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DRAFT AUGUST 10, 2004
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 30, 2004
------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO _________
COMMISSION FILE NUMBER 1-11344
INTERMAGNETICS GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK 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 ___
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $691,617,180. Such aggregate market value was
computed by reference to the closing price of the Common Stock based on quoted
market prices on July 30, 2004. 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 30, 2004 was 18,618,180.
DOCUMENTS INCORPORATED BY REFERENCE
The information required for Part III below is incorporated by reference from
the registrant's Proxy Statement for its 2004 Annual Meeting of Shareholders to
be filed within 120 days after the end of the registrant's fiscal year.
TABLE OF CONTENTS
PART I............................................................................................................1
ITEM 1. BUSINESS DESCRIPTION...................................................................................1
MRI SEGMENT....................................................................................................2
MEDICAL DEVICES SEGMENT........................................................................................7
INSTRUMENTATION SEGMENT.......................................................................................10
ENERGY TECHNOLOGY SEGMENT.....................................................................................12
RESEARCH AND DEVELOPMENT......................................................................................18
INVESTMENTS...................................................................................................19
PERSONNEL.....................................................................................................19
EXECUTIVE OFFICERS OF THE REGISTRANT..........................................................................19
ITEM 2. PROPERTIES............................................................................................21
ITEM 3. LEGAL PROCEEDINGS.....................................................................................22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................................22
PART II..........................................................................................................22
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES............................................................................................22
ITEM 6. SELECTED FINANCIAL DATA...............................................................................24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................25
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK............................................38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................................................39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE............................................................................................39
ITEM 9A. CONTROLS AND PROCEDURES...............................................................................39
PART III.........................................................................................................40
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................................................40
ITEM 11. EXECUTIVE COMPENSATION................................................................................40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................40
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................................40
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES................................................................40
PART IV..........................................................................................................40
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K........................................40
(a) FINANCIAL STATEMENTS, SCHEDULE AND EXHIBITS...........................................................40
(b) REPORTS ON FORM 8-K...................................................................................45
SIGNATURES.......................................................................................................46
Report of Independent Registered Public Accounting Firm..........................................................48
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 2005 and
beyond to differ materially from those expressed in the forward-looking
statements. These important factors include, without limitation, the
assumptions, risks, and uncertainties set forth in 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
Since its founding in 1971, Intermagnetics has evolved into a
successful developer, manufacturer and marketer of high-field MRI magnets,
sub-systems and components and other specialized value-added devices. "MRI"
stands for magnetic resonance imaging; a tool used for medical diagnostic
imaging of the human body. Drawing on its financial strength, operational
excellence and technical leadership, Intermagnetics expanded its reach in the
medical device market in 2004 with its acquisition of Invivo Corporation. This
expansion continued in the first quarter of fiscal year 2005 with the
acquisition of MRI Devices Corporation, which closed on July 16. Through these
recent acquisitions, we have added a new segment, which we call Medical Devices.
We also continue to design and sell products in three additional reportable
segments, which are named to reflect the markets they serve: Magnetic Resonance
Imaging (MRI), Instrumentation and Energy Technology.
The MRI segment primarily provides products that enable the use of MRI
systems. Our Magnet Business Group ("MBG") develops, manufactures and sells low
temperature superconducting ("LTS") magnets that are used in MRI systems. Our
wholly-owned subsidiaries, Medical Advances Inc. ("MAI") and recently acquired
MRI Devices Corporation ("MRID"), design, manufacture and sell radio frequency
("RF") coils, which are used in conjunction with MRI systems to create
diagnostic images of various parts of the human body.
Our newly created Medical Devices segment provides products to the
broad market of diagnostic imaging, but with a focus on applications associated
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with MRI. The segment also targets niche opportunities within the patient
monitoring market. Invivo Corporation ("Invivo"), currently the only operating
division within this segment, designs, manufactures and sells patient monitors,
primarily for use in MRI suites as well as other areas in a hospital.
Our Instrumentation segment provides cryogenic refrigeration equipment
used primarily in ultra-high vacuum, analytical instrumentation and
semiconductor processing and testing applications through our wholly-owned
subsidiary, Polycold Systems Inc. ("Polycold").
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. These materials and devices are also
expected to have distinct defense industry applications.
We completed two major divestitures in fiscal year 2002. On October 24,
2001, we sold the assets and business of our former low temperature
superconducting division, IGC-Advanced Superconductors ("IGC-AS") to Outokumpu
Copper Products Oy. Prior to this divestiture, IGC-AS was included in our MRI
segment. On February 5, 2002, we sold all of the outstanding shares of our
former subsidiary, IGC-APD Cryogenics, Inc. to Sumitomo Heavy Industries, Ltd.
Prior to the sale, IGC-APD was included in our Instrumentation segment. These
dispositions and their impact are discussed in more detail in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MRI SEGMENT
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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. We design and manufacture
superconducting magnet systems that offer powerful, high-quality magnetic fields
with virtually no loss of power, and we sell these magnets to MRI system
integrators.
We also design and manufacture 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. We sell these coils to
MRI system integrators, who then sell them with their MRI systems, and we also
sell our RF coils directly to hospitals, imaging centers, universities and
research centers.
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 J of the Notes to Consolidated Financial Statements included in response to
Item 8.
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B. PRINCIPAL PRODUCTS
We derived approximately 67% and 85% of our net sales in fiscal years
2004 and 2003, respectively, from sales of products in the MRI segment.
Our principal products in the MRI segment include:
o 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. We offer a full line of
superconductive MRI magnet systems with field strengths of 0.5, 1.0,
1.5 and 3.0 Tesla ("T"). In addition, MBG is developing a 1.0T
superconducting open magnet system with commercial sales expected to
begin during 2005.
o RF Coils for MRI Systems. Through MAI, which, in fiscal year 2005 will
be combined with newly acquired MRI Devices Corporation ("MRID"), we
manufacture and sell RF coils for use in MRI systems. MAI's current
product line includes several product groups covering multiple
anatomical areas and magnetic field strengths from 0.3T to 3.0T. MRID's
current product line also includes multiple anatomical applications in
field strengths ranging from 0.7T to 3.0T. MRID also designs,
manufactures and sells 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) as well as brain
anatomy. This system works in conjunction with a conventional MRI
system.
C. MARKETING
We market and sell our products in the MRI segment principally through
our own marketing personnel and sales force. We sell our MRI products through
two channels: to MRI system integrators on an OEM basis, and directly to
end-users, such as hospitals, imaging centers and research facilities.
