SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 28, 2004 ----------------- 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 - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 14-1537454 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 450 Old Niskayuna Road, PO Box 461, Latham, NY 12110-0461 --------------------------------------------------------- (Address of principal executive offices) (Zip Code) (518) 782-1122 -------------- (Registrant's telephone number, including area code) ____________________________________________________ (Former name, former address and former fiscal year, if changed since last report) 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 whether the registrant is an accelerated filer (as defined as Rule 12b-2 of the Exchange Act). Yes __x__ No ____. As of December 20, 2004, the registrant had 28,007,472 shares of $.10 par value Common Stock outstanding. 1 INTERMAGNETICS GENERAL CORPORATION CONTENTS PART I - FINANCIAL INFORMATION Item 1: Financial Statements: Consolidated Balance Sheets - November 28, 2004 and May 30, 2004................................3 Consolidated Income Statements - Three and Six Months Ended November 28, 2004 and November 23, 2003.......................................................5 Consolidated Statements of Cash Flows - Six Months Ended November 28, 2004 and November 23, 2003.....................................................6 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income - Six Months Ended November 28, 2004 ...........................................................7 Notes to Consolidated Financial Statements......................................................8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................20 Item 3: Quantitative and Qualitative Disclosures About Market Risk.....................................30 Item 4: Controls and Procedures........................................................................30 PART II - OTHER INFORMATION.............................................................................31 SIGNATURES..............................................................................................33 CERTIFICATIONS..........................................................................................34 2 INTERMAGNETICS GENERAL CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, Except Per Share Amounts) (Unaudited) November 28, May 30, 2004 2004 ------------ -------- ASSETS Cash and cash equivalents $ 2,756 $ 11,868 Trade accounts receivable, less allowance (November 28, 2004 - $1,198; May 30, 2004 - $849) 66,055 41,218 Costs and estimated earnings in excess of billings on uncompleted contracts 124 127 Inventories: Consigned products 1,766 1,822 Finished products 4,959 2,969 Work in process 9,470 8,291 Materials and supplies 19,823 13,955 -------- -------- 36,018 27,037 Deferred income taxes 4,333 4,333 Prepaid expenses and other 5,877 4,608 Income tax receivable 3,414 4,285 -------- -------- TOTAL CURRENT ASSETS 118,577 93,476 PROPERTY, PLANT AND EQUIPMENT Land and improvements 2,128 1,628 Buildings and improvements 19,248 14,972 Machinery and equipment 53,906 48,692 Leasehold improvements 4,476 4,425 -------- -------- 79,758 69,717 Less accumulated depreciation and amortization 35,319 32,981 -------- -------- 44,439 36,736 INTANGIBLE AND OTHER ASSETS Goodwill 176,590 118,816 Other intangibles, less accumulated amortization (November 28, 2004 - $13,629; May 30, 2004 - $10,605) 55,832 32,491 Derivative asset 238 253 Other assets 3,079 3,163 -------- -------- TOTAL ASSETS $398,755 $284,935 ======== ======== 3 INTERMAGNETICS GENERAL CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, Except Per Share Amounts) (Unaudited) November 28, May 30, 2004 2004 ------------ -------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 8,244 $ 4,171 Accounts payable 17,057 10,242 Salaries, wages and related items 13,112 10,799 Customer advances and deposits 1,861 1,302 Product warranty reserve 3,179 3,189 Other liabilities and accrued expenses 9,978 11,753 -------- -------- TOTAL CURRENT LIABILITIES 53,431 41,456 LONG-TERM DEBT, less current portion 80,205 57,635 DEFERRED INCOME TAXES 20,605 10,050 NOTE PAYABLE 5,000 DERIVATIVE LIABILITY 129 225 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Preferred Stock, par value $.10 per share: Authorized - 2,000,000 shares Issued and outstanding - None Common Stock, par value $.10 per share: Authorized - 80,000,000 shares Issued (including shares in treasury): November 28, 2004 - 29,868,980 shares; May 30, 2004 - 27,076,418 shares 2,987 2,707 Additional paid-in capital 201,212 146,153 Notes receivable from employees (3,181) (3,421) Retained earnings 54,390 44,944 Accumulated other comprehensive income (loss) 260 (134) -------- -------- 255,668 190,249 Less cost of Common Stock in treasury November 28, 2004 - 1,869,335 shares; May 30, 2004 - 1,789,316 shares (16,283) (14,680) -------- -------- 239,385 175,569 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $398,755 $284,935 ======== ======== See notes to consolidated financial statements. 4 INTERMAGNETICS GENERAL CORPORATION CONSOLIDATED INCOME STATEMENTS (Dollars in Thousands, Except Per Share Amounts) (Unaudited) Three Months Ended Six Months Ended ----------------------------------- --------------------------------- November 28, November 23, November 28, November 23, 2004 2003 2004 2003 ---------------- ------------ ------------ ------------ Net revenues $ 75,156 $ 39,894 $ 134,904 $ 62,163 Cost of revenues 39,946 24,316 72,680 38,100 ---------------- ------------ ------------ ------------ Gross margin 35,210 15,578 62,224 24,063 Product research and development 6,384 2,759 11,508 5,667 Selling, general and administrative: Stock based compensation 1,566 155 2,693 241 Non-performance stock based compensation 1,875 1,875 Other selling, general and administrative 15,869 5,581 27,383 10,369 Amortization of intangible assets 1,685 460 3,081 921 Impairment of intangible assets 913 913 ---------------- ------------ ------------ ------------ 28,292 8,955 47,453 17,198 ---------------- ------------ ------------ ------------ Operating income 6,918 6,623 14,771 6,865 Interest and other income 211 238 413 519 Interest and other expense (1,120) (107) (2,134) (229) Adjustment to gain on prior period sale of division 1,094 ---------------- ------------ ------------ ------------ Income before income taxes 6,009 6,754 14,144 7,155 Provision for income taxes 1,875 2,344 4,698 2,483 ---------------- ------------ ------------ ------------ NET INCOME $ 4,134 $ 4,410 $ 9,446 $ 4,672 ================ ============ ============ ============ Net Income per Common Share: Basic $ 0.15 $ 0.18 $ 0.35 $ 0.19 ================ ============ ============ ============ Diluted $ 0.15 $ 0.17 $ 0.34 $ 0.18 ================ ============ ============ ============ See notes to consolidated financial statements. 5 INTERMAGNETICS GENERAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited) Six Months Ended -------------------------------------- November 28, November 23, 2004 2003 ----------------- ----------------- OPERATING ACTIVITIES Net income $ 9,446 $ 4,672 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,398 3,121 Stock based compensation 2,693 241 Loss on sale and disposal of assets 370 22 MRID profit sharing contribution 1,875 Impairment of intangible asset 913 Change in discount on note receivable (41) Amortization of debt issuance costs 149 Adjustment to prior period gain on sale of division (1,094) Change in operating assets and liabilities net of effects from the purchase of MRID: (Increase) decrease in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts (12,979) 3,904 Increase in inventories and prepaid expenses and other assets (2,750) (3,004) Increase (decrease) in accounts payable and accrued expenses 5,695 (1,077) ----------------- ----------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 10,716 7,838 INVESTING ACTIVITIES Purchases of property, plant and equipment (4,399) (2,374) Collection of note receivable 4,000 Purchase of Invivo, net of cash acquired (99) Purchase of MRID, net of cash acquired (38,317) Investment in patent and production rights (536) Cash in lieu of fractional shares (10) ----------------- ----------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (43,361) 1,626 FINANCING ACTIVITIES Proceeds from sale of Common Stock, including exercise of stock options 850 2,786 Proceeds from employees - Executive Stock Purchase Plan 240 304 Purchase of Treasury Stock (1,603) (1,779) Payment to obtain debt financing (155) Proceeds from long term borrowings 45,000 Principal payments on note payable and long-term debt (21,140) (139) ----------------- ----------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 23,192 1,172 EFFECT OF EXCHANGE RATE CHANGES ON CASH 341 ----------------- ----------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,112) 10,636 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,868 88,514 ----------------- ----------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,756 $ 99,150 ================= ================= SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES: Issuance of note payable as consideration for purchase of MRID due in 2007 $ 5,000 ================= See notes to consolidated financial statements. 