UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Quarter Ended March 29, 2002
[_] 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
--------- ----------
(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
------- -------
The aggregate market value of shares held by non-affiliates was approximately
$121,000 on May 8, 2002, when the last sales price of the Registrant's Common
Stock, as reported in the Nasdaq National Market System, was $0.01. As of May 8,
2002, 33,049,000 shares of the Registrant's common stock were outstanding.
1
SHELDAHL, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I: Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
Three months ended March 29, 2002 and March 30, 2001.......3
Condensed Consolidated Balance Sheets -
March 29, 2002 and December 28, 2001.......................4
Condensed Consolidated Statements of Cash Flows - Three
months ended March 29, 2002 and March 30, 2001.............5
Notes to condensed consolidated financial statements..............6-7
Item 2. Management's Discussion and Analysis of Consolidated
Operating Results and Financial Condition...............8-11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk......................................................12
PART II: Other Information
Item 2. Changes in Securities and Use of Proceeds.................13
Item 3. Default Upon Senior Securities............................13
Item 5. Other Information ........................................13
Item 6. Exhibits and Reports on Form 8-K .........................13
2
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
SHELDAHL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
-----------------------
March 29, March 30,
(in thousands, except for per share data) 2002 2001
--------- ---------
Net sales $ 24,244 $ 28,395
Cost of sales 19,558 32,696
-------- --------
Gross profit (loss) 4,686 (4,301)
-------- --------
Expenses:
Sales and marketing 1,508 2,515
General and administrative 2,957 2,622
Research and development 1,113 1,800
Interest 3,116 1,015
-------- --------
Total expenses 8,694 7,952
-------- --------
Loss before income taxes (4,008) (12,253)
Income tax provision 18 --
-------- --------
Net loss before preferred dividends (4,026) (12,253)
Convertible preferred stock dividends (900) (840)
-------- --------
Net loss applicable to common shareholders $ (4,926) $(13,093)
======== ========
Net loss per common share - Basic and Diluted $ (0.15) $ (0.43)
======== ========
Number of shares outstanding - Basic and Diluted 32,522 30,715
======== ========
The accompanying notes are an integral part of these statements.
3
SHELDAHL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(unaudited)
(In thousands) March 29, December 28,
2002 2001
----------- ------------
Current assets:
Cash and cash equivalents $ 1,375 $ 197
Accounts receivable, net 14,023 14,018
Inventories 14,271 15,905
Prepaid expenses and other current assets 1,742 1,373
-------- --------
Total current assets 31,411 31,493
-------- --------
Land and buildings 10,650 10,488
Machinery and equipment 14,854 15,158
Construction in progress 447 268
Accumulated depreciation (626) --
-------- --------
Net plant and equipment 25,325 25,914
-------- --------
Other assets 200 168
-------- --------
$ 56,936 $ 57,575
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of debt $ 43,329 $ 42,571
Accounts payable 15,000 13,600
Accrued compensation 2,429 1,346
Other accrued liabilities 11,386 11,189
-------- --------
Total current liabilities 72,144 68,706
-------- --------
Long-term debt 4,413 4,541
Other non-current liabilities 3,426 3,934
-------- --------
Total liabilities 79,983 77,181
-------- --------
Shareholders' investment:
Convertible preferred stock 53 53
Common stock 8,243 8,014
Additional paid-in capital 60,539 59,283
Accumulated deficit (91,882) (86,956)
-------- --------
Total shareholders' equity (deficit) (23,047) (19,606)
-------- --------
$ 56,936 $ 57,575
======== ========
The accompanying notes are an integral part of these statements.