Export Sales. Products sold to foreign-based companies, such as Philips
Medical Systems in the Netherlands, or Hitachi Medical Corporation and Toshiba
Corporation in Japan, were accounted for as export sales even if some of the
products sold were installed in the U.S. On that basis, our net export sales
(including all segments) for fiscal years 2004, 2003 and 2002 totaled $115.9,
$123.7, $127.3 million, respectively, most of which were to European customers
billed in U.S. currency.
Principal Customers. Sales to customers of the MRI segment accounting
for more than 10% of our net sales aggregated approximately 60% of net sales in
fiscal year 2004, 79% in fiscal year 2003 and 72% in fiscal year 2002. (See Note
J of Notes to Consolidated Financial Statements included in response to Item 8.)
We sell a substantial portion of our products in the MRI segment to
four OEM customers, one of which is significant. Philips Medical Systems is the
principal customer for our MRI magnet systems. In fiscal year 1999,
Intermagnetics and Philips executed a new sales agreement naming Intermagnetics
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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 60%, 79% and 72% of our net sales for fiscal years 2004, 2003,
and 2002 respectively.
D. COMPETITION/MARKET
The annual commercial market for new MRI systems, upgrades and
accessories (including RF coils, but excluding MRI compatible monitors and
pumps) in calendar year 2004 is estimated to be within the range of $4.5 to $5.5
billion worldwide. A small number of system integrators dominate the MRI
industry. They include GE Healthcare ("GE"), Philips Medical Systems
("Philips"), Siemens Medical Solutions ("Siemens"), Hitachi Medical Corporation
("Hitachi") and Toshiba Corporation ("Toshiba"). We supply key components to a
number of these integrators and have an open commercial relationship with all of
them.
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. Two emerging MRI applications could
provide additional growth opportunities for our products in the future. MRI
system integrators are developing systems that can be used as non-invasive
diagnostic tools for cardiac disease. These systems could replace the need for
interventional X-rays in certain cases. Functional MRI ("fMRI"), in which
physicians can monitor brain activity (function) as well as brain anatomy, is
another emerging area. We serve these applications with both 1.5T magnets and
our 3.0T magnet system and associated RF coils, as well as with interventional
and fMRI systems, currently being developed and sold by recently acquired MRI
Devices Corporation. There are no assurances that the market for these
applications will become significant.
Most large MRI system suppliers perceive higher field strength imaging
systems (1.0T or greater) 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. 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 growth appears to have leveled off and is
expected 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 is developing a more powerful
1.0T superconducting "open" magnet system for this market segment. There is no
assurance that this product will be successfully commercialized.
Within the market for superconductive MRI magnet systems and RF coils,
our competitors fall into two categories: (1) magnet and RF coil manufacturers
that make products for MRI system integrators; and (2) MRI system integrators
that manufacture superconductive magnet systems and/or RF coils for their own
use.
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The largest MRI system integrator, GE Healthcare, manufactures its own
magnet systems and last year acquired one of the largest independent RF coil
manufacturers (USA Instruments) in the US. We do not sell any magnet systems to
GE. While we expect the acquisition of USA Instruments to reduce the number of
RF coil opportunities we may have with GE in the long term, we believe we will
continue to sell RF coils to GE. The degree of this decline and the rate at
which it may occur is primarily dependent on competitive performance of our
respective RF coil product offerings in the future.
During our fiscal year 2004, Siemens acquired Oxford Magnet Technology
Limited ("OMT"), a joint venture it controlled (owning 51%), that manufactures
MRI magnets systems. OMT supplies all of Siemens' requirements for
superconducting magnet systems and also supplies MRI magnets systems to some
smaller system integrators. We believe we compete effectively against OMT 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.
Siemens historically has developed and manufactured its own RF coils, but we
have seen a shift in this approach over the past few years and, with our
acquisition of MRI Devices, Siemens is now a customer for our RF coil products.
Philips Medical Systems does not manufacture its own MRI magnets. We
supply all of Philips' requirements for superconducting magnet systems (see
Principal Products above). Philips maintains substantial in-house RF coil
capacity, but also outsources RF coil development and manufacturing to third
parties, including MAI and MRI Devices.
There are several 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 offer high quality, technically advanced products while reducing
costs.
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 RF coils and 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.
5
F. RAW MATERIALS AND INVENTORY
Most materials and parts used in the manufacturing process for our MRI
products are ordered based on production needs. For our magnet systems, 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 shield coolers - a key
component of our MRI magnet systems. Sumitomo Heavy Industries, which owns
SHI-APD, is now the leading manufacturer of shield 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 new 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 and has resulted in higher than historic
levels of inventory at Intermagnetics.
For other products in the MRI segment, we believe there are alternative
suppliers at competitive prices for most of the parts, materials and components
that we purchase for the manufacture of RF coils. There are, however, discrete
electrical components and mechanical housings that are sole sourced because of
the uniqueness of their specifications. In the event that a sole source supplier
cannot meet demand, a re-engineering or re-tooling of the sourced component
would be required.
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 and Instrumentation segments) 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 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) premarket 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 premarket approval procedure. The FDA may
6
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
Historically, Intermagnetics has not experienced seasonality in its
business. Going forward, however, we do expect to see some seasonality in our
revenue resulting from the company's recently amended MRI magnet supply contract
with Philips and our increased focus on direct sales of RF coils.
Typical expectations going forward are that the first quarter of each
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 newly defined aspect of seasonality, we expect favorable
year-over-year comparisons for both original and acquired businesses throughout
FY05.
MEDICAL DEVICES SEGMENT
-----------------------
A. INTRODUCTION
With our recent acquisition of Invivo Corporation, we created a new
segment, which we call Medical Devices. Invivo is the market leader in the
design, manufacture and sale 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 also
must be protected from the MRI system's magnetic field and radio frequency coils
in order to perform accurately. Through Invivo, we also design, manufacture and
sell bedside monitoring, central station monitoring and telemetry products for
use in other areas of the hospital.
B. PRINCIPAL PRODUCTS
We derived approximately 14% of our net sales in fiscal year 2004 from
sales of products in the Medical Devices segment. Additional segment data is
provided in Note J of the Notes to Consolidated Financial Statements included in
response to Item 8.
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Our principal products in the Medical Devices segment include:
o MRI Patient Monitors. Through Invivo, we design, manufacture and sell a
line of patient monitors that can be used in the MRI suite during an
MRI scan. We also distribute and sell an anesthesia delivery system
designed and engineered to operate safely in the MRI environment.
o Bedside Patient Monitors. Through Invivo, we offer a broad range of
general patient monitors for bedside monitoring in a variety of areas,
including the operating room, neonatal intensive care unit, emergency
room and patient recovery rooms.
o Central Station Monitoring and Telemetry. In April of 2003, Invivo
acquired Medical Data Electronics, Inc. ("MDE") and expanded its reach
in the area of wireless patient monitoring products. 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
principally through our own marketing personnel and 60 person field sales
organization. In addition to the Medical Device segment products this sales
force sells RF coils and accessories of the MRI segment to direct customers.