6 INTERMAGNETICS GENERAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) For Six Months Ended November 28, 2004 (Dollars in Thousands) (Unaudited) Accumulated Notes Additional Other Receivable Compre- Common Paid-in Retained Comprehensive Treasury from hensive Stock Capital Earnings Income (Loss) Stock Employees Income --------- ---------- ------------------------------------- ----------- --------- BALANCES AT MAY 30, 2004 $ 2,707 $ 146,153 $ 44,944 $ (134) $ (14,680) $ (3,421) Comprehensive income: Net income 9,446 9,446 Gain on derivatives, net of tax benefit 53 53 Unrealized gain on foreign currency translation 341 341 --------- Total comprehensive income $9,840 ========= Issuance of 331,673 shares of Common Stock, 34 816 related to exercises of stock options and stock based compensation Issuance of 2,460,889 shares for purchase of MRID 246 51,851 Repayments of notes receivable 240 Restricted Stock 2,402 Cash in lieu of fractional shares (10) Treasury stock, upon exercise of stock options (1,603) --------- ---------- --------- ------------- ---------- ----------- BALANCES AT NOVEMBER 28, 2004 $ 2,987 $ 201,212 $ 54,390 $ 260 $ (16,283) $ (3,181) ========= ========== ========= ============= ========== =========== See notes to consolidated financial statements. 7 INTERMAGNETICS GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - General In the opinion of Management, the accompanying unaudited consolidated financial statements contain all adjustments, which are of a normal recurring nature, necessary to present fairly the Company's financial position at November 28, 2004 and the results of its operations, cash flows and changes in shareholders' equity for the periods presented. The results for the three and six months ended November 28, 2004 are not necessarily indicative of the results to be expected for the entire year. The Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Consolidated Financial Statements for the year ended May 30, 2004, filed on Form 10-K and Form 10-K/A on August 13, 2004 and October 12, 2004, respectively. It is the Company's policy to reclassify prior period consolidated financial statements to conform to current year presentation. Note B - Acquisition On July 16, 2004, the Company completed its purchase of MRI Devices Corporation ("MRID"), a privately held company. MRID is a leading manufacturer of radio frequency (RF) coils and related sub-systems for magnetic resonance imaging (MRI) systems. As a result of the acquisition, MRID became a wholly-owned subsidiary of the Company. The deal was structured as a cash and stock transaction which included a $45.0 million cash payment, a three-year $5 million promissory note and 2,460,889 shares of Company common stock, of which about 88,500 shares (the "Plan Shares") were allocated to fund an employee benefit plan for MRID employees. The value of the Plan Shares of about $1.9 million was recorded as compensation expense as a result of accelerating the vesting requirements during the three months ended November 28, 2004. The remaining 2,372,389 shares were issued as consideration with a value of $50.2 million based on the average closing stock price for two days prior to and after the measurement date which was determined to be June 9, 2004 in accordance with Emerging Issues Task Force (EITF) No. 99-12. Fifty percent of the stock is restricted from sale for two years and the other fifty percent for three years. The cash portion of the consideration was financed through our credit facility that was amended effective May 2004 to expand the aggregate committed amount by $30 million to $130 million. MRID's results of operations have been included in our consolidated financial statements since the date of acquisition of July 16, 2004. Management believes that, in addition to the financial benefits, the acquisition of MRID will provide an expanded high value add product portfolio that will serve the broader MRI market. In addition, Intermagnetics expects to add incremental value to this acquisition through the integration with the global sales team that the Company assumed in its acquisition of Invivo Corp. effective January 27, 2004. The following represents the initial allocation of the total purchase price to the assets acquired and liabilities assumed: 8 (In thousands) -------------- Consideration: Cash paid to MRID shareholders $ 44,177 Issuance of Intermagnetics Common Stock to MRID Shareholders (2,372,389 shares at $21.17) 50,222 Promissory note payable (payable in three years from closing date) 5,000 Transaction costs paid 983 -------------- Total purchase price $ 100,382 ============== Allocated to: Working capital, less inventory $ 14,903 Inventory 7,351 Property and equipment 6,991 Deferred tax liability (10,555) Long-term debt (2,783) Intangible assets: Trade name/Trademarks 970 Product trade name 3,290 Original equipment manufacturer customer (OEM) relationships 9,300 Know-how and core technology 11,280 Product technology and design 1,960 Goodwill 57,675 -------------- Total $ 100,382 ============== The allocation of the purchase price is based on initial fair value estimates of the assets and liabilities acquired. The Company plans on finalizing the purchase price allocation from its acquisition of MRID by the end of its fiscal year which ends May 29, 2005. The following (unaudited) pro forma consolidated income statements have been prepared in accordance with SFAS No. 141 "Business Combinations" as if the acquisition of MRID occurred at the beginning of the earliest period presented: Six Months Ended ------------------------------------------- November 28 November 23 2004 2003 -------------------- -------------------- Net revenues $ 141,364 $ 118,804 ========= ========= Net income $ 10,102 $ 10,105 ========= ========= Earnings per share: Basic $ 0.36 $ 0.37 ========= ========= Diluted $ 0.36 $ 0.36 ========= ========= In the above pro forma consolidated income statements, net income for the six months ended November 28, 2004 includes $2.7 million of non-recurring charges net of tax which primarily consists of $1.2 million for a stock contribution made to a profit sharing plan for original MRID employees prior to change of control; about $600,000 for an impairment charge on the acquired MRID trade name; and about $900,000 for other acquisition related charges. The above pro forma results do not include any anticipated revenue synergies. 9 Note C - Earnings Per Common Share In July 2004, the Company's Board of Directors declared a three-for-two split on all outstanding shares of its common stock. The split was completed in the form of a fifty percent stock dividend, effective August 17, 2004 to shareholders of record on July 23, 2004. The consolidated financial statements and related notes have been adjusted to retroactively reflect this stock dividend in all numbers of shares, prices per share and earnings per share. A summary of the shares used in the calculation of net income per Common Share is shown below: (Dollars in Thousands, Except Per Share Amounts) Three Months Ended Six Months Ended ---------------------------------- ------------------------------------ November 28, November 23, November 28, November 23, 2004 2003 2004 2003 --------------- --------------- ---------------- ----------------- Income available to Common shareholders $ 4,134 $ 4,410 $ 9,446 $ 4,672 =============== =============== ================ ================= Weighted average shares 27,979,535 25,069,418 27,334,721 24,897,333 Dilutive potential Common Shares: Warrants 77,912 31,784 73,919 20,285 Restricted stock 2,165 2,561 677 1,515 Stock options 418,901 578,364 391,868 523,260 --------------- --------------- ---------------- ----------------- Adjusted weighted average shares 28,478,513 25,682,127 27,801,185 25,442,393 Net income per Common Share: Basic $ 0.15 $ 0.18 $ 0.35 $ 0.19 =============== =============== ================ ================= Diluted $ 0.15 $ 0.17 $ 0.34 $ 0.18 =============== =============== ================ ================= As of November 28, 2004 the Company had 1,294,650 shares of performance based restricted stock, net of forfeitures, outstanding to key employees. These shares are restricted units, which will convert into common stock only upon the achievement of compounded growth in the Company's pre-tax diluted earnings per share greater than eight percent over the next five fiscal years. For 1,131,000 of these shares, the vesting schedule in fiscal years 2003 through 2007 is 0%, 0%, 15%, 20% and 65% respectively. For 163,650 of these shares, the vesting schedule in fiscal years 2003 through 2007 is 0%, 0%, 0%, 40% and 60% respectively. In the current year, management has determined that it is probable that performance targets will be met, and has recognized expense in the three and six months ended November 28, 2004 of $1,421,000 and $2,402,000. Additional shares of restricted stock may be granted to newly hired key employees. As of November 28, 2004 the Company had granted 20,802 shares of restricted common stock to the Board of Directors. These shares are vesting over a 5 year timeframe at 10%, 10%, 10%, 10%, and 60%, respectively. For the three months ended November 28, 2004 and November 23, 2003 and the corresponding six months ended, the Company recognized expense of $7,500, $3,750 and $15,000 and $7,500, respectively. As of November 28, 2004 the Company had outstanding 23,250 shares of restricted common stock to certain employees. These shares are vesting over time ranging from 1 to 3 years. For the three months ended November 28, 2004 and November 23, 2003 and the corresponding six months ended, the Company recognized expense of $28,400, $16,400 and $57,600 and $34,100, respectively. 