UNITED STATES 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 29, 2005
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
LATHAM, NEW YORK 12110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 782-1122
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
(Title of Class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock -- $.10 par value per share
(Title of each 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 by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
described in Rule 12b-2 of the Exchange Act). Yes X No ___
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The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $808,474,158. Such aggregate market value was
computed by reference to the closing price of the Common Stock based on quoted
market prices on July 29, 2005. 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 July 29, 2005 was 28,300,482.
DOCUMENTS INCORPORATED BY REFERENCE
The information required for Part III below is incorporated by reference from
the registrant's Proxy Statement for its 2005 Annual Meeting of Stockholders to
be filed within 120 days after the end of the registrant's fiscal year.
ii
TABLE OF CONTENTS
PART I............................................................... 1
ITEM 1. BUSINESS DESCRIPTION 1
MRI SEGMENT 2
MEDICAL DEVICES SEGMENT 5
ENERGY TECHNOLOGY SEGMENT 8
RESEARCH AND DEVELOPMENT 14
INVESTMENTS 15
PERSONNEL 15
EXECUTIVE OFFICERS OF THE REGISTRANT 15
ITEM 2. PROPERTIES......................................... 17
ITEM 3. LEGAL PROCEEDINGS.................................. 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
PART II.............................................................. 19
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES......................................... 19
ITEM 6. SELECTED FINANCIAL DATA............................ 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................ 22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT
MARKET RISK....................................... 40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................ 41
ITEM 9A. CONTROLS AND PROCEDURES........................... 41
ITEM 9B. OTHER INFORMATION................................. 42
PART III............................................................. 43
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 43
ITEM 11. EXECUTIVE COMPENSATION............................ 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................... 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.... 43
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............ 43
PART IV.............................................................. 44
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE......... 44
SIGNATURES........................................................... 50
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SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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 an
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 2006 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 Management's Discussion and Analysis of Financial
Condition and Results of Operations, changes in global political, economic,
business, competitive and regulatory factors 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
In fiscal 2005, Intermagnetics completed the integration of its two recently
acquired medical device businesses and sold its instrumentation business
resulting in a "new" Intermagnetics that serves the direct healthcare market as
well as major healthcare equipment manufactures such as Philips Medical Systems
("Philips"), GE Healthcare ("GE"), and Siemens Medical Solutions ("Siemens").
Since its founding in 1971, Intermagnetics has evolved into a successful
developer, manufacturer and marketer of high-field MRI magnets, radio frequency
coils used with MRI systems, patient monitors and other diagnostic subsystems
and components. We also continue to invest in the development of high-
temperature superconducting materials and devices designed to enhance the
capacity, reliability and quality of electrical power transmission and
distribution.
In fiscal years 2004 and 2005, we acquired two new medical device
businesses; Invivo Corporation ("Invivo") and MRI Devices Corporation ("MRID"),
respectively. On February 15, 2005, we completed the sale of the only
subsidiary (IGC-Polycold Systems, Inc.) in our former Instrumentation segment.
As a result of the integration of our recent acquisitions and the sale of
Polycold, our continuing operations now consist of three reportable segments:
Magnetic Resonance Imaging (MRI), Medical Devices and Energy Technology.
The MRI segment consists primarily of the manufacture and sale of low
temperature superconducting ("LTS") magnets by our Magnet Business Group
("MBG"). Previously, this segment also included the manufacture and sale of
radio frequency coils which are now included in the Medical Devices segment.
All prior year data has been restated to reflect this change.
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The Medical Devices segment now consists of one collectively managed entity,
Invivo Corporation, with a universal brand identity of "Invivo". Invivo's
management team concentrates on the collective growth, revenues and
profitability of its portfolio of products including RF coils, vital sign
patient monitors, visualization and analysis systems and service for these
products.
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. These materials
and devices are also expected to have distinct defense industry applications.
MRI SEGMENT
A. INTRODUCTION
Intermagnetics first entered the medical market as a supplier to system
integrators when Magnetic Resonance Imaging Systems ("MRI systems") were
introduced in the early 1980's. MRI is a non-invasive diagnostic imaging tool
that uses magnetic fields and radio frequencies to produce images of the
internal organs and structures of the body. MRI systems are used worldwide,
principally in hospitals and stand-alone imaging centers. At the core of an MRI
system is a large, highly engineered magnet system. Through our Magnet Business
Group (MBG), we design and manufacture superconducting magnet systems that
offer high field strengths, excellent field quality and operational efficiency.
We sell these magnets to MRI system integrators (also called MRI original
equipment manufacturers).
Additional segment data is provided in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operation," as well as in Note I
of the Notes to Consolidated Financial Statements included in Item 8.
B. PRINCIPAL PRODUCTS
Intermagnetics derived approximately 45%, 68% and 90% of its net revenues
from continuing operations in fiscal years 2005, 2004 and 2003, respectively,
from sales of products in the MRI segment.
Our principal products in the MRI segment include a variety of
superconductive MRI magnet systems. Through MBG, we manufacture and sell
superconductive MRI magnet systems to MRI system integrators for use in
stationary and mobile applications. The primary customer for these products is
Philips. MBG offers a full family of cylindrical superconductive MRI magnet
systems with field strengths of 0.5, 1.0, 1.5 and 3.0 Tesla ("T"). Market
demand for higher field strengths to enable faster and better quality imaging
has resulted in an overall shift towards the higher field 1.5T and 3T systems.
In addition, in fiscal year 2005, MBG commenced commercial production of its
1.0T superconducting open magnet system.
C. MARKETING
We market and sell our products in the MRI segment to MRI system integrators
through our own marketing personnel.
2
Export Sales. Products sold to foreign-based companies, such as Philips
Medical Systems in the Netherlands, were included as export sales even if some
of the products sold were installed in the U.S. On that basis, Intermagnetics'
net export sales from continuing operations (including all segments) for fiscal
years 2005, 2004 and 2003 totaled $160.5 million, $101.8 million and $116.3
million respectively, most of which were to European customers billed in U.S.
currency.
Principal Customers. Sales to customers accounting for more than 10% of
Intermagnetics' net revenues from continuing operations (including all
segments) aggregated approximately 52% of sales in fiscal year 2005, 71% of net
sales in fiscal year 2004 and 92% in fiscal year 2003. (See Note I of Notes to
Consolidated Financial Statements included in Item 8.)
Philips Medical Systems is the principal customer for our MRI magnet
systems. In fiscal year 1999, Intermagnetics and Philips executed a sales
agreement naming Intermagnetics as the exclusive supplier of certain magnet
systems to Philips. We amended that agreement in fiscal year 2003 to extend the
term until the end of calendar year 2009. The term extends each year thereafter
such that beginning in calendar 2005 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 all segments) amounted to approximately 52%, 71% and 92% of our net
revenues from continuing operations for fiscal years 2005, 2004 and 2003,
respectively.
D. COMPETITION/MARKET
A small number of system integrators dominate the multi-billion dollar MRI
industry. They include GE, Philips, Siemens, Hitachi Medical Corporation
("Hitachi") and Toshiba Corporation ("Toshiba"). MRI systems compete indirectly
with other diagnostic imaging methods such as conventional and digital X-ray
systems, nuclear medical systems, Ultrasound, PET scans and X-ray CT scanners.
Most large MRI system suppliers perceive higher field strength imaging
systems that use 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. The overall trend towards higher fields has continued with the
large system suppliers (Philips, GE and Siemens) offering predominantly 1.5T
and 3T cylindrical magnet systems. Such systems are unfeasible with permanent
or resistive magnets. Lower field strength systems generally produce lower
quality images, although rapid gains in computer technology have offset some of
this quality loss. In the mid to late 1990s low field (0.2 to 0.3T) "open"
magnet configurations based on permanent and resistive magnets enjoyed rapid
growth in market share. This segment of the market has begun to decline with
the continued introduction of higher field open MRI systems based on
superconducting magnets. Two such systems have entered the market at 0.7T with
another entry at 0.6T. MBG has developed a more powerful 1.0T superconducting
"open" magnet system for this market segment, with image quality competitive
with 1.5T cylindrical magnets, and commenced commercial sales of this product
to Philips toward the end of our fiscal year 2005.
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Within the market for superconductive MRI magnet systems our competitors
fall into two categories: (1) magnet manufacturers that make products for MRI
system integrators; and (2) MRI system integrators that manufacture
superconductive magnet systems for their own use.
One of the largest MRI system integrators, GE Healthcare, manufactures its
own magnet systems. During our fiscal year 2004, Siemens acquired Oxford Magnet
Technology Limited ("OMT"), a joint venture Siemens controlled (owning 51%),
that manufactures MRI magnets systems. This entity (now named Siemens Magnet
Technology or "SMT") supplies all of Siemens' requirements for superconducting
magnet systems and also continues to supply MRI magnets systems to some smaller
system integrators. We believe we compete effectively against SMT on the basis
of technology and price and that we are capable of increasing our production
capacity to meet opportunities for business expansion as they arise.
Philips Medical Systems does not manufacture its own MRI magnets. Our
exclusive contract provides that we supply all of Philips' requirements for
medical diagnostic superconducting magnet systems (see Principal Products
above).
E. PATENTS/INTELLECTUAL PROPERTY
Our success and competitive position in the MRI segment depends upon, among
other things, our continued ability to develop new proprietary technology while
protecting our existing intellectual property.
We directly or indirectly either own, or license a number of patents
relating to magnet systems. No patents that we consider significant expire
during the next five (5) years. There are no assurances that changing
technology and/or emerging patents will not adversely impact our current patent
position or competitiveness. In addition, while we focus on developing and
patenting new technologies, there are no assurances that this technology will
become commercially significant, that patents will be granted or that competing
patents will not be issued.
F. RAW MATERIALS AND INVENTORY
Most materials and parts used in the manufacturing process for our MRI
magnet systems are ordered based on production needs. We have long-term supply
agreements with Outokumpu Advanced Superconductors (formerly IGC-AS, a division
of Intermagnetics) for the supply of low temperature superconducting ("LTS")
wire and with SHI-APD Cryogenics Inc. (formerly IGC-APD, a subsidiary of
Intermagnetics) for the supply of cryo-coolers - a key component of our MRI
magnet systems. Sumitomo Heavy Industries, which owns SHI-APD, is now the
leading manufacturer of cryo-coolers. LTS wire generally requires long lead
times for order placement. An unplanned loss or severe reduction in supply of
either of these components could result in added cost and temporary production
delays. Generally, we invest in inventories based on production schedules
required to fill existing and anticipated customer orders. As a consequence of
our 2003 expanded agreement with Philips we now have increased responsibility
for delivery flexibility in the magnet supply chain. This resulted in a one-
time significant decrease in magnet deliveries in our first quarter of fiscal
year 2004.
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G. WARRANTY
We have not had significant expense to date for performance of our warranty
obligations in the MRI segment.
H. GOVERNMENT/INDUSTRY REGULATION
All of our commercial manufacturing facilities (including the Medical
Devices segment) are ISO 9001 certified. In addition, we seek, where
appropriate, to comply with the certification and safety standards of
organizations such as Underwriters' Laboratories and the various safety and
test regulations of the European Community. All of our facilities are subject
to various government regulations, including those issued by the Department of
Labor, the Occupational, Safety and Health Administration, and various federal,
state and local environmental agencies. Our MBG manufacturing facility is also
ISO 14000 certified, which is a contractual requirement under our agreement
with our largest customer.
I. SEASONALITY
Historically, Intermagnetics has not experienced substantial seasonality in
its business, but beginning in fiscal year 2005, we expected to see a higher
degree of seasonality in our revenue resulting from the company's amended MRI
magnet supply contract with Philips and our increased focus on direct sales of
RF coils in the Medical Devices segment.
While we did not experience the magnitude of seasonality as originally
forecasted, typical expectations going forward are that the first quarter of
each fiscal year, which includes slower summer months, will be the lightest
because of buying patterns of our newly expanded customer base. The second
quarter is expected to be substantially stronger, followed sequentially by a
somewhat softer third quarter, which includes a significant number of globally
observed holidays. The fourth quarter is generally expected to be the strongest
of the year. Despite this description of our expected seasonality, we
anticipate favorable year-over-year comparisons for continuing operations
throughout fiscal year 2006.
MEDICAL DEVICES SEGMENT
A. INTRODUCTION
In fiscal year 2005, we acquired MRI Devices Corporation ("MRID"), a leading
developer and manufacturer of RF coils. During the fiscal year, we combined
MRID and our existing RF coil business (IGC-Medical Advances, Inc.) with Invivo
Corporation, a patient monitoring business that we acquired in fiscal year
2004. This collectively managed entity has a universal brand identity of
"Invivo".
Invivo is the market leader in the design and manufacture of MRI compatible
patient monitors, which enable physicians to track vital signs while a patient
is undergoing an MRI scan. Invivo pioneered the development of vital signs
monitoring in the MRI environment. While not every patient needs to be
monitored during an MRI scan, as the use of MRI continues to expand,
particularly into areas such as cardiac and interventional MRI, we believe
patient monitoring during MRI procedures will become increasingly important.
The MRI environment presents unique challenges for patient monitoring. A
monitor must not interfere with the MRI scan, and
5
also must be protected from the MRI system's magnetic field and radio frequency
coils in order to perform accurately. Invivo also designs and manufactures
bedside monitoring, central station monitoring and telemetry products for use
in other areas of the hospital.
Invivo is a leading independent developer and manufacturer of RF coils,
which act as antennae 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 signals are transferred electronically to the MRI system computer where
they are reconstructed into clinically useful diagnostic images. Invivo also
designs a subsystem that allows for MRI breast imaging and biopsy, and a
Functional MRI (fMRI) subsystem that allows physicians to monitor brain
activity (function) as well as brain anatomy. These subsystems work in
conjunction with a conventional MRI system.
B. PRINCIPAL PRODUCTS
We derived approximately 51%, 27% and 9% of our net revenues from continuing
operations in fiscal years 2005, 2004 and 2003, respectively, from products in
the Medical Devices segment. Additional segment data is provided in Note I of
the Notes to Consolidated Financial Statements included in Item 8.
Our principal products in the Medical Devices segment include:
o RF Coils for MRI Systems. We manufacture and sell RF coils for use in MRI
systems. Our product line includes several product groups covering
multiple anatomical areas and magnetic field strengths from 0.3T to 3.0T.
We also design, manufacture and sell breast biopsy coils that allow for
MRI breast imaging and biopsy, as well as a Functional MRI (fMRI) system
that allows physicians to monitor brain activity (function) and brain
anatomy.
o MRI Patient Monitors. We design, manufacture and sell a line of patient
monitors that can be used in the MRI suite during an MRI scan.
o Bedside Patient Monitors. We offer a broad range of general patient
monitors for bedside monitoring in a variety of acute care departments
and ambulatory surgery centers, including the operating room, neonatal
intensive care unit, emergency room and post-operative recovery areas.
o Central Station Monitoring and Telemetry. Invivo's central patient
monitoring station is capable of providing centralized, real-time patient
monitoring, CIS connectivity, alarm surveillance and documentation of up
to sixteen telemetry transmitters and/or bedside monitors.
C. MARKETING
We market and sell our products in the Medical Devices segment through
Invivo's own approximately 110 person sales and marketing team. Invivo sells
its products throughout the world through direct sales representatives and
independent distributors. In addition, Invivo enters into supply agreements
with group purchasing organizations to sell products to the GPO member
healthcare providers. We also sell our RF coils directly to original equipment
manufacturers including Philips, GE, Siemens and Toshiba Medical Systems.
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D. COMPETITION/MARKET
We estimate the worldwide market for patient monitoring products that
measure multiple vital signs, including MRI-compatible and acute care, bedside
patient monitoring, was approximately $2 billion in calendar year 2004. We are
aware of three current competitors in the worldwide MRI compatible patient
monitoring market and believe that we are the market leader. The Company
expects that growth in the MRI monitoring market will come from new MRI system
placements, outfitting existing MRI equipment not presently equipped with
monitoring devices and replacing existing MRI patient monitors.
The market for RF coils is also linked to the general MRI system market.
Specialized RF coils those dedicated to imaging particular parts of the human
anatomy such as the brain, liver, knee, neck, back, etc. -- increase the number
of diagnostic applications for which an MRI system can be used. Generally, each
MRI system can benefit from an array of seven to ten RF coils. MRI original
equipment manufacturers generally sell between six and eight RF coils with each
new MRI system, some of which they produce internally and some of which are
provided by external suppliers including Invivo. We also sell coils directly to
hospitals and imaging centers for new MRI system placements that do not already
include our coils and to upgrade existing systems. In addition to the in-house
RF coil capacity of original equipment manufacturers, there are several
independent RF coil manufacturers of various size, but with our acquisition of
MRI Devices, we believe we are a market leader. Competition generally is based
upon rapid innovation, capacity for development and production, price and
diagnostic image quality. To remain competitive, we must continue to invent,
commercialize, supply, service and sell products that deliver improved clinical
outcomes and economic value.
The general patient monitoring market is highly competitive (we estimate 15
to 20 competitors) and includes companies that are much larger than us and that
have significantly greater financial resources. We target our non MRI patient
monitors to historically underserved or "niche" patient monitoring
applications, including small hospitals (fewer than 100 beds), emergency rooms
and ambulatory surgical centers.
Price is an important factor in hospital purchasing patterns as a result of
cost containment pressures on the health care industry. To the extent that
healthcare reform measures negatively affect the financial condition of
hospitals and thereby reduce their capital purchases, we expect price to
continue to be a very important competitive factor. We also compete on the
basis of product reliability, quality, technical features, performance and
service.
E. PATENTS
Our success and competitive position in the Medical Devices segment depends
upon, among other things, our continued ability to develop new proprietary
technology while protecting our existing intellectual property.
We directly or indirectly either own, or license a number of patents
relating to RF coils, MRI patient monitors and wireless telemetry. No patents
that we consider significant expire during the next five (5) years. There are
no assurances that changing technology and/or emerging patents will not
adversely impact our current patent position or competitiveness. In addition,
while we focus on developing and patenting new technologies, there are no
assurances
7
that this technology will become commercially significant, that patents will be
granted or that competing patents will not be issued.
F. RAW MATERIALS AND INVENTORY
Most materials and parts used in the manufacturing process for our Medical
Devices products are ordered based on production needs. We believe there are
alternative suppliers at competitive prices for most of the parts, materials
and components that we purchase for the manufacture of patient monitors. There
are, however, certain components that are sole sourced because of the
uniqueness of their specifications. In the event that a sole source supplier
cannot meet demand, we do not anticipate any significant difficulties in
obtaining any of these materials from alternate sources.
G. WARRANTY
The company provides a warranty for products. The term of the warranty is
normally between 12 and 36 months, depending on the product. Products requiring
service during, or after the warranty period, are returned to the company
operated repair centers.
H. GOVERNMENT/INDUSTRY REGULATION
The Medical Devices segment is subject to the same regulations described in
Section H, MRI Segment above. In addition, our medical products are subject to
regulation by the U.S. Food and Drug Administration ("FDA") and, in some
instances, corresponding state and foreign government agencies. Our existing
medical devices were cleared for marketing in the U.S. through the FDA's
section 510(k) pre-market notification process. This process is available where
the new product being submitted to the FDA can be compared to a pre-existing
commercially available product that performs substantially equivalent
functions. If a product does not meet the eligibility requirements for the
510(k) process, then it must receive approval under a more time consuming and
costly pre-market approval procedure. The FDA may conduct investigations,
evaluations and inspections of our medical device products and manufacturing
facilities at its own initiative or in response to customer complaints or
reports of malfunctions. If the FDA believes its regulations have been
violated, it has extensive enforcement authority including the power to seize,
embargo or restrain entry of products into the market and to prohibit the
operation of manufacturing facilities until the deficiencies are corrected to
the FDA's satisfaction. Compliance with these requirements has not, to date,
had a material effect on the Company's capital expenditures, earnings or
competitive position.
