Subordinated Notes and Warrant Purchase Agreement between Sheldahl, Inc. and Purchasers (August 13, 2001)

Summary

This agreement, dated August 13, 2001, is between Sheldahl, Inc. and the purchasers listed in the agreement, including Morgenthaler Venture Partners V, L.P. and Molex Incorporated. Under the agreement, the purchasers will buy $3,000,000 in 12% Senior Subordinated Notes from Sheldahl, Inc., and in return, will receive warrants to purchase a total of 702,000 shares of the company's common stock. The agreement outlines the terms of the notes, interest payments, redemption rights, and the process for issuing the warrants. The notes mature five years from the closing date.

EX-4.1 3 c64645ex4-1.txt SUBORDINATED NOTES AND WARRANT PURCHASE AGREEMENT 1 EXHIBIT 4.1 SUBORDINATED NOTES AND WARRANT PURCHASE AGREEMENT This Subordinated Notes and Warrant Purchase Agreement (this "Agreement"), dated as of August 13, 2001, among Sheldahl, Inc., a Minnesota corporation (the "Company) and, the purchasers listed on Schedule I attached hereto (sometimes referred to herein as a "Purchaser" and collectively as the "Purchasers"). Preliminary statement Subject to the terms and conditions set forth in this Agreement, the Company desires to issue and sell to the Purchasers and the Purchasers severally desire to purchase from the Company 12% Senior Subordinated Notes in an aggregate principal amount of $3,000,000 (the "Notes"). In consideration for the agreement of the Purchasers to purchase the Notes, the Company desires to issue to the Purchasers and the Purchasers desire to acquire from the Company warrants (the "Warrants") to purchase in the aggregate 702,000 shares of common stock, par value $.25 per share, of the Company, all subject to the terms and conditions of this Agreement. Accordingly, the Company and the Purchasers agree as follows: ARTICLE I ISSUANCE OF THE NOTES AND THE WARRANTS 1.1 Authorization of Issuance. (a) $3,000,000, such Notes to be substantially in the form of Exhibit A attached hereto. (b) The Company has authorized the issuance of Warrants to purchase an aggregate of 702,000 shares of Common Stock, such Warrants to be substantially in the form of Exhibit B attached hereto. (c) Each Purchaser shall be entitled to receive Warrants at the rate of 234,000 Warrants per $1,000,000 principal amount of Notes actually purchased. (d) The Notes and the Warrants are sometimes collectively referred to herein as the "Securities." As used herein, the term "Warrant" refers to a warrant to purchase one share of Common Stock (or such other number of shares of Common Stock as a result of any adjustments made pursuant to the anti-dilution provisions of the Warrants) and a designated number of Warrants refers to warrants to purchase the same number of shares of Common Stock (or such other number of shares of Common Stock as a result of any adjustments made pursuant to the anti-dilution provisions of the Warrants). 2 1.2 Purchase Commitments. (a) Morgenthaler Venture Partners V, L.P. ("Morgenthaler") agrees to purchase in accordance with and subject to the terms and conditions hereof Notes in the aggregate principal amount of $1,500,000 and a corresponding number of Warrants determined in accordance with Section 1.1(c) hereof. (b) Molex Incorporated ("Molex") agrees to purchase in accordance with and subject to the terms and conditions hereof Notes in the aggregate principal amount of $1,500,000 and a corresponding number of Warrants determined in accordance with Section 1.1(c) hereof. 1.3 The Closing. (a) The closing of the purchase and sale of the Notes and Warrants (the "Closing") shall take place at the offices of Lindquist & Vennum P.L.L.P., 4200 IDS Center, 80 South 8th Street, Minneapolis, Minnesota. The date of the Closing is hereinafter referred to as the "Closing Date." (b) At the Closing: (1) the Company shall deliver or caused to be delivered to each Purchaser (A) Notes in the principal amount set forth below the name of such Purchaser on Schedule I attached hereto, dated the Closing Date and duly executed by the Company; (B) the number of Warrants set forth below the name of such purchaser on Schedule I attached hereto, dated the Closing Date and duly executed by the Company, and (C) all other documents, instruments and writings required to have been delivered at or prior to the Closing by the Company to the Purchasers pursuant to this Agreement, and (2) each Purchaser shall deliver to the Company the purchase price set forth below the name of such Purchaser on Schedule I attached hereto by wire transfer of same day funds to an account designated by the Company in writing two (2) business days before the Closing. (c) The Purchasers' obligation to purchase Securities hereunder shall be several, not joint, but it shall be a condition to each Purchasers' obligation to purchase Securities hereunder that all Securities to be purchased hereunder are purchased simultaneously. ARTICLE II PROVISIONS OF THE NOTES 2.1 Interest Payments. (a) The Company shall pay interest on the outstanding principal balance of the Notes at a rate equal to 12% per annum payable quarterly in arrears on the thirteenth (13th) day of each February, May, August and November, and computed on the basis of a 360-day year of twelve months. -2- 3 (b) In the event the interest on the Notes is payable at a rate that exceeds the maximum rate of interest permissible under any applicable law (the "Maximum Legal Rate") at any time, the interest on the Notes shall be payable at a rate equal to the Maximum Legal Rate at such time. 2.2 Default Interest. If the Company defaults in the payment of the principal of, premium, if any, or accrued interest on, the Notes, or on any other amount due hereunder, the Company shall, on or upon demand from time to time, pay interest on such overdue amount from the date when due up to and including the date of actual payment (before as well as after judgment) at a rate equal to the lower of 15% per annum or the Maximum Legal Rate. 2.3 Payments. (a) Subject to the provisions for redemption in Section 2.4 hereof and Article VIII hereof, the aggregate principal amount of the Notes, together with all interest accrued thereon, shall be due and payable on the fifth anniversary of the Closing Date or earlier in accordance with the terms hereof if permitted pursuant to the terms of the Credit Agreement and the Subordination Agreement as defined herein (such date being referred to herein as the "Maturity Date"). As used herein, the term "Credit Agreement" shall mean the Credit and Security Agreement, dated as of June 19, 1998, by and among the Company, the lenders party thereto, and Wells Fargo Bank, National Association f/k/a Norwest Bank Minnesota, National Association, as amended or restated from time to time (with such lenders under the Credit Agreement being referred to as "Senior Lenders"). (b) The Company shall make payment of principal of and premium, if any, or accrued interest on the Notes, or any other amount due to the Purchasers under this Agreement, as provided herein or in the Notes. All payments hereunder shall be in United States dollars by wire transfer of same day funds. If any payment hereunder shall be due on a day that is not a business day, the date for payment shall be extended to the next succeeding business day, and in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. If at any time any payment made by the Company hereunder is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy or reorganization of the Company or otherwise, such payment obligations of the Company hereunder shall be reinstated as though such payment had been due but not made when due. 2.4 Optional Redemption of the Notes. Upon notice given as provided in Section 2.6 below, the Company, at its option, but subject to the terms of the Credit Agreement and the Subordination Agreement, may redeem the Notes as a whole, or from time to time in part (in a minimum amount of $100,000 and otherwise in multiples of $100,000), in each case at the principal amount so to be prepaid, together with interest accrued thereon to the date fixed for such prepayment. -3- 4 2.5 Mandatory Redemption. (a) Except as otherwise provided in Section 2.7 hereof, concurrently with the receipt by the Company or any of its subsidiaries of the cash proceeds from (i) the issuance of any shares, interests, participations or other equivalents of corporate stock or membership interests ("Capital Stock") of any of the Company's subsidiaries or options or warrants to acquire Capital Stock of any of the Company's subsidiaries or (ii) any sale or other disposition of assets by the Company or any of its subsidiaries (excluding granting any Permitted Liens as defined in Section 7.2 hereof), the Company shall apply such cash proceeds (net of expenses payable by the Company or any of its subsidiaries to any person other than an affiliate of the Company in connection with the issuance thereof and net of accrued interest as a result of such redemption) to the redemption of Notes, together with interest accrued thereon to the date of such prepayment; provided, however, that the Company shall first apply such cash proceeds to repay the Company's obligations, in the following order of priority, under: (w) the Credit Agreement, (x) May Debt Agreement (y) the Notes as provided in this Section 2.5(a) and (z) the December Debt