This sales force sells Invivo products through two channels: to MRI system
integrators on an OEM basis, and directly to end-users, such as hospitals,
imaging centers and research facilities. Invivo has also established
relationships with hospital group purchasing organizations such as HealthTrust,
Premier Inc., AmeriNet, Inc., Broadlane, Inc., Novation, LLC, HealthSouth
Corporation and MedAssets HSCA, Inc.
There were no sales to customers of the Medical Devices segment
accounting for more than 10% of our net sales in fiscal year 2004.
D. COMPETITION/MARKET
We estimate the worldwide market for patient monitoring products that
measure multiple vital signs, including MRI and general patient monitoring, was
approximately $2 billion in calendar year 2003. 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 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) and emergency
rooms.
8
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/INTELLECTUAL PROPERTY
Our success and competitive position in 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 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 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
We have not had significant expense to date for performance of our
warranty obligations in the Medical Devices segment.
H. GOVERNMENT/INDUSTRY REGULATION
The Medical Devices Segment is subject to the same regulations
(including FDA) described in Section H, MRI Segment above.
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.
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INSTRUMENTATION SEGMENT
-----------------------
A. INTRODUCTION
Our Instrumentation segment provides low-temperature solutions
primarily to original equipment manufacturers ("OEM's") in a variety of
industries. In fiscal year 2002, we made a number of changes in this segment
aimed at maximizing strategic value. These changes included moving Polycold from
multiple locations in San Rafael to one larger facility in Petaluma, California;
transferring the manufacturing and sales of two mixed-gas refrigeration product
lines from a former subsidiary to Polycold; and divesting that former
subsidiaries' remaining business through the sale of its outstanding shares to
Sumitomo Heavy Industries, Ltd.
As a result of these changes, this segment now consists of one
wholly-owned subsidiary, Polycold, which designs, manufactures and sells low
temperature refrigeration equipment. This segment returned to profitability in
fiscal year 2003 despite a challenging environment in the capital equipment
market and it experienced significant growth in fiscal year 2004.
Segment data is provided in Note J of the Notes to Consolidated
Financial Statements included in response to Item 8.
B. PRINCIPAL PRODUCTS
Polycold manufactures and sells a line of low temperature refrigeration
systems in the -40 to -203 Celsius range. Polycold's refrigeration systems are
used in a wide variety of high tech and industrial applications, including
optical coating, semiconductor manufacturing, magnetic media, decorative
coating, optical coating, flat panel displays, detector cooling and roll/web
coating.
The Instrumentation segment continues to enjoy a market leadership
position in ultra-high vacuum cryo-vapor pumping, by way of our industry proven
products and services. These products have strong brand recognition, and provide
versatility to a broad base of existing and new vacuum applications. Included in
this product offering are the AquaTrap(R) and CryoTiger(R) product lines -
transferred to Polycold from a former subsidiary in fiscal year 2002.
In addition to the vacuum market, we continued to diversify into low
temperature heat transfer markets such as semiconductor and imaging. Although
the Instrumentation segment has typically not derived significant sales from
semiconductor manufacturers in the past, new products have been developed for
this market and repetitive product revenues for a range of products were
realized during fiscal 2004.
Polycold also licenses certain mixed gas refrigerant technology to
third parties for use in markets in which the Company does not otherwise
participate and to distributors who service Polycold's products outside the U.S.
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C. MARKETING
Polycold markets refrigeration systems through a direct sales force
managed from Petaluma, California, two key distributors located in Japan and
Germany, and through a worldwide network of independent sales representatives
and distributors. Although these two key distributors account for significant
portion of the Company's revenues, no single end customer accounts for more than
10% of revenue. There are no significant contracts with Federal agencies.
D. COMPETITION/MARKET
Polycold faces competition from several manufacturers in the Far East,
and a number of manufacturers in the United States and Europe. As markets and
manufacturers migrate to the Far East, competition may increase. Polycold also
competes with the use of liquid nitrogen as an alternative to Polycold's low
temperature refrigeration systems. The Company generally competes in this area
on the basis of uniquely available temperature ranges, ability to rapidly cycle
between various critical temperatures, total cost of ownership, as well as
price, availability and product quality and reliability. In addition, the
CryoTiger refrigeration system competes against alternative technologies
including Stirling refrigerators and open-cycle coolers that rely on reservoirs
of liquid nitrogen, which must be replenished periodically. Although the initial
purchase price for a CryoTiger refrigerator may exceed the price of a comparable
liquid nitrogen cooler, we believe lower operating and maintenance costs and
greater ease of use offset this higher initial cost.
E. PATENTS
Patents are a significant competitive factor in some areas of our
Instrumentation segment. Our CryoTiger and AquaTrap lines are based upon
patented proprietary technology. The Company has intellectual property
protection and various proprietary rights, including but not limited to,
licensed patent rights for a variety of its products and intends to assert such
rights to protect its interest and market position. Patents may become more
significant in the future, however, as Polycold develops new products. One of
the Company's keys to success in marketing its refrigeration products will
depend on its continued ability to obtain patents, maintain trade secret
protection and operate without infringing on the proprietary rights of others.
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. No patents
that the Company considers significant expire during the next five years.
F. RAW MATERIALS AND INVENTORY
Polycold generally maintains a sufficient inventory of raw materials,
assembled parts and partially and fully assembled major components to meet
production requirements. Polycold purchases certain major standard components
for its products from a single source. While alternative sources are available,
an unplanned loss or severe reduction in supply from this source could result in
added cost and temporary production delays.
11
G. WARRANTY
Warranty expense continued at historical levels as a percentage of
sales in fiscal year 2004.
ENERGY TECHNOLOGY SEGMENT
-------------------------
A. INTRODUCTION
The U.S. Department of Energy has reported that much of the nation's
electrical transmission and distribution infrastructure is rapidly becoming
incapable of meeting the demands of our modern economy (see for example, the
National Transmission Grid Study, May 2002). There has been a material decline
in investment in this infrastructure by service providers, due to the difficulty
in licensing new facilities using conventional technology, and especially as a
result of regulatory uncertainty associated with the deregulation of the
electric utility industry. Yet, the demand for electricity continues to grow at
2-3% annually, or by about 25% in the decade of the 1990's. Deregulation has
also resulted in exponential growth in electricity transactions at the wholesale
level, which has placed a burden on the existing delivery infrastructure.
Increasing congestion indicates that the ability to move electricity over the
existing wires is limited. This is further aggravated by the remote location of
many new generating facilities, which are typically not fully integrated into
the delivery system. On August 14, 2003, the worst blackout in U.S. history
occurred. More than 50 million people in eight northeast states and in two
Canadian provinces had no electricity, in some cases for several days. The
economic damage from this blackout has been estimated at $4 - $6 billion.