I. SEASONALITY
Because a significant portion of Invivo's sales are to direct customers
(hospitals, clinics, etc.), sales in the Medical Devices segment will
contribute to the seasonality described in Section I, MRI segment above.
ENERGY TECHNOLOGY SEGMENT
A. INTRODUCTION
Energy Technology is an emerging industry dedicated to providing a more
efficient, reliable and environmentally responsible means of generating,
transmitting and distributing
8
electricity. High-temperature superconducting ("HTS") materials could become a
key solution to what the U.S. Department of Energy has described as a national
electrical transmission and distribution infrastructure that is rapidly
becoming incapable of meeting the demands of our modern economy. Through our
wholly-owned subsidiary, SuperPower, Inc., we are focused on developing HTS
materials and HTS-based devices that address a potential market for more
efficient, reliable and environmentally friendly electric transmission and
distribution, which we expect will be easier to permit and license than the
conventional counterparts. We expect additional uses in defense applications
such as directed energy weapons using high-power microwaves and pulsed lasers,
all-electric warships and hypersonic airborne applications, as well as naval
operations involving aircraft launch, ship degaussing and mine-sweeping.
HTS materials are composed of ceramic-like compounds that become
superconducting at higher temperatures than those required to maintain
superconductivity in LTS materials. HTS materials typically remain
superconducting when cooled to temperatures similar to that of liquid nitrogen
(77o Kelvin or minus 321o F). Accordingly, HTS materials usually require less
sophisticated and less costly cryogenic refrigeration systems than LTS
materials, making them well-suited for use in devices such as HTS cables,
transformers, motors, generators and fault current limiters.
We have maintained an HTS program since shortly after these materials were
first identified in 1986. Initially, the Company and others pursued the
development of "First Generation" (1G) HTS wires and tapes using Bismuth-based
materials. The Company and others have incorporated 1G conductor into
successful prototype products. Despite improvements in 1G wires and tapes, we
believe that the high cost of raw materials required for these conductors
(notably, high-purity silver), the high labor content and certain performance
limitations will prevent widespread commercialization of 1G materials and
devices.
In 1999, we shifted our focus to "Second Generation" (2G) HTS conductors
using Yttrium based rare earth copper oxides. These conductors are based on
less expensive nickel alloy substrates (e.g., hastelloy, or inconel) and can be
manufactured using a far less labor-intensive process than 1G conductor. These
factors, and the superior mechanical and electrical performance demonstrated by
2G conductors, will, we believe, allow us to reach cost and performance levels
necessary for commercialization of 2G electric power devices. SuperPower
develops 2G materials and electric power devices that utilize HTS materials.
SuperPower intends to incorporate HTS materials into electric power devices
(see "Principal Products" below) for sale into the electric power utility and
defense industry marketplaces.
We expect to establish commercial manufacturing capability in calendar 2006.
In August of 2005, we announced that SuperPower had produced a 207 meter 2G HTS
wire, with a critical current of 100 amperes per meter corresponding to a
performance level of more than 22,000 amp-meters. We believe this world record
performance improves the previous world record set by a Japanese company by
more than 2,000 amp-meters.
B. PRINCIPAL PRODUCTS
(I)2G HTS CONDUCTOR
As a pre-requisite to developing certain commercially successful HTS-based
electric power devices (e.g., cables, transformers, generators and motors) we
intend to develop, manufacture and sell 2G HTS conductor. To that end, we are
working primarily with a U.S. Department of Energy national laboratory (the Los
Alamos National Laboratory ("LANL")) to
9
scale up certain promising HTS deposition processes to commercial manufacturing
levels. We have also worked with other national laboratory partners, such as
the Argonne National Laboratory ("ANL"), and the Oak Ridge National Laboratory
("ORNL") and obtained cost-share funding from the U.S. Department of Energy
("DOE Agreement") to assist in these efforts. SuperPower has received
additional funding from the Title III office, Dual Use Science & Technology
("DUST") office and the Air Force Research Laboratory ("AFRL") at Wright
Patterson Air Force Base related to 2G HTS manufacturing.
(II) HTS-BASED ELECTRIC POWER DEVICES
SuperPower expects to manufacture and sell HTS materials and components for
integration into products such as HTS cables, transformers and fault current
limiters.
(a) HTS TRANSMISSION CABLE: An alternating current ("A.C.") HTS
transmission cable can carry three to five times more power than a
conventional copper cable system. In a direct current application
("D.C."), this multiple would increase to ten times or more. 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, or is difficult to license.
Given their high current-carrying capacity and other attractive
characteristics, (such as low electrical impedance), HTS cables may
open up new alternatives in network design. A superconducting cable
would also eliminate environmental concerns caused by leaks, fires
or explosions because it does not use oil like conventional cables.
HTS cables could be retrofitted into existing conventional cable
ducts allowing for the delivery of more power as well as creating
conduit space for redundancy to enhance reliability and/or for
telecommunications cable. HTS cables could also ensure that service
reliability will be maintained as the demand for electricity grows
and would improve operating efficiency through lower line losses.
We participated in the first known practical demonstration of an
HTS cable in a project led by Southwire Company. The 30m, 12.5kV,
1,250A HTS power cable was commissioned in February 2000 and
currently provides power to three Southwire plants. It is the
longest continuously operating HTS cable in the world.
In 2001, we announced that SuperPower would develop and install a
1G power cable in an urban right-of-way in Albany, New York. The
New York State Energy Research and Development Authority awarded
SuperPower $6 million for this project in November 2001. In 2002 we
announced that Sumitomo Electric Industries, Ltd. ("SEI") would be
our cable integration partner for the project. In July 2003, the
U.S. Department of Energy awarded SuperPower nearly $13 million for
this project under its Superconductivity Partnership Initiative
("SPI") program. While we initially targeted this as a three year
effort, we expanded the project to five years to include an
additional phase in which we will design, build and test a 2G cable
prototype. The first phase of the HTS cable project is a total of
350m in length and will use 1G conductor. The second phase is
expected to substitute a 30m section of 2G cable for a portion of
the original 1G cable. The 2G conductor used in the project (a
total of nearly 10 km) will be manufactured by SuperPower. In July
of 2003, Superpower executed an agreement with the BOC Group, Inc
("BOC"). BOC has agreed to provide the
10
cryogenic refrigeration system for the project. SuperPower, SEI and
BOC have agreed to share costs that are not covered by third party
funding. We expect to complete the installation of the 1G cable in
calendar year 2006 and testing/operation will continue thereafter
for an undetermined period of time.
(b) HTS FAULT CURRENT LIMITER: In the electrical transmission and
distribution system, a short circuit (fault condition) can result
from events such as lightning striking a power line, or downed
trees or utility poles. Such events create a surge of current
through the electric power grid system that can cause serious
damage to grid equipment. Conventional circuit breakers are
deployed within electric distribution and transmission substations
to protect equipment from damage, but continuing growth of power
demands and complexity in the power grid have created the potential
for fault currents to increase to levels that exceed the current
interrupting capabilities of conventional circuit breakers. We are
working to develop an HTS fault current limiter ("FCL") that would
effectively function as a "power valve", serving to reduce the
available fault current in a fraction of a second to a safer level
within the operating limit of existing circuit breakers.
We believe that a substantial market for FCL technology exists
at transmission voltage levels of 138 kV and higher, based on
extensive discussions with a number of electric utility industry
representatives. SuperPower has developed patented FCL technology,
and has initiated a program to develop, design, manufacture and
demonstrate a 138 kV HTS FCL. We have been awarded approximately
$6.7 million in government and other funding for this program and
we are working with industry partners to develop a FCL that can
operate at high voltage.
The first of three scaled prototype FCLs was built and
successfully tested in July 2004. We are presently in the design
stage for the next prototype, a full-scale single phase 138kV
device for off-grid demonstration, but we are in the process of
evaluating the technological readiness of our partners to proceed
to the next phase of this project. The FCL is the most demanding
and technically challenging of SuperPower's current development
programs.
(c) 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 and can
damage the environment should the oil leak. HTS technology has the
potential to enhance operating cost, performance and flexibility
while offering reductions in both size and weight.
Together with our partner Waukesha Electric Systems (an
operating unit of SPX Corporation) and ORNL, we successfully
developed and tested a 1 MVA HTS transformer prototype using 1G
conductor. This project was completed in 1999. We subsequently
worked with Waukesha and ORNL to complete a 5/10 MVA HTS
transformer prototype, also using 1G conductor. We believe that 2G
wire will be required for commercial success of HTS transformers.
In the interim, until 2G wire becomes commercially viable, further
research and development will be necessary to address high voltage
dielectric insulation requirements and the introduction of load tap
changing (voltage regulation) capability. The Company, along with
its partners intends to pursue funds to complete these
11
additional developments. While we have a Product Development
Agreement with Waukesha to commercialize HTS transformers, there is
no commitment by either party at this point to continue the program
beyond the current 1G prototype.
We maintain a long-term perspective on the development of the market for HTS
technology and the described devices. The company plans to continue to pace its
rate of investment based on the progress of the requisite technology and the
perceived willingness of industry to adopt HTS devices. As a result, any or all
of the described devices and their product development schedules will be
examined on a regular basis and schedules may be readjusted or projects
cancelled altogether.
C. MARKETING
The Company intends to reach the electric utility and defense industry
marketplaces via strategic relationships with major multi-national, brand
recognized electrical equipment OEM's and material/component suppliers. Under
our cable project agreements with SEI and BOC, we have a first right to supply
2G conductor for HTS cable demonstration projects in North America and/or the
U.K. and we have also agreed to explore other cable opportunities in North
America and or the U.K. Nexans SuperConductors Gmblt and SuperPower have agreed
to an exclusive five-year arrangement for the design, development, manufacture
and marketing of FCL technology in a defined field of use, assuming the
successful completion of the current development agreement. Rockwell Automation
(Reliance Electric) and SuperPower have signed an exclusive agreement to design,
develop, build and install HTS electric motors and generators for commercial,
industrial, military and marine applications. SuperPower has agreed to negotiate
in good faith with SEI, BOC, Nexans and Rockwell Automation to establish
commercial relationships to manufacture and sell products. However, there can be
no assurance that any such relationships will be consummated. Notwithstanding
our strategic relationships with SEI, BOC, Nexans, Rockwell Automation and
Waukesha Electric Systems, we intend to entertain additional strategic partners
covering material supply and device integration in the interest of improving
overall competitiveness. There can be no assurance that such strategic partners
will be found, or that such partners will be successful in bringing any of our
products to market.
D. COMPETITION/MARKET
With respect to HTS-based products, we anticipate that we will participate
principally as a developer and manufacturer of materials and components. These
materials and components are necessary to enable HTS cable, transformer, fault
current limiting and motor/generator technologies, and associated cryogenic
refrigeration systems to succeed. We will also be a developer and supplier of
2G HTS conductors (i.e., wires/tapes). We believe that we can compete
effectively by leveraging Intermagnetics' experience in superconducting
materials, magnet systems and cryogenic refrigeration systems, and its long
track record as a world-class manufacturer.
We believe our most significant U.S.-based competitor for HTS 2G conductor
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
Ultera (NKT/Southwire joint venture), Nexans and Furukawa for cables, and
Siemens and ABB for transformers and FCLs. We also compete with Fujikura on 2G
conductor.
The underlying economics for HTS-based products appear to be attractive.
However, potential commercial and defense end-users lack experience with such
products in field
12
operations. This, along with the cost of currently existing 1G HTS materials,
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 and defense applications. 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, reliability
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 2G HTS conductor, we expect 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 and there are no assurances that a market for these products will
develop.
The current annual market for 1G HTS conductor is estimated to be about 800
km. When 2G conductor is available with performance characteristics exceeding
those for 1G conductor, at prices that are competitive with 1G conductor, it is
likely that 2G will supplant the existing 1G market for ongoing HTS application
demonstration programs. SuperPower presently expects to be a first mover in the
fabrication of 2G conductor, and as such expects to have an early market
advantage in the displacement of 1G conductor.
The 2005 Energy Policy Act (the "ACT") was signed into law by the President
on August 8, 2005. We believe that the Act will be instrumental in accelerating
the development and adoption of HTS technology. The Act authorizes the Federal
Energy Regulatory Commission to enforce mandatory reliability rules for the
delivery of electric power; it repeals the Public Utility Company Holding Act;
and authorizes a new Power Delivery Research Initiative employing HTS cable
technology. All of these aspects of the Act are expected to result in
significant new construction of electric transmission and distribution
facilities using HTS technology.
We do not believe Intermagnetics' current overall operations depend upon
successful market acceptance of HTS-based products or devices, nor are the
Company's continued operations dependent on our success in the HTS marketplace.
If HTS-based products or devices do become commercially viable, however, we
believe that, as a leader in superconductivity, we would benefit from
participating in that market. Accordingly, while representing a relatively
high-risk, long-term investment of our resources, we perceive HTS technology as
being of important strategic interest.
Because of the perceived 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 we will have sufficient resources to bring HTS
products to market or that emerging patents will not adversely impact our
competitiveness. In addition, there can be no assurance that we will achieve a
commercially significant position in this emerging marketplace.
E. INTELLECTUAL PROPERTY/PATENTS
We have been awarded a number of US patents and have more than 40 patent
applications pending in process, equipment and device technologies invented by
SuperPower employees. We believe that our current patents and patent
applications, together with our expected ability to obtain licenses from other
parties, will provide us with sufficient access to relevant intellectual
property to develop and sell HTS wires and system components consistent with
our business plan. However, the patent landscape in HTS is unusually complex,
and many participants are continuously filing new patents aggressively. 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 2G HTS rare earth copper oxide materials reached its
conclusion in favor of Lucent Technologies Inc. However, a considerable number
of intellectual property
13
ownership issues with respect to HTS materials and processes remain contested.
A number of patents and patent applications of third parties relate to our
current and future products. We may need to acquire licenses for those patents,
successfully contest the scope or validity of those patents, or design around
patented processes or applications.
We have obtained a non-exclusive license to Lucent Technology's HTS patent
portfolio, including a license to the patent covering rare earth copper oxides.
We believe 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 our competitors.
We are developing a manufacturing process for 2G HTS conductor using the
buffer layer coating processes developed by LANL. We have the right to obtain a
license to technology developed by LANL and ORNL under our existing research
agreements. We believe that we will be able to obtain such licenses on
commercially reasonable terms, but there can be no assurance that this will be
the case. Our competitors are developing 2G HTS conductor using competing
processes. There is no guarantee that the process we are developing will be the
most commercially viable one.
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. We would
be required to obtain licenses under any patents issued or pending patents that
might cover the materials, processes, architectures, components or devices that
we wish to use, develop or sell.
F. RAW MATERIALS AND INVENTORY
First Generation conductors currently require relatively high proportions of
silver in the manufacturing process. This adds significant expense to the cost
of the conductor and is one of the reasons we believe 1G conductor will not
achieve widespread commercial success. We expect to order parts and components
for demonstration devices based on needs, utilizing multiple sources. For early
demonstration prototypes, and prior to the availability of 2G material, we
expect that 1G HTS conductor will be available from a number of sources. We
anticipate purchasing raw materials that include targets, precursors and nickel
alloy tape for scaling up the manufacture of 2G conductor. These materials are
available from multiple sources. We currently do not maintain significant
quantities of inventory of any of the supplies used in 2G conductor or for our
device development needs.
G. WARRANTY
The Energy Technology Segment has not experienced any warranty obligations
to date.
RESEARCH AND DEVELOPMENT
Our research and development activities are important to our 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 our technical capabilities without burdening
operating expenses. While many of our government contracts require that we
share any new technology resulting from the government funded project, which
includes the right to transfer such technology to other government contractors,
we currently do not expect such rights to have a material adverse impact on our
future operations.
14
External funding covers a substantial portion of our research and
development expenditures, principally from the U.S. government. In fiscal 2005,
approximately 36% of total research and development activities were paid by
such external programs, compared to approximately 49% in fiscal 2004 and 22% in
fiscal 2003. During fiscal years 2005, 2004 and 2003, product research and
development expenses from continuing operations, including externally funded
amounts, were $39,880,000, $25,480,000 and $16,023,000, respectively. This
increase in fiscal 2005 is the combination of more government awards available
for funding projects, primarily in the Energy Technology segment and increased
internal investment on new product development. Although it is nearly
impossible to predict, the Company expects this trend to continue.
Additionally, fiscal 2005 and 2004 contain funding from a customer for product
development.
In any given year, we can experience significant increases or decreases in
external funding depending on our success in obtaining funded contracts.
INVESTMENTS
The Company does not currently hold any investments. Any invested cash
balances have original maturities of 90-days or less and are classified as cash
and cash equivalents.
PERSONNEL
On May 29, 2005, we employed approximately 1,070 people. We consider our
relations with our employees to be good.
There is great demand for trained scientific and technical personnel as well
as for key management personnel, and our growth and success will require us 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 for prospective employees.
AVAILABLE INFORMATION
On our Web site at www.igc.com, we make available, free of charge, our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, other filings required by the SEC, and any amendments to those
reports, as soon as reasonably practicable after we electronically file such
material with or furnish it to the SEC. Our SEC reports can be accessed through
the investor relations section of our Web site. Our Code of Conduct is also
available on our Web site. The information found on our Web site is not part of
this or any other report we file with or furnish to the SEC.
EXECUTIVE OFFICERS OF THE REGISTRANT
At the end of fiscal 2005, the executive officers of the Company were:
Name Position Age
- ---- -------- ---
Glenn H. Epstein Chairman and Chief Executive Officer 47
15
Michael K. Burke Executive Vice President and 47
Chief Financial Officer
Thomas J. O'Brien Executive Vice President, Corporate 47
Development
Leo Blecher Sector President -- MRI 59
Philip J. Pellegrino Sector President -- Energy Technology 56
Michael Mainelli Sector President -- Medical Devices 44
Glenn H. Epstein was elected Chairman of the Board effective May 26, 2002.
He became the Company's Chief Executive Officer on June 1, 1999. Mr. Epstein
joined the Company on May 5, 1997 as its President and Chief Operating Officer.
Prior to joining the Company, Mr. Epstein worked for Oxford Instruments Group,
plc in various capacities between 1986 and April 1997, including the position
of President of Nuclear Measurements Group, Inc., a wholly-owned subsidiary of
Oxford. Mr. Epstein also worked for the General Electric Company between 1981
and 1985.
Michael K. Burke was appointed Executive Vice President and Chief Financial
Officer on December 17, 2001. He is also the Company's Treasurer. In May 2000,
Mr. Burke became the chief financial officer at Hydrogen Burner Technology,
Inc., a manufacturer of onsite hydrogen generators and integrated fuel
processors for fuel-cell applications. Prior to that, he was a managing
director in the U.S. investment banking department of CIBC Oppenheimer Corp.
(now CIBC World Markets) having joined the firm in 1995. Prior to joining CIBC
Oppenheimer he was a director within the global investment banking division of
Barclays Bank Group and was team leader of its New York-based infrastructure
finance unit.
Thomas J. O'Brien was appointed Executive Vice President of Corporate
Development on July 23, 2003. In January, he was named acting Sector President
of the newly formed Medical Devices Sector, which includes Invivo Corporation.
Prior to joining Intermagnetics, Mr. O'Brien was President, Color Division of
Sensient Technologies Corporation., a manufacturer of specialty chemicals.
Prior to that, Mr. O'Brien held numerous leadership positions in both the
United States and Europe at Sun Chemical Corporation, a manufacturer of
specialty chemicals. Mr. O'Brien began his career at General Electric
Corporation.
Leo Blecher was appointed Sector President MRI on October 16, 2001. He
previously held the title of Vice President and General 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.
Philip J. Pellegrino joined the Company as Sector President Energy
Technology on October 19, 2001. He is also the President of SuperPower, Inc.
Mr. Pellegrino was president, chief executive officer and a director of the
Independent System Operator in New England, which administers the region's
wholesale electricity markets, centrally dispatches power
16
generation and exercises operational control over the bulk transmission system.