Agreement; provided, further, that the Company shall have no obligation to apply to such redemption of Notes hereunder or under the May Debt Agreement or December Debt Agreement the first $1,000,000 of net cash proceeds received by the Company or any subsidiary from all such issuances of Capital Stock subsequent to the Closing Date. (b) "December Debt Agreement" shall mean the indebtedness and other obligations of the Company pursuant to that certain Subordinated Notes and Warrant Purchase Agreement dated as of November 10, 2000 by and among the Company and the Purchasers party thereto, as amended by the Amended and Restated Subordinated Note and Warrant Purchase Agreement dated December 29, 2000, as amended from time to time and related documents. "May Debt Agreement" shall mean the indebtedness and other obligations of the Company pursuant to that certain Subordinated Secured Notes Purchase Agreement dated as of May 23, 2001 by and among the Company and the Purchasers party thereto and related documents. (c) Notwithstanding the foregoing, if the Company or any of its subsidiaries sells or disposes of equipment in the ordinary course of business, the Company shall not be obligated to use such cash proceeds to redeem the Notes pursuant to this Section 2.5. (d) On September 1, 2001, September 30, 2001, November 1, 2001 and January 2, 2002, or at such time as the Company refinances the indebtedness owed to a Senior Lender, and subject to any subordination agreement in force with any Senior Lender of the Company, any Purchaser may require the Company to redeem all or any portion of such Purchaser's Note at face value plus accrued interest, provided however that (i) the Purchaser may only require redemption with respect to a portion of the Note obtained by multiplying the face vale of the Note by the percentage of total Warrants issued to such Purchaser which have not been exercised (ii) the Purchaser must tender to the Company for cancellation a number of Warrants equal to (w) all of Purchaser's unexercised Warrants in the case of a redemption required on or before September 1, 2001, (x) 75% of Purchaser's unexercised Warrants in the case of a redemption required on or before September 30, 2001, (y) 50% of Purchaser's unexercised Warrants in the case of a redemption required on or before November 1, 2001, (z) 25% of Purchaser's unexercised Warrants in the case of a redemption required on or before January 2, 2002. -4- 5 2.6 Notice of Redemption. The Company shall give the holder of each Note irrevocable written notice of any redemption pursuant to Section 2.4 hereof not less than five (5) days nor more than twenty (20) days prior to the date specified for such redemption, specifying such date and the principal amount of the Notes held by such holder to be redeemed on such date and stating that such redemption is to be made pursuant to Section 2.4 hereof. Notice of redemption having been given as aforesaid, the principal amount of the Notes specified in such notice, together with accrued and unpaid interest thereon through the redemption date with respect thereto, shall become due and payable (i) in the case of an event of redemption under Section 2.5(a)(ii), within ninety (90) days of the redemption date (ii) in all other cases, on such redemption date. 2.7 Change in Control. (a) In the event of any Change in Control (as hereinafter defined), each holder of Note or Notes shall have the right, at its option, subject to the terms of the Subordination Agreement to require the Company to purchase all or any portion of such holder's Note(s) (at a purchase price equal to the principal amount of Note(s) to be so purchased plus accrued interest thereon) on the date (the "Change in Control Payment Date") which is twenty (20) business days after the date the Change in Control Notice (as hereinafter defined) is required to be mailed. (b) For purposes of this Agreement, the term "Change in Control" means the occurrence of any of the following: (i) the sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole, to any "person" or "group" (as such terms are used in Section 13(d)(3) and Section 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than Morgenthaler and its affiliates, Ampersand IV Limited Partnership and its affiliates, Ampersand IV Companion Fund Limited Partnership and its affiliates or Molex and its affiliates (collectively, the "Permitted Holders"); (ii) the adoption of a plan relating to the liquidation or dissolution of the Company; (iii) any person or group (as defined above), other than the Permitted Holders, becomes the "beneficial owner" (as such term is used in Section 13(d)(3) of the Exchange Act) of 35% or more of the voting power of the voting stock of the Company; or (iv) during any consecutive two-year period, individuals, who at the beginning of such period constituted the Board of Directors (together with any new directors whose election by the Board of Directors or whose nomination for election by the stockholders of the Company was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors then in office. For so long as the Permitted Holders hold a majority of the outstanding shares of the Company's Series G Convertible Preferred Stock (the "Series G Stock"), those directors elected by the holders of the Series G Stock shall not be considered in applying clause (iv) above. In addition, any change in the identity of a person occupying a board seat resulting from the loss by the holders of the Series G Stock of the right to elect one or more directors shall not be considered in applying clause (iv) above. -5- 6 (c) The Company shall send all holders of the Notes, within five (5) business days after the occurrence of any Change in Control, a notice of the occurrence of such Change in Control (the "Change in Control Notice") and each holder of Notes who wishes to have its Notes repurchased pursuant to this Section 2.7 shall so indicate by written notice delivered to the Company within ten (10) business days of receipt of the Change in Control Notice. Each Change in Control Notice shall state: (1) the Change in Control Payment Date; (2) the date by which the right to have Notes purchased must be exercised; (3) that such right is conditioned on receipt of notice from the holders; (4) the purchase price, if the right to have Notes purchased is exercised; (5) a description of the procedure which the holders of Notes must follow to exercise the right to have Notes purchased; (6) that the purchase is being made pursuant to this Section 2.7; (7) that any Note not tendered will continue to accrue interest if interest is then accruing; and (8) that, unless the Company defaults in making payment therefor, any Note purchased shall cease to accrue interest after the Change in Control Payment Date. (d) No failure of the Company to give the Change in Control Notice shall limit any holder's right to exercise a right to have Notes purchased. (e) If any indebtedness is outstanding under the Credit Agreement, or any amounts are owing thereunder or in respect thereof, at the time of the occurrence of a Change in Control, prior to the mailing of the Change in Control Notice to holders of the Notes, but in any event within ten (10) business days after the date the Change in Control Notice is required to be mailed, the Company shall (i) repay in full all obligations and terminate all commitments under or in respect of such indebtedness under the Credit Agreement or (ii) obtain the requisite consents under the Credit Agreement to permit the repurchase of the Notes as described above. The Company must first comply with the covenant described in the preceding sentence before it shall be required to purchase Notes pursuant to this Section 2.7 in the event of a Change in Control; provided, however, that the Company's failure to timely comply with the covenant described in the preceding sentence shall constitute an Event of Default as described in Section 8.1(c) hereof. -6- 7 2.8 Redemptions Pro Rata. Upon any partial redemption of the Notes pursuant to Section 2.4 or 2.5 hereof, the principal amount so redeemed shall be allocated to all Notes at the time outstanding in proportion to the respective outstanding principal amounts thereof. 2.9 Retirement of the Notes. The Company shall not redeem or otherwise retire in whole or in part prior to the Maturity Date (other than by redemption pursuant to Section 2.4, 2.5 or 2.7 hereof or upon acceleration of such Maturity Date pursuant to Section 8.1 hereof), or purchase or otherwise acquire, directly or indirectly, Notes held by any holder unless the Company shall have offered to redeem or otherwise retire, purchase or acquire, as the case may be, the same proportion of the aggregate principal amount of Subordinated Notes held by each holder of Subordinated Notes at the time outstanding upon the same terms and conditions. Any Subordinated Notes so redeemed or otherwise retired, purchased or acquired by the Company shall not be deemed to be outstanding for any purpose under this Agreement. 