10 Note D - Product Warranty 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. The following table is a reconciliation of the change in the aggregate accrual for product warranty for the six months ended November 28, 2004: Three Months Six Months Ended Ended (Dollars in thousands) November 28, 2004 November 28, 2004 --------------------- ----------------------- Balance at beginning of period $ 3,145 $ 3,189 Reserves acquired from acquisition of MRID Corp. - 87 Warranty expense 347 605 Cost of warranty performed (313) (702) --------------------- ----------------------- $ 3,179 $ 3,179 ===================== ======================= Note E - Long-term Debt On July 16, 2004, the Company borrowed $45.0 million from its amended unsecured credit facility to partially finance the acquisition of MRID. As a result of the acquisition, the Company assumed from MRID a $3.1 million term loan note due in October 2007. The term loan is unsecured, except for a negative pledge that the Company will not use their Gainesville, Florida facility as collateral for any additional financing. The note also includes a prepayment penalty of 2% to 5%, depending on the year of prepayment. Up to 20% of the note payable can be prepaid annually without penalty. The note bears interest at 5.85% and is payable in monthly installments of about $11,000 with the balance due in October 2007. The Company's unsecured Credit Facility contains mandatory prepayment provisions whereby certain amounts borrowed must be repaid upon the occurrence of certain specified events and conditions. The Company shall make mandatory prepayments in an amount equal to; 100% of net insurance proceeds not applied to the repair or replacement of damaged properties; 100% of net proceeds from asset sales other than assets sold in the normal course of business and proceeds from asset sales to the extent that such proceeds are reinvested in a like asset within six months; 100% of the net proceeds from the issuance of any debt or equity (other than certain permitted debt or equity issuances if the leverage ratio of the Company after giving effect thereto is less than or equal to 2.25 to 1.0) and 50% of annual excess cash flow, with such percentage to be reduced to 0% in the event the Company's leverage ratio is reduced to or below 2.00 to 1.0. 11 As of November 28, 2004, the Company had the following long-term debt outstanding: As of -------------------------- (In thousands) November 28, May 30, ------------- 2004 2004 ---- ---- Long-Term Debt: Mortgages and notes payable $ 8,261 $ 5,744 Term loan ($25 million) 22,188 24,062 Revolving line of credit ($105 milllion) 58,000 32,000 ------------ ------- Total long-term debt 88,449 61,806 Less current maturities 8,244 4,171 ------------ ------- Long-term debt excluding current maturities $ 80,205 $57,635 ============ ======= In addition to the long-term debt noted above, the Company issued a $5.0 million three-year note payable that accrues interest at LIBOR plus 0.5% in conjunction with the acquisition of MRI Devices. As of November 28, 2004, the Company had $46.4 million additional borrowing capacity under its unsecured credit facility which is net of $565,000 of standby letters of credit issued to the Company's insurance agent as collateral for potential workers' compensation claims. Note F - New Accounting Pronouncements On December 16, 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment. Statement 123(R) would require us to measure all employee stock-based compensation awards using a fair value method and record such expense in our consolidated financial statements. In addition, the adoption of Statement 123(R) will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. Statement 123(R) is effective beginning in our second quarter of fiscal 2006. The adoption of Statement 123(R) could have a material impact on our consolidated financial position, results of operations and cash flows. On December 16, 2004, the FASB issued Statement No. 153, Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29. Statement 153 addresses the measurement of exchanges of non-monetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. Statement 153 is effective for non-monetary asset exchanges beginning in our second quarter of fiscal 2006. Management is in the process of evaluating the effect SFAS 153 will have on the Company's financial position and results of operations. In November 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 151, "Inventory costs - An Amendment of ARB No. 43 Chapter 4" ("SFAS No. 151"). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). This Statement requires that those items be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this statement shall be effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management is in the process of evaluating the effect SFAS 151 will have on the Company's financial position and results of operations. 12 Note G - Stock Compensation The Company accounts for its stock compensation arrangements using the intrinsic value method under the provisions of APB No. 25, accounting for stock issued to employees. The following pro forma net income and earnings 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. (Dollars in Thousands, Except Per Share Amounts) Three Months Ended Six Months Ended ---------------------------------- ---------------------------------- November 28, November 23, November 28, November 23, 2004 2003 2004 2003 ---------------- ---------------- ---------------- ---------------- Net income (as reported) $ 4,134 $ 4,410 $ 9,446 $ 4,672 Add recorded non-cash stock compensation, net of tax 2,247 101 2,983 157 Less non-cash stock compensation under SFAS No. 123, net of tax (2,537) (488) (3,675) (1,010) ---------------- ---------------- ---------------- ---------------- Pro forma Net Income $ 3,844 $ 4,023 $ 8,754 $ 3,819 Earnings per Common Share (as reported): Basic $0.15 $0.18 $0.35 $0.19 ================ ================ ================ ================ Diluted $0.15 $0.17 $0.34 $0.18 ================ ================ ================ ================ Earnings per Common Share (pro forma): Basic $0.14 $0.16 $0.32 $0.15 ================ ================ ================ ================ Diluted $0.14 $0.16 $0.32 $0.15 ================ ================ ================ ================ Note H - Segment and Related Information The Company operates in four reportable segments: Magnetic Resonance Imaging (MRI), Medical Devices, Instrumentation, and Energy Technology. The MRI segment consists primarily of the manufacture and sale of low temperature superconducting ("LTS") magnets (by the IGC-Magnet Business Group). Previously, this segment also included the manufacture and sale of radio frequency coils (by IGC-Medical Advances Inc. "IGC-MAI" and recently acquired MRI Devices Corp. "MRID" which are now included in the Medical Devices segment). All prior year data has been restated to reflect this change. The Medical Devices segment now consists of one collectively managed entity with a universal brand identity of "Invivo". Invivo's management team concentrates on the collective growth, revenues and profitability of the Medical Device enterprise within Intermagnetics. The operating components of Invivo are: Invivo Patient Care (IPC) and Invivo Diagnostic Imaging (IDI). Invivo Patient Care designs, manufactures and sells patient monitors, primarily for use in MRI suites and for centralized nursing monitoring stations. In addition, Invivo Patient Care sells radio frequency coils manufactured by Invivo Diagnostic Imaging (formally IGC-MAI and MRID). Invivo Diagnostic Imaging designs, manufactures and sells Radio Frequency (RF) coils, for use with an MRI magnet. Invivo Diagnostic Imaging also sells coils to Original Equipment Manufactures (OEM). 13 The Instrumentation segment consists of the manufacture and sale of refrigeration equipment (by IGC-Polycold Systems Inc.), used primarily in ultra-high vacuum applications, industrial coatings, analytical instrumentation, medical diagnostics and semiconductor processing and testing. On December 15, 2004, the Company, as approved by its Board of Directors, entered into a definitive agreement to sell Polycold. (See Footnote L). The Energy Technology segment, operated through SuperPower Inc., is developing second generation, high-temperature superconducting (HTS) materials that we expect to use in devices designed to enhance capacity, reliability and quality of transmission and distribution of electrical power. The Company evaluates the performance of its reportable segments based on operating income (loss). 