Prior to joining ISO New England, Mr. Pellegrino worked for more than 21 years
at the New York Power Authority (NYPA) in increasingly responsible positions,
including his final position as Senior Vice President, Transmission Business
Unit, and for 6 years at the American Electric Power Service Corporation, where
he began his career.
Michael Mainelli was appointed Sector President, Medical Devices Sector and
President of Invivo Corporation in January, 2005. Prior to that he was
president of Stryker Spine and previously was president of Stryker Japan.
Stryker Corporation is one of the world's largest medical device companies.
Prior to joining Stryker, Mr. Mainelli spent more than 12 years with General
Electric, primarily within GE Medical Systems (now GE Healthcare), where he
held executive positions in GE's Magnetic Resonance Imaging unit and product
management positions in the Ultrasound business.
ITEM 2. PROPERTIES
Our corporate headquarters and MBG are located in approximately 146,000
square feet of space located in Latham, New York (the "Latham Facility"). We
own the Latham Facility, which is subject to a mortgage. (See Note C of the
Notes to Consolidated Financial Statements included in response to Item 8
hereto.)
We lease approximately 65,000 square feet of office and manufacturing space
in nearby Schenectady, New York, which SuperPower currently occupies. The lease
has a 20 year term ending in October 2019.
Invivo Corporation owns an approximately 50,000 square foot office and
manufacturing facility in Orlando, Florida. This facility is subject to a
mortgage. (See Note C of the Notes to Consolidated Financial Statements
included in response to Item 8 hereto.) Invivo also leases approximately 30,000
square feet of additional office and manufacturing space in Orlando. In
addition Invivo owns approximately 55,000 square feet of office and
manufacturing space in Gainesville, Florida, which is subject to a term loan
(See Note C of the Notes to Consolidated Financial Statements included in
response to Item 8 hereto.) Invivo leases approximately 30,000 square feet of
office and manufacturing space in Pewaukee, Wisconsin. Invivo also leases
approximately 13,000 square feet of office space in Valencia, California and
approximately 2,000 square feet of office space in Tulsa, Oklahoma. The company
also leases approximately 15,000 square feet in Germany, UK, and Singapore to
support international distribution, product development, and light
manufacturing.
We intend to expand our respective MRI magnet and RF coil manufacturing
capability during fiscal 2006. We believe that our facilities are adequate and
suitable for our 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.
17
To our 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.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Company's stock trades on the Nasdaq National Market under the ticker
symbol IMGC. 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 2005 High Low
----- -----
Quarter Ended August 29, 2004 25.64 20.03
Quarter Ended November 28, 2004 28.61 20.32
Quarter Ended February 27, 2005 30.54 23.52
Quarter Ended May 29, 2005 29.76 23.13
Fiscal Year 2004
Quarter Ended August 24, 2003 15.94 10.64
Quarter Ended November 23, 2003 16.92 13.70
Quarter Ended February 22, 2004 18.06 14.40
Quarter Ended May 30, 2004 19.66 15.63
- -----
(1) The closing prices have been adjusted to reflect a 50% stock dividend
distributed on August 17, 2004 to stockholders of record on July 23, 2004.
There were approximately 1,209 holders of record of Common Stock as of August
5, 2005. 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. 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.
The remaining information called for by this item relating to "Securities
authorized for issuance under equity compensation plans" is reported in Note D
of the Notes to Consolidated Financial Statements included in response to Item
8.
19
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 29, 2005 May 30, 2004 May 25, 2003 May 26, 2002 May 27, 2001
------------ ------------ ------------ ------------ ------------
Net Revenues (d) $264,759 $139,739 $126,841 $135,152 $112,057
Gross Margin, (d) 120,185 59,261 50,498 55,522 46,296
Income before 19,922 18,194 20,723 29,729 12,203
Income taxes (d)
Income, from continuing operations 14,017 11,881 13,532 20,218 7,492
Per common share (c) :
Basic:
Continuing operations 0.51 0.47 0.54 0.83 0.33
Discontinued operations 0.85 0.12 0.06 0.01 0.15
------------ ------------ ------------ ------------ ------------
1.36 0.59 0.60 0.84 0.48
Diluted:
Continuing operations 0.50 0.46 0.53 0.79 0.31
Discontinued operations 0.84 0.12 0.05 0.01 0.14
------------ ------------ ------------ ------------ ------------
1.34 0.58 0.58 0.80 0.45
AT END OF FISCAL YEAR 2005 2004 2003 2002 2001
------- ------- -------- ------- -------
Working Capital $51,551 $52,020 $109,865 $93,113 $60,370
Total Assets 389,648 284,935 185,055 177,225 152,158
Long-Term debt
(net of current maturities) 19,885 57,635 4,384 4,668 6,185
Retained Earnings / (accumulated deficit) 82,490 44,944 30,084 15,167 (5,422)
Stockholders' Equity 275,006 175,569 154,504 147,394 115,015
- -----
(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.
20
(c) Net income per common share has been restated to give effect to the three
for two stock split in the form of a 50% stock dividend distributed on August
17, 2004 to stockholders of record on July 23, 2004.
(d) Net revenues, gross margin, and income before income taxes have been
restated to exclude amounts associated with IGC-Polycold Systems, Inc.
("Polycold"), the Company's wholly-owned subsidiary, which was sold on February
15, 2005.
21
ITEM 7. 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 2006 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 our Annual Report on Form
10-K.
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.
OVERVIEW OF SIGNIFICANT EVENTS
On February 15, 2005, we completed the sale of our wholly-owned subsidiary,
IGC-Polycold Systems, Inc. ("Polycold"), to Helix Technology Corporation
("Helix"). Helix purchased all of the outstanding capital stock of Polycold for
about $49.7 million in cash, which included a contractual $500,000
reimbursement representing the Company's estimate for certain tax obligations.
The decision to sell Polycold was a step in our overall strategic plan to focus
financial and managerial resources on the Company's highly profitable and more
consistently growing and more profitable medical devices business. The sale,
which resulted in a pre-tax gain of about $33.4 million, was included in income
from discontinued operations. We utilized the net proceeds from the sale of
Polycold and a portion of existing cash balances to pay off the $58.0 million
that was outstanding under the Company's revolving credit facility at the end
of our third fiscal quarter.
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 118,000 shares (the "Plan Shares") were allocated to fund employee
benefit plans for MRID employees. About 88,500 of these Plan Shares with a
value of $1,875,000 was recorded as compensation expense as a result of
accelerating the vesting requirements during the three months ended November
28, 2004 and about 29,500 Plan Shares with a value of $624,000 are being
recognized as compensation expense ratably over a contractual four year vesting
period. The Company recognized $143,000 of compensation expense from vesting
during the year ended May 29, 2005. The remaining 2,342,872 shares were issued
as consideration with a value of $49.6 million based on the average closing
stock price for two days prior to and after the
22
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 from the date of closing and the other fifty
percent for three years. The cash portion of the consideration was financed
through our credit facility that was 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
and are included in our discussion on the Results of Operations below. Since
the acquisition, we have combined MRID and our pre-existing RF coil subsidiary
(IGC-Medical Advances) into one entity: Invivo Diagnostic Imaging, a division
of Invivo Corporation. This has resulted in adding incremental value to this
acquisition through the physical consolidation of product development and
manufacturing facilities in Wisconsin, a unified RF coil management team and
the integration of direct sales activities with Invivo Corporation's global
sales team.
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 stockholders
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.
During fiscal year 2004 we completed our purchase of Invivo Corporation,
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 now
operates two divisions: Invivo Patient Care (IPC) develops and manufactures
patient monitors and Invivo Diagnostic Imaging (IDI) develops and manufactures
RF coils and related subsystems. Invivo's results of operations have been
included in our consolidated financial statements since the date of acquisition
and are included in our discussion on Results of Operations below.
SEGMENT STRUCTURE
As a result of the sale of Polycold, the sole subsidiary in our
Instrumentation segment, our reportable segments from continuing operations now
consist of: Magnetic Resonance Imaging ("MRI"), Medical Devices, 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 OEM sales of Radio Frequency (RF) coils, which
are 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,
Invivo Corporation with a universal brand identity of "Invivo". Invivo's
management team concentrates on the collective growth, revenues and
profitability of its portfolio of products including RF-coils, vital sign
patient monitors, visualization and analysis products and service for these
products. RF-coils are application-specific devices that work as a part of the
overall MRI system to create images of specific anatomical areas of the body.
Examples include breast, head, knee and wrist RF-coils. These products are sold
directly to major original equipment manufacturers including Philips Medical
Systems ("Philips"), GE Healthcare ("GE"), Siemens Medical Solutions
("Siemens") and Toshiba Medical Systems ("Toshiba"). These products are also
sold
23
directly to healthcare providers through Invivo's direct global sales network
comprised of direct sales representatives and independent distributors. Vital
sign monitoring products are devices used throughout hospital acute care
departments, ambulatory surgical outpatient centers, hospital based radiology
departments, and free-standing diagnostic imaging centers. These products
monitor and display respiratory and cardiac vital signs such as temperature,
heart rate and blood pressure. Invivo offers both MRI-compatible monitors for
use in the MRI imaging suite and bedside monitors with central viewing systems
at central nurse stations. Visualization and analysis systems are software
based products used in conjunction with RF coils in diagnostic imaging and
interventional diagnostic procedures. Invivo provides service through company
operated repair centers. An integral part of Invivo's sales and marketing
strategy is a corporate and national account program. Invivo enters into supply
agreements with Group Purchasing Organizations to sell products to the GPO
member hospitals or healthcare facilities.
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. Fiscal 2005 was a 52 week
fiscal year ending May 29, 2005.
We also have a foreign sales corporation located in Barbados. There was no
activity in our foreign sales corporation during fiscal year 2005.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results
of operations are based upon, in part, on 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 in accordance with Staff Accounting Bulletin
No. 101 as amended by Staff Accounting Bulletin No. 104, on product that has
been shipped. In these cases, all the criteria for revenue recognition have
been met including, but not limited to: persuasive evidence of an arrangement
exists; the arrangement includes a product price that is fixed and
determinable; the company has accomplished what it must do to satisfy the terms
of the arrangement including passing title and risk of loss to our customer
upon shipment; and collection from our customer is reasonably assured in
accordance with the terms in the arrangement.
In other 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
24
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 May 29, 2005, May 30, 2004, and May 25, 2003 bill and hold sales comprised
0.1%, 0.0% and 3.1% of annual consolidated revenue from continuing operations,
respectively.
The Company recognizes revenue and profit on long-term development contracts
based upon actual time and material costs incurred plus contractual earned
profit. These types of contracts typically provide engineering services to
achieve a specific scientific result relating to superconductivity. 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 Product Research and
Development by the funding received.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records an allowance for doubtful accounts for estimated
receivable losses. Management considers historical collection experience and
reviews aging reports on its outstanding receivable balances on a regular basis
to assess the collectibility of these balances, and adjusts the allowance for
doubtful accounts accordingly. Increases to the allowance are expensed and
included in operating expenses. The allowance and the related receivable are
reduced when the account is deemed uncollectible.
INVENTORY RESERVES
The Company maintains a reserve for inventory that has 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.
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. Additionally, 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 is calculated using
estimated discounted future cash flows of the operations associated with the
related reporting unit and 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
25
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 H 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
CONTINUING OPERATIONS:
CONSOLIDATED REVENUE
For the year ended May 29, 2005 net revenues increased $125 million or
nearly 90% to $264.8 million from $139.7 million in the prior year. Improved
performance from all segments contributed to the increase. Increased magnet
sales, the acquisition of MRID and increased billing from the Energy Technology
segment were some of the factors contributing to the improved revenues. During
the year ended May 30, 2004 revenues increased $12.9 million or 10.2% to $139.7
million primarily from the acquisition of Invivo and increased billings on
existing contracts from the Energy Technology segment partially offset by
declines from the MRI Segment. During the year ended May 25, 2003 revenues were
$126.8 million.
REVENUES MRI SEGMENT
As of May 29, 2005 net year to date sales for the MRI segment increased
$23.4 million or 24.6% to $118.6 million from $95.2 million in the prior year.
This increase was related to increased magnet volume and an improved magnet mix
of the higher field strength magnets partially offset by previously negotiated
reductions in magnet selling prices. Additionally, fiscal 2004 had an unusually
low first quarter relating to supply chain management (described below). During
fiscal 2004 sales of the MRI segment decreased $19 million from the prior year,
or 16.6%, to $95.2 million. This decrease was primarily the result of a planned
reduction in magnet shipments during the first fiscal quarter related to the
transition of managing supply chain logistics for Philips in return for an
enhanced and extended exclusive supply contract. In addition, an unfavorable
magnet mix combined with lower contractual selling prices more than offset an
increase in magnet volume during the remainder of the year. During the year
ended May 25, 2003 sales of the MRI segment were $114.2 million.
REVENUES MEDICAL DEVICES SEGMENT
During fiscal 2005 sales of the Medical Devices Segment increased $97.2
million to $135.3 million from $38.1 million in the previous year. This
increase is primarily related to the
26
benefit of a full year of sales from the acquisition of Invivo Corporation and
the benefit of ten months of sales from the acquisition of MRID. For the period
ended May 30, 2004 the Medical Devices segment provided $38.1 million of sales,
an increase of $27.2 million primarily as the result of the acquisition of
Invivo and access to a larger direct sales force for additional sales of RF
coils. During fiscal 2003 sales from this segment were nearly $11 million.
REVENUES ENERGY TECHNOLOGY SEGMENT
For the period ended May 29, 2005 the Energy Technology segment revenues
increased $4.4 million to $10.8 million from $6.5 million in the prior year.
This revenue increase is primarily related to increased effort on existing
programs relating to superconducting wire and devices. During fiscal year 2004,
revenues in the Energy Technology segment increased $4.7 million to $6.5
million. This is a result of increased revenues from billings against existing
contracts provided by our industry partners and various state and federal
agencies. During the fiscal year ended May 25, 2003, revenues in the Energy
Technology segment were $1.8 million.
CONSOLIDATED GROSS MARGIN
Consolidated gross margin for the year ended May 29, 2005 increased $60.9
million or greater then 100% to $120.2 million from $59.3 million in the prior
year. As a percent of revenues gross margin increased from 42.4% in fiscal 2004
to 45.4% in the current year. All units have contributed to the increase in
gross margin. The MRI segment contributed approximately $9 million of the
increase as a result of increased volume and continuous cost reduction as well
as favorable product mix partially offset by previously negotiated price
reductions. Invivo Diagnostic Imaging (IDI) gross margin increased $23.8 million
based on improved sales resulting, in part, from additional products made
available to our sales force as a result of the acquisition of MRID. As a
percent of revenues, gross margin from IDI declined to 57.5% from 59.6%
reflecting charges that in management's judgment related to acquisition and
integration activities. Invivo Patient Care (IPC) gross profit increased $27.1
million as a result of increased sales of both patient monitors and direct sales
of RF coils from the acquisition of MRID. As a percent of revenues, gross margin
declined to 50.4% from 53.7%, again, resulting from acquisition and integration
related charges. Energy technology gross margin increased to $3.1 million from
$2.5 million in the previous year. About $1.1 million of the increased margin is
related to increased revenues partially offset by the benefit of $600,000 gross
profit in fiscal 2004 without any costs. The costs related to this profit were
recognized in fiscal 2003 prior to funding being authorized.
Consolidated Gross margin for the fiscal year ended May 30, 2004, was $59.3
million, which represents an increase of $8.8 million or 17.4% over fiscal 2003.
As a percent of revenues, gross margin increased to 42.4% compared to 39.8%
during fiscal 2003. The increase in both absolute dollars and percent of
revenues was primarily driven by the inclusion of $15.2 million of margin from
higher margin sales of our Medical Devices segment. In our MRI segment, gross
margin decreased $7.9 million or 18.1% to $35.9 million. The decline was
principally due to unfavorable magnet mix, price reductions and lower sales
volumes primarily during the first fiscal quarter as discussed above. Margins
from the Energy Technology segment increased about $2.0 million corresponding to
the increased revenue under Government and third-party contracts and the receipt
of about $1.2 million of funding for costs incurred in the prior year. This
additional funding was the result of two government contracts that were
negotiated during
27
fiscal year 2004 with a provision to bill for costs expensed in fiscal year
2003. During the year ended May 25, 2003 consolidated gross margin was $50.5
million.
CONSOLIDATED OPERATING EXPENSES
PRODUCT RESEARCH AND DEVELOPMENT
During fiscal 2005 Product Research and Development increased $13.4 million
to $25.4 million from nearly $12 million in fiscal 2004. Approximately $9.5
million of this increase is related to Medical Device segment spending relating
to the development of the next generation of our existing product and new
products based, in part, on customer requested additional functionality of both
patient monitors and RF coils. Product Research and Development spending in the
MRI segment increased $2.2 million related to fiscal 2004 was artificially low
as a result of customer funding. Energy Technology segment increased $1.7
million as a result of additional cost share related to increased revenue.
Product Research and Development increased $776,000 or 6.9% to nearly $12
million during fiscal 2004. This increase primarily resulted from increased
spending on various High Temperature Superconducting (HTS) projects of about
$1.1 million in our Energy Technology segment. In the MRI segment, spending
decreased $2.5 million as third party funding increased for continued
development on magnet systems. Our Medical Devices segment contributed $2.2
million of the increase relating to new product development. It is important to
note that increased activities in Product Research and Development during
fiscal 2004 across all segments benefited through externally provided third
party funding. During fiscal 2003 research and development expense was $11.2
million.
SELLING, GENERAL AND ADMINISTRATIVE
During fiscal 2005 Selling, General and Administrative and Stock Based
Compensation increased $40.3 million to $66 million from $25.6 million last
year. About $26.6 million is related to the addition of MRID and a full year of
Invivo in our consolidation. The re-branding of MRID into Invivo impaired the
intangible asset of the MRID trade name in the amount of $913,000 net of
amortization. Additionally, a non-cash charge of $1.9 million was taken during
the year relating to a stock contribution made to a profit sharing plan for the
original MRID shareholders, prior to the acquisition. As a condition of the
purchase of MRID the Company agreed to honor an agreement to provide key MRID
employees certain non-cash stock compensation benefits of about $2 million
recognized as a non-cash expense. During fiscal 2005 the Company also incurred
a non-cash expense for performance based stock compensation of $5.8 million as
our financial results achieved the growth targets established by the
Compensation Committee of the Board of Directors and approved by the
stockholders. An additional $2.5 million is related to increased audit and tax
as well as Sarbanes-Oxley 404 compliance costs. Finally, $393,000 of additional
compensation was recognized resulting from the unrealized gain on the Company's
tax deferred compensation plan. An equal and offsetting gain was recognized in
interest income with no impact on net income.
During the fiscal year ended May 30, 2004, Selling, General and
Administrative expenses and Stock Based Compensation increased $9.6 million or
59.7% to $25.6 million from fiscal 2003. This increase is primarily
attributable to the inclusion of Invivo's Selling, General and Administrative
expenses of about $6.6 million as well as the due diligence and integration
related expenses associated with the acquisition which totaled about $1.2
million. In addition, salaries, benefits, incentive compensation and other
employee related expenses increased about
28
$2.3 million, primarily in the MRI segment. This increase is a result of
filling open positions as well as creating new positions that correspond with
our expected future growth. During fiscal 2003, Selling, General and
Administrative and Stock Based Compensation were $16.1 million.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization expense of $6.4 million increased $3.3 million over 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. Fiscal year 2004 included only four months of amortization relating
to Invivo. During fiscal year 2004, amortization of intangible assets increased
$1.3 million or 73% from fiscal year 2003 primarily due to the addition of
amortizable intangible assets resulting from our acquisition of Invivo
Corporation. Amortization expense in fiscal year 2003 was $1.8 million.