2.10 Subordination. The Purchasers agree to subordinate their interest in and to the unpaid principal amount of and interest on the Notes to the interest of the Senior Lenders pursuant to the terms of a Subordination Agreement among the Purchasers, the Senior Lenders and the Company substantially in the form of Exhibit C attached hereto (the "Subordination Agreement"); provided however, that the holders of the Notes will not be obligated to subordinate their interests to more than an aggregate of $45,000,000 of Indebtedness owed to such Senior Lenders. To the extent that any provisions in this Agreement or the Notes conflict with the provisions of such Subordination Agreement, the provisions of such Subordination Agreement shall govern. If any Purchaser has not requested redemption pursuant to Section 2.5(d) and if requested by the Company, such Purchaser must subordinate its interest in and to the unpaid principal amount of and interest on the Notes to the interest of any of senior lenders of the Company that may refinance the Credit Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES 3.1 Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchasers as follows: (a) Organization. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Minnesota. Each of the subsidiaries of the Company is a corporation or limited liability company duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization. Each of the Company and its subsidiaries has the requisite corporate power and authority to own, operate or lease its properties and to carry on its business as it is now being conducted, and is duly qualified or licensed to do business, and is in good standing, in each jurisdiction in which the nature of its business or the properties owned, operated or leased by it makes such qualification, licensing or good standing necessary, except where the failure to have such power or authority, -7- 8 or the failure to be so qualified, licensed or in good standing, would not have a Material Adverse Effect (as defined in Section 5.1(c) hereof) on the Company. The term "subsidiary" or "subsidiaries" means, with respect to the Company, any person, corporation, partnership, joint venture or other legal entity of which the Company (either alone or through or together with any other subsidiary), owns, directly or indirectly, stock or other equity interests the holders of which are generally entitled to more than 50% of the vote for the election of the Board of Directors or other governing body of such corporation or other legal entity. (b) Authorization. The Company has the requisite corporate power and authority to enter into and perform its obligations hereunder and under the other Loan Documents (as hereinafter defined). The execution, delivery and performance by the Company of each Loan Document has been duly authorized by all requisite corporate action by the Company, and each of the Loan Documents constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting creditors' rights generally and to general principles of equity. As used herein, the term "Loan Documents" means, collectively, this Agreement, each of the Notes, and each of the Warrants and each of the other instruments, documents or certificates delivered in connection herewith. (c) Conflicts. The execution and delivery of each of the Loan Documents by the Company, the consummation of the transactions contemplated thereby and the compliance with the provisions thereof by the Company and the issuance, sale and delivery of the Notes and Warrants by the Company, will not: (1) violate any provision of law, statute, rule or regulation, or any ruling, writ, injunction, order, judgment or decree of any court, administrative agency or other governmental body applicable to the Company; or (2) conflict with or result in any breach of any of the terms, conditions or provisions of, or constitute (with due notice or lapse of time, or both) a default (or give rise to any right of termination, cancellation or acceleration) under, the certificate of incorporation or by-laws of the Company, or under any note, indenture, mortgage, lease, purchase or sales order or other material contract, agreement or instrument to which the Company is a party or by which it or any of its property is bound or affected; or (3) result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company. (d) Securities Laws Compliance. The Company has not offered the Securities or any other security the offering of which would be integrated (as that term is used in Rule 502 of Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act")) with the offer or sale of the Securities for sale to, or solicited any offers to buy any of the foregoing from, or otherwise approached or negotiated in respect thereof, with any Person other than a limited number of institutional or other sophisticated investors deemed to be "accredited investors" as such term is defined in rule 501(a) of Regulation D adopted under the Securities Act. -8- 9 (e) No Consent or Approval Required. Except as provided herein and except for the filing of any notice subsequent to the date hereof that may be required under applicable federal or state securities laws (which, if required, shall be filed on a timely basis as may be so required), no permit, consent, approval or authorization of, or declaration to, or filing with, any person (governmental or private) is required for the valid authorization, execution, delivery and performance by the Company of this Agreement or for the valid authorization, issuance, sale and delivery by the Company of the Notes or the Warrants, or the carrying out by the Company of the transactions contemplated hereby which has not been obtained. (f) No Default or Violation. Neither the Company nor any subsidiary (i) is in default under or in violation of any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound, other than the Credit Agreement; or (ii) is in violation of any order of any court, arbitrator or governmental body, except for purposes of clauses (i) or (ii) as could not reasonably be expected to, in any such case (individually or in the aggregate) have or result in a Material Adverse Effect. (g) Compliance with Laws. The Company and its respective subsidiaries are in compliance, in all material respects, with any applicable law, rule or regulation of any United States federal, state, local, or foreign government or agency thereof which affects the business, properties or assets of the Company and its respective subsidiaries, the non-compliance with which would have a Material Adverse Effect on the Company and no notice, charge, claim, action or assertion has been received by the Company or any of its subsidiaries or has been filed, commenced or, to the Company's knowledge, threatened against the Company or any of its subsidiaries alleging any such violation. (h) Use of Proceeds; Margin Stock. None of the proceeds of the sale of the Securities will be used for the purpose of purchasing or carrying any "margin stock" as defined in Regulations U, T, or X of the Board of Governors of the Federal Reserve System, or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase or carry "margin stock," or for any other purpose which might constitute transactions contemplated by this Agreement a "purpose credit" within the meaning of Regulations U, T or X. The Company is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stocks. The Company has not taken and will not take any action which might cause any violation of Regulations U, T or X or any other regulations of the Board of Governors of the Federal Reserve System or any violation of Section 7 of the Exchange Act, or any rule or regulation promulgated thereunder, in each case as now in effect or as the same may hereinafter be in effect. (i) Disclosure. The representations, warranties and other statements of the Company contained in this Agreement and the other certificates furnished to the Purchasers by the Company pursuant hereto, taken as a whole, do not contain any untrue statement of a material fact or, to the best of the knowledge of the Company, omit to state a material fact necessary in order to make the statements contained herein and therein, in light of the circumstances made, not materially misleading as of the date hereof. -9- 10 (j) Knowledge. Whenever a representation or warranty made by the Company refers to the best of the knowledge of the Company or its subsidiaries, such knowledge shall be deemed to consist only of the actual knowledge of the executive officers of the Company or its subsidiaries. 