Energy Technology is an emerging industry dedicated to providing a more
efficient, reliable and environmentally responsible means of generating,
transmitting and distributing electricity. High-temperature superconducting
("HTS") materials could become a key solution. 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 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
(77(degree) Kelvin or minus 321(degree) 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
12
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 2000, when SuperPower was formed, 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 believe that 2G HTS conductors can be made in sufficient quantity
and length, and with cost and performance attributes that will meet the
commercial requirements of the applications we are pursuing. However, we expect
that it will take at least until 2006 for SuperPower to establish commercial
manufacturing capability. To date, 2G HTS conductors have been demonstrated by
SuperPower in lengths on the order of 50 meters, with critical currents of 100
amperes per cm width. In July of 2004 SuperPower demonstrated a 100 meter 2G HTS
conductor with a critical current of 70 amperes per cm width. We believe that
SuperPower currently holds the world record for this performance achievement.
However, there can be no assurance that we will be successful in extending these
pilot scale results to a manufacturing scale with cost and performance levels
adequate for successful commercialization or that end-user utilities or the
defense industry will accept the new products we are developing.
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 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.
13
(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
under its Superconductivity Partnership Initiative ("SPI")
program. While we initially targeted this as a three year
effort, we expanded the project to four 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 Second
Generation cable for a portion of the original 1G cable. The
2G conductor used in the cable (a total of 8km) 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 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 phases of the project in 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) may 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
14
distribution and transmission substations to protect equipment
from damage. However, due to continuing growth of power
demands and increased interconnections between power
distribution networks, transmission networks, and power
generation sources, fault current levels may increase to
levels that exceed the current interrupting capabilities of
the circuit breakers. An HTS fault current limiter ("FCL")
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, without resorting to other expensive
measures such as breaker replacement, bus splitting or
construction of new substations.
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 Matrix Fault Current Limiter (MFCL)
technology, and has initiated a program to develop, design,
manufacture and demonstrate a 138 kV HTS MFCL. In November
2002, we received a commitment of $600,000 from the Electric
Power Research Institute ("EPRI") for the MFCL project. In
July 2003, the U.S. Department of Energy awarded SuperPower
$6.1 million under the SPI program to support the development
of the MFCL. We also reached agreement with Nexans
SuperConductors, GmbH in August 2003 to participate in this
project and supply the HTS melt cast elements used in the
MFCL. Nexans is a global leader in the fiber optics and
electric power cable industries, and in superconductivity
research and development. A scaled prototype MFCL has been
built, and will undergo proof-of-concept testing during FY 05.
(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. Specifically, HTS transformers would
eliminate the fire, explosion and environmental hazard
associated with conventional oil-filled transformers, run
indefinitely at rated and above rated power without reduction
of transformer life, provide more power per unit volume in
existing substations, and increase operational electrical
efficiency. Initially, HTS will have to compete against
conventional copper-based transformer technology to gain
acceptance and market share.
Together with 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. This prototype was assembled and began factory
acceptance testing during 2003. Extensive electrical testing
of the unit was completed in May 2004. Based on the outcome of
the tests the partners learned a great deal about electrical
insulation and related dielectric material performance under
cryogenic conditions. We believe that 2G wire will be required
for commercial success of HTS transformers. In the interim,
15
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 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.
The company maintains 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 and SuperPower have agreed to an exclusive
five-year arrangement for the design, development, manufacture and marketing of
the MFCL in a defined field of use, assuming the successful completion of the
current development agreement. SuperPower has agreed to negotiate in good faith
with SEI, BOC and Nexans 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 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 and fault current limiting 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 FCL's. We also compete with Fujikura on
2G conductor.
16
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 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.
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 30
patent applications pending in process, equipment and device technology 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 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.
17
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 combination of buffer layer and superconductor deposition 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
conductors 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.
18
External funding covers a substantial portion of our research and
development expenditures, principally from the U.S. government. In fiscal 2004,
approximately 49% of total research and development activities were paid by such
external programs, compared to approximately 22% in fiscal 2003 and 34% in
fiscal 2002. During fiscal years 2004, 2003 and 2002, product research and
development expenses in all segments, including externally funded amounts, were
$25,571,000, $16,023,000 and $22,482,000, respectively. This increase in fiscal
2004 is the result of more government awards available for funding projects,
primarily in the Energy Technology segment. Although it is nearly impossible to
predict, the Company expects this trend to continue. Additionally, fiscal 2002
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
-----------
See Note C of the Notes to Consolidated Financial Statements included
in response to Item 8 for a description of our investments.
PERSONNEL
---------
On May 30, 2004, we employed 850 people. With the acquisition of MRI
Devices Corporation, that number grew to 1,038 as of July 30, 2004.
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
At the end of fiscal 2004, the executive officers of the Company were:
Name Position Age
- ---- -------- ---
Glenn H. Epstein Chairman and Chief Executive Officer 46
Michael K. Burke Executive Vice President and 46
Chief Financial Officer
Thomas J. O'Brien Executive Vice President, Corporate 46
Development and
Acting Sector President - Medical Devices
Leo Blecher Sector President - MRI 58
Philip J. Pellegrino Sector President - Energy Technology 55
David E. Thielman Senior Vice President and General 48
Manager - Invivo Corporation
19
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 generation and
20
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.
David E. Thielman was appointed Senior Vice President and General
Manager of Invivo Corporation in January, 2004. Prior to that, he was Vice
President and General Manager of Polycold Systems Inc. having joined
Intermagnetics in that capacity on December 10, 2001. Mr. Thielman previously
served in progressively responsible engineering and senior management positions
in his 13 year career with Milwaukee-based APW Corporation. At APW, he was
appointed general manager of the company's Dallas and Austin, Texas, facilities.
Prior to APW, he worked for 10 years at The Trane Company in LaCrosse,
Wisconsin, where he began his career.
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 D 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.
MAI leases approximately 24,000 square feet in a multi-tenant building
located in the Milwaukee County Research Park's Technology Innovation Center
(the "Research Park"). Approximately 9,000 square feet are used for office space
with the remaining space dedicated to lab, assembly, shipping and material
storage. The lease expires in August 2004 and will continue month to month
thereafter. MRI Devices leases approximately 25,000 square feet in a building
located in Waukesha, Wisconsin. That lease expires on November 30, 2004. We
currently plan to move MRID and MAI operations into a new leased facility in the
greater Milwaukee area.