14 Summarized financial information concerning the Company's reportable segments is shown in the following table: (Dollars in Thousands) Three Months Ended ----------------------------------------------------------------------------------- November 28, 2004 ----------------------------------------------------------------------------------- Magnetic Resonance Medical Energy Imaging Devices Instrumentation Technology Total --------------------- -------------- --------------- --------------- -------------- Net revenues to external customers: Magnet systems $ 29,506 $ 29,506 Patient Monitors & RF Coils $ 33,645 33,645 Refrigeration equipment $ 8,980 8,980 Other $ 3,025 3,025 --------------------- -------------- --------------- --------------- -------------- Total 29,506 33,645 8,980 3,025 75,156 Segment operating profit (loss) 1,718 4,635 2,310 (1,745) 6,918 Total assets $ 303,537 $ 73,393 $ 10,223 $ 11,602 $ 398,755 Three Months Ended ----------------------------------------------------------------------------------- November 23, 2003 ----------------------------------------------------------------------------------- Magnetic Resonance Medical Energy Imaging Devices Instrumentation Technology Total --------------------- -------------- --------------- --------------- -------------- Net revenues to external customers: Magnet systems $ 28,310 $ 28,310 Patient Monitors & RF Coils $ 4,025 4,025 Refrigeration equipment $ 6,582 6,582 Other $ 977 977 ------------------ ---------------- ----------------- --------------- -------------- Total 28,310 4,025 6,582 977 39,894 Segment operating profit (loss) 6,958 555 963 (1,875) 6,601 Total assets $ 166,418 $ 4,855 $ 9,218 $ 9,302 $ 189,793 15 Six Months Ended ----------------------------------------------------------------------------------------- November 28, 2004 ----------------------------------------------------------------------------------------- Magnetic Resonance Medical Energy Imaging Devices Instrumentation Technology Total -------------------- --------------- ----------------- --------------- -------------- Net revenues to external customers: Magnet systems $ 53,608 $ 53,608 Patient Monitors & RF Coils $ 59,516 59,516 Refrigeration equipment $ 17,205 17,205 Other $ 4,575 4,575 -------------------- --------------- ----------------- --------------- -------------- Total 53,608 59,516 17,205 4,575 134,904 Segment operating profit (loss) 5,153 8,642 4,823 (3,847) 14,771 Total assets $ 303,537 $ 73,393 $ 10,223 $ 11,602 $ 398,755 Six Months Ended ----------------------------------------------------------------------------------------- November 23, 2003 ----------------------------------------------------------------------------------------- Magnetic Resonance Medical Energy Imaging Devices Instrumentation Technology Total -------------------- --------------- ----------------- --------------- -------------- Net revenues to external customers: Magnet systems $ 40,071 $ 40,071 Patient Monitors & RF Coils $ 6,691 6,691 Refrigeration equipment $ 12,392 12,392 Other $ 3,009 3,009 -------------------- --------------- ----------------- --------------- -------------- Total 40,071 6,691 12,392 3,009 62,163 Segment operating profit (loss) 7,134 590 1,556 (2,437) 6,843 Total assets $ 166,418 $ 4,855 $ 9,218 $ 9,302 $ 189,793 16 The following are reconciliations of the information used by the chief operating decision maker to the Company's consolidated totals: Dollars in thousands Three Months Ended --------------------------------------------- November 28, 2004 November 23, 2003 --------------------- --------------------- Reconciliation of income before income taxes: Total operating profit from reportable segments $ 6,918 $ 6,601 Intercompany profit in ending inventory 22 --------------------- --------------------- Net operating profit 6,918 6,623 Interest and other income 211 238 Interest and other expense (1,120) (107) Adjustment to gain on prior period sale of division --------------------- --------------------- Income before income taxes $ 6,009 $ 6,754 ===================== ===================== Six Months Ended --------------------------------------------- November 28, 2004 November 23, 2003 --------------------- --------------------- Reconciliation of income before income taxes: Total operating profit from reportable segments $ 14,771 $ 6,843 Intercompany profit in ending inventory 22 --------------------- --------------------- Net operating profit 14,771 6,865 Interest and other income 413 519 Interest and other expense (2,134) (229) Adjustment to gain on prior period sale of division 1,094 --------------------- --------------------- Income before income taxes $ 14,144 $ 7,155 ===================== ===================== Note I - Goodwill and Other Intangible Assets The Company follows the provisions of Statement of Financial Accounting Standards No. 142 (FAS No. 142), "Goodwill and Other Intangible Assets". FAS No. 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. The components of other intangibles are as follows: (Dollars in Thousands) As of November 28, 2004 ------------------------------------------------------------ Weighted Gross Carrying Accumulated Average Life Amount Amortization in Years ------------------- ------------------- ---------------- Amortized intangible assets Production rights $ 9,250 $ 7,822 5.7 Patents 3,811 1,089 18.0 Unpatented technology 930 930 5.0 Trade names/trademarks 12,470 768 24.6 Product name/trademark 4,640 204 12.6 Know-how and core technology 17,940 1,117 9.3 Product technology and design 4,930 476 6.6 OEM customer relationships 14,950 683 10.5 Order backlog 540 540 0.3 ------------------- ------------------- ---------------- $ 69,461 $ 13,629 12.5 =================== =================== 17 Aggregate amortization expense for the three months ended November 28, 2004 and November 23, 2003 and the corresponding six month periods was $1,685,000 and $460,000 and $3,081,000 and $921,000, respectively. During the three month period ended November 28, 2004, the Company, through re-branding exercises and market analysis, determined that the acquired MRI Devices trade name will no longer be utilized in future branding. As a result, the Company reduced the net book value of the acquired MRI Devices trade name originally valued at $970,000 to zero resulting in an impairment charge of $913,000. ESTIMATED AMORTIZATION EXPENSE: For the year ending May 2005 $6,452 For the year ending May 2006 $5,283 For the year ending May 2007 $5,150 For the year ending May 2008 $5,138 For the year ending May 2009 $5,103 All intangibles are amortized on a straight line basis. The changes in the carrying amount of goodwill between May 30, 2004 and November 28, 2004 are as follows: (In thousands) MRI Segment ------- Goodwill as of May 30, 2004 $118,816 Goodwill acquired on July 16, 2004 with the acquisition of MRI Devices Corp. (preliminary purchase price allocation) 57,675 Adjustments to purchase price allocation of Invivo 99 -------- Goodwill as of November 28, 2004 $176,590 ======== Management has evaluated goodwill for impairment during the quarter ended November 28, 2004 in accordance with SFAS No. 142 and determined that no impairment exists. Note J - Environmental Remediation In connection with the sale of IGC-AS in October 2001, the Company had recorded a $1.5 million liability related to environmental investigation and potential remediation costs to be incurred by the Company under certain property transfer laws of the State of Connecticut. As a result of recent developments and environmental site assessments, the Company reduced its current liability resulting in an adjustment to the gain on a prior period sale of a division of $1.1 million. As of November 28, 2004, the total remaining reserve for environmental remediation relating to the divestitures of IGC-APD and IGC-AS was approximately $548,000. Note K - Derivative Instruments and Hedging Activities The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective May 28, 2001. SFAS No. 133, as amended, requires that all derivative instruments be recognized on the balance sheet at their fair value and changes in fair value be recognized immediately in earnings, unless the derivatives qualify as hedges in accordance with the Standard. The change in fair value for those derivatives that qualify as hedges is recorded in shareholders' equity as other comprehensive income (loss). 18 The Company has entered into interest rate swap agreements to reduce the effect of changes in interest rates on its floating rate long-term debt. On November 28, 2004, the Company had outstanding interest rate swap agreements with a commercial bank, having a notional principal amount of approximately $4.2 million. Those agreements effectively change the Company's interest rate exposure on its mortgages due in November 2005 to a fixed 6.88%. The interest rate swap agreement matures at the time the related notes mature. The fair value of this interest rate swap increased $96,000 to $(129,000) during the six months ended November 28, 2004. On February 5, 2004, the Company entered into a separate interest rate swap agreement with a commercial bank, having a current notional principal amount of $22.2 million. This agreement effectively hedges the Company's interest rate exposure on its $25 million term loan due on December 31, 2008 to a fixed rate of 2.95% plus applicable margins as defined in our credit agreement. The interest rate swap agreement corresponds with the repayment terms of the term loan and matures on December 31, 2008. The fair value of this interest rate swap decreased $15,000 to $238,000 during the quarter ended November 28, 2004. The Company is exposed to credit loss in the event of non-performance by the other parties to the interest rate swap agreements. However, the Company does not anticipate non-performance by the counterparties. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For the six months ended November 28, 2004 the Company recorded an other comprehensive gain of $53,000 net of tax for the two interest rate swap agreements. NOTE L - Subsequent Event On December 15, 2004, the Company entered into a definitive Stock Purchase Agreement (the "Agreement") with Helix Technology Corporation ("Helix") whereby Helix has agreed to purchase all of the outstanding shares of capital stock of IGC-Polycold Systems, Inc ("Polycold") a wholly owned subsidiary of the Company. Polycold is the sole subsidiary in the Company's Instrumentation Segment. The transaction is structured as an all cash deal amounting to $49.2 million payable at closing, plus reimbursement of up to $3.3 million in certain tax obligations of the Company relating to a Section 338(h)(10) election under the Internal Revenue Code payable at the time the Company makes the election. Management intends on using a significant portion of the proceeds from the sale to pay down its long-term debt. As of November 28, 2004, the net book value of Polycold was about $14.5 million. The transaction, pending regulatory approval is scheduled to close in mid-February 2005. 