SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended May 28, 2000
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or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from
____________ to ___________
Commission File Number 1-11344
INTERMAGNETICS GENERAL CORPORATION
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(Exact name of registrant as specified in its charter.)
New York 14-1537454
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 Old Niskayuna Road
Latham, New York 12110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (518) 782-1122
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock - $.10 par value American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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(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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
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The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $197,000,000. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the American Stock Exchange on August 3, 2000. It assumes that all directors
and officers of the registrant are affiliates. In making such calculation, the
registrant does not determine whether any director, officer or other holder of
Common Stock is an affiliate for any other purpose.
The number of shares of the registrant's Common Stock outstanding, net of
Treasury shares, as of August 3, 2000 was 12,913,676.
DOCUMENTS INCORPORATED BY REFERENCE
The information required for Part III below is incorporated by reference from
the registrant's Proxy Statement for its 2000 Annual Meeting of Shareholders to
be filed within 120 days after the end of the registrant's fiscal year.
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TABLE OF CONTENTS
PART I............................................................................................................4
ITEM 1. BUSINESS DESCRIPTION.....................................................................................4
ELECTROMAGNETICS SEGMENT.......................................................................................5
REFRIGERATION SEGMENT.........................................................................................12
LTS SUPERCONDUCTING MATERIALS SEGMENT.........................................................................15
ENERGY TECHNOLOGY SEGMENT.....................................................................................18
RESEARCH AND DEVELOPMENT......................................................................................23
INVESTMENTS...................................................................................................24
PERSONNEL.....................................................................................................25
EXECUTIVE OFFICERS OF THE REGISTRANT..........................................................................26
ITEM 2. PROPERTIES..............................................................................................27
ITEM 3. LEGAL PROCEEDINGS.......................................................................................28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................28
PART II..........................................................................................................29
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................................29
ITEM 6. SELECTED FINANCIAL DATA.................................................................................30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK..............................................36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................36
PART III.........................................................................................................37
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................................37
ITEM 11. EXECUTIVE COMPENSATION..................................................................................37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................................37
PART IV..........................................................................................................37
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.........................................37
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS........................................................37
(b) REPORTS ON FORM 8-K.................................................................................42
SIGNATURES.......................................................................................................43
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SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Intermagnetics General Corporation ("Intermagnetics" or "Company") makes
forward-looking statements in this document. Typically, we identify
forward-looking statements with words like "believe," "anticipate," "perceive,"
"expect," "estimate" and similar expressions. Unless a passage describes an
historical event, it should be considered a forward-looking statement. These
forward-looking statements are not guarantees of future performance and involve
various important assumptions, risks, uncertainties and other factors that could
cause the Company's actual results for fiscal year 2001 and beyond to differ
materially from those expressed in such forward-looking statements. These
important factors include, without limitation, the assumptions, risks, and
uncertainties set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations, as well as other assumptions, risks,
uncertainties and factors disclosed throughout this report.
Except for our continuing obligations to disclose material information
under federal securities laws, we are not obligated to update these
forward-looking statements, even though situations may change in the future. We
qualify all of our forward-looking statements by these cautionary statements.
PART I
ITEM 1. BUSINESS DESCRIPTION
Intermagnetics is a leading developer and manufacturer of
superconducting materials, electromagnetic components and cryogenic
refrigeration systems. These products are sold separately, or are combined
together and sold as integrated sub-systems primarily in the magnetic resonance
imaging (MRI), instrumentation and energy technology markets.
Superconductivity is the phenomenon in which certain materials lose all
resistance to the flow of electrical current when cooled below a critical
temperature. Superconductors offer advantages over conventional conductors, such
as copper, by carrying electricity with virtually no energy loss, and generating
comparatively more powerful magnetic fields. The principal commercial
application for the Company's technology is MRI. The Company also leverages its
expertise in superconductivity and cryogenics to participate in the
instrumentation market and to develop materials and products for the electric
utility market.
The Company designs, develops, manufactures and sells products in four
segments: Electromagnetics, Refrigeration, Low Temperature (LTS) Superconducting
Materials and Energy Technology. Electromagnetics includes low temperature
superconducting ("LTS") magnets manufactured and sold by the IGC-Magnet Business
Group ("IGC-MBG"), and radio frequency ("RF") coils manufactured and sold by
IGC-Medical Advances Inc. ("IGC-MAI"), a wholly-owned subsidiary. Three
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wholly-owned subsidiaries make up the Company's Refrigeration segment. IGC-APD
Cryogenics Inc. ("IGC-APD") and IGC-Polycold Systems Inc. ("IGC-Polycold")
manufacture and sell low and very low temperature refrigeration equipment. The
Company is in the process of exiting the business of the third subsidiary in
this segment, InterCool Energy Corporation ("ICE"), which sells refrigerants for
mobile and stationary applications. The LTS Superconducting Materials Segment
includes LTS wire and cable manufactured and sold by the Company's IGC-Advanced
Superconductors division ("IGC-AS"). The Energy Technology Segment consists
primarily of the design and manufacture of high temperature superconducting
("HTS") material and related products by the Company's newest subsidiary,
IGC-SuperPower, LLC ("IGC-SuperPower"), primarily for the electric utility
market.
Through May 30, 1999, the activities of the Energy Technology segment
were included in the Electromagnetics segment. Segment data for prior years has
been adjusted to conform with current year presentation.
ELECTROMAGNETICS SEGMENT
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A. Introduction
1. About MRI and Other Magnets Generally
The single largest existing commercial application for
superconductivity is the magnetic resonance imaging system ("MRI System").
Hospitals and clinics use MRI Systems for non-invasive, diagnostic imaging of
organs within a patient's body. At the core of an MRI System is a large, highly
engineered magnet system. The magnet system can be based upon a resistive
electro-magnet, a permanent magnet or a superconductive magnet. Intermagnetics
designs and manufactures superconductive magnets, which offer far more powerful,
high-quality magnetic fields with virtually no power loss. Higher magnetic field
strengths (measured in Tesla) correlate with improved "signal-to-noise" ratios,
which can in turn lead to higher quality images in shorter acquisition times.
The annual commercial market for new MRI Systems, upgrades and accessories in
calendar year 2000 is estimated at approximately $3.2 billion worldwide. A small
number of system integrators dominate the MRI industry. They include GE Medical
Systems ("GE"), Siemens Corporation ("Siemens"), Philips Medical Systems
Nederlands B.V. ("Philips"), Hitachi Medical Corporation ("Hitachi"), Toshiba
Corporation ("Toshiba") and Marconi Medical Systems (formerly Picker
International Ltd.). Intermagnetics supplies key components to a number of these
integrators. (See "Principal Products" below.)
Other existing applications for superconductivity include nuclear
magnetic resonance ("NMR") spectroscopy, used in biological and chemical
research and testing of the composition and structure of non-ferrous materials,
and other scientific, defense and research applications. (See "Principal
Products - Other Superconductive Magnet Systems" below.)
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2. About MRI Radio Frequency (RF) Coils Generally
All MRI Systems use RF coils placed inside the bore of the magnet, or
more generally placed onto the patient. The RF coil acts as an antenna to
transmit and/or receive radio frequency signals from the human body as it lies
inside the strong magnetic field of the MRI System. These radio frequency
signals are transferred electronically to the MRI System computer where they are
reconstructed into a clinically useful diagnostic image.
Specialized RF coils -- those dedicated to imaging particular parts of
the human anatomy, such as the knee, neck, wrist, foot, etc. -- increase the
number of diagnostic applications for which an MRI System can be used. The
increased number of applications increases the potential utilization rate of a
given MRI System, which typically helps to economically justify the acquisition
of that system. In addition, specialized RF coils designed to image a specific
part of the human body will yield a sharper, more detailed image that typically
is more clinically useful than a similar image produced with a multi-purpose
large body RF coil. The Company believes most MRI Systems benefit from an array
of seven to ten separate specialized RF coils.
Each MRI System model creates the opportunity for development of a new
array of RF coils. This is the case because an RF coil must work closely with
the MRI System in which it is used. Consequently, RF coils are designed for a
specific manufacturer's system configuration and its related characteristics.
Hence, RF coils may not be moved easily between MRI Systems manufactured by
different companies, from one field strength magnet to another, or even among
different models manufactured by a single company.
B. Principal Products
The Company derived approximately 60% and 55% of its net sales in
fiscal years 2000 and 1999, respectively, from the sale of products in its
Electromagnetics segment. Those sales consisted primarily of MRI-related
products, including superconductive MRI magnet systems and RF coils. Within its
Electromagnetics segment, the Company produces the following:
o Superconductive MRI Magnet Systems. Through IGC-MBG, the Company
manufactures and sells superconductive MRI magnet systems to MRI System
integrators for use in stationary and mobile applications. During
fiscal years 2000, 1999 and 1998, MRI magnet systems accounted for 50%,
43% and 50%, respectively, of the Company's net sales. The Company's
latest generation of superconductive MRI magnet systems consists of
three types of systems with field strengths of 0.5, 1.0 and 1.5 Tesla
("T"). In April 2000, IGC-MBG announced a development program with
Philips for a 3.0T magnet product, although the Company does not expect
this program to have a material impact in fiscal year 2001.
The Company's MRI magnet systems are made with LTS wire from IGC-AS
(and other suppliers) and fitted with cryogenic refrigerators (shield
coolers) supplied by IGC-APD. The Company is the only fully integrated
manufacturer of superconductive MRI magnet systems, which the Company
views as a competitive advantage in the MRI market, as well as in the
instrumentation and energy technology markets.
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o Other Superconductive Magnet Systems. Through IGC-MBG, the Company has
the capacity to design and build superconductive magnet systems for
various scientific, energy storage and defense applications. These
usually are one-of-a-kind, custom-built systems. For example, the
Company is working with the National High Magnetic Field Laboratory at
Florida State University, to design and manufacture a
technology-leading superconductive magnet for a 900 MHz NMR system.
Systems with higher operating frequencies offer better sensitivity and
discrimination in the analysis of complex molecules. To date, the
Company has not had significant sales of non-MRI magnet systems.
o RF Coils for MRI Systems. Through IGC-MAI, the Company manufactures and
sells RF coils for use in MRI Systems. IGC-MAI's current product line
includes ten anatomical applications with more than fifty product
groups available in magnetic field strengths from 0.2T to 3.0T, for a
total of more than 150 products. In fiscal years 2000, 1999 and 1998,
RF coils accounted for 10%, 13% and 11%, respectively, of the Company's
net sales.
C. Marketing
The Company markets its magnet systems through its own personnel. In
addition, in 1987 it licensed the manufacture and marketing of superconductive
MRI magnet systems to its European joint venture. That license expired on
December 31, 1999. (See "European Joint Venture" below.) The Company also has a
wholly-owned European marketing and service subsidiary in the U.K., as well as a
foreign sales corporation located in Barbados. IGC-MAI markets its RF coils
through a direct sales force to domestic MRI System integrators and end-users,
such as hospitals, clinics and research facilities. Internationally, IGC-MAI
markets its RF coils through direct sales to foreign-based MRI System
integrators and to end-users through a combination of distributors and direct
contact with customers in selected markets.
Export Sales. Products sold to foreign-based companies, such as Philips
in the Netherlands, or Hitachi and Toshiba in Japan, were accounted for as
export sales even if some of the products sold were installed in the U.S. On
that basis, the Company's net export sales (including the Refrigeration segment)
for fiscal years 2000, 1999 and 1998 totaled $76.8, $61.1 and $57.3 million,
respectively, most of which were to European customers.
Principal Customers. Sales to customers accounting for more than 10% of
the Company's net sales aggregated approximately 61% of net sales in fiscal
2000, 54% of net sales in fiscal 1999 and 55% of net sales in fiscal 1998. (See
Note K of Notes to Consolidated Financial Statements included in response to
Item 8.)
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The Company sells a substantial portion of its products in the MRI
industry to four customers, two of which are significant. Philips is the
principal customer for the Company's MRI magnet systems. In fiscal year 1999,
Intermagnetics and Philips executed a new sales agreement with an initial
five-year term. The term is extended each year such that the agreement will
continue in effect on a rolling five-year basis, unless otherwise terminated in
accordance with certain provisions of the agreement. Under this agreement,
Intermagnetics is the sole supplier of certain MRI magnet systems to Philips.
Sales to Philips (including sales by the Refrigeration segment) amounted to
approximately 50%, 41% and 44% of the Company's net sales for fiscal 2000, 1999
and 1998, respectively.
The Company's second principal customer for MRI products is GE Medical
Systems ("GE"). The Company sells LTS wire to GE for use in GE's MRI magnet
systems, as well as RF coils for use with GE's MRI Systems. Under the Company's
current arrangement with GE, GE places orders for LTS wire and RF coils from
time to time with the Company. Sales to GE (including sales by the LTS
Superconducting Materials segment) accounted for approximately 11%, 13% and 11%
of the Company's net sales for fiscal 2000, 1999 and 1998, respectively.
D. European Joint Venture
In 1987, the Company and Alstom Energy, S.A. ("Alstom") created a joint
venture named Alstom Intermagnetics ("AISA") located in France. AISA
manufactured superconductive MRI magnet systems under a license from the
Company, and supplied a portion of Philips' requirements for superconductive MRI
magnet systems under an agreement that terminated on December 31, 1999.
Effective May 30, 1999, the Company sold its interest in AISA to Alstom
for three hundred thousand dollars ($300,000 U.S. currency). In fiscal year
2000, the Company consolidated AISA's magnet production in the Company's Latham,
New York facility, and AISA ceased production of superconductive MRI magnet
systems. In consideration of the obligations of AISA and Alstom under the
termination agreement, Intermagnetics paid AISA nine million dollars ($9,000,000
U.S. currency).
E. Competition/Market
U.S. sales of MRI Systems grew in each of calendar years 1997, 1998 and
1999. The Company's growth in this segment is dependent on its customers'
ability to grow their respective businesses, and on the Company's ability to
attract new customers. There are no assurances that such growth will continue in
the future. In addition, healthcare cost control initiatives and regional
economic conditions could negatively impact continued growth.
Two emerging MRI applications could provide additional growth
opportunities for the Company's products in the future. MRI System integrators
are developing systems that can be used as non-invasive diagnostic tools for
cardiac disease. These systems could replace the need for interventional X-rays.
Functional MRI (fMRI) is another emerging area. Specialized gradient coils could
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allow an MRI System to be used as a non-invasive tool for (a) pre-surgical
mapping of the brain; (b) quantification of psychiatric disease and (c) human
brain mapping. The Company is well-positioned to supply specialized MRI magnet
systems and coils to address these emerging markets. There are no assurances
that these markets will become significant or that the Company will be
successful in providing commercial products for these markets.
MRI Systems compete indirectly with other diagnostic imaging methods
such as conventional and digital X-ray systems, nuclear medical systems,
ultrasound and X-ray CT scanners. Most large MRI Systems suppliers perceive
higher field strength imaging systems (1.0T or greater) based upon
superconductive magnets to have technical advantages over MRI Systems that use
resistive electromagnets and permanent magnets, which are limited in field
strength either by high power consumption or by basic material properties. Lower
field strength systems generally produce lower quality images, although rapid
gains in computer technology have offset some of this quality loss. In addition,
"open" magnet configurations based on permanent and resistive magnets have
enjoyed rapid growth in market share over the past few years, although this
growth appears to have leveled off in calendar year 1999. It is too soon to
assess the impact on market share of recently introduced "open" systems based on
superconducting magnets.
o Superconductive MRI Magnet Systems. Within the market for
superconductive MRI magnet systems, the Company's competitors fall into
two categories: (1) magnet manufacturers that make MRI magnet systems
for MRI System integrators; and (2) MRI System integrators that
manufacture superconductive magnet systems for their own use.
The Company considers Oxford Magnet Technology Limited ("OMT") its
principal competitor in the first category. OMT is a joint-venture
between Siemens (51%) and Oxford Instruments Group, plc ("Oxford")
(49%). OMT supplies MRI magnet systems to two MRI system integrators:
Siemens and Marconi. OMT sells substantially more superconductive MRI
magnet systems and has greater production capacity than the Company;
however, the Company believes it can compete effectively against OMT on
the basis of technology and price.
Competitors in the second category include companies like GE and
Toshiba that manufacture MRI magnet systems for use in their own MRI
Systems. While these integrators do not purchase Intermagnetics' magnet
systems, they present a market opportunity to Intermagnetics for its
component products. For example, Intermagnetics sells LTS wire and RF
coils to GE. The Company also sells RF coils to Toshiba.
Within the market for superconductive MRI magnet systems, the Company
also has seen increased competition from low-field "open" MRI magnet
systems. These systems are designed to reduce the feeling of
claustrophobia in a patient undergoing imaging, and may give medical
personnel greater access to the patient during imaging. While the
Company does not currently manufacture an "open" MRI magnet system, it
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does manufacture a magnet system for another rapidly growing segment of
the market: compact high field MRI systems. Philips is the Company's
primary customer for this magnet system.
o Other Superconductive Magnet Systems. Historically, the Company has
competed against many different companies domestically and
internationally (including Oxford, which dominates the worldwide market
for NMR systems) for the opportunity to design and build non-MRI
superconductive magnet systems. To date, the Company's sales of such
systems have not been significant.
o RF Coils for MRI Systems. The Company believes that the market for RF
coils will grow faster than the market for MRI Systems because: (i) the
number of MRI applications using specialized RF coils is increasing;
(ii) RF coil technology is being improved continuously, with an average
technology obsolescence rate of approximately three years; and (iii) an
increasing number of existing MRI Systems are being upgraded by MRI
System integrators at a much lower cost than replacing an entire MRI
System. An added set of RF coils typically is needed in connection with
each upgrade.
The Company's primary RF coil competitors consist of independent
manufacturers that make RF coils for sale to MRI System integrators and
end-users. The Company also experiences competition from MRI System
integrators that manufacture RF coils for sale with their MRI Systems.
Most MRI System integrators outsource RF coil development and
manufacture to companies such as IGC-MAI; although, the Company
believes Siemens and Philips have maintained the most extensive
in-house coil development activities of the major MRI System
integrators. If the MRI System integrators decide to pull RF coil
development in-house, access to the market for independent RF coil
manufacturers could be limited. The Company believes this risk is
remote, however, because outsourcing specialized RF coils generally
results in lower cost and faster time-to-market than with in-house
resources.
There are several independent RF coil manufacturers of various size.
