 compared to $4.8 million and $1.2 million in
the pro-forma and actual fiscal period ended December 29, 2000. The increase in
interest expense is substantially due to the increase in the level of debt
outstanding. Debt increased as a result of the Merger and the Company issued new
subordinated notes at the end of December 2000 and in May, August and October
2001 for a total of $21.5 million. In addition, the Company incurred increased
interest rates on its debt as evidenced by the interest rates charged on the
subordinated notes which carry interest rates higher than the senior notes
issued by the Company. See also Note 6 to the Consolidated Financial Statements
included with this report. For the fiscal period ended December 29, 2000
compared to the fiscal year ended January 29, 2000 interest expense increased to
$1.2 million from $1.0 million in the fiscal year ended January 29, 2000, as
interest rates increased and the Company accessed its revolver to meet increased
operational demands.
EBITDA. EBITDA, defined as earnings before interest, taxes,
------
depreciation, amortization and asset impairments, was $(16.8) million for the
twelve months ended December 28, 2001 compared to $0.1 million and ($0.7)
million in the pro-forma and actual fiscal period ended December 29, 2000. For
the fiscal year ended December 29, 2000 compared to the fiscal year ended
January 29, 2000, EBITDA decreased $2.4 million from $1.7 million in the fiscal
year ended January 29, 2000. EBITDA is a key financial measure but should not be
construed as an alternative to operating income (loss) or cash flows from
operating activities (as determined in accordance with generally accepted
accounting principles in the U.S.). The Company believes EBITDA is a useful
supplement to net loss and other statement of operations data in understanding
cash flows generated from operations that are available for taxes, debt service
and capital expenditures. However, the Company's method of computation may not
be comparable to other similarly titled measures of other companies.
Income Taxes. The income tax provisions for the fiscal periods ended
------------
December 28, 2001, December 29, 2000 and January 29, 2000 reflect a benefit of
$0.3 million, $0.2 million and $0.6, respectively. The tax benefit in each
period is primarily related to investment tax credits associated with incentives
on investments in capital assets and employment refundable to the Company from
the State of New York. As of December 28, 2001, the Company has provided a full
valuation allowance for its deferred income tax assets as management believes
that it is more likely than not that such deferred tax assets will not be
realized.
Fourth Quarter Summary Results. The consolidated results of operations
------------------------------
for the fourth fiscal quarter of 2001 and 2000 are as follows (in thousands):
21
Unaudited
Unaudited Pro-Forma Unaudited
Three Months Three Months Two Months
Ended Ended Ended
12/28/01 12/29/00 12/29/00
------------- ------------- -------------
Net sales $ 24,346 $ 31,576 $ 2,889
Gross profit 854 (4,628) (608)
Operating loss (45,283) (13,776) (2,072)
Operating loss excluding
asset impairment (6,248) (13,776) (2,072)
EBITDA (39,286) (6,765) (1,167)
EBITDA excluding
asset impairment (251) (6,765) (1,167)
Fiscal fourth quarter sales for the three month period ended December
28, 2001 decreased $7.2 million or 22.9% compared to pro-forma fourth quarter
sales for the three month period ended December 29, 2000. The decrease in sales
reflects the reduced demand in the MFI segment and a technological shift in the
marketplace which adversely affected sales in the IFT segment. The comparison to
the actual fourth quarter ended December 29, 2000 is not comparable due to the
Merger. Gross profit increased in the current fourth quarter ended December 28,
2001 compared to the pro-forma fourth quarter ended December 29, 2000 primarily
due to reduced labor costs in the current fourth fiscal quarter. These cost
reductions were also evident in the reduced operating loss and improved EBITDA
(excluding the asset impairment charge of $39.0 million recorded in the fourth
fiscal quarter ended December 28, 2001 - see Note 5 to the Consolidated
Financial Statements-asset impairment charge). The improvement in EBITDA,
excluding asset impairment, was $6.5 million in the current fourth quarter
compared to the comparable period in the prior fiscal period on a pro-forma
basis. This improvement is due to the substantial cost reductions which occurred
in September and May 2001 which were primarily the result of a reduction in the
number of employees. The reduction plan initiated in September 2001 was designed
to save $4.5 million in costs per fiscal quarter. The Company attributes another
$2.0 million in cost savings experienced in the fourth fiscal quarter ended
December 28, 2001 to cost reductions implemented earlier in the fiscal year. The
Company believes these cost reductions have brought the operations as reflected
in the indicator, EBITDA, to an essentially breakeven point. EBITDA, as
calculated above was $(0.3) million on revenues of $24.3 million. While this
assumption depends on the particular mix of products and expenses, the Company
assumes this particular mix of product sales and expenses will continue while it
focuses its efforts on increasing revenues. In addition, the Company has
adjusted its cost structure to continue at an essentially breakeven point after
the closure of its Endicott, New York facility. EBITDA is a key financial
measure but should not be construed as an alternative to operating income (loss)
or cash flows from operating activities (as determined in accordance with
generally accepted accounting principles in the U.S.). The Company believes
EBITDA is a useful supplement to net loss and other statement of operations data
in understanding cash flows generated from operations that are available for
taxes, debt service and capital expenditures. However, the Company's method of
computation may not be comparable to other similarly titled measures of other
companies. See also risks associated with the Company's strategies in "Liquidity
and Capital Resources" below.
Financial Condition
Bank Facility. At December 28, 2001, the Company's Credit and Security
-------------
Agreement dated as of July 19, 1998, as amended, with the lenders party thereto
and Wells Fargo Bank, National Association f/k/a Norwest Bank Minnesota,
National Association (the "Credit Agreement") consisted of two separate
facilities: a revolving credit facility of up to $25 million based on the
Company's adjusted working capital; and a term facility for $16 million based on
the appraised value of the Company's unencumbered equipment. Interest on the
revolving credit facility and the term facility is charged at the prime rate
plus six percent (10.75% as of December 28, 2001). As of December 28, 2001, the
amount available to borrow on the revolving credit facility was approximately
$2.3 million, which reflects a $5 million reduction by the Company's lenders for
a liquidity reserve. All borrowings under the Credit Agreement are secured by
the Company's tangible and intangible assets. The term facility requires monthly
repayments of $205,000, with the remaining outstanding balance under the term
facility and the revolving credit facility due June 1, 2002. The Credit
Agreement borrowings have been classified as current in the December 28, 2001
consolidated balance sheet.
22
In connection with the execution of the Credit Agreement, the Company
issued to the lenders warrants, to purchase 230,000 shares of common stock at a
price of $3.01 per share, exercisable through July 2003. On October 25, 2002 in
connection with an amendment to the Credit Agreement, the Company issued an
amended and restated warrant to the lender for the purchase of 243,717 shares of
the Company's common stock at an exercise price of $0.38 per share, with an
extended termination date of October 25, 2006. As of December 28, 2001, none of
the warrants had been exercised.
The Credit Agreement restricts the payments of cash dividends, capital
expenditures and the redemption of preferred stock, and requires the Company to
meet certain financial covenants, including maintaining certain levels of
pre-tax net income (loss), cash flow available for debt service and debt service
coverage ratios. Existing economic and industry conditions, as well as
operational performance of the Company's business units, have resulted in the
Company being out of compliance with certain of the financial covenants during
2001. As part of the lenders waiving these events of non-compliance, the Company
paid to the lenders a fee of $250,000 for the period ending December 28, 2001,
are required to pay $100,000 in each of the first three months of fiscal year
2002, adjusted the exercise price of the warrants previously granted to the
lenders (see above) to $0.38 per share and extended the expiration date of the
warrants through October 2006. The Company also anticipates it will be out of
compliance with covenant requirements during the first quarter of fiscal 2002.
An event of non-compliance will cause an increase in the borrowing margin from
prime plus six percent to prime plus eight percent and allow the lenders to call
for repayment of outstanding borrowings. In response, the Company is in process
of implementing cost reduction plans and other matters as discussed in Note 3 to
the consolidated financial statements, and has initiated discussions with its
lenders with respect to amending such financial covenants (See "Liquidity and
Capital Resources" below.) While management currently believes that it will be
successful in obtaining an amendment to the Credit Agreement to cure such
defaults, there can be no assurance that an amendment will be obtained on terms
acceptable to the Company. In addition, an event of default under the Credit
Agreement will cause an event of default under the terms of all the Senior
Subordinated Notes. As such, all the Senior Subordinated Notes have been
classified as current in the accompanying December 28, 2001 consolidated balance
sheet. No other adjustments to the carrying amount or classification of assets
or liabilities in the accompanying financial statements have been made with
respect to this pending event of non-compliance.
Subordinated Notes and Warrant Purchase Agreements. In October 2001,
--------------------------------------------------
the Company completed the issuance of $7.0 million of 17% Senior Subordinated
Notes to Morgenthaler Partners VII, L.P., Ampersand IV Limited Partnership and
Molex Incorporated. These Notes are due and payable in October 2006 or earlier
upon certain issuances of capital stock or the sale of assets by the Company
after first applying proceeds to existing debt under the Company's current
Credit Agreement and the 12% Senior Subordinated Notes issued in May 2001. In
addition, the purchasers were issued seven-year warrants for an aggregate of
approximately 3.13 million shares of the Company's common stock at an exercise
price of $0.01 per share of common stock. The warrants are exercisable at $0.01
per share for a period of seven years. Additionally, for each year for which any
portion of these Notes remain outstanding, the Company will issue additional
warrants to purchase an aggregate of 261,010 shares of the Company's common
stock at an exercise price of $0.01 per share.
In August 2001, the Company completed the issuance of $3.0 million of
12% Senior Subordinated Notes to Morgenthaler Venture Partners V, L.P. and Molex
Incorporated. These Notes are due upon the earlier of the following events:
August 2006, certain issuances of capital stock or the sale of assets by the
Company after first applying proceeds to existing debt under the Company's
current Credit Agreement, the 22% Senior Subordinated Notes and the 17% Senior
Subordinated Notes discussed below. In addition, each purchaser was issued
warrants to purchase 351,000 shares of the Company's common stock. The
seven-year warrants are exercisable at $0.01 per share of common stock.
In May 2001, the Company completed the issuance of $5.0 million of 22%
Senior Subordinated Notes to Morgenthaler Venture Partners V, L.P., Ampersand IV
Limited Partnership and Molex Incorporated. These notes are due at such time
that the Company repays the obligations under its current Credit Agreement, or
earlier upon certain issuance of capital stock or the sale of assets by the
company after first applying proceeds to existing debt under the Credit
Agreement.
In December 2000, the Board of Directors of Sheldahl approved a series
of transactions as described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Profile." As part of
23
these transactions, Sheldahl issued shares of its Common Stock, $.25 par value
per shares (the "Common Stock"), to two accredited investors (the
"Stockholders") in connection with the Merger. In addition, Sheldahl issued
shares of Common Stock and its newly created Series G Convertible Preferred
Stock, $1.00 par value per share (the "Preferred Stock") and Warrants (the
"Series G Warrants") to purchase shares of the Company's Common Stock to three
accredited investors (the "Investors") who collectively invested an aggregate of
$25 million. Sheldahl also completed the issuance of $6.5 million of
subordinated notes to four accredited investors (the "Purchasers"), and in
connection with such issuance, the Purchasers received Warrants (the "Subdebt
Warrants") to purchase shares of Sheldahl common stock. The Board also
authorized granting the Stockholders, Investors and Purchasers certain
registration rights with respect to the shares of Common Stock and the Common
Stock underlying the Preferred Stock, the Series G Warrants and the Subdebt
Warrants issued in the transactions. The closing of the investment of $25
million, the subdebt investment and the Merger occurred on December 28, 2000.
Cash Flows. Net cash used in operating activities for the fiscal year
----------
2001 was approximately $22.1 million compared to approximately $4.2 million of
cash provided for such activities in the fiscal period 2000. During the year
ended December 28, 2001 operating funds of approximately $25.5 million were used
by the net loss prior to depreciation/amortization and asset impairment.
Operating funds were also used by decreases in accounts payable and accrued
liabilities in the amount of approximately $8.3 million while operating funds
were provided by reductions in accounts receivable and inventory in the amount
of approximately $11.6 million.
Fiscal 2001 investments by the Company were approximately $2.5 million.
Substantially all of these investments were in the form of capital expenditures.
Capital expenditures in fiscal 2002 are expected to be approximately $3.4
million.
The Company obtained cash from its financing activities in the net
amount of approximately $15.0 million in fiscal 2001. This is the result of an
increase in subordinated notes and additional net borrowings under the Company's
revolving line of credit which increases were partially offset by reductions in
various long-term debt agreements. The majority of the reductions were the
result of scheduled repayments under the Company's senior term note. Assuming a
continuing revolving and term facility can be obtained under similar terms and
conditions and extension of the terms under all the subordinated notes which
require payment upon full payment under the senior Credit Agreement, the
majority of the debt repayments for fiscal 2002 will be similar to those of
fiscal 2001.
Liquidity and Capital Resources. Net working capital deficit was
-------------------------------
$(37.2) million at December 28, 2001, down from $(3.4) million at December 29,
2000. This decrease in working capital is due in part to the Company classifying
as current its debt under the Credit Agreement which also increased during the
fiscal year and all the Subordinated Notes issued in May, August and October
2001 as well as the note payable to IBM. In addition, the Company's accounts
receivable and inventory decreased by $12.9 million and the Company invested
cash in long-term assets. These decreases in working capital were partially
offset by reductions in accounts payable and accrued liabilities of $8.9
million.
IFT has failed to make two semi-annual payments totaling $1.5 million
under its note payable to IBM with respect to an intellectual property license
of IBM technology, however, unlike the Lease with IBM, no default has been
declared. Furthermore, the Company is behind in payments on certain of its
capital lease and installment note obligations (see Note 6 to the Consolidated
Financial Statements). In addition, although the Company was in compliance with
the terms of the Credit Agreement at the end of fiscal year 2001, it expects to
be out of compliance with certain covenants under the Credit Agreement during
the first quarter of 2002. The Company is negotiating with its lender to
continue borrowing under the Credit Agreement until the maturity of the senior
Credit Agreement on June 1, 2002. Although the Company cannot be assured this
facility will be extended or a replacement facility will be obtained on terms
acceptable to the Company or at all, the Company is pursuing alternatives to
either extend or replace this facility.
The Company experienced significant softening of sales orders during
2001, particularly in the second half of 2001, and consequently disappointing
operating performance. In response, the Company reduced the number of employees
to 601 as of December 28, 2001 from 966 at the beginning of this fiscal year, a
decrease of nearly 40%. The last significant cost reduction in 2001 occurred in
September 2001 and brought operating expenses, excluding non-cash expenses,
substantially in line with the Company's projected ongoing sales level.
Subsequent to 2001, the Company finalized an operational and financial plan
which includes further cost reduction measures including facility closures (see
Note 15 to the Consolidated Financial Statements). The inability of the Company
to (i) obtain
24
waivers for anticipated events of non-compliance under its Credit Agreement;
(ii) negotiate new covenants or agreements with lenders; (iii) control operating
costs; (iv) achieve profitable execution of the sales orders received for its
Longmont, Colorado business; (v) achieve operating performance from the MFI
division business above 2001 levels; (vi) achieve other cost or productivity
improvements; (vii) maintain adequate liquidity to fund normal operations;
(viii) complete and fund the trade credit program as desribed in the Current
Report on Form 8-K filed on February 27, 2002, and (ix) successfully negotiate
with IBM to settle litigation relating to IFT's lease in Endicott, New York
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 short 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 address the Company's operational and cash flow
objectives. Should any of the adverse matters discussed above ultimately occur,
management will attempt to take one or all of the following actions; i) seek
continuing waivers of lenders covenants; ii) obtain new equity capital; iii)
issue new debt; and/or iv) significantly restructure the Company's operations.
However, there can be no assurance that the Company will be successful in
obtaining waivers of lenders covenants, negotiating a new covenants or debt
agreements, negotiating a credit facility to replace the Credit Agreement or at
all, achieving positive operating results, excluding non-cash operating expenses
during fiscal 2002, obtaining additional debt or raising additional capital on
terms acceptable to the Company, or in the event of the failure of the
foregoing, successfully take the actions described above.
Contractual Obligations and Commitments. The Company has various
---------------------------------------
contractual obligation and commitments to make future payments including debt
agreements, lease obligations and rent agreements. The following table
summarizes the Company's future obligations under these commitments due by
period as of December 28, 2001:
(millions) 2002 2003 2004 Thereafter Total
--------- -------- --------- ---------- ---------
Debt (1) $ 42.6 $ 0.4 $ 0.2 $ 4.0 $ 47.2
Operating Leases 4.2 3.3 0.4 0.4 8.3
--------- -------- --------- ---------- ---------
Total $ 46.8 $ 3.7 $ 0.6 $ 4.4 $ 55.5
========= ======== ========= ========== =========
(1) See Note 6 to Consolidated Financial Statements
The Company does not have any other material definitive commitments
that require cash resources.