3.2 Representations, Warranties and Agreements of the Purchasers. Each Purchaser severally and not jointly, hereby represents and warrants to the Company as follows: (a) Authorization. The execution, delivery and performance by Purchaser of this Agreement has been duly authorized by all requisite entity action by Purchaser, and this Agreement constitutes a valid and binding obligation of Purchaser, enforceable in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting creditors' rights generally and to general principles of equity. (b) Conflicts. The consummation of the transactions contemplated hereby and compliance with the provisions hereof by Purchaser, will not: (1) violate any provision of law, statute, rule or regulation, or any ruling, writ, injunction, order, judgment or decree of any court, administrative agency or other governmental body applicable to Purchaser; or (2) conflict with or result in any breach of any of the terms or provisions of, or constitute a default (or give rise to any right of termination, cancellation or acceleration) under, the organizational documents of Purchaser or under any note, indenture, agreement or instrument to which Purchaser is a party or by which it or any of its properties is bound or affected. (c) Purchase for Investment. Purchaser is acquiring the Securities for its own account, for investment and not with a view to the distribution thereof within the meaning of the Securities Act. (d) No Registration. Purchaser understands that the Securities have not been, nor will it or they be, registered under the Securities Act, by reason of its or their issuance by the Company in a transaction exempt from the registration requirements of the Securities Act; and that the Notes must be held by Purchaser indefinitely unless a subsequent disposition thereof is registered under the Securities Act or is exempt from registration. (e) Restrictions on Resale. Purchaser understands that the exemption from registration afforded by Rule 144 (the provisions of which are known to Purchaser) promulgated under the Securities Act depends on the satisfaction of various conditions, and that, if and when applicable, Rule 144 may only afford the basis for sales in limited amounts. (f) Accredited Investor. -10- 11 (1) Purchaser is an "accredited investor" as defined in Rule 501(a) of Regulation D promulgated under the Securities Act and, by reason of its business and financial experience and the business and financial experience of those persons retained by it to advise it with respect to its investment in the Securities, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment, is able to bear the economic risk of such investment and, at the present time, is able to afford a complete loss of such investment; and (2) Purchaser is familiar with the business of the Company and has had the opportunity to ask questions of the officers and directors of the Company and to obtain such information about the financial condition of the Company as it has requested. (g) Reliance. Each Purchaser understands and acknowledges that (i) the Securities are being offered and sold to the Purchaser without registration under the Securities Act in a private placement that is exempt from the registration provisions of the Securities Act under Section 4(2) of the Securities Act or Regulation D promulgated thereunder; and (ii) the availability of such exemption depends in part on, and the Company will rely upon the accuracy and truthfulness of, the foregoing representations and such Purchaser hereby consents to such reliance. (h) No Affiliation. No Purchaser is an "interested shareholder" of the Company or an "affiliate" or "associate" thereof, as such terms are defined in Section 302A.011 of the MBCA resulting from any share purchase, contract, arrangement or understanding, other than this Agreement and the other Loan Documents, the December Debt Agreement, the Merger Agreement (as defined in the December Debt Agreement), the May Debt Agreement or any acquisition of shares approved by a committee of the Board of Directors of the Company as required in Section 302A.673, subdivision 1(d) of the MBCA. ARTICLE IV OTHER AGREEMENTS OF THE PARTIES 4.1 Transfer Restrictions. (a) If any Purchaser should decide to dispose of any of the Securities held by it, such Purchaser understands and agrees that it may do so only pursuant to an effective registration statement under the Securities Act or pursuant to an available exemption from the registration requirements of the Securities Act. In connection with any transfer of any Securities other than pursuant to an effective registration statement or to the Company or to an affiliate of such Purchaser or pursuant to Rule 144 under the Securities Act ("Rule 144"), the Company may require the transferor thereof to provide to the Company a written opinion of counsel experienced in the area of United States securities laws selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration of such transferred securities under the Securities Act. -11- 12 (b) Each Purchaser agrees to the imprinting, so long as is required, of the following legends on the Notes: THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS NOTE IS SUBJECT TO THE TERMS OF A SUBORDINATION AGREEMENT IN FAVOR OF WELLS FARGO BANK MINNESOTA, NATIONAL ASSOCIATION, AS AGENT FOR CERTAIN SENIOR LENDERS, DATED AS OF AUGUST __, 2001. (c) Each Purchaser agrees to the imprinting, so long as is required, of the following legends on the Warrants: THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. 4.2 Use of Proceeds. The Company shall use the net proceeds from the issuance of the Securities for working capital and other general corporate purposes, but not for the repayment of indebtedness to any Senior Lender. 4.3 Commercially Reasonable Efforts. Subject to the terms and conditions herein provided and to applicable legal requirements, each of the parties hereto agrees to use its commercially reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done, and assist and cooperate with the other parties hereto in doing, as promptly as practicable, all things necessary, proper or advisable under applicable laws and regulations to ensure that the conditions set forth in Article V hereof are satisfied. -12- 13 4.4 Consents. Each of the parties will use its commercially reasonable efforts to obtain as promptly as practicable all consents and approvals of any governmental authority or other person necessary in connection with the execution, delivery and performance of this Agreement and the Notes. 4.5 Waivers. Notwithstanding any terms to the contrary set forth in this Agreement, the December Debt Agreement or the May Debt Agreement, the Purchasers hereby consent to the transactions contemplated by this Agreement and consent and agree that neither this Agreement, nor any of the transactions contemplated herein, will constitute a default of or entitle any of the Purchasers to accelerate any payment under the December Debt Agreement or the May Debt Agreement or any document or instrument entered into in connection herewith. Molex further consents and agrees, with respect to issuances of Securities under this Agreement, to waive any preemptive rights or any right to notice of preemptive rights it may have pursuant to that certain Amended and Restated Agreement Relating to Sheldahl dated as of November 10, 2000 by and between the Company and Molex. ARTICLE V CONDITIONS 5.1 Conditions Precedent to the Obligation of the Purchasers to Purchase the Securities on the Closing Date. The obligation of each Purchaser hereunder to acquire and pay for the Securities is subject to the satisfaction or waiver by such Purchaser, at or before the Closing, of each of the following conditions: (a) Accuracy of the Company's Representations and Warranties. The representations and warranties of the Company contained herein shall be true and correct, in all material respects, as of the date hereof. (b) Performance by the Company. The Company shall have performed, satisfied and complied with in all material respects all covenants and agreements required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date. (c) No Material Adverse Effect. There shall not have occurred any change, circumstance or event that has had or may reasonably be expected to have (i) a material adverse effect on the business, financial condition, assets, results of operations or prospects of the Company and its subsidiaries, taken as a whole, or (ii) prevent or materially delay the ability of the Company to consummate the transactions contemplated by this Agreement and the other Loan Documents (a "Material Adverse Effect"). (d) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement. -13- 14 (e) Required Approvals. The Company shall have obtained the consent or approval of the Senior Lenders under the Credit Agreement in connection with the execution, delivery and performance of this Agreement and the Notes. (f) Delivery of Notes and Warrants. The Company shall have delivered to such Purchaser or such Purchaser's designee duly executed Notes and Warrants at the Closing to be received by each Purchaser, in the name of such Purchaser or such Purchaser's designee, each in form satisfactory to such Purchaser or such Purchaser's designee. (g) Secretary's Certificate and Other Documents. The Purchasers shall have received from the Company on the Closing Date (i) a copy of the Company's certificate of incorporation, including all amendments thereto, certified by the Secretary of State of its jurisdiction of incorporation and a certificate as to the good standing of the Company in such jurisdiction as of no more than five (5) days prior to the Closing Date, (ii) a certificate of an officer of the Company dated as of the Closing Date certifying to the Purchasers that the Purchasers have received (A) a correct and complete copy of the Company's certificate of incorporation and bylaws as in effect on the Closing Date and at all times subsequent to the date of the resolutions described in the following clause (B), (B) a correct and complete copy of resolutions duly adopted by the Board of Directors of the Company authorizing the execution, delivery and performance of the Loan Documents, the sale of the Notes and Warrants hereunder, and the other transactions contemplated hereby and thereby, as applicable, and (C) as to the incumbency and specimen signature of each officer of the Company who shall execute any Loan Document or any other document delivered in connection therewith; and (iii) such other documents as the Purchasers and their counsel may reasonably request. (h) Officer's Certificate. The Company shall have delivered to the Purchasers on the Closing Date a certificate signed on its behalf by its President, Chief Executive Officer or Chief Financial Officer certifying that the conditions specified in Sections 5.1(a) and (b) hereof have been fulfilled. (i) Subordination Agreement. The Purchasers and the Senior Lenders shall have executed a Subordination Agreement on terms consistent with those contained herein, in the form of Exhibit C attached hereto. 