The Company believes that, of these companies, two compete with IGC-MAI
against its full product range. The other competitors offer limited
product lines and generally lack organizational infrastructure and
extensive product development capabilities to compete across IGC-MAI's
broad product line at this time. Competition generally is based upon
price and diagnostic image quality. To remain competitive, the Company
must continue to offer high quality, technically advanced products
while reducing costs. In fiscal year 2000, IGC-MAI faced increased
competitive pressures on both price and new technology. Its two main
competitors grew in both size and market share, mainly as a result of
their supply relationship with one major MRI System integrator. While
the Company is responding to these challenges with new products and
expanded distribution, there are no guarantees that IGC-MAI will be
successful in regaining significant market share.
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F. Patents
The Company believes at the present time that patents are not a
significant competitive factor in the conduct of its business in the
Electromagnetics segment. The Company directly or indirectly either owns, or is
a licensee under a number of patents relating to RF coils and magnet systems.
There are no assurances that changing technology and/or emerging patents will
not adversely impact the Company's current patent position or its
competitiveness. In addition, while the Company is focusing on developing and
patenting new technologies, there are no assurances that there will not be
competing patents issued, or that such technology will become commercially
significant.
G. Raw Materials and Inventory
Most materials and parts used in the manufacturing process for
superconducting magnet systems are ordered for delivery based on production
needs. The Company's investment in inventories for production of MRI magnet
systems is based primarily on production schedules required to fill existing and
anticipated customer orders.
IGC-MAI believes that there are alternative suppliers at competitive
prices for most of the parts, materials and components that it purchases for the
manufacture of its RF coils. There are, however, discrete electrical components
and mechanical housings that are sole sourced because of the uniqueness of their
specifications. In the event that a sole source supplier cannot meet demand, a
re-engineering or re-tooling of the sourced component would be required.
H. Warranty
The expense to the Company to date for performance of its warranty
obligations in the Electromagnetics segment has not been significant.
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REFRIGERATION SEGMENT
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A. Introduction
Three wholly-owned subsidiaries comprise the Company's Refrigeration
segment: IGC-APD and IGC-Polycold design, manufacture and sell low temperature
(semi-cryogenic) and very low temperature (cryogenic) refrigeration equipment;
and InterCool Energy Corporation ("ICE") sells refrigerants.
The Company derived approximately 30% of its net sales in each of
fiscal years 2000 and 1999, respectively, from the sale of products in its
Refrigeration segment.
B. Principal Products
IGC-APD's product line includes shield coolers (refrigerators) used in
the production of MRI magnet systems, a specialized cryogenic refrigeration
system sold under the registered tradename CRYOTIGER (R) and specialized water
pump systems and cryopumps sold under the registered tradenames AquaTrap (R) and
Marathon (R) that are used primarily in the manufacture of semiconductors.
Shield coolers currently make up IGC-APD's largest product line. In fiscal year
2000 IGC-APD experienced significant growth generated by demand from the
semiconductor industry and the Company expects that growth to continue in fiscal
year 2001.
IGC-Polycold manufactures and sells a line of low temperature
refrigeration systems in the -40 to -90 Celsius range. The Company acquired
IGC-Polycold in fiscal year 1998. IGC-Polycold's refrigeration systems are used
in several markets, including optical coating, semiconductor manufacturing,
magnetic media, decorative coating, plastic coating and roll/web coating. In
fiscal 2000, sales to the optical coating industry made up the largest single
market for IGC-Polycold's products. The Company believes, however, that
IGC-Polycold's served market in the semi-conductor industry will grow faster
than optical coating in fiscal year 2001.
Historically, the semiconductor market has been cyclical based on
demand for technology products such as personal computers and cellular phones.
Accordingly, the growth of product lines from IGC-APD and IGC-Polycold that
serve this market may be adversely affected by a downturn in the semiconductor
industry.
ICE developed environmentally acceptable refrigerants under the
registered tradename of FRIGC (R) to replace ozone-depleting chlorofluorocarbons
("CFC's"). ICE's core product, FRIGC FR-12 (sold under ASHRAE designation
R-416A), is an EPA-approved replacement for R-12 (the leading CFC refrigerant)
in mobile and certain stationary air conditioning and refrigeration systems. In
fiscal year 2000, the Company decided to exit this business and has taken an
appropriate restructuring charge (see Note C of the Notes to Consolidated
Financial Statements included in response to Item 8.)
IGC-APD, IGC-Polycold and ICE also license certain mixed gas
refrigerant technology to third parties for use in markets in which the Company
does not otherwise participate.
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C. Marketing
IGC-APD markets its shield coolers through a direct sales force located
in its Allentown, Pennsylvania headquarters, its office in Sunnyvale, California
and its office in the U.K. IGC-APD's other cryogenic and semi-cryogenic products
are marketed worldwide through its direct sales force and through scientific and
vacuum equipment sales representatives and distributors. In addition, IGC-APD
has a worldwide partnership with Daikin Industries, Ltd. ("Daikin"), a Japanese
company, pursuant to which the parties sell common cryopumps under the
"Marathon" trademark in well-defined territories. In fiscal year 1999, IGC-APD
licensed a non-core portion of its laboratory systems business to a third party,
which now markets and sells IGC-APD's laboratory systems on an exclusive basis.
IGC-Polycold markets its line of refrigeration systems through a direct
sales force based in its San Rafael, California headquarters, two key
distributors located in Japan and Germany, and through a worldwide network of
sales representatives. In addition, IGC-APD and IGC-Polycold share common direct
sales and marketing teams. In fiscal year 2000, IGC-APD and IGC-Polycold began
marketing their combined product lines as "Cool Solutions" to OEM's. As a result
of this effort, the companies secured two new OEM customers for two new product
platforms.
In connection with the restructuring, the Company eliminated ICE's
direct sales force in fiscal year 2000 and is selling its current inventory of
FRIGC FR-12 through a master distributor.
D. Competition/Market
IGC-APD supplies shield coolers to IGC-MBG for its superconductive MRI
magnet systems. In addition, IGC-APD sells these refrigerators to other
manufacturers of superconducting MRI magnet systems. IGC-APD licenses Daikin to
produce shield coolers and other cryogenic products for the Japanese market. The
Company considers its principal competitor in the manufacture of shield coolers
to be Leybold AG ("Leybold"). Leybold has greater production capacity and
financial resources than the Company, and has successfully locked up many of
IGC-APD's potential customers in multi-year supply agreements. In addition,
Sumitomo Heavy Industries supplies shield coolers to a major MRI System
integrator, and may become a supplier to other IGC-APD customers or potential
customers.
IGC-APD's principal competitors in its other markets include Helix
Technology Corporation ("Helix") (which markets its products under the names
"CTI Cryogenics" and "CTI") and Ebara Technologies, Inc. Helix is believed to
control 80% or more of the world market for cryopumps. Notwithstanding Helix's
market predominance, the Company believes that it can retain its position in the
market on the basis of technology and equipment performance. In addition,
IGC-APD's CRYOTIGER refrigeration system competes against machines known as
Stirling refrigerators (which the Company believes are more costly and less
reliable than CRYOTIGER), and against open-cycle coolers that rely on reservoirs
of liquid nitrogen which must be replenished periodically. Although the initial
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purchase price for a CRYOTIGER refrigerator may exceed the price of a comparable
liquid nitrogen cooler, this higher initial cost is offset by lower operating
and maintenance costs and greater ease of use. The Company believes there is a
significant opportunity for this product in the marketplace, however, there are
no assurances it will achieve widespread commercial success.
IGC-Polycold's major competitors include Sanyo and Shin Meiwa in Japan,
and Helix domestically. In fiscal year 2000, two additional competitors emerged,
but it is too soon to assess the impact they may have on IGC-Polycold's market
share. IGC-Polycold also competes with the use of liquid nitrogen as an
alternative to IGC-Polycold's low temperature refrigeration systems. The Company
generally competes in this area on the basis of efficiency and/or cycle time, as
well as price, availability and product quality. In fiscal year 2000,
IGC-Polycold implemented a program to increase its production capacity to meet
increased demand for its products, primarily from the semiconductor industry. If
the Company is unable to ramp up its capacity sufficiently to meet this demand,
it may experience increased competitive pressure from alternative suppliers. In
addition, with respect to both IGC-APD and IGC-Polycold, there are no assurances
that emerging technology will not adversely impact their competitiveness.
ICE's FRIGC FR-12 refrigerant has been marketed as a substitute for
R-12 in automobile, truck and bus air conditioning systems and in certain
stationary applications, such as building air conditioning systems,
refrigeration systems and food chillers. FRIGC faced strong competition in all
of its markets from (a) other replacement alternatives and (b) the continued
availability of R-12 notwithstanding the phase-out of domestic production of
R-12 at the end of 1996. While the availability of R-12 appeared to dwindle
somewhat in fiscal year 2000, competition from other replacement refrigerants
remained strong. While the Company believes that FRIGC FR-12's superior
technical performance, safety record and superior operating performance compared
to other blends make it an attractive choice as a replacement refrigerant, it
has decided to exit this non-core business(see Section B above).
E. Patents
Patents are a significant competitive factor for the Company's
Refrigeration segment. IGC-APD's CRYOTIGER line is based upon its patented
proprietary technology. IGC-APD's AquaTrap systems are based principally on
IGC-APD's proprietary CRYOTIGER technology. While IGC-Polycold does have some
patent protection for its products, patents currently are not a significant
competitive factor for IGC-Polycold. Patents may become more significant in the
future, however, as IGC-Polycold develops new products. The Company's success in
marketing its refrigeration products will depend on its continued ability to
obtain patents, maintain trade secret protection and operate without infringing
on the proprietary rights of others. No assurance can be given that any
additional patents will issue with respect to patent applications filed or to be
filed by the Company. Furthermore, even if such patents issue, there can be no
assurance that any issued patents will protect against competitive products or
otherwise be commercially valuable. No patents that the Company considers
significant expire during the next five years.
14
F. Raw Materials and Inventory
IGC-APD purchases certain major components from single sources, but the
Company believes alternate sources are available. IGC-APD generally maintains a
sufficient inventory of raw materials, assembled parts, and partially and fully
assembled major components to meet production requirements.
IGC-Polycold purchases certain major standard components for its
products from a single source. While alternative sources are available, an
unplanned loss or severe reduction in supply from this source could result in
added cost and temporary production delays. IGC-Polycold generally maintains a
sufficient inventory of raw materials, assembled parts and partially and fully
assembled major components to meet production requirements.
ICE is in the process of selling its current inventory of FRIGC FR-12
and does not plan to order additional quantities from its refrigerant supplier.
G. Warranty
In fiscal year 1999, IGC-APD experienced significant warranty
obligations, which adversely affected its overall financial performance. IGC-APD
addressed the warranty issue and its warranty obligations in fiscal year 2000
were not significant.
LTS SUPERCONDUCTING MATERIALS SEGMENT
-------------------------------------
A. Introduction
There are two broad classes of superconductive materials; low
temperature ("LTS") and high temperature ("HTS") superconductors. LTS materials
are metals and alloys that become superconductive when cooled to temperatures
near absolute zero (4.2 Kelvin or minus 452 F). Because of their superior
ductile characteristics, LTS materials generally are used in the form of
flexible wire or cable (LTS cable is made up of bundles of LTS wire). HTS
materials are composed of ceramic-like compounds that become superconductive
when cooled to temperatures close to that of liquid nitrogen (77 Kelvin or minus
321 F) and primarily are manufactured in the form of tape (basically, flat
wire). HTS materials are discussed in the Energy Technology Segment below.
15
LTS wire is used today mainly in the manufacture of MRI magnet systems
and for high-energy physics applications.
B. Principal Products
Through IGC-AS, the Company manufactures and sells the two principal
LTS materials that are commercially available for the construction of
superconductive magnets: niobium-titanium ("NbTi") wire, and niobium-tin
("Nb3Sn") wire. In contrast to the relatively large market for NbTi wire, Nb3Sn
multi-filamentary wire is sold only in limited quantities. This is because NbTi
wire is more cost effective for MRI magnet systems, which is the leading market
for LTS wire. The Company has seen a significant increase in
government-sponsored work for non-MRI applications through its participation in
the Large Hadron Collider project for the European Organization for Nuclear
Research ("CERN") in Switzerland, and the Superconducting Tokamak Advanced
Research Project in Korea. These multi-year programs offer potential for
increased non-MRI wire and cable orders. During each of fiscal years 2000, 1999
and 1998, sales of LTS wire and cable (excluding intercompany sales) accounted
for approximately 9%, 12% and 12% of the Company's net sales.
C. Marketing
The Company markets its wire/cable through its own personnel. (See
"Electromagnetics Segment - Marketing" for information about principal
customers.)
D. Competition/Market
The single largest commercial market for LTS wire is MRI. In fact, most
of the LTS wire manufactured by the Company is used for superconductive MRI
magnet systems (either internally by IGC-MBG, or externally by other customers).
The Company believes that it, Oxford Superconducting Technology and
VACUUMSCHMELZE GmbH & Co. KG are the major suppliers of NbTi wire for the MRI
market, although Alstom and Europa Metalli also supply LTS wire to this market.
While there are several other foreign and domestic manufacturers of NbTi
superconductive wire, none of them have been a significant factor in the
worldwide MRI market.
The Company has a contract to supply nearly 100 tons of LTS cable to
CERN for the Large Hadron Collider Project, a European government-sponsored
program. European companies (Alstom, VACUUMSCHMELZE and Europa Metalli) will
supply an additional 1,400 tons of cable to CERN and Furukawa Electric, a
Japanese company, will supply 100 tons of cable. The Company believes that the
quantity of wire required for this project exceeds that required for the global
MRI market. Even with this significant project, industry capacity for NbTi wire
is greater than current demand, and the Company has seen substantial pressure on
prices. The Company's prices for LTS wire/cable currently are competitive, and
the Company believes that product quality and the ability to meet delivery
schedules are factors important to its market position. There are no assurances,
however, that the Company can remain competitive without future price
reductions, or that the Company can find means to offset price reductions with
further cost reductions. In addition, the CERN program is technically
challenging and there are no assurances that IGC-AS will succeed in meeting
CERN's specification and delivery requirements.
16
The Company is also a major U.S. supplier of Nb3Sn superconducting
wire. Oxford Superconducting Technology participates in the domestic market, and
there are a number of manufacturers of Nb3Sn wire in Japan and Europe. Nb3Sn
wire is used in the commercial nuclear magnetic resonance and high field magnet
markets, as well as in government-sponsored programs. The Company believes that
it and one other Company in Japan, Mitsubishi Electric, are the only companies
supplying substantial quantities of Nb3Sn material needed for the
Superconducting Tokamak Advanced Research Project in Korea.
In the area of LTS wire/cable, practical and more cost-effective HTS
materials developed by the Company and others could eventually reduce the market
for the Company's current LTS products, although the Company does not, at this
time, believe this is likely to happen in the near future. (See "Energy
Technology Segment" below.)
E. Patents
The Company believes at the present time that patents are not a
significant competitive factor in the conduct of its business in the LTS
Superconducting Materials segment. The Company directly or indirectly either
owns, or is a licensee under a number of patents relating to LTS materials and
the manufacture thereof. There are no assurances that changing technology and/or
emerging patents will not adversely impact the Company's current patent position
or its competitiveness.
F. Raw Materials and Inventory
There are two sources for NbTi raw material required for production of
NbTi wire. While the Company has not experienced difficulty in obtaining such
materials, fluctuation in demand caused by large projects such as the Large
Hadron Collider being constructed by CERN in Switzerland, could create temporary
imbalances in supply and demand and thus adversely impact the price of such raw
material. The Company has negotiated a multi-year contract with a key supplier
in order to reduce this risk and stabilize supply and price.
G. Warranty
The expense to the Company to date for performance of its warranty
obligations in the LTS Superconducting Materials segment has not been
significant.
17
ENERGY TECHNOLOGY SEGMENT
-------------------------
A. Introduction
High-temperature superconducting (HTS) materials are composed of
ceramic-like compounds. HTS materials become superconducting at higher
temperatures than those required to maintain superconductivity in LTS materials.
For example, HTS materials typically remain superconducting when cooled to
temperatures similar to that of liquid nitrogen (77 Kelvin or minus 321 F).
Accordingly, HTS materials usually require less sophisticated and less costly
cryogenic refrigeration systems. In addition, certain HTS materials can be used
to generate magnetic fields higher than can be reached using LTS materials.
The Company has maintained an HTS program since HTS materials were
first identified in 1986. Initially, the Company and others pursued the
development of "First Generation" HTS wires and tapes using Bismuth-based
materials. The Company and others have incorporated these First Generation
conductors into successful prototype products. Despite improvements in these
First Generation wires and tapes, the Company believes that the high cost of raw
materials required for First Generation conductors (notably, high-purity silver)
and certain performance limitations will prevent widespread commercialization.
More recently, the Company shifted its focus to "Second Generation" HTS
conductors. These conductors are based on less expensive metal alloy substrates
(e.g., nickel) and can be manufactured using a far less labor-intensive process
than First Generation conductors. Based on these factors, and the superior
performance demonstrated by Second Generation conductors, the Company believes
these conductors can reach cost and performance levels necessary for
commercialization. Accordingly, in fiscal year 2000, the Company formed a new
subsidiary, IGC-SuperPower, LLC, to develop and commercialize electric power
devices that utilize HTS materials. IGC-SuperPower intends to incorporate HTS
wire products (initially, First- and subsequently, Second-Generation) into
electric power devices (see "Principal Products" below) for sale primarily into
the electric power utility marketplace.
It is the Company's belief that Second Generation HTS conductors can be
made in sufficient quantity and length, and with cost and performance attributes
that will meet the commercial requirements of the applications being pursued by
the Company. It is expected that it will take at least three to five years to
reach such commercial thresholds. To date, Second Generation HTS conductors have
been successfully demonstrated by the Company or other entities only on a
laboratory scale. There can be no assurance that the Company will be successful
in extending the laboratory results to a manufacturing scale with cost and
performance levels adequate for successful commercialization.