IMPAIRMENT OF INTANGIBLE ASSET
During our second fiscal quarter of 2005, management, through re-branding
exercises and market analysis, determined that the acquired MRI Devices trade
name with an acquired value of $970,000 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
Operating income during fiscal 2005 increased $3 million or 16.4% to $21.6
million from fiscal 2004. This increase is primarily due to improved revenues
and gross margins across all segments as well as the inclusion of operations
from our acquisition of MRID in July of 2004 and our acquisition of Invivo in
January 2004. These increases were partially offset by increases in internal
acquisition and integration costs, as well as increased audit and Sarbanes-Oxley
404 compliance costs, combined with the increases in amortization and stock
based compensation.
During fiscal year 2004, operating income of $18.5 million decreased $2.9
million or 13.5% from operating income of $21.4 million during fiscal year
2003. This decrease was primarily the result of reduced magnet sales in our MRI
segment during the first quarter of fiscal year 2004. Additionally, we incurred
about $1.2 million of internal acquisition and integration charges associated
with the acquisition of Invivo. Partially offsetting the MRI segment decrease
of $8.2 million was the increase from the Medical Devices segment of $4.5
million primarily driven by the contributions of Invivo. Additionally, the net
operating loss from our Energy Technology segment decreased about $805,000.
INTEREST AND OTHER
Interest and other income for fiscal 2005 of $1.2 million increased $404,000
or 51% from fiscal 2004. This increase is primarily attributable to a $393,000
increase in earnings from the Company's income tax deferred compensation plan.
An equal and offsetting compensation charge was recorded as an operating
expense in accordance with EITF 97-14. During fiscal year 2004, interest and
other income of $790,000 decreased about $550,000 from $1.3 million in fiscal
2003. This decrease was primarily driven by the continued decline in the
interest rate environment as well as our lower cash balances resulting from
funding our acquisition of Invivo.
29
Interest and other expense of $3.9 million increased nearly $2.7 million
over prior 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 May 29, 2005, we had $4.0 million outstanding on
our revolving credit facility and $20.3 million outstanding on our term loan
portion of our unsecured credit facility. During fiscal year 2004, interest and
other expense of $1.2 million increased $762,000 from $482,000 in fiscal year
2003. This increase is primarily driven by the interest expense from the $67
million of proceeds borrowed under our $130 million unsecured credit facility
used to partially finance our acquisition of Invivo. As of May 30, 2004, $56.1
million was outstanding under this credit facility.
During the year ended May 29, 2005, $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 H in the notes to the consolidated financial statements included
herein). Management originally estimated this liability based upon information
received from professional site assessments. During the first fiscal 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.
As of May 29, 2005 and May 30, 2004 approximately $545,000 and $1,853,000
remains on the Company's balance sheet in other liabilities and accrued
expenses.
In May 2004, the Company sold its 1,172,840 shares of KryoTech, Inc. a
privately-held corporation for total proceeds and a gross realized gain of
$114,000. In October 2002, (fiscal 2003) the Company sold its remaining 827,153
shares of Ultralife Batteries, Inc. for total proceeds of approximately $1.3
million with a gross realized loss of approximately $2.1 million. In connection
with the sale a net, unrealized holding loss of $628,000 has been reclassified
from accumulated other comprehensive income.
Additionally, during fiscal 2003 the Company received $537,000 as a result
of a favorable settlement of trade litigation.
Our effective tax rate for continuing operations of 29.6% for fiscal 2005
decreased 5.1% from last year. The decrease in the effective tax rate resulted
from reversals of certain tax accruals amounting to about $450,000 based upon
management's review of certain discreet events and the resulting impact to
historical tax requirements combined with an increased benefit of the
Extraterritorial Income Exclusion. We do not expect our effective tax rate to
remain this low during fiscal 2006, due to our acquisitions, which are
registered to do business in additional states. Therefore, we expect our
effective tax rate to be about 37% for fiscal year 2006. In addition, we are
currently determining the potential benefit from the Qualified Production
Activity deductions of the American Jobs Creation Act of 2004 as our historical
benefit from the Extra Territorial Income Regime is being phased out. The
effective tax rate in fiscal year 2004 of 34.7% was consistent with fiscal 2003.
We continue to review effective tax strategies to minimize our effective tax
rate.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of our deferred tax
assets will not be realized. The
30
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 including
discontinued operations and the gain on sale of Polycold of approximately $62.3
million in fiscal 2005, $16.7 million in fiscal 2004 and $16.9 million in fiscal
2003. 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 that 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.
DISCONTINUED OPERATIONS:
As a result of the sale of our wholly owned subsidiary, IGC-Polycold
Systems, Inc., effective February 15, 2005, and in accordance with SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets", we have
classified the income from operations and the related gain on sale as
discontinued operations. All prior periods have been restated to reflect this
treatment. Polycold's revenues and net operating profit included in
discontinued operations is as follows:
(In thousands) For the Year Ended
-------------------------
May 29, May 30, May 25,
2005 2004 2003
------- ------- -------
Net revenues to external customers $23,354 $24,708 $20,564
Net operating income 7,359 4,570 1,982
Polycold's revenues for fiscal year 2005 decreased $1.4 million or 5.5% from
last year to nearly $23.4 million. The decrease is primarily the result of
fiscal year 2005 having three and a half fewer months of operations partially
offset by product revenues and service growth for vacuum-related products
across a broad range of non-semiconductor customers in the United States and
the Pacific Rim. During fiscal year 2004, Polycold's revenues increased $4.1
million to $24.7 million or 20% from nearly $20.6 million in fiscal year 2003.
This increase was primarily driven by continued sales and service growth in our
vacuum market in both Asia and the United States as well as slowly increasing
demand in the semiconductor market during the latter part of fiscal year 2004.
Polycold's net operating income in fiscal year 2005 through the date of sale
increased nearly $2.8 million or 61% to $7.4 million over last year despite
having three and a half fewer months of operations. The increases are primarily
driven by improved margins due to manufacturing cost reductions through
successful lean manufacturing initiatives in addition to a decrease in total
operating expenses. During fiscal year 2004, Polycold's net operating income
increased nearly $2.6 million to $4.6 million or 131% from $2 million in fiscal
year 2003. This increase was primarily driven by the increase in revenues and
related gross margin as operating expenses remained relatively consistent.
Effective with the sale of Polycold and also included in discontinued
operations for the year ended May 29, 2005, was the $33.4 million gain on sale
which is calculated as follows:
31
(In thousands)
Cash proceeds received $49,714
Less:
Polycold net assets sold 15,343
Costs directly related to the sale 1,014
-------
Pre-tax gain on sale $33,357
=======
FORWARD LOOKING
Looking forward, into fiscal year 2006, we expect sales to increase
primarily from both the MRI and Medical Devices segments. The MRI segment
growth is expected to come from increased sales related to high field (3.0T)
and 1.0T open magnet systems. We anticipate revenue growth from our Medical
Devices segment driven by increased RF coil sales in the direct market
leveraging off of a full year contribution from our acquisition of MRID. In
addition, we expect sales of patient monitors to be consistent with fiscal year
2005. We expect our net loss for investment in SuperPower (Energy Technology
segment) to remain at about fiscal 2005 levels. Revenues from the Energy
Technology segment are expected to increase during fiscal 2006 through
increased funding opportunities. As we advance through the construction and
installation phase of our superconducting cable project we continue to
anticipate a successful physical demonstration of high temperature
superconducting technology on a commercial grid in calendar year 2006.
Additionally we expect continued progress towards developing products for
external market commercialization. The Company will continue to seek partners
with enhancing technology to participate in our projects in order to share both
costs and technology, as demonstrated in the Cable Project.
Additionally, in fiscal year 2006, similar with last year, we expect to
experience seasonality in our sales. We expect that the first quarter of each
year, which includes slower summer months, will be the lightest because of
buying patterns of our expanded customer base. The second quarter is expected
to be substantially stronger, followed by a somewhat softer third quarter,
which includes a number of globally observed holidays. The fourth quarter is
generally expected to be the strongest of the year.
During fiscal year 2006, we anticipate a decrease in total operating
expenses from fiscal year 2005 driven by a reduction in selling, general and
administrative expenses primarily associated with the significant acquisition
and integration related charges that were incurred during fiscal year 2005.
Partially offsetting this decrease are expected increases in product research
and development expenses as products and projects across all segments are
continuously being developed. Typically, our customers are actively involved in
the definition and development of these products. In addition, we expect an
increase in performance based stock compensation as a larger portion of
Management's restricted stock award plan is expected to vest based on
satisfying certain pre-specified financial performance measures. Additionally,
the Company has an active cost cutting program in each of its divisions to
increase earnings. These expectations are based on the following assumptions,
among others:
o The market for MRI systems continues to grow;
o Order trends for MRI magnets continue to improve;
32
o Major OEM customers continue to purchase RF coils at increasing
levels;
o Customer acceptance of the new products being developed throughout
the Company;
o New products, existing products and upgrades to existing products
achieve the level of growth and market acceptance expected;
o Third party funding is available for Energy Technology to continue
its research;
o Partners are available to continue to help offset some of the
unfunded costs related to this research;
o The Company is able to locate and retain qualified people for
various positions;
o We are able to maintain gross margins through continued production
cost reductions and manufacturing efficiencies;
o The Company does not experience any interruption of supply of our
critical materials used in all of our segments;
o If such a disruption does occur we are able to find alternate
sources expeditiously;
o We are able to effectively compete with our competitors in the MRI
and Medical Devices segments in regards to pricing, product
reliability, technical features, performance and service;
o We are able to continue to submit and gain approval for products
from the FDA under the section 510(k) of the code pre-market
notification process rather than the more time consuming and costly
pre-market approval process;
o We are able to continue to operate under FDA approval in our
manufacturing facilities requiring such approval; and
o We are continually able to effectively integrate current and future
acquisitions
o No additional integration costs are required.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
For the fiscal year ended May 29, 2005 we generated $27.9 million from
operations compared to $19.4 million in fiscal year 2004. The increase is
primarily driven by improved earnings. In addition, significant fluctuations
within working capital items provided a slight favorable impact on cash. The
most significant generation came from an increase in accounts payable and
accrued expenses of $24.1 million nearly offset by cash uses from increases in
accounts receivable and inventory and other assets of $12.8 million and $10.5
million, respectively.
During the year ended May 30, 2004, the $19.4 million generated from
operations was primarily due to earnings partially offset by an unfavorable
fluctuation in working capital primarily driven by increases in both accounts
receivable and inventory and other assets of $3.9 million and $2 million,
respectively.
INVESTING ACTIVITIES
For the year ended May 29, 2005, investing activities resulted in a use of
cash of $1.7 million compared to cash used of $152.4 million last year. The use
of cash during the current fiscal year is primarily due to cash paid to acquire
MRID of $39 million, net of cash acquired, purchases of property and equipment
of $10.5 million and $871,000 for other investing activity
33
requirements. These uses of cash were nearly offset by the $48.7 million, net
of transaction costs and a tax reimbursement received from the sale of
Polycold.
The significant use of cash during the year ended May 30, 2004 was primarily
due to the cash used to fund our acquisition of Invivo of about $150.2 million
combined with purchases of property and equipment of about $6.3 million
partially offset by the collection of a $4.0 million note receivable relating
to a disposition in fiscal 2002 and proceeds from the sale of available for
sale securities of $114,000.
The net cash received from the sale of Polycold effective February 15, 2005,
consisted of the following:
Cash received:
Cash received from sale $49,200
Cash received as reimbursement for certain tax obligations 514
Less cash on Polycold's balance sheet (37)
Transaction costs (1,014)
-------
$48,663
=======
The cash used from our acquisition of MRID effective July 16, 2004,
consisted of the following:
Cash paid:
Cash paid to MRID shareholders $44,802
Transaction costs 1,016
Less cash acquired from MRID (6,843)
-------
$38,975
=======
FINANCING ACTIVITIES
Financing activities for the year ended May 29, 2005, used about $31.7
million of cash. During the fourth quarter, we borrowed $8 million on our
revolving credit facility to cover temporary timing differences in our working
capital requirements which included a $16.2 million tax payment (primarily
related to the gain on sale of Polycold). Prior to year end, we repaid half of
this borrowing leaving $4.0 million outstanding on our revolving facility as of
May 29, 2005. Additionally, we used $45 million of proceeds received from long-
term borrowings to partially finance the acquisition of MRID. During our third
fiscal quarter, the proceeds received from the sale of Polycold combined with
available operating cash were used to pay down nearly $60 million of our credit
facility. These events increased our total proceeds from long-term borrowings
to $53 million and also increased our total year to date debt repayments to
$85.3 million. Total long-term debt including the current portion was $32.3
million as of May 29, 2005. The remaining financing activities reflects the
cash received from the exercise of stock options of $1.5 million and payments
received from employees under the executive stock purchase plan of $879,000
partially offset by the purchase of treasury shares of $1.7 million and
$155,000 for payments made to amend our credit facility.
Financing activities during the year ended May 30, 2004 consisted of
proceeds from long-term borrowings of $67 million used to partially fund our
acquisition of Invivo reduced by principal payments of $11.1 million and costs
paid to obtain the credit facility of $1.3 million.
34
Other financing activities consisted of proceeds from the exercise of stock
options of $3.3 million and payments received from employees under the
executive stock purchase plan of $304,000 partially offset by $1.8 million for
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.
COMMITMENTS
Our capital and resource commitments at July 22, 2005 consisted of capital
equipment commitments of $2,856,000. As of May 29, 2005, our total contractual
obligations for the next five fiscal years are as follows:
(Dollars in thousands) Fiscal Year
----------------------------------------
2006 2007 2008 2009 2010
------- ------ ------- ------ ------
Non-cancelable operating lease commitments $ 1,844 $1,670 $ 1,489 $1,508 $1,522
Purchase commitments 2,993
Minimum pension liability 435
Interest payments on long-term debt (1) 1,147 997 791 452 37
Principal payments on long-term debt 12,404 5,587 8,704 4,801 113
------- ------ ------- ------ ------
$18,823 $8,254 $10,984 $6,761 $1,672
======= ====== ======= ====== ======
- ----------
(1) Represents estimated interest payments on long-term debt using current
interest rates as of May 29, 2005
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 fiscal 2006,
and availability under our unsecured $130 million credit facility. In the
longer-term, we may need to raise additional funds if we experience substantial
increases in sales volume or unusually large research and development or
capital expenditure requirements. Additional funds could also be required for
pursuing new opportunities in the Energy Technology segment or in meeting
business development opportunities through additional acquisitions. We would
expect to be able to do so through additional lines of credit, public offerings
or private placements of securities. 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.
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision with respect to Intermagnetics' common stock. Additional
risks not presently known to us, or that we currently deem immaterial, may also
impair our business. Any of these could have a material and negative effect on
our business, financial condition or results of operations. In addition to the
risk factors included elsewhere in this report:
THE COMPANY IS SUBJECT TO RISK ASSOCIATED WITH ACQUISITIONS.
35
The company acquired invivo corporation 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.
The Company 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 and its customers receive from both
government and third-party payers. 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.
A SIGNIFICANT PORTION OF OUR REVENUE CURRENTLY COMES FROM A SMALL NUMBER OF
CUSTOMERS, AND ANY DECREASE IN REVENUE FROM THESE CUSTOMERS COULD HARM OUR
OPERATING RESULTS.
We depend on a small number of customers for a large portion of our
business, and changes in our customers' orders may have a significant impact on
our operating results. If a major customer significantly reduces the amount of
business it does with us, there would be an adverse impact on our operating
results (See Note I of the Notes to Consolidated Financial Statements included
in response to Item 8). Although we have broadened our customer base over the
past fiscal year, we will continue to depend on sales to a relatively small
number of major customers. Because it often takes significant time to replace
lost business, it is likely that our operating results would be adversely
affected if one or more of our major customers were to
36
cancel, delay or reduce significant orders in the future. In addition, we
generate significant accounts receivable in connection with the products we
sell to our major customers. Although our major customers are large
corporations, if one or more of our customers were to become insolvent or
otherwise be unable to pay for our products, our operating results and
financial condition could be adversely affected.
COMPETITION FROM EXISTING OR NEW COMPANIES COULD CAUSE US TO EXPERIENCE
DOWNWARD PRESSURE ON PRICES, FEWER CUSTOMER ORDERS, REDUCED MARGINS, THE
INABILITY TO TAKE ADVANTAGE OF NEW BUSINESS OPPORTUNITIES AND THE LOSS OF
MARKET SHARE.
Our MRI and Medical Device segments operate in a highly competitive
industry. We are subject to competition based upon product design, performance,
pricing, quality and service. While we try to maintain competitive pricing on
those products that are directly comparable to products manufactured by others,
in many instances our products will conform to more exacting specifications and
carry a higher price than analogous products manufactured by others.
Our competitors include divisions of much larger, more diversified
organizations as well as a number of specialized companies. Some of them have
greater resources and larger staffs than we have. Many of our OEM customers and
potential OEM customers have the capacity to design and manufacture internally
the products we manufacture for them. We face competition from research and
product development groups and the manufacturing operations of our current and
potential customers, who continually evaluate the benefits of internal research
and product development and manufacturing versus outsourcing.
WE DEPEND ON OUR SUPPLIERS, SOME OF WHICH ARE THE SOLE SOURCE FOR OUR
COMPONENTS, AND OUR PRODUCTION WOULD BE SUBSTANTIALLY CURTAILED IF THESE
SUPPLIERS ARE NOT ABLE TO MEET OUR DEMANDS AND ALTERNATIVE SOURCES ARE NOT
AVAILABLE.
We order raw materials and components to complete our customers' orders, and
some of these raw materials and components are ordered from sole-source
suppliers. Although we work with our customers and suppliers to minimize the
impact of shortages in raw materials and components, we sometimes experience
short-term adverse effects due to price fluctuations and delayed shipments. If
a significant shortage of raw materials or components were to occur, we might
have to delay shipments or pay premium pricing, which could adversely affect
our operating results. In some cases, supply shortages of particular components
will substantially curtail production of products using these components. We
are not always able to pass on price increases to our customers. Accordingly,
some raw material and component price increases could adversely affect our
operating results.
UNCERTAINTIES AND ADVERSE TRENDS AFFECTING THE MEDICAL DEVICE INDUSTRY,
INCLUDING THE MARKETS OF ANY OF OUR MAJOR CUSTOMERS MAY ADVERSELY AFFECT OUR
OPERATING RESULTS.
Our business depends primarily on the MRI market, which is subject to rapid
technological change and pricing and margin pressure. In addition, changes in
government policy relating to reimbursement for the purchase and use of medical
capital equipment could also affect our sales.
37
OUR DELAY OR INABILITY TO OBTAIN ANY NECESSARY UNITED STATES OR FOREIGN
REGULATORY CLEARANCES OR APPROVALS FOR OUR NEW PRODUCTS COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
Our products in the Medical Device segment are subject to a high level of
regulatory oversight. A delay or inability to obtain any necessary United
States or foreign regulatory clearances or approvals for our new products could
have a material adverse effect on our business. The process of obtaining
clearances and approvals can be costly and time-consuming. There is a further
risk that any approvals or clearances, once obtained, may be withdrawn or
modified. Medical devices cannot be marketed in the United States without
clearance or approval by the FDA. Medical devices sold in the United States
must also be manufactured in compliance with FDA rules and regulations, which
regulate the design, manufacture, packing, storage and installation of medical
devices. Moreover, medical devices are required to comply with FDA regulations
relating to investigational research and labeling. States may also regulate the
manufacture, sale and use of medical devices. Medical device products are also
subject to approval and regulation by foreign regulatory and safety agencies.
LOSS OF ANY OF OUR KEY PERSONNEL COULD HURT OUR BUSINESS BECAUSE OF THEIR
INDUSTRY EXPERIENCE AND THEIR TECHNOLOGICAL EXPERTISE.
We operate in a highly competitive industry and depend on the services of
our key senior executives and our technological experts. The loss of the
services of one or several of our key employees or an inability to attract,
train and retain qualified and skilled employees, specifically engineering and
operations personnel, could result in the loss of customers or otherwise
inhibit our ability to operate and grow our business successfully.