MRI Devices also owns an approximately 50,000 square foot office and
manufacturing facility in Gainesville, Florida. Effective with the acquisition
of MRID on July 12, 2004 the Company assumed a term loan due in 2007. The term
loan bears interest at 5.85 % and is unsecured except for a negative pledge not
to use the Florida facility as collateral for any other financing. As of May 30,
2004, $2.8 million was due on the loan of which $223,000 was payable within one
year, none of which was included in our financial statements.
Invivo Corporation owns an approximately 47,000 square foot office and
manufacturing facility in Orlando, Florida. This facility is subject to a
mortgage. (See Note D of the Notes to Consolidated Financial Statements included
in response to Item 8 hereto.) Invivo also leases approximately 35,000 square
feet of office and manufacturing space in Arleta, California. In April, 2004
Intermagnetics announced that it is closing this facility and moving production
to Invivo's Orlando facility. Invivo also leases approximately 2,000 square feet
of office space in Tulsa, Oklahoma for a small design engineering team.
21
Polycold Systems Inc. leases approximately 70,000 square feet of
manufacturing and office space in Petaluma, California. The lease expires in
October of 2011.
We believe our current 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.
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUERS 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.
22
Closing Prices
--------------
- -------------------------------------------------------------------------------------------------------------
Fiscal Year 2004 High Low
- ---------------- ---- ---
- -------------------------------------------------------------------------------------------------------------
Quarter Ended August 24, 2003 23.91 15.97
- -------------------------------------------------------------------------------------------------------------
Quarter Ended November 23, 2003 25.38 20.55
- -------------------------------------------------------------------------------------------------------------
Quarter Ended February 22, 2004 27.09 21.60
- -------------------------------------------------------------------------------------------------------------
Quarter Ended May 30, 2004 29.49 23.44
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Fiscal Year 2003
- -------------------------------------------------------------------------------------------------------------
Quarter Ended August 25, 2002 24.94 11.57
- -------------------------------------------------------------------------------------------------------------
Quarter Ended November 24, 2002 20.23 13.83
- -------------------------------------------------------------------------------------------------------------
Quarter Ended February 23, 2003 21.96 15.84
- ------------------------------------------------------- -------------------------- --------------------------
Quarter Ended May 25, 2003 19.97 15.10
- ------------------------------------------------------- -------------------------- --------------------------
_______________________
There were approximately 1,238 holders of record of Common Stock as of August
03, 2004. 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 E
of the Notes to Consolidated Financial Statements included in response to Item
8.
23
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 30, 2004 May 25, 2003 May 26, 2002 May 27, 2001 May 28, 2000
------------ ------------ ------------ ------------ ------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Net Sales $164,447 $147,405 $153,294 $138,157 $112,772
- --------------------------------------------------------------------------------------------------------------------------
Gross Margin 68,785 57,387 61,901 58,528 40,766
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Income before Income taxes 22,756 22,844 30,275 18,026 10,506
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Net income 14,860 14,917 20,589 11,067 6,452
- --------------------------------------------------------------------------------------------------------------------------
Per common share:
- --------------------------------------------------------------------------------------------------------------------------
Basic 0.89 0.90 1.26 (c) 0.72 (c) 0.48
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Diluted 0.87 0.88 1.19 (c) 0.67 (c) 0.45
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
AT END OF FISCAL YEAR 2004 2003 2002 2001 2000
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Working Capital $52,020 $109,865 $93,113 $60,370 $44,816
- --------------------------------------------------------------------------------------------------------------------------
Total Assets 284,935 185,055 177,225 152,158 127,977
- --------------------------------------------------------------------------------------------------------------------------
Long-Term debt
(net of current maturities) 57,635 4,384 4,668 6,185 26,524
- --------------------------------------------------------------------------------------------------------------------------
Retained Earnings /
(accumulated deficit) 45,776 30,916 15,999 (4,590) (6,159)
- --------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 175,569 154,504 147,394 115,015 78,463
- --------------------------------------------------------------------------------------------------------------------------
_____________________
(a) Income per common share has been computed during each period based on the
weighted average number of shares of Common Stock outstanding plus dilutive
potential common shares (where applicable).
(b) The Company did not pay a cash dividend on its Common Stock during any of
the periods indicated.
(c) Net income (loss) per common share has been restated to give effect to the
2% stock dividend distributed in August 2001, and 3% stock dividend distributed
in August 2000.
24
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 2005 and
beyond to differ materially from those expressed in the forward-looking
statements. These important factors include, without limitation, the
assumptions, risks, and uncertainties set forth in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, as well as other
assumptions, risks, uncertainties and factors disclosed throughout 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.
COMPANY OVERVIEW
- ----------------
We operate in four reportable operating segments: Magnetic Resonance
Imaging ("MRI"), Medical Devices, Instrumentation, and Energy Technology. The
MRI segment primarily consists of the manufacture and sale of low temperature
superconducting ("LTS") magnets that are used in MRI systems, and radio
frequency coils. These products are used principally in the medical diagnostic
imaging market. Until October 24, 2001, this segment also included the
manufacture and sale of low-temperature superconducting wire by our IGC-Advanced
Superconductor division ("IGC-AS").
Our newly formed Medical Devices segment consists of Invivo Corporation
("Invivo"), which we acquired effective January 27, 2004. Invivo designs,
manufactures and sells patient monitors, primarily for use in MRI suites and for
centralized nursing monitoring stations.
Our Instrumentation segment provides cryogenic refrigeration equipment
used primarily in ultra-high vacuum applications, industrial coatings,
analytical instrumentation and semiconductor processing and testing through our
wholly-owned subsidiary, IGC-Polycold Systems Inc. ("Polycold"). For the first
three quarters of fiscal year 2002, this segment also included IGC-APD
Cryogenics, Inc. ("IGC-APD").
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.
We completed two major divestitures in fiscal year 2002. On October 24,
2001, we sold the assets and business of IGC-AS to Outokumpu Copper Products Oy.
On February 5, 2002, we sold all of the outstanding shares of our former
subsidiary, IGC-APD, to Sumitomo Heavy Industries, Ltd. These dispositions and
their impact are discussed in more detail below.
25
Intersegment sales and transfers are accounted for as if the sales or
transfers were to third parties; that is, at current market prices. The Company
evaluates the performance of its reportable segments based on operating income
(loss). The Company operates on a 52/53-week fiscal year ending the last Sunday
during the month of May. Fiscal 2004 was a 53 week fiscal year ending May 30,
2004.
We also have a foreign sales corporation located in Barbados, which
remains active until legislation is finalized under the Extraterritorial Income
Exclusion Act of 2000. The Act provides for an exclusion from gross income of a
percentage of income attributable to certain activities performed outside the
United States. This exclusion is designed to parallel the treatment of
foreign-sourced income by other countries and contains no requirement for a
separate foreign entity to obtain the benefit.