B. Principal Products
(i) Second Generation HTS Conductor
As a pre-requisite to developing commercially successful HTS-based
electric power devices, the Company intends to develop, manufacture and sell
(both internally and externally) Second Generation HTS conductor. To that end,
in March 2000 the Company entered into a three-year collaborative technology
18
transfer agreement (the "LANL/ANL Agreement") with two U.S. Department of Energy
national laboratories (the Los Alamos National Laboratory ("LANL") and the
Argonne National Laboratory ("ANL")). Under this agreement, LANL and ANL will
assist the Company in scaling up to commercial manufacturing levels certain
promising HTS deposition processes developed by LANL. The Company will have
exclusive access to technology developed under the agreement, and has the first
right to negotiate an exclusive license within a field of use, for reasonable
terms and conditions, to inventions made by LANL and ANL under the agreement.
The Company will bear approximately half of the estimated $2.5 million
development cost and the laboratories will share the other half. In addition,
the Company announced in June 2000 the signing of a contract with the U.S.
Department of Energy ("DOE Agreement") for the first phase of a three-year, $4.5
million project to commercialize the manufacturing process for Second-Generation
HTS conductors. This contract will complement the LANL/ANL Agreement. In the DOE
Agreement, Intermagnetics and DOE will share the costs of developing the new
manufacturing process. The first phase, with costs of approximately $500,000, is
expected to be completed by December 2000. The Company expects the program to
continue for three more phases, bringing total expenditures to about $4.5
million over the three-year period.
(ii) HTS-Based Electric Power Devices
Using initially First Generation and, subsequently, Second Generation
HTS conductor, the Company intends to develop electric power devices for sale
primarily into the electric power utility marketplace. IGC-SuperPower would
manufacture and sell HTS components and devices for products such as:
(a) HTS Transformer: Conventional copper-wound, oil-filled
transformers are heavy, costly and of massive size relative to
output. They are also susceptible to fire and explosion. HTS
technology has the potential to enhance operating cost and
performance while offering reductions in both size and weight.
Specifically, HTS transformers would eliminate the fire and
explosion hazard associated with conventional oil-filled
transformers, run indefinitely above rated power without
reduction of transformer life, provide more power per unit
volume in existing substations, and increase operational
electrical efficiency. Initially, HTS will have to compete
against conventional copper-based transformer technology to
gain acceptance and market share.
Together with its partner Waukesha Electric Systems
(an operating unit of SPX Corporation), the Company in 1998
successfully developed and tested a 1 MVA HTS transformer
prototype using First Generation conductor. The Company and
Waukesha are currently developing a 5/10 MVA HTS transformer
prototype. The ultimate goal of the program is to develop a 30
MVA HTS transformer for the commercial market.
(b) HTS Fault Current Controller: HTS Fault Current
Controllers ("FCC") are a new type of device enabled by HTS
technology that potentially provide the ability to limit
damaging, high-current transients to power station and
substation components. By avoiding the damage to equipment
19
created by such swings in power level, electric utilities can
defer or eliminate the need for several types of equipment
upgrades or replacement, such as additional parallel bus,
switchgear, transformers, etc. FCC's can potentially also be
used as power valves in the transmission network, allowing
loads to be shifted from higher to lower loaded lines,
significantly increasing network efficiency.
As part of a team lead by General Atomics,
Intermagnetics participated in the development of a 15kV, 20kA
HTS FCC using First Generation HTS conductor. The complete FCC
assembly was installed and tested at Southern California
Edison in July of 1999. The Company's HTS coils met and
exceeded specifications. The FCC system currently is at Los
Alamos National Laboratory for cooling system modification
(the cooling system was not supplied by the Company). We
believe the system will be re-installed on the grid in
calendar year 2001.
(c) HTS Transmission Cable: An HTS transmission cable can
carry three to five times more power than a conventional
copper cable system. This has potential advantages in
circumstances where new underground installation is too
expensive, the terrain too difficult or where overhead right
of way is not available. Given their high current-carrying
capacity and other attractive characteristics, HTS cables may
open up new alternatives in network design. A superconducting
cable would also eliminate environmental concerns because it
does not use oil like conventional cables. HTS cables provide
increased operating efficiency. HTS cables could be
retrofitted into existing conventional cable ducts allowing
for the delivery of more power as well as creating conduit
space for telecommunications fiber. HTS cables could also
provide improved power quality by overriding peak loads and
improved operating efficiency through lower line losses.
In collaboration with Southwire Company,
Intermagnetics developed First Generation HTS conductor for a
30m, 12.5kV, 1,250A HTS power cable that was commissioned in
February 2000. This is the first known "real world"
demonstration of an HTS cable. The cable currently provides
power to three Southwire manufacturing plants.
C. Marketing
The Company intends to reach the electric utility marketplace via
strategic relationships with existing suppliers of electric power equipment.
While a strategic relationship already exists with Waukesha Electric Systems,
the Company believes it will be necessary to obtain additional strategic
partners in order for it to compete successfully. There can be no assurance that
such strategic marketing partners will be found, or that such partners will be
successful in bringing any of the Company's products to market.
20
D. Competition/Market
With respect to HTS-based products, the Company anticipates that it
will participate principally as a developer and manufacturer of cables, devices,
and associated cryogenic refrigeration systems and also as a developer and
supplier of HTS conductors (i.e.: wires/tapes). The Company believes that it can
compete effectively by leveraging its experience in superconducting materials
and cryogenic refrigeration systems, and its long track record of world-class
technical achievements and profitable commercialization of LTS products.
However, many of the Company's competitors have resources that are greater than
the Company, and there can be no assurance that the Company will be successful
in achieving a commercially significant position in this highly-competitive
emerging marketplace.
The Company believes its most significant U.S.-based competitor for HTS
materials is American Superconductor Corporation, which has established
strategic development and/or marketing relationships with a number of existing
suppliers and users of electric power equipment. Internationally, competitors
include NKT, Pirelli, Sumitomo and Furukawa for cables, and Siemens and ABB for
transformers and FCC's. The Company also competes with 3M, Sumitomo and Fujikura
on Second Generation conductor.
The underlying economics for HTS-based products appear to be
attractive. However, potential commercial end-users lack experience with such
products in field operations. This has tended to limit the adoption rate,
especially in the context of larger, more expensive applications such as those
for utility power plants and electric networks. Managers of electric utilities
focus on issues of long-term reliability, compatibility and maintenance, and
must make investments with a 40-year time horizon. For this reason, only the
most forward-looking utilities have begun to test prototype HTS systems.
HTS-based products ultimately will need to justify themselves in economic and
performance terms before widespread adoption can take place. Before HTS wire or
cables can replace conventional conductors available today, the
price/performance relationship of HTS must be demonstrated reliably. On the
basis of forecasted improved performance in Second Generation HTS conductor, the
Company expects to achieve HTS conductor selling prices that will stimulate
broad, commercial demand. However, there are many technical hurdles that must be
overcome before this goal can be attained.
The Company does not believe its current overall operations depend upon
successful market acceptance of HTS-based products or devices, nor are the
Company's continued operations necessarily dependent on its success in the HTS
marketplace, even if HTS-based products or devices do become commercially
viable. However, if technical problems are solved and HTS materials become
economically feasible for commercial applications in fields in which the Company
competes, then the Company could be adversely affected unless it is able to
develop products or devices using HTS materials. Accordingly, while representing
a relatively high-risk, long-term investment of its resources, the Company
perceives HTS technology as being of important strategic interest.
Because of the perceived high commercial potential of HTS materials,
HTS research is a highly competitive field, and currently involves many
commercial and academic institutions around the world that may have more
substantial economic and human resources to devote to HTS research and
development than the Company. There can be no assurances that the Company will
have sufficient resources to bring HTS products to market or that emerging
patents will not adversely impact the Company's competitiveness.
21
E. Patents
Management believes that its current patent position, together with its
expected ability to obtain licenses from other parties to the extent necessary,
will provide the Company with sufficient access to relevant intellectual
property to develop and sell HTS wires and system components consistent with its
business plan. However, the patent situation in HTS is unusually complex. Since
the discovery of high temperature superconductors in 1986, rapid technical
advances have resulted in the filing of a large number of patent applications
relating to superconductivity worldwide. Many patents and patent applications
overlap and are contested. A protracted interference proceeding in the U.S.
regarding the fundamental Second Generation HTS composition (YBCO) recently
reached its conclusion in favor of Lucent Technologies Inc. However, a
considerable number of intellectual property ownership issues with respect to
HTS materials and processes remain contested. A number of patents and patent
applications of third parties relate to the Company's current and future
products. The Company may need to acquire licenses for those patents,
successfully contest the scope or validity of those patents, or design around
patented processes or applications.
The Company recently obtained a non-exclusive license to Lucent
Technology's HTS patent portfolio, including a license to YBCO, one of the key
raw materials the Company is developing for use in Second Generation HTS
conductors. Lucent's YBCO patent application is expected to issue as a U.S.
patent within the next six to twelve months. The Company believes that the
Lucent patent portfolio has been, or will be, licensed broadly on a
non-exclusive basis to other HTS technology participants, including several of
the Company's competitors.
The Company is developing a manufacturing process for Second Generation
HTS conductor using the combination of Ion Beam Assisted Deposition and Pulsed
Laser Deposition coating developed by LANL. Intermagnetics has the right to
obtain a license to this technology. The Company believes that it will be able
to obtain the license on commercially reasonable terms, but there can be no
assurance that this will be the case.
A number of other companies (including HTS competitors) have filed
patent applications, and in some instances have been issued patents, on various
aspects of HTS composition of matter, HTS wire processing, HTS wire
architecture, and HTS component and subsystem design and fabrication. To the
extent that any of these issued or pending patents might cover the materials,
processes, architectures, components or devices that the Company wishes to use,
develop or sell, the Company would be required to obtain licenses under those
patents.
22
F. Raw Materials and Inventory
First Generation conductors currently require silver in the
manufacturing process. This adds significant expense to the cost of the
conductor and is one of the reasons the Company does not believe First
Generation conductors will achieve widespread commercial success. IGC-SuperPower
expects to order parts and components for demonstration devices based on needs,
utilizing multiple sources. IGC-SuperPower anticipates purchasing raw materials
that include precursors and nickel alloy tape for scaling up the manufacture of
Second Generation conductor. These materials are available from multiple
sources. The Company currently does not maintain significant quantities of
inventory of any of the supplies used in Second Generation conductor or for its
device development needs.
G. Warranty
The expense to the Company to date for performance of its warranty
obligations in the Energy Technology Segment has not been significant.
RESEARCH AND DEVELOPMENT
------------------------
The Company believes its research and development activities are
important to its continued success in new and existing markets. Externally
funded development programs have directly increased sales of design services and
products and, at the same time, assisted in expanding the Company's technical
capabilities without burdening operating expenses. Under many of the Company's
government contracts, it must share any new technology resulting from such
contracts with the government, which includes the right to transfer such
technology to other government contractors; however, the Company currently does
not expect such rights to have a material adverse impact on its future
operations.
Previously, a substantial portion of the Company's research and
development expenditures had been covered by external funding, principally from
the U.S. government. In fiscal 2000, approximately 43% of total research and
development activities were paid by such external programs compared to
approximately 43% and 37% in fiscal years 1999 and 1998, respectively. During
fiscal years 2000, 1999 and 1998, product research and development expenses in
all segments, including externally funded amounts, were $11,038,000, $10,886,000
and $13,072,000, respectively. The decline in fiscal year 1999 primarily
resulted from the closure of the Company's Field Effects division in December
1998, and the completion of certain internally-funded programs.
The Company can experience, in any given year, significant increases or
decreases in external funding depending on its success in obtaining funded
contracts.
23
INVESTMENTS
-----------
See Note D of the Notes to Consolidated Financial Statements included in
response to Item 8 for a Description of the Company's Investments.
24
PERSONNEL
---------
On May 28, 2000, the Company employed 592 people.
Within the LTS Superconducting Materials segment, the production and
maintenance employees of IGC-AS, in Waterbury, Connecticut, are represented by
the United Steelworkers of America ("United Steelworkers"). The Company and the
United Steelworkers have a five-year collective bargaining agreement that
expires on May 30, 2003. Within the Refrigeration segment, the production
employees at IGC-APD in Allentown, Pennsylvania, are represented by the
International Association of Machinists and Aerospace Workers ("IAMAW"). The
Company and IAMAW have a three-year collective bargaining agreement that expires
on August 22, 2003.
There is great demand for trained scientific and technical personnel as
well as for key management personnel, and the Company's growth and success will
require it to attract and retain such personnel. Many of the prospective
employers of such personnel are larger and have greater financial resources than
the Company and may be in a better position to compete with the Company for
prospective employees.
25
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
As of the date of this report, the executive officers of the Company
were:
Name Position Age
- ---- -------- ---
Glenn H. Epstein President and Chief Executive Officer 42
Michael C. Zeigler Senior Vice President --
Chief Financial Officer 54
Leo Blecher Vice President and General Manager -- 54
IGC-Magnet Business Group
David Dedman Vice President and General Manager -- 46
IGC-APD Cryogenics Inc.
and IGC-Polycold Systems Inc.
Barry Gawthrope Vice President and General Manager - 47
IGC-Advanced Superconductors
Ian L. Pykett Chief Technology Officer 47
Richard J. Stevens Vice President and General Manager -- 58
IGC-Medical Advances Inc.
Glenn H. Epstein was named President and Chief Operating Officer on May
5, 1997. Effective June 1, 1999, he was appointed Chief Executive Officer. Prior
to joining the Company, Mr. Epstein worked for Oxford Instruments Group, plc in
various capacities between 1986 and April 1997, and most recently held the
position of President of the Nuclear Measurements Group, Inc., a wholly-owned
subsidiary of Oxford Instruments, plc. Mr. Epstein also worked for the General
Electric Company between 1981 and 1986.
Michael C. Zeigler was appointed Chief Financial Officer of the Company
in June, 1987. Prior to that, he served as the Company's Controller from June
1985 through June 1987.
Leo Blecher was appointed Vice President and General Manager of IGC-MBG
in April, 1997. He previously held the title of Deputy Manager of IGC-MBG. He
originally joined the Company in 1988 as Manager of Technology Projects. Prior
to joining the Company, Mr. Blecher held various positions of responsibility
with Israel Aircraft Industry, holding the title of Manager - Engineering and
Project Manager, for the Space Technology Division.
David Dedman was appointed Vice President and General Manager of
IGC-APD and IGC-Polycold in September, 1998. Prior to joining the Company, Mr.
Dedman served as Executive Vice President, Global Business Development for
SubMicron Systems Corporation and has held various executive management
positions in a range of technology companies including EI DuPont de Nemours,
Emerson Electric and Tylan General.
26
Barry Gawthrope was appointed Vice President and General Manager of
IGC-AS in December, 1999. Prior to joining IGC-AS, Mr. Gawthrope was director of
operations for Madison Cable Corporation, a manufacturer of highly specialized
cable and wire. Mr. Gawthrope also served as director of operations and vice
president of operations for Computer Products Inc. and Poly-Flex Circuits Inc.,
respectively.
Ian L. Pykett, Ph.D. was appointed Chief Technology Officer in
February, 2000. He had served as Vice President of the IGC-Technology
Development division since 1991. That division was dissolved in fiscal year
2000. Prior to joining the Company, Dr. Pykett had been President and Chief
Executive Officer of Advanced NMR Systems, Inc., a diagnostic imaging company he
co-founded in 1983.
Richard J. Stevens became Vice President and General Manager - IGC-MAI
upon its acquisition by the Company in March 1997. An original founder of
Medical Advances, Inc., Mr. Stevens had been its President since 1985. Prior to
that, Mr. Stevens was a marketing and advertising executive for seventeen years
with the General Electric Company. He spent twelve years of his career at the
General Electric Company in the Medical Systems Group and five years in
materials technologies businesses, and held the title of Manager of Computed
Tomography Marketing in the Medical Systems Group from 1981 to 1985.
ITEM 2. PROPERTIES
The Company's corporate offices, IGC-MBG and ICE offices are located in
approximately 146,000 square feet of space located in Latham, New York (the
"Latham Facility"). The Company owns the Latham Facility, which is subject to a
mortgage. (See Note E of the Notes to Consolidated Financial Statements included
in response to Item 8 hereto.)
In fiscal year 1999, the Company entered into a lease agreement for up
to approximately 65,000 square feet of office and manufacturing space in nearby
Schenectady, New York. IGC-SuperPower currently occupies approximately 33,000
square feet of that space and plans to expand into the remaining 32,000 square
feet during fiscal year 2001. The facility contains both offices and
manufacturing space. The lease has a 20 year term ending in October 2019.
IGC-AS' offices and production facilities are located in Waterbury,
Connecticut in premises of approximately 212,700 square feet (of which 57,900
square feet are presently being used) pursuant to a thirty-year prepaid lease
that expires in December, 2021. The facility's equipment includes a drawbench
with a pulling force of up to 150,000 pounds and a length of approximately 400
feet. The Company believes that this drawbench is one of the largest in the
world.
The former IGC Field Effects division operated out of premises totaling
approximately 21,900 square feet in Tyngsboro, Massachusetts. The lease for this
facility was terminated by mutual consent of the Company and the landlord in
December, 1999.
27
IGC-APD operates out of a building, which it owns, in Allentown,
Pennsylvania totaling approximately 56,550 square feet.
IGC-MAI leases approximately 21,200 square feet in a multi-tenant
building located in the Milwaukee County Research Park's Technology Innovation
Center (the "Research Park"). Approximately 9,000 square feet are used for
office space with the remaining space dedicated to lab, assembly, shipping and
material storage. The lease expires in August 2001, and may be renewed for a
successive one-year term. While the Company currently believes that it will be
able to renew this lease, the Research Park expects that IGC-MAI will purchase
or lease property within the Park for a new facility. IGC-MAI is studying the
possibility of building, or moving to, a new facility.
IGC-Polycold Systems Inc. leases approximately 27,900 square feet of
manufacturing and office space in three buildings located in San Rafael,
California. The lease for one building expires in October 2001. Leases for the
two other buildings expire in 2002.
The Company believes its facilities are adequate and suitable for its
current and near-term needs.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to any
material legal proceeding. The Company is, from time to time, a party to
litigation arising in the normal course of its business.
To the Company's knowledge, no director, officer, affiliate of the
Company, holder of 5% or more of the Company's Common Stock, or associate of any
of the foregoing, is a party adverse to, or has a material interest adverse to,
the Company or any of its subsidiaries in any proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange
under the symbol IMG. The high and low sales prices of the Common Stock for each
quarterly period for the last two fiscal years, based on quoted market prices,
are shown below.