Foreign Currency Risk. The Company periodically maintains a limited
---------------------
exposure to foreign currency risk with smaller programs contracted in British
Sterling, and Euros. These contracts and the exchange rates are reviewed
periodically. As of December 28, 2001, the Company has no material contracts
outstanding. 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 December 28, 2001.
Critical Accounting Policies and Estimates
The Company's financial statements include some amounts that are based
on management's best judgments and estimates. Critical accounting policies are
those that require the application of management's most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain and may change in subsequent
periods. Such judgments and uncertainties are sufficiently sensitive to result
in materially different results under different assumptions and conditions. The
Company believes that its most critical accounting policies are those described
below:
Revenue Recognition. The Company recognizes revenue in accordance with
-------------------
SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements (SAB 101), as amended by SAB 101A and 101B. SAB 101 requires that
four basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred or services
rendered to the customer's satisfaction; (3) the fee is fixed and determinable;
and (4) collectibility is reasonably assured. Determination of criteria (3) and
(4) are based on management's judgments regarding the fixed nature of the fee
charged for services rendered and quality of products delivered and the
collectibility of those fees. Should changes in conditions cause management to
determine these
25
criteria are not met for certain future transactions, revenue recognized for any
reporting period could be adversely affected.
Accounts Receivable and Credit Losses. The Company continuously
-------------------------------------
monitors collections and payments from its customers and maintains a provision
for estimated credit losses based upon its historical experience and any
specific customer collection issues that the Company has identified. While such
credit losses have historically been within the Company's expectations and the
provisions established, the Company cannot guarantee that it will continue to
experience the same credit loss rates that it has in the past. A significant
change in the Company's collectibility experience of its accounts receivable
could have a material adverse impact on the Company's future operating results.
Collectibility experience is dependent upon, among other matters, purported
product quality and return issues and the customer's ability to pay based upon
their respective business operations.
Inventories. The Company values its inventory at the lower of the
-----------
actual cost to purchase and/or manufacture the inventory or the current
estimated market value of the inventory with cost determined on the first-in,
first-out (FIFO) method. Cost includes the cost of materials, direct labor, and
applicable manufacturing overhead. The Company regularly reviews inventory
quantities on hand and records a provision for excess and obsolete inventory
based primarily on:
i. The Company's estimated forecast of product demand and
production requirements for the next twelve months. As
demonstrated during 2001, demand for the Company's
products can fluctuate significantly.
ii. Rapid technological change characterized by the Company's
industry, including frequent new product development.
iii. Ever changing economic and competitor environment causing
fluctuations in product pricing.
iv. Production commitments contracted with various customers.
Given these factors:
i. A significant decrease in demand could result in a
potential increase in the amount of excess inventory
quantities on hand and thus a potential impact on reserve
requirements.
ii. Rapid technological and product development changes could
result in an increase in the amount of obsolete inventory
quantities on hand.
iii. Falling product prices could result in overvalued
inventory that may require the Company to recognize such
costs in its cost of goods sold at the time of such
determination.
iv. Customer cancellations of contractual production
commitments may result in customized inventory quantities
on hand that are unable to be resold to another customer
and thus a potential impact on reserve requirements.
Therefore, although the Company makes every effort to ensure the
accuracy of its forecasts of future product demand, any significant
unanticipated changes in demand or technological developments could have a
significant impact on the value of the Company's inventory and its reported
operating results.
Impairment of Long-Lived Assets. The Company reviews the carrying
-------------------------------
amount of certain of its assets in light of the current operating environment,
specifically the Company's business strategy and projected future operating
results and cash flows. During 2001, the Company reviewed the carrying amount of
its long-lived assets given the changes in the economic environment and, as a
result of these changes, the Company prepared analyses in accordance with SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," to determine if there was impairment of recorded
long-lived assets. Based upon the anticipated cash flows from these analyses,
the Company identified other long-lived assets which no longer had sufficient
cash flows to support their carrying amounts, and wrote them down to estimated
fair value. Fair value was based on discounting estimated future cash flows for
assets grouped at the lowest level for which there were identifiable cash flows
at a discount rate commensurate with the risks involved. As specified in SFAS
No. 121, if the estimated discounted future cash flows for specific asset
groupings would have resulted in a write down below estimated salvage value, the
write down recorded would not go below such estimated salvage value. As a result
of the impairment analysis, the Company recorded a charge during the fourth
quarter of 2001 of approximately $39.0 million related to the impairment of
long-lived assets. Considerable management judgment was necessary to estimate
fair value and determination of future cash flows, including projected product
pricing and estimated costs to generate product production, resultant revenue
and projected cash flows, estimated asset salvage values and discount
26
rate commensurate with the risks involved. Changes in these estimates could
impact the assessment of the Company's impairment of long-lived assets and the
impact on the Company's consolidated financial position and results of
operations.
Legal Contingencies. The nature of the Company's operations exposes it
-------------------
to the risk of certain legal and environmental claims in the normal course of
business. In addition, as a result of the Merger discussed in Note 2 of the
Company's Notes to Consolidated Financial Statements, an investment-banking firm
has filed suit alleging it is owed an investment-banking fee arising from the
Merger, seeking $1.75 million plus interest. The Company has filed a response to
the claim, denying that the investment banking firm is entitled to any fees
arising from the Merger between Sheldahl, Holdings and IFT and asserting various
defenses to the investment banking firm's claims. As required under SFAS No. 5,
the Company has established reserves for issues that it believes are probable
and estimable in amounts management believes are adequate to cover reasonable
adverse judgments not covered by insurance. Based upon the information available
to management and discussions with legal counsel, it is the opinion of
management that the ultimate outcome of the various legal actions and claims
that are incidental to the Company's business will not have a material adverse
impact on the consolidated financial position, results of operations or cash
flows of the Company, however, such matters are subject to many uncertainties,
and the outcomes of individual matters are not predictable with assurance.
Income taxes. The Company has a history of unprofitable operations with
------------
losses generating a sizeable federal tax net operating loss, or NOL, carry
forward of approximately $128 million as of December 28, 2001.
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax assets will not be realized. The Company has
established a full valuation allowance for its net deferred tax assets at
December 28, 2001, due to the uncertainty related to their ultimate realization.
The Company arrived at such a decision considering several factors, including
but not limited to, historical cumulative losses incurred by the Company and
anticipated continued operating losses.
The Company will continue to evaluate the need for the valuation
allowance, and at such time it is determined that it is more likely than not
that such deferred tax assets will be realized, the valuation allowance, or a
portion thereof, will be reversed. Upon reaching such a conclusion, the Company
would immediately record the estimated net realizable value of a portion or all
of the Company's deferred tax assets at that time and would then provide for
income taxes at a rate equal to the Company's combined federal and state
effective rates, as applicable. Subsequent revisions to the estimated net
realizable value of the deferred tax asset could cause the Company's provision
for income taxes to vary significantly from period to period, although the
Company's cash tax payments would remain unaffected until the benefit of the NOL
is utilized.
The above listing is not intended to be a comprehensive list of all of
the Company's accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles in the United States, with no need for management's judgment in their
application. There are also areas in which management's judgment in selecting
any available alternative would not produce a materially different result. See
the Company's audited consolidated financial statements and notes thereto which
begin on page F-1 of this Form 10-K which contain accounting policies and other
disclosures required by generally accepted accounting principles in the United
States.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." Under SFAS No. 141, business combinations initiated after
June 30, 2001 must be accounted for using the purchase method of accounting.
Under SFAS No. 142, amortization of goodwill and indefinite-lived assets will
cease, and the carrying value of these assets will instead be evaluated for
impairment using a fair-value-based test, applied at least annually. The Company
will adopt SFAS No. 142 in fiscal 2002. Management believes that the adoption of
SFAS No.'s 141 and 142 will not have an impact on the Company's financial
position or results of operations, because at the beginning of the fiscal 2002,
the Company has no intangible assets or goodwill.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible
27
long-lived assets and the associated retirement costs. The Company will adopt
the SFAS No. 143 on January 1, 2003. The Company does not expect the adoption of
SFAS No. 143 will have a significant impact on its financial position or results
of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes previous
guidance for financial accounting and reporting for the impairment or disposal
of long-lived assets and for segments of a business to be disposed of. The
Company will adopt the SFAS No. 144 standard on January 1, 2002. SFAS No. 144 is
not expected to have a significant impact on its financial position or results
of operations.
The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," December 30, 2000. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains or
losses to offset related results on the hedged item in the income statement and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The adoption of
SFAS No. 133 did not have a material impact on the Company's results of
operations or financial position.
Cautionary Statement
Statements included in this management's discussion and analysis of
financial condition and results of operations, in the letter to shareholders,
elsewhere in this Form 10-K, in the Company's annual report, and in future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases, and oral statements made with the approval of an
authorized executive officer that are not historical, or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Certain risks and
uncertainties could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of the date made. The following important
factors, among others, in some cases have affected and in the future could
affect the Company's actual financial performance and cause it to differ
materially from that expressed in any forward-looking statement: (i) the
Company's ability to begin full volume production at its Longmont, Colorado
facility is dependent upon final qualification by the Company's customers and,
in some cases, their customers, of ViaThin(R) as well as the ability of its
production equipment to produce sufficient quantities of product at acceptable
quality levels; (ii) delays in achieving full volume production at the Longmont,
Colorado facility will have a material adverse impact on the Company's results
of operations and liquidity position; (iii) a continued general downturn in the
automotive market, the Company's principal market, could have a material adverse
effect on the demand for the electronic components supplied by the Company to
its customers; (iv) the Company's ability to continue to make significant
capital expenditures for equipment, expansion of operations, and research and
development is dependent upon funds generated from operations and the
availability of capital from other sources; (v) the extremely competitive
conditions that currently exist in the automotive and data communications
markets are expected to continue, including development of new technologies, the
introduction of new products, and the reduction of prices; (vi) the ability of
the Company to obtain waivers for anticipated events of non-compliance under the
Credit Agreement; (vii) the ability of the Company to implement cost reduction
plans and other cost or productivity improvements to achieve levels of sales
growth and operational performance that sustain sufficient cash flow to operate
the business; (viii) the ability to complete and fund the trade credit program
as described in the Current Report on Form 8-K filed on February 27, 2002, and
(ix) the ability to successfully negotiate with IBM to settle litigation
relating to IFT's lease in Endicott, New York. The foregoing list should not be
construed as exhaustive and the Company disclaims any obligation subsequently to
revise any forward-looking statements to reflect the events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
The Company's Credit and Security Agreement, described in Note 6 to the
Consolidated financial statements as well as in the Management's Discussion and
Analysis of Financial Condition and Results of Operations carries interest rate
risk. Amounts borrowed under this Agreement are subject to interest charges at a
rate equal to the lender's prime rate plus six percent, which as of March 15,
2002 was 10.75%. Should the lenders base rate change,
28
the Company's interest expense will increase or decrease accordingly. As of
December 28, 2001, the Company had borrowed approximately $16.8 million subject
to interest rate risk. On this amount, a 1% increase in the interest rate would
cost the Company $168,000 in additional gross interest cost on an annual basis.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The Consolidated Financial Statements are listed under Item 14 of this
report. Unaudited quarterly financial data for the twelve months ended December
28, 2001 and the eleven months ended December 29, 2000 is set forth in Note 14
to the Consolidated Financial Statements included with this report.
Item 9. Changes in and Disagreements with Accountants
- ------------------------------------------------------
On December 28, 2000, Sheldahl engaged in a series of transactions as
more fully described in "Management's Discussion and Analysis of Financial
Condition, including a merger transaction whereby Sheldahl acquired all of the
outstanding securities of IFT's parent and sole shareholder, International Flex
Holdings, Inc. ("Holdings"). Although Sheldahl is the legal survivor of the
Merger and remains the registrant with the Securities and Exchange Commission
("SEC") and a listed company on Nasdaq, under United States generally accepted
accounting principles, due to the number of shares issued and sold in the
transactions, Holdings is considered the "acquiror" of Sheldahl for financial
reporting purposes. Prior to engaging in the transaction with Sheldahl, Holdings
used the firm of Ernst & Young LLP to audit its financial statements. Because
Sheldahl must now report Holdings' historical financial statements as its own,
the firm of Ernst & Young LLP is deemed to be the auditors of Sheldahl unless
Sheldahl chooses differently. Sheldahl, however, has historically used the firm
of Arthur Andersen LLP. Accordingly, on February 8, 2001, the Audit Committee
and the Board of Directors of Sheldahl took formal action to dismiss Ernst &
Young LLP and approve Arthur Andersen LLP to continue as the independent
accountants for Sheldahl, Inc. post-Merger with Holdings.
Ernst & Young LLP's prior reports and the financial statements of
Holdings did not include an adverse opinion or a disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or accounting
principles. Additionally, there are no disagreements between Holdings and Ernst
& Young LLP on any matter of accounting principles or practice, financial
statement disclosure or auditing scope or procedure, which disagreements, if not
resolved satisfactorily, would have caused Ernst & Young LLP to make reference
to the subject matter of such in connection with any of its reports.
PART III
Pursuant to General Instruction G(3), Registrant omits Part III, Items
10 (Directors and Executive Officers of Registrant), 11 (Executive
Compensation), 12 (Security Ownership of Certain Beneficial Owners and
Management), and 13 (Certain Relationships and Related Transactions), except
that portion of Item 10 related to Executive Officers of the Registrant, which
is set forth in Item 4A of Part I of this report as a definitive proxy statement
will be filed with the Commission pursuant to Regulation 14(A) within 120 days
after the end of the Registrant's fiscal year, and such information required by
such items is incorporated herein by reference from the proxy statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) Documents filed as a part of the report: Form 10-K
Page Reference
--------------
1. Consolidated Financial Statements
Index to Consolidated Financial Statements
Report of Independent Public Accountants - Arthur Andersen LLP F-1
Report of Independent Public Accountants - Ernst & Young LLP F-2
29
Consolidated Balance Sheets as of December 28, 2001 and,
December 29, 2000 F-3
Consolidated Statements of Operations for the Twelve Months Ended
December 28, 2001, Eleven Months Ended December 29, 2000 and Twelve Months
Ended January 29, 2000 F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the
Twelve Months Ended December 28, 2001, Eleven Months Ended
December 29, 2000 and Twelve Months Ended January 29, 2000 F-5
Consolidated Statements of Cash Flows for the Twelve Months Ended December 28, 2001,
Eleven Months Ended December 29, 2000 and Twelve Months January 29, 2000 F-6
Notes to Consolidated Financial Statements F-7
2 Consolidated Financial Statement Schedules
Form 10-K
Description Page Reference
- ----------- --------------
Schedule II - Valuation and Qualifying Accounts S-1
(b) Reports on Form 8-K
The Company filed the following report during the fourth quarter of
fiscal 2001: Current Report on Form 8-K filed on October 30, 2001
(reporting Items 5 and 7).
Additionally, the Company filed a Current Report on Form 8-K on
February 27, 2002 (reporting Items 2, 5, and 7).
(c) Exhibits and Exhibit Index
Exhibit No. Description
- ----------- -----------
2.1.1 Agreement and Plan of Merger dated November 10, 2000 among the
Registrant, IFT West Acquisition Company, International Flex
Holdings, Inc., and the Stockholders of International Flex
Holdings, Inc., incorporated by reference from Exhibit 2.0 of the
Registrant's Form 8-K filed November 13, 2000.
2.1.2 Amendment Number One to the Agreement and Plan of Merger Among
Registrant, IFT West Acquisition Company, International Flex
Holdings, Inc. and the Stockholders of International Flex
Holdings, Inc., incorporated by referenced from Exhibit 2.1 of the
Registrant's Form 8-K filed January 12, 2001.
3.1 Amended and Restated Articles of Incorporation, incorporated by
reference from Exhibit 3.1 of the Registrant's Form 10-Q for the
quarter ended June 29, 2001.
3.2 Bylaws, as amended, incorporated by reference from Exhibit 3.2 of
the Registrant's Form 10-Q for the quarter ended June 29, 2001.
4.3.1 Rights Agreement dated as of June 16, 1996 and amended July 25,
1998 between the Company and Norwest Bank Minnesota, N.A., is
incorporated by reference to Exhibit 1 to the Company's Form 8-A
dated June 20, 1996 and Amendment No. 1 thereto dated July 30,
1998.