OUR SUCCESS DEPENDS ON NEW PRODUCT DEVELOPMENT.
We have continuing development program designed to develop new products and
to enhance and improve our products. We are expending significant resources on
the development of new products in all of our segments. The successful
development of our products and product enhancements are subject to numerous
risks, both known and unknown, including:
o unanticipated delays;
o access to capital;
o budget overruns;
o technical problems; and
o other difficulties that could result in the abandonment or substantial change
in the design, development and commercialization of these new products,
including, for example, changes requested by the FDA in connection with pre-
market approval applications for our medical device products or lack of
government funding for our HTS initiatives.
Given the uncertainties inherent with product development and introduction,
we cannot assure that any of our product development efforts will be successful
on a timely basis or within
38
budget, if at all. Our failure to develop new products and product enhancements
on a timely basis or within budget could harm our business and prospects.
OUR BUSINESS COULD BE HARMED IF OUR PRODUCTS CONTAIN UNDETECTED ERRORS OR
DEFECTS OR DO NOT MEET CUSTOMER SPECIFICATIONS.
We are continuously developing new products and improving our existing
products. Newly introduced products can contain undetected errors or defects.
In addition, these products may not meet their performance specifications under
all conditions or for all applications. If, despite our internal testing and
testing by our customers, any of our products contains errors or defects or any
of our products fails to meet customer specifications, then we may be required
to enhance or improve those products or technologies. We may not be able to do
so on a timely basis, if at all, and may only be able to do so at considerable
expense. In addition, any significant reliability problems could result in
adverse customer reaction, negative publicity or legal claims and could harm
our business and prospects.
THERE ARE A NUMBER OF TECHNOLOGICAL CHALLENGES THAT MUST BE SUCCESSFULLY
ADDRESSED BEFORE OUR HTS PRODUCTS CAN GAIN WIDESPREAD COMMERCIAL ACCEPTANCE.
Our HTS products are in the early stages of commercialization or development
and we must successfully address a number of technological challenges to
complete our development and commercialization efforts. We will also need to
improve the performance and/or reduce the cost of our HTS wire to expand the
number of commercial applications for it. We may be unable to meet such
technological challenges. Delays in development, as a result of technological
challenges or other factors, may result in the termination of certain HTS
product development efforts or delays in the introduction or commercial
acceptance of our products.
A WIDESPREAD COMMERCIAL MARKET FOR OUR HTS PRODUCTS MAY NOT DEVELOP.
To date, there has been no widespread commercial use of HTS products. It is
possible that the market demands we currently anticipate for our HTS products
will not develop even if technological hurdles are overcome and that HTS
products will never achieve widespread commercial acceptance.
MANY OF OUR HTS PROJECTS ARE DEPENDENT UPON GOVERNMENT FUNDING, SUBCONTRACTORS
AND OTHER BUSINESS PARTNERS.
We partner with other companies, including cable manufacturers and suppliers
of cryogenic systems on many of our HTS projects, such as our HTS cable
installation program. Accordingly, most of our current and planned revenue-
generating projects involve business partners on whose performance our revenue
and technical success is dependent. If these business partners fail to deliver
their products or perform their obligations on a timely basis, our revenue from
these projects may be delayed or decreased and our technical success may be
jeopardized. A significant source of revenue for our HTS projects is the U.S.
government (e.g., the Department of Energy) and this funding is subject to
annual appropriations. If the amount committed to each project is not
appropriated annually, then our revenue for HTS projects may be substantially
impacted.
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS 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 an amortizing $25 million term
loan. The Company manages interest rates through various methods within
existing 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 N 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.
Additionally, the Company makes certain estimates about inventory value,
collectability of accounts receivable, warranty expense and market acceptance
of new product under development. We use factors such as probability of use,
ability of a customer to pay, historical experience of product repair and
customer need and or acceptance of new products in making the associated
estimates. These estimates are believed to be reasonable and based on
information available at the time the estimate is made.
40
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 Schedule included in Item 15 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
AND CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
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
annual 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. In addition, no
changes in our internal control over financial reporting (as such term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred
during the fourth quarter of our fiscal year ended May 29, 2005 to which this
report relates that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Intermagnetics General Corporation is responsible for
establishing and maintaining adequate internal control over financial reporting
for the Company. Exchange Act Rule 13a-15(f) defines internal control over
financial reporting as a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the company's board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
the assets of the company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the
company; and
o Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
company's assets that could have a material effect on the financial
statements.
41
Management has evaluated the effectiveness of the Company's internal control
over financial reporting as of May 29, 2005 based on the control criteria
established in a report entitled Internal Control-Integrated Framework, issued
by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on such evaluation we have concluded that Intermagnetics General Corporation's
internal control over financial reporting was effective as of May 29, 2005.
We have excluded MRI Devices Corporation ("MRID") from our assessment of
internal control over financial reporting as of May 29, 2005, because it was
acquired in a purchase business combination during fiscal year 2005. MRID is a
100% wholly-owned consolidated subsidiary of Intermagnetics General Corporation
whose total assets and net revenues (from continuing operations) comprised 7%
and 15% respectively, of the related consolidated financial statement amounts
as of and for the year ended May 29, 2005.
PricewaterhouseCoopers LLP, the independent registered public accounting
firm that audited Intermagnetics General Corporation's consolidated financial
statements included herein, has also audited management's assessment of the
effectiveness of Intermagnetics General Corporation's internal control over
financial reporting and the effectiveness of the Company's internal control
over financial reporting as of May 29, 2005, as stated in their report which is
included herein.
ITEM 9B. OTHER INFORMATION
NONE
42
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 2005 Annual Meeting of Stockholders
(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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information with respect to principal accounting fees and services to be
contained under the heading "Fees Paid To Auditors" in our Proxy Statement is
hereby incorporated by reference.
43
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
Attached hereto and filed as part of this report are the financial statements,
schedule and the exhibits listed below.
(A)(1). FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets of Intermagnetics General Corporation as of
May 29, 2005 and May 30, 2004
Consolidated Income Statements of Intermagnetics General Corporation for
the Three Fiscal Years Ended May 29, 2005, May 30, 2004 and May 25, 2003.
Consolidated Statements of Cash Flows of Intermagnetics General
Corporation for the Three Fiscal Years Ended May 29, 2005, May 30, 2004
and May 25, 2003.
Consolidated Statements of Changes in Stockholders' Equity and
Comprehensive Income (Loss) of Intermagnetics General Corporation for the
Three Fiscal Years Ended May 29, 2005, May 30, 2004 and May 25, 2003.
Notes to Consolidated Financial Statements of Intermagnetics General
Corporation.
(A)(2). FINANCIAL STATEMENT SCHEDULE
II Valuation and Qualifying Accounts
All other schedules are not required or are inapplicable and, therefore,
have been omitted.
44
(A)3. EXHIBITS
Plan of Acquisition, reorganization, arrangement, liquidation or succession
2.1 Agreement and Plan of Merger among Intermagnetics General
Corporation, Magic Subsidiary Corporation (as buyer) and Invivo
Corporation, dated December 17, 2003 (12) (Exhibit 99.2)
2.2 Plan of Merger and Reorganization among Intermagnetics General
Corporation, Sunshine Merger Sub, Inc. (as buyer), MRI Devices
Corporation and Jeffrey Fitzsimmons and Brent Berthy, collectively
in their capacity as the Stockholders' Representative, dated May
17, 2004 (13) (Exhibit 2.1)
2.3 Purchase Agreement dated October 4, 2001 between Intermagnetics
General Corporation as Seller and Outokumpu Copper Products Oy and
Outokumpu Advanced Superconductors Inc. as Buyer (3) (Exhibit 2.1)
2.4 Agreement and Plan of Merger dated November 29, 2004 by and between
Intermagnetics General Corporation and Intermagnetics, Inc. (14)
(Exhibit 2.1)
2.5 Stock Purchase Agreement dated December 15, 2005, by and among
Intermagnetics General Corporation, (seller), IGC Polycold Systems,
Inc., a wholly-owned subsidiary (the "Company"), and Helix
Technology Corporation, a Delaware corporation (buyer) (15)
(Exhibit 2.1)
Articles of Incorporation and By-laws
3.1 Certificate of Incorporation of Registrant (14) (Exhibit 3.1)
3.2 By-laws of Registrant (14) (Exhibit 3.2)
Instruments defining the rights of security holders, including indentures
* 4.1 Form of Common Stock certificate
4.2 Credit Agreement for $100 million dated December 17, 2003 among
Intermagnetics General Corporation and its domestic subsidiaries
(borrower) with Wachovia Bank, N.A. (administrative agent),
JPMorgan Chase Bank (syndication agent) and KeyBank, N.A.
(documentation agent) (10) (Exhibit 10.1)
4.3 Amendment 1 to Credit Agreement dated May 18, 2004 among
Intermagnetics General Corporation and its domestic subsidiaries
(borrower) with Wachovia Bank, N.A. (administrative agent) (5)
(Exhibit 4.2)
4.4 Amendment 2 to Credit Agreement dated November 29, 2004 among
Intermagnetics General Corporation and its domestic subsidiaries
(borrower) with Wachovia Bank, N.A. (5) (Exhibit 4.3)
45
4.5 Amendment 3 to Credit Agreement dated December 12, 2004 among
Intermagnetics General Corporation and its domestic subsidiaries
(borrower) with Wachovia Bank, N.A. (administrative agent) (19)
(Exhibit 10.1)
Material Contracts
+ 10.1 Employment Agreement dated July 23, 2002 between Intermagnetics
General Corporation and Glenn H. Epstein (8) (Exhibit 10.1)
+ 10.2 Employment Agreement dated October 19, 2001 between Intermagnetics
General Corporation and Philip J. Pellegrino (8) (Exhibit 10.2)
+ 10.3 1990 Stock Option Plan (4) (Appendix A)
* 10.4 Amended and Restated Agreements first dated April 29, 1999 between
Philips Medical Systems Nederlands B.V. and Intermagnetics General
Corporation for sales of magnet systems
+ 10.5 Employment Agreement dated April 20, 1998 between Intermagnetics
General Corporation and Carl H. Rosner (1) (Exhibit 10.1)
+ 10.6 Enhanced Benefit Plan (2) (Exhibit 10.10)
+ 10.7 Executive Stock Purchase Plan (2) (Exhibit 10.11)
10.8 Patent License Agreement dated June 30, 2000 between Intermagnetics
General Corporation and Lucent Technologies GRL Corporation (6)
(Exhibit 10.2)
+ 10.9 2000 Stock Option and Stock Award Plan as Amended and Restated (7)
(Exhibit 10.1)
+ 10.10 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Glenn H. Epstein dated December 16, 2002 (9)
(Exhibit 10.1)
+ 10.11 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Leo Blecher dated February 12, 2003 (11) (Exhibit
10.12)
+ 10.12 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Michael K. Burke dated February 12, 2003 (11)
(Exhibit 10.13)
+ 10.13 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Philip J. Pellegrino dated February 12, 2003 (11)
(Exhibit 10.14)
+ 10.14 SuperPower Inc. Equity Compensation Plan (11) (Exhibit 10.16)
+ 10.15 2003 Director Compensation Plan (11) (Exhibit 10.17)
+ 10.16 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Thomas J. O'Brien dated August 4, 2003 (16)
(Exhibit 10.18)
46
+ 10.17 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Glenn H. Epstein dated March 14, 2005 (17) (Exhibit
10.1)
+ 10.18 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Michael K. Burke dated March 14, 2005 (17) (Exhibit
10.2)
+ 10.19 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Michael Mainelli dated March 14, 2005 (17) (Exhibit
10.3)
+ 10.20 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Thomas J. O'Brien dated March 14, 2005 (17)
(Exhibit 10.4)
+ 10.21 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Leo Blecher dated April 13, 2005 (18) (Exhibit
10.1)
+ 10.22 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Michael Mainelli dated April 13, 2005 (18) (Exhibit
10.2)
+ 10.23 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Michael Mainelli dated April 13, 2005 (18) (Exhibit
10.3)
Code of Ethics
* 14 Code of Business Conduct and Ethics
Subsidiaries of the registrant
* 21 Subsidiaries of the Company
Consents of experts and counsel
* 23 Consent of Independent Registered Public Accounting Firm
(PricewaterhouseCoopers 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, 333-75269, 333-64822 and 333-126818 on Form S-8.
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.
47
(1) Exhibit incorporated herein by reference to the Annual Report on Form 10-
K filed by the Company for the fiscal year ended May 31, 1998.
(2) Exhibit incorporated herein by reference to the Annual Report on Form 10-
K filed by the Company for the fiscal year ended May 28, 2000.
(3) Exhibit incorporated herein by reference to the Current Report on Form 8-
K filed by the Company on November 8, 2001.
(4) Exhibit incorporated herein by reference to the Proxy Statement dated
September 27, 1999 for the 1999 Annual Meeting of Stockholders.
(5) Exhibit incorporated herein by reference to the Current Report on Form 8-
K filed by the Company on May 19, 2005.
(6) Exhibit incorporated herein by reference to the Quarterly Report on Form
10-Q filed by the Company for the quarter ended August 27, 2000.
(7) Exhibit incorporated herein by reference to the Current Report on Form 8-
K filed by the company on November 18, 2004, as amended by Form 8-K/A
filed by the company on July 15, 2005.
(8) Exhibit incorporated herein by reference to the Annual Report on Form 10-
K filed by the Company for the fiscal year ended May 26, 2002.
(9) Exhibit incorporated herein by reference to the Quarterly Report on Form
10-Q filed by the Company for the quarter ended February 23, 2003.
(10) Exhibit incorporated herein by reference to the Quarterly Report on Form
10-Q filed by the Company for the quarter ended November 23, 2003.
(11) Exhibit incorporated herein by reference to the Annual Report on Form 10-
K filed by the Company for the fiscal year ended May 25, 2003.
(12) Exhibit incorporated herein by reference to the Current Report on Form 8-
K filed by the Company on December 18, 2003.
(13) Exhibit incorporated herein by reference to the Current Report on Form 8-
K filed by the Company on May 18, 2004.
(14) Exhibit incorporated herein by reference to the Current Report on Form 8-
K filed by the Company on December 2, 2004.
(15) Exhibit incorporated herein by reference to the Current Report on Form 8-
K/A filed by the Company on December 17, 2004.
(16) Exhibit incorporated herein by reference to the Annual Report on Form 10-
K filed by the Company for the fiscal year ended May 30, 2004.
48
(17) Exhibit incorporated herein by reference to the Current Report on Form 8-
K filed by the Company on March 16, 2005.
(18) Exhibit incorporated herein by reference to the Current Report on Form 8-
K filed by the Company on April 19, 2005.
(19) Exhibit incorporated herein by reference to the Quarterly Report on Form
10-Q filed by the Company for quarter ended February 27, 2005.
* Filed with the Annual Report on Form 10-K for the fiscal year ended May
29, 2005.
# To be filed by amendment.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this annual report on Form 10-K.
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.
The Company agrees to furnish supplementally a copy of omitted Schedules
and Exhibits, if any, with respect to Exhibits listed above upon request.
(B) The Registrant has filed, as exhibits to this annual report on Form 10-K,
the exhibits by required by Item 601 of Regulation S-K.
(C) Not applicable.
49
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 12, 2005
By: /s/ Glenn H. Esptein
--------------------------------------
Glenn H. Epstein
Chairman 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 K. Burke, Executive
Vice President 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 Chairman and August 12, 2005
- ------------------------ Chief Executive Officer
Glenn H. Epstein (principal executive
officer)
/s/ Michael K. Burke Executive Vice President and August 12, 2005
- ------------------------ Chief Financial
Michael K. Burke Officer (principal financial
and accounting officer)
/s/ John M. Albertine
- ------------------------ Director August 12, 2005
John M. Albertine
/s/ Larry G. Garberding
- ------------------------ Director August 12, 2005
Larry G. Garberding
/s/ A. Jay Graf
- ------------------------ Director August 12, 2005
A. Jay Graf
/s/ Michael E. Hoffman
- ------------------------ Director August 12, 2005
Michael E. Hoffman
/s/ Thomas L. Kempner
- ------------------------ Director August 12, 2005
Thomas L. Kempner
/s/ Sheldon Weinig
- ------------------------ Director August 12, 2005
Sheldon Weinig
50
1. FINANCIAL STATEMENTS
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Intermagnetics General Corporation:
We have completed an integrated audit of Intermagnetics General Corporation's
2005 consolidated financial statements and of its internal control over
financial reporting as of May 29, 2005 and audits of its 2004 and 2003
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our
audits, are presented below.
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Intermagnetics General Corporation and its subsidiaries at
May 29, 2005 and May 30, 2004, and the results of their operations and their
cash flows for each of the three years in the period ended May 29, 2005 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15(a)(2) presents 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 audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
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 audits provide a
reasonable basis for our opinion.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of May
29, 2005 based on criteria established in Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of May 29, 2005, based on
criteria established in Internal Control Integrated Framework issued by the
COSO. The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our
52
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control Over Financial
Reporting, management has excluded MRI Devices Corporation (MRID) from its
assessment of internal control over financial reporting as of May 29, 2005
because it was acquired by the Company in a purchase business combination during
fiscal year 2005. We have also excluded MRID from our audit of internal control
over financial reporting. MRID is a wholly-owned subsidiary whose total assets
and net revenues from continuing operations represent 7% and 15%, respectively,
of the related consolidated financial statement amounts as of and for the year
ended May 29, 2005.
/s/PricewaterhouseCoopers LLP
Albany, New York
August 12, 2005
53
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
May 29, May 30,
2005 2004
-------- --------
ASSETS
Cash and cash equivalents $ 6,970 $ 11,868
Trade accounts receivable, less allowance
(May 29, 2005 -- $1,549; May 30, 2004 -- $849) 60,682 41,218
Costs and estimated earnings in excess of
billings on uncompleted contracts 718 127
Inventories:
Consigned products 1,158 1,822
Finished products 7,349 2,969
Work in process 11,261 8,291
Materials and supplies 20,497 13,955
-------- --------
40,265 27,037
Deferred income taxes 6,042 4,333
Prepaid expenses and other 6,961 4,608
Income tax receivable 4,285
-------- --------
TOTAL CURRENT ASSETS 121,638 93,476
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 2,128 1,628
Buildings and improvements 19,410 14,972
Machinery and equipment 45,186 48,692
Leasehold improvements 935 4,425
-------- --------
67,659 69,717
Less accumulated depreciation and amortization 24,685 32,981
-------- --------
42,974 36,736
INTANGIBLE AND OTHER ASSETS
Goodwill 169,910 118,816
Other intangibles, less accumulated amortization
(May 29, 2005 -- $15,100; May 30, 2004 -- $10,605) 51,519 32,491
Derivative asset 396 253
Other assets 3,211 3,163
-------- --------
TOTAL ASSETS $389,648 $284,935
======== ========
54
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
May 29, May 30,
2005 2004
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 12,404 $ 4,171
Accounts payable 22,136 10,242
Salaries, wages and related items 16,029 10,799
Customer advances and deposits 1,951 1,302
Product warranty reserve 4,073 3,189
Accrued income taxes 3,305
Other liabilities and accrued expenses 10,189 11,753
-------- --------
TOTAL CURRENT LIABILITIES 70,087 41,456
LONG-TERM DEBT, less current portion 19,885 57,635
DEFERRED INCOME TAXES 19,618 10,050
NOTE PAYABLE 5,000
DERIVATIVE LIABILITY 52 225
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' 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):
May 29, 2005 -- 29,970,403 shares;
May 30, 2004 -- 27,076,418 shares 2,997 2,707
Additional paid-in capital 208,074 146,153
Notes receivable from employees (2,542) (3,421)
Retained earnings 82,490 44,944
Accumulated other comprehensive income (loss) 352 (134)
-------- --------
291,371 190,249
Less cost of Common Stock in treasury
May 29, 2005 -- 1,872,546 shares;
May 30, 2004 -- 1,789,316 shares (16,365) (14,680)
-------- --------
275,006 175,569
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $389,648 $284,935
-------- --------
See notes to consolidated financial statements.