Closing Prices(1)
Fiscal Year 1999 High Low
- ---------------- ---- ---
Quarter Ended August 30, 1998 $ 9.6480 $ 6.5534
Quarter Ended November 29, 1998 7.5242 5.2791
Quarter Ended February 28, 1999 6.3107 5.1577
Quarter Ended May 30, 1999 11.8932 5.4005
Fiscal Year 2000
- ----------------
Quarter Ended August 29, 1999 $ 7.7670 $ 5.4611
Quarter Ended November 28, 1999 6.9174 5.4005
Quarter Ended February 27, 2000 19.4781 5.9466
Quarter Ended May 28, 2000 33.2523 9.8301
- -------------
(1) The closing prices have been adjusted to reflect a three percent stock
dividend distributed on August 25, 2000, to stockholders of record on
August 4, 2000.
There were approximately 1,100 holders of record of Common Stock as of
August 3, 2000. The Company has not paid cash dividends in the past ten years,
and it does not anticipate that it will pay cash dividends or adopt a cash
dividend policy in the near future. The Board of Directors of the Company has
declared a policy of granting annual stock dividends where, and to the extent
that, the performance of the Company warrants such a declaration. The Company
did not declare any stock dividend for fiscal year 1999. Under the Company's
bank agreements, prior bank approval is required for cash dividends in excess of
the Company's net income for the year to which the dividend pertains.
29
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been taken from the
consolidated financial statements of the Company. The selected statement of
operations data and the selected balance sheet data set forth below should be
read in conjunction with, and is qualified in its entirety by, Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and related Notes included in response to
Items 7 and 8.
(Dollars in Thousands Except Per Share Amounts)
-------------------------------------------------------------------------------
For the Fiscal Year Ended May 28, 2000 May 30, 1999 May 31, 1998 May 25, 1997 May 26, 1996
------------ ------------ ------------ ------------ ------------
Net sales $112,772 $102,871 $95,894 $87,052 $88,467
Gross Margin 40,766 32,739 35,685 26,200 22,279
Income (loss) before 10,506 (8,241) 4,744 4,035 6,882
income taxes
Net Income (loss) 6,452 (7,029) 2,753 2,615 4,427
Per common share
Basic .49 (0.55) 0.21 0.21 0.36
Diluted .46 (0.55) 0.20 0.20 0.34
At End of Fiscal Year 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Working capital $44,816 $34,389 $45, 493 $49,346 $53,642
Total assets 127,977 125,458 127,776 115,889 112,397
Long-term debt
(net of current maturities) 26,524 26,631 28,833 29,105 29,364
Accumulated deficit (5,914) (8,061) (1,081) (1,643) (1,727)
Shareholders' equity 78,463 72,173 83,801 73,087 67,296
- ------------
(a) Income (loss) per common share has been computed during each period based
on the weighted average number of shares of Common Stock outstanding plus
dilutive potential common shares (where applicable).
(b) The Company did not pay a cash dividend on its Common Stock during any of
the periods indicated.
(c) Net income (loss) per common share has been restated to give effect to the
3% stock dividend distributed in August 2000, 2% stock dividend distributed
in September 1998, September 1997 and August 1996.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The statements contained in this annual report which are not historical
fact are "forward-looking statements" that involve various important
assumptions, risks, uncertainties and other factors which could cause the
Company's actual results for fiscal year 2000 and beyond to differ materially
from those expressed in such forward-looking statements. These important factors
include, without limitation, the assumptions, risks, and uncertainties set forth
herein, as well as other assumptions, risks, uncertainties and factors disclosed
elsewhere in this report and in the Company's press releases, shareholders'
reports and filings with the Securities and Exchange Commission.
COMPANY OVERVIEW
Intermagnetics General Corporation ("we" or the "Company") operates in
four reportable operating segments: Electromagnetics, LTS Superconducting
Materials, Refrigeration and Energy Technology. The Electromagnetics segment
consists primarily of the manufacture and sale of magnets (by the IGC-Magnet
Business Group) and radio frequency coils (by IGC-Medical Advances, Inc), and
the LTS Superconducting Materials segment consists primarily of the manufacture
and sale of low-temperature superconducting wire and cable (by IGC-AS), all of
which are used mainly in Magnetic Resonance Imaging ("MRI") for medical
diagnostics. The majority of the Company's sales in these two segments are to US
and European customers. The Refrigeration segment consists of refrigeration
equipment produced by two subsidiaries, IGC- APD Cryogenics Inc. (IGC-APD) and
IGC - Polycold Systems Inc. (IGC-Polycold), and refrigerants which are sold by
another subsidiary, InterCool Energy Corporation (ICE). Refrigeration equipment
is used in the vacuum deposition industry, the semiconductor manufacturing
process, MRI, and in a variety of research applications. Refrigerants consist of
a family of environmentally friendly refrigerants designed to replace banned CFC
refrigerants. Sales of this segment are primarily to US, Asian and European
customers. The Energy Technology segment consists primarily of the design and
manufacture of High Temperature Superconductor ("HTS") material and the
development of devices used to transmit and distribute electric power such as
HTS transmission cables and power transformers. Through May 30, 1999, the
activities of the Energy Technology segment were included in the
Electromagnetics segment. Segment data for prior years has been adjusted to
conform with current year presentation. The Company operates on a 52/53 week
fiscal year ending the last Sunday during the month of May.
During the current fiscal year, the Company decided to exit its
refrigerant business, because the business did not fit the Company's strategic
direction, and has developed an exit plan. Under this plan, which is expected to
be completed within 15 months, the Company terminated all but two employees and
is continuing the business through a master distributor while attempting to find
a buyer for the business. As a result of this exit plan, we recorded a
restructuring charge of $2 million, including $1.8 million of inventory
write-offs during the year.
31
In the previous fiscal year, we discontinued our Field Effects division
which had been engaged in the manufacture and sale of clinical MRI systems. We
recorded a total restructuring charge of $4.7 million, including inventory
write-offs of $1.8 million in connection with the closure, of which
approximately $0.4 million was recovered in the current year.
As of May 30, 1999, the Company completed an agreement with Alstom, SA
("Alstom") to terminate the parties' joint venture, Alstom Intermagnetics
("AISA"), which previously manufactured MRI magnet systems under a license from
the Company. As part of the agreement, AISA's magnet production is being
transferred to our factory. We paid Alstom about $9 million for certain assets,
most of which related to intangible assets, including production rights.
RESULTS OF OPERATIONS
For the year ended May 28, 2000, sales increased by 9.6%, to $112.8
million, compared with an increase of 7.3% for the preceding year.
Sales of the Electromagnetics segment increased by $10.3 million, or
18%, due to a substantial increase in magnet system sales resulting from higher
demand by the Company's major customer and additional volume resulting from the
purchase of AISA's production rights. Sales of RF coils declined by about $2
million, or 16%, due to lower sales resulting from the loss of a customer (to
industry consolidation) and a temporary decrease in direct sales personnel. In
the prior year, Electromagnetics sales were down by $1.8 million (3%) due to a
decline in magnet system sales of $4 million (a portion of which related to the
closure of the Field Effects division), partially offset by a $2.2 million
increase in RF Coil sales.
Sales of LTS Superconducting Materials were down by $1.8 million (15%)
in the current fiscal year due to lower demand from IGC-AS's largest external
customer. Overall segment sales, however, were up due to higher inter-company
demand from the Electromagnetics segment. In the prior year, overall activity
was essentially unchanged as a $1 million increase in external sales was offset
by a reduction in shipments to the Electromagnetics segment.
Sales of refrigeration products increased by $2.5 million (8%) due
mainly to higher refrigerant sales. This represents the sale of inventory in
connection with the Company's exit plan for the refrigerant business. The exit
plan resulted in a restructuring charge of $2 million for the current year as
described in Note C of Notes to Consolidated Financial Statements. Segment sales
increased by $6.9 million (29%) in the previous year due mainly to the inclusion
of Polycold Systems (acquired in November, 1997) for the full year.
During the current year, the Company increased its emphasis on
developing HTS for application to devices expected to improve electric power
transmission and distribution. These devices are expected to include HTS power
transmission cables, transformers, and fault current controllers. In view of the
expected increased importance of these activities, the Company began reporting
32
them as a separate segment, Energy Technology. In prior years, this segment's
activities had been aggregated in the Electromagnetics segment. Prior year
segment data presented in Note K of Notes to Consolidated Financial Statements
has been reclassified to conform with current year presentation. Sales of this
segment declined to $1.7 million from $2.8 million last year due to the
Company's decision to de-emphasize first generation conductors. The Company
believes, in general, that first generation conductors (consisting of ceramic
components in a silver matrix) will be unable to achieve cost and performance
targets necessary to make devices produced with this material economically
feasible. Accordingly, we refocused our efforts on conductors in which the
superconducting components are deposited on a nickel substrate. We have
developed important relationships and cooperative agreements for the pursuit of
this approach, and we expect these to lead to an increase in sales in the coming
year. We are actively seeking additional strategic partners to assist in the
development and marketing of these products. Sales in fiscal 1999 grew by about
$800,000 over the previous year due to the completion of certain first
generation conductor programs.
Before the effects of inventory written off as a result of restructurings of
$1.4 million in the current year and $1.8 million last year, gross margins
increased to $42.2 million, or 37.4% of sales from $34.6 million, or 33.6% last
year. The improvement was largely due to the substantial increase in magnet
sales in the Electromagnetics segment, as well as improved margins in the
Refrigeration segment resulting from operating improvements begun last year in
the refrigeration equipment portion of the segment. Margins in fiscal 1999 were
lower than the prior year due to inventory write-offs, production problems and,
in certain business groups, an unfavorable sales mix.
Product research and development was essentially unchanged in fiscal
2000, and declined by 23.5% in fiscal 1999 from fiscal 1998, due to the
completion of certain internal programs as well as the termination of the Field
Effects Division.
Marketing, general and administrative expenses increased in the current
fiscal year due primarily to the settlement of a claim by a former distributor
together with associated legal costs, and the fact that last year's expenses
were lowered by a pension curtailment gain of $0.5 million. Exclusive of those
items, both years would have increased by about 10% over fiscal 1998, largely
due to the inclusion of IGC-Polycold which was acquired in November 1997.
Amortization of intangible assets increased in the current year due to
intangibles acquired in connection with the termination of the AISA joint
venture agreement.
Operating income increased substantially during the current year due to
the higher level of sales and improved gross margins. In the prior year, before
restructuring charges, operating income was essentially unchanged from fiscal
1998.
In fiscal 1999, we wrote off our investment in SMIS, a UK company, and
provided for a $2 million obligation for financial guarantees of that company's
indebtedness. During the current year, SMIS was liquidated, and the proceeds
were sufficient to reduce our obligation under the guarantee to approximately
33
$400,000. Accordingly, we recorded a recovery of $1.6 million in fiscal 2000.
Prior to the write-off, the investment in SMIS had been recorded using the
equity method of accounting. Losses included in "Equity in Net Loss of
Unconsolidated Affiliates" amounted to approximately $518,000 in fiscal 1999 and
$1,009,000 in fiscal 1998.
"Equity in Net Loss of Unconsolidated Affiliates" also included losses
recognized from application of the equity method to our investment in Kryotech,
a maker of computer chip cooling devices, of $236,000 in fiscal 2000 and
$973,000 in fiscal 1999. We used the equity method only because our ownership
interest exceeded 20% of Kryotech's equity. During the current year, Kryotech
raised additional capital through an offering, and they expect to raise
additional capital in the coming months. Our ownership interest was diluted and,
accordingly, we have ceased applying the equity method to this investment.
Our effective tax rate was 38.6% in fiscal 2000 compared with 42% in
fiscal 1998. The reduction is largely due to higher benefit from our Foreign
Sales Corporation, and the utilization of capital loss carryforwards. In fiscal
1999, we recorded a tax benefit of $1.2 million on a pre-tax loss of $8.2
million. A major reason for the low rate of benefit was the fact that a large
portion of the loss related to capital losses from the write-off of our
investment in SMIS. Because these losses can only be used to offset capital
gains, the benefits are only recognized when and if capital gains are generated.
Looking forward, we expect higher sales and earnings in fiscal 2001
based on expected increases in Electromagnetics and Refrigeration segment sales.
As previously noted, both the Electromagnetics and Refrigeration segments had an
increase in gross margin for the year. The Refrigeration segment attained
profitability during the fourth quarter, and we expect it to continue. We also
believe that we will be able to continue and expand the gains in gross margins
achieved in fiscal 2000. We expect to devote a portion of this increase to
internal research and development efforts, particularly in the Energy Technology
segment, but we believe that earnings will continue to grow at a faster rate
than sales. These expectations are based on the following assumptions, among
others:
o The market for MRI systems continues to grow;
o We are able to reverse the decline in RF coil sales;
o Current order trends for MRI magnets and refrigeration equipment
continue; and
o Reductions in production costs in all business segments continue.
YEAR 2000
Our Information Technology systems and facilities successfully
completed the transition to the year 2000 with no adverse or negative impacts
associated with the processing of date sensitive systems and equipment. We
continue to evaluate the year 2000 compliance of our business systems,
facilities and significant vendors, but we believe that the risk of significant
problems is small. We spent about $0.2 million on our total year 2000 readiness
activities which was expensed as incurred.
34
LIQUIDITY AND CAPITAL COMMITMENTS
We generated nearly $25 million in cash from operating activities in
the current year. We used this cash to repay advances on our line of credit
($4.85 million), complete payment for the AISA termination ($4.75 million), and
purchase property, plant and equipment ($5.29 million). Our total cash position
improved to $12.5 million from $2.3 million last year.
During this year, we redeemed the Preferred Stock issued in connection
with the fiscal 1998 acquisition of Polycold. Of the $7 million of Preferred
Stock, $0.7 million was redeemed for cash, $2.2 million for a note payable in
equal installments in June 2000 and June 2001, and $4.1 million for Common
Stock.
Under our Share Repurchase Plan, we acquired 114,000 shares of Treasury
Stock for $0.7 million in fiscal 2000; 530,500 shares for $4.0 million in fiscal
1999; and 465,650 shares for $4.1 million in fiscal 1998.
See the consolidated statement of cash flows, located elsewhere in this
report, for further details on sources and uses of cash.
On June 30, 2000, we entered into a non-exclusive license agreement
with respect to certain US and international patents related to HTS materials
and devices. In connection with the agreement, we agreed to pay the licensor a
lump sum fee, payable in two installments on June 30, and granted them warrants
to purchase 103,000 shares of our Common Stock at a price of $19.36 per share
(shares and prices adjusted for the stock dividend for holders of record on
August 4, 2000). The license is valid for all fields of use and does not require
us to pay an ongoing royalty.
Also in July 2000, $10,090,000 of our 5 3/4% convertible subordinated
debentures were converted into 728,187 shares of our Common Stock at $13.856 per
share. Additionally, we issued 31,415 shares of Common Stock valued at $19.539
per share to induce early conversion and in lieu of all accrued interest. The
shares and prices have been adjusted for the stock dividend.
Our capital and resource commitments at August 1 consisted of capital
equipment commitments of $522,000 and the $1 million due on the previously
mentioned license agreement.
We have a $27 million unsecured line of credit with two banks.
Borrowings under the line bear interest at the London Interbank Offered Rate
(LIBOR) plus 0.5% or prime less 0.5% at our option. The line expires in November
2002.
We believe we have adequate resources to meet our needs for the
short-term from our existing cash balances, our expected cash generation in the
current fiscal year, and our line of credit. Longer-term, with substantial
increases in sales volume and/or unusually large research and development or
capital expenditure requirements to pursue new opportunities in the Energy
35
Technology segment, we could need to raise additional funds. We would expect to
be able to do so through additional lines of credit, public offerings or private
placements. However, in the event funds were not available from these sources,
or on acceptable terms, we would expect to manage our growth within the
financing available.
Inflation has not had a material impact on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
The Company's exposure to market risk through derivative financial
instruments and other financial instruments, such as investments in short-term
marketable securities and long-term debt, is not material. The financial
instruments of the Company that are interest rate dependent are revenue bonds
issued in connection with the acquisition of certain land, building and
equipment, an unsecured line of credit and a mortgage payable. The Company
manages interest rates through various methods within contracts. For the revenue
bonds, the Company negotiated variable rates with the option to set fixed rates.
On its mortgage payable, the Company negotiated an "interest rate swap"
agreement that, in effect, fixes the rate at 6.88%. With respect to its
unsecured line of credit, the Company may elect to apply interest rates to
borrowings under the line which relate to either the London Interbank Offered
Rate or prime, whichever is most favorable. (See Note E of the Notes to
Consolidated Financial Statements included in response to Item 8 for more
details regarding these instruments.) The Company's objective in managing its
exposure to changes in interest rates is to limit the impact of changing rates
on earnings and cash flow and to lower its borrowing costs.
The Company does not believe that its exposure to commodity and foreign exchange
risks are material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as part of this report are the consolidated
financial statements and supplementary data listed in the list of Financial
Statements and Schedules included in response to Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 7, 2000, Intermagnetics General Corporation (the "Company")
dismissed KPMG LLP and engaged PricewaterhouseCoopers LLP as the Company's
independent auditors for the fiscal year ending May 28, 2000. The Company filed
a report on Form 8-K with the Securities and Exchange Commission with respect to
this matter.
36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning directors called for by Item 10 of Form 10-K
will be set forth under the heading "Election of Directors" in the Company's
definitive proxy statement relating to the 2000 Annual Meeting of Shareholders
(the "Proxy Statement"), and is hereby incorporated herein by reference.
The information concerning executive officers called for by Item 10 of
Form 10-K is set forth in "Item 1. Business" of this annual report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information with respect to compensation of certain executive
officers and all executive officers of the Company as a group to be contained
under the headings "Executive Compensation" and "Certain Transactions" in the
Proxy Statement is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information with respect to ownership of the Company's Common Stock
by management and by certain other beneficial owners to be contained under the
heading "Security Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information with respect to certain relationships and related
transactions to be contained under the heading "Certain Transactions" in the
Proxy Statement is hereby incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
37
Attached hereto and filed as part of this report are the financial statements,
schedules and the exhibits listed below.
1. Financial Statements
Report of Independent Accountants
Independent Auditors' Report
Consolidated Balance Sheets as of May 28, 2000 and May 30, 1999
Consolidated Statements of Operations for fiscal years ended May 28,
2000, May 30, 1999 and May 31, 1998
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income (Loss) for fiscal years ended May 28, 2000, May
30, 1999 and May 31, 1998
Consolidated Statements of Cash Flows for the fiscal years ended May
28, 2000, May 30, 1999 and May 31, 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
II Valuation and Qualifying Accounts
All other schedules are not required or are inapplicable and,
therefore, have been omitted.