4
SHELDAHL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
-----------------------
(in thousands) March 29, March 30,
2002 2001
--------- ---------
Operating activities:
Net loss applicable to common shareholders $ (4,926) $(13,093)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 639 3,991
Preferred stock dividends 1,108 840
Net change in other operating activities:
Accounts receivable (5) (21)
Inventories 2,034 (83)
Other current assets (369) (406)
Other assets (32) 56
Accounts payable and accrued liabilities 2,463 (6,649)
Other non-current liabilities (121) 182
-------- --------
Net cash generated by (used in) operating activities 791 (15,547)
-------- --------
Capital expenditures, net (50) (1,323)
-------- --------
Financing activities:
Net borrowings under revolving credit facility 1,402 8,545
Repayments of long-term debt (965) (959)
Proceeds from long-term debt -- --
Stock options exercised -- 155
-------- --------
Net cash provided by financing activities 437 7,741
-------- --------
Net increase (decrease) in cash and cash equivalents 1,178 (9,129)
Cash and cash equivalents at beginning of period 197 9,701
-------- --------
Cash and cash equivalents at end of period $ 1,375 $ 572
======== ========
Supplemental cash flow information:
Interest paid $ 643 $ 1,065
======== ========
Income taxes paid $ 39 $ --
======== ========
The accompanying notes are an integral part of these statements.
5
SHELDAHL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
ARTHUR ANDERSEN LLP HAS HISTORICALLY SERVED AS THE COMPANY'S INDEPENDENT
AUDITORS AND HAS IN THE PAST ALSO REVIEWED THE COMPANY'S QUARTERLY REPORTS ON
FORM 10-Q AS REQUIRED BY SAS NO. 71. ARTHUR ANDERSEN WAS UNABLE TO REVIEW THIS
FORM 10-Q, HOWEVER, DUE TO THE COMPANY'S APRIL 30, 2002 FILING OF A PETITION
UNDER CHAPTER 11 OF THE BANKRUPTCY CODE AND THE CURRENT STATUS OF THE
MINNEAPOLIS OFFICE OF ARTHUR ANDERSEN.
These condensed and unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, these condensed unaudited
consolidated financial statements reflect all adjustments, of a normal and
recurring nature, necessary for a fair statement of the interim periods, on a
basis consistent with the annual audited financial statements. Certain
information, accounting policies and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such
rules and regulations. Although these disclosures should be considered adequate,
the Company strongly suggests that these condensed unaudited financial
statements be read in conjunction with the financial statements and summary of
significant accounting policies and notes thereto included in the Company's
latest annual report on Form 10-K.
On December 28, 2000, Sheldahl, Inc. ("Sheldahl") acquired all of the
outstanding securities of International Flex Holdings, Inc., a Delaware
corporation ("Holdings"), the sole shareholder of International Flex
Technologies, Inc., a Delaware corporation ("IFT"), pursuant to a merger of a
newly formed subsidiary of Sheldahl with and into Holdings (the "Merger").
Although Sheldahl was the legal survivor in the Merger and remains the
registrant with the Securities and Exchange Commission ("SEC") and a listed
company under Nasdaq, under United States generally accepted accounting
principles, as a result of the number of shares issued and sold in these
transactions, Holdings was considered the "acquiror" of Sheldahl for financial
reporting purposes. Among other matters, this required Sheldahl, in this report
and all of its future financial and informational filings with the SEC, to
present the prior historical, financial and other information of Holdings and
IFT. Accordingly, unless otherwise indicated to the contrary herein, the results
of Holdings and IFT will be presented herein as the "Company" for all periods
prior to December 28, 2000 without inclusion of Sheldahl's results for the same
period. For purposes of this report, unless otherwise stated to the contrary,
Company shall refer to Sheldahl, Holdings and IFT on a combined basis for all
periods on or after December 28, 2000.
On January 5, 2001, the Board of Directors of the Company changed its
fiscal year to the Friday closest to December 31 of each year, beginning with
December 29, 2000.
The Company 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.
1) (a) Inventories, which are valued at the lower of first-in first-out
cost or market, consists of (in thousands):
March 29, 2002 December 28, 2001
-------------- ----------------
Raw materials $ 5,482 $ 6,167
Work-in-process 4,708 5,164
Finished goods 4,081 4,574
---------- ----------
$ 14,271 $ 15,905
========== ==========
6
(b) Petition for relief under Chapter 11 of U.S. Bankruptcy Court
and Liquidity
On April 30, 2002, Sheldahl, Inc. filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy
Court for the District of Minnesota. ("Court") the case number assigned
is 02-31674. The Debtor claimed total assets of $33,764,000 and total
debts of $81,930,000.