55
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
----------------------------
May 29, May 30, May 25,
2005 2004 2003
-------- -------- --------
Net revenues $264,759 $139,739 $126,841
Cost of revenues 144,574 80,478 76,343
-------- -------- --------
Gross margin 120,185 59,261 50,498
Product research and development 25,363 11,985 11,211
Selling, general and administrative:
Stock based compensation 5,764 575 563
Accelerated stock based compensation 1,875
Other selling, general and administrative 58,323 25,070 15,496
Amortization of intangible assets 6,382 3,097 1,793
Impairment of intangible assets 913
-------- -------- --------
98,620 40,727 29,063
-------- -------- --------
Operating income 21,565 18,534 21,435
Interest and other income 1,194 790 1,341
Interest and other expense (3,931) (1,244) (482)
Adjustment to gain on prior period sale of division 1,094
Gain/(loss) on available-for-sale securities 114 (2,108)
Gain on litigation settlement 537
-------- -------- --------
Income from continuing operations before income taxes 19,922 18,194 20,723
Provision for income taxes 5,905 6,313 7,191
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS 14,017 11,881 13,532
Discontinued operations:
Income from operations of discontinued subsidiary
including gain on sale of $33,357 in FY'05 40,709 4,562 2,121
Provision for income taxes 17,180 1,583 736
-------- -------- --------
INCOME FROM DISCONTINUED OPERATIONS 23,529 2,979 1,385
-------- -------- --------
NET INCOME $ 37,546 $ 14,860 $ 14,917
======== ======== ========
Basic Net Income per Common Share:
Continuing operations $ 0.51 $ 0.47 $ 0.54
Discontinued operations 0.85 0.12 0.06
-------- -------- --------
Basic Net Income per Common Share $ 1.36 $ 0.59 $ 0.60
======== ======== ========
Diluted Net Income per Common Share:
Continuing operations $ 0.50 $ 0.46 $ 0.53
Discontinued operations 0.84 0.12 0.05
-------- -------- --------
Diluted Net Income per Common Share $ 1.34 $ 0.58 $ 0.58
======== ======== ========
See notes to consolidated financial statements.
56
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Fiscal Year Ended
--------------------------
May 29, May 30, May 25,
2005 2004 2003
------- -------- -------
OPERATING ACTIVITIES
Net income $37,546 $ 14,860 $14,917
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 13,263 8,225 6,017
Gain on sale of subsidiary (33,357)
Provision for deferred taxes (2,137) 2,455 2,345
Stock based compensation 5,764 575 563
Loss on sale and disposal of assets 1,277 82 60
MRID profit sharing contribution 1,875
Impairment of intangible asset 913
Realized (gain) loss on available-for-sale securities (114) 2,108
Change in discount on note receivable (41) (98)
Amortization of debt issuance costs 298 88
Adjustment to prior period gain on sale of division (1,094)
Tax benefit from stock option exercises 2,778 3,493 126
Change in operating assets and liabilities net of effects from
acquisitions:
Increase in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts (12,774) (3,908) (3,012)
(Increase) decrease in inventories and prepaid expenses
and other assets (10,492) (1,961) 4,656
Increase (decrease) in accounts payable and accrued
expenses 24,074 (4,377) (1,089)
------- -------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 27,934 19,377 26,593
INVESTING ACTIVITIES
Purchases of property, plant and equipment (10,503) (6,277) (4,312)
Collection of note receivable 4,000
Purchase of Invivo, net of cash acquired (737) (150,222)
Purchase of MRID, net of cash acquired (38,975)
Cash in lieu of shares (10)
Investment in patent rights (124) (28)
Proceeds from sale of available-for-sale securities 114 1,363
Proceeds from sale of property, plant and equipment 38 17
Proceeds from sale of subsidiary 48,663
------- -------- -------
NET CASH (USED IN) INVESTING ACTIVITIES (1,686) (152,375) (2,932)
FINANCING ACTIVITIES
Proceeds from sale of Common Stock, including exercise of
stock options 1,527 3,307 1,050
Proceeds from (advances to) employees -- Executive Stock
Purchase Plan 879 304 (2,926)
Purchase of Treasury Stock (1,685) (1,779) (6,521)
Payment to obtain debt financing (155) (1,325)
Proceeds from long term borrowings 53,000 67,000
Principal payments on note payable and long-term debt (85,300) (11,147) (267)
------- -------- -------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES (31,734) 56,360 (8,664)
EFFECT OF EXCHANGE RATE CHANGES ON CASH 588 (8)
------- -------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,898) (76,646) 14,997
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,868 88,514 73,517
------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,970 $ 11,868 $88,514
======= ======== =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Exchange of Common Stock in partial payment of exercise price on options $ 328
=======
Issuance of Common Stock as consideration for purchase of MRID $49,597
=======
Issuance of note payable as consideration for purchase of MRID due in 2007 $ 5,000
=======
See notes to consolidated financial statements.
57
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (LOSS)
Fiscal Years Ended May 29, 2005, May 30, 2004, May 25, 2003
(Dollars in Thousands)
Accumulated
Other Notes
Additional Comprehensive Receivable
Common Paid-in Retained Income Treasury from
Stock Capital Earnings (Loss) Stock Employees
------ ---------- -------- ------------- -------- ----------
BALANCES AT MAY 26, 2002 2,599 137,385 15,167 (906) (6,052) (799)
Comprehensive income:
Net Income 14,917
Unrealized gain on available-for-sale
securities, net of tax 10
Minimum pension liability adjustment (209)
Reclassification adjustment -- available-for-
sale securities 628
Loss on derivative, net of tax benefit (37)
Total comprehensive income
Tax benefit from exercise of stock options 126
Loans to employees for purchase of Common
Stock (2,926)
Issuance of 307,955 shares of Common
Stock, related to exercises of stock options 31 1,091
Treasury stock, upon exercise of stock options 328 (328)
Treasury stock purchase (6,521)
------ ---------- -------- ------------- -------- ----------
BALANCES AT MAY 25, 2003 $2,630 $ 138,930 $ 30,084 $ (514) $(12,901) $ (3,725)
Comprehensive income:
Net income 14,860
Unrealized gain on derivatives, net of tax benefit 323
Minimum pension liability adjustment 65
Unrealized loss on foreign currency translation (8)
Total comprehensive income
Issuance of 768,671 shares of Common Stock,
related to exercises of stock options and
stock based compensation 77 3,730
Repayments of notes receivable 304
Tax benefit from exercise of stock options 3,493
Treasury stock purchase (60)
Treasury stock, upon exercise of stock options (1,719)
------ ---------- -------- ------------- -------- ----------
BALANCES AT MAY 30, 2004 $2,707 $ 146,153 $ 44,944 $ (134) $(14,680) $ (3,421)
Comprehensive income:
Net income 37,546
Unrealized gain on derivatives, net of tax benefit 199
Unrealized gain on foreign currency translation 578
Minimum pension liability adjustment (291)
Total comprehensive income
Issuance of 433,096 shares of Common Stock,
related to exercises of stock options and stock based
compensation 44 2,108
Issuance of 2,460,889 shares for purchase of
MRID 246 51,851
Capital transactions of a subsidiary 16
Accrual for Stock based compensation 5,178
Cash in lieu of fractional shares (10)
Tax benefit from exercise of stock options 2,778
Treasury stock, upon exercise of stock options (1,685)
Repayments of notes receivable 879
------ ---------- -------- ------------- -------- ----------
Balances at May 29, 2005 $2,997 $ 208,074 $ 82,490 $ 352 $(16,365) $ (2,542)
====== ========== ======== ============= ======== ==========
Comprehensive
Income
-------------
BALANCES AT MAY 26, 2002
Comprehensive income:
Net Income 14,917
Unrealized gain on available-for-sale
securities, net of tax 10
Minimum pension liability adjustment (209)
Reclassification adjustment -- available-for-
sale securities 628
Loss on derivative, net of tax benefit (37)
-------------
Total comprehensive income $ 15,309
=============
Tax benefit from exercise of stock options
Loans to employees for purchase of Common
Stock
Issuance of 307,955 shares of Common
Stock, related to exercises of stock options
Treasury stock, upon exercise of stock options
Treasury stock purchase
BALANCES AT MAY 25, 2003
Comprehensive income:
Net income 14,860
Unrealized gain on derivatives, net of tax benefit 323
Minimum pension liability adjustment 65
Unrealized loss on foreign currency translation (8)
-------------
Total comprehensive income $ 15,240
=============
Issuance of 768,671 shares of Common Stock,
related to exercises of stock options and
stock based compensation
Repayments of notes receivable
Tax benefit from exercise of stock options
Treasury stock purchase
Treasury stock, upon exercise of stock options
BALANCES AT MAY 30, 2004
Comprehensive income:
Net income 37,546
Unrealized gain on derivatives, net of tax benefit 199
Unrealized gain on foreign currency translation 578
Minimum pension liability adjustment (291)
-------------
Total comprehensive income $ 38,032
=============
Issuance of 433,096 shares of Common Stock,
related to exercises of stock options and stock based
compensation
Issuance of 2,460,889 shares for purchase of
MRID
Capital transactions of a subsidiary
Accrual for Stock based compensation
Cash in lieu of fractional shares
Tax benefit from exercise of stock options
Treasury stock, upon exercise of stock options
Repayments of notes receivable
Balances at May 29, 2005
See notes to consolidated financial statements.
58
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 inter-company transactions have been
eliminated in consolidation. 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. Fiscal 2005 had 52 weeks, Fiscal 2004 had 53 weeks, and
Fiscal 2003 had 52 weeks.
CASH EQUIVALENTS:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company records an allowance for doubtful accounts for estimated receivable
losses. Management considers historical collection experience and reviews
aging reports on its outstanding receivable balances on a regular basis to
assess the collectibility of these balances, and adjusts the allowance for
doubtful accounts accordingly. Increases to the allowance are expensed and
included in operating expenses. The allowance and the related receivable are
reduced when the account is deemed uncollectible.
REVENUE RECOGNITION:
The Company recognizes revenue in accordance with Staff Accounting Bulletin No.
101 as amended by Staff Accounting Bulletin No. 104, on product that has been
shipped. In these cases, all the criteria for revenue recognition have been met
including, but not limited to: persuasive evidence of an arrangement exists;
the arrangement includes a product price that is fixed and determinable; the
company has accomplished what it must do to satisfy the terms of the
arrangement including passing title and risk of loss to our customer upon
shipment; and collection from our customer is reasonably assured in accordance
with the terms in the arrangement.
In other 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 May 29, 2005, May 30, 2004, and May 25, 2003 bill and
hold sales comprised 0.1%, 0.0% and 3.1% of annual consolidated revenue from
continuing operations, respectively.
The Company recognizes revenue and profit on long-term development contracts
based upon actual time and material costs incurred plus contractual earned
profit. These types of contracts typically provide engineering services to
achieve a specific scientific result relating to superconductivity. 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.
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.
Warranty expense for fiscal 2005, 2004 and 2003, was $2,666,000, $1,514,000 and
$1,117,000, respectively. The following table represents the activity in
product warranty reserve:
59
Fiscal Year Fiscal Year Fiscal Year
(Dollars in thousands) 2005 2004 2003
----------- ----------- -----------
Beginning Balance $ 3,189 $ 1,466 $ 1,326
Reserves acquired from
acquisition of MRID Corp. 87
Reserves acquired from
acquisition of Invivo Corp. 1,602
Reserves released from sale of
Polycold (651)
Warranty expense 2,666 1,514 1,117
Cost of warranty performed (1,218) (1,393) (977)
----------- ----------- -----------
Ending Balance $ 4,073 $ 3,189 $ 1,466
=========== =========== ===========
INVENTORIES:
Inventories are stated at the lower of cost or market value. Cost is determined
on a standard cost basis that approximates the first-in, first-out (FIFO)
method. Variances from standard costs are accumulated as they are incurred and
are included in the carrying value of inventory to the extent appropriate.
Market value is determined based on the net realizable value. Appropriate
consideration is given to obsolescence, excessive levels and other factors in
evaluating net realizable value. At May 29, 2005 and May 30, 2004 the Company
had reserves for excess and obsolete inventory of $2,801,000 and $2,853,000,
respectively.
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 or
estimated useful life, whichever is shorter. 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.
The cost of fully depreciated assets remaining in use is included in the
respective asset and accumulated depreciation accounts. When items are sold or
retired, related gains or losses are included in income. Depreciation expense
from continuing operations for the fiscal years ended May 29, 2005, May 30,
2004 and May 25, 2003, was $6,405,000, $4,513,000 and $3,693,000 respectively.
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 income when realized.
60
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
stockholders' 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 income statements.
GOODWILL AND OTHER INTANGIBLES:
In accordance with Statement of Financial Accounting Standard No. 142 "Goodwill
and Other Intangible Assets", the Company performs a test for goodwill
impairment annually during the second fiscal quarter of each year (or at an
interim date if certain events occur or circumstances change that would more
likely than not reduce the fair value of the reporting unit below its carrying
amount). A determination of impairment is made based upon the estimated
discounted future cash flows of the operations associated with the related
reporting unit. If goodwill is determined to be impaired the Company would be
required to record a charge to its results of operations.
IMPAIRMENT OF LONG-LIVED ASSETS:
In accordance with SFAS No. 144 "Accounting for Impairment or Disposal of Long-
Lived Assets", the Company reviews long-lived assets 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 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.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development costs which include, labor, materials,
external contractor fees and applicable overhead allocations are charged to
operations when incurred and are included in operating expenses.
STOCK-BASED COMPENSATION:
The intrinsic value method of accounting under the provisions of APB No. 25,
"Accounting for Stock Issued to Employees", 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.
Under SFAS 123, "Accounting for Stock-Based Compensation" (SFAS 123) as
amended, compensation costs for stock option grants would be based on the fair
value at the grant date and the resulting compensation expense would be shown
as an expense on the consolidated income statements as the option vests. 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 under SFAS 123:
61
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
-------------------------
May 29, May 30, May 25,
2005 2004 2003
------- ------- -------
Net income (as reported) $37,546 $14,860 $14,917
Add recorded non-cash stock compensation, net of tax 4,942 375 368
Less non-cash stock compensation under
SFAS No. 123, net of tax (6,544) (2,345) (2,211)
------- ------- -------
Pro forma Net Income $35,944 $12,890 $13,074
Earnings per Common Share (as reported):
Basic $ 1.36 $ 0.59 $ 0.60
======= ======= =======
Diluted $ 1.34 $ 0.58 $ 0.58
======= ======= =======
Earnings per Common Share (pro forma):
Basic $ 1.30 $ 0.51 $ 0.53
======= ======= =======
Diluted $ 1.28 $ 0.51 $ 0.51
======= ======= =======
The weighted average fair value of each option granted under the 1990 Stock
Option Plan and the 2000 Stock Option and Award Plan during fiscal years 2005,
2004, and 2003 was $15.404, $12.301 and $8.377, respectively. The fair value of
each option grant was estimated on the date of the grant using the Black-
Scholes Model with the following weighted average assumptions. The risk-free
interest rates for fiscal years 2005, 2004, and 2003 were 4.0%, 4.7%, and 3.0%,
respectively. The expected volatility of the market price of the Company's
Common Stock for fiscal years 2005, 2004, and 2003 grants was 64.7%, 65.1% and
68.6%, respectively. The expected average term of the granted options for
fiscal 2005, 2004, and 2003 was 8.0 years, 7.9 years and 7.1 years,
respectively. There was no expected dividend yield for the options granted for
fiscal years 2005, 2004, and 2003.
PER SHARE AMOUNTS:
Basic earnings per share excludes dilution and is computed by dividing income
available to common stockholders 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 Company.
COMPREHENSIVE INCOME:
Comprehensive income (loss) currently consists of net income, foreign currency
translation adjustments, minimum pension liability adjustments and gain (loss)
on derivative activity and is presented in the consolidated statements of
changes in stockholders' equity and comprehensive income (loss), net of tax.
USE OF ESTIMATES:
In order to prepare these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenue and expenses and the
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS:
In June 2005, the FASB's Emerging Issues Task Force reached a consensus on
Issue No. 05-6, "Determining the Amortization Period for Leasehold
Improvements" ("EITF 05-6"). The guidance requires that leasehold improvements
acquired in a business combination or purchased subsequent to the inception of
a lease be amortized over the lesser of the useful life of the assets or a term
that includes renewals that are reasonably assured at the date of the business
combination or purchase. The guidance is effective for periods beginning after
June 29, 2005. The Company does not believe that the adoption of EITF 05-6 will
have a significant effect on its financial statements.
62
In May 2005, the FASB issued Statement of Financial Accounting Standards No.
154, "Accounting Changes and Error Corrections---A Replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application
to prior periods' financial statements for changes in accounting principle,
unless it is impracticable to determine either the period-specific effects or
the cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct
effects of the change. Indirect effects of a change in accounting principle,
such as a change in non-discretionary profit-sharing payments resulting from an
accounting change, should be recognized in the period of the accounting change.
SFAS 154 also requires that a change in depreciation, amortization, or
depletion method for long-lived non-financial assets be accounted for as a
change in accounting estimate affected by a change in accounting principle.
SFAS 154 is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. Early adoption is permitted for
accounting changes and corrections of errors made in fiscal years beginning
after the date this Statement is issued. The Company is required to adopt the
provision of SFAS 154, as applicable, beginning in fiscal 2007.
On March 29, 2005, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 107 (SAB 107) regarding the Staff's interpretation of
Share-Based Payments. This interpretation expresses the views of the staff
regarding the interaction between Statement of Financial Accounting Standards
Statement No. 123 (revised 2004) Share-Based Payment (Statement 123R) and
certain SEC rules and regulations and provide the staff's views regarding the
valuation of share-based payment arrangements for public companies. In
particular, this SAB provides guidance related to share-based payment
transactions with nonemployees, the transition from nonpublic to public entity
status, valuation methods, the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the classification
of compensation expense, non-GAAP financial measures, first-time adoption of
Statement 123R in an interim period, capitalization of compensation cost
related to share-based payment arrangements, the accounting for income tax
effects of share-based payment arrangements upon adoption of Statement 123R,
the modification of employee share options prior to adoption of Statement 123R
and disclosures in Management's Discussion and Analysis ("MD&A") subsequent to
adoption of Statement 123R. The Company will adopt SAB 107 in connection with
its adoption of Statement 123R which is expected to have a material impact on
the Company's results of operations.
In March 2005, the FASB issued FASB Staff Position (FSP) FIN 46(R)-5 "Implicit
Variable Interests under FASB Interpretation No. 46, Consolidation of Variable
Interest Entities." FSP FIN 46(R)-5 provides guidance for a reporting
enterprise that holds an implicit variable interest in a variable interest
entity (VIE) and is also a related party to other variable interest holders.
This guidance requires that if the aggregate variable interests held by the
reporting enterprise and its related parties would, if held by a single party,
identify that party as the primary beneficiary, then the party within the
related party group that is most closely associated with the VIE is the primary
beneficiary. The effective date of FSP FIN 46(R)-5 is the first reporting
period beginning after March 3, 2005, with early application permitted for
periods for which financial statements have not been issued. Management does
not believe that implementation of this FSP will have a material effect on the
Company's results of operations or financial position.
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. In April 2005, the SEC issued a Final Rule amending
Rule 4-01(A) of Regulation S-X which amends the effective date of this
statement to fiscal years beginning after June 15, 2005. Therefore this
Statement applies to the Company beginning with the quarter ending August 27,
2006. The Company has not completed its analysis of the impact of this
statement, however, it is expected that the application of this Statement will
have a material impact on the Company's results of operations.
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 but does not anticipate it will have a material
impact on the Company's financial position and results of operations.