On January 27, 2004, we completed our purchase of Invivo, which was
acquired through a public tender offer. Invivo designs, manufactures and markets
patient monitoring systems. These monitoring systems measure and display vital
signs of patients in medical settings, particularly during magnetic resonance
imaging procedures. As a result of the acquisition, Invivo became a wholly-owned
subsidiary of the Company. The acquisition of Invivo substantially expands our
direct sales team and customer base. Invivo's results of operations have been
included in our consolidated financial statements since the date of acquisition
and are included in our discussion on Results of Operations below. The total
acquisition price for Invivo was $159.2 million including professional fees and
other acquisition related costs. The source of funds for the acquisition was a
combination of our available cash and borrowings totaling $67 million under our
existing $130 million unsecured credit facility.
On May 17, 2004, we entered into a definitive agreement to acquire
privately held MRI Devices Corporation ("MRID") and on July 16, 2004, we
completed this acquisition. MRID is a leading manufacturer of RF coils for MRI
systems. As a result of the acquisition, MRID became a wholly-owned subsidiary
of the Company. The purchase price consisted of $45 million in cash, a
three-year $5 million promissory note and 1,624,654 shares of Company common
stock. The number of shares paid to MRID's shareholders was based on the twenty
day average closing price of Intermagnetics' common stock prior to the closing,
which was approximately $33.08 per share. Fifty percent of the stock is
restricted from sale for two years and the other fifty percent for three years.
The cash portion of the consideration was financed through our $130 million
credit facility. The acquisition of MRID further expands our high value added
product portfolio serving the MRI market. In addition, we expect to expand sales
of MRID's products through our direct sales force, which is significantly larger
than MRID's direct sales force.
26
On July 15, 2004, our Board of Directors declared a three-for-two split
on all outstanding shares of our common stock. The split, to be completed in the
form of a fifty percent stock dividend, will be payable on August 17, 2004 to
shareholders of record on July 23, 2004.
RESULTS OF OPERATIONS
- ---------------------
During the year ended May 30, 2004 sales increased $17.0 million or
11.6% to $164.4 million primarily from the acquisition of Invivo. During the
year ended May 25, 2003 sales decreased 3.8% or $5.9 million, to $147.4 million
from $153.3 million for the year ended May 26, 2002. Divested businesses
represented $10.8 million of the sales decline.
During fiscal 2004 sales of the MRI segment decreased $14.3 million
from the prior year or 11.5% to $110.7 million. This decrease is primarily the
result of the previously disclosed planned reduction in magnet shipments during
the first fiscal quarter related to the transition of managing supply chain
logistics for Philips Medical Systems ("PMS") 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. The increase of RF coils
primarily related to increased market penetration of the direct sales market.
During the year ended May 25, 2003 sales of the MRI segment increased $2.3
million or 1.8% to $125.1 million. Offsetting this increase was a decrease of
$2.1 million related to the disposed wire business in the prior year. This
increase was primarily related to increased demand, by PMS, and other customers
for higher field strength magnets, partially offset by a reduced demand for RF
coils. During the fiscal 2002, sales of the MRI segment were $122.8 million.
Our newly formed Medical Devices segment provided $22.5 million of
sales since the acquisition of Invivo. This additional revenue more than offset
the decrease from our MRI segment.
During fiscal 2004 sales of the Instrumentation segment increased 19.9%
to $24.7 million from $20.6 million in the prior year. 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 the fiscal year. During the
fiscal year ended May 25, 2003, sales of the Instrumentation segment declined
$6.3 million, or 23.5%, to $20.6 million. A decline in sales of $8.7 million
related to the divesture of IGC-APD was partially offset by an increase in sales
of $2.4 million, related to increased customer demand for the vacuum and imaging
products from the Pacific Rim. The economic slowdown during this period
curtailed demand from most other parts of the world. During the fiscal 2002,
sales of the Instrumentation segment were $26.9 million.
During fiscal year 2004, sales 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,
sales in the Energy Technology segment declined 50.7% to $1.8 million. This
decline was primarily related to reduced third party funding for superconducting
projects primarily related to HTS devices. During the fiscal 2002, sales of the
Energy Technology segment were $3.6 million.
27
Gross margin for the fiscal year ended May 30, 2004, was $68.8 million,
which represents an increase of $11.4 million or 19.9% over fiscal 2003. As a
percent of sales, gross margin increased to 42% compared to 39% during fiscal
2003. The increase in both absolute dollars and percent of sales was primarily
driven by the inclusion of $12.1 million of higher margin sales from our Medical
Devices segment. In our MRI segment, gross margin decreased $4.8 million or 9.6%
to $45.2 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. In addition, gross margin from the Instrumentation
segment increased about $2.6 million or 38.2%, primarily from increased sales
volumes and manufacturing improvements. Margins from the Energy Technology
segment also 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. During the year ended May 25,
2003 gross margin decreased $4.5 million or 7.3% to $57.4 million. Included in
this decline was $6.1 million related to divested businesses. Partially
offsetting this was an increase of approximately $2.9 million related to
improved magnet mix and nearly $400,000 related to increased customer demand
from the vacuum products market. This was partially offset by decreased sales,
and related gross profit of RF coils and customer funding of research and
development projects. Additionally, active cost reduction programs contributed
favorably to the gross profit during the fiscal year. Gross margin in fiscal
2002 was $61.9 million.
Product Research and Development increased $450,000 or 3.6% to $12.9
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, partially offset by a decline in
spending in our Instrumentation segment of $324,000 as resources were
reallocated to existing product enhancements. In the MRI segment, spending
decreased $2.2 million as third party funding increased for continued
development on magnet systems, partially offset by new product development costs
at IGC-Medical Advances. Our Medical Devices segment contributed $1.9 million
towards new product development. It is important to note our development
activities in all segments increased through third party funding. During fiscal
2003 research and development decreased $2.4 million or 16.1% to $12.5 million.
Included in this decline was $1.8 million of research and development incurred
in the prior year related to divested businesses. The remaining decline of
$600,000 was related primarily to decreased spending, as development programs
mostly in the MRI segment began the transition into manufacturing. Most other
segments were flat compared to fiscal 2003. During fiscal 2002 product research
and development was $14.9 million.
28
During the fiscal year ended May 30, 2004, Selling, General and
Administrative expenses and Stock Based Compensation increased $10.0 million or
50.7% to $29.6 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 $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 expense declined $5.8 million or nearly 22.8% to $19.6
million. Included in this decline was $2.6 million related to divested
businesses. The most significant decline came from the MRI segment ($1.8
million) related to reduced spending for salaries and benefits, consulting and
employment related expenses. Instrumentation segment spending declined about
$900,000 which relate to costs included in fiscal year 2002 for relocating to
Petaluma, California. Finally, the Energy Technology segment declined about
$425,000 due to lower market research and business development costs in fiscal
2003. During fiscal 2002 selling, general and administrative expenses were $25.4
million.