On May 7, 2002 the Court approved an interim order authorizing Sheldahl
to incur post petition debt as a debtor in possession ("DIP" financing)
and to grant security to the lenders, Morgenthaler VII, L.P., Ampersand
IV Limited Partnership and Molex Incorporated (together "Lenders"). The
Terms of the DIP financing provide for advances of up to $1,500,000 at
an initial rate of 11% and a subsequent rate of 14%, payable quarterly,
in arrears. Principal is payable upon the sale of substantially all the
assets of the Company. Advances under this facility are secured and
subordinate to the existing security under the pre-petition loans
provided under the Credit and Security Agreement with Wells Fargo Bank.
The total pre-petition debt outstanding to Wells Fargo is approximately
$15,660,000. In addition, the Court approved an interim order
authorizing Sheldahl to continue its factoring agreement with
Greenfield Commercial Credit, Inc. As of April 30, 2002 the Company had
approximately $1,050,000 outstanding under this facility. Accompanying
the announcement of the Chapter 11 petition, the Company announced the
intention of the group described above as the Lenders to make an offer
to acquire substantially all the assets of the Company subject to
approval of the Court.
3) Segment Reporting
The following is a summary of certain financial information relating to
the two segments for the three months ended as follows:
March 29, March 30,
2002 2001
----------- -----------
Total sales by segment:
MFI $ 19,562 $ 20,417
IFT 4,682 7,978
--------- --------
Total company sales $ 24,244 $ 28,395
========= ========
Operating Profit (loss) by segment:
MFI:
----
Before general and administrative expenses $ 1,557 $(3,970)
General and administrative expenses 1,651 1,506
Interest expense 2,513 697
--------- --------
Total (2,607) (6,173)
--------- --------
IFT:
----
Before general and administrative expenses 508 (4,646)
General and administrative expenses 1,306 1,116
Interest expense 603 318
--------- --------
Total (1,401) (6,080)
--------- --------
Total segments operating losses $ (4,008) $(12,253)
========= ========
4) Reclassifications
Certain amounts previously reported in 2001 have been reclassified to
conform to the 2002 presentation.
7
Item 2. Management's discussion and analysis of financial condition
and results of operations
ARTHUR ANDERSEN LLP HAS HISTORICALLY SERVED AS THE COMPANY'S
INDEPENDENT AUDITORS AND HAS IN THE PAST ALSO REVIEWED THE COMPANY'S QUARTERLY
REPORTS ON FORM 10-Q AS REQUIRED BY SAS NO. 71. ARTHUR ANDERSEN WAS UNABLE TO
REVIEW THIS FORM 10-Q, HOWEVER, DUE TO THE COMPANY'S APRIL 30, 2002 FILING OF A
PETITION UNDER CHAPTER 11 OF THE BANKRUPTCY CODE AND THE CURRENT STATUS OF THE
MINNEAPOLIS OFFICE OF ARTHUR ANDERSEN.
Results of Operations
The consolidated financial statements that accompany this discussion show
the operating results from operations of the Company for the quarters ended
March 29, 2002 and March 30, 2001.
The following table shows sales, cost of sales, gross profit, sales,
research and development and general and administration and operating profit
before interest by segment (in thousands):
March 29, 2002 March 30, 2001
----------------------------------- -----------------------------------
Total Total
MFI IFT Company MFI IFT Company
------- ------ ------- ------- -------- -------
Sales $19,562 $4,682 $24,244 $20,417 $ 7,978 $28,395
Cost of sales 15,916 3,642 19,558 21,493 11,203 32,696
Gross profit (loss) 3,646 1,040 4,686 (1,076) (3,225) (4,301)
% of sales 18.6% 22.2% 19.3% (5.3%) (40.4%) (15.1%)
Sales, marketing, research &
development expense 2,089 532 2,621 2,894 1,421 4,315
% of sales 10.7% 11.4% 10.8% 14.2% 17.8% 15.2%
Profit before general
administration and interest $1,557 $ 508 $2,065 $(3,970) $(4,646) $(8,616)
General administration $1,651 $1,306 $2,957 $1,506 $1,116 $2,622
Operating profit before interest
$(94) $(798) $(892) $(5,476) $(5,762) $(11,238)
Net Sales. The Company's net sales decreased by approximately $4.1
million, or 14.6%, to $24.2 million for the three months ended March 29, 2002,
as compared to the same period in the prior year. The majority of this decline,
or $3.3 million, occurred in the IFT segment. This decline is primarily due to a
decrease in sales at IFT's Endicott, NY facility which, the Company has
announced, is scheduled to close in May 2002.