19 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Intermagnetics General Corporation ("Intermagnetics", "Company", "we" or "us") 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 a historical event, it should be considered a forward-looking statement. These forward-looking statements are not guarantees of future performance and involve important assumptions, risks, uncertainties and other factors that could cause the Company's actual results for fiscal year 2005 and beyond to differ materially from those expressed in the forward-looking statements. These important factors include, without limitation, the assumptions, risks, and uncertainties set forth in this 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. Company Overview - ---------------- On December 15, 2004, we entered into a definitive Stock Purchase Agreement (the "Agreement") with Helix Technology Corporation ("Helix") whereby Helix has agreed to purchase all of the outstanding shares of capital stock of IGC-Polycold Systems, Inc ("Polycold") a wholly owned subsidiary of the Company. Polycold is the sole subsidiary in the Company's Instrumentation Segment. The transaction is structured as an all cash deal amounting to $49.2 million payable at closing, plus reimbursement of up to $3.3 million in certain tax obligations of the Company relating to a Section 338(h)(10) election under the Internal Revenue Code payable at the time the Company makes the election. Management intends on using a significant portion of the proceeds from the sale to pay down its long-term debt. As of November 28, 2004, the net book value of Polycold was about $14.5 million. The transaction, pending regulatory approval is scheduled to close in mid-February 2005. On July 16, 2004, we completed our purchase of MRI Devices Corporation ("MRID"), a privately held company. MRID is a leading manufacturer of radio frequency (RF) coils and related sub-systems for magnetic resonance imaging (MRI) systems. As a result of the acquisition, MRID became a wholly-owned subsidiary of the Company. The deal was structured as a cash and stock transaction which included a $45.0 million cash payment, a three-year $5 million promissory note and 2,460,889 shares of Company common stock, of which about 88,500 shares (the "Plan Shares") were allocated to fund an employee benefit plan for MRID employees. The value of the Plan Shares of about $1.9 million was recorded as compensation expense as a result of accelerating the vesting requirements during the three months ended November 28, 2004. The remaining 2,372,389 shares were issued as consideration with a value of $50.2 million based on the average closing stock price for two days prior to and after the measurement date which was determined to be June 9, 2004 in accordance with Emerging Issues Task Force (EITF) No. 99-12. Fifty percent of the stock is restricted from sale for two years and the other fifty percent for three years. The cash portion of the consideration was financed through our credit facility that was recently amended to expand the aggregate committed amount by $30 million to $130 million. MRID's results of operations have been included in our consolidated financial statements since the date of acquisition of July 16, 2004 and are included in our discussion on the Results of Operations below. Management believes that, in addition to the financial benefits, the acquisition of MRID will provide an expanded high value add product portfolio that will serve the broader MRI market. In addition, Intermagnetics expects to add incremental value to this acquisition through the integration with the world-class global sales team that the Company assumed in its acquisition of Invivo Corp. effective January 27, 2004. 20 On July 15, 2004, our Board of Directors declared a three-for-two split on all outstanding shares of our common stock. The split was completed in the form of a fifty percent stock dividend, effective August 17, 2004 to shareholders of record on July 23, 2004. All share and per share data included in this filing have been adjusted to retroactively reflect this stock dividend. On January 27, 2004, we completed our purchase of Invivo, which was acquired through a public tender offer. Invivo designs, manufactures and markets patient monitoring systems. These monitoring systems measure and display vital signs of patients in medical settings, particularly during magnetic resonance imaging procedures. As a result of the acquisition, Invivo became a wholly-owned subsidiary of the Company. The acquisition of Invivo substantially expanded our direct sales team and customer base. Invivo's results of operations have been included in our consolidated financial statements since the date of acquisition of January 27, 2004 and are included in our discussion on Results of Operations below. The total acquisition price for Invivo was $159.2 million including professional fees and other acquisition related costs. The source of funds for the acquisition was a combination of our available cash and borrowings totaling $67 million under our existing $130 million unsecured credit facility. We operate in four reportable segments: Magnetic Resonance Imaging ("MRI"), Medical Devices, Instrumentation, and Energy Technology. The MRI segment consists of IGC-MBG which manufactures and sells low temperature superconducting ("LTS") magnets that are used in MRI systems. Previously this segment included IGC-MAI and recently acquired MRID which manufactures and sells Radio Frequency (RF) coils to Original Equipment Manufactures (OEM) which is now included in the Medical Devices segment. All prior year data has been restated to reflect this change. Our Medical Devices segment now consists of one collectively managed entity with a universal brand identity of "Invivo". Invivo's management team concentrates on the collective growth, revenues and profitability of the Medical Device enterprise within Intermagnetics. The operating components of Invivo are: Invivo Patient Care (IPC) and Invivo Diagnostic Imaging (IDI). Invivo Patient Care designs, manufactures and sells patient monitors, primarily for use in MRI suites and for centralized nursing monitoring stations. Invivo Diagnostic Imaging designs, manufactures and sells Radio Frequency (RF) coils and associated sub-systems, for use with an MRI magnet. Invivo Diagnostic Imaging also sells coils to OEM's. The global sales network is a shared-access resource with Invivo serving both IPC and IDI. Our Instrumentation segment provides cryogenic refrigeration equipment used primarily in ultra-high vacuum applications, industrial coatings, analytical instrumentation and semiconductor processing and testing through our wholly-owned subsidiary, IGC-Polycold Systems Inc. ("Polycold"). 21 In Energy Technology, our wholly-owned subsidiary, SuperPower, Inc. ("SuperPower") is developing high-temperature superconducting materials and devices designed to enhance the capacity, reliability and quality of electrical power transmission and distribution. The Company evaluates the performance of its reportable segments based on operating income (loss). The Company operates on a 52/53-week fiscal year ending the last Sunday during the month of May. Critical Accounting Policies and Estimates - ------------------------------------------ The Company's discussion and analysis of its financial condition and results of operations are based upon, in part, the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires the Company to make estimates and judgments that affect assets, liabilities, revenues, expenses and related disclosure of contingent liabilities. REVENUE RECOGNITION ------------------- The Company recognizes revenue and profit on long-term development contracts based upon actual costs and earned profit. These types of contracts typically provide engineering services to achieve a specific scientific result relating to superconductivity. Some of these contracts require the Company to contribute to the development effort. The customers for these contracts are both commercial customers and various state and federal government agencies. When government agencies are providing revenue we do not expect the government to be a significant end user of the resulting products. Therefore, the Company does not reduce Internal Research and Development by the funding received. When it appears probable that estimated costs will exceed available funding, and the Company is not successful in securing additional funding, the Company records the estimated additional expense before it is incurred. In certain instances, the Company recognizes revenue in accordance with Staff Accounting Bulletin No. 101 as amended by Staff Accounting Bulletin No. 104, on product that is complete and ready to ship for which our customer has requested a delay in delivery. In these cases, all the criteria for revenue recognition have been met including, but not limited to: the customer has a substantial business purpose, there is a fixed delivery date, title and risk of loss has transferred to our customer, the product is complete and ready for shipment, and the product has been segregated and is not available to be used to fill other orders. Upon notification from our customer the product is shipped to the stated destination. As of November 28, 2004, and November 23, 2003, there were no products sold for which our customer has requested a delay in delivery. INVENTORY RESERVES ------------------ The Company maintains a reserve for inventory that may become damaged in the manufacturing process or technologically obsolete. If technology advances more rapidly than expected, manufacturing processes improve substantially or the market for our products declines substantially, adjustments to reserves may be required. 