4.3.2 Amendment No. 2 dated November 10, 2000 to Rights Agreement dated
as of June 16, 1996, and amended July 25, 1998 between Sheldahl,
Inc. and Norwest Bank Minnesota, N.A. now known as Wells Fargo
Bank, N.A., is incorporated by reference to Exhibit 1 to the
Company's Amended Form 8-A filed on November 13, 2000.
4.3.3 Amendment No. 3 dated October 18, 2001 to Rights Agreement dated
as of June 16, 1996 and amended July 25, 1998 and amended November
10, 2000 between Sheldahl, Inc. and Norwest Bank
30
Minnesota, N.A., now known as Wells Fargo Bank, N.A., is
incorporated by reference to the Company's Amended Form 8-A filed
on October 30, 2001.
4.3.4 Certificate of Designation, Preferences and Rights of Series A
Junior Participating Preferred Stock, incorporated by reference
from Exhibit 1 of Registrant's Form 8-A dated June 20, 1996.
4.4.1 Convertible Preferred Stock Purchase Agreement among the Company
and the Series D Purchasers listed in Exhibit A thereto,
incorporated by reference from Exhibit 4.1 of the Registrant's
Form 8-K filed August 18, 1998.
4.4.2 Certificate of Designation, Preferences and Rights of Series D
Convertible Preferred Stock, incorporated by reference from
Exhibit 4.2 of the Registrant's Form 8-K filed August 18, 1998.
4.5.1 Convertible Preferred Stock Purchase Agreement among the Company
and the Series E Investors listed in Exhibit A thereto,
incorporated by reference from Exhibit 4.1 of the Registrant's
Form 8-K filed March 9, 1999.
4.5.2 Certificate of Designation, Preferences and Rights of Series E
Convertible Preferred Stock, incorporated by reference from
Exhibit 4.2 of the Registrant's Form 8-K filed March 9, 1999.
4.5.3 Form of Warrant issued to the Series E Investors, incorporated by
reference from Exhibit 4.3 of Registrant's Form 8-K filed March 9,
1999.
4.6.1 Convertible Preferred Stock Purchase Agreement among the Company
and the Series F Investors listed in Exhibit A thereto,
incorporated by reference from Exhibit 4.1 of the Registrant's
Form 8-K filed January 11, 2000.
4.6.2 Certificate of Designation, Preferences and Rights of Series F
Convertible Preferred Stock, incorporated by reference from
Exhibit 4.2 of the Registrant's Form 8-K filed January 11, 2000.
4.6.3 Form of Warrant issued to the Series F Investors, incorporated by
reference from Exhibit 4.3 of Registrant's Form 8-K filed January
11, 2000.
4.6.4 Registration Rights Agreement among the Company and the Series F
Investors listed in Exhibit A thereto, incorporated by reference
from Exhibit 4.4 of Registrant's Form 8-K filed January 11, 2000.
4.7.1 Stock Purchase Agreement dated November 10, 2000 among the
Registrant and the individuals and entities listed on Exhibit A
thereto, incorporated by reference from Exhibit 4.0 of
Registrant's Form 8-K filed November 13, 2000.
4.7.2 First Amendment to Stock Purchase Agreement among the Registrant
and the individuals and entities listed on Exhibit A thereto,
incorporated by reference from Exhibit 4.1 of Registrant's Form
8-K filed January 12, 2001.
4.7.3 Form of Certificate of Designation, Preferences and Rights of
Series G Convertible Preferred Stock, incorporated by reference
from Exhibit 4.2 of Registrant's Form 8-K filed January 12, 2001.
4.7.4 Form of Registration Rights Agreement among the Registrant and the
individuals listed on Exhibit A thereto, incorporated by reference
from Exhibit 4.12 of Registrant's Form 8-K filed January 12, 2001.
4.8.1 Amended and Restated Subordinated Notes and Warrant Purchase
Agreement dated December 28, 2000 among the Registrant and the
entities listed on Schedule I thereto, incorporated by reference
from Exhibit 4.3 of Registrant's Form 8-K filed January 12, 2001.
4.8.2 Note to Morgenthaler Venture Partners V, L.P. issued under
Subordinated Notes and Warrant Purchase Agreement, incorporated by
reference from Exhibit 4.4 of Registrant's Form 8-K filed January
12, 2001.
31
4.8.3 Note to Ampersand IV Limited Partnership issued under issued under
Subordinated Notes and Warrant Purchase Agreement, incorporated by
reference from Exhibit 4.5 of Registrant's Form 8-K filed January
12, 2001.
4.8.4 Note to Ampersand IV Companion Fund Limited Partnership issued
under Subordinated Notes and Warrant Purchase Agreement,
incorporated by reference from Exhibit 4.6 of Registrant's Form
8-K filed January 12, 2001.
4.8.5 Note to Molex Incorporated issued under Subordinated Notes and
Warrant Purchase Agreement, incorporated by reference from Exhibit
4.7 of Registrant's Form 8-K filed January 12, 2001.
4.8.6 Warrant to Morgenthaler Venture Partners V, L.P. issued under
Subordinated Notes and Warrant Purchase Agreement, incorporated by
reference from Exhibit 4.8 of Registrant's Form 8-K filed January
12, 2001.
4.8.7 Warrant of Ampersand IV Limited Partnership issued under
Subordinated Notes and Warrant Purchase Agreement, incorporated by
reference from Exhibit 4.9 of Registrant's Form 8-K filed January
12, 2001.
4.8.8 Warrant of Ampersand IV Companion Fund Limited Partnership issued
under Subordinated Notes and Warrant Purchase Agreement,
incorporated by reference from Exhibit 4.10 of Registrant's Form
8-K filed January 12, 2001.
4.8.9 Warrant of Molex Incorporated issued under Subordinated Notes and
Warrant Purchase Agreement, incorporated by reference from Exhibit
4.11 of Registrant's Form 8-K filed January 12, 2001.
4.9 Dublin Investments, LLC Warrant, incorporated by reference from
Exhibit 4.15 of Registrant's Form 8-K filed January 12, 2001.
4.10 Governance Agreement among the Registrant and the individuals and
entities listed on the signature pages thereto, incorporated by
reference from Exhibit 4.13 of Registrant's Form 8-K filed January
12, 2001.
4.11 Amended and Restated Agreement Relating to Sheldahl dated November
10, 2000 by and between the Registrant and Molex Incorporated,
incorporated by reference from Exhibit 4.8 of Registrant's Form
8-K filed November 13, 2000.
4.12 Piper Jaffray Warrant, incorporated by reference from Exhibit 4.14
of Registrant's Form 8-K filed January 12, 2001.
4.13 Subordinated Secured Notes Purchase Agreement dated May 23, 2001
among the Company and the entities listed on Schedule II thereto
and Ampersand IV Limited Partnership as Agent, incorporated by
reference from Exhibit 4.1 of Registrant's Form 8-K filed on May
23, 2001.
4.14 Form of Note to Subordinated Secured Notes Purchase Agreement
issued to May 2001 Subdebt Investors incorporated by reference
from Exhibit 4.2 of Registrant's Form 8-K filed May 23, 2001.
4.15 Subordinated Notes and Warrant Purchase Agreement dated August 13,
2001 among the Company and the entities listed on Schedule I
thereto, incorporated by reference from Exhibit 4.1 of the
Registrant's Form 8-K filed on August 20, 2001.
4.16 Form of Note to Subordinated Notes and Warrant Purchase Agreement
issued to August 2001 Subdebt Investors incorporated by reference
from Exhibit 4.2 of Registrant's Form 8-K filed on August 20,
2001.
32
4.17 Form of Warrant to Subordinated Notes and Warrant Purchase
Agreement issued to August Subdebt Investors incorporated by
reference from Exhibit 4.3 of Registrant's Form 8-K filed on
August 20, 2001.
4.18 Subordinated Notes and Warrants Purchase Agreement dated October
25, 2001 among the Company and the entities listed on Schedule II
thereto, incorporated by reference from Exhibit 4.1 of the
Registrant's Form 8-K filed on October 30, 2001.
4.19 Form of Note to Subordinated Notes and Warrants Purchase Agreement
issued to October 2001 Subdebt Investors incorporated by reference
to Exhibit 4.2 of Registrant's Form 8-K filed on October 30, 2001.
4.20 Form of Warrant to Subordinated Notes and Warrants Purchase
Agreement issued to October 2001 Subdebt Investors incorporated by
reference to Exhibit 4.3 of registrant's Form 8-K filed on October
30, 2001.
4.21 Security Agreement dated October 25, 2001 among the Company and
Morgenthaler Partners V II, L.P. incorporated by reference to
Exhibit 4.4 of Registrant's Form 8-K filed on October 30, 2001.
10.1 1987 Stock Option Plan, incorporated by reference from Exhibit
10.1 of the Registrant's Form 10-K for the fiscal year ended
August 27, 1993.
10.2 1994 Stock Option Plan, as amended, incorporated by reference from
Exhibit 4.1 of the Registrant's Form S-8 dated June 29, 2001 (File
No. 333-64202).
10.3 Employee Stock Purchase Plan, incorporated by reference from
Exhibit 4.1 of the Registrant's Form S-8 filed June 29, 2001 (File
No. 333-64204).
10.4 Credit and Security Agreement dated June 19, 1998, among the
Registrant, Norwest Bank Minnesota, N.A., Harris Trust and Savings
Bank, NBD Bank, N.A., and The CIT Group/Equipment Financing, Inc.,
incorporated by reference from Exhibit 10.1 of the Registrant's
Form S-3 dated July 1, 1998 (File No. 333-58307).
10.4.1 First Amendment to Credit and Security Agreement dated November
25, 1998, among the Registrant, Norwest Bank Minnesota, N.A.,
Harris Trust and Savings Bank, NBD Bank, N.A., and the CIT
Group/Equipment Financing, Inc., incorporated by reference from
Exhibit 10.4.1 of the Registrant's Form 10-K filed December 3,
1998.
10.4.2 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., incorporated by reference from Exhibit 10.1 of
the Registrant's Form 10-Q filed April 9, 1999.
10.4.3 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., incorporated by reference from Exhibit 10.2 of
the Registrant's Form 10-Q filed April 9, 1999.
10.4.4 Fourth Amendment to the Credit and Security Agreement, dated
November 12, 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., incorporated by reference from
Exhibit 10.7.4 of the Registrant's Form 10-K for the fiscal year
ended August 27, 1999.
10.4.5 Fifth Amendment to the Credit and Security Agreement, dated June
16, 2000 between the Company and Norwest Bank Minnesota, N.A. and
The CIT Group/Equipment Financing, Inc., incorporated by reference
from Exhibit 10.1 of the Registrant's Form 10-Q filed July 10,
2000.
33
10.4.6 Sixth Amendment to the Credit and Security Agreement, dated June
27, 2000 between the Company and Norwest Bank Minnesota, N.A. and
The CIT Group/Equipment Financing, Inc., incorporated by reference
from Exhibit 10.2 of the Registrant's Form 10-Q filed July 10,
2000.
10.4.7 Seventh Amendment to the Credit and Security Agreement, dated
November 7, 2000 between the Company and Wells Fargo Bank, N.A.
and The CIT Group/Equipment Financing, Inc., incorporated by
reference from Exhibit 10.4.7 of the Registrant's Form 10-K filed
November 30, 2000.
10.4.8 Eighth Amendment to the Credit and Security Agreement, dated
December 26, 2000 between the Company and Wells Fargo Bank, N.A.
and The CIT Group/Equipment Financing, Inc., incorporated by
reference from Exhibit 10.1 of the Registrant's Form 10-Q filed
January 16, 2001.
10.4.9 Ninth Amendment to Credit and Security Agreement dated May 23,
2001 between the Company and Wells Fargo Bank, N.A. and The CIT
Group/ Equipment Financing, Inc., incorporated by reference from
Exhibit 4.3 of the Registrant's Form 8-K filed May 23, 2001.
10.4.10 Tenth Amendment to Credit and Security Agreement dated August 13,
2001 between the Company and Wells Fargo Bank, N.A. and The CIT
Group/ Equipment Financing, Inc., incorporated by reference from
Exhibit 4.4 of the Registrant's Form 8-K filed August 20, 2001.
10.4.11 Eleventh Amendment to Credit and Security Agreement dated October
25, 2001 between the Company and Wells Fargo Bank, N.A. and The
CIT Group/ Equipment Financing, Inc., incorporated by reference
from Exhibit 4.5 of the Registrant's Form 8-K filed October 30,
2001.
10.5 Form of Amended and Restated Warrant to the Credit and Security
Agreement dated October 25, 2001 among the Company, Wells Fargo
Bank Minnesota, N.A. and The CIT Group/ Equipment Financing, Inc.
10.6 Deed of Trust and Security Agreement by and between Sheldahl
Colorado LLC, the Registrant, the Public Trustee of Boulder
County, Colorado and Morgan Guaranty Trust Company of New York
dated November 16, 1999, incorporated by reference from Exhibit
10.4 of the Registrant's Form 10-K for the fiscal year ended
August 27, 1999.
10.7 Fixed Rate Note between the Registrant as the sole member of
Sheldahl Colorado LLC and Morgan Guaranty Trust Company of New
York dated November 16, 1999, incorporated by reference from
Exhibit 10.5 of the Registrant's Form 10-K for the fiscal year
ended August 27, 1999.
10.8 Guaranty by the Registrant to Morgan Guaranty Trust Company of New
York dated November 16, 1999, incorporated by reference from
Exhibit 10.6 of the Registrant's Form 10-K for the fiscal year
ended August 27, 1999.
10.10 Loan Agreement, dated February 26, 1998, between the Company and
Relational Funding Corporation, incorporated by reference from
Exhibit 10.1 of the Company's Report on Form 10-Q filed April 13,
1998.
10.11 Promissory Note dated February 26, 1998, between the Company and
Relational Funding Corporation, incorporated by reference from
Exhibit 10.2 of the Company's Report on Form 10-Q filed April 13,
1998.
*10.12 Form of Employment (change of control) Agreement for Executive
Officers of the Registrant, incorporated by reference from Exhibit
10.4 of the Registrant's Form 10-K for the fiscal year ended
August 30, 1996.
*10.12.1 Form of Amendment No. 1 to Employment (change of control)
Agreement for Executive Officers of the Registrant, incorporated
by reference from Exhibit 10.10.1 of the Registrant's Form 10-K
filed for the fiscal year ended August 28, 1998.
34
*10.12.2 Form of Amendment No. 2 to Employment (change of control)
Agreement for Executive Officers of the Registrant, incorporated
by reference from Exhibit 10.12.2 of the Registrant's Form 10-K
filed for the fiscal year ended August 27, 1999.
*10.13 Supplementary Executive Retirement Plan Agreement between the
Registrant and James E. Donaghy dated November 5, 1996,
incorporated by reference from Exhibit 10.12 of the Registrant's
Form 10-K for the fiscal year ended August 28, 1998.
*10.14 Letter Agreement between John V. McManus and the Registrant dated
October 15, 1999, incorporated by reference from Exhibit 10.14 of
the Registrant's Form 10-K for the fiscal year ended August 27,
1999.
10.15 Abstract of Agreement between the Union of Needletrades Industrial
and Textile Employees and the Registrant dated November 12, 1999,
incorporated by reference from Exhibit 10.15 of the Registrant's
Form 10-K for the fiscal year ended August 27, 1999.
10.16 Lease dated June 15, 1989 between Aberdeen Development Corporation
and the Registrant, incorporated by reference from Exhibit 10.13
of the Registrant's Form 10-K for the fiscal year ended August 27,
1993.
10.17 Loan Authorization dated October 1, 1994 between South Dakota
Board of Economic Development Registrant, incorporated by
reference from Exhibit 10.1 of the Registrant's Form 10-Q for the
quarter ended February 25, 1994.
10.18 Agreement Relating to Employment dated October 1, 1994 between the
South Dakota Board of Economic Development and the Registrant,
incorporated by reference from Exhibit 10.2 of the Registrant's
Form 10-Q for the quarter ended February 25, 1994.
10.19 Promissory Note dated October 4, 1993 due to the South Dakota
Board of Economic Development, incorporated by reference from
Exhibit 10.3 of the Registrant's Form 10-Q for the quarter ended
February 25, 1994.
10.20 Agreement dated January 10, 1994 between the MCM-L Consortium and
the Advanced Projects Research Agency, incorporated by reference
from Exhibit 10.4 of the Registrant's Form 10-Q for the quarter
ended February 25, 1994.
10.21 Articles of Collaboration dated November 30, 1993 for the MCM-L
Consortium, incorporated by reference from Exhibit 10.5 of the
Registrant's Form 10-Q for the quarter ended February 25, 1994.