5.2 Conditions Precedent to the Company's Obligations on the Closing Date. The obligations of the Company to consummate the Closing hereunder are subject to the following conditions: (a) Accuracy of the Representations and Warranties of the Purchasers. The representations and warranties of the Purchasers contained herein shall be true and correct in all material respects as of the Closing Date. -14- 15 (b) Performance by the Purchasers. The Purchasers shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Purchasers at or prior to the Closing Date. (c) No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction which prohibits the consummation of any of the transactions contemplated by this Agreement. (d) Payment of Purchase Price. Each Purchaser shall have paid the purchase price set forth below the Purchaser's name on Schedule I attached hereto for the Securities being purchased by such Purchaser at the Closing. ARTICLE VI AFFIRMATIVE COVENANTS The Company hereby covenants and agrees with the Purchasers that, immediately after the Closing Date and for so long as any Note or any monetary obligation under this Agreement remains outstanding, the Company shall comply with the covenants set forth in this Article VI: 6.1 Payment of Principal, Premium, Interest, Fees and Expenses. The Company shall duly and punctually pay the principal of (and premium, if any) and interest on the Notes in accordance with the terms of the Notes, this Agreement and the other Loan Documents and all fees and expenses due under this Agreement when payable. 6.2 Corporate Existence. The Company shall and shall cause its subsidiaries to do or cause to be done all things necessary to preserve, renew and keep in full force and effect its corporate existence and any necessary state or other qualifications (other than any qualifications the absence of which, in the aggregate, would not have a Material Adverse Effect). 6.3 Obligations and Taxes. The Company shall and shall cause its subsidiaries to pay or discharge, or cause to be paid or discharged, before the same shall become delinquent (a) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or in respect of its business or property unless such taxes, assessments or governmental charges are being paid in accordance with the terms of an agreement with the applicable taxing authority, (b) all lawful claims for labor, materials and supplies, (c) all required payments under any Indebtedness and (d) all other obligations; provided however, that, in each case, it shall not be required to pay or discharge or to cause to be paid or discharged any such amount so long as the validity or amount thereof shall be contested in good faith in an appropriate manner and appropriate reserves and accruals have been made with respect thereto. 6.4 Performance under Agreements. The Company shall perform its obligations under this Agreement, each other Loan Document, and each other contract to which it is a party; provided however, that the Company shall not be required to so perform its obligations under -15- 16 any contract (other than this Agreement, any other Loan Document and the December Debt Agreement) to the extent it is reasonably contesting such obligations in good faith and in an appropriate manner and, if required by GAAP, it has made appropriate reserves and accruals with respect thereto. 6.5 Access to Properties and Inspections. The Company shall and shall cause its subsidiaries to maintain financial records in accordance with accounting practices and controls sufficient to allow the Company to prepare the financial statements, certificates and reports required by Section 6.10 hereof; and, upon written notice, at all reasonable times and as often as the Purchasers may reasonably request, permit any authorized representative or agent of any Purchaser to visit and inspect their physical properties and reports and permit any authorized representative or agent of any Purchaser to discuss their affairs, finances and condition with such officers, key employees and independent chartered accountants acting as auditors as the Purchasers shall deem appropriate. Delivery of a copy of this Agreement to the respective independent accountants acting as auditors shall constitute instructions to such accountants to discuss the financial condition of the Company with the Purchasers and their representatives, and to permit the Purchasers and their representatives to inspect, copy and make extracts from all financial statements, analyses, work papers and other documents and information (including electronically stored documents and information) prepared by such accountants with respect to the Company. 6.6 Defense of Claims. The Company shall and shall cause its subsidiaries to diligently defend itself and its properties from and against any lawsuits or claims. 6.7 Notice of Litigation, Claims, Etc. The Company shall promptly upon obtaining notice of the occurrence thereof (but in no event more than ten (10) days after obtaining notice of the occurrence thereof), provide the Purchasers with written notice of any of the following events: (a) the issuance by any governmental authority of any injunction, order or decision involving the Company, any of its subsidiaries or any of their respective properties; (b) the filing or commencement of any action, suit or proceeding against or affecting the Company, any of its subsidiaries or the properties of the Company or its subsidiaries, whether at law or in equity or by or before any court if such event might reasonably be interpreted to have a Material Adverse Effect; (c) the imposition of any lien which is not a Permitted Lien (as defined in Section 7.2 hereof); (d) any claim, demand or action impairing title to any of the properties or assets of the Company or any of its subsidiaries; (e) any other adverse action by or notice from a governmental authority with respect to the Company or any of its respective properties; -16- 17 (f) any default by the Company under any contract of indebtedness in excess of $250,000 other than a lease or conditional sales contract for immaterial amounts; and (g) any development in the business or affairs of the Company which is likely, in the reasonable judgment of the Company, to have a Material Adverse Effect. Each notice shall specify, as applicable, (i) the nature and extent of the subject matter being disclosed, (ii) any rights of any other parties thereto with respect to termination, acceleration or similar provisions and (iii) any corrective action taken or proposed to be taken with respect thereto. 6.8 Proceeds. The Company shall use the net proceeds from the issuance of the Securities for general corporate purposes, including the retirement of existing indebtedness. 6.9 Compliance. The Company shall and shall cause its subsidiaries to comply in all material respects with all applicable laws and maintain all required clearances, consents, permits and approvals of governmental authorities. 6.10 Financial Statements and Reports. The Company shall furnish to the Purchasers: (a) as soon as available but in any event within ninety (90) days after the end of each fiscal year, consolidated balance sheets, income statements and cash flow statements of the Company and its subsidiaries, showing its financial condition as at the end of such fiscal year and the results of its operations for such fiscal year, all the foregoing financial statements (other than any consolidating schedules) to be audited by independent chartered accountants of nationally-recognized standing reasonably acceptable to the Purchasers and prepared in accordance with GAAP. (b) as soon as available but in any event within forty-five (45) days after the end of each fiscal quarter, commencing with the fiscal quarter including the Closing Date, the unaudited consolidated balance sheets, income statements and cash flow statements (along with comparisons to budget), showing the financial condition as at the end of such fiscal quarter, and the results of operations for such fiscal quarter and for the then elapsed portion of the fiscal year, for the Company and its subsidiaries in each case prepared in accordance with GAAP, subject to normal year-end adjustments (none of which alone or in the aggregate would result in a Material Adverse Effect) and the absence of notes thereto; (c) as soon as received, copies of any notice of potential liability or charge or complaint received by the Company or any of its subsidiaries from any governmental authority which could reasonably cause the Company or any of their subsidiaries to incur liabilities in excess of $250,000; (d) concurrently with the statements provided pursuant to clauses (a) and (c) a certificate of the Chief Financial Officer of the Company containing a narrative management discussion and analysis of the financial condition