During fiscal 2004 amortization of intangible assets increased $1.3
million or 71% from fiscal 2003 primarily due to the addition of the amortizable
intangible assets resulting from our acquisition of Invivo. During fiscal 2003
amortization of intangible assets declined $138,000 primarily due to certain
intangibles becoming fully amortized. During fiscal 2002 amortization of
intangible assets was about $1.9 million. (See Note N of the Notes to the
Consolidated Financial Statements.)
Operating income during fiscal 2004 decreased $313,000 or 1.3% to $23.1
million from fiscal 2003. This decrease was primarily the result of reduced
magnet sales in our MRI segment during the first quarter. Additionally, we
incurred about $1.2 million of internal acquisition and integration related
costs associated with the acquisition of Invivo. Partially offsetting the MRI
segment decrease of $6.8 million was the $3.1 million of operating income
contributed by our Medical Devices segment. Additionally, a decrease in our net
investment in the Energy Technology segment of about $805,000 and continued
sales growth and related margin in our Instrumentation segment resulted in an
increase of operating income of $2.6 million. Excluding the internal acquisition
and integration charges, operating income for the fiscal year ended May 30, 2004
would have been $24.4 million which represents an increase of $935,000 or 4.0%
over fiscal year 2003. See the reconciliation below:
29
Reconciliation of financial statements to GAAP equivalent
Fiscal Year Ended
---------------------
May 30, May 25,
2004 2003
------- -------
As reported operating income $23,104 $23,417
Internal acquisition and integration charges
(included in selling, general and administrative
expenses) 1,248 --
------- -------
Operating income, excluding internal acquisition
and integration charges $24,352 $23,417
======= =======
The Company believes this table provides helpful information for
assessing the impact of the acquisition of Invivo.
During fiscal year 2003, despite reduced sales, operating income
improved to $23.4 million or 19.4% from $19.6 million in fiscal 2002.
Essentially this was achieved by controlling non-essential costs and aggressive
implementation of product cost reduction strategies. Divested businesses had
little effect on operating income.
Interest and other income during fiscal 2004 decreased about $700,000
or 47% from fiscal 2003 to $790,000. This decrease is 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. During fiscal 2003
interest and other income decreased nearly $500,000 or 24% to $1.5 million from
nearly $2.0 million in the previous year. This decrease was primarily related to
the prior year containing $540,000 of income from the sale of a product line.
During fiscal 2002, interest and other income was $1.9 million.
Interest and other expense during fiscal 2004 increased $759,000 to
$1.3 million. 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. Interest expense
during fiscal 2003 decreased $159,000 or 24% to nearly $500,000. This decrease
was related to the divesture of IGC-APD and its associated mortgage. During
fiscal 2002 interest expense was $650,000
On October 24, 2001, we divested our low-temperature superconducting
(LTS) materials business, IGC-Advanced Superconductors of Waterbury,
Connecticut, for more than $33.5 million. The purchase price consisted of a $4
million note, paid in October 2003 and the balance in cash. The agreement
between Intermagnetics and Outokumpu Copper Products Oy, a subsidiary of the
Outokumpu Group of Finland, also included a six-year strategic supply
arrangement that expanded Outokumpu's existing superconducting materials
business. Intermagnetics will purchase from Outokumpu a substantial portion of
its internal LTS wire requirements, primarily for manufacturing superconducting
magnet systems for magnetic resonance imaging systems. The sale resulted in a
one-time pre-tax gain of approximately $15.4 million in fiscal 2002.
Additionally, the Company recorded stock based compensation expense of $795,000
related to the sale.
30
On February 5, 2002, the Company sold the stock of its subsidiaries
IGC-APD Cryogenics, Inc. and IG-Europe, Ltd. The sale was subject to a stock
purchase agreement between the Company and Sumitomo Heavy Industries ("SHI") of
Japan dated January 7, 2002. The sale to SHI included only the helium related
assets of these subsidiaries and the assumption of related liabilities. The
purchase consideration was arrived at by arms length negotiation and consisted
of $9.5 million in cash paid on February 5, 2002. The Company was also able to
withdraw an additional $1.2 million in cash prior to closing. The net pretax
gain from the sale was $10,000. The agreement included a six-year strategic
supply agreement under which the Company will purchase from SHI shield coolers
it requires internally, primarily for manufacturing superconducting magnet
systems. The mixed-gas portion of the refrigeration systems business, previously
conducted at IGC-APD, was transferred and integrated into Polycold.
Additionally, the Company recorded stock based compensation expense of $528,000
related to the sale.
In connection with these divestitures the Company has established a
liability for environmental remediation and penalties of approximately $2.0
million. As of May 30, 2004 and May 25, 2003 approximately $1.9 million 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.
During fiscal 2002 the Company evaluated the probability of realizing
the value of our investments in Ultralife Batteries Inc. and Kryotech. As a
result, the Company determined these investments were impaired and accordingly
wrote down Ultralife Batteries Inc. to its then current market value as of
November 23, 2001 and Kryotech to zero, its then estimated value. The write down
amounted to $6.3 million and was due to a decline in fair market value of these
investments, which, in the opinion of management, was other than temporary.
Additionally, during fiscal 2003 the Company received $537,000 as a
result of a favorable settlement of trade litigation.
During fiscal 2004, the Company's effective income tax rate remained
the same as fiscal 2003 at 34.7%. During fiscal 2003 the company had an
effective income tax rate of 34.7% compared to a 32.0% rate in fiscal 2002. The
increase in rate was primarily related to the ability to use certain capital
losses to partially offset capital gains in fiscal 2002 due to divested
businesses partially offset by the effect of the Extraterritorial Income Regime.
31
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 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 of approximately $23.2 million in fiscal 2004, $24.1
million in fiscal 2003 and $28.8 million in fiscal 2002. 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.
The following (unaudited) pro forma consolidated income statements have been
prepared in accordance with SFAS No. 141 "Business Combinations" as if the
acquisition of Invivo had occurred on May 27, 2002. In connection with the
acquisition the below includes $2.5 of acquisition related costs. The table
below includes certain costs that would not have been incurred by either company
had the acquisition not occurred:
Fiscal Year Ended
-------------------------------
May 30, May 25,
2004 2003
---------- -----------
Net sales $ 209,518 $ 200,745
========== ===========
Net income $ 17,367 $ 9,108
========== ===========
Earnings per share:
Basic $ 1.04 $ 0.55
========== ===========
Diluted $ 1.02 $ 0.54
========== ===========
In the following (unaudited) pro forma consolidated income statements, net
income for the fiscal year ended May 25, 2003 has been adjusted by $6.7 million,
net of tax for investment banking, legal, other professional fees, inventory
impairment charge and the true-up of commissions incurred by Invivo and other
costs incurred by both companies that would not have been incurred had the
acquisition not occurred. By providing this information the Company is not
implying acquisitions and the related costs are an infrequent event. However,
the Company believes this information will provide the shareholders and
potential investors with the appropriate information required for assessing the
impact of this acquisition.