3. Exhibits
Articles of Incorporation and By-laws
3.1 Restated Certificate of Incorporation (11) (Exhibit 3)
*3.2 By-laws, as amended
Instruments defining the rights of security holders, including indentures
4.1 Form of Common Stock certificate (5) (Exhibit 4.1)
4.2 Intermagnetics General Corporation Indenture dated as of
September 15, 1993 (11) (Exhibit 4.1)
38
4.3 Second Amended and Restated Loan and Agency Agreement dated as of
October 23, 1997 among Corestates Bank, N.A. and Intermagnetics
General Corporation, APD Cryogenics Inc., Magstream Corporation,
Medical Advances, Inc. and InterCool Energy Corporation (11)
(Exhibit 4.2)
4.4 First Amendment dated as of May 18, 1998 to the Second Amended
and Restated Loan Agreement dated as of October 23, 1997 among
Corestates Bank, N.A. and Intermagnetics General Corporation, APD
Cryogenics Inc., Magstream Corporation, Medical Advances, Inc.
and InterCool Energy Corporation (11) (Exhibit 4.3)
*4.5 Fourth Amendment dated as of March 31, 2000 to the Second Amended
and Restated Loan Agreement dated as of October 23, 1997, among
Intermagnetics General Corporation, IGC APD Cryogenics Inc.
Magstream Corporation, IGC Medical Advances Inc., Intercool
Energy Corporation, and IGC Polycold Systems Inc., First Union
National Bank (successor by merger to CoreStates Bank, N.A.), and
The Chase Manhattan Bank
Material Contracts
10.1 Agreement Restating and Superseding Lease and Granting Rights to
Use Common Areas and Other Rights dated as of December 23, 1991
between Waterbury Industrial Commons Associates, IGC Advanced
Superconductors Inc. and Intermagnetics General Corporation (5)
(Exhibit 10.1)
+10.2 1990 Stock Option Plan (4) (Appendix A)
+10.3 1981 Stock Option Plan, as amended (2) (Exhibit 10.7)
+10.4 Supplemental Executive Benefit Agreement (1) (Exhibit 10.37)
10.5 Agreement dated June 2, 1992 between Philips Medical Systems
Nederlands B.V. and Intermagnetics General Corporation for sales
of magnet systems (7) (Exhibit 10.6)
10.6 Amendment No. 3 dated January 1, 1997 to the Agreement of June 2,
1992 between Philips Medical Systems Nederlands B.V. and
Intermagnetics General Corporation for sales of magnet systems
(8) (Exhibit 10.6)
39
10.7 Agreements dated April 29, 1999 between Philips Medical Systems
Nederlands B.V. and Intermagnetics General Corporation for sales
of magnet systems (3) (Exhibit 10.7)
+10.8 Employment Agreement dated April 20, 1998 between Intermagnetics
General Corporation and Carl H. Rosner (11) (Exhibit 10.1)
+10.9 Employment Agreement dated June 1, 1999 between Intermagnetics
General Corporation and Glenn H. Epstein (3) (Exhibit 10.9)
+*10.10 Enhanced Benefit Plan
*10.11 Executive Stock Purchase Plan
10.12 Share Purchase Agreement, dated January 23, 1992, by and between
Ultralife Batteries, Inc. and Intermagnetics General Corporation
(6) (Exhibit 10.1)
#10.13 Patent License Agreement dated June 30, 2000 between
Intermagnetics General Corporation and Lucent Technologies GRL
Corporation
Subsidiaries of the registrant
*21 Subsidiaries of the Company
Consents of experts and counsel
*23 Consent of KPMG LLP with respect to the Registration Statements
Numbers 2-80041, 2-94701, 33-2517, 33-12762, 33-12763, 33-38145,
33-44693, 33-50598, 33-55092, 33-72160, 333-10553, 333-42163 and
333-75269 on Form S-8.
*24 Consent of PriceWaterhouseCoopers with respect to the
Registration Statements Numbers 2-80041, 2-94701, 33-2517,
33-12762, 33-12763, 33-38145, 33-44693, 33-50598, 33-55092,
33-72160, 333-10553, 333-42163 and 333-75269 on Form S-8.
- -----------------
(1) Exhibit incorporated herein by reference to the Registration
Statement on Form S-2 (Registration No. 2-99408) filed by the
Company on August 2, 1985.
(2) Exhibit incorporated herein by reference to the Annual Report on
Form 10-K filed by the Company for the fiscal year ended May 31,
1987.
40
(3) Exhibit incorporated herein by reference to the Annual Report on
Form 10-K filed by the Company for the fiscal year ended May 30,
1999.
(4) Exhibit incorporated herein by reference to the Proxy Statement
dated October 4, 1991 for the 1991 Annual Meeting of
Shareholders.
(5) Exhibit incorporated herein by reference to the Annual Report on
Form 10-K filed by the Company for the fiscal year ended May 31,
1992, as amended by Amendment No. 1 on Form 8 dated November 17,
1992.
(6) Exhibit incorporated herein by reference to the Quarterly Report
on Form 10-Q filed by the Company for the six months ended
November 29, 1992.
(7) Exhibit incorporated herein by reference to the Annual Report on
Form 10-K/A2 for the fiscal year ended May 29, 1994. Portions of
this Exhibit were omitted and filed separately with the Secretary
of the Securities and Exchange Commission pursuant to an
Application for Confidential Treatment under Rule 24b-2 of the
Securities Exchange Act of 1934, as amended.
(8) Exhibit incorporated herein by reference to the Annual Report on
Form 10-K/A filed by the Company for the fiscal year ended May
25, 1997.
(9) Exhibit incorporated herein by reference to the Current Report on
Form 8-K filed by the Company on March 10, 1997.
(10) Exhibit incorporated herein by reference to the Current Report on
Form 8-K filed by the Company on November 24, 1997.
(11) Exhibit incorporated herein by reference to the Annual Report on
Form 10-K filed by the Company on August 28, 1998.
* Filed with the Annual Report on Form 10-K for the fiscal year ended May 28,
2000.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit to this annual report on Form 10-K.
# To be filed by amendment.
The Company agrees to provide the SEC upon request with copies of
certain long-term debt obligations which have been omitted pursuant to the
applicable rules.
41
The Company agrees to furnish supplementally a copy of omitted
Schedules and Exhibits, if any, with respect to Exhibits listed above upon
request.
(b) REPORTS ON FORM 8-K
None.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INTERMAGNETICS GENERAL CORPORATION
Date: August 28, 2000
By: /s/ Glenn H. Epstein
----------------------------------------
Glenn H. Epstein
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints Glenn H.
Epstein, President and Chief Executive Officer, Michael C. Zeigler, Senior Vice
President - Finance and Chief Financial Officer, and each of them, his true and
lawful attorneys-in-fact, in his name, place and stead to execute and cause to
be filed with the Securities and Exchange Commission any or all amendments to
this report.
Name Capacity Date
- ----------------------------------------------------------------------------------------------------------
/s/ Glenn H. Epstein President and August 28, 2000
- --------------------------- Chief Executive Officer
Glenn H. Epstein (principal executive
officer) and Director
/s/ Michael C. Zeigler Senior Vice President- August 28, 2000
- --------------------------- Finance; Chief Financial
Michael C. Zeigler Officer (principal financial
and accounting officer)
/s/ Carl H. Rosner Chairman of the Board August 28, 2000
- --------------------------- of Directors
Carl H. Rosner
43
Name Capacity Date
- ----------------------------------------------------------------------------------------------------------
/s/ Joseph C. Abeles Director August 28, 2000
- ---------------------------
Joseph C. Abeles
/s/ John M. Albertine Director August 28, 2000
- ---------------------------
John M. Albertine
/s/ Edward E. David, Jr. Director August 28, 2000
- ------------------------
Edward E. David, Jr.
/s/ James S. Hyde Director August 28, 2000
- ---------------------------
James S. Hyde
/s/ Thomas L. Kempner Director August 28, 2000
- ---------------------
Thomas L. Kempner
/s/ Stuart A. Shikiar Director August 28, 2000
- ---------------------------
Stuart A. Shikiar
/s/ Sheldon Weinig Director August 28, 2000
- ---------------------------
Sheldon Weinig
44
1. Financial Statements
45
Report of Independent Accountants
To the Board of Directors and Shareholders
of Intermagnetics General Corporation:
In our opinion, the 2000 consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Intermagnetics General Corporation and its subsidiaries at
May 28, 2000 and the results of their operations and their cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States. In addition, in our opinion, the 2000 financial statement
schedule listed in the index appearing under Item 14(a)(2) present fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Albany, New York
July 17, 2000
46
Independent Auditors' Report
The Board of Directors and Shareholders
Intermagnetics General Corporation:
We have audited the accompanying consolidated balance sheet of Intermagnetics
General Corporation and subsidiaries as of May 30, 1999, and the related
consolidated statements of operations, shareholders' equity and comprehensive
income (loss), and cash flows for the years ended May 30, 1999 and May 31, 1998.
In connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedule for the years ended May 30, 1999
and May 31, 1998. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Intermagnetics General Corporation and subsidiaries as of May 30, 1999, and the
results of their operations and their cash flows for the years ended May 30,
1999 and May 31, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
Albany, New York
July 16, 1999, except as to
Note E, which is as of
August 30, 1999
47
CONSOLIDATED BALANCE SHEETS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
May 28, May 30,
2000 1999
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,527 $ 2,283
Trade accounts receivable, less allowance
(May 28, 2000 - $478; May 30, 1999 - $401) 21,319 22,275
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,525 1,788
Inventories:
Finished products 1,600 1,106
Work in process 10,174 15,725
Materials and supplies 9,436 9,748
-------- --------
21,210 26,579
Income tax refund receivable 1,717
Deferred income taxes 6,187 4,069
Prepaid expenses and other 1,442 2,020
-------- --------
TOTAL CURRENT ASSETS 64,210 60,731
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 1,479 1,479
Buildings and improvements 16,639 16,639
Machinery and equipment 39,470 38,500
Leasehold improvements 910 649
-------- --------
58,498 57,267
Less allowances for depreciation and amortization 35,342 33,090
-------- --------
23,156 24,177
Equipment in process of construction 3,110 1,798
-------- --------
26,266 25,975
INTANGIBLE AND OTHER ASSETS
Available for sale securities 6,806 1,366
Other investments 4,544 5,904
Investment in affiliate 3,736
Excess of cost over net assets acquired, less accumulated
amortization (May 28, 2000- $3,866; May 30, 1999 - $2,514) 16,270 17,618
Other intangibles, less accumulated amortization
(May 28, 2000- $663; May 30, 1999 - None) 8,087 8,750
Other assets 1,794 1,378
-------- --------
TOTAL ASSETS $127,977 $125,458
======== ========
(Continued)
48
May 28, May 30,
2000 1999
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 1,428 $ 317
Borrowings under line of credit 4,850
Accounts payable 7,121 5,641
Salaries, wages and related items 2,988 2,348
Accrual for compensated absences 1,014 1,048
Customer advances and deposits 1,753 2,065
Product warranty reserve 2,059 1,577
Accrued income taxes 1,220
Accrued termination payment 4,750
Accrual for affiliate financial guarantee 2,000
Other liabilities and accrued expenses 1,811 1,746
-------- --------
TOTAL CURRENT LIABILITIES 19,394 26,342
LONG-TERM DEBT, less current portion 26,524 26,631
DEFERRED INCOME TAXES 3,596 312
COMMITMENTS and CONTINGENCIES - Note J
SHAREHOLDERS' EQUITY
Preferred Stock, par value $.10 per share: Authorized - 2,000,000 shares
Issued and outstanding - May 28, 2000 - None;
May 30, 1999 - 69,992 shares 6,999
Common Stock, par value $.10 per share:
Authorized - 40,000,000 shares
Issued and outstanding (including shares in treasury):
May 28, 2000 - 14,403,159 shares;
May 30, 1999 - 13,522,900 shares 1,440 1,352
Additional paid-in capital 90,700 82,175
Notes receivable for executive stock purchases (1,666)
Accumulated deficit (5,914) (8,061)
Accumulated other comprehensive income (loss) (276) (668)
-------- --------
84,284 81,797
Less cost of Common Stock in treasury
May 28, 2000 - 661,282 shares;
May 30, 1999 -1,161,690 shares (5,821) (9,624)
-------- --------
78,463 72,173
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $127,977 $125,458
======== ========
See notes to consolidated financial statements.
49
CONSOLIDATED STATEMENTS OF OPERATIONS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
-----------------------------------------------
May 28, May 30, May 31,
2000 1999 1998
-------- -------- -------
Net sales $112,772 $102,871 $95,894
Cost of products sold 70,616 68,312 60,209
Inventory written off in restructuring, net of recoveries 1,390 1,820
-------- -------- -------
Total cost of products sold 72,006 70,132 60,209
-------- -------- -------
Gross margin 40,766 32,739 35,685
Product research and development 6,271 6,220 8,128
Marketing, general and administrative 23,107 21,472 20,840
Amortization of intangible assets 2,011 1,348 1,203
Restructuring charges 80 2,919
-------- -------- -------
31,469 31,959 30,171
-------- -------- -------
Operating income 9,297 780 5,514
Interest and other income 1,790 1,942 2,364
Interest and other expense (1,965) (2,172) (2,125)
(Write off) recovery of investment in unconsolidated affiliate 1,620 (7,300)
Equity in net loss of unconsolidated affiliates (236) (1,491) (1,009)
-------- -------- -------
Income (loss) before income taxes 10,506 (8,241) 4,744
Provision for income taxes (benefit) 4,054 (1,212) 1,991
-------- -------- -------
NET INCOME (LOSS) $ 6,452 $ (7,029) $ 2,753
======== ======== =======
Net Income (loss) per Common Share:
Basic $0.49 $(0.55) $ .21
======== ======== =======
Diluted $0.46 $(0.55) $ .20
======== ======== =======
See notes to consolidated financial statements.
50
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
INTERMAGNETICS GENERAL CORPORATION
Fiscal Years Ended May 28, 2000, May 30, 1999, May 31, 1998
(Dollars in Thousands)
Accumulated Compre-
Additional Other hensive
Common Paid-in Accumulated Comprehensive Treasury Income
Stock Capital Deficit Income (Loss) Stock (Loss)
-------- ----------- ----------- --------------- ---------- -------
Balances at May 25, 1997 $1,264 $74,378 $(1,643) $597 $(1,509)
Comprehensive income:
Net income 2,753 $2,753
Unrealized gain on available for
sale securities, net 237 237
Unrealized loss on foreign currency
translation (338) (338)
-------
Total comprehensive income $2,652
=======
Tax benefit from exercise of stock options 177
Sale of 136,180 shares of Common Stock,
including receipt of 21,843 shares of
Treasury Stock, upon exercise of stock
options 13 739 (226)
Sale of 7,233 shares of Common Stock
to IGC Savings Trust 1 69
Stock dividends and payments for
fractional shares 25 2,157 (2,191)
Purchase of 465,650 shares of Treasury Stock (4,065)
Issuance of 322,029 shares of Common Stock
and 69,992 shares of Series A Preferred Stock
in payment for acquisitions 31 2,719
Issuance of 89,018 shares of Treasury Stock
for purchase of inventory 25 845
Issuance of warrant to acquire 500,000
shares of Common Stock 720
Stock based compensation 24
------ ------- ------- ----- -------
Balances at May 31, 1998 1,334 81,008 (1,081) 496 (4,955)
Comprehensive income:
Net loss (7,029) $(7,029)
Unrealized loss on available for
sale securities, net (1,358) (1,358)
Unrealized gain on foreign currency
translation 194 194
-------
Total comprehensive loss $(8,193)
=======
Tax benefit from exercise of stock options 185
Sale of 194,212 shares of Common Stock,
including receipt of 69,015 shares of
Treasury Stock, upon exercise of stock
options 19 911 (623)
Sale of 9,003 shares of Common Stock
to IGC Savings Trust 58
Stock dividend adjustment of 8,937 shares and
payments for fractional shares (1) (48) 49
Stock based compensation 61
Purchase of 530,500 shares of Treasury Stock (4,046)
------ ------- ------- ----- -------
Balances at May 30, 1999 1,352 82,175 (8,061) (668) (9,624)
Comprehensive income:
Net Income 6,452 $ 6,452
Unrealized Gain on available for
sale securities, net 874 874
Unrealized loss on foreign currency
translation (482) (482)
-------
Total comprehensive loss $ 6,844
=======
Tax benefit from exercise of stock options 84
Sale of 399,329 shares of Common Stock,
including receipt of 24,345 shares of
Treasury Stock and recognition of $386,000 of
compensation expense , upon exercise of stock options 39 3,905 (643)
Sale of 32,221 shares of Common Stock
to IGC Savings Trust 3 253
Issuance of 62,859 shares upon conversion of debentures. 6 865
Issuance of 618,753 Treasury shares upon conversion of
Series A Preferred Stock. (885) 5,011
Stock based compensation 37 162
Purchase of 114,000 shares of Treasury Stock (727)
Stock Dividend 40 4,266 (4,305)
------ ------- ------- ----- -------
Balances at May 28, 2000 $1,440 $90,700 ($5,914) ($276) ($5,821)
====== ======= ======= ===== =======
See notes to consolidated financial statements.