22 GOODWILL AND INTANGIBLE ASSET IMPAIRMENTS ----------------------------------------- Goodwill and other long-lived assets are reviewed for impairment whenever events such as significant changes in the business climate, plant closures, changes in product offerings, or other circumstances indicate that the carrying amount may not be recoverable. The Company performs a test for goodwill impairment annually during the second quarter of each fiscal year. The determination of whether these assets are impaired involves significant judgments such as long term revenue projections, weighted average cost of capital, product cost reductions, market penetration and sufficient product research and development to keep pace with market demand. Changes in strategy and/or market conditions may result in adjustments to recorded asset balances. WARRANTY RESERVES ----------------- The provision for warranty for potential defects with our manufactured products is based on historical experience for the period the product was under warranty during the fiscal year. In some cases, when historical warranty information is not available the Company estimates warranty costs based on spending related to the cost centers responsible for the warranty repair. The Company believes these reserves are adequate based on the evaluation criteria, procedures in place to control the manufacturing process and pre-testing of newly developed products to ensure their manufacturability prior to commercial introduction. If product quality declines, the Company may require additional provisions. RESERVE FOR ENVIRONMENTAL REMEDIATION ------------------------------------- The Company maintains a provision for potential environmental remediation for businesses disposed of during fiscal 2002 (see also Note J in the notes to the consolidated financial statements included herein). These provisions are based upon management's best estimate under the given circumstances and available information. Our provision did not include any range of loss. Therefore, we are unable to identify or estimate any additional loss that is reasonably possible. The Company believes these provisions are adequate. If unexpected costs related to the environmental issues are incurred additional provisions will be needed. RESULTS OF OPERATIONS - --------------------- Revenues increased about $35.3 million or more than 88%, to $75.2 million, for the three months ended November 28, 2004, from $39.9 million for the same period last year. This increase was the result of improved revenues from all of our segments and the inclusion of revenues from Invivo Patient Care (formally InvivoMDE) and Invivo Diagnostic Imaging (formally IGC-MAI and MRI Devices). For the six months ended November 28, 2004, revenues increased $72.7 million or 117% to $134.9 million from $62.2 million for the same period last year. Again, this increase was the result of improved revenues from all of our units and the inclusion of Invivo Patient Care (formally InvivoMDE) and Invivo Diagnostic Imaging (formally IGC-MAI and MRI Devices). The recent acquisition of MRI Devices and the reorganization of the Radio Frequency (RF) Coil businesses as well as the use of the Direct Sales force of Invivo Patient Care to sell RF coils, made it necessary to review the way the Chief Operating Decision Maker receives information and all the other criteria required by FAS 131 regarding segment reporting. As a result of this review we found it necessary to revise our segment presentation. Effective with this report the MRI Segment consists of MRI magnet revenues, manufacturing and selling expense. No longer will any Original Equipment Manufactured (OEM) RF coil information be reported in this segment. The Medical Devices segment will now have all the RF coil information reported within this segment. Previously only Direct Sale RF coil information was in this segment. All prior periods have been restated to reflect this change. 23 MRI SEGMENT REVENUES -------------------- MRI segment revenues during the three month period ended November 28, 2004 increased $1.2 million or 4% to nearly $30 million compared to $28.3 million in the prior year. This increase is the result of improved product mix. Reduced selling prices on the 1.5T was more than offset by improved shipments of the higher field 3.0T magnet. For the six months ended November 28, 2004, MRI segment revenues increased $13.5 million or 34.0% to nearly $54 million from the $40 million in same six month period last year. This increase is primarily related to increased volume resulting from an abnormally low first quarter in fiscal 2004 related to the transition of managing supply chain logistics for Philips Medical Systems in return for an enhanced and extended exclusive supply contract. Additionally, reduced selling prices on the 1.5T were more than offset by improved shipments of the higher field 3.0T magnet. MEDICAL DEVICES REVENUES ------------------------ Our Medical Devices segment provided $33.6 million of revenues for the quarter ended November 28, 2004 an increase of $29.6 million over the same period last year. Invivo Diagnostic Imaging provided about $14.1 million from OEM RF coil revenues an increase of about $10.1 million from the same period last year due to the addition of coils from the MRID acquisition. Invivo Patient Care provided about $19.5 million of revenues relating to patient monitors and direct sales of RF coils compared to none in the same period last year. For the six months ended November 28, 2004 Medical Devices segment provided $59.5 million of revenues, an increase of $52.8 million. Invivo Diagnostic Imaging increased about $14.6 million to $21.3 million primarily the result of our recent acquisition of MRID. Invivo Patient Care contributed $38.2 million which includes patient monitors and direct sales of RF coils compared to none in the same period last year. INSTRUMENTATION SEGMENT REVENUES -------------------------------- Instrumentation segment revenues for the current quarter ended November 28, 2004, increased $2.4 million or 36.4% to $9.0 million over the same quarter last year. This increase is primarily due to product revenues and service growth for vacuum-related products across a broad range of non-semiconductor customers in Europe, the United States and the Pacific Rim. For the six months ended, revenues increased $4.8 million or 38.7% to $17.2 million over the same six month period last year. This increase, consistent with the current quarter, was primarily driven by continued strength in our vacuum market. 24 ENERGY TECHNOLOGY SEGMENT REVENUES ---------------------------------- Revenues of the Energy Technology segment increased $2.1 to $3 million and $1.6 million to $4.6 million for the three and six months ended November 28, 2004, respectively over their corresponding periods last year as a result of a net increase in government and third-party billable revenue on pre-existing programs involving HTS devices. GROSS MARGIN ------------ Consolidated gross margin for the three months ended increased $19.6 million to $35.2 million or 46.8% of net revenues compared to the same period last year of $15.6 million or 39% of net revenues. The increase in both absolute dollars and as a percent of net revenues in the MRI segment corresponds to the increase in revenues, improved product mix as well as the continued benefits of this segments cost savings efforts, which all combined, contributed about $700,000 to the increase. The Medical Devices segment contributed $16.7 million of the increase in consolidated gross margin during the quarter as a result of a full quarter's contribution from the acquisitions. The Instrumentation segment increased $1.5 million leveraging off of increased revenues combined with the continued benefit of this segment's lean manufacturing initiatives. Energy Technology segment contributed about $900,000 of the increase due to increased revenue. During the six months ended, gross margin increased $38.2 million to $62.2 million or 46% of net revenues from $24.1 million or 39% of net revenues for the same six month period last year. All segments contributed to this increase. MRI segment contributed about $6 million to the increase as a result of increased volume, improved mix and continued cost reduction efforts. Medical Devices sector increased $29.2 million primarily from the contribution of our acquisitions. Included in the Medical Devices segment improvement is about $200,000 of costs incurred for relocating manufacturing operations from our Arleta, CA facility to our Orlando, FL facility. The Instrumentation segment contributed about $3 million as a result of increased revenues and continued lean manufacturing initiatives. Finally, Energy Technology contributed about $200,000 to the increase resulting from improved revenue. PRODUCT RESEARCH AND DEVELOPMENT -------------------------------- Product research and development increased $3.6 million or 131% to $6.4 million for the three months ended November 28, 2004 from $2.8 million for the same period last year. This increase primarily resulted from increased spending on various HTS projects in our Energy Technology segment ($829,000), new product development programs in our MRI segment ($500,000) and the contribution of new product development in our Medical Devices segment ($2.3 million). Instrumentation segment remained about the same as last year. For the six months ended product research and development increased $5.8 million or 103% to $11.5 million from $5.7 million for the same period last year. About 40% of this increase is related to additional spending from the MRI segment of $685,000 relating to new magnet development and the Energy Technology segment of about $1.6 million relating to existing programs and additional cost share relating to increased revenue. Medical Devices segment contributed about $3.6 million of the increase primarily related to the acquisitions. Instrumentation segment declined slightly as engineering resources were focused on manufacturing improvements. 