10.22 Agreement relating to Joint Venture dated August 1, 1995 between
Registrant, Jiangxi Changjiang Chemical Plant, Hong Kong Wah Hing
(China) Development Co., Ltd. and Jiujiang Flex Co., Ltd.,
incorporated by reference from Exhibit 10.23 of the Registrant's
Form 10-K for the fiscal year ended September 1, 1995.
10.23 Agreement relating to payments dated August 1, 1995 between
Registrant and Jiangxi Changjiang Chemical Plant, Hong Kong Wah
Hing (China) Development Co., Ltd. and Jiujiang Flex Co., Ltd.,
incorporated by reference from Exhibit 10.24 of the Registrant's
Form 10-K for the fiscal year ended September 1, 1995.
10.24 Manufacturing Agreement dated August 1, 1995 between Registrant
and Jiujiang Flex Co., Ltd., incorporated by reference from
Exhibit 10.25 of the Registrant's Form 10-K for the fiscal year
ended September 1, 1995.
10.25 Marketing and License Agreement dated August 1, 1995 between
Registrant and Jiujiang Flex Co., Ltd., incorporated by reference
from Exhibit 10.26 of the Registrant's Form 10-K for the fiscal
year ended September 1, 1995.
35
10.26 Technology Development Agreement dated August 15, 1995 between Low
Cost Flip Chip Consortium and the Advanced Projects Research
Agency, incorporated by reference from Exhibit 10.27 of the
Registrant's Form 10-K for the fiscal year ended September 1,
1995.
10.27 Articles of Collaboration dated July 10, 1995 for the Low Cost
Flip Chip Consortium, incorporated by reference from Exhibit 10.28
of the Registrant's Form 10-K for the fiscal year ended September
1, 1995.
10.28 Technology Development Agreement dated March 23, 1995 between
Plastic Packaging Consortium and the Advanced Projects Research
Agency, incorporated by reference from Exhibit 10.29 of the
Registrant's Form 10-K for the fiscal year ended September 1,
1995.
10.29 Articles of Collaboration dated March 17, 1995 for the Plastic
Packaging Consortium, incorporated by reference from Exhibit 10.30
of the Registrant's Form 10-K for the fiscal year ended September
1, 1995.
10.30 License Agreement dated June 20, 1994 between Sidrabe and
Registrant, incorporated by reference from Exhibit 10.31 of the
Registrant's Form 10-K for the fiscal year ended September 1,
1995.
*10.30.1 Amendment No. 1 to License Agreement dated June 20, 1994 between
Sidrabe and the Registrant, incorporated by reference from Exhibit
10.28.1 of the Registrant's Form 10-K for the fiscal year ended
August 28, 1998.
*10.31 Consulting Agreement dated August 17, 1988 between James S. Womack
and Sheldahl, Inc. incorporated by reference from Exhibit 10.2 of
the Registrant's Form 10-K for the fiscal year ended August 27,
1993.
*10.32 Sheldahl, Inc. Supplemental Executive Retirement Program effective
as of January 1, 1995 incorporated by reference from Exhibit 10.34
of the Registrant's Form10-K filed November 30, 2000.
*10.32.1 First Amendment to the Sheldahl, Inc. Supplemental Executive
Retirement Plan effective as of October 14, 1997 incorporated by
reference from Exhibit 10.34.1 of the Registrant's Form 10-K filed
November 30, 2000.
*10.32.2 Second Amendment to the Sheldahl, Inc. Supplemental Executive
Retirement Plan effective as of September 16, 1998 incorporated by
reference from Exhibit 10.34.2 of the Registrant's Form 10-K filed
November 30, 2000.
*10.33 Sheldahl, Inc. Retirement Benefit Program for Directors
incorporated by reference from Exhibit 10.35 of the Registrant's
Form 10-K filed November 30, 2000.
*10.34 Employment Letter dated August 1, 2001 between Benoit Y. Pouliquen
and the Company.
10.35 Factoring and Security Agreement dated December 28, 2001 by and
between the Company and Greenfield Commerical Credit, L.L.C.
22 Subsidiaries of Registrant.
23.1 Consent of Independent Public Accountants - Arthur Andersen LLP.
23.2 Consent of Independent Public Accountants - Ernst & Young LLP.
99.0 Registrant's Statement to the Commission regarding Arthur Andersen
LLP
* Management contract, compensatory plan or arrangement required to be filed as
an exhibit to this Form 10-K.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 9, 2002 SHELDAHL, INC.
By /s/ Benoit Pouliquen
-----------------------------------------
Benoit Pouliquen
President and Chief Executive Officer
By /s/ Peter J. Duff
-----------------------------------------
Peter J. Duff, Vice President-Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant on April 5, 2001 and in the capacities indicated.
(Power of Attorney)
Each person whose signature appears below constitutes and appoints Benoit
Pouliquen and Peter Duff as such person's true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubmission, for
such person and in such person's name, place and stead, in any and all
capacities, to sign any of all amendments to this Annual Report on Form 10-K and
to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as such person
might or could do in person, hereby ratifying and confirming all said attorneys-
in-fact as agents, each acting alone, or such person's substitute or substitutes
may lawfully do or cause to be done by virtue thereof.
By /s/ Benoit Pouliquen President and Chief Executive Officer and
------------------------------ Director (Principal Executive Officer)
Benoit Pouliquen
By /s/ Peter J. Duff Vice President-Finance
------------------------------ (Principal Accounting Officer)
Peter J.Duff
By /s/ John D. Lutsi Chairman of the Board of Directors
------------------------------
John D. Lutsi
By /s/ Stuart A. Auerbach Director
------------------------------
Stuart A. Auerbach
By /s/ William B. Miller Director
------------------------------
William B. Miller
By /s/ Raymond C. Wieser Director
------------------------------
Raymond C. Wieser
By /s/ Donald R. Friedman Director
------------------------------
Donald R. Friedman
37
Index to Consolidated Financial Statements
Report of Independent Public Accountants - Arthur Andersen LLP............................................... F-1
Report of Independent Public Accountants - Ernst & Young LLP................................................. F-2
Consolidated Balance Sheets as of December 28, 2001 and December 29, 2000.................................... F-3
Consolidated Statements of Operations for the Year Ended December 28, 2001,
the Eleven Months Ended December 29, 2000, and Twelve Months Ended January 29, 2000...................... F-4
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Year Ended December 28, 2001,
the Eleven Months Ended December 29, 2000, and Twelve Months Ended January 29, 2000...................... F-5
Consolidated Statements of Cash Flows for the Year Ended December 28, 2001,
the Eleven Months Ended December 29, 2000, and Twelve Months Ended January 29, 2000 ..................... F-6
Notes to Consolidated Financial Statements................................................................... F-7
Schedule II - Valuation and Qualifying Accounts ............................................................. F-28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sheldahl, Inc.:
We have audited the accompanying consolidated balance sheets of
Sheldahl, Inc. (a Minnesota corporation) and Subsidiaries as of December 28,
2001 and December 29, 2000, and the related consolidated statements of
operations, changes in shareholders' equity (deficit) and cash flows for the
year and eleven month periods then ended. These financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Sheldahl, Inc. and
Subsidiaries as of December 28, 2001 and December 29, 2000, and the results of
their operations and their cash flows for the year and eleven month periods then
ended, in conformity with accounting principles generally accepted in the United
States.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has suffered recurring losses from operations,
has a net capital deficiency, is unable to ascertain whether it will have
sufficient liquidity available under its current Credit Agreement to fund
operations and was out of compliance with certain covenant requirements
contained in its Credit Agreement. These matters raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 3. The accompanying financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Minneapolis, Minnesota,
March 15, 2002
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sheldahl, Inc.:
We have audited the accompanying consolidated statement of operations,
changes in shareholders' equity (deficit) and cash flows of Sheldahl, Inc. (a
Minnesota corporation) and Subsidiaries (formerly International Flex Holdings,
Inc,) for the year ended January 29, 2000. Our audit also included the financial
statement schedule listed in the index at Item 14(a). These financial statements
and the schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of their operations and their
cash flows of Sheldahl, Inc. and Subsidiaries for the year ended January 29,
2000, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Syracuse, New York
March 8, 2000
F-2
Sheldahl, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
Assets
December 28, December 29,
2001 2000
------------ ------------
Current assets:
Cash and cash equivalents $ 197 $ 9,701
Accounts receivable, net of allowance of $1,118 and $1,623 14,018 17,657
Inventories 15,905 25,205
Prepaid expenses and other current assets 1,373 1,538
----------- ----------
Total current assets 31,493 54,101
----------- ----------
Plant and equipment:
Land and buildings 10,488 16,596
Machinery and equipment 15,158 50,950
Construction in progress 268 8,238
Accumulated depreciation - (3,863)
----------- ----------
Net plant and equipment 25,914 71,921
----------- ----------
Other assets 168 3,340
----------- ----------
$ 57,575 $ 129,362
=========== ==========
Liabilities and Shareholders' Equity (Deficit)
Current liabilities:
Current maturities of debt $ 42,571 $ 22,450
Accounts payable 13,600 16,933
Accrued compensation 1,346 2,388
Other accrued liabilities 11,189 15,767
----------- ----------
Total current liabilities 68,706 57,538
Long-term debt, less current maturities 4,541 10,640
Other non-current liabilities 3,934 4,316
----------- ----------
Total liabilities 77,181 72,494
----------- ----------
Commitments and contingencies (Notes 2, 3, 5, 7, 8, 9 and 11)
Shareholders' equity (deficit):
Preferred stock, $1 par value, 500,000 shares authorized; Series D, E, F
and G cumulative convertible preferred,
32,917, 8,560, 1,800 and 11,303 shares issued and
outstanding at December 28, 2001, and December 29, 2000 53 53
Common stock, $.25 par value, 100,000,000 shares authorized;
32,057,700 and 30,590,000 shares issued and outstanding 8,014 7,648
Additional paid-in capital 59,283 54,830
Accumulated deficit (86,956) (5,663)
----------- ----------
Total shareholders' equity (deficit) (19,606) 56,868
----------- ----------
$ 57,575 $ 129,362
=========== ==========
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
Sheldahl, Inc. and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Year Ended Eleven Months Ended Twelve Months Ended
December 28, 2001 December 29, 2000 January 29, 2000
----------------- ----------------- ----------------
Net sales $ 108,494 $ 20,417 $ 24,081
Cost of sales 115,772 16,333 17,051
---------- ---------- ----------
Gross profit (loss) (7,278) 4,084 7,030
---------- ---------- ----------
Expenses:
Sales and marketing 7,463 1,337 804
General and administrative 12,922 3,373 4,879
Research and development 5,904 2,888 2,060
Asset impairment 39,035 - -
Interest, net 5,656 1,203 960
---------- ---------- ----------
Total expenses 70,980 8,801 8,703
---------- ---------- ----------
Loss before income taxes (78,258) (4,717) (1,673)
Income tax benefit 311 197 550
---------- ---------- ----------
Net loss (77,947) (4,520) (1,123)
Convertible preferred dividends (3,346) - -
---------- ---------- ----------
Loss applicable to common
shareholders $ (81,293) $ (4,520) $ (1,123)
========== ========== ==========
Loss per common share - basic and diluted $ (2.60) $ (0.51) $ (0.13)
========== ========== ==========
Weighted average number of shares
outstanding - basic and diluted 31,279 8,802 8,737
========== ========== ==========
The accompanying notes are an integral part of these consolidated statements of
operations.
F-4
Sheldahl, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity (Deficit)
(in thousands)
Year Ended Eleven Months Ended Twelve Months Ended
December 28, 2001 December 29, 2000 January 29, 2000
----------------- ----------------- ----------------
Common stock - shares:
Balance at beginning of period 30,590 8,737 -
Initial capitalization - - 8,737
Shares deemed issued in Merger - 12,069 -
Shares issued for preferred stock dividends 347 - -
Sale of common stock 1,121 9,784 -
--------- ----------- ----------
Balance end of period 32,058 30,590 8,737
========= =========== ==========
Series D convertible preferred stock:
Balance at beginning of period $ 32 $ - $ -
Shares deemed issued in Merger - 32 -
--------- ----------- ----------
Balance at end of period $ 32 $ 32 $ -
========= =========== ==========
Series E convertible preferred stock:
Balance at beginning of period $ 8 $ - $ -
Shares deemed issued in Merger - 8 -
--------- ----------- ----------
Balance at end of period 8 $ 8 $ -
========= =========== ==========
Series F convertible preferred stock:
Balance beginning of period $ 2 $ - $ -
Shares deemed issued in Merger - 2 -
--------- ----------- ----------
Balance at end of period $ 2 $ 2 $ -
========= =========== ==========
Series G convertible preferred stock
Balance at beginning of period $ 11 $ - $ -
Sale of stock - 11 -
--------- ----------- ----------
Balance at end of period $ 11 $ 11 $ -
========= =========== ==========
Common stock:
Balance at beginning of period $ 7,648 $ 2,184 $ -
Initial capitalization - - 2,184
Shares deemed issued in Merger - 3,018 -
Shares issued for preferred stock dividends 86 - -
Sale of common stock 280 2,446 -
--------- ----------- ----------
Balance at end of period $ 8,014 $ 7,648 $ 2,184
========= =========== ==========
Additional paid-in capital:
Balance at beginning of period $ 54,830 $ 7,836 $ -
Initial capitalization - - 7,836
Deemed equity value at Merger - 22,840 -
Issuance of preferred stock dividends 2,024 - -
Proceeds from sale of common stock 20 11,251 -
Proceeds from sale of series G preferred stock - 11,292 -
Value of warrants issued with subordinated notes 2,409 1,611 -
--------- ----------- ----------
Balance at end of period $ 59,283 $ 54,830 $ 7,836
========= =========== ==========
Accumulated deficit:
Balance at beginning of period $ (5,663) $ (1,143) $ -
Common stock issued at initial capitalization
for no consideration - - (20)
Net loss (81,293) (4,520) (1,123)
--------- ----------- ----------
Balance at end of period $ (86,956) $ (5,663) $ (1,143)
========= =========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
Sheldahl, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Year Ended Eleven Months Ended Twelve Months Ended
December 28, December 29, January 29,
2001 2000 2000
------------ ------------ ------------
Operating activities:
Net loss $ (81,293) $ (4,520) $ (1,123)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 16,724 2,807 2,433
Non-cash interest 900 513 527
Asset impairment 39,035 - -
Issuance of preferred stock dividends 3,346 - -
Issuance of warrants to in exchange for services 169 - -
Other non-cash (218) 14 155
Net change in other operating activities:
Accounts receivable 3,685 2,238 (3,821)
Inventories 7,886 (250) (983)
Prepaid expenses and other current assets 165 556 (1,171)
Accounts payable and accrued liabilities (11,830) 2,806 576
------------ ------------ -----------
Net cash provided by (used in) operating activities (21,431) 4,164 (3,407)
------------ ------------ ------------
Investing activities:
Capital expenditures, net (2,475) (4,614) (3,026)
Increase in other assets (593) (945) (494)
------------ ------------ -----------
Net cash used in investing activities (3,068) (5,559) (3,520)
------------ ------------ -----------
Financing activities:
Net proceeds under revolving credit facility 3,460 10,062 -
Issuance of senior subordinated notes 15,000 6,500 -
Borrowings of long-term debt - - 5,250
Repayments of long-term debt (3,765) (10,915) -
Proceeds from sales of common stock 300 13,697 -
Proceeds from sale of preferred stock - 11,303 -
------------ ------------ -----------
Net cash provided by financing activities 14,995 10,523 5,250
------------ ------------ -----------
Net increase (decrease) in cash and cash equivalents (9,504) 9,128 (1,677)
------------ ------------ -----------
Cash and cash equivalents, beginning of period 9,701 573 2,250
------------ ------------ -----------
Cash and cash equivalents, end of period $ 197 $ 9,701 $ 573
============ ============ ===========
Supplemental cash flow information:
Interest paid $ 3,751 $ 1,130 $ 378
============ ============ ===========
Income taxes paid $ 21 $ 13 $ 160
============ ============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
Sheldahl, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(1) Business Description
Sheldahl, Inc. (the Company or Sheldahl) creates and distributes
high-density substrates, high-quality flexible printed circuitry, and
thin, flexible laminates and their derivatives to worldwide markets.
The Company's laminates are of two types: adhesive-based tapes and
materials, and its patented adhesiveless material, Novaclad(R). From
these materials, the Company fabricates high-value derivative products:
single- and double-sided flexible interconnects and assemblies under
the trade names Flexbase(R), Novaflex(R) HD, Novaflex(R) VHD,
FlexStrate, DendriPlate(R) and substrates for silicon chip carriers
under the trade names ViaArray(R) and ViaThin(R). Management believes
that Sheldahl's leading technology products serve the electronic
interface between the function of electronic-based products and their
integrated circuits. The Company targets specific OEMs and contract
assemblers in the telecommunications, computer, medical, automotive and
aerospace markets in the drive to create electronic-based products that
require increased functionality.