51
CONSOLIDATED STATEMENTS OF CASH FLOWS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands)
Fiscal Year Ended
-------------------------------------------------
May 28, May 30, May 31,
2000 1999 1998
-------- -------- --------
OPERATING ACTIVITIES
Net income (loss) $ 6,452 $(7,029) $ 2,753
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 6,380 5,636 5,424
Non-cash restructuring charges 2,000 4,739
Write off (recovery) of investment in unconsolidated affiliate (1,341) 7,300
Gain on debt redemption (275)
Provision for deferred taxes 708 227 (1,028)
Equity in net loss of unconsolidated affiliates including amortization 236 1,491 1,009
Loss on disposal of assets 248 306 60
Gain on sale of available for sale securties (615)
Non-cash expense from warrants issued 600
Gain on sale of joint venture (300)
Stock based compensation 460 61 24
Change in operating assets and liabilities, net of effects of acquisitions
and restructuring:
(Increase) decrease in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts 1,719 (4,858) 3,494
(Increase) decrease in inventories and prepaid expenses and other 5,875 2,583 (5,579)
Increase (decrease) in accounts payable and accrued expenses 2,851 (1,362) 27
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,973 8,519 6,784
INVESTING ACTIVITIES
Purchases of property, plant and equipment (5,287) (3,139) (3,146)
Proceeds from sale of assets 51 92
Proceeds from sale of available for sale securties 1,369
AISA termination payments (4,750) (4,250)
Acquisitions, net of cash acquired (3,115)
Payments on financial guarantee, net (623)
Purchase of other investments (1,043)
Investment in and advances to unconsolidated affiliates (1,015) (6,855)
Repayment of advances by unconsolidated affiliate 611 470
Decrease in other assets 41 66
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (9,291) (8,744) (12,488)
FINANCING ACTIVITIES
Net proceeds from (repayment of) short term borrowings (4,850) 4,850
Loans for executive stock purchases (1,666)
Early debt redemption (1,550)
Redemption of Preferred Stock (682)
Proceeds from sale of warrants 120
Purchase of Treasury Stock (727) (4,046) (4,065)
Proceeds from sales of Common Stock 3,286 365 572
Principal payments on note payable and long-term debt (317) (298) (259)
------- ------- -------
52
Fiscal Year Ended
-------------------------------------------------
May 28, May 30, May 31,
2000 1999 1998
-------- -------- --------
NET CASH USED IN FINANCING ACTIVITIES (4,956) (679) (3,632)
EFFECT OF EXCHANGE RATES ON CASH (482) 194 (338)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 10,244 (710) (9,674)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,283 2,993 12,667
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $12,527 $ 2,283 $ 2,993
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of Note Payable for redemption of Preferred Stock $ 2,192
=======
Issuance of Treasury Stock for redemption of Preferred Stock $ 4,126
=======
Issuance of Common Stock upon conversion of debentures $ 871
=======
Exchange of Common Stock in partial payment of exercise
price on options $ 643 $ 623 $ 226
======= ======= =======
Tax benefit from exercise of stock options $ 84 $ 185 $ 177
======= ======= =======
Issuance of Common Stock, Preferred Stock, and Treasury Stock
for acquisitions $ 9,749
=======
Accrual of termination payment $ 4,750
========
Issuance of Treasury Stock for purchase of inventory $ 870
=======
See notes to consolidated financial statements.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERMAGNETICS GENERAL CORPORATION
NOTE A - ACCOUNTING POLICIES
Basis of Presentation:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions have been eliminated
in consolidation. Affiliated companies (20 to 50% owned) are accounted for on
the equity method. It is the Company's policy to reclassify prior year
consolidated financial statements to conform to current year presentation.
The Company operates on a 52/53 week fiscal year ending the last Sunday during
the month of May.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Revenue Recognition:
Sales are recognized as of the date of shipment or upon customer acceptance,
which is based on product test results. In addition, certain goods are shipped
to a warehouse designated by the customer and are recorded as revenue when the
goods are removed by the customer and placed in production.
Sales to the United States Government or its contractors under cost
reimbursement contracts are recorded as costs are incurred and include estimated
earned profits.
Sales of products involving long-term production periods and manufactured to
customer specifications are generally recognized by the percentage-of-completion
method, by multiplying the total contract price by the percentage that incurred
costs to date bear to estimated total job costs, except when material costs are
substantially incurred at the beginning of a contract, in which case material
costs are charged to the contract as they are placed into production. At the
time a loss on a contract is indicated, the Company accrues the entire amount of
the estimated ultimate loss.
The Company accrues for possible future claims arising under terms of various
warranties (one to three years) made in connection with the sale of products.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market
value.
Property, Plant and Equipment:
Land and improvements, buildings and improvements, machinery and equipment and
leasehold improvements are recorded at cost. Depreciation is computed using the
straight-line method in a manner that is intended to amortize the cost of such
assets over their estimated useful lives. Leasehold improvements are amortized
on a straight-line basis over the remaining initial term of the lease. For
financial reporting purposes, the Company provides for depreciation of property,
plant and equipment over the following estimated useful lives:
Land improvements 25 years
Buildings and improvements 7 - 40 years
Machinery and equipment 3 - 15 years
Leasehold improvements 2 - 15 years
Significant additions or improvements extending assets' useful lives are
capitalized; normal maintenance and repair costs are expensed as incurred.
54
The cost of fully depreciated assets remaining in use are included in the
respective asset and accumulated depreciation accounts. When items are sold or
retired, related gains or losses are included in net income.
Investments:
Certain investments are categorized as available for sale securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Available
for sale securities are reported at fair value, with unrealized gains and losses
included in shareholders' equity. Realized gains and losses for securities
classified as available for sale are included in earnings and are derived using
the specific identification method for determining the cost of securities sold.
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Investment and other tax credits are included in net income when realized.
Foreign Currency Translation:
Foreign currency translation adjustments arise from conversion of the Company's
foreign subsidiary's financial statements to US currency for reporting purposes,
and are included in Other Comprehensive Income (Loss) in shareholders' equity on
the accompanying consolidated balance sheets. Realized foreign currency
transaction gains and losses are included in interest and other expense in the
accompanying consolidated statements of operations.
Excess of Cost Over Net Assets Acquired and Other Intangibles:
Excess of cost over the fair value of net assets acquired in acquisitions is
being amortized on a straight-line basis over 15 years. Other intangibles are
being amortized on a straight-line basis over 5 years.
Impairment of Long-Lived Assets:
Long-lived assets, including intangible assets, used in the Company's operations
are reviewed for impairment when circumstances indicate that the carrying amount
of an asset may not be recoverable. The primary indicators of recoverability are
the associated current and forecasted undiscounted operating cash flows.
Stock-Based Compensation:
The intrinsic value method of accounting is used for stock-based compensation
plans. Under the intrinsic value method, compensation cost is measured as the
excess, if any, of the quoted market price of the stock at the grant date over
the amount an employee must pay to acquire the stock.
Per Share Amounts:
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue Common Stock
were exercised or converted into Common Stock or resulted in the issuance of
Common Stock that then shared in the earnings of the entity.
55
Comprehensive Income:
On June 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income (loss) and its components in a full set of financial
statements. Comprehensive income (loss) consists of net income, net unrealized
gains (losses) on available-for-sale securities and foreign currency translation
adjustments and is presented in the consolidated statements of changes in
shareholders' equity and comprehensive income (loss). Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
Derivative Financial Instruments:
The Company enters into interest rate hedge agreements which involve the
exchange of fixed and floating rate interest payments periodically over the life
of the agreement, without the exchange of underlying principal amounts. The
differential to be paid or received is accrued as interest rates change and is
recognized over the life of the agreements as an adjustment to interest expense.
Use of Estimates:
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, and the disclosure of
contingent assets and liabilities, to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
New Accounting Pronouncements:
In March, 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 also requires that costs related to the preliminary project stage and
post-implementation/operations stage of an internal-use computer software
development project be expensed as incurred. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998. The Company has adopted the reporting
requirements of SOP 98-1 for the fiscal year ended May 28, 2000. The adoption
of SOP 98-1 has had no material effect on the Company's consolidated financial
statements.
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 has subsequently been amended by SFAS No. 137,
issued in June, 1999, which delays the effective date for implementation of SFAS
No. 133 until fiscal quarters of fiscal years beginning after June 15, 2000.
Management is currently evaluating the impact of SFAS No. 133 on the Company's
consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101),
"Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company is required to adopt SAB 101 in
the quarter ended May 27, 2001. Management does not expect the adoption of SAB
101 to have a material effect on the Company's financial condition or results of
operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation - an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence of various modifications to the terms of previously
fixed stock options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events that occurred after
either December 15, 1998 or January 12, 2000. The Company has applied the
applicable provisions of FIN 44 which did not have a material effect on the
Company's Consolidated Financial Statements.
56
NOTE B - ACQUISITIONS
Polycold Systems International, Inc.
On November 24, 1997, the Company issued a note for, and on March 11, 1998, paid
$3,115,000 in cash, net of cash acquired, and issued 281,568 shares of Common
Stock, valued at $8.879 per share, and 69,992 shares of Series A Preferred Stock
valued at $7,139,184, for all of the outstanding shares of Polycold Systems
International, Inc. ("Polycold") Common Stock. On November 30, 1999, the Company
elected to redeem $2,873,616 of the Series A Preferred Stock and made an initial
payment of $682,000 in cash and issued $2,191,616 of notes payable for the
balance. The notes bear interest at the three-month LIBOR rate. One-half of the
notes are payable in June 2000 (these were subsequently paid) and the balance in
June 2001. On December 1, 1999 the remaining $4,265,568 of the Series A
Preferred Stock was automatically converted into 618,763 shares of Common Stock
at $6.8937 per share.
The acquisition has been accounted for using the purchase method of accounting,
and the results of operations of Polycold have been included in the consolidated
financial statements since November 24, 1997, the date of acquisition. The
excess of cost over the fair value of net assets acquired of approximately
$10,175,000 is being amortized on a straight-line basis over 15 years.
Medical Advances, Inc.
On March 11, 1997, the Company paid $4,139,000 in cash, net of cash acquired,
and issued 678,517 shares of Common Stock, valued at $10.573 per share,
including 474,895 shares of Treasury Stock, for all of the outstanding shares of
Medical Advances, Inc. ("MAI") Common Stock. The acquisition agreement provided
for the issuance of up to 101,777 additional shares as part of the purchase
price if the average of the Company's closing price on the American Stock
Exchange during the ninety calendar day period following the release of earnings
for fiscal 1997 was less than $11.053. During fiscal 1998 this contingency was
resolved and the Company issued 31,082 additional Common Shares.
The acquisition has been accounted for using the purchase method of accounting,
and the results of operations of MAI have been included in the consolidated
financial statements since March 11, 1997, the date of acquisition. The excess
of cost over the fair value of net assets acquired of approximately $9,700,000
is being amortized on a straight-line basis over 15 years.
Total amortization of excess of cost over the fair value of net assets acquired
for the fiscal years ended May 28, 2000, May 30, 1999, and May 31, 1998 amounted
to $1,348,000, $1,348,000, and $997,000, respectively.
ALSTOM Intermagnetics
Effective May 30, 1999, the Company completed an agreement with Alstom, S.A.
("Alstom") to terminate the parties' joint venture, ALSTOM Intermagnetics
("AISA"). AISA, a previously 45% owned unconsolidated joint venture located in
Belfort, France, was created for the manufacture and sale of superconductive MRI
magnet systems under license from the Company. Effective December 31, 1999,
AISA's magnet production was consolidated in the Company's Latham, New York
facility, and AISA ceased production of superconductive MRI magnet systems.
Under the termination agreement, the Company sold its interest in AISA to Alstom
for $300,000. In consideration of the contractual rights of AISA and Alstom
under the termination agreement, the Company paid AISA $9,000,000 for the
purchase of certain assets with an approximate fair value of $250,000, and other
intangibles, comprising future production rights, as well as technology and a
covenant not to compete, with a total value of $8,750,000. The intangible assets
are being amortized over a period of five years.
Total amortization of Other Intangibles for the year ended May 28, 2000 amounted
to $663,000.
57
NOTE C - RESTRUCTURING
Refrigerant Business
In February 2000, the Company decided to exit its refrigerant business, a part
of the Refrigeration Segment, over a 15 month period. As a result, the Company
recorded a restructuring charge of $2,000,000 including liabilities recorded of
$191,000, comprised of the following:
(Dollars in Thousands)
Inventory write-down $1,770
Write-down of equipment 39
Severance costs 191
------
$2,000
======
Under the exit plan, the Company terminated all but two of its employees. The
plan involves continuing operations through a master distributor while
attempting to find a buyer for the business, and contemplates sales of product
through May 2001, at which time operations would cease. The Company paid a total
of $99,000 in payments of the severance costs during fiscal 2000.
Selected financial data for this business follows:
(Dollars in Thousands)
FY 00 FY 99 FY 98
----- ----- -----
Sales $ 5,031 $ 2,794 $ 2,196
Net Loss (2,938) (4,320) (2,083)
58
Field Effects Division
In October 1998, the Company received notice from Trex Medical Corporation
("Trex") that it was not prepared to continue operating under a distributor
agreement under which Trex was to distribute the Company's permanent
magnet-based clinical MRI systems. The Company has filed suit against Trex for
breaching and repudiating the agreement. In November 1998, the Company decided
to exit this business and restructured its operations through the closure of its
Field Effects division, which was engaged in the manufacture and sale of
clinical MRI systems. As a result, the Company recorded a total restructuring
charge of $4,739,000 ($3,952,000 in November 1998 and $787,000 in May 1999),
including liabilities recorded of $1,277,000 ($922,000 in November 1998 and
$355,000 in May 1999), comprising:
(Dollars in Thousands)
Inventory write-down included in cost of products sold $ 1,820
Restructuring charges:
Write-down of equipment to fair value $ 1,267
Write-off of accounts receivable and other assets 375 1,642
-------
Liabilities for:
Severance and lease obligations 751
Other 526 1,277
------- -------
2,919
-------
Total $ 4,739
=======
The Company vacated the premises and moved existing equipment and inventory to
storage near its corporate headquarters. All usable equipment was transferred to
other operations at its book value. Other equipment and inventory was written
down to estimated realizable value. The impaired equipment consisted primarily
of tooling and fixtures associated with the manufacture of permanent, and
demonstration MRI systems.
The Company made a total of $535,000 in payments on liabilities recorded in the
restructuring during fiscal 2000 as follows:
(Dollars in Thousands)
Balance as of Balance as of
May 30, 1999 Payments Recovery Transfer May 28, 2000
------------- -------------- -------------- -------------- --------------
Lease obligation $ 405 $ 241 $ 150 $ (14) $ 0
Liability for customer
returns and allowances 304 294 - (10) 0
Other - - - 24 24
----- ----- ----- ---- ----
Total $ 709 $ 535 $ 150 $ 0 $ 24
===== ===== ===== ==== ====
In December 1999, the Company negotiated a settlement of the lease obligation
with the landlord, which resulted in a gain of $150,000 that was shown as a
reversal of restructuring charges in the accompanying Consolidated Statements of
Operations. Additionally, the Company sold certain inventory resulting in a
$380,000 gain, also shown as a reversal of restructuring charges.
Selected financial data for the Field Effects Division follows:
(Dollars in Thousands)
FY 99 FY 98
----- -----
Sales $ 36 $ 1,266
Net Loss (5,728) (1,196)
An analysis of the restructuring events for year ended May 28, 2000 follows:
(Dollars in Thousands)
Components
----------------------------
Cost of
Field Net Goods Operating
Refrigerant Effects Restructuring Sold Expense
------------ ----------- ------------- ----------- -----------
Inventory written off in
restructuring (recovery) $1,770 $(380) $1,390 $1,390
Severance obligations 191 191 $191
Write-down of equipment 39 39 39
Lease accrual recovery (150) (150) (150)
------ ----- ------ ------ ----
$2,000 $(530) $1,470 $1,390 $ 80
====== ===== ====== ====== ====
59
NOTE D - INVESTMENTS
Available for Sale Securities:
The Company owns 850,753 shares of the Common Stock of Ultralife Batteries Inc.,
as of May 28, 2000, which are accounted for as "Available for Sale Securities."
Realized gains from the sale of such securities amounted to $615,000 and $0 in
fiscal 2000 and 1999, respectively. The sale of certain such securities was
restricted under US securities laws as of May 30, 1999. Such securities were
included in Other Investments. The restriction has since lapsed, and,
accordingly, the entire investment is included in available for sale securities
as of May 28, 2000. The cost and market value of the Company's available for
sale securities at May 28, 2000 and May 30, 1999 were:
(Dollars in Thousands)
May 28, 2000 May 30, 1999
------------ ------------
Cost $6,262 $2,154
Gross unrealized holding gain (loss) 544 (788)
------ ------
Market value $6,806 $1,366
====== ======
Other Investments:
In September 1998, the Company acquired Series A Convertible Preferred Stock of
PowerCold, a publicly held corporation for approximately $1,000,000. The Series
A Convertible Preferred Stock is entitled to a number of votes per share equal
to the number of common shares into which each such share of Series A
Convertible Preferred Stock is convertible at the time of such vote. As of May
28, 2000 and May 30, 1999, the Company's voting interest was approximately 12%
and 15% respectively. The Company accounts for this investment at cost.
The Company owns approximately 19% of the Common Stock of KryoTech Inc. a
privately-held corporation, acquired at a cost of $4,750,000.
Until December 1999, the Company accounted for its investment in KryoTech using
the equity method of accounting because it owned more than 20% of the common
shares. In December 1999, the Company's ownership position fell below 20%. As a
result, during the quarter ended February 27, 2000, the Company began accounting
for the remaining investment value of approximately $3.5 million using the cost
method. The initial acquisition cost exceeded the underlying equity in net
assets by $3,645,000, which was being amortized over a period of 15 years.
Accumulated amortization at May 28, 2000 and May 30, 1999 was $404,000 and
$283,000, respectively. The market value of this investment is not readily
determinable.
SMIS:
As of May 30, 1999 and May 31, 1998, the Company owned 354,223 ordinary shares
(approximately 23%) of SMIS acquired at a cost of $3,530,000, and 980,000
redeemable preference shares acquired at a cost of $1,511,000. The preference
shares were convertible into ordinary equity of SMIS. The Company has recorded
its investment using the equity method of accounting, and, accordingly, has
reduced its investment by amortizing the excess of the cost of its investment in
the ordinary shares over the underlying equity over a period of 40 years and by
recording its proportionate share of SMIS' losses. The total amount written off
amounted to $2,674,000 at May 30, 1999 and $2,156,000 at May 31, 1998. Also, as
of May 31, 1998, the Company had made advances to SMIS of approximately
$2,476,000 in the form of loans which were convertible into ordinary equity of
SMIS. In May 1998, the Company guaranteed repayment of one half of the
outstanding balance of borrowings under a line of credit obtained by SMIS at
that time. The maximum amount guaranteed was (pound)1,250,000 (approximately
$2,000,000 at May 30, 1999). During the year ended May 30, 1999, the Company
advanced a total of $1,015,000 to SMIS, of which $611,000 was repaid.