and results of operations of the Company for the periods covered by such statements; -17- 18 (e) promptly upon their becoming available, copies of any statements, reports and other communications, if any, which the Company shall have generally provided to its stockholders, or to the Senior Lenders, or material statements, reports and other communications to particular stockholders or to the Company's directors; (f) promptly upon receipt thereof, copies of all financial and management reports submitted to the Company by their independent auditors in connection with each annual audit of the books of the Company; (g) promptly, from time to time, such other information (in writing if so requested) regarding the assets and properties and operations, business affairs and financial condition of the Company as the Purchasers may reasonably request; and (h) all filings with the Securities and Exchange Commission. Each certificate of the Chief Financial Officer of the Company (and, in the case of year-end financial statements and reports, the independent auditors of the Company) delivered under this Section 6.10 shall certify that the statement or report to which such certificate relates fairly presents in all material respects the financial position and results of operations of the Company and its subsidiaries at the dates thereof and for the periods then ended and has been prepared in accordance with GAAP, in the case of unaudited financial statements, subject to normal year-end audit adjustments (none of which alone or in the aggregate would result in a Material Adverse Effect) and the absence of notes thereto, no Event of Default has occurred and is continuing and to the best of the Chief Financial Officer's knowledge no event or condition has occurred which would have a Material Adverse Effect on the Company. The audit report with respect to the financial statements referred to in clause (a) shall not contain a "going concern" or like qualification or exception or any qualification arising out of the scope of the audit. 6.11 Insurance. The Company shall and shall cause its subsidiaries to maintain insurance on its business and properties to such extent and against such risks, including fire and other risks insured against by extended coverage, and workers' compensation insurance and public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with, the use of any properties owned, occupied or controlled by the Company or any of its subsidiaries, in each case as is customary with companies similarly situated and in the same or similar businesses, and shall provide evidence to the Purchasers of such insurance upon their request. 6.12 Notification of Event of Default. The Company shall immediately notify the Purchasers in writing of (a) the occurrence of any default or any Event of Default hereunder or under the Credit Agreement of which it becomes aware and (b) any event or condition which has or could reasonably be expected to have a Material Adverse Effect and specify what steps, if any, are being taken to cure the same. -18- 19 6.13 Fiscal Year. The Company shall maintain its current fiscal year for financial reporting purposes; provided, however, that the Company may without the consent of the Purchasers change its fiscal year as may be approved by its Board of Directors so long as the Company delivers written notice to the Purchasers of such change within thirty (30) days of Board approval of such change. 6.14 Further Assurances. The Company shall duly execute and deliver, or cause to be duly executed and delivered, at its own cost and expense, such further instruments and documents and take or cause to be taken all such action, in each case as may be necessary or proper in the reasonable judgment of the Purchasers, to carry out the provisions and purposes of this Agreement and the other Loan Documents and to better assure and confirm unto the Purchasers, its rights and remedies under this Agreement and the other Loan Documents. 6.15 Maintenance of Properties. The Company shall and shall cause its subsidiaries to keep and maintain all property material to the conduct of its business as in good working order and condition, ordinary wear and tear excepted, as such property is in as of the date hereof. ARTICLE VII NEGATIVE COVENANTS The Company hereby covenants and agrees with the Purchasers that, immediately after the Closing Date and for so long as any Note or any monetary obligation under this Agreement remains outstanding, the Company shall, except to the extent waived by the holders of the Required Percent (as defined below), comply with the covenants set forth in this Article VII: 7.1 Indebtedness. The Company shall not, and shall not permit any of its subsidiaries to, incur, create, assume or suffer or permit to exist any indebtedness, except (a) indebtedness under and pursuant to the terms of this Agreement and the other Loan Documents, (b) indebtedness under the December Debt Agreement, (c) indebtedness under the May Debt Agreement (d) indebtedness under capital or operating leases entered into within the ordinary course of the Company' business consistent with past practice, and (e) indebtedness to the Senior Lenders under the Credit Agreement in an amount not to exceed $45,000,000 in the aggregate. 7.2 Liens. Neither the Company nor its subsidiaries shall incur, create, assume or suffer or permit to exist any lien on any of its property or assets or on any income or rights in respect of any thereof, except (the "Permitted Liens"): (a) liens incurred and arising out of surety bonds, appeal bonds, statutory obligations, bids, performance and return of money and similar obligations and pledges or deposits made in the ordinary course of business in connection with worker compensation, unemployment insurance, old age pensions and other social security benefits; (b) liens imposed by law, including carriers', warehousemen's, mechanics', materialmen's and vendors' liens incurred in the ordinary course of business and securing obligations which are not yet due or which are being contested in good faith by appropriate proceedings, and in any such case as to which it shall have set aside adequate cash reserves in accordance with GAAP; -19- 20 (c) liens securing the payment of taxes, assessments and governmental charges or levies, either not yet due and payable or being contested in good faith by appropriate legal or administrative proceedings, and in any such case as to which it shall have set aside adequate cash reserves in accordance with GAAP; (d) zoning restrictions, easements, licenses, reservations, provisions, covenants, conditions, waivers, restrictions on the use of property or minor irregularities of title which do not in the aggregate impair the use of any parcel of property material to the operation of the business of the Company or its subsidiaries or the value of such property for the purpose of the business of the Company or its subsidiaries; (e) liens securing purchase money indebtedness; provided, however, that each such lien does not secure any other indebtedness and does not encumber any property other than that property acquired with the proceeds of such indebtedness; (f) extensions and renewals of liens permitted hereunder; provided, however, that the indebtedness secured thereby is not increased and the lien does not encumber any property not encumbered by the lien so extended or renewed; (g) liens securing capital or operating leases within the ordinary course of business consistent with past practice; (h) liens securing indebtedness under the Credit Agreement; (i) liens existing on the date of the December Debt Agreement and listed on Part 3.1(m) of the Disclosure Letter (as defined in the December Debt Agreement); and (j) Liens securing the notes under the May Debt Agreement. 7.3 Restricted Payments. The Company shall not declare nor make, nor permit any of its subsidiaries to declare or make (a) any dividend or other distribution on any shares of the capital stock of the Company or its subsidiaries (other than (i) in the case of the Company, stock splits, stock dividends or the distribution of shares of capital stock of the Company pursuant to the exercise of warrants and dividends payable in the form of the Company's common stock to holders of the Company's Series D, E, F and G Convertible Preferred Stock and (ii) in the case of any subsidiary of the Company, distributions to the Company), or (b) any payment on account of the purchase, redemption, retirement or acquisition of (i) any shares of capital stock of the Company or its subsidiaries or (ii) any option, warrant or other right to acquire shares of the capital stock of the Company or its subsidiaries. 7.4 Nature of Business; Place of Business. The Company shall not conduct, nor permit any of its subsidiaries to conduct any business or operations other than the business or operations conducted on the date hereof; provided, however, that the Company and its subsidiaries may engage in business or operations which are complementary to the business and operations of the Company and its subsidiaries. The Company shall not change, nor permit any -20- 21 of its subsidiaries to change its corporate structure or its principal place of business. The Company shall not change its state of incorporation without providing thirty (30) days prior written notice to the Purchasers. 