The Company operates in two business divisions identified as the
Materials and Flex Interconnect Division (MFI), and the International
Flex Technologies Division (IFT). The MFI business division specializes
in high quality, roll-to-roll flexible circuits and specialty materials
for the automotive, communications, and aerospace markets. The IFT
business division consists of fine-line, roll-to-roll flexible circuits
including substrates for silicon chip carriers. These products target
the telecommunications, computer and medical markets.
The Company's high performance products - FlexStrate, ViaArray,
ViaThin(R), Novaflex(R) HD and Novaflex(R) VHD provide substantial
benefits compared to traditional flexible circuits, including the
capability for very fine circuit traces and very small holes, or vias,
thus utilizing both sides of the laminate for circuit routing reducing
size and cost per function. The Company has developed its ViaThin(R) to
enable IC manufacturers to package future generations of ICs
economically by attaching the silicon die to a ViaThin(R) substrate
manufactured by the Company or other circuitry manufacturers using the
Company's Novaclad(R) or ViaArray products. As ICs are becoming
increasingly powerful, they produce more heat and require a greater
number of connections to attach the silicon die, placing substantially
greater demands on IC packaging materials. The Company's substrates for
silicon chip carriers offer high-end thermal, electrical and quality
attributes.
(2) Merger Transaction and Basis of Presentation
Merger -
On December 28, 2000, Sheldahl acquired all of the outstanding
securities of International Flex Holdings, Inc. (Holdings) for
approximately 8.7 million shares of Sheldahl's common stock, plus
shares issuable under stock options and warrants of approximately 1.0
million shares, under the terms of a definitive merger agreement, as
amended, (the Merger Agreement) by and among Sheldahl, IFT West
Acquisition Company, a newly formed subsidiary of Sheldahl (West),
Holdings, the sole shareholder of International Flex Technologies,
Inc., the operating company, and the stockholders of Holdings (the
Holdings Stockholders). Under the terms of the Merger Agreement, West
merged with and into Holdings, with Holdings surviving and becoming a
wholly owned subsidiary of Sheldahl (the Merger). As consideration for
the Merger, holders of outstanding shares of Holdings' equity
securities received shares of Sheldahl common stock. Holdings' option
holders and warrant holder received options and a warrant to purchase
shares of Sheldahl common stock based upon the exchange ratio, as
defined.
Common Stock and Series G Convertible Preferred Stock Investment -
Concurrent with consummating the Merger, Sheldahl completed an equity
placement pursuant to a stock purchase agreement (the Stock Purchase
Agreement) by and among Sheldahl and three accredited investors (the
Investors), who collectively invested an aggregate of $25.0 million in
equity capital in exchange for approximately 9.8 million shares of
Sheldahl common stock and 11,303 shares of a newly created 11.06%
Series G Convertible Preferred Stock of Sheldahl, par value $1.00 per
share (the Series G Convertible Preferred Stock), such shares are
convertible in the aggregate into approximately 8.1 million shares of
Sheldahl common stock (the Equity Investment).
F-7
The Series G Convertible Preferred Stock is convertible into shares of
Sheldahl common stock at any time. Each holder of the Series G
Convertible Preferred Stock is entitled to convert each share of Series
G Convertible Preferred Stock into that number of shares of Sheldahl
common stock that equals $1,000 plus accrued dividends divided by the
Conversion Price. The Conversion Price is $1.40 per share and is
subject to adjustment from time-to-time under certain anti-dilution
provisions, as defined. The Series G Convertible Preferred Stock is
entitled to approximately 11.06% dividends, payable annually. For a
period of twenty-four months from the date of issuance, Sheldahl is
obligated to pay the dividend in shares of its common stock at a
Dividend Conversion Price of $1.625, as adjusted from time-to-time
under certain anti-dilution provisions, as defined. Thereafter,
Sheldahl may pay the dividend in shares of its common stock, or, at its
option, cash. One year of dividends at the Dividend Conversion Price
would equate to approximately 769,300 shares.
The Series G Convertible Preferred Stock is subordinate to the
Company's Series D, E and F Convertible Preferred Stock with regard to
payment of dividends and proceeds upon liquidation. Upon a liquidation
of all of the assets of Sheldahl, the holders of the Series G
Convertible Preferred Stock would be entitled to receive $25.0 million
plus any accrued but unpaid dividends less the market value of the
shares of common stock purchased under the Stock Purchase Agreement and
retained by the holders of the Series G Convertible Preferred Stock
following the adoption of a plan of liquidation, provided that any
shares of common stock purchased under the Stock Purchase Agreement may
be turned into Sheldahl for cancellation at the election of the holders
of the Series G Preferred Stock after eighteen months from the original
issue date. The Company may require holders of the Series G Convertible
Preferred Stock to convert to common stock if Sheldahl's common stock
trades at a price greater than $12.50 for at least thirty consecutive
business days and the average daily trading volume of Sheldahl's common
stock on the NASDAQ National market for thirty consecutive business
days exceeds 50,000 shares.
Subordinated Notes and Warrant Purchase Investment -
Concurrent with consummating the Merger and Equity Investment, Sheldahl
completed the issuance of $6.5 million of subordinated notes. Under the
terms of the agreement, the purchasers acquired $6.5 million of 12%
senior subordinated notes (the Subordinated Notes) and related warrants
(the Warrants) (collectively, the Debt Investment). The purchasers
collectively received Warrants to purchase 1,526,814 shares of Sheldahl
common stock. The Warrants issued under the Debt Investment are
exercisable at $.01 per share for a period of seven years. As discussed
in Note 6, the warrants were recorded at their estimated value at the
date of issuance as an increase to equity and a discount to the
Subordinated Notes, and are being accreted to interest expense over the
five-year period of the Subordinated Notes.
Post Transactions Ownership -
After completion of the Merger, Equity Investment and Debt Investment
(the Transactions), the parties that acquired securities in the
Transactions collectively hold securities representing ownership of
approximately 60% of Sheldahl's currently outstanding common stock and
60% of Sheldahl on a fully diluted basis (assuming conversion of all
Sheldahl convertible securities in existence at such date). In
addition, as part of the Transactions, the Company issued warrants to
purchase 175,000 shares of Sheldahl common stock to its investment
advisor, exercisable at $2.77 per share, for seven years.
Basis of Presentation -
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and
include the accounts of the Company and its wholly owned subsidiaries.
The Merger discussed above resulted in Sheldahl acquiring all of the
outstanding securities of Holdings, with Holdings becoming a wholly
owned operating subsidiary of Sheldahl. Although Sheldahl is the legal
survivor in the Merger and remains the registrant with Securities and
Exchange Commission, under United States generally accepted accounting
principles, as a result of the number of shares issued and sold in the
Transactions, the Merger will be accounted for as a reverse
acquisition, whereby Holdings is considered the `acquirer' of Sheldahl
for financial reporting purposes. Among other matters, this will
require Sheldahl to present in all financial statements and other
public informational filings, post completion of the Transactions,
prior historical financial and other information of Holdings, and
require a retroactive restatement of Holdings historical shareholders'
investment for the equivalent number of shares of common stock received
in the Merger.
F-8
Accordingly, the accompanying consolidated financial statements present
the results of Holdings for the year ended January 29, 2000.
Immediately prior to the commencement of its operations, Holdings
acquired certain assets from International Business Machines
Corporation (IBM). The aggregate purchase price was approximately $18
million and was funded by a $10 million capital contribution and debt
financing.
The accompanying financial statements include the results of Holdings
for the year ended January 29, 2000 and reflect the acquisition of
Sheldahl on December 28, 2000 under the purchase method of accounting.
The equity accounts and equity transactions of the combined entity
reflect that of the legal acquirer, Sheldahl, as required under reverse
acquisition accounting. The aggregate purchase price was approximately
$25.9 million. The assets acquired and liabilities assumed were
recorded at their estimated fair values as of the date of acquisition.
During 2001, the Company finalized the purchase price allocation
process based upon the completion of fair value determination of
certain assets and liabilities, principally related to completion of
plant and equipment and other asset appraisals, for which estimates of
fair value were used at December 29, 2000. The final purchase price
allocation resulted in a reduction in the recorded value of plant and
equipment of approximately $14.8 million and the recognition of
approximately $18.3 million of goodwill (see Note 5 related to
impairment charge recorded during the fourth quarter of 2001). The
operating results of Sheldahl have been included in the consolidated
financial statements since its deemed date of acquisition under reverse
acquisition accounting, December 28, 2000. The pro forma effects of the
acquisition are included in the table below. No financial information
is available for periods prior to February 1, 1999, with respect to
Holdings. All significant inter-company transactions have been
eliminated in consolidation.
Subsequent to the Transactions, Sheldahl's Board of Directors
determined that it would be in the best interests of the Company to
change its fiscal year-end to the Friday closest to December 31 of each
year, beginning with December 28, 2001.
Pro Forma Financial Information -
The accompanying unaudited consolidated pro forma results of operations
give effect to the Transactions discussed above as if such Transactions
had occurred at the beginning of the period (in thousands, except per
share amounts):
Eleven Month Twelve Month
Period Ended Period Ended
December 29, January 29,
2000 2000
---- ----
Net sales $137,673 $153,152
Operating loss (22,780) (19,516)
Net loss (25,699) (22,178)
Basic and diluted loss per share $ (0.84) $ (0.73)
The unaudited consolidated pro forma results of operations do not
purport to represent what the Company's financial position or results
of operations would actually have been if the Transactions had occurred
at such dates or to project the Company's future results of operations.
Acquisition Integration -
In connection with the Merger, the Company developed and during 2001
finalized and began implementing its facility consolidation plan
designed to better integrate the combined operations and to reduce its
operational cost structure. Purchase liabilities recorded by the
Company as part of the acquisition included approximately $0.5 million
for costs associated with the shutdown and consolidation of certain
acquired facilities and $2.0 million for severance and other related
costs. Approximately $1.5 million of these reserves were paid in the
year ended December 28, 2001. None of these reserves were used in the
year ended December 28, 2000. Employee terminations totaling 258 have
occurred under this plan of merger through December 28, 2001. As of
December 28, 2001 remaining shutdown and consolidation costs total
approximately $0.2 million and remaining severance payments total
approximately $0.8 million of which the Company will use approximately
$0.6 million of theses reserves in 2002 with the remaining amounts to
continue into 2003.
F-9
(3) Liquidity and Going Concern Matters
As discussed in Note 2, Holdings began operations on February 1, 1999,
and has incurred operating losses, excluding asset impairment charges,
of approximately $56.7 million during the three fiscal years
ended December 28, 2001. On a pro-forma basis, including the operations
of Sheldahl, the Company has incurred losses of approximately $128
million during the same period. These losses have been principally
financed through equity and debt financing.
Fiscal 2002 capital expenditures for the Company are planned at
approximately $3.4 million. Scheduled debt repayments for fiscal 2002
(excluding amounts under the Credit Agreement, the note payable to IBM
and the Senior Subordinated Notes that could be called by the lenders
due to non-compliance with associated debt covenants or payment default
provisions - see Note 6) will be approximately $2.3 million.
The Company experienced continued significant softening of sales orders
during 2001, particularly in the second half of 2001, and consequently
disappointing operating performance. During February 2002, the Company
finalized an operational and financial plan for the Company, which
includes significant additional cost reduction measures and facility
closures (see Note 15), some of which were implemented in 2001, and
assisted in improving operating performance. Notwithstanding the
foregoing, the Company anticipates that it will be out of compliance
with certain of its debt covenants during the first quarter of 2002 and
the amounts borrowed under its Credit and Security Agreement dated as
of July 19, 1998, as amended, with the lenders party thereto and Wells
Fargo Bank, National Association f/k/a Norwest Bank Minnesota, National
Association (the "Credit Agreement") are due in June of 2002 (see Note
6). In addition, the Company has not made required principal payments
on its note payable to IBM in the aggregate of $1,500,000, for which
payments of $750,000 each were due on July 13, 2001 and on January 15,
2002, respectively. In addition the Company is also behind in payments
on certain of its capital lease and installment note obligations (see
Note 6). The inability of the Company to: i) obtain waivers for events
of non-compliance under its Credit Agreement; ii) negotiate new
covenants or agreements with lenders; iii) control operating costs; iv)
achieve profitable execution of the sales orders received at its
Longmont Colorado business; v) achieve operating performance from the
MFI business above 2001 levels; vi) achieve other cost or productivity
improvements; vii) maintain adequate liquidity to fund normal
operations; viii) complete and fund the trade credit program as
described in the Current Report on Form 8-K filed on February 27, 2002,
and ix) the ability to successfully negotiate with IBM to settle
litigation relating to IFT's lease in Endicott, New York 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 short 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 address the Company's operational and cash flow
objectives. Should any of the adverse matters discussed above
ultimately occur, management will attempt to take one or all of the
following actions; i) seek continuing waivers of lenders covenants; ii)
obtain new equity capital; iii) issue new debt; and/or iv)
significantly restructure the Company's operations. However, there can
be no assurance that the Company will be successful in obtaining
waivers of lenders covenants, negotiating new covenants or debt
agreements, negotiating a credit facility to replace the Credit
Agreement or at all, achieving positive operating results, excluding
non-cash operating expenses during fiscal 2002, obtaining additional
debt or raising additional capital on terms acceptable to the Company,
or in the event of the failure of the foregoing, successfully take the
actions described above.
(4) Summary of Significant Accounting Policies
Use of Estimates -
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of sales and expenses during the reporting period. Ultimate
results could differ from those estimates.
Fair Value of Financial Instruments -
The carrying amounts reported in the consolidated balance sheet for
accounts receivable and accounts payable approximate fair value because
of the immediate or short-term maturity of these financial instruments.
The carrying amount for long-term debt under the Company's Credit
Agreement approximates fair value because of
F-10
the variable rate feature and because the related interest rates are
comparable to rates currently available to the Company for debt with
similar terms. The fair value of the Company's outstanding notes
payable, excluding the Note Payable to IBM, were recorded at fair value
in connection with the Merger discussed in Note 2. The fair value
approximated carrying value based upon quoted market rates. The Company
is currently in negotiations with IBM regarding the note payable (see
Note 15).
Significant Customers -
In the fiscal year ended December 28, 2001, no single customer
accounted for 10% or more of the Company's net sales. However, the two
largest customers accounted for an approximate total of 16% of net
sales in the 2001 fiscal year. In the fiscal period ended December 29,
2000, two customers accounted for 10% or more of the Company's net
sales, one of whom accounted for approximately 46% of net sales and the
other accounted for approximately 24% of net sales. In the fiscal year
ended January 29, 2000, two customers accounted for 10% or more of the
Company's net sales, one of whom accounted for approximately 32% of net
sales and the other accounted for approximately 21% of net sales. At
December 28, 2001, amounts due from these customers approximated
$1,743,000 at December 28, 2001, $138,000 at December 29, 2000 and
$244,000 at January 29, 2000.
Export Sales -
The Company had export sales of approximately $35,847,000 for the year
ended December 28, 2001, approximately $1,130,000 for the eleven month
period ended December 29, 2000 and approximately $916,000 for the
twelve month period ended January 29, 2000.
Revenue Recognition -
The Company recognizes revenue principally as products are shipped. In
addition, the Company grants credit to customers and generally does not
require collateral or any other security to support amounts due.
Inventories -
Inventories are stated at the lower of cost or market, with cost
determined on the first-in, first-out (FIFO) method. Cost includes the
cost of materials, direct labor, and applicable manufacturing overhead.
The components of inventories are as follows (in thousands):
December 28, December 29,
2001 2000
---------- ----------
Raw material $ 6,167 $ 9,769
Work-in-process 5,164 7,589
Finished goods 4,574 7,847
---------- ----------
Total $ 15,905 $ 25,205
========== ==========
Plant and Equipment -
Plant and equipment acquired prior to the Merger discussed in Note 2
were stated at cost and included expenditures that increased the useful
lives of existing plant and equipment. Maintenance, repairs and minor
renewals are charged to operations as incurred. When plant and
equipment are disposed of, the related cost and accumulated
depreciation are removed from the respective accounts and any gain or
loss is reflected in the results of operations. As discussed in Note 2,
the Company obtained appraisals and finalized the purchase price
allocation process during 2001, and, accordingly, adjusted the recorded
value of the plant equipment acquired in connection with the Merger to
fair value based upon appraised values. This resulted in a reduction to
plant and equipment of approximately $14.8 million from the estimated
values as recorded at December 29, 2000. This difference was recorded
as goodwill.