In December 2004, the FASB issued Staff Position No. FAS 109-1, "Application of
FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American
63
Jobs Creation Act of 2004". This Staff Position clarifies that the tax
deduction for qualified domestic production activities provided by the American
Jobs Creation Act of 2004 (the Act) should be accounted for as a special
deduction under FAS 109 as opposed to a tax-rate deduction. The phase-in of the
tax deduction begins with qualifying production activities for the year ending
December 31, 2005. The American Jobs Creation Act of 2004 replacing the
extraterritorial income (ETI) tax incentive with a domestic manufacturing
deduction. In the long term we expect this new deduction to provide a similar
tax benefit as the ETI tax incentive has in the past.
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.
NOTE B -- ACQUISITIONS AND DISPOSITIONS
On February 15, 2005, the Company completed the sale of its wholly-owned
subsidiary, IGC-Polycold Systems, Inc. ("Polycold") to Helix Technology
Corporation ("Helix"). Helix purchased all of the outstanding capital stock of
Polycold for about $49.7 million in cash, which included a contractual $500,000
reimbursement representing the Company's estimate for certain tax obligations
of up to a maximum liability of $3.3 million relating to a Section 338(h)(10)
election under the Internal Revenue Code. The decision to sell Polycold was a
step in management's overall strategic plan to focus financial and managerial
resources on the Company's growing and more profitable medical devices
business. The Company utilized the net proceeds from the sale of Polycold in
addition to available operating cash to pay off the remaining $58.0 million
that was outstanding under the Company's revolving credit facility as of
February 15, 2005. The sale, which resulted in a pre-tax gain of about $33.4
million, was included in income from discontinued operations for the year ended
May 29, 2005. The gain was calculated as follows:
(In thousands)
Cash proceeds received $49,714
Less:
Polycold net assets sold 15,343
Costs directly related to the sale 1,014
-------
Pre-tax gain on sale $33,357
=======
The revenues and net operating profit of Polycold, the sole subsidiary in the
Company's Instrumentation segment are included in discontinued operations as
required by SFAS No. 144 "Accounting for the Impairment or Disposal of Long-
Lived Assets" as follows:
(In thousands) Fiscal Year Ended
-------------------------
May 29, May 30, May 25,
2005 2004 2003
------- ------- -------
Net revenues to external customers $23,354 $24,708 $20,564
Net operating profit 7,359 4,570 1,982
The assets of Polycold consisted primarily of accounts receivable, inventories,
property and equipment, goodwill and intangible assets and other assets. Under
this stock transaction, Helix assumed Polycold's accounts payable and accrued
liabilities. The following is a summary of the book value of the net assets as
of February 15, 2005, the closing date and May 30, 2004:
64
(In thousands)
February 15, May 30,
2005 2004
------------ -------
Cash $ 38 $ 40
Trade accounts receivable less allowance 4,571 3,210
Inventories 2,672 2,620
Property and equipment, net 3,132 3,448
Goodwill and intangible assets 7,530 7,564
Other assets 94 104
------------ -------
Total assets $ 18,037 $16,986
============ =======
Accounts payable $ 365 $ 534
Other liabilities and accrued expenses 2,329 2,205
------------ -------
Total liabilities 2,694 2,739
------------ -------
Net assets of discontinued operations $ 15,343 $14,247
============ =======
On July 16, 2004, the Company completed its purchase of MRI Devices Corporation
("MRID"), a privately held company. MRID was 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 118,000 shares (the "Plan Shares") were allocated to fund employee
benefit plans for MRID employees. About 88,500 of these Plan Shares with a
value of $1,875,000 was recorded as compensation expense as a result of
accelerating the vesting requirements during the three months ended November
28, 2004 and about 29,500 Plan Shares with a value of $624,000 are being
recognized as compensation expense ratably over a contractual four year vesting
period. The Company recognized $143,000 of compensation expense from vesting
during the year ended May 29, 2005. The remaining 2,342,872 shares were issued
as consideration with a value of $49.6 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 from the date of closing 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 provides an expanded high value product portfolio that will
serve the broader MRI market. In addition, Intermagnetics added incremental
value to this acquisition through the physical consolidation of product
development and manufacturing facilities in Wisconsin, a unified RF coil
management team and the integration of direct sales activities with the global
sales team that the Company assumed in its acquisition of Invivo Corporation.
The following represents the allocation of the total purchase price to the
assets acquired and liabilities assumed:
65
(In thousands)
--------------
Consideration:
Cash paid to MRID shareholders $ 44,802
Issuance of Intermagnetics Common Stock to MRID Shareholders
(2,342,872 shares at $21.17) 49,597
Promissory note payable (payable in three years from closing date) 5,000
Transaction costs paid 1,016
--------------
Total purchase price $ 100,415
==============
Allocated to:
Working capital, less inventory $ 14,226
Inventory 7,351
Property and equipment 6,991
Deferred tax liability (10,292)
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 58,122
--------------
Total $ 100,415
==============
The allocation of the purchase price is based on fair value estimates of the
assets and liabilities acquired.
The following (unaudited) pro forma consolidated income statements and
disclosure have been prepared in accordance with SFAS No. 141 "Business
Combinations" as if the acquisition of MRID and Invivo Corporation occurred at
the beginning of the earliest period presented:
Years Ended
------------------
May 29, May 30,
2005 2004
-------- --------
Net revenues $271,240 $234,342
======== ========
Net income $ 38,370 $ 23,211
======== ========
Earnings per share:
Basic $ 1.37 $ 0.84
======== ========
Diluted $ 1.35 $ 0.83
======== ========
In the above pro forma consolidated income statements, net income for the year
ended May 29, 2005, includes a $19.3 million gain on sale of subsidiary, a
$714,000 adjustment on prior period gain on sale of division, both net of tax
and $8.8 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; $596,000 for an impairment
charge on the acquired MRID trade name; and about $7.0 million for other non-
recurring acquisition and integration related charges. Net income for the year
ended May 30, 2004 includes about $815,000 of acquisition related charges net
of tax.
The above pro forma results do not include any anticipated revenue synergies.
66
In connection with the acquisition of Invivo Corporation on January 27, 2004,
the Company acquired manufacturing facilities located in Arleta, California and
Orlando, Florida. During the first half of fiscal year 2005, the Company
consolidated and physically relocated the Arleta manufacturing operation into
the Orlando facility. Management believes this consolidation will optimize the
complimentary capabilities of what were two separate companies (Invivo
Corporation acquired Medical Data Electronics, Inc. in April of 2003 to form
InvivoMDE). The costs incurred associated with ceasing manufacturing operations
in Arleta and the relocation and start-up in Orlando of about $212,000 were
included in costs of revenues.
NOTE C -- LONG-TERM DEBT
Credit Facility:
On December 17, 2003, the Company entered into a Credit Facility with a group
of commercial lenders to partially finance its acquisition of Invivo
Corporation. The Company could borrow up to $100 million in the aggregate
consisting of (i) up to $75 million in a five-year revolving credit facility
and (ii) a $25 million five-year term loan facility. On May 18, 2004 the
Company amended its credit facility with its existing group of commercial
lenders to effectively increase the aggregate revolving commitment amount by
$30 million to $105 million. In conjunction with this increase, the Company was
required to pay an upfront non-refundable commitment fee ranging from 0.25% to
0.50% to each lender based on their pro-rata share of the revolver increase.
These fees were deferred and are amortized using the straight-line method over
the remaining life of the debt.
On July 16, 2004, the Company borrowed $45.0 million from its amended $130
million unsecured credit facility to partially finance the acquisition of MRID.
On December 13, 2004, the Company amended its credit facility to effectively
release the Company from the provision that required the Company to apply the
net cash proceeds from its sale of Polycold as a mandatory prepayment of first
the term loan and then revolving credit facility. This amendment also
effectively releases Polycold from its obligations as a guarantor under the
credit agreement. This amendment shall be effective solely with respect to the
specific circumstances of the Polycold divestiture. The Company utilized the
net proceeds from the sale of Polycold in addition to available operating cash
to pay off the remaining $58.0 million that was outstanding under the Company's
revolving credit facility.
On May 16, 2005, the Company borrowed $8 million from its revolving credit
facility to meet timing differences in general working capital requirements,
which included the Company's income tax obligations associated with the gain on
the sale of Polycold in the previous fiscal quarter ending February 27, 2005.
By fiscal year end, the Company repaid $4 million of the $8 million borrowed.
Both the term loan and the revolving portions of our credit facility have
maturity dates five years from December 17, 2003, the effective date of these
loans. The $25 million term loan is payable quarterly in scheduled amounts; 15%
in years one and two, 20% in year three, and 25% in years four and five.
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 (a) 100% of net insurance proceeds not
applied to the repair or replacement of damaged properties; (b) 100% of net
proceeds from asset sales except for assets sold in the normal course of
business or proceeds from asset sales to be reinvested in a like asset within
six months; (c) 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.
Borrowings under the facilities will bear interest, at the Company's option,
at: (x) the higher of Wachovia's prime commercial lending rate or the federal
funds rate plus 0.50% per annum, plus the applicable margin rate based on the
Company's leverage ratio (the ratio of total funded debt to earnings before
interest, taxes, depreciation and amortization, "EBITDA") (the "Leverage
Ratio") which for the first two full fiscal quarters following the closing of
the Credit Agreement, will be 0.50% per annum; or (y) the applicable London
Interbank Offered Rate ("LIBOR") plus the applicable LIBOR margin rate based on
the Company's Leverage Ratio, which, for the first two full fiscal quarters
following the closing of the Credit Agreement, will be 1.50% per annum. The
Company has entered into an interest rate swap agreement to reduce the effect
of changes in interest rates on its $25 million term loan. This
67
agreement effectively changes the interest rate exposure to a fixed 2.95% plus
applicable margins as defined in our credit agreement. (See also Footnote N.)
In addition, the Company is obligated to pay a commitment fee ranging from
0.20% to 0.375% per annum (based on the Company's leverage ratio) on the
unutilized portion of the revolving facility. The Company incurred costs
directly associated with obtaining this unsecured credit facility including
underwriting, administrative and professional fees amounting to $1.3 million.
These costs were deferred and are being amortized using the straight-line
method over the life of the debt.
The agreement is unsecured and unconditionally guaranteed by each existing and
subsequently acquired or organized domestic subsidiary of the Company. The
Company must also comply with certain financial and operational covenants. The
most restrictive financial covenants include debt to EBITDA, tangible net worth
and fixed charge coverage ratios as defined in the Credit Facility.
Mortgages and Other Notes Payable:
The mortgage payable related to the Latham NY facility bears interest at the
rate of LIBOR (3.78% at May 29, 2005 and 2.08% at May 30, 2004) 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 collateralized by land and buildings and certain
equipment located in Latham, NY acquired at a cost of approximately
$10,800,000. The Company has entered into an interest rate swap agreement to
reduce the effect of changes in interest rates on its mortgage. This agreement
effectively changes the interest rate exposure to a fixed 6.88%. (See also
Footnote N.)
Effective with the acquisition of Invivo on January 27, 2004, the Company
assumed a term loan mortgage due in 2016. The term loan bears interest at LIBOR
plus 2% and is secured by land and building located in Orlando, FL. As of May
29, 2005 and May 30, 2004, $1,247,000 and $1,360,000, respectively, was
included in total long-term debt of which $113,000 was payable within one year
for both years presented.
Effective with the acquisition of MRI Devices Corp. (MRID), on July 16, 2004,
the Company assumed a $3.1 million term loan note due on October 2007. The term
loan is unsecured, except for a negative pledge that the Company will not use
MRID's 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.
As of May 29, 2005, the Company had the following long-term debt outstanding:
As of
----------------
May 29, May 30,
(In thousands) 2005 2004
------- -------
Long-Term Debt:
Mortgages and notes payable $ 7,976 $ 5,744
Term loan ($25 million) 20,313 24,062
Revolving line of credit ($105 milllion) 4,000 32,000
Total long-term debt 32,289 61,806
------- -------
Less current maturities 12,404 4,171
------- -------
Long-term debt excluding current maturities $19,885 $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 May 29, 2005, the Company had $100.4 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.
Aggregate maturities of long-term debt as of May 29, 2005 are as follows:
68
Fiscal year ending:
2006 $12,404
2007 5,587
2008 8,704
2009 4,801
2010 113
Thereafter 680
-------
$32,289
=======
Interest paid for the years ended May 29, 2005, May 30, 2004 and May 25, 2003,
amounted to $3,190,000, $898,000 and $410,000, respectively.
NOTE D -- STOCKHOLDERS' EQUITY
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, completed in the form
of a fifty percent stock dividend, was paid on August 17, 2004 to stockholders
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.
During fiscal 2003 the Company established a stock option plan for SuperPower
Inc., a wholly--owned subsidiary. The options which were granted during Fiscal
year 2003, were valued at a $1.00 each based upon the best available evidence.
The plan had 1,184,000 shares outstanding as of May 29, 2005. Options granted
under the plan will have lives ranging from five to ten years and vest over
periods ranging from one to five years. Under this plan, the Company granted an
additional 554,000 shares of restricted stock to key employees. These shares are
restricted units which will convert into common stock only upon a change in
control.
The company has established three stock option plans: the 1981 Stock Option
Plan, the 1990 Stock Option Plan, and the 2000 Stock Option and Stock Award
Plan. A total of 4,551,000 shares have been authorized under the 2000 Plan.
Options granted under the 2000 Stock Option and Stock Award Plan has lives
ranging from three to ten years and vest over periods ranging from one to five
years. The company is no longer issuing stock under the 1981 and 1990 Stock
Option Plans.
Option activity under these plans was as follows:
Fiscal Year Ended
--------------------------------------------------------
May 29, 2005 May 30, 2004 May 25, 2003
------------------ ----------------- -----------------
Outstanding, beginning of year 1,666,030 $12.332 2,322,478 $9.574 2,672,273 $8.937
Granted 17,700 22.157 205,500 17.520 186,282 12.533
Exercised (489,293) 6.752 (808,350) 5.549 (275,412) 3.825
Forfeited (69,533) 15.789 (53,598) 15.025 (260,665) 11.233
--------- --------- ---------
Outstanding, end of year 1,124,904 14.700 1,666,030 12.332 2,322,478 9.574
========= ========= =========
Exercisable, end of year 721,982 $13.916 942,345 $9.870 1,470,341 $6.929
========= ========= =========
69
May 29, 2005
--------------------------------------------------------------
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
----------- -------- ---------------- ----------- --------
$2.3674 -- $4.7346 41,929 $ 4.1322 3.7 41,929 $ 4.1322
$4.7347 -- $7.1019 72,480 5.8453 4.1 72,480 5.8453
$7.1020 -- $9.4693 4,100 8.8439 1.3 4,100 8.8439
$9.4694 -- $11.8366 106,994 11.2025 6.7 53,080 11.0683
$11.8367 -- $14.2039 166,225 13.4777 5.8 122,158 13.4744
$14.2040 -- $16.5713 284,392 15.5125 6.5 190,793 15.5236
$16.5714 -- $18.9386 404,538 17.6191 7.0 214,256 17.4866
$18.9387 -- $21.3059 29,246 20.1889 5.6 23,186 20.3703
$21.3060 -- $23.6733 15,000 22.2973 9.1 -- --
----------- -------- ---------------- ----------- --------
1,124,904 $14.7002 6.3 721,982 $13.9164
=========== ===========
In connection with the license of patent rights, the Company issued warrants to
purchase 157,590 shares of its Common Stock during fiscal year 2001 at a price
of $12.65 per share. These warrants were valued at $1,097,000, which was
capitalized as part of the cost of the patent rights.
Following are the shares of Common Stock reserved for issuance and the related
exercise prices for the outstanding stock options, restricted stock awards and
outstanding warrants at May 29, 2005:
Number Exercise Price
of Shares Per Share
--------- --------------
2000 Stock Option and Stock Award Plan:
Restricted Stock Awards 2,398,744 $0.00
Stock Options 980,598 $10.74-$23.67
1990 Stock Option Plan 144,306 $3.89-$17.40
Warrants 157,590 $12.65
---------
Shares reserved for issuance 3,681,238
=========
During the year ended May 29, 2005, the Company issued 16,350 shares of Common
Stock at a fair market value of $25.29 per share as compensation to the Board
of Directors. During the year ended May 30, 2004, the Company issued 26,001
shares of Common Stock at a fair market value of $16.75 per share as
compensation to the Board of Directors. During the year ended May 25, 2003 the
Company issued 28,872 shares of Common Stock at a fair market value of $12.67
per share as compensation to the Board of Directors.
70
Equity compensation plan information follows:
EQUITY COMPENSATION PLAN INFORMATION
Number of securities
remaining available for
Number of securities to be Weighted-average future issuance under
issued upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
warrants and rights. warrants and rights. reflected in column (a))
-------------------------- -------------------- -------------------------
Plan Category (a) (b) (c)
- ------------------------------- -------------------------- -------------------- -------------------------
Equity compensation plans
approved by shareholders...... 3,543,238 $ 5.230 1,056,701
Equity compensation plans
not approved by shareholders..
New Hire Incentive Plan 138,000 none none
The New Hire Incentive Plan is designed to attract highly competent employees
for key positions within the Company. As such, this plan is not for general use
but for selected critical positions. Therefore, no specific shares have been
allocated for this purpose. Rather shares will be issued form the authorized
shares of the Company's Common Stock and approved by the company's Board of
Directors on a applicant by applicant basis.
NOTE E -- RETIREMENT PLANS
The Company had a non-contributory, defined benefit plan covering approximately
50 bargaining unit employees at a subsidiary. Benefits under the plan were
based on years of service and employees' career average compensation. The
Company's funding policy was to contribute annually an amount sufficient to
meet or exceed the minimum funding standard contained in the Internal Revenue
Code. Contributions were 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 November 30, 2000, the Company froze all pension benefits relating to this
plan. As of May 29, 2005 and May 30, 2004, the Company recorded a minimum
pension liability for the Bargaining Unit plan of $398,000 and $154,000,
respectively.
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 makes a contribution for all employees and matches a portion of
participants' contributions. Expenses under the plan during the fiscal years
ended May 29, 2005, May 30, 2004 and May 25, 2003 aggregated $2,143,000,
$964,000, and $854,000, 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 recorded under these plans were $124,000,
$124,000 and $138,000 for the fiscal years ended May 29, 2005, May 30, 2004 and
May 25, 2003, respectively. As of May 29, 2005, May 30, 2004 and May 25, 2003,
the Company recorded an additional minimum pension liability for this plan of
$103,000, $51,000 and $75,000, respectively.
NOTE F -- INCOME TAXES
The components of the provision for income taxes (benefit) from continuing
operations are as follows:
71
Fiscal Year Ended
----------------------------------------
(Dollars in Thousands) May 29, 2005 May 30, 2004 May 25, 2003
- --------------------------------------------------------------------
Current
Federal $ 7,264 $ 5,251 $ 4,555
State 778 300 258
------------ ------------ ------------
Total current 8,042 5,551 4,813
Deferred
Federal (2,044) 676 2,152
State (93) 86 226
------------ ------------ ------------
Total deferred (2,137) 762 2,378
------------ ------------ ------------
Provision for income taxes $ 5,905 $ 6,313 $ 7,191
============ ============ ============
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
As of
--------------------------
(Dollars in Thousands) May 29, 2005 May 30, 2004
- ---------------------------------------------------------------------------
Deferred tax assets:
Inventory reserves $ 1,323 $ 1,554
Non-deductible accruals 3,085 1,443
roduct warranty reserve 1,709 1,044
Restructuring and other accruals 292
Stock Plan Compensation 1,910
Net operating losses and credit carryforwards 2,298 4,798
------------ ------------
Total gross deferred tax assets 10,325 9,131
Less valuation allowance (191)
------------ ------------
Deferred tax assets 10,325 8,940
Deferred tax liabilities:
Depreciation and amortization differences (4,489) (2,485)
Intangibles (19,336) (11,716)
Other, net (76) (456)
------------ ------------
Total gross deferred tax liabilities (23,901) (14,657)
------------ ------------
Net deferred tax (liabilities) assets $ (13,576) $ (5,717)
============ ============
The foregoing assets and liabilities are classified in the accompanying
consolidated balance sheets as follows:
(Dollars in Thousands) May 29, 2005 May 30, 2004
- ---------------------------------------------------------------------------
Net current deferred tax assets $ 6,042 $ 4,333
Net long-term deferred tax (liabilities)/assets (19,618) (10,050)
------------ ------------
$ (13,576) $ (5,717)
============ ============
72
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 including discontinued operations and the gain on sale of Polycold of
approximately $62,335,000 in Fiscal 2005, $16,709,000 in Fiscal 2004 and
$16,865,000 in Fiscal 2003. 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.