7.5 Charter, Bylaw and Loan Document Amendment. The Company shall not amend, modify or supplement its charter or bylaws in any manner that the Purchasers deem will adversely affect the rights of the Purchasers under this Agreement or any other Loan Document or their ability to enforce the same or amend, modify or supplement the Loan Documents without the consent of the Purchasers. 7.6 Transactions with Affiliates. (a) The Company will not enter into, or permit any of its subsidiaries to enter into, any transaction, including, without limitation, the purchase, sale, lease or exchange of property, real or personal, the purchase or sale of any security, the borrowing or lending of any money, or the rendering of any service, with any person or entity affiliated with the Company or any of its subsidiaries (including officers, directors and shareholders owning 3% (three percent) or more of the Company's outstanding capital stock (other than the holders of the Series G Stock)), except (i) a sale of the Company's Materials Business or (ii) in the ordinary course of and pursuant to the reasonable requirements of its business and upon fair and reasonable terms not less favorable than would be obtained in a comparable arms-length transaction with any other person or entity not affiliated with the Company. (b) For purposes of this Agreement, "Materials Business" shall mean the Company's adhesive-based tapes, laminates and composite materials business, excluding the Company's Accentia, Comclad and lithium batteries products and assets associated exclusively with these products. The Materials Business shall also exclude the Company's flexible interconnect division, including Novaclad, Novaflex and Flexbase products and assets associated exclusively with that division. 7.7 Mergers. Neither the Company nor any subsidiary shall, in a single transaction or through a series of related transactions, merge or consolidate with another corporation or other business entity, except that any wholly-owned subsidiary of the Company may merge with another wholly-owned subsidiary of the Company or with the Company (so long as the Company is the surviving corporation). 7.8 Asset Sales. Neither the Company nor subsidiary shall, directly or indirectly, in a single transaction or a series of related transactions, sell, lease, transfer or otherwise dispose of or suffer to be sold, leased, transferred, abandoned or otherwise disposed of, all or any part of its assets except: (i) assets related to the Company' Materials Business, (ii) inventory sold in the ordinary course of business, (iii) equipment sold or disposed of in the ordinary course of business and (iv) assets in transactions not otherwise permitted by subsections (i), (ii) and (iii) so long as (A) the Company or applicable subsidiary receives consideration at the time of such transaction equal to at least the fair market value of the assets sold; (B) not less than 80% of the consideration received by the Company or such subsidiary was in the form of cash or cash equivalents; and (C) the sale of such assets would not have a Material Adverse Effect. -21- 22 7.9 Use of Proceeds. The Company shall not use the net proceeds from the issuance of the Securities to purchase or carry "margin securities." 7.10 Contracts. The Company shall prohibit its subsidiaries from entering into any contract, commitment, understanding, or arrangement by which the subsidiaries are restricted from making distributions or other payments to the Company. The Company will not, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement (other than this Agreement, the Credit Agreement, the December Debt Agreement and the May Debt Agreement) that prohibits, restricts or imposes any condition upon the ability of the Company to create, incur or permit to exist any lien upon any of its property or assets (other than Permitted Liens); provided that the foregoing shall not apply to customary provisions in capital or operating leases but solely with respect to the property being leased, and restrictions and conditions imposed by law or by this Agreement, the Credit Agreement or the December Debt Agreement and the May Debt Agreement. 7.11 Required Percent. As used in this Agreement, the term "Required Percent" shall mean no less than sixty-six and two-thirds percent (66-2/3 %) of the then outstanding principal amount of the Subordinated Notes. ARTICLE VIII EVENTS OF DEFAULT 8.1 Events. In case of the happening of any of the following events (each, an "Event of Default"): (a) the Company shall fail to make any payment on principal of the Notes when and as the same shall become due and payable, whether at the due date thereof, by acceleration or otherwise (a "Principal Payment Default"). A Principal Payment Default shall be deemed to have occurred notwithstanding the fact that the Principal Payment Default results from compliance with or enforcement of the subordination provisions of the Subordination Agreement; or (b) the Company shall fail to pay any premium, interest, fee or other obligation due hereunder or under the Notes when and as the same shall become due and payable, whether at the due date thereof, by acceleration or otherwise (an "Interest Payment Default"). An Interest Payment Default shall be deemed to have occurred notwithstanding the fact that the Interest Payment Default results from compliance with or enforcement of the subordination provisions of the Subordination Agreement; or (c) the Company shall fail timely to perform its obligations under Section 2.7(e) hereof; or (d) default shall be made in the due observance or performance by the Company of any covenant or agreement contained in Section 6.1 or 6.2 or Article VII of this Agreement, and such default shall continue unremedied for thirty (30) days after written notice thereof to the Company by the Purchasers; or -22- 23 (e) default shall be made in the due observance or performance by the Company of any other covenant or agreement to be observed or performed under this Agreement or any other Loan Document, and such default shall continue unremedied for thirty (30) days (or such lesser period as may be required as a result of such default) after written notice thereof to the Company by the Purchasers; or (f) any representation or warranty made by the Company contained in this Agreement or in any other Loan Document or in any certificate, financial statement or other instrument furnished by or on behalf of the Company pursuant to this Agreement or such other Loan Document shall prove to have been false or misleading in any material respect when made or furnished; or (g) the Company or any of its subsidiaries shall (i) voluntarily commence any proceeding or file any petition or proposal or any notice of its intent to commence or file any such proceeding, petition or proposal seeking relief under the U.S. Bankruptcy Code or any other federal or state bankruptcy, insolvency or similar law, (ii) consent to the institution of, or fail to controvert in a timely and appropriate manner, any such proceeding or the filing of any such petition or proposal, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator or similar official for any such person or for any substantial part of its property or assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) fail generally to pay its debts as they become due or (vii) take any corporate or stockholder action in furtherance of any of the foregoing; or (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Company or any of its subsidiaries or of any substantial part of the property or assets thereof, under Title 11 of the United States Code or any other federal, state bankruptcy, insolvency or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator or similar official for the Company or any of its subsidiaries or for any substantial part of their property or (iii) the winding-up or liquidation of the Company or any of its subsidiaries, and such proceeding, petition or order shall continue unstayed and in effect for a period of sixty (60) consecutive days; or (i) a final judgment for the payment of money in an amount in excess of $500,000 shall be rendered by a court or other tribunal against the Company or any of its subsidiaries and shall remain undischarged for a period of sixty (60) consecutive days during which such judgment and any levy or execution thereof shall not have been effectively stayed or vacated; or (j) any event shall occur or condition shall exist or fail to occur or exist if the effect of such occurrence, existence or failure is to accelerate the maturity of any indebtedness of the Company or any of its subsidiaries in a principal amount in excess of $500,000 or any such -23- 24 indebtedness shall not be paid when due, whether at maturity, by acceleration or otherwise, or the holder of any lien upon property of the Company shall commence foreclosure of such lien; or (k) any Loan Document shall cease to be in full force and effect and enforceable against the Company in accordance with its terms; or (l) there shall have occurred with respect to the Company a Change in Control; or (m) the Company or an ERISA Affiliate (as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) shall fail to pay when due an amount or amounts aggregating in excess of $500,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate an "employee pension benefit plan" (a "Benefit Plan") shall be