Cost of Sales/Gross Profit. Gross profit increased approximately $9.0
million to a gross profit of 19.3% of sales for the three months ended March 29,
2002 compared to a gross loss of 15.1% of sales for the same period in the prior
year. Nearly $4.0 million of this increase is related to reduced depreciation
expense as a result of the Company's asset impairment charge recorded in the
fourth fiscal quarter of the fiscal year ended December 28, 2001. Depreciation
expense declined as a result of the reduced carrying value of the assets
affected by the asset impairment charge. The Company attributes substantially
all of the remainder of the improvement in gross profit to the substantial cost
reductions which occurred in May and September 2001. These reductions were
primarily the result of a reduction in the number of employees.
Sales and Marketing Expenses. For the three months ended March 29, 2002,
sales and marketing expenses decreased approximately $1.0 million compared to
the same period in the prior year. The Company attributes the majority of this
reduction in expense to the cost reductions referred to above.
8
Research and Development Expenses. For the three months ended March 29,
2002, research and development expenses decreased approximately $0.7 million
compared to the same period in the prior year. The Company attributes the
majority of this reduction in expense to the cost reductions referred to above.
General and Administrative Expenses. For the three months ended March 29,
2002, general and administrative expenses increased approximately $0.3 million
compared to the same period in the prior year. The increase is related to
severance expenses approximating $0.7 million attributable to the closing of the
Endicott, NY facility and severance expenses of $0.1 million that were incurred
at the Company's Longmont facility. This increase was partially offset by a
reduction in other expenses due to the cost reductions referred to above.
Interest Expense. For the three months ended March 29, 2002, interest
expense increased approximately $2.1 million compared to the same period in the
prior year. This increase is related to a net increase in debt of approximately
$7.1 million. This increase is substantially due to the subordinated debt issues
in May, August and October 2001 which debt carries an average rate of
approximately 18%, a higher rate than the average interest rate on the senior
debt.
EBITDA. For the three months ended March 29, 2002, EBITDA, defined as
earnings before interest, taxes, depreciation and amortization, was $(0.3)
million compared to $(7.3) million for the same period in the prior year. The
$(0.3) million loss includes the nonrecurring severance charge of $0.8 million
discussed above. Excluding this charge, EBITDA was positive $0.5 million which
represents a $7.8 million improvement in operations as compared to the three
months ended March 30, 2001.
Financial Condition
- -------------------
As a result of continuing decreases in sales in both the Company's MFI
and IFT segments and a resulting lack of liquidity, on April 30, 2002, Sheldahl
filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in
the United States Bankruptcy Court for the District of Minnesota (the "Court").
The case number is 02-31674. Sheldahl claimed total assets of $33,764,000 and
total debts of $81,930,000.
Under Chapter 11, Sheldahl is operating its business as a
debtor-in-possession. As of the petition date, actions to collect pre-petition
indebtedness are stayed and other contractual obligations against Sheldahl may
not be enforced. In addition, under the Bankruptcy Code, Sheldahl may assume or
reject executory contracts, including lease obligations. Parties affected by
these rejections may file claims with the Court in accordance with the
reorganization process. Substantially all pre-petition liabilities are subject
to settlement under a plan of reorganization to be voted upon by creditors and
equity holders and approved by the Court.
On May 7, 2002 the Court approved an interim order authorizing Sheldahl
to incur post petition debt as a debtor in possession ("DIP" financing) and to
grant security to the lenders, Morgenthaler VII, L.P., Ampersand IV Limited
Partnership and Molex Incorporated (together "Lenders"). The Terms of the DIP
financing provide for advances of up to $1,500,000 at an initial rate of 11% and
a subsequent rate of 14%, payable quarterly, in arrears. Principal is payable
upon the sale of substantially all the assets of the Company. Advances under
this facility are secured and subordinate to the existing security under the
pre-petition loans provided under the Credit and Security Agreement with Wells
Fargo Bank. The total pre-petition debt outstanding to Wells Fargo is
approximately $15,660,000.