In addition, as a result of the continuing decline in demand for the
Company's products, the Company completed an assessment for asset
impairment under Statement of Financial Accounting Standards No. 121,
which resulted in
F-11
a write-down of approximately $19.2 million of plant and equipment,
$1.5 million of intangibles and all of the goodwill (resulting from
above). This charge to earnings was recorded in the fourth quarter of
2001 (see Note 5).
For financial reporting purposes, plant and equipment are depreciated
principally on a straight-line basis over the estimated useful lives of
10 years for buildings and 3 to 5 years for machinery and equipment.
For income tax reporting purposes, straight-line and accelerated
depreciation methods are used.
Start-up Costs -
The Company expenses start-up costs as incurred. Start-up activities
are broadly defined and include one-time activities related to opening
a new facility, introducing a new product or service, conducting
business in a new territory, conducting business with a new class of
customer or beneficiary, initiating a new process in an existing
facility, commencing some new operation, and organizing a new entity.
Other Assets -
Other assets consisted principally of purchased patent rights that were
being amortized on a straight-line basis over a five-year period. As
part of the finalization of the purchase price allocation process of
the Merger discussed in Note 2, the Company had appraisals completed
related to other intangible assets. However, the Company performed an
evaluation as to whether events and circumstances had occurred which
affected the estimated useful life or the recoverability of the
remaining balance of such intangible assets. As a result of such
review, the Company determined that the carrying amount of these assets
would not be recoverable and recorded an impairment charge in the
fourth quarter of 2001, as previously discussed above, the result of
which was to write off all identified intangible assets (see Notes 5
and 15).
Earnings per Share -
The Company follows the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share". Basic earnings per share is
computed using the weighted average number of shares of common stock
outstanding for the period. Diluted earnings per share is computed
using the weighted average number of shares of common stock, the
dilutive common equivalent shares related to stock options and warrants
outstanding during the period and the equivalent common shares of
convertible preferred stock, if those equivalent shares are dilutive.
During the year ended December 28, 2001, the eleven month period ended
December 29, 2000, and the twelve month period ended January 29, 2000,
stock options, warrants and convertible preferred stock equivalents
were anti-dilutive and therefore not included in the computation of
diluted earnings per share.
New Accounting Pronouncements -
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets." Under SFAS No. 141, business combinations
initiated after June 30, 2001 must be accounted for using the purchase
method of accounting. Under SFAS No. 142, amortization of goodwill and
indefinite-lived assets will cease, and the carrying value of these
assets will instead be evaluated for impairment using a
fair-value-based test, applied at least annually. The Company will
adopt SFAS No. 142 in fiscal 2002. The adoption of SFAS Nos. 141 and
142 will not have an impact on the Company's financial position or
results of operations, because at the beginning of fiscal 2002, the
Company has no intangible assets or goodwill.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting
and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated retirement costs. The
Company will adopt the SFAS No. 143 on January 1, 2003. The Company
does not expect the adoption of SFAS No. 143 will have a significant
impact on its financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes
previous guidance for financial accounting and reporting for the
impairment or disposal of long-lived assets and for segments of a
business to be disposed of. The Company will adopt the SFAS No. 144
standard on January 1, 2002. SFAS No. 144 is not expected to have a
significant impact on its financial position or results of operations.
F-12
The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective December 30, 2000. SFAS
No. 133 establishes accounting and reporting standards requiring that
every derivative instrument, including certain derivative instruments
embedded in other contracts, be recorded in the balance sheet as either
an asset or liability measured at its fair value. SFAS No. 133 requires
that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains or losses
to offset related results on the hedged item in the income statement
and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting.
The adoption of SFAS No. 133 did not have a material impact on the
Company's results of operations or financial position.
(5) Asset Impairment Charge
The asset impairment charge recorded in 2001 was a result of
management's review of the carrying amount of certain of its assets in
light of the current operating environment, specifically the Company
reviewed the carrying amount of its goodwill, fixed assets and certain
intangible assets given the changes in the economic environment, the
Company's industry, business strategy and projected future operating
results and cash flows. As a result of these changes, the Company
prepared analyses in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of," to determine if there was impairment of recorded goodwill
and other long-lived assets. Based upon the anticipated undiscounted
cash flows from these analyses, the Company determined that goodwill
resulting from the merger discussed in Note 2 was impaired and thus
written down. In addition, the Company identified other long-lived
assets which no longer had sufficient anticipated undiscounted cash
flows to support their carrying amounts and were written down to fair
value. Fair value was based on discounting estimated future cash flows
for assets grouped at the lowest level for which there were
identifiable cash flows at a discount rate commensurate with the risks
involved. As a result of the impairment analysis, the Company recorded
a charge during the fourth quarter of 2001 of approximately $39.0
million related to the impairment of goodwill, intangibles and plant
and equipment. Considerable management judgment was necessary to
estimate fair value and determination of future cash flows. Ultimate
results could vary significantly from management's estimates.
(6) Financing
Debt consisted of the following (in thousands):
December 28, December 29,
2001 2000
---------- ----------
Revolving credit facility, interest at prime plus
six percent (10.75% at December 28, 2001). $ 8,225 $ 4,765
Term facility, interest at prime plus six percent
(10.75% at December 28, 2001) 8,615 11,077
12% Senior Subordinated Notes, net, issued December 2000 5,211 4,889
22% Senior Subordinated Notes, issued May 2001 5,000 -
17% Senior Subordinated Notes, net, issued August 2001 5,763 -
12% Senior Subordinated Notes, net, issued October 2001 2,074 -
Note payable to insurance company, secured by real estate
mortgage. Interest at 8.53% with monthly payments of $48,
including principal and interest through December 2009 4,204 4,252
Note payable to IBM, net of warrants issued and secured by
intellectual property. Interest at 9.75% with semi-annual payments
of varying amounts of $750 or more through December 2004 5,400 5,627
Capitalized lease obligations payable to an investment company
secured by computer equipment and software. Interest at 8.97%
with monthly payments of $27, including principal and interest
through July 2002 206 655
F-13
Capitalized lease obligation payable to a bank, secured by computer,
communications equipment and related software. Interest at 9.03% with
monthly payments of $14, including principal and interest through July 2002 106 274
Installment note due a finance company, secured by computer hardware
and software, interest at 9.05% with monthly payments of $49,
including principal and interest through January 2003 691 1,102
Note payable to Economic Development Agency secured by real estate
Interest at 3.0% with monthly payments of $2.6, including principal
and interest payments through December 2007 200 200
Note payable to Community Development Agency secured by equipment.
Interest at 3.0% with monthly payments of $0.6, through July 2002,
and monthly payments of $3 thereafter through July 2009 250 250
Capitalized lease obligations to payable to an investment company,
secured by equipment. Interest 7.6% to 8.5% with monthly payments
of $61, including principal and interest through December 2002 598 -
Capitalized lease obligations to payable to a financing company,
secured by equipment. Interest at 5.9% with monthly payments of
$20, including principal and interest through April 2004 569 -
---------- ----------
47,112 33,090
Less-current maturities (42,571) (22,450)
---------- ----------
$ 4,541 $ 10,640
========== ==========
At December 28, 2001, the Company's Credit and Security Agreement dated
as of July 19, 1998, as amended, with the lenders party thereto and
Wells Fargo Bank, National Association f/k/a Norwest Bank Minnesota,
National Association (the "Credit Agreement") consisted of two separate
facilities: a revolving credit facility of up to $25 million based on
the Company's adjusted working capital; and a term facility for $16
million based on the appraised value of the Company's unencumbered
equipment. Interest on the revolving credit facility and the term
facility is charged at the prime rate plus six percent (10.75% as of
December 28, 2001). As of December 28, 2001, the amount available to
borrow on the revolving credit facility was approximately $2.3 million,
which reflects a $5.0 million reduction by the Company's lenders for a
liquidity reserve. All borrowings under the Credit Agreement are
secured by the Company's tangible and intangible assets. The term
facility requires monthly repayments of $205,000, with the remaining
outstanding balance under the term facility and the revolving credit
facility due June 1, 2002. The Credit Agreement borrowings have been
classified as current in the accompanying December 28, 2001
consolidated balance sheet.
In connection with the obtainment of the Credit Agreement, the Company
issued to the lenders warrants to purchase 230,000 shares of common
stock at a price of $3.01 per share, exercisable through July 2003. The
warrants are subject to adjustment for certain anti-dilution provisions
and have been adjusted accordingly. The adjustment resulted in an
increase in the number of original warrants to 243,717. As of December
28, 2001, none of these warrants had been exercised.
The Credit Agreement restricts the payments of cash dividends, capital
expenditures and the redemption of preferred stock, and requires the
Company to meet certain financial covenants, including maintaining
certain levels of pre-tax net income (loss), cash flow available for
debt service and debt service coverage ratios. Existing economic and
industry conditions, as well as operational performance of the
Company's business units, have resulted in the Company being out of
compliance with certain of the financial covenants during 2001. As part
of the lenders waiving these events of non-compliance, the Company paid
to the lenders a fee of $250,000 for the period ending December 28,
2001, are required to pay $100,000 in each of the first three months of
fiscal year 2002, adjusted the exercise price of the warrants
previously granted to the lenders (see above) to $0.38 per share and
extended the expiration date of the warrants through October 2006. The
Company also anticipates it will be out of compliance with covenant
requirements during the first quarter of fiscal 2002.
F-14
An event of non-compliance will cause an increase in the borrowing
margin from prime plus six percent to prime plus eight percent and
allow the lenders to call for repayment of outstanding borrowings.
While management currently believes that it will be successful in
obtaining an amendment to the Credit Agreement to cure such defaults,
there can be no assurance that an amendment will be obtained on terms
acceptable to the Company. In addition, an event of default under the
Credit Agreement will cause an event of default under the terms of all
of the Senior Subordinated Notes. As such, all Senior Subordinated
Notes have also been classified as current in the accompanying December
28, 2001 consolidated balance sheet. No other adjustments to the
carrying amount or classification of assets or liabilities in the
accompanying financial statements have been made with respect to this
pending event of non-compliance.
As part of the Transactions discussed in Note 2, the Company completed
the issuance of $6.5 million of 12% Senior Subordinated Notes. In
addition, the purchasers collectively received warrants to purchase
1,526,814 shares of Sheldahl common stock. The warrants are exercisable
at $.01 per share for a period of seven years. The fair value of the
warrants, as determined using the Black-Scholes pricing model,
amounting to approximately $1.6 million, has been reflected as a
discount to the carrying value of the 12% Senior Subordinated Notes and
as a credit to additional paid-in capital. The $1.6 million will be
accreted to interest expense over the five-year period of the 12%
Senior Subordinated Notes.
In May 2001, the Company completed the issuance of $5.0 million of 22%
Senior Subordinated Notes to Morgenthaler Venture Partners V, L.P.,
Ampersand IV Limited Partnership and Molex Incorporated. These notes
are due at such time that the Company repays the obligations under its
current Credit Agreement, or earlier upon certain issuance of capital
stock or the sale of assets by the Company after first applying
proceeds to existing debt under the Credit Agreement. The Notes are
secured by all of the non-real property assets of the Company and its
subsidiaries. The Notes are subordinate to the obligations of the
Company to lenders under the Credit Agreement.
In August 2001, the Company completed the issuance of $3.0 million of
12% Senior Subordinated Notes to Morgenthaler Venture Partners V, L.P.
and Molex Incorporated. These Notes are due upon the earlier of the
following events: August 2006, certain issuances of capital stock or
the sale of assets by the Company after first applying proceeds to
existing debt under the Company's current Credit Agreement, the 22%
Senior Subordinated Notes and the 17% Senior Subordinated Notes
discussed below. In addition, each purchaser was issued warrants to
purchase 351,000 shares of the Company's common stock. The seven-year
warrants are exercisable at $0.01 per share of common stock. The Notes
are subordinate to the Company's obligations to lenders under the
Credit Agreement. The fair value of the warrants, as determined using
the Black-Scholes pricing model, amounting to approximately $978,000,
will be accreted to interest expense over the term of these 12% Senior
Subordinated Notes.
In October 2001, the Company completed the issuance of $7.0 million of
17% Senior Subordinated Notes to Morgenthaler Partners VII, L.P.,
Ampersand IV Limited Partnership and Molex Incorporated. These Notes
are due and payable in October 2006 or earlier upon certain issuances
of capital stock or the sale of assets by the Company after first
applying proceeds to existing debt under the Company's current Credit
Agreement and the 12% Senior Subordinated Notes issued in May 2001. In
addition, the purchasers were issued seven-year warrants for an
aggregate of approximately 3.13 million shares of the Company's common
stock at an exercise price of $0.01 per share of common stock. The
warrants are exercisable at $0.01 per share for a period of seven
years. Additionally, for each year for which any portion of these Notes
remain outstanding, the Company will issue additional warrants to
purchase an aggregate of 261,010 shares of the Company's common stock
at an exercise price of $0.01 per share. The Notes are secured by all
of the non-real property assets of the Company and its subsidiaries,
International Flex Technologies, Inc. and International Flex Holdings,
Inc. The Notes are subordinate to the Company's obligations to lenders
under the Credit Agreement. The fair value of the warrants, as
determined using the Black-Scholes pricing model, amounting to
approximately $1,262,000, will be accreted to interest expense over the
term of these 17% Senior Subordinated Notes.
Accretion of approximately $0.4 million, related to the discount
recorded from warrants issued as part of the above Senior Subordinated
Note issuances and $0.5 million related to the note payable to IBM (see
below), is included in interest expense in the accompanying 2001
consolidated statement of operations.
In connection with the formation of Holdings, the Company entered into
an intellectual property and license agreement with IBM. The Company
obtained seller financing through a five-year $7.5 million non-interest
bearing note. This financing was discounted at a rate of 9.75%, with
accrued interest being added to the carrying
F-15
value of the note. Semi-annual principal payments began July 2000 and
continue until January 2004. As discussed in Note 3, the Company is in
default under the IBM Note payable, having missed the required $750,000
principal payments due in July 2001, and January 2002. The Company has
classified the IBM note payable as current in the accompanying December
28, 2001 consolidated balance sheet.
The Company is also behind on principal payments on certain of its
capital lease and installment note obligations of approximately $0.1
million at December 28, 2001.
Future scheduled maturities of debt as of December 28, 2001 are as
follows (in thousands):
2002 $ 42,571
2003 353
2004 164
2005 71
2006 78
Thereafter 3,875
(7) Effect of the Merger on Shareholders' Equity (Deficit) and Earnings
(Loss) Per Share
As a result of the Merger discussed in Note 2, the historical
shareholder's equity (deficit) of Holdings, deemed the accounting
acquirer for financial reporting purposes, has been retroactively
restated to reflect the effect of the exchange ratio established as
part of the Merger. Shareholders' equity (deficit) presents the
equivalent number of shares received in the Merger after giving effect
to the difference in par value of common stock, with the offset to
additional paid-in capital. The accumulated deficit of Holdings, as the
accounting acquirer, has been carried forward. Operations prior to the
Merger are those of Holdings as the accounting acquirer. Earnings
(loss) per share for periods prior to the Merger have been
retroactively restated to reflect the number of equivalent shares of
common stock received by Holdings as the acquiring company. The shares
of common and preferred stock outstanding of Sheldahl prior to the
Merger are reflected as being issued at the date of the Merger in the
accompanying consolidated statements of shareholders' equity (deficit).
(8) Preferred Stock and Warrants
Preferred Stock -
As discussed in Note 2, as part of the Transactions, the Company sold
11,303 shares of Series G Convertible Preferred Stock in December 2000
with a total stated value of $11,303,000. This Series G preferred stock
earns an approximate 11.06% dividend rate, payable annually. The
dividend is payable in shares of common stock of the Company for the
twenty-four months from the date of issuance at a stated value of
$1.625 per share, adjustable for certain anti-dilutive provisions.
Thereafter the Company may pay the dividend in shares of its common
stock or, at its option, cash. The Series G preferred stock is
convertible into approximately 8.1 million shares of common stock at a
rate of $1.40 per share adjustable for certain anti-dilutive
provisions. The Series G preferred stock is subordinated to the Series
D, E and F preferred stock with regard to payment of dividends and
proceeds upon liquidation. As of December 28, 2001, 11,303 shares of
Series G preferred stock were outstanding. Accrued dividends of
approximately $1.3 million are included in other accrued liabilities in
the accompanying December 28, 2001, consolidated balance sheet. At
December 28, 2001, the Company was in arrears on the dividend payment
that was due December 2001. The Company subsequently paid this Series G
dividend in January 2002 by issuing 769,232 shares of common stock.