25 SELLING, GENERAL AND ADMINISTRATIVE ----------------------------------- For the three months ended November 28, 2004, selling, general and administrative expenses including stock based compensation, increased $13.6 million to $19.3 million from $5.7 million for the same period last year. Our Recent acquisitions of Invivo and MRID account for $8.1 million of the increase. In addition, a stock contribution made to a profit sharing plan for original MRID employees, prior to change in control, was recorded as an expense of $1.9 million during the current period as a result of accelerating the vesting requirements. Performance based stock compensation increased $1.5 million over the same period last year as well as $1 million related to incentive compensation. These accruals are based on forecasted performance. Of the aforementioned expenses, $3.4 million were non cash. Acquisition / integration related expenses increased about $625,000. Finally, spending increased for operating costs relating to audit and tax fees, information system expense, various liability insurances partially offset by reductions in other operating expenses resulted in an increase of about $500,000 over the same period last year. Selling, general and administrative expenses including stock based compensation increased about $21.3 million or 201% to nearly $32 million for the six months ended November 28, 2004 from $10.6 million for the same period last year. The majority of this increase, $13.9 million is related to our recent acquisition of Invivo Corp. and MRI Devices. In addition, a stock contribution made to a profit sharing plan, prior to change in control, of a recent acquisition was recorded as an expense of $1.9 million during the current period. Performance based stock compensation increased $2.5 million over the same period last year as well as $1.2 million related to incentive compensation. These accruals are based on forecasted performance. Acquisition / integration related expenses increased about $800,000. Finally, spending increased on other operating costs relating to audit and tax fees, information system expense, various liability insurances and was partially offset by reductions in other operating expenses resulting in an increase of about $1.0 million over the same period last year. AMORTIZATION OF INTANGIBLE ASSETS --------------------------------- Amortization expense of $1.7 million and $3.1 million for the three and six month periods ended November 28, 2004, increased about $1.2 million and $2.2 million, respectively from the three and six month periods last year. The increase is due to the addition of the amortizable intangible assets resulting from our acquisition of Invivo on January 27, 2004 and MRID on July 16, 2004. IMPAIRMENT OF INTANGIBLE ASSET ------------------------------ During the three month period ended November 28, 2004, management, through re-branding exercises and market analysis, determined that the acquired MRI Devices trade name will no longer be utilized. As a result, the company reduced the net book value of the acquired MRI Devices trade name to zero resulting in an impairment charge of $913,000. OPERATING INCOME ---------------- For the second quarter of fiscal year 2005, operating income increased $295,000 to $6.9 million from $6.6 million for the same period last year. This increase is primarily due to improved revenues and margins as well as the inclusion of operations from our two acquisitions, partially offset by internal acquisition and integration costs combined with the increases in amortization and stock based compensation. For the six month period ended November 28, 2004, operating income increased $7.9 million to $14.8 million from $6.9 million compared to the six month period ended November 23, 2003. This increase is also primarily due to improved revenues and margins as well as the inclusion of operations from our two acquisitions, partially offset by internal acquisition and integration costs combined with the increases in amortization and stock based compensation. 26 INTEREST AND OTHER ------------------ Interest and other income of $211,000 and $413,000 for the three and six months ended November 28, 2004 decreased $27,000 and $106,000, respectively from the corresponding periods last year. This decrease is primarily driven by our lower cash balances resulting from funding our acquisitions of Invivo and MRID, partially offset by an improvement in the interest rate environment and grant income earned by MRID. Interest and other expense of $1.1 million and $2.1 million for the three and six months ended November 28, 2004 increased $1.0 million and $1.9 million, respectively from the corresponding three and six month periods last year. This increase is primarily driven by the interest expense from the $112 million borrowed under our $130 million unsecured credit facility used to partially finance our acquisition of Invivo and MRID, combined with about $4.4 million of debt assumed in our acquisitions and a $5.0 million three year note payable accruing interest at LIBOR plus 0.5% issued in conjunction with the MRID acquisition. As of November 28, 2004, $22.2 million of our term loan and $58.0 million of our revolving line of credit was outstanding under our unsecured credit facility. During the six months ended November 28, 2004, $1.1 million of other income was recognized resulting from a reduction in the provision for potential environmental remediation relating to a business disposed of during fiscal 2002 (see also Note J in the notes to the consolidated financial statements included herein). Management originally estimated this liability based upon information received from site assessments. During the first quarter ended August 29, 2004, management determined that the probable risk of loss was only $100,000 which resulted in a net reduction in the accrual of $1.1 million. Our effective tax rate of 31.2% and 33.2% for the three and six months ended November 28, 2004 decreased 3.5% and 1.5% from the same three and six months periods ended last year. The decrease in the effective tax rate resulted from the reversal of a $210,000 tax accrual based on a change by management upon review of certain tax planning strategies. We continue to review effective tax strategies to minimize our effective tax rate. LIQUIDITY AND CAPITAL COMMITMENTS - --------------------------------- OPERATING ACTIVITIES -------------------- For the six months ended November 28, 2004, we generated about $10.7 million in cash from operating activities compared to $7.8 million in the same period last year. The increase in cash from operating activities is primarily the result of improved earnings partially offset by an unfavorable cash impact of increased working capital usage in the newly acquired businesses. INVESTING ACTIVITIES -------------------- For the six months ended November 28, 2004, investing activities resulted in the use of $43.3 million in cash compared to generating $1.6 million in the same period last year. This significant use of cash primarily resulted from our acquisition of MRID effective July 16, 2004 which included the following payments: 27 Cash paid: Cash paid to MRID shareholders $44,177 Transaction costs 983 Less cash acquired from MRID (6,843) ------- $38,317 ======= Effective December 15, 2004, we announced our agreement to sell our wholly owned subsidiary IGC-Polycold Systems, Inc. to Helix Technology Corporation in an all cash deal amounting to $49.2 million plus $3.3 million as reimbursement for certain tax obligations. It is our intention upon successful consummation of this transaction to use net proceeds from the sale to pay down a significant portion of our unsecured revolving line-of-credit. FINANCING ACTIVITIES -------------------- Financing activities for the six months ended November 28, 2004, generated about $23.2 million which primarily comprised $45 million of proceeds received from long-term borrowings used to partially finance the acquisition of MRID, net of $21.2 million of principal payments. The remainder of the usage reflects the cash received from the exercise of stock option more than offset by the purchase of treasury shares. See the consolidated statement of cash flows, located elsewhere in this report for further details on sources and uses of cash. CAPITAL COMMITMENTS ------------------- Our capital and resource commitments as of November 28, 2004 consisted of capital equipment commitments of approximately $853,000. These commitments consisted of machinery, equipment and tooling used to improve the production process and in research and development. Additionally, some of the capital commitment is for computers and computer equipment to improve engineering efficiency and to update other supporting functions. Individually, none of these commitments are considered significant. ADEQUATE RESOURCES ------------------ 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 available unsecured credit facility. Longer-term, with substantial increases in sales volume and/or large research and development or capital expenditure requirements to pursue new opportunities in the Energy Technology segment, we may 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. 