60
As a result of SMIS' inability to achieve anticipated improvements in its
business plan, including new product orders, improved manufacturing results and
cost reductions, SMIS continued operating at a loss in 1999. In March 1999, it
was determined by SMIS management that additional funds would be required to
sustain operations based on projected cash flows and the deterioration in its
backlog. Based on the Company's evaluation of SMIS' past performance and
projections for future results, it was determined by Intermagnetics' management,
in the fourth quarter of fiscal 1999, that it would not provide additional
funding to SMIS. Additionally, during July 1999, SMIS management agreed in
principle to sell the majority of its operations at a price that did not result
in any return to its shareholders. Accordingly, the Company wrote off its
remaining investment in and advances to SMIS and provided for the estimated
amount which it would have been required to pay as a result of the financial
guarantee discussed above. The total amount written off was $7,300,000,
consisting of the write-off of the ordinary and redeemable preference shares in
the amount of $2,337,000, notes receivable in the amount of $2,924,000 and the
accrual of approximately $2,000,000 related to the financial guarantee. The
write-off is shown in "(Write-off) recovery of investment in unconsolidated
affiliate" in the accompanying consolidated statement of operations.
During fiscal 2000, SMIS was liquidated. The net amount of the Company's
liability for the financial guarantee amounted to approximately $400,000.
Accordingly, the Company recorded a recovery of $1,620,000 during the year ended
May 28, 2000. The recovery is shown in "(Write-off) recovery of investment in
unconsolidated affiliate" in the accompanying consolidated statement of
operations.
Following is selected financial information contained in SMIS' internal
unaudited financial statements for the seven months ended May 31, 1999 and May
31, 1998.
(Dollars in Thousands)
May 31, 1999 May 31, 1998
--------------------- ---------------------
Current assets $ 4,498 $ 3,689
Non-current assets 212 742
Current liabilities 4,868 4,075
Non-current liabilities 5,246 1,183
Shareholders funds (5,193) (827)
Seven Months Ended Seven Months Ended
May 31, 1999 May 31, 1998
------------ ------------
Net sales 4,022 2,673
Gross margin 1,359 882
Loss from continuing operations 1,580 1,555
Net loss 1,580 1,555
As of May 28, 2000 SMIS is no longer in business, therefore, no additional
financial information exists.
NOTE E - NOTES PAYABLE AND LONG-TERM DEBT
The Company has an unsecured line of credit of $27,000,000, which expires in
October 2002, of which $4,850,000 was in use at May 30, 1999 and none at May
28, 2000. The Company may elect to apply interest rates to borrowings under the
line which relate to either the London Interbank Offered Rate (LIBOR) or prime,
whichever is the most favorable. The weighted average interest rate with respect
to borrowings at May 30, 1999 was 5.4134%. The line of credit agreement provides
for various covenants, including requirements that the Company maintain
specified financial ratios.
Long-term debt consists of the following:
(Dollars in Thousands) May 28, May 30,
2000 1999
--------- ---------
Revenue bonds $ 1,450 $ 1,550
Notes payable 2,192
Mortgage payable 5,416 5,633
Convertible debentures 18,894 19,765
------- -------
27,952 26,948
Less current portion 1,428 317
------- -------
Long-term debt $26,524 $26,631
======= =======
61
Revenue bonds consist of a subsidiary's obligation under an agreement with an
Economic Development Authority with respect to revenue bonds issued in
connection with the acquisition of certain land, building and equipment acquired
at a total cost of $2,408,000. The bonds bear interest at a weekly adjustable
annual rate (convertible to fixed rate at the option of the Company) which
averaged 3.72% for the year ended May 28, 2000 (3.68% for the year ended May 30,
1999). The bonds mature serially in amounts ranging from $100,000 in December,
1999 to $200,000 in December, 2009. In the event of default or upon the
occurrence of certain conditions, the bonds are subject to mandatory redemption
at prices ranging from 100% to 103% of face value. As long as the interest rate
on the bonds is adjustable weekly, the bonds are redeemable at the option of the
Company at face value. The Company makes monthly advance payments to restricted
cash accounts in amounts sufficient to meet the interest and principal payments
on the bonds when due. The balances of these accounts, included in "Cash and
Cash Equivalents" on the accompanying consolidated balance sheets, were $41,000
at May 28, 2000 and $52,000 at May 30, 1999.
The notes payable bear interest at the three-month LIBOR rate, 6.83% at May 28,
2000. One-half of the notes are payable in June 2000 and the balance in June
2001. The notes result from the redemption of the Series A Preferred Stock on
November 30, 1999.
The mortgage payable bears interest at the rate of LIBOR (7.45% at May 28, 2000)
plus 0.9% and is payable in monthly installments of $50,000, including principal
and interest, through October 2005 with a final payment of $3,943,000 due in
November 2005. The loan is secured by land and buildings and certain equipment
acquired at a cost of approximately $10,800,000. The Company has entered into an
interest rate swap agreement, the effect of which is to fix the rate on this
loan at 6.88%.
Convertible debentures at May 28, 2000 consist of $18,894,000 of 5.75%
convertible subordinated debentures due September 2003, issued in a private
placement. The debentures are convertible into Common Stock at approximately
$13.856 per share. Interest on the debentures is payable semi-annually. The
debentures are redeemable, in whole or in part, at the option of the Company at
any time at prices ranging from 102.3% to 100.575%. The debentures also provide
for redemption at the option of the holder upon a change in control of the
Company, as defined, and are subordinated to senior indebtedness, as defined.
In February 1999, the Company paid $1,550,000 for the early retirement of
Convertible Subordinated Debentures with a carrying value of $1,860,000. As a
result of the early retirement of debt, the Company recognized a gain of
approximately $275,000 in fiscal year 1999. In March 2000, the holders of the
Convertible Subordinated Debentures converted $871,000 of debt for 61,029 shares
of Common Stock. See Note O for details of conversion of an additional
$10,900,000 of debentures in July 2000.
Aggregate maturities of long-term debt for the next five fiscal years are: 2001
- - $1,428,000; 2002 - $1,445,000; 2003 - $392,000; 2004 - $19,303,000 and 2005
$432,357.
Interest paid for the years ended May 28, 2000, May 30, 1999, and May 31, 1998,
amounted to $1,725,000, $1,961,000 and $1,910,000, respectively.
NOTE F - SHAREHOLDERS' EQUITY
In June 2000 the Company declared a 3% stock dividend to be distributed on all
outstanding shares, except Treasury Stock, on August 25, 2000 to holders of
record on August 4, 2000. The consolidated financial statements have been
adjusted retroactively to reflect this stock dividend in all numbers of shares,
prices per share and earnings per share.
The Company has established two stock option plans: the 1981 Stock Option Plan
and the 1990 Stock Option Plan. Shares and prices per share have been adjusted
to reflect the 3% stock dividend declared June 2000. A total of 3,492,208 shares
have been authorized for grant under the 1990 plan. All remaining grants under
the 1981 Plan were exercised during the year. Options granted under the 1990
Plan have lives ranging from five to ten years and vest over periods ranging
from one to five years.
62
Option activity under these plans was as follows:
Fiscal Year Ended
------------------------------------------------------------------------------------------------
May 28, 2000 May 30, 1999 May 31, 1998
--------------------------------- -------------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
----------- -------- ----------- --------- ----------- ---------
Outstanding,
beginning of year 1,981,340 $ 8.713 1,856,785 $ 9.200 1,738,616 $ 9.047
Granted 967,924 8.018 495,324 6.568 364,090 9.288
Exercised (399,330) 8.915 (194,213) 4.854 (136,180) 5.518
Forfeited (184,382) 9.813 (176,556) 12.082 (109,740) 11.604
---------- ---------- ----------
Outstanding,
end of year 2,365,552 8.308 1,981,340 8.713 1,856,786 9.200
========= ========= =========
Exercisable,
end of year 837,838 $ 9.145 1,073,626 $ 9.265 1,092,300 $ 8.396
======= ========= =========
May 28, 2000
-----------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------ -------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Option Number Exercise Remaining Number Exercise
Exercise Prices Outstanding Price Contractual Life Exercisable Price
- --------------- ----------- -------- ---------------- ----------- ---------
$4.10 to $6.00 244,289 $ 4.883 2.4 years 215,114 $ 4.760
$6.01 to $7.00 404,830 6.333 7.7 years 68,258 6.434
$7.01 to $8.00 740,821 7.456 4.5 years 48,321 7.693
$8.01 to $10.00 462,854 8.924 5.8 years 118,863 9.078
$10.01 to $20.15 512,758 12.171 3.8 years 387,282 12.261
--------- -------
2,365,552 $ 8.308 4.9 years 837,838 $ 9.145
========= =======
Following are the shares of Common Stock reserved for issuance and the related
exercise prices for the outstanding stock options and convertible subordinated
debentures at May 28, 2000:
Number Exercise Price
Of Shares Per Share
---------- ---------------
1990 Stock Option Plan 2,365,551 $4.103 to $20.14
Convertible subordinated debentures 1,363,597 $13.856
---------
Shares reserved for issuance 3,729,148
=========
The following pro forma net income (loss) and earnings (loss) per share
information has been determined as if the Company had accounted for stock-based
compensation awarded under its stock option plans using the fair value-based
method. The pro forma effect on net income for fiscal years 2000, 1999 and 1998
is not representative of the pro forma effect on net income in future years
because, as required by SFAS No. 123, "Accounting for Stock Based Compensation,"
no consideration has been given to awards granted prior to fiscal 1996.
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
----------------------------------------------------------------------------------
May 28, 2000 May 30, 1999 May 31, 1998
---------------------- ---------------------- -----------------------
As As As
Reported Pro Forma Reported Pro Forma Reported Pro Forma
-------- --------- -------- --------- -------- ---------
Net income (loss) $6,452 $4,595 $(7,029) $(8,359) $2,753 $1,816
Earnings (loss) per Common
Share:
Basic $ .49 $ .35 $ (0.55) $ (0.65) $ 0.21 $ 0.14
====== ====== ======= ======= ====== ======
Diluted $ .46 $ .33 $ (0.55) $ (0.65) $ 0.20 $ 0.13
====== ====== ======= ======= ====== ======
63
The weighted average fair value of each option granted under the 1990 Stock
Option Plan during fiscal years 2000, 1999 and 1998 was $4.385, $3.808 and
$5.446, respectively. The fair value of each option grant was estimated on the
date of grant using the Black-Scholes Model with the following weighted average
assumptions. The risk-free interest rates for fiscal years 2000, 1999 and 1998
were 6.1%, 5.1% and 5.9%, respectively. The expected volatility of the market
price of the Company's Common Stock for fiscal years 2000, 1999 and 1998 grants
was 55.1%, 51.3% and 55.3%, respectively. The expected average term of the
granted options for fiscal years 2000, 1999 and 1998 was 4.8 years, 6.6 years
and 5.9 years, respectively. There was no expected dividend yield for the
options granted for fiscal years 2000, 1999 and 1998.
During the years ended May 28, 2000, May 30, 1999 and May 31, 1998, in
connection with the grant of stock options to consultants, the Company has
recognized compensation cost in the amount of $24,000, $61,000 and $24,000,
respectively. Also, in connection with the exercise of certain stock options in
fiscal 2000, the Company recognized $386,000 of compensation expense. In
addition, during the year ended May 28, 2000 the Company issued 618,753 shares
of Treasury Stock for partial redemption of Preferred Stock and 20,000 shares at
a fair market value of $8.75 per share as compensation to the Board of
Directors; during the year ended May 31, 1998, the Company issued 89,018 shares
of Treasury Stock at fair market value in connection with the purchase of
inventory from a supplier.
The Company has loaned $1,666,000 to certain executives to enable them to
purchase Company common stock on the open market. Such loans bear interest at
the Company's cost of borrowing and have a term of five years. The loans have
been recorded as a reduction of Shareholders Equity.
NOTE G - RETIREMENT PLANS
The Company has a non-contributory, defined benefit plan covering all eligible
employees. Benefits under the plan are based on years of service and employees'
career average compensation. The Company's funding policy is to contribute
annually an amount sufficient to meet or exceed the minimum funding standard
contained in the Internal Revenue Code. Contributions are intended to provide
not only for benefits attributable to service to date, but also for those
expected to be earned in the future. As of December 31, 1998 the Company froze
all pension benefits except for approximately 50 bargaining unit employees at a
subsidiary. Since prior Company contributions were intended to fund both
benefits earned and those expected to be earned in the future, the freezing of
the benefits generated a "curtailment gain" of $1,465,000, which has been
credited to the appropriate operating expenses containing salary and wages
expense in the fiscal 1999 Consolidated Statement of Operations. The Company has
been advised that the pension plan has sufficient assets to permit termination
of the plan and has begun the required steps to do so in accordance with
statutory requirements.
64
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated balance sheets at May 28, 2000 and May 30, 1999:
Fiscal year ended
(Dollars in Thousands) May 28, 2000 May 30, 1999
------------ ------------
Change in benefit obligation during year:
Benefit obligation at beginning of year $ 8,146 $ 9,399
Service cost 59 393
Interest cost 472 645
Benefit payments (248) (221)
Administrative expenses (100) (98)
Actuarial (gain) or loss 32 (507)
Settlements (4,268)
Curtailments (1,465)
------ -------
Benefit obligation at end of year $4,093 $8,146
====== =======
Change in plan assets during year:
Fair value of plan assets at beginning of year $10,956 $ 9,583
Employer contributions 5
Benefit payments (248) (221)
Administrative expenses (100) (98)
Actual return on plan assets 605 1,692
Settlements (4,941)
------ -------
Fair value of plan assets at end of year $ 6,277 $10,956
====== =======
Reconciliation of funded status at end of year:
Funded status $ 2,183 $ 2,810
Unrecognized net transition (asset) or obligation 17 22
Unrecognized prior service cost 69 598
Unrecognized net (gain) or loss (1,570) (2,895)
------ -------
Net amount recognized $699 $535
====== =======
Amounts recognized in the Consolidated Balance Sheet at end of year:
Prepaid benefit cost $699 $535
====== =======
Net periodic benefit cost recognized for year:
Service cost $59 $392
Interest cost 472 645
Expected return on plan assets (673) (752)
Amortization of net transition (asset) or obligation 6 6
Amortization of prior service cost 29 51
Amortization of net (gain) or loss (70) (6)
------ -------
Net periodic benefit cost $(177) $336
====== =======
Additional amounts recognized for year:
Settlement (gain) or loss $19
Curtailment (gain) or loss $(1,465)
Weighted-average assumptions for year:
Discount rate 7.50% 7.00%
Rate of compensation increases 4.50% 4.50%
Expected long-term rate of return on plan assets 8.00% 8.00%
Weighted-average assumptions at end of year
Discount rate 8.00% 7.50%
Rate of compensation increases 4.50% 4.50%
The Company also maintains an employee savings plan, covering substantially all
employees, under Section 401(k) of the Internal Revenue Code. Under this plan,
the Company matches a portion of employees' contributions. Expenses under the
plan during the fiscal years ended May 28, 2000, May 30, 1999 and May 31, 1998
aggregated $588,000, $348,000 and $252,000, respectively.
The Company also maintains supplemental retirement and disability plans for
certain of its executive officers. These plans utilize life insurance contracts
for funding purposes. Expenses under these plans were $21,000, $56,000 and
$67,000 for the fiscal years ended May 28, 2000, May 30, 1999 and May 31, 1998,
respectively.
65
NOTE H - INCOME TAXES
The components of the provision for income taxes (benefit) are as follows:
(Dollars in Thousands)
Fiscal Year Ended
----------------------------------------------------------------
May 28, 2000 May 30, 1999 May 31, 1998
--------------- --------------- ---------------
Current
Federal $2,573 $(1,727) $2,487
State 611 176 352
Foreign 162 112 180
------ ------- ------
Total current 3,346 (1,439) 3,019
Deferred
Federal 664 (57) (920)
State 44 284 (108)
------ ------- ------
Total deferred 708 227 (1,028)
------ ------- ------
Provision for income taxes (benefit) $4,054 $(1,212) $1,991
====== ======= ======
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
(Dollars in Thousands) May 28, 2000 May 30, 1999
--------------- ---------------
Deferred tax assets:
Inventory reserves $3,163 $2,766
Non-deductible accruals 1,058 863
Product warranty reserve 756 560
Equity in net loss of unconsolidated affiliate 469 368
Restructuring and other accruals 1,582 1,600
Capital loss carryforward 1,120 1,329
Unrealized loss of available for sale securities - 280
------ ------
Total gross deferred tax assets 8,148 7,766
Less valuation allowance (1,311) (1,520)
------ ------
Deferred tax assets 6,837 6,246
Deferred tax liabilities:
Unrealized gain on available for sale securities (178) -
Depreciation and amortization differences (479) (452)
Intangibles (2,939) (1,475)
Pension curtailment gain (549) (538)
Other, net (101) (24)
------ ------
Total gross deferred tax liabilities (4,246) (2,489)
------ ------
Net deferred tax assets $2,591 $3,757
====== ======
The foregoing assets and liabilities are classified in the accompanying
consolidated balance sheets as follows:
(Dollars in Thousands) May 28, 2000 May 30, 1999
--------------- ---------------
Net current deferred tax assets $6,187 $4,069
Net long-term deferred tax liabilities 3,596 312
------ ------
$2,591 $3,757
====== =======
66
During fiscal 1998, in connection with the acquisition of Polycold, the Company
recorded $123,000 of deferred tax assets.
During the years reported, the Company adjusted the valuation allowance to an
amount it believes is necessary to reduce deferred taxes to an amount which is
more likely than not to be realized.
Changes made to the valuation allowance during fiscal 2000 and 1999 were a
decrease of $209,000 and an increase of $916,000, respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income and capital gains during
the periods in which those temporary differences become deductible. Management
considers projected future taxable income, the character of such income and tax
planning strategies in making this assessment. The Company had Federal taxable
income (loss) of approximately $6,500,000 in fiscal 2000, ($3,250,000) in fiscal
1999, and $7,000,000 in fiscal 1998. Based upon the level of historical taxable
income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of the remaining deductible
differences. The amount of the deferred tax assets considered realizable,
however, could be reduced in the near term if estimates of future taxable income
are reduced.