At May 29, 2005 the Company has net operating loss carryforwards of $4,702,000
which will expire through 2024. The Company also has Federal credit
carryforwards of $360,000, of which $100,000 will expire in 2022 and $260,000
which are not subject to expiration.
The reasons for the differences between the provision for income taxes (benefit)
and the amount of income tax (benefit), from continuing operations determined by
applying the applicable statutory Federal tax rate to income (loss) from
continuing operations before income taxes are as follows:
Fiscal Year Ended
----------------------------------------
(Dollars in Thousands) May 29, 2005 May 30, 2004 May 25, 2003
- ---------------------------------------------------------------------------------------------------
Pretax income (loss) at statutory tax rate
(35% for 2005, 35% for 2004 and 34.6% for 2003) $ 6,973 $ 6,376 $ 7,170
State taxes, net of Federal benefit 445 251 315
Benefit of Extraterritorial Income Exclusion (858) (749) (662)
Amortization of intangibles & other permanent adjustments 136 36
Capital loss carryforward used
Change in valuation allowance (191)
Settlement of prior year tax liabilities (449)
Other, net (15) 299 332
------------ ------------ ------------
Provision for income taxes $ 5,905 $ 6,313 $ 7,191
============ ============ ============
The Company paid income taxes, net of cash refunds received of $15,117,000,
$4,735,000 and $6,883,000 during the years ended May 29, 2005, May 30, 2004 and
May 25, 2003, respectively.
NOTE G -- PER SHARE INFORMATION
The following table provides calculations of basic and diluted earnings per
share:
73
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
----------------------------------------
May 29, 2005 May 30, 2004 May 25, 2003
------------ ------------ ------------
Income available to Common shareholders $ 37,546 $ 14,860 $ 14,917
============ ============ ============
Weighted average shares 27,689,343 25,046,718 24,778,728
Dilutive potential Common Shares:
Warrants 77,381 29,277
Stock Options and Awards 365,476 417,384 738,908
------------ ------------ ------------
Adjusted weighted average shares 28,132,200 25,493,379 25,517,636
Net income (loss) per Common Share:
Basic $ 1.36 $ 0.59 $ 0.60
============ ============ ============
Diluted $ 1.34 $ 0.58 $ 0.58
============ ============ ============
As of May 29, 2005 the Company had 1,240,950 shares of 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 109,950 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 for the fiscal year ended 2005 of $4,942,000.
Effective April 14, 2005, the Company granted an additional 1,057,000 shares of
restricted stock 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. The vesting schedule in fiscal years 2006 through 2010
is 0%, 0%, 15%, 20% and 65% respectively. In the current year, the stock is not
considered dilutive. The Company will record expense for the restricted stock
when management determines it will be probable that the performance targets will
be met. At that time the expense will be recorded and treated as variable
through the date that the restriction lapses. Additional shares of restricted
stock may be granted to newly hired key employees.
As of May 29, 2005 the Company had outstanding 78,925 shares of restricted
stock to certain employees. These shares are vesting over time ranging from 1
to 3 years. For the fiscal year ended 2005, 2004, and 2003 the Company had
recorded expense of $165,000, $135,000 and $88,000, respectively.
As of May 29, 2005 the Company had granted 21,869 shares of restricted stock to
the Board of Directors. These shares are vesting over a five year time frame at
10%, 10%, 10%, 10%, and 60%, respectively. For the fiscal year ended 2005,
2004, and 2003 the Company had recorded expense of $90,000, $22,500, and $7,500
respectively.
NOTE H -- COMMITMENTS AND CONTINGENCIES
The Company leases certain manufacturing facilities and equipment under
operating lease agreements expiring at various dates through October 2019.
Certain leases provide for renewal options. Total rent expense was $1,264,000,
$1,518,000 and $1,238,000 for the years ended May 29, 2005, May 30, 2004 and
May 25, 2003 respectively.
Future minimum rental commitments, excluding renewal options, under the non-
cancelable leases covering certain manufacturing facilities and equipment
through the term of the leases are as follows:
74
(Dollars in Thousands)
Fiscal year:
2006 $ 1,844
2007 1,670
2008 1,489
2009 1,508
2010 1,522
Thereafter 7,258
-------
$15,291
=======
In addition to operating lease agreements, the Company also has a maintenance
agreement for about $228,000 for a three year period ending December 2006, on
its computer system.
At May 29, 2005, the Company's capital equipment commitments were approximately
$2,993,000.
The Company is subject to certain claims and lawsuits arising in the normal
course of business.
The Company maintains a provision for potential environmental remediation for
two divisions (IGC-Advanced Superconductors "IGC-AS" and IGC- APD Cryogenics,
Inc. "IGC-APD") that were sold during fiscal 2002. The original provisions of
about $1,500,000 and $540,000 for IGC-AS and IGC-APD, respectively were
recorded under certain state property transfer laws should a cleanup be
required. These provisions which were based upon management's best estimate
using the information available at that time did not include a range of loss.
As a result of recent developments and environmental site assessments performed
during the three months ended August 29, 2004, the Company reduced its current
liability related to IGC-AS resulting in an adjustment to the gain on a prior
period sale of a division of $1.1 million. If unexpected costs related to the
environmental issues are incurred additional provisions will be needed. As of
May 29, 2005 and May 30, 2004, the total remaining reserve for environmental
remediation relating to the divestitures of IGC-AS and IGC-APD was
approximately $545,000 and $1,853,000, respectively.
NOTE I -- SEGMENT AND RELATED INFORMATION
As a result of the sale of Polycold, the sole subsidiary in its Instrumentation
segment, the Company's continuing operations now consists of three reportable
segments: Magnetic Resonance Imaging (MRI), Medical Devices, 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. All prior year data has been restated to reflect this
change.
The Medical Devices segment now consists of one collectively managed entity,
Invivo Corporation, with a universal brand identity of "Invivo". Invivo's
management team concentrates on the collective growth, revenues and
profitability of its two divisions; Invivo Patient Care (IPC) and Invivo
Diagnostic Imaging (IDI). Invivo Patient Care designs and manufactures patient
monitors, primarily for use in MRI suites. IPC also designs and manufactures
bedside monitors and central station monitoring systems. Invivo Diagnostic
Imaging (formerly IGC-MAI and MRID) designs and manufactures Radio Frequency
(RF) coils, which are used to enhance the image quality of MRI systems. Invivo
sells its products to original equipment manufacturers such as Philips Medical
Systems, GE Healthcare, Siemens Medical Solutions, Toshiba Medical Systems and
Hitachi Medical Systems. Invivo also distributes its products directly through
a global sales network that serves both IDI and IPC. In addition, Invivo sells
its products to group purchasing organizations, research hospitals,
universities and other luminary sites.
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 accounting policies of the reportable segments are the same as those
described in Note A of the Notes to Consolidated Financial Statements. The
Company evaluates the performance of its reportable segments based on operating
income (loss).
Summarized financial information concerning the Company's reportable segments
is shown in the following table:
75
SEGMENT DATA
(Dollars in Thousands)
-----------------------------------------
May 29, 2005
-----------------------------------------
Magnetic
Resonance Medical Energy
Imaging Devices Technology Total
--------- -------- ---------- --------
Net revenues to external customers:
Magnet systems $ 118,589 $118,589
Patient Monitors and RF Coils $135,332 135,332
Other $ 10,838 10,838
--------- -------- ---------- --------
Total 118,589 135,332 10,838 264,759
Segment operating income (loss) 16,233 12,499 (7,167) 21,565
Goodwill 169,910 169,910
Total assets 126,689 251,806 11,153 389,648
Additions to plant, property and equipment 4,372 3,985 2,023 10,380
Depreciation and amortization expense 8,725 2,230 1,832 12,787
---------------------------------------
May 30, 2004
---------------------------------------
Magnetic
Resonance Medical Energy
Imaging Devices Technology Total
--------- ------- ---------- -------
Net revenues to external customers:
Magnet systems $ 95,180 $95,180
Patient Monitors and RF Coils $38,101 38,101
Other $ 6,458 6,458
--------- ------- ---------- -------
Total 95,180 38,101 6,458 139,739
Segment operating income (loss) 19,494 5,182 (6,164) 18,512
Goodwill 111,852 111,852
Total assets 108,311 149,859 9,779 267,949
Additions to plant, property and equipment 1,981 1,072 2,836 5,889
Depreciation and amortization expense 5,647 632 1,379 7,658
76
----------------------------------------
May 25, 2003
----------------------------------------
Magnetic
Resonance Medical Energy
Imaging Devices Technology Total
--------- ------- ---------- --------
Net revenues to external customers:
Magnet systems $ 114,173 $114,173
Patient Monitors and RF Coils $10,908 10,908
Other $ 1,760 1,760
--------- ------- ---------- --------
Total 114,173 10,908 1,760 126,841
Segment operating income (loss) 27,679 697 (6,969) 21,407
Goodwill 6,786 6,786
Total assets 147,784 11,174 8,360 167,318
Additions to plant, property and equipment 2,282 314 973 3,569
Depreciation and amortization expense 4,170 390 974 5,534
------------ ------------ ------------
May 29, 2005 May 30, 2004 May 25, 2003
------------ ------------ ------------
Reconciliation of income from continuing operations before income taxes:
Total operating income from reportable segments $ 21,565 $ 18,512 $ 21,407
Intercompany income in ending inventory 22 28
------------ ------------ ------------
Net operating income 21,565 18,534 21,435
Interest and other income 1,194 790 1,341
Interest and other expense (3,931) (1,244) (482)
Gain on litigation settlement 537
Gain (loss) on available-for-sale securities 114 (2,108)
Adjustment to gain on prior period sale of division 1,094
------------ ------------ ------------
Income from continuing operations before income taxes $ 19,922 $ 18,194 $ 20,723
============ ============ ============
During fiscal 2005, 2004, and 2003, the Company had one customer with sales in
excess of 10% of the Company's total net sales. Net sales to this customer
during the last three fiscal years were as follows:
Fiscal Year Ended
----------------------------------------
(Dollars in Thousands) May 29, 2005 May 30, 2004 May 25, 2003
------------ ------------ ------------
Customer A $ 136,515 $ 99,297 $ 116,310
============ ============ ============
Net sales by country, based on the location of the customer, for the last three
fiscal years were as follows:
77
Fiscal Year Ended
----------------------------
May 29, May 30, May 25,
(Dollars in Thousands) 2005 2004 2003
-------- -------- --------
United States $104,248 $ 37,897 $ 10,579
Netherlands 131,010 95,539 111,915
Other countries 29,501 6,303 4,347
-------- -------- --------
Total $264,759 $139,739 $126,841
======== ======== ========
All significant long-lived assets of the Company are located within the United
States.
NOTE J -- 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.
Long-term debt: The carrying value of long-term debt was approximately equal to
fair value at May 29, 2005 and May 30, 2004 based upon interest rates available
to the Company for issuance of similar debt with similar terms and discounted
cash flows for remaining maturities.
Note payable: The carrying value of the note payable was approximately equal to
fair value at May 29, 2005 due to the resetting dates of the variable interest
rates.
NOTE K -- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The accumulated
balances for each classification of accumulated other comprehensive income
(loss) is as follows:
78
Accumulated
Foreign Available for Minimum Other
Currency Sale Securities, Derivative Pension Comprehensive
Items Net of Tax Asset/Liability Liability Income (Loss)
-------- ---------------- --------------- --------- -------------
Balances at May 26, 2002 $ $ (638) $ (268) $ $ (906)
Current period change -- 2003 638 (37) (209) 392
-------- ---------------- --------------- --------- -------------
Balances at May 25, 2003 (305) (209) (514)
Current period change -- 2004 (8) 323 65 380
-------- ---------------- --------------- --------- -------------
Balances at May 30, 2004 (8) 18 (144) (134)
Current period change -- 2005 578 199 (291) 486
-------- ---------------- --------------- --------- -------------
Balances at May 29, 2005 $ 570 $ $ 217 $ (435) $ 352
======== ================ =============== ========= =============
NOTE L- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for fiscal 2005 and 2004 are as follows:
(Dollars in Thousands, Except Per Share Amounts)
From Continuing
Operations Earnings Per:
---------------- --------------
Net Gross Net Basic Diluted
Sales Margin Income Share Share
------- ------- ------- ----- -------
2005 Quarter Ended
August 29, 2004 $51,524 $23,116 $ 5,312 $0.20 $ 0.20
November 28, 2004 $66,175 $31,229 $ 4,134 $0.15 $ 0.15
February 27, 2005 $68,974 $32,439 $24,735 $0.88 $ 0.87
May 29, 2005 $78,086 $33,401 $ 3,365 $0.12 $ 0.12
2004 Quarter Ended
August 24, 2003 $16,459 $ 6,207 $ 262 $0.01 $ 0.01
November 23, 2003 $33,312 $13,042 $ 4,410 $0.18 $ 0.17
February 22, 2004 $37,561 $16,277 $ 4,281 $0.17 $ 0.17
May 30, 2004 $52,407 $23,735 $ 5,907 $0.23 $ 0.23
NOTE M -- 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. For purposes of applying FAS No. 142, the Company has
determined that the reporting units are consistent with the operating segments
identified in Note I, Segment and Related Information. Fair values of reporting
units and the related implied fair values of their respective goodwill were
established using public company analysis and discounted cash flows.
During fiscal 2005, the Company acquired MRI Devices Corporation. In connection
with the acquisition, approximately $58,122,000 was recorded as goodwill and
$26,800,000 as definitive lived intangible assets that are amortized using the
straight line method over their respective useful lives. (See also Footnote B)
The components of other intangibles are as follows:
79
(Dollars in Thousands)
As of May 29, 2005
------------------------------------------
Weighted
Gross Carrying Accumulated Average Life
Amount Amortization in Years
-------------- ------------ ------------
Amortized intangible assets
Production rights $ 8,750 $ 8,617 5.5
Patents 3,899 1,198 17.7
Trade names/trademarks 11,510 614 25.0
Product name/trademark 4,640 416 10.5
Know-how and core technology 17,940 2,097 9.3
Product technology and design 4,930 852 6.6
OEM customer relationships 14,950 1,306 12.0
-------------- ------------
$ 66,619 $ 15,100 12.5
============== ============
Aggregate amortization expense for the fiscal years ended May 29, 2005, May 30,
2004 and May 25, 2003 was $6,382,000, $3,097,000 and $1,793,000, respectively.
During the Company's second fiscal quarter, 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 2006 $5,202
For the year ending May 2007 $5,070
For the year ending May 2008 $5,070
For the year ending May 2009 $5,058
For the year ending May 2010 $5,018
All intangibles are amortized on a straight line basis.
The changes in the carrying amount of goodwill between May 25, 2003 and May 29,
2005 are as follows:
(In thousands)
Goodwill as of May 25, 2003 $ 13,750
Goodwill acquired on January 27, 2004 with the acquisition
of Invivo Corporation 105,066
--------
Goodwill as of May 30, 2004 $118,816
Goodwill acquired on July 16, 2004 with the acquisition of
MRI Devices Corporation 58,122
Adjustments to purchase price allocation of Invivo Corporation (64)
Goodwill disposed of from sale of IGC-Polycold Systems, Inc. (6,964)
--------
Goodwill as of May 29, 2005 $169,910
========
Management has evaluated goodwill for impairment during the quarter ended
November 28, 2004 in accordance with SFAS No. 142 and determined no impairment
exists. A determination of impairment is made based upon the estimated
discounted future cash flows of the operations associated with the related
reporting unit. Management will perform the next annual goodwill impairment
test during the quarter ended November 27, 2005 unless an event occurs or
circumstances change that would more likely than not reduce the fair value of
the reporting unit below its carrying amount.
80
NOTE N -- 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 by SFAS No.138, "Accounting for Certain
Derivative and Certain Hedging Activities", 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 stockholders' equity as
other comprehensive income (loss).
The Company has entered into interest rate swap agreements designated as cash
flow hedges to reduce the effect of changes in interest rates on its floating
rate long-term debt. On May 29, 2005, the Company had outstanding interest rate
swap agreements with a commercial bank, having a current notional principal
amount of approximately $4.1 million. Those agreements effectively change the
Company's interest rate exposure on its mortgages due in 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 $173,000 to $(52,000)
during the year ended May 29, 2005.
On February 5, 2004, the Company entered into an interest rate swap agreement
designated as a cash flow hedge with a commercial bank, having a notional
principle amount of $20.3 million as of May 29, 2005. 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.
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 increased $143,000 to $396,000 during the year ended May 29, 2005.
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 fiscal years ended May 29, 2005 and May 30, 2004, the
Company recorded net other comprehensive gains of $199,000 and $323,000,
respectively net of tax for the two interest rate swap agreements.
81
2. SCHEDULE II
INTERMAGNETICS GENERAL CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
Additions
-----------------------------
Balance at Charged to Charged to
Beginning of Costs Other Accounts- Deductions- Balance at End
DESCRIPTION Period and Expenses Describe Describe of Period
- ----------------------------------- ------------ ------------ --------------- ----------- --------------
Year Ended May 29, 2005
Deducted from asset accounts:
Allowance for doubtful accounts $ 849 $ 567 $ 373(7) $ (110)(2) $ 1,549
(130)(5)
Reserve for inventory obsolescence 2,853 2,136 150(7) (1,992)(4) 2,801
(346)(5)
Included in liability accounts:
Product warranty reserve 3,189 2,666 87(7) (1,218)(1) 4,073
(651)(5)
Contract adjustment reserve (3) 390 (373)(8) 17
Year Ended May 30, 2004
Deducted from asset accounts:
Allowance for doubtful accounts $ 223 $ 310 $ 788(6) $ (472)(2) $ 849
Reserve for inventory obsolescence 1,272 1,622 3,020(6) (3,061)(4) 2,853
Included in liability accounts:
Product warranty reserve 1,466 1,514 1,602(6) (1,393)(1) 3,189
Contract adjustment reserve (3) 136 254 390
Year Ended May 25, 2003
Deducted from asset accounts:
Allowance for doubtful accounts $ 293 $ 158 $ (228)(2) $ 223
Reserve for inventory obsolescence 1,064 930 (722)(4) 1,272
Included in liability accounts:
Product warranty reserve 1,326 1,117 (977)(1) 1,466
Contract adjustment reserve (3) 58 78 136
(1) Cost of warranty performed.
(2) Write-off uncollectible accounts.
(3) Classified in the Balance Sheet with other liabilities and accrued
expenses.
(4) Write-off or sale of obsolete inventory.
(5) Represents reserves released relating to divestiture of Polycold.
(6) Represents reserves acquired from the acquisition of Invivo Corp.
(7) Represents reserves acquired from the acquisition of MRI Devices Corp.
(8) Represents settlement of prior year federal government contracts.
82
3. EXHIBITS
83
3. EXHIBITS
EXHIBIT INDEX
Exhibit Number Description
- -------------- -------------
4.1 Form of Stock Certificate
10.4 Amended and Restated Agreements first dated April 29, 1999 between Philips
Medical Systems Nederlands B.V. and Intermagnetics General Corporation for sales
of magnet systems
14 Code of Conduct
21 Subsidiaries of Company
23 Consent of Independent Registered Public Accounting Firm
(PricewaterhouseCoopers LLP)
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