F-16
Prior to the Merger discussed in Note 2, Sheldahl completed the
following equity issuances:
. The Company issued 1,800 shares of Series F Convertible Preferred
Stock with a total stated value of $1,800,000. This Series F
preferred stock earns a 5% dividend rate, payable annually in
shares of common stock or cash at the Company's option, and is
convertible into nearly 330,000 shares at a fixed rate of $5.46
per share, adjustable for certain anti-dilution provisions. The
purchasers of the Series F preferred stock were also issued
55,800 warrants to purchase the Company's Common Stock at a price
of $5.46 per share, adjustable for certain anti-dilution
provisions. These warrants expire in January 2005. None of the
warrants have been exercised as of December 28, 2001. Net
proceeds from the Series F preferred stock were approximately
$1,800,000. As of December 28, 2001, 1,800 shares of Series F
preferred stock were outstanding. Dividends paid during 2001 of
approximately $90,000, were paid by the issuance of 16,484 shares
of Common Stock. Accrued dividends of approximately $83,000 are
included in other accrued liabilities in the accompanying
December 28, 2001 consolidated balance sheet.
. The Company issued 8,560 shares of Series E Convertible Preferred
Stock with a total stated value of $8,560,000. This Series E
preferred stock earns a 5% dividend rate, payable annually in
shares of common stock or cash at the Company's option, and is
convertible into nearly 1.4 million shares at a fixed rate of
$6.25 per share, adjustable for certain anti-dilution provisions.
The purchasers of the Series E preferred stock were also issued
85,600 warrants to purchase the Company's common stock at a price
of $7.8125 per share, adjustable for certain anti-dilution
provisions. These warrants expire in February 2004. None of the
warrants have been exercised as of December 28, 2001. Net
proceeds from the Series E preferred stock were approximately
$8,460,000. As of December 28, 2001, 8,060 shares of Series E
convertible preferred stock were outstanding. Dividends paid
during 2001 of approximately $403,000, were paid by the issuance
of 64,551 shares of Common Stock. Accrued dividends of
approximately $343,000 are included in other accrued liabilities
in the accompanying December 28, 2001 consolidated balance sheet.
. The Company issued 32,917 shares of Series D Convertible
Preferred Stock with a total stated value of $32,917,000. This
Series D preferred stock earns a 5% dividend rate, payable
annually in shares of common stock or cash at the Company's
option, and is convertible into nearly 5.4 million shares at a
fixed rate of $6.12 per share, adjustable for certain anti-
dilution provisions. The holders of the Series D preferred stock
were also issued 329,170 warrants to purchase the Company's
common stock at a price of $7.6875 per share, adjustable for
certain anti-dilution provisions. These warrants expire in July
2001. None of the warrants have been exercised as of December 28,
2001. Net proceeds from the Series D preferred stock were
$32,409,000. As of December 28, 2001, 32,353 shares of Series D
preferred stock were outstanding. Dividends paid during 2001 of
approximately $1,617,000, were paid by the issuance of 265,214
shares of Common Stock. Accrued dividends of approximately
$679,000 are included in other accrued liabilities in the
accompanying December 28, 2001 consolidated balance sheet.
The Company received notice from Nasdaq that it does not meet the
requirements for continued listing under the Nasdaq Market Place Rules
in that the Company has not maintained a $5,000,000 minimum market
value of its publicly held common shares and the closing bid price of
the Company's common stock was less than $1.00 per share for 30
consecutive trading days. The Company has until May 15, 2002 to meet
the minimum bid price requirement and until June 20, 2002 to meet the
minimum market value of publicly held shares requirement. In order to
achieve compliance with the bid price requirement, the bid price of the
Company's common stock must close at $1.00 per share or more for a
minimum of ten consecutive trading days. If the Company is not able to
regain compliance with the Nasdaq Market Place Rules, the Company's
common stock may be delisted from the Nasdaq National Market. As an
alternative to meeting the requirements for continued listing for the
Nasdaq National Market, the Company may apply for listing on the Nasdaq
SmallCap Market. If the Company's common stock were delisted, the
Company's common stock may be traded on the Nasdaq OTC Bulletin Board.
The Company is currently exploring the Nasdaq listing requirements and
the Company's ability to comply with the requirements of either the
Nasdaq National Market or SmallCap Market listing.
Under the terms governing the Company's Series D and E Convertible
Preferred Stock, the delisting of the Company's common stock from the
Nasdaq National Market would require that all dividends to the Series D
and E Convertible Preferred Stock holders be paid in cash, rather than
in shares of common stock. However, the Company is prohibited from
paying any cash dividend by the terms of its Credit Agreement and each
of the subordinated notes agreements. Further, in the event that there
are accrued but unpaid dividends, the Company
F-17
would be prohibited from paying any dividend on any junior series of
preferred stock until the more senior series of preferred stock is
fully paid.
Warrants -
In addition to the warrants issued and outstanding discussed in Notes 2
and 6, and those issued in conjunction with the preferred stock
discussed above, the Company has issued and has outstanding warrants
for the purchase of 484,600 shares of the Company's common stock at a
price of $1.67 per share, which expire August 2002, and additional
warrants to purchase 304,933 shares of the Company's common stock at a
price of $1.37 which expire September 2004.
(9) Stock Based Compensation
The shareholders of the Company have approved stock option plans (the
Plans) for officers, other full-time key salaried employees, and
non-employee directors of the Company to reward performance and enable
the Company to attract and retain key personnel. Under the Plans,
options are granted at an exercise price equal to the fair market value
of the Company's common stock at the date of grant and are generally
exercisable for five or ten years. The Plans also provide for automatic
grants of 25,000 target grant replacement stock options to each
non-employee director of the Company on the date that each such
director is first elected to the Board of Directors, and expire, to the
extent not already expired, one year after termination of service as a
Director. Certain non-employee directors have elected to not receive
such grants. As of December 28, 2001, the Board of Directors has
approved plans to authorize the future granting of options to purchase
up to approximately 2,201,000 shares of common stock. This approval is
pending at the date of this filing subject to shareholder approval.
The following table summarizes the stock option transactions for the
periods indicated and includes, for the periods prior to the Merger
discussed in Note 2, option activity of both Holdings and Sheldahl.
Options of Holdings outstanding at the date of the Merger were
converted to options of Sheldahl at the exchange ratio defined as part
of the Merger.
Twelve Month Eleven Month Twelve Month
Period Ended Period Ended Period Ended
December 28, 2001 December 29, 2000 January 29, 2000
-------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Exercise -Average Exercise -Average Exercise -Average
Price Exercise Price Exercise Price Exercise
Shares Range Price Shares Range Price Shares Range Price
-------------------------------------------------------------------------------------------------------
Outstanding at $ 0.26 - $ 0.26 - $ 5.00 -
Beginning of Year 1,894,135 $ 22.13 $10.44 1,856,907 $ 22.13 $ 11.93 1,575,042 $ 22.13 $ 16.23
Granted $ 0.53 - $ 0.26 - $ 0.26 -
3,623,000 $ 2.51 1.25 155,463 $ 5.00 0.55 466,777 $ 6.69 1.95
Exercised - - - - - - (834) $ 5.25 5.25
$ 2.91 - $ 5.00 - $ 5.00 -
Lapsed (218,317) $ 22.13 11.48 (118,235) $ 22.13 16.39 (184,078) $ 22.13 15.10
--------- -------- ------ --------- -------- ------- --------- ------- -------
Outstanding at $ 0.26 - $ 0.26 - 0.26 -
End of Year 5,298,818 $ 22.13 $ 4.12 1,894,135 $ 22.13 $ 10.44 1,856,907 $ 22.13 $ 11.93
========= ======== ====== ========= ======== ======= ========= ======= =======
Exercisable at
End of Year 1,800,801 $ 9.85 1,394,540 $ 13.02 1,088,671 $ 15.93
========= ====== ========= ======= ========= =======
As of December 28, 2001
-----------------------
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Exercise Price Number Option Term Average Number Average
Range Outstanding (Years) Exercise Price Exercisable Exercise Price
- -------------------------------------------------------------------------------------------------------------------------------
$0.00 - 0.50 500,192 7.6 $ 0.26 189,866 $ 0.26
$0.51 - 1.00 731,000 6.8 0.53 - -
$1.01 - 5.00 2,977,387 4.6 1.53 521,474 1.84
F-18
$5.01 - 15.00 421,908 4.2 8.63 421,130 8.64
$15.01 - 22.125 668,331 4.5 19.58 668,331 19.58
--------- --- -------- --------- -------
$0.00 - 22.125 5,298,818 5.1 $ 4.12 1,800,801 $ 9.85
========= === ======== ========= =======
Options exercisable were 1,800,801 as of December 29, 2001, 1,394,540
as of December 29, 2000 and 1,088,671 as of January 29, 2000.
The options outstanding as of December 28, 2001, expire five or ten
years after the grant date as follows:
Number of Options
Fiscal Years That Expire
------------ -----------
2002 241,469
2003 105,935
2004 63,579
2005 732,100
2006 2,510,175
2007 147,961
2008 939,837
2009 522,795
2010 34,967
As provided for in Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation", the Company
continues to measure compensation cost for its plans using the method
of accounting prescribed by Accounting Principles Board Opinion No. 25
(APB 25). Entities electing to remain with the accounting in APB 25
present pro forma disclosures of net income (loss) and, if presented,
earnings per share, as if the fair value based method of accounting
defined in SFAS No. 123 had been followed. The following tables and
information with respect to SFAS No. 123 includes, for the periods
prior to the Merger discussed in Note 2, option activity of both
Holdings and Sheldahl. Options outstanding at the date of the Merger of
Holdings were converted to options of Sheldahl at the exchange ratio
defined as part of the Merger.
The following weighted average assumptions were used by the Company:
Twelve Month Ended Eleven Month Period Twelve Month Period
December 28, 2001 Ended December 29, 2000 Ended January 29, 2000
----------------- ----------------------- ----------------------
Risk-free interest rate 4.22 - 4.99% 5.42 - 6.63% 5.61 - 6.32%
Expected lives 5 - 7 years 7 years 7 years
Expected volatility 56 - 73% 52% 52%
Using the Black-Scholes option pricing model, the total value of stock
options granted for the year ended December 28, 2001 was $2,640,000,
for the eleven month period ended December 29, 2000, was $50,000, and
during the twelve month period ended January 29, 2000 was $521,000
which would be amortized on a pro forma basis over the vesting period
of the options (typically ranging from six months to five years). The
weighted average fair value of options granted during those periods was
$0.73, $0.32 and $1.12 per share, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net loss per share (basic
and diluted) would have been as follows (in thousands, except per share
data):
Twelve Month Period Ended Eleven Month Period Ended Twelve Month Period Ended
December 28, 2001 December 29, 2000 January 29, 2000
----------------- ----------------- ----------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
Net loss $(81,293) $(85,361) $ (4,520) $ (7,773) $ (1,123) $ (5,431)
Loss per share $ (2.60) $ (2.73) $ (0.51) $ (0.92) $ (0.13) $ (0.63)
(10) Commitments and Contingencies
F-19
Lease Commitments -
The Company has non-cancelable operating lease commitments for certain
manufacturing facilities and equipment, which expire at various dates
through 2003. Minimum commitments as of December 28, 2001, under
operating leases are approximately $4.2 million in 2002, $3.3 million
in 2003, $0.4 million in 2004 and $0.2 million in 2005 and none
thereafter. In accordance with the terms of the lease agreements, the
Company is required to pay maintenance and property taxes related to
the leased property. Operating lease expense was approximately $5.8
million for the year ended December 28, 2001, approximately $2.6
million for the eleven months ended December 29, 2000 and approximately
$2.9 million for the twelve months ended January 29, 2000.
The Company has entered into various capital lease arrangements for the
purchase of certain communication and computer equipment and related
software and manufacturing equipment totaling approximately $1.4
million. The following is a schedule of future gross minimum capital
lease payments (in thousands):
2002 $ 1,123
2003 240
2004 191
-------
Gross minimum capital lease payments 1,554
Less amount representing interest 75
-------
Present value of net minimum capital lease payments $ 1,479
=======
Employment Agreements -
The Company has employment agreements with certain officers not
affiliated with Holdings prior to the merger which, as a result of the
Merger discussed in Note 2, require severance benefits of $1.2 million,
or a greater amount, if any, payable under the Company's severance pay
plan, which provides generally for payment based on length of service
of up to two times an employee's base pay in effect on the date of
termination if an employee is terminated at the Company's initiative
and such employee is in good standing at the time of such termination.
Benefits under the employment agreements are available upon termination
of employment if the officer continues employment with the Company for
at least one year from the date of the Merger or if certain other
events occur resulting in a termination of employment within three
years of the date of the Merger.
Certain officers who were affiliated with Holdings prior to the Merger
have employment agreements which provide severance payments ranging
from 12 to 18 months of base pay in the event of a termination of
employment by the Company without cause, as defined. One officer's
employment agreement provides additional severance benefits if his
employment is terminated within one year following a change of control
either by the Company without cause or by the officer for good reason.
In such event, the officer receives severance pay through the end of
the term of the agreement plus twelve months.
The Company recorded approximately $0.5 million during 2001 related to
severance under the various employment agreements with former officers
of the Company as a result of the above provisions contained in the
employment agreements.
In addition, the Company entered into an employment agreement with its
new Chief Executive Officer in 2001, which provides for a base salary,
bonus and the granting of 2,287,000 options of the Company's common
stock at an exercise price of $1.41 per share. The options vest over
five years and will expire in 2006. The employment agreement also
provides for a severance amount equal to one years pay if termination
occurs for other than cause.
Litigation -
The nature of the Company's operations exposes it to the risk of
certain legal and environmental claims in the normal course of
business. In addition, as a result of the Merger discussed in Note 2,
an investment banking firm has filed suit alleging it is owed an
investment banking fee arising from the Merger, seeking $1.75 million
plus interest. The Company has filed a response to the claim, denying
that the investment banking firm is entitled to any fees arising from
the Merger between Sheldahl, Holdings and IFT and asserting various
defenses to the investment banking firm's claims. As required under
SFAS No. 5, the Company has established reserves for issues that it
believes are probable and estimable in amounts management believes are
adequate to cover reasonable adverse judgments not covered by
insurance. Based upon the information available to management
F-20
and discussions with legal counsel, it is the opinion of management
that the ultimate outcome of the various legal actions and claims that
are incidental to the Company's business will not have a material
adverse impact on the consolidated financial position, results of
operations or cash flows of the Company. However, such matters are
subject to many uncertainties, and the outcomes of individual matters
are not predictable with assurance.
(11) Income Taxes
The Company accounts for income taxes following the provisions of SFAS
No. 109, "Accounting for Income Taxes", which requires recognition of
deferred income tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income tax
assets and liabilities are determined based upon the difference between
the financial statement and tax bases of assets and liabilities using
currently enacted tax rates. From a tax attribute perspective, the
Merger discussed in Note 2 is treated as if Holdings was the acquiree;
thus, the tax attributes of the Company post Merger are those of the
continuing legal entity, Sheldahl, as if Sheldahl had acquired
Holdings.
Significant components of the provision (benefit) for income taxes for
the year ended December 28, 2001, the eleven month period ended
December 29, 2000, and the twelve month period ended and January 29,
2000, are as follows (in thousands):
December 28, December 29, January 29,
2001 2000 2001
------------ ------------ -----------
Current:
Federal $ - $ - $ 50
State (311) (242) (555)
Deferred - 45 (45)
------------ ------------ -----------
$ (311) $ (197) $ (550)
============ ============ ===========
A reconciliation of the provision (benefit) for income taxes at the
statutory rate to the reported income tax provision (benefit) for the
respective following periods is as follows (in thousands):
December 28, December 29, January 29,
2001 2000 2000
------------ ------------- -----------
Federal provision at statutory rate (34)% (34)% (34)%
Change in valuation allowance 26 40 52
Intangible asset basis difference 8 - -
New York State refundable credits - (5) (45)
Federal AMT - - -
State taxes, net of federal benefit - (6) (6)
Other - 1 -
------------ ------------- -----------
- % (4)% (33)%
============ ============= ===========
A summary of deferred income taxes is as follows (in thousands)
December 28, December 29,
2001 2000
------------ ------------
Deferred tax assets:
Net operating loss carryforwards $ 46,555 $ 30,573
Depreciation and property basis differences 5,801 -
Inventory reserves 3,220 1,956
Accrued compensation related costs 955 1,462
Post-retirement benefit obligations 1,211 1,246
Revenue recognition - 771
Allowance for doubtful accounts 416 602
New York state investment credits 707 404
Intangibles 398 356
Facility closure and consolidation costs 285 285
Income tax credit carry forward 805 805
Other 1,028 172
------------ ------------
Deferred tax assets 61,381 38,632
------------ ------------
Deferred tax liabilities:
Depreciation and property basis differences - (817)
State refund credit (212) (99)
------------ ------------
Deferred tax liabilities (212) (916)
------------ ------------
Valuation allowance (61,169) (37,716)
------------ ------------
Net deferred income taxes $ - $ -
============ ============
F-21
As of December 28, 2001, the Company has federal net operating loss
carryforwards of approximately $128 million and federal income tax
credit carryforwards of approximately $805,000 that expire through
2021. Future use of these tax benefits are dependent upon profitability
of the Company. The future use of federal tax benefits are subject to
limitation under Internal Revenue Code Section 382 due to a change in
control as defined thereunder having occurred.