The reasons for the differences between the provision for income taxes (benefit)
and the amount of income tax (benefit) determined by applying the applicable
statutory Federal tax rate to income (loss) before income taxes are as follows:
(Dollars in Thousands)
Fiscal Year Ended
----------------------------------------------------------------
May 28, 2000 May 30, 1999 May 31, 1998
--------------- --------------- ---------------
Pretax income (loss) at statutory
tax rate (34%) $3,572 $(2,802) $1,613
State taxes, net of Federal benefit 432 304 161
Benefit of Foreign Sales Corporation (425) (210) (288)
Non-deductible distribution expense - - 204
Amortization of intangibles 539 539 392
Benefit of tax credits - (45) -
Capital loss carryforward used (209) - -
Change in valuation allowance - 916 (230)
Other, net 145 86 139
------ ------- ------
Provision for income taxes $4,054 $(1,212) $1,991
====== ======= ======
The Company received $50,000 in net tax refunds during May 28, 2000 and paid
income taxes, net of cash refunds received, of $2,504,000 and $1,815,000 during
the years ended May 30, 1999 and May 31, 1998, respectively.
67
NOTE I - PER SHARE INFORMATION
The following table provides calculations of basic and diluted earnings per
share:
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
-------------------------------------------------------------
May 28, 2000 May 30, 1999 May 31, 1998
------------ ------------ ------------
Income (loss) available to
Common shareholders $ 6,452 $ (7,029) $ 2,753
=========== =========== ===========
Weighted average shares 13,115,785 12,801,910 13,138,404
Dilutive potential Common
Shares:
Convertible Preferred Stock 533,338 335,702
Stock options 439,095 337,121
----------- ----------- -----------
Adjusted weighted average
Shares 14,088,218 12,801,910 13,811,227
=========== =========== ===========
Net income (loss) per Common Share:
Basic $ 0.49 $ (0.55) $ 0.21
======== ========= ========
Diluted $ 0.46 $ (0.55) $ 0.20
======== ========= ========
Shares issuable upon conversion of convertible debentures are considered in
calculating "diluted" earnings per share, but have been excluded, as the effect
would be anti-dilutive. Shares issuable upon conversion of Convertible Preferred
Stock and exercise of stock options have been excluded from the year ended May
30, 1999 as their effect would be anti-dilutive.
In June 2000 the Company declared a 3% stock dividend to be distributed on all
outstanding shares, except Treasury Stock, on August 25, 2000 to holders of
record on August 4, 2000. The Company distributed 2% stock dividends on
September 17, 1998 and September 16, 1997. The distributions have been made from
the Company's authorized but unissued shares. All data with respect to earnings
per share, weighted average shares outstanding and Common Stock equivalents have
been adjusted to reflect these stock dividends.
NOTE J - COMMITMENTS AND CONTINGENCIES
The Company leases certain manufacturing facilities and equipment under
operating lease agreements expiring at various dates through October 2019.
Certain of the leases provide for renewal options. Total rent expense was
$731,000, $519,000 and $400,000 for the years ended May 28, 2000, May 30, 1999,
and May 31, 1998, respectively.
Future minimum rental commitments, excluding renewal options, under the
noncancellable leases covering certain manufacturing facilities and equipment
through the term of the leases are as follows:
Fiscal Year
- ------------
2001 $ 945,000
2002 906,000
2003 689,000
2004 467,000
2005 457,000
-----------
Total $3,464,000
===========
68
In addition to operating lease agreements, the Company also has a five-year
maintenance agreement for $113,000 per year beginning January 1, 1999 for a
newly implemented computer system.
At May 28, 2000, the Company's capital equipment commitments were approximately
$763,000.
In connection with the termination of AISA (see Note B), the Company has agreed
to purchase approximately $3,000,000 of superconducting wire for use in
producing MRI Magnets. As of May 28, 2000, approximately $2,176,000 of the
commitment remains outstanding.
The Company is subject to certain claims and lawsuits arising in the normal
course of business. Based on information currently available, it is the opinion
of management, based upon advice of counsel, that the ultimate resolution of
these matters would not have a material adverse effect on the Company's
consolidated financial position or results of operations. However, based on
future developments and as additional information becomes known, it is possible
that the ultimate resolution of such matters could have a material adverse
effect on the Company's results of operations in future periods.
NOTE K - SEGMENT AND RELATED INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", in fiscal year 1999. SFAS No. 131 changes the way the
Company reports information about its operating segments.
The Company's individual business units have been aggregated into four
reportable segments: (1) Electromagnetics; (2) LTS Superconducting Materials;
(3) Refrigeration, and (4) Energy Technology on the basis of similar products,
processes and economic circumstances, among other things. The Electromagnetics
segment designs, manufactures and sells magnet systems and radio frequency
("RF") coils used in MRI for medical diagnostics. The LTS Superconducting
Materials segment manufactures and sells superconducting wire principally for
the construction of superconducting MRI magnet systems. The Refrigeration
segment designs, develops, manufactures and sells refrigeration equipment and
refrigerants. The Energy Technology segment consists primarily of the design and
manufacture of High Temperature Superconductor ("HTS") material and the
development of devices used to transmit and distribute electric power such as
HTS transmission cables and power transformers. Through May 30, 1999, the
activities of the Energy Technology Segment were included in the
Electromagnetics Segment. Segment data for prior years has been adjusted to
conform with current year presentation.
The accounting policies of the reportable segments are the same as those
described in Note A of the Notes to Consolidated Financial Statements.
Intersegment sales and transfers are accounted for as if the sales or transfers
were to third parties, that is, at current market prices. The Company evaluates
the performance of its reportable segments based on operating income (loss).
69
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
(Dollars in Thousands)
Fiscal Year Ended
---------------------------------------------------------------------------------
May 28, 2000
---------------------------------------------------------------------------------
LTS
Superconducting Energy
Electromagnetics Materials Refrigeration Technology Total
---------------- --------------- ------------- ---------- ---------
Net sales to external customers:
Magnet systems $56,358 $ 56,358
RF Coils 10,865 10,865
Superconductive wire $10,337 10,337
Refrigeration equipment $28,515 28,515
Refrigerants 5,030 5,030
Other $1,667 1,667
------- ------- ------- ------ -------
Total 67,223 10,337 33,545 1,667 112,772
Intersegment net sales 10,666 2,414 13,080
Segment operating profit (loss) 10,964 3,229 (3,164) (1,732) 9,297
Total assets 89,905 13,732 21,562 2,778 127,977
Additions to property, plant and equipment 3,309 774 472 732 5,287
Depreciation and
amortization expense 3,541 975 1,514 350 6,380
Other significant non-cash items:
Restructuring charges 2,000 2,000
May 30, 1999
---------------------------------------------------------------------------------
LTS
Superconducting Energy
Electromagnetics Materials Refrigeration Technology Total
---------------- --------------- ------------- ---------- ---------
Net sales to external customers:
Magnet systems $43,925 $ 43,925
RF Coils 12,926 12,926
Superconductive wire $12,160 12,160
Refrigeration equipment $28,268 28,268
Refrigerants 2,794 2,794
Other $2,798 2,798
------- ------- ------- ------ -------
Total 56,851 12,160 31,062 2,798 102,871
Intersegment net sales 6,806 2,223 9,029
Segment operating profit (loss) 5,590 2,585 (5,895) (1,500) 780
Total assets 64,977 10,857 47,707 1,917 125,458
Investment in unconsolidated
affiliates: 3,736 3,736
Additions to property, plant and equipment 1,619 798 620 102 3,139
Additions to long-lived assets 8,750 8,750
Depreciation and
amortization expense 3,006 871 1,471 288 5,636
Other significant non-cash items:
Restructuring charges 4,739 4,739
70
May 31, 1998
---------------------------------------------------------------------------------
LTS
Superconducting Energy
Electromagnetics Materials Refrigeration Technology Total
---------------- --------------- ------------- ---------- ---------
Net sales to external customers:
Magnet systems $47,890 $ 47,890
RF Coils 10,746 10,746
Superconductive wire $11,131 11,131
Refrigeration equipment $21,947 21,947
Refrigerants 2,196 2,196
Other $1,984 1,984
------- ------- ------- ------ -------
Total 58,636 11,131 24,143 1,984 95,894
Intersegment net sales 7,775 4,141 11,916
Segment operating profit (loss) 4,992 2,324 (517) (1,285) 5,514
Total assets 67,586 13,872 44,297 2,021 127,776
Investment in unconsolidated
affiliates: 5,330 4,710 10,040
Additions to property, plant and equipment
exclusive of acquisitions 2,309 310 425 102 3,146
Additions to long-lived assets 10,175 10,175
Depreciation and
amortization expense 3,662 912 562 288 5,424
Other significant non-cash items:
Non-cash expense from warrants issued 600 600
The following are reconciliations of the information used by the chief operating
decision maker to the Company's consolidated totals:
(Dollars in Thousands)
Fiscal Year Ended
------------------------------------------------
May 28, May 30, May 31,
2000 1999 1998
---------- ------------ ----------
Reconciliation of income (loss) before income taxes:
Total profit from reportable segments $ 9,297 $ 780 $ 5,514
Unallocated Amounts:
Interest and other income 1,790 1,942 2,364
Interest and other expense (1,965) (2,172) (2,125)
(Write off) recovery of investment
unconsolidated affiliate 1,620 (7,300)
Equity in net loss of unconsolidated affiliate (236) (1,491) (1,009)
------- ------- -------
Income (loss) before income taxes $10,506 $(8,241) $ 4,744
======= ======= =======
71
Net sales to two customers of the Company's Electromagnetics and LTS
Superconducting Materials segments were each in excess of 10% of the Company's
total net sales. Net sales to each of these customers during the last three
years were as follows:
Fiscal Year Ended
-------------------------------------------
May 28, May 30, May 31,
(Dollars in Thousands) 2000 1999 1998
-------- -------- --------
Customer A $56,098 $41,652 $42,751
Customer B 12,286 13,747 10,408
------- ------- -------
Total $68,384 $55,399 $53,159
======= ======= =======
Net sales by country, based on the location of the customer, for the last three
fiscal years were as follows:
Fiscal Year Ended
-------------------------------------------
May 28, May 30, May 31,
(Dollars in Thousands) 2000 1999 1998
-------- -------- --------
United States $ 35,992 $ 41,771 $38,594
Netherlands 56,860 41,652 42,751
Other countries 19,920 19,448 14,549
-------- -------- -------
Total $112,772 $102,871 $95,894
======== ======== =======
All significant long-lived assets of the Company are located within the United
States.
72
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS No. 107, "Disclosures About
Fair Value of Financial Instruments". Although the estimated fair value amounts
have been determined by the Company using available market information and
appropriate valuation methodologies, the estimates presented are not necessarily
indicative of the amounts that the Company could realize in current market
exchanges.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents, receivables, and accounts payable and accrued
expenses: The carrying amounts reported in the consolidated balance sheets
approximate their fair values because of the short maturities of these
instruments.
Available for sale securities and other investments: The fair value of available
for sale securities is estimated based on quoted market prices (see Note D) at
the balance sheet date. The fair value of other investments is not readily
determinable.
Long-term debt: The carrying value of long-term debt, including current portion,
was approximately $27,900,000 at May 28, 2000, while the estimated fair value
was $25,000,000, based upon interest rates available to the Company for issuance
of similar debt with similar terms and discounted cash flows for remaining
maturities.
Letters of credit: The letters of credit reflect fair value as a condition of
their underlying purposes and are subject to fees competitively determined in
the market place. The contract value and fair value of the letters of credit at
May 28, 2000 was $1,722,000.
73
Note M - Accumulated Other Comprehensive Income (Loss)
The accumulated balances for each classification of accumulated other
comprehensive income (loss) are as follows:
Unrealized Accumulated
Foreign Gains (Losses) Other
Currency on Available for Sale Comprehensive
Items Securities, Net of Tax Income (Loss)
-------- ---------------------- --------------
Balances at May 25, 1997 $ (16) $ 613 $ 597
Current period change - 1998 (338) 237 (101)
------- ------- --------
Balances at May 31, 1998 (354) 850 496
Current period change - 1999 194 (1,358) (1,164)
------- ------- --------
Balances at May 30, 1999 (160) (508) (668)
Current period change - 2000 (482) 874 392
------- ------- --------
Balances at May 28, 2000 $ (642) $ 366 $ (276)
======= ======= ========
The related tax effects allocated to each component of accumulated other
comprehensive income (loss) are as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
---------- ------------- ----------
Balance at May 25, 1997 $ 942 $(345) $ 597
Foreign currency translation
adjustments (338) - (338)
Unrealized gains (losses) on
available for sale securities 338 (101) 237
------- ----- -------
Balance at May 31, 1998 942 (446) 496
Foreign currency translation
adjustments 194 - 194
Unrealized gains (losses) on
available for sale securities (2,084) 726 (1,358)
------- ----- -------
Balance at May 30, 1999 (948) 280 (668)
Foreign currency translation
adjustments (482) - (482)
Unrealized gains (losses) on
available for sale securities 1,332 (458) 874
------- ----- -------
Balance at May 28, 2000 $ (98) $(178) $ (276)
======= ===== =======
74
NOTE N - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for fiscal 2000 and 1999 are as follows:
(Dollars in Thousands, Except Per Share Amounts)
Earnings Per:
Net ----------------------
Net Gross Income Basic Diluted
Sales Margin (Loss) Share Share
------- -------- -------- ------- --------
2000 Quarter Ended
August 29, 1999 $26,838 $ 9,810 $ 1,199 $ .09 $ .09
November 28, 1999 28,490 10,192 1,503 .12 .11
February 27, 2000 28,081 9,600 1,676 .13 .12
May 28, 2000 29,363 11,164 2,074 .15 .14
1999 Quarter Ended
August 30, 1998 $26,494 $ 9,781 $ 1,005 $ .08 $ .07
November 29, 1998 25,963 7,779 (1,449) (.11) (.11)
February 28, 1999 23,004 7,759 452 .04 .03
May 30, 1999 (1) 27,410 7,420 (7,037) (.55) (.55)
(1) During the quarterly period ended May 30, 1999, the Company recorded a
$7,300,000 write-off of its investment in and advances to SMIS , and
recognized a $1,465,000 curtailment gain upon amendment to and planned
termination of the Company's defined benefit pension plan. In addition, due
to declining sales, warranty issues and management's review of operations
during fiscal 1999 at the Company's IGC-APD, a $1,750,000 adjustment for
inventory impairment was recorded during the quarter. Other adjustments and
significant transactions which occurred during the quarterly period ended
May 30, 1999 included a $300,000 gain upon sale of the Company's interest
in AISA and $787,000 of additional restructuring charges, incurred in the
closure of the Company's Field Effects division. The aggregate effect of
these adjustments resulted in a pretax loss of $8,072,000 during the
quarterly period ended May 30, 1999.
NOTE O - SUBSEQUENT EVENTS
On June 30, 2000 the Company entered into a non-exclusive, royalty-free
agreement to license certain US and international patents and pending patents
related to superconducting materials and devices. In connection with the
agreement, the Company agreed to pay a lump sum fee payable in two installments.
Additionally, the Company granted the licensor warrants to purchase 103,000
shares of the Company's Common Stock at a price of $19.36 per share.
On July 12, 2000, $10,090,000 of the Company's 5.75% Convertible Subordinated
Debentures were converted into 728,187 shares of the Company's Common Stock at
$13.856 per share. The Company issued an additional 31,415 shares of the
Company's Common Stock valued at approximately $614,000, or $19.539 per share to
induce early conversion and in lieu of all accrued interest.
75
2. Schedule
76
INTERMAGNETICS GENERAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
COL A. COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------
Balance at Charged to Charged to
Beginning Costs and Other Accounts- Deductions- Balance at
DESCRIPTION of Period Expenses Describe Describe End of Period
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended May 28, 2000
Deducted from asset accounts:
Allowance for doubtful accounts $ 401 $ 171 $ 89(3) $ 478
5(2)
Reserve for inventory obsolescence 8,282 2,665 1,770(10) 2,247(5) 10,470
Included in liability accounts:
Product warranty reserve 1,577 958 40(2) 366(1) 2,059
150(2)
Contract adjustment reserve(4) 301 80(9) 221
Upgrade Reserve(4) 40 40(2) 0
Year Ended May 30, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $ 350 $ 206 $ 119(11) $ 412(3) $ 401
138(10)
Reserve for inventory obsolescence 6,843 3,732 1,820(10) 4,113(5) 8,282
Included in liability accounts:
Product warranty reserve 996 2,152 1,571(1) 1,577
265(2)
Contract adjustment reserve(4) 458 70 227(9) 301
Upgrade Reserve(4) 60 40 60(2) 40
77
INTERMAGNETICS GENERAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
COL A. COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------
Balance at Charged to Charged to
Beginning Costs and Other Accounts- Deductions- Balance at
DESCRIPTION of Period Expenses Describe Describe End of Period
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended May 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $ 302 $ 60 $ 88 (2) $ 130(3) $ 350
30 (7)
Reserve for inventory obsolescence 6,653 1,266 (9)(6) 1,087(5) 6,843
20 (7)
Included in liability accounts:
Product warranty reserve 911 664 70 (7) 649(1) 996
Contract adjustment reserve(4) 274 184 458
Upgrade Reserve(4) 60 60 60(8) 60
(1) Cost of warranty performed.
(2) Adjustments from accruals.
(3) Write-off uncollectible accounts.
(4) Classified in the Balance Sheet with other liabilities and accrued
expenses.
(5) Write-off or sale of obsolete inventory.
(6) Foreign currency translation.
(7) Balance at date of acquisition of subsidiary.
(8) Cost of upgrade work performed.
(9) Cost to finalize contracts.
(10) Restructuring charges.
(11) SMIS write-off.
78
3. Exhibits
79
3. Exhibits
Exhibit Index
Exhibit
- -------
3.1 By-laws, as amended
4.5 Fourth Amendment dated as of March 31, 2000 to the Second Amended and
Restated Loan Agreement dated as of October 23, 1997, among
Intermagnetics General Corporation, IGC APD Cryogenics Inc. Magstream
Corporation, IGC Medical Advances Inc., Intercool Energy Corporation, and
IGC Polycold Systems Inc., First Union National Bank (successor by merger
to CoreStates Bank, N.A.), and The Chase Manhattan Bank
10.10 Enhanced Benefit Plan
10.11 Executive Stock Purchase Plan
10.13 Patent License Agreement dated June 30, 2000 between Intermagnetics
General Corporation and Lucent Technologies GRL Corporation
21 Subsidiaries of the Company
23 Consent of Independent Auditors (KPMG LLP)
24 Consent of Independent Auditors (PricewaterhouseCoopers LLP)
80