filed under Title IV of ERISA by any ERISA Affiliate, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer any Benefit Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Benefit Plan must be terminated; or there shall occur a complete or partial withdrawal from or a default, within the meaning of Section 4219 (c) (5) of ERISA, with respect to, one or more multi-employer plans which could cause one or more ERISA Affiliates to incur a payment obligation in excess of $500,000; or (n) there shall occur a material breach by the Company of its obligations under the Warrants; or (o) payment of any amount due under the Notes is prevented due to compliance with or enforcement of the subordination provisions of the Subordination Agreement, or any amounts previously paid to the Purchasers must be repaid or held in trust by the Purchasers due to compliance with or enforcement of the subordination provisions contained in the Subordination Agreement; or (p) there shall have occurred any event which would constitute a Material Adverse Effect; then, and in any such event, and at any time thereafter during the continuance of such event, subject to the terms of the Subordination Agreement or the holders of the Required Percent, by notice to the Company, take any of the following actions at the same or different times: (i) terminate forthwith the commitment hereunder to purchase the Notes and (ii) declare the Notes (if outstanding) to be forthwith due and payable, whereupon the entire unpaid principal of the Notes, together with accrued interest thereon, the then applicable redemption premium, if any, and all other obligations, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Company, anything contained herein or in the Notes or the other Loan Documents to the contrary notwithstanding (except for the Subordination Agreement), and (iii) exercise any and all other remedies provided under any Loan Document upon the occurrence and continuance of an Event of Default. -24- 25 Notwithstanding the foregoing, in the case of an Event of Default arising under subsections (g) or (h) of Section 8.1 hereof with respect to the Company or any subsidiary of the Company, all outstanding Notes will ipso facto become due and payable without further action or notice. 8.2 All rights and remedies of the Agent and the Purchasers under this Agreement and all covenants and obligations of the Company hereunder, are subject to the terms and conditions of the Subordination Agreement. In the event of any conflict between the terms of this Agreement and the terms of the Subordination Agreement, the terms of the Subordination Agreement shall control. ARTICLE IX AMENDMENTS AND WAIVERS The Company and the holders of the Notes may amend, supplement or waive any provision of this Agreement and the Notes with the written consent of the holders of the Required Percent. Notwithstanding the foregoing, without the consent of each holder of the Notes affected, an amendment or waiver may not (with respect to any Notes held by a non-consenting holder of Notes): (a) reduce the aggregate principal amount of the Notes held by any holder; (b) reduce the principal of or change the fixed maturity of any Note or alter the provisions with respect to the redemption of the Notes; (c) reduce the rate of or change the time for payment of interest on any Note; (d) waive an Event of Default in the payment of principal of or premium, if any, or interest on the Notes (except a rescission of acceleration of the Notes by the holders of the Required Percent and a waiver of the payment default that resulted from such acceleration); (e) make any Note payable in money other than that stated herein or in the Notes; (f) make any change in the provisions of this Agreement relating to waivers of past Events of Default or the rights of holders of Notes to receive payments of principal of or interest on the Notes; (g) waive a payment of a premium or mandatory redemption with respect to any Note; or (h) make any change in the foregoing amendment and waiver provisions. -25- 26 ARTICLE X MISCELLANEOUS 10.1 Notices. Any notice or other communication required or permitted to be given hereunder shall be in writing and shall be deemed to have been received (a) upon hand delivery (receipt acknowledged) or delivery by telex (with correct answer back received), telecopy or facsimile (with transmission confirmation report) at the address or number designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day following such delivery (if delivered on a business day after during normal business hours where such notice is to be received); or (b) on the business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: If to the Company: Sheldahl, Inc. 1150 Sheldahl Road Northfield, MN 55057-9444 Attn: Donald R. Friedman Fax: (507) 663-8326 or ###-###-#### With copies to: Lindquist & Vennum P.L.L.P. 4200 IDS Center 80 South Eighth Street Minneapolis MN 55402 Attn: Charles P. Moorse, Esq. Fax: (612) 371-3207 If to a Purchaser: To the address set forth on Schedule I attached hereto. or such other address as may be designated in writing hereafter, in the same manner, by such person. 10.2 Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 10.3 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. Neither the Company nor any Purchaser may assign this Agreement or any rights or obligations hereunder without the prior written consent of the other. Notwithstanding anything to the contrary contained herein, each Purchaser may assign its rights hereunder in connection with any sale or transfer of such Purchaser's Securities to any "Affiliate" or "Associate" (as such terms are defined in Rule 12b-2 under the Exchange Act) of such Purchaser as long as the transferee Affiliate or Associate agrees in writing to be bound by the applicable provisions of this Agreement, in which case the term "Purchaser" shall be deemed to refer to such transferee as though such transferee were an original signatory hereto. -26- 27 10.4 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person. 10.5 Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Minnesota without regard to the principles of conflicts of law thereof. 10.6 Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become binding with respect to each Purchaser on the date the acceptance form hereto is executed by such Purchaser and with respect to the Company on the date executed by the Company, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof. 10.7 Severability. In case any one or more of the provisions of this Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 10.8 Survival of Representations and Warranties. The representations and warranties made in this Agreement, or in any instrument delivered pursuant to this Agreement shall survive indefinitely. All covenants and agreements shall survive in accordance with their respective terms. 10.9 Entire Agreement. This Agreement, together with the Exhibits and Schedules attached hereto and the other Loan Documents contains the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, with respect to such matters. 10.10 The Company agrees to reimburse Purchasers for paying all reasonable out-of-pocket expenses incurred by Purchasers, including the reasonable fees, charges and disbursements of its legal counsel in connection with this Agreement and any Loan Document, which shall be paid, at the Purchaser's election, thirty (30) days after the Closing Date or upon the redemption of the Notes pursuant to Section 2.4 or 2.5 hereof. -27- 28 IN WITNESS WHEREOF, the Company has caused this Agreement to be duly executed by its authorized representative and each Purchaser has caused this Agreement to be executed by signing in counterpart the acceptance form attached to this Agreement. COMPANY: SHELDAHL, INC. By: /s/ Donald R. Friedman ------------------------------------- Name: Donald R. Friedman Title: President and Chief Executive Officer -28- 29 ACCEPTANCE The undersigned hereby accepts the terms and conditions set forth in the Subordinated Notes and Warrant Purchase Agreement, dated August 13, 2001, among Sheldahl, Inc., a Minnesota corporation (the "Company"), and certain Purchasers listed in Schedule I attached thereto, as the terms and conditions applicable to the purchase of Notes and Warrants of the Company by the undersigned. By execution of this Acceptance, the undersigned hereby makes each of the representations contained in Section 3.2 of the Subordinated Notes and Warrant Purchase Agreement. PURCHASER: MORGENTHALER VENTURE PARTNERS V, L.P. By: /s/ John D. Lutsi ------------------------------------- Name: John D. Lutsi Title: General Partner 30 ACCEPTANCE The undersigned hereby accepts the terms and conditions set forth in the Subordinated Notes and Warrant Purchase Agreement, dated August 13, 2001, among Sheldahl, Inc., a Minnesota corporation (the "Company"), and certain Purchasers listed in Schedule I attached thereto, as the terms and conditions applicable to the purchase of Notes and Warrants of the Company by the undersigned. By execution of this Acceptance, the undersigned hereby makes each of the representations contained in Section 3.2 of the Subordinated Notes and Warrant Purchase Agreement. PURCHASER: MOLEX INCORPORATED By: /s/ Robert Mahoney ------------------------------------- Name: Robert Mahoney Title: Vice President, Chief Financial Officer 31 SCHEDULE I