28 RISK FACTORS - ------------ In addition to the risk factors set forth in the Company's annual report on Form 10-K and 10-K/A for the year ended May 30, 2004 and elsewhere in this report: The Company May be Subject to Risk Associated with Acquisitions --------------------------------------------------------------- The Company acquired Invivo Corp. (Invivo) effective January 27, 2004, MRI Devices Corporation (MRID) effective July 16, 2004 and may make additional acquisitions in the future. Acquisitions involve numerous risks, including difficulties in the integration of the operations, services, technologies, products and personnel of the acquired companies, diversion of management's attention from other business concerns, overvaluation of the acquired companies, potential loss of key employees and customers of the acquired companies and lack of acceptance by the marketplace of the acquired companies' products or services. Future acquisitions may also result in dilution to existing stockholders, the use of a substantial portion of the Company's cash, the incurrence of debt, large one-time write-offs and the creation of goodwill or other intangible assets that could result in significant impairment charges or amortization expense. Moreover, the Company may face exposure to litigation and other unanticipated contingent liabilities of the acquired companies. Any of these problems or factors with respect to the acquisition of Invivo and MRID or any other acquisition completed by the Company could result in a material adverse effect to the Company's business, financial condition and results of operations. The Company May on Occasion be Subject to Significant Litigation ---------------------------------------------------------------- With the acquisition of Invivo, the Company now does business in the critical healthcare setting, and may from time to time be subject to significant litigation arising from actual or alleged injuries to patients. Litigation is by its nature costly and may divert management's attention, either of which could adversely affect the Company's operating results. In addition, if any current or future litigation is determined adversely, the Company's operating results and financial condition could be adversely affected. The Company is Subject to Risk of New Laws Related to Health Care ----------------------------------------------------------------- The Company's customer base includes original equipment manufacturers of medical diagnostic equipment, imaging centers, small rural hospitals and other healthcare providers. Changes in the law or new interpretations of existing laws may have a significant effect on the Company's costs of doing business and the amount of reimbursement the Company receives from both government and third-party payors. In addition, economic forces, regulatory influences and political initiatives are subjecting the health care industry to fundamental changes. Federal, state and local government representatives are likely to continue to review and assess alternative health care delivery systems and payment methods. The Company expects ongoing public debate on these issues. Any of these efforts or reforms could have a material adverse affect on the Company's business and results of operations. 29 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- The Company's exposure to market risk through foreign currency exchange, derivative financial instruments and other financial instruments, such as investments in short-term cash equivalents and long-term debt, is not material. The Company has minimal exposure to foreign currency exchange risk with respect to sales as the Company's sales are primarily denominated in U.S. Dollars. The Company does not currently hedge against foreign currency rate fluctuations and an immediate 10% change in exchange rates would not have a material impact on the Company's future operating results or cash flows. The financial instruments of the Company that are interest rate dependent are mortgages payable and an unsecured $130 million credit facility consisting of a $105 million revolving line of credit and a $25 million term loan. The Company manages interest rates through various methods within contracts. 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 credit facility the Company may elect to apply interest rates to borrowings under (x) the higher of Wachovia's prime commercial lending rate or the federal funds rate plus applicable margins or (y) the applicable London Interbank Offered Rate ("LIBOR") plus applicable margins, whichever is more favorable. In addition, the Company entered into an "interest rate swap" agreement that in effect, fixes the rate on its $25 million term loan at 2.95% plus applicable margins. See also Note K to the Company's consolidated financial statements. 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. With regards to invested cash the Company invests only in high quality, low risk securities backed by the full faith of the United States Government. The duration of these securities are an average weighted duration of 90 days. The Company does not believe that its exposure to commodity and foreign exchange risk is material. ITEM 4: CONTROLS AND PROCEDURES ----------------------- (a) Evaluation of disclosure controls and procedures Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15. (b) Changes in internal controls over financial reporting There have not been any changes in our internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 30 (c) Section 404 of the Sarbanes-Oxley Act of 2002 This Act requires management's annual review and evaluation of our internal controls, and an attestation of the effectiveness of these controls by our independent registered public accounting firm beginning with our Form 10-K for the fiscal year ending on May 29, 2005. We are dedicating significant resources, including management time and effort, and incurring substantial costs in connection with our ongoing Section 404 assessment. We are currently documenting and testing our internal controls and considering whether any improvements are necessary for maintaining an effective control environment at our company. The evaluation of our internal controls is being conducted under the direction of our senior management. In addition, our management is regularly discussing the results of our testing and any proposed improvements to our control environment with our Audit Committee. We will continue to work to improve our controls and procedures, and to educate and train our employees on our existing controls and procedures in connection with our efforts to maintain an effective controls infrastructure at our Company. PART II: OTHER INFORMATION ITEM 4: Submission of Matters to a Vote of Security Holders (a) The 2004 Annual Meeting of shareholders of the Company was held on November 16, 2004. (b)(i) At the Annual Meeting, the shareholders of the Company approved certain amendments to the 2000 Stock Option and Stock Award Plan. The vote was 11,313,951 FOR; 7,815,835 AGAINST; 122,587 ABSTAIN. (b)(ii) At the Annual Meeting, the shareholders of the Company approved a proposal to reincorporate the Company in the State of Delaware. The vote was 16,047,785 FOR; 2,933,588 AGAINST; 271,301 ABSTAIN. (b) (iii) At the Annual Meeting, the shareholders of the Company approved a proposal to increase of the number of authorized shares of common stock of the Company to be issued to 80,000,000. The vote was 21,345,008 FOR; 2,753,653 AGAINST; 95,887 ABSTAIN. (b)(iv) At the Annual Meeting, the shareholders of the Company elected to the Board of Directors all three nominees with the following vote: -------------------------- ---------------------- --------------------- -------------------- -------------------- BROKER DIRECTOR FOR WITHHELD ABSTAIN NON-VOTES -------------------------- ---------------------- --------------------- -------------------- -------------------- John M. Albertine 21,954,611 2,239,938 -- -- -------------------------- ---------------------- --------------------- -------------------- -------------------- Glenn H. Epstein 22,667,137 1,527,412 -- -- -------------------------- ---------------------- --------------------- -------------------- -------------------- Larry G. Garberding 22,158,202 2,036,347 -- -- -------------------------- ---------------------- --------------------- -------------------- -------------------- The terms of the Directors that continued after this Annual Meeting included; Michael E. Hoffman, Thomas L. Kempner and Sheldon Weinig 31 ITEM 6: Exhibits (a) Exhibits Certifications of Chief Executive Officer and Chief Financial Officer 31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer) 31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer) 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002. 32 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTERMAGNETICS GENERAL CORPORATION Dated: January 7, 2005 By: /s/Glenn H. Epstein ---------------------------- Glenn H. Epstein Chairman and Chief Executive Officer Dated: January 7, 2005 By: /s/Michael K. Burke ---------------------------- Michael K. Burke Executive Vice President and Chief Financial Officer 33