In addition, the Court approved an interim order authorizing Sheldahl to
continue its factoring agreement with Greenfield Commercial Credit, Inc. As of
April 30, 2002 the Company had approximately $1,050,000 outstanding under this
facility.
Accompanying the announcement of the Chapter 11 petition, the Company
announced the intention of the group described above as the Lenders to make an
offer to acquire substantially all the assets of the
9
Company subject to approval of the Court. Sheldahl anticipates that all proceeds
of the sale of its assets will be used to pay creditors and that there will be
no residual value for shareholders.
Following the petition date, the Company has used or intends to use cash
flows generated from operations, the DIP financing and the factoring agreement
as its primary sources of working capital. The Company believes that these
sources of working capital will be sufficient to allow the Company to complete
the sale process and wind up its operations under the supervision of the Court.
The terms of any sale of Sheldahl's assets and the amount available for payment
to pre-petition creditors will be dependent upon negotiations with the Lenders
and any other potential buyers, the administrative costs of the bankruptcy
process, and operations of the Company through the date of the sale.
During the period in which the Company is operating under the supervision
of the Court, the Company has no plans to make principal payments under the
terms of Sheldahl's debt agreements. However, the Company's operating
subsidiary, IFT, is not part of the Chapter 11 filing and IFT is in payment
default under a note payable to IBM in the amount of $5.4 million and other
obligations and there is no assurance that IBM and other holders of IFT debt
obligations will refrain from taking action to enforce payment. In addition, the
Company expects to make only those capital expenditures that are necessary to
maintain its assets in the present condition.
Cash Flows. Net cash generated by operating activities for the fiscal
quarter ended March 29, 2002 was approximately $0.8 million compared to
approximately $(15.5) million used for such activities in the same period in the
prior year. During the three months ended March 29, 2002 operating funds of
approximately $3.2 million were used by the net loss prior to
depreciation/amortization and accretion of warrants. Operating funds were also
used primarily by increases in prepaid expenses, a decrease in the restructuring
reserve and decreases in other liabilities of approximately $0.5 million while
operating funds were provided by decreases in inventories and increases in
accounts payable and accrued salaries in the amount of approximately $4.5
million.
Investments by the Company were approximately $0.05 million.
Substantially all of these investments were in the form of capital expenditures.
Cash was provided by financing activities in the amount of approximately
$0.4 million. This is substantially the result of additional short term
borrowings based on current assets which was partially offset by principal
payments on the Company's term debt agreements.
Liquidity and Capital Resources. Net working capital deficit was
approximately $(40.7) million at March 29, 2002 up from approximately $(37.2)
million at December 28, 2001. The increase in the working capital deficit of
$3.5 million is primarily the result of an increase in current liabilities of
approximately $4.0 million offset by an increase in current assets of
approximately $0.5 million. The increase in current liabilities is primarily due
to an increase in accounts payable and accrued compensation while the increase
in current assets is primarily due to an increase in prepaid expenses and
accounts receivable. Prepaid expenses increased primarily due to deposits
required by the Company's vendors for cash in advance of shipping product to the
Company. Accrued compensation increased primarily due to an accrual for
severance payments related to the scheduled closure of the Endicott, NY
facility.
During the first fiscal quarter ended March 29, 2002 the Company was
out of compliance with certain terms of the Credit and Security Agreement with
its primary financial institution, however, no event of default was declared.
And although no default was declared under the Company's note payable to IBM
during the first fiscal quarter, the Company continued to withhold payment under
this note payable. In addition, the Company was in non-payment status under two
substantial master lease agreements. In April 2002 one of these two lessors,
filed a lawsuit to collect payment. Due to the Company's Chapter 11 filing an
automatic stay is in effect with regard to this lawsuit.
Subsequent Events. On May 2, 2002, subsequent to the Company's Chapter
11 filing, the Company
10
was notified by the NASD that the Company's common stock securities would be
delisted from The Nasdaq Stock Market at the opening of business on May 10, 2002
due to the Chapter 11 filing. The Company has taken no action with respect to
this notice.