The Company has not used any of these state income tax credits to
offset income tax liabilities. Approximately $851,000 of the New York
state investment tax credits will be carried forward to future tax
years and will expire, if unused, in the year 2010. The Company
realized New York state refundable wage credits and refundable income
taxes of approximately $311,000 for the year ended December 28, 2001,
approximately $242,000 for the period ended December 29, 2000 and
approximately $555,000 for the period ended January 29, 2000,
representing the balance of New York state investment tax credits that
will be refunded to the Company. The refundable amounts result from
certain incentives on investments in capital assets and employment
granted by the state of New York in the initial four years of a new
entity's operations, and are included in other current assets in the
accompanying consolidated balance sheets.
Under SFAS No. 109, a valuation allowance is provided when it is more
likely than not that some portion of the deferred tax assets will not
be realized. The Company has established a full valuation allowance for
its net deferred tax assets at December 28, 2001, due to the
uncertainty related to their ultimate realization. The Company arrived
at such a decision considering several factors, including but not
limited to, historical cumulative losses incurred by the Company and
anticipated continued operating losses. The Company will continue to
evaluate the need for the valuation allowance, and at such time it is
determined that it is more likely than not that such deferred tax
assets will be realized, the valuation allowance, or a portion thereof,
will be reversed.
(12) Pension and Post-retirement Benefits
Defined Benefit Plan -
The Company sponsors a defined benefit pension plan covering
substantially all hourly employees of the Company's Northfield,
Minnesota facility (the Northfield Plan). Pension costs are funded in
compliance with the Employee Retirement Income Security Act of 1974. As
a result of the accounting treatment of the Merger discussed in Note 2,
the Northfield Plan had no impact on operations for the period ended
December 29, 2000 as Holdings was not the sponsor of the Northfield
Plan.
Post-retirement Benefits -
The Company recognizes expense for the expected cost of providing post
retirement benefits other than pensions to its employees. The expected
cost of providing these benefits is charged to expense during the years
that the employees render service. The Company's plan, which is
unfunded, provides medical and life insurance benefits for select
employees. These employees, who retire after age 40 with 20 years or
more service, have access to the same medical plan as active employees.
As a result of the accounting treatment of the Merger discussed in Note
2, the cost of the benefits provided hereunder had no impact on
operations for the period ended December 29, 2000, as Holdings was not
the sponsor of these benefits.
F-22
The change in benefit obligation, plan assets and funded status
consisted of the following (in thousands):
Post-retirement Benefits
Pension Plan Other Than Pensions
------------ -------------------
December 28, December 29, December 28, December 29,
2001 2000 2001 2000
---- ---- ---- ----
Change in Benefit Obligation:
Benefit obligation at beginning of year $ 7,141,664 $ - $ 892,473 $ -
Service cost 216,022 - 5,812 -
Interest cost 528,740 - 45,997 -
Plan's participants contributions - - 39,804 -
Actuarial (gain) / loss 591,834 - (18,020) -
Merger - 7,141,664 - 892,473
Benefits paid (240,751) - - -
------------ ------------ ------------ -----------
Benefit obligation at end of year $ 8,237,509 $ 7,141,664 $ 918,378 $ 892,473
============ ============ ============ ===========
Change in Plan Assets:
Fair value of plan assets at beginning of year $ 8,005,575 $ - $ - $ -
Actual return on plan assets (153,213) - - -
Employer contributions - - 47,668 -
Merger - 8,005,575 - -
Plan's participants contributions - - - -
Benefits paid (240,751) - (47,688) -
------------ ------------ ------------ -----------
Fair value of plan assets at end of year $ 7,611,611 $ 8,005,575 $ - $ -
============ ============ ============ ===========
Change in Funded Status:
Funded status $ (625,898) $ 863,911 $ - $ (824,761)
Unrecognized actuarial (gain) / loss (1,087,467) (2,648,242) (246,938) (156,040)
Unrecognized prior service cost 1,153,235 1,249,764 - -
Employer contribution after measurement date - - - 88,328
Unrecognized net transition obligation (asset) 6,682 16,711 - -
----------- ------------ ------------ -----------
Prepaid (accrued) benefit cost $ 553,448 $ (517,856) $ (918,378) $ (892,473)
=========== ============ ============ ===========
The following weighted-average assumptions were used to account for the
plans:
Post-retirement Benefits
Pension Plan Other Than Pensions
------------ -------------------
December 28, December 29, December 28, December 29,
2001 2000 2001 2000
---- ---- ---- ----
Discounted rate 7.0% 8.0% 7.0%-8.0% 8.0%
Expected return on plan assets 8.5% 8.5% 6.0% N/A
Rate of compensation increase N/A N/A 6.0% N/A
The components of net periodic benefit cost are as follows:
Post-retirement Benefits
Pension Plan Other Than Pensions
------------ -------------------
December 28, December 29, December 28, December 29,
2001 2000 2001 2000
---- ---- ---- ----
Service cost $ 216,022 $ - $ 5,812 $ -
Interest cost 528,740 - 45,997 -
Expected return on plan assets (670,055) - - -
Amortization of prior service cost 96,529 - - -
Recognized actuarial (gain) / loss (135,644) - (18,020) -
------------- ------------ ------------ ------------
Net periodic benefit cost $ 35,592 $ - $ 33,789 $ -
============ ============ ============ ============
F-23
For measurement purposes, an 8.5% annual rate of increase in the per
capita cost of covered health care benefits was assumed at December 28,
2001. The rate was assumed to decrease gradually to 5.50% for fiscal
2007 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the post-retirement medical benefit plan. A one
percentage-point change in assumed health care cost trend rates would
not have had a material impact on total service cost, interest cost or
the post retirement benefit obligation.
Supplemental Executive Retirement Plan -
The Supplemental Executive Retirement Plan (the Plan) provides that
benefits may be paid to or in respect of certain senior executive
employees of the Company as selected by the Company's Board of
Directors. Benefits under the Plan represent 50% of the employee's
final average compensation annually for the life of the senior
executive and their spouse. Final average compensation is defined as
annual cash compensation (and excluding all non-cash compensation such
as income recognized as a result of the exercise of the exercise of
stock options or the sale of stock so acquired) paid to the executive
by the Company for the five calendar years preceding the calendar year
which includes the executive's termination date. Approximately $116,000
was charged to expense during the year ended December 28, 2001. The
Company has accrued approximately $1,103,000 and $1,132,000 under the
Plan as of December 28, 2001 and December 29, 2000 were respectively.
Defined Contribution Plans -
The Company sponsors a defined contribution plan (the Plan) covering
employees who meet certain age and service requirements and who are not
participants in the Northfield Plan. The Company matches 100% of the
first 2% of participants' voluntary contributions to the Plan, subject
to certain limitations. Subject to the Company's profitability,
additional matching contributions may be made by the Company of up to
4% of each participants compensation. The Company leases employees from
ADP Totalsource at its Endicott, New York facility, and contributes 50%
of the first 8% of these individuals voluntary contributions to ADP
Totalsource Retirement Savings Plan. Employer contributions totaled
approximately $1,687,000, $168,000 and $143,000 for the year ended
December 28, 2001, the eleven month period ended December 29, 2000 and
the twelve month period ended January 29, 2000, respectively.
(13) Segment Information
The Company's revenue producing business segments are identified as the
materials and flexible interconnect business (MFI) and the
international flex technology business (IFT). The Management Team, a
group of operating executives, is responsible for defining the
strategies and directions for the businesses. The MFI segment consists
of flexible advanced laminates, high performance tapes and derivative
products, principally flexible interconnect circuits and assemblies.
These products are targeted across all markets served by the Company
with the automotive market generating a majority of December 28, 2001,
sales for this segment. The Company's Novaclad(R), Novaflex(R) HD and
VHD products are marketed and sold by this business. The IFT business
segment provides flexible circuits for use in high end tape ball grid
array, wire bond, flip chip and interconnect applications. These
products are principally targeted to the data communications market.
The Company markets and sells its products to major North American and
European automotive original equipment manufacturers (OEM's) and first
and second tier suppliers to the automotive industry. The Company also
markets and sells its products to the data communications (electronics)
market in areas that require dense electronic packaging such as
integrated circuit packages, laptop computers, high-end disc drives and
portable communication devices.
The Company's manufacturing and assembly sites with their related
assets are used to manufacture specific product offerings of the
Company regardless of business segment. For instance, the Longmont,
Colorado, facility today contributes to the manufacture of all
Novaclad(R)-based products. The Company allocates its shared production
assets based on approximate percentage of asset utilization with unused
capacity being assigned to the segment originating the investment.
Principally all of the Company's long-term assets are located in and
all of the Company's sales revenue is generated from North America.
F-24
As a result of the Merger discussed in Note 2, all of the sales,
operating profit, depreciation and amortization and capital
expenditures reflected in the accompanying consolidated financial
statements are those of the IFT business segment.
The following is a summary of certain financial information relating to
the two segments (in thousands):
Twelve Month Eleven Month Twelve Month
Period Ended Period Ended Period Ended
December 28, December 29, January 29,
2001 2000 2000
------------ ------------ -------------
Total sales by segment:
MFI $ 83,474 $ - $ -
IFT 25,020 20,417 24,081
----------- ----------- ----------
Total Company sales $ 108,494 $ 20,417 $ 24,081
=========== =========== ==========
Operating profit (loss) by segment:
MFI:
----
Before corporate administration $ (3,429) $ - $ -
Corporate administration 8,724 - -
Asset impairment 20,005 - -
Interest expense 4,376 - -
----------- ----------- ----------
Total $ (36,534) $ - $ -
=========== =========== ==========
IFT:
----
Before corporate administration $ (17,216) $ (141) $ 4,166
Corporate administration 4,198 3,373 4,879
Asset impairment 19,030 - -
Interest expense 1,280 1,203 960
----------- ----------- ----------
Total $ (41,724) $ (4,717) $ (1,673)
----------- ----------- ----------
Total segments operating losses $ (78,258) $ (4,717) $ (1,673)
=========== =========== ==========
The following is a summary of plant and equipment by segment for the
twelve-month and eleven-month period ended:
December 28, December 29,
2001 2000
---------- ----------
MFI $ 16,331 $ 32,617
IFT 9,583 39,304
---------- -----------
Total plant and equipment $ 25,914 $ 71,921
========== ===========
Sales by product line for the twelve-month, eleven-month and
twelve-month periods ended, respectively, are as follows (in
thousands):
December 28, December 29, January 29,
2001 2000 2000
---------- ---------- ----------
MFI Division
Novaflex(R) VHD $ 1,086 $ - $ -
Novaflex(R) HD 18,693 - -
Flexbase(R) Flexible Interconnects 42,540 - -
Laminate Materials 21,155 - -
IFT Division
TBGA and ViaThin(R) 22,009 16,792 18,091
Flexible circuits 1,617 1,484 1,514
DendriPlate(R) 1,394 2,141 4,476
----------- ---------- -----------
Total $ 108,494 $ 20,417 $ 24,081
=========== ========== ===========
F-25
(14) Quarterly Results of Operations (Unaudited)
The consolidated results of operations for the four quarters of 2001
and 2000 are as follows (in thousands, except per share data):
Twelve Months Ended December 28, 2001
-------------------------------------
First Second Third Fourth(1)
---------- ---------- ---------- ----------
Net sales $ 28,395 $ 30,103 $ 25,650 $ 24,346
Gross profit (loss) (4,301) (1,072) (2,759) 854
Operating loss (12,255) (8,957) (11,764) (45,282)
Loss applicable to common shareholders (13,096) (9,797) (12,603) (45,797)
Loss per common share - basic and diluted $ (0.43) $ (0.32) $ (0.40) $ (1.43)
Weighted average common shares
outstanding - basic and diluted 30,715 30,769 31,576 32,058
Eleven Months Ended December 29, 2000
-------------------------------------
First Second Third Fourth(2)
---------- ---------- ---------- -----------
Net sales $ 5,872 $ 6,352 $ 5,304 $ 2,889
Gross profit (loss) 1,694 1,652 1,346 (608)
Operating loss (463) (334) (645) (2,072)
Loss applicable to common shareholders (808) (478) (671) (2,563)
Loss per common share - basic and diluted $ (0.09) $ (0.05) $ (0.08) $ (0.29)
Weighted average common shares
outstanding - basic and diluted 8,737 8,737 8,737 8,980
(1) Fourth quarter of 2001 includes an asset impairment charge of
approximately $39.0 million see (Note 5).
(2) Fourth quarter of 2000 consists of two months, as the Company
changed its year-end (see Note 2).
(15) Subsequent event - Facility Closure and Restructuring (Unaudited)
On February 15, 2002, the Company announced and gave notice to affected
employees that its wholly owned subsidiary, International Flex
Technologies (IFT), will close its Endicott, New York facility in May
2002. The Company's Endicott facility, which employs 115 individuals,
manufactures fine-line, flexible circuits for use in the computer, data
communications and medical markets and is the primary location where
the IFT products have been made. The Company made this decision after
experiencing diminished demand for the specialized products
manufactured in Endicott, is not anticipating demand levels to return
and with few exceptions, the Company expects to cease manufacture of
these IFT products. As a result of these conditions and as part of the
Company's ongoing efforts to reduce costs, the action was taken to
permanently close the Endicott facility. The Company expects to begin
using its Longmont, Colorado facility for the manufacture of products
sold in its MFI segment and will continue to manufacture a few products
formerly made in the Endicott facility.
In connection with the closure, the Company is expected to incur
severance costs of approximately $0.8 million in addition to other
closing costs. The Company plans to sell the equipment at the Endicott
facility, obtaining the highest price possible. The Company can not
guarantee that it will be able to find a buyer in a reasonable time
frame nor can it guarantee that it will be able to achieve the
liquidation value which is the basis of the equipment at Endicott
included in the accompanying December 28, 2001 balance sheet. In
addition, the Company leases its Endicott facility from IBM under a
non-cancelable operating lease through February 2004. Lease expense
under this agreement is approximately $2.8 million per year. The
Company also has a Note Payable to IBM for certain intellectual
property rights, which have allowed the Company to manufacture product
at the Endicott facility. The Company, which is in arrears in payments
to IBM on both its rent and its Note Payable (see Note 6), is currently
in negotiations to resolve these matters. The Company will record a
charge for severance, facility and other
F-26
matters in the first quarter of 2002 related to the closure of its
Endicott facility. A gain or loss, if any, on restructuring the
agreements with IBM will be recorded upon finalization of such
agreement in accordance with SFAS No. 5.
On March 22, 2002, the Company's subsidiary, International Flex
Technologies, Inc., received notice of default from International
Business Machines with respect to a Lease dated January 25, 1999 for
IFT's Endicott, New York facility. The Company is in negotiations with
IBM with respect to the closure of this facility and the outstanding
lease payments.
F-27
Sheldahl, Inc. and Subsidiaries
Schedule II: Valuation and Qualifying Accounts
Allowance for Doubtful Accounts:
- -------------------------------
The transactions in the allowance for doubtful accounts were as follows:
Twelve Month Eleven Month Twelve Month
Period Ended Period Ended Period Ended
December 28, December 29, January 29,
2001 2000 2000
------------ ------------ ------------
Balance, beginning of period $ 1,623 $ 155 $ -
Write-offs (530) (18) -
Provision 484 13 155
Acquired in Merger (459) 1,473 -
------------ ------------ ------------
Balance, end of period $ 1,118 $ 1,623 $ 155
============ ============ ============
Facility Consolidation Reserves:
- -------------------------------
The transactions in the facility consolidation reserve accounts were as follows:
Twelve Month Eleven Month
Period Ended Period Ended
December 28, December 29,
2001 2000
------------ ------------
Balance, beginning of period $ 1,855 $ -
Reserves established in connection with Merger 683 1,855
Utilization (1,548) -
------------ ------------
Balance, end of period $ 990 $ 1,855
============ ============