Effective May 17, 2002 Arthur Andersen LLP terminated its relationship
as independent public accountants of Sheldahl, Inc. The Company originally
intended to obtain the Bankruptcy Court's approval of payments to engage Arthur
Andersen for additional post-petition services, however, the current status of
the Minneapolis office of Arthur Andersen is such that the Company cannot expect
continuity of professional staff from this office. and so elected not to seek
the Court's approval to engage Arthur Andersen. As a result, the Company has
accepted termination of Arthur Andersen and is seeking another firm to replace
Arthur Andersen LLP.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 141, business combinations initiated after June 30, 2001
must be accounted for using the purchase method of accounting. Under SFAS No.
142, amortization of goodwill and indefinite-lived assets will cease, and the
carrying value of these assets will instead be evaluated for impairment using a
fair-value-based test, applied at least annually. The Company will adopt SFAS
No. 142 in fiscal 2002. Management believes that the adoption of SFAS No.'s 141
and 142 will not have an impact on the Company's financial position or results
of operations, because at the beginning of the fiscal 2002, the Company has no
intangible assets or goodwill.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The Company will adopt the SFAS No.
143 on January 1, 2003. The Company does not expect the adoption of SFAS No. 143
will have a significant impact on its financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes previous
guidance for financial accounting and reporting for the impairment or disposal
of long-lived assets and for segments of a business to be disposed of. The
Company will adopt the SFAS No. 144 standard on January 1, 2002. SFAS No. 144 is
not expected to have a significant impact on its financial position or results
of operations.
The Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," December 30, 2000. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains or
losses to offset related results on the hedged item in the income statement and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The adoption of
SFAS No. 133 did not have a material impact on the Company's results of
operations or financial position.
Cautionary Statement
Statements included in this management's discussion and analysis of
financial and results of operations condition, in the letter to shareholders,
elsewhere in this Form 10-Q, in the Company's annual report, and in future
filings by the Company with the Securities and Exchange Commission, in the
Company's press releases, and oral statements made with the approval of an
authorized executive officer that are not historical, or current facts are
"forward-looking statements" made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Certain risks and
uncertainties could cause actual results to differ materially from historical
earnings and those presently anticipated or projected. The Company wishes to
caution readers not to place undue reliance on any such forward-looking
statements, which speak only as of
11
the date made. The following important factors, among others, in some cases have
affected and in the future could affect the Company's actual financial
performance and cause it to differ materially from that expressed in any
forward-looking statement: (i) the Company's ability to generate value for its
creditors through the bankruptcy process is dependent upon completing a sale of
Sheldahl's assets to the Lenders or any other buyer on terms acceptable to the
Court and subject to review by creditors' committees; (ii) Certain customers and
suppliers may be reluctant to deal with a company in reorganization under
Chapter 11 and the Company's operations may suffer as a result; (iii) a
continued general downturn in the automotive market, the Company's principal
market, could have a material adverse effect on the demand for the electronic
components supplied by the Company to its customers; (iv) as a
debtor-in-possession under the supervision of the Court, the Company may not
engage in transactions outside the ordinary course of business without the
approval of the Court, after notice and an opportunity for a hearing, which
limit's management's flexibility in the operation of the Company's business; and
(v) the extremely competitive conditions that currently exist in the automotive
and data communications markets are expected to continue, including development
of new technologies, the introduction of new products, and the reduction of
prices. The foregoing list should not be construed as exhaustive and the Company
disclaims any obligation subsequently to revise any forward-looking statements
to reflect the events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's Credit and Security Agreement, carries interest rate
risk. Amounts borrowed under this Agreement are subject to interest charges at a
rate equal to the lender's prime rate plus six percent, which as of March 15,
2002 was 10.75%. Should the lenders base rate change, the Company's interest
expense will increase or decrease accordingly. As of March 29, 2002, the Company
had borrowed approximately $16.3 million subject to interest rate risk. On this
amount, a 1% increase in the interest rate would cost the Company $163,000 in
additional gross interest cost on an annual basis.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On December 28, 2001, the Company issued 769,232 shares of its Common
Stock in respect of a dividend owed to holders of its Series G
Convertible Preferred Stock. On February 1, 2002, the Company issued
16,880 shares of its Common Stock in respect of a dividend owed to
holders of its Series F Convertible Preferred Stock. On February 26,
2002, the Company issued 66,142 shares of its Common Stock in respect
of a dividend owed to holders of its Series E Convertible Preferred
Stock. As a result of the Series G dividend, the conversion price of
the Company's Series D, E and F Convertible Preferred Stock and the
exercise price of the outstanding E and F warrants have been adjusted.
As a result of the Series F dividend, the conversion price of the
Company's Series D and E Convertible Preferred Stock and the exercise
price of the outstanding E and F warrants have been adjusted. As a
result of the Series E dividend, the conversion price of the Company's
Series D Convertible Preferred Stock and the exercise price of the
outstanding E warrants have been adjusted.
Item 3. Default Upon Senior Securities
The Company failed to meet all the financial covenants, particularly
the level of pre-tax income (loss) for the months of February and March
2002 under the Credit and Security Agreement with the Company's senior
credit facility ("Credit Agreement"). This constituted an event of
default under the terms of the Credit Agreement. The lenders to this
Credit Agreement did not issue a default notice nor did it take any
actions allowed under the terms of the Credit Agreement as a result of
this default.
Item 5. Other Information. Changes in Registrant's Certifying Accountant
(a) Effective May 17, 2002 Arthur Andersen LLP ("Andersen") terminated
its engagement as Sheldahl, Inc.'s independent public accountants. As
of the date of this filing the Company has not yet engaged a
replacement firm to serve as its independent public accountants for the
fiscal year 2002.
Andersen's reports on the Company's consolidated financial statements
for each of the years ended December 28, 2001 and December 29 2000 were
qualified with respect to the Company's ability to continue as a going
concern. Andersen's reports were not modified as to audit scope or
accounting principles.
During the years ended December 28, 2001and December 29, 2000 and
through May 17, 2002, there were no disagreements with Andersen on any
matter of accounting principle or practice, financial statement
disclosure, or auditing scope or procedure which, if not resolved to
Andersen's satisfaction, would have caused them to make reference to
the subject matter in connection with their report on the Company's
consolidated financial statements for such years; and there were no
reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.
The Company provided Andersen with a copy of the foregoing disclosures.
Attached as Exhibit 16 is a copy of Andersen's letter, dated May 20,
2002, stating its agreement with such statements.
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Item 6. Exhibits and Reports on Form 8-K
A) Exhibits
Exhibit 16: Letter from Arthur Andersen LLP to the Filed with
Securities and Exchange Commission this document dated May 20,
2002.
B) Reports on Form 8-K
Current Report on Form 8-K filed February 27, 2002, reporting
items 2, 5 and 7.
Current Report on Form 8-K filed April 30, 2002, reporting
items 3 and 7.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SHELDAHL, INC.
(Registrant)
Dated May 22, 2002 By /s/ Benoit Pouliquen
------------------ ----------------------------------
President and
Chief Executive Officer
Dated May 22, 2002 By /s/ Peter Duff
------------------ ----------------------------------
Vice President - Finance
15
Sheldahl, Inc. and Subsidiaries
Schedule II: Valuation and Qualifying Accounts
Allowance for Doubtful Accounts:
- -------------------------------
The transactions in the allowance for doubtful accounts for the periods ending
March 29, 2002 and December 28, 2001 were as follows:
March 29, 2002 December 28, 2001
------------- -----------------
Balance, beginning of period $ 1,118 $ 1,623
Write-offs (8) (530)
Provision 1 484
Acquired in Merger - (459)
--------- ---------
Balance, end of period $ 1,111 $ 1,118
========= =========
Facility Consolidation Cost Reserves:
- ------------------------------------
The transactions in the restructuring reserves accounts for the periods ending
March 29, 2002 and December 28, 2001 were as follows:
March 29, 2002 December 28, 2001
-------------- -----------------
Balance, beginning of period $ 990 $ 1,855
Reserves established in connection
with Merger 31 683
Reserve utilized during the period (418) (1,548)
--------- ---------
Balance, end of period $ 603 $ 990
========= =========
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