Fiscal Year Ended
-------------------------------
May 30, May 25,
2004 2003
---------- -----------
Net sales $ 209,518 $ 200,745
========== ===========
Net income $ 17,367 $ 15,779
========== ===========
Earnings per share:
Basic $ 1.04 $ 0.96
========== ===========
Diluted $ 1.02 $ 0.93
========== ===========
The above pro forma results do not include any anticipated revenue synergies.
32
Looking forward, during fiscal 2005, we expect sales to increase
significantly, primarily from the MRI and Instrumentation segments as well as
including a full year of Medical Devices segment sales. A portion of this growth
is expected to come from sales related to high field (3.0T) and open magnet
systems as well as increased market penetration by IGC-Medical Advances and
newly acquired MRID for RF Coil sales and a continuing improvement of market
conditions in the Instrumentation segment. We expect our investment in
SuperPower (Energy Technology segment) to remain at about fiscal 2004 levels.
Sales from the Energy Technology segment are expected to increase during fiscal
2005. We expect to make advances towards the first functional superconducting
cable on a commercial grid. Additionally we expect to make further 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 2005, we expect to begin to experience
seasonality in our sales resulting from the amended contract with our largest
OEM customer and by the acquisition of Invivo and MRID, both of which sell their
products to end users in addition to the large MRI system integrators. We expect
that the first quarter of each 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 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 2005, we expect our Selling, General and Administrative
costs to increase reflecting the effect of the addition of the Medical Devices
segment and increased market penetration by MRID for RF Coil sales. Internal
Research and Development is expected to increase significantly resulting from
the addition of a full year of expense from our Medical Devices Segment as well
as decreased customer funding in our MRI and Energy Technology segments. Our
products are continuously being developed in all segments. Typically, our
customers are actively involved in the definition and development of these
products. 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;
o Instrumentation orders are not impacted by any downturn in the
economy;
o A continuation of the increased demand from the Pacific Rim for
products of the Instrumentation segment;
o Major OEM customers continue to purchase RF coils at increasing
levels;
o Customer acceptance of the new products being developed throughout
the Company;
33
o New products, existing products and upgrades to existing products
achieve the level of growth and market acceptance expected;
o Low cost competitors of our products are unable to gain a
substantial share of the market;
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,
Medical Devices and Instrumentation 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 premarket
notification process rather than the more time consuming and costly
premarket approval process;
o We are able to continue to operate under FDA approval in our
manufacturing facilities requiring such approval; and
o We are able to effectively integrate current and future
acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended May 30, 2004 the Company generated $19.4
million in cash from operations compared to $26.6 million in fiscal 2003. The
most significant use came from inventory which increased $6.6 million compared
to last year. This increase was primarily the result of the planned slow down of
magnet shipments in the first quarter of fiscal 2004 associated with
supply-chain management logistics with PMS. In addition, inventory purchases for
the last four months of fiscal 2004 include Invivo.
Investing activities required $152.4 million during fiscal 2004. This
significant use of cash primarily resulted from our acquisition of Invivo
effective January 27, 2004 which included the following payments:
(Dollars in thousands)
Cash paid:
Outstanding common shares of Invivo (5,948,323 at $22.00/share) $ 130,863
Outstanding options of Invivo ($22.00/share net of exercise price) 20,141
Transaction costs 5,426
Less cash acquired from Invivo (6,208)
---------
$ 150,222
=========
34
Additional investing activities during the current period included plant,
property and equipment purchases of $6.3 million. These purchases are for
equipment used in production as well as internal research and product
development. Partially offsetting this use of cash was the collection of the
$4.0 million note receivable which was the final payment from the sale of IGC-AS
to Outokumpu Advanced Superconductors, Inc. in fiscal year 2002, and proceeds
from the sale of available for sale securities of $114,000. Investing activities
during fiscal 2003 consisted of about $4.3 million of plant, property and
equipment purchases partially offset by proceeds from the sale of
available-for-sale securities of $1.4 million.
Financing activities for the fiscal year ended May 30, 2004, generated
$56.4 million which primarily comprised $67 million of proceeds received from
long-term borrowings used to partially finance the acquisition of Invivo,
combined with $1.3 million of costs incurred to obtain the debt financing less
$11.1 million of principal payments made during the year. In addition, proceeds
received from exercised options of $3.3 million were partially offset by $1.8
million of treasury stock. This is compared to the $8.7 million of cash used in
the prior year which mainly consisted of $6.5 million of treasury stock
purchases and $2.9 million of advances to employees under a shareholder approved
executive stock purchase plan. These uses of cash were partially offset by $1.1
million of proceeds received from exercised options. For the twelve months ended
May 30, 2004 the Company had a cash balance of $11.9 million, a decrease of
about $76.6 million from the same period last year.
See the consolidated statement of cash flows, located elsewhere in this
report, for further details on sources and uses of cash.
Our capital and resource commitments at July 23, 2004 consisted of
capital equipment commitments of $809,000. As of May 30, 2004, our total
contractual obligations for the next five fiscal years are as follows:
(Dollars in thousands) Fiscal Year
-----------------------------------------------------------------
2005 2006 2007 2008 2009
---- ---- ---- ---- ----
Non-cancelable operating lease commitments $ 1,577 $ 1,307 $ 1,283 $ 1,297 $ 1,327
Purchase commitments 1,917 -- -- -- --
Principal payments on long-term debt 4,171 8,252 5,426 6,363 36,800
------- ------- ------- ------- -------
$ 7,665 $ 9,559 $ 6,709 $ 7,660 $38,127
======= ======= ======= ======= =======
On December 17, 2003, we entered into a Credit Facility with a group of
commercial lenders under which we 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. Effective May 18,
2004, we amended this credit facility with our existing group of commercial
lenders to increase the revolving credit facility by $30 million and effectively
increase the aggregate committed amount to a total $130 million. In conjunction
with this increase, the Company is obligated to pay an upfront, non-refundable
commitment fee ranging from .25% to .50% to each lender based on their pro-rata
share of the revolver increase. These fees will be deferred and amortized using
the straight-line method over the remaining life of the debt. The proceeds of
this increase will be used for the pending acquisition of MRI Devices
Corporation including costs associated with the acquisition. Both facilities
have maturity dates five years from the effective date of these loans. Proceeds
of this facility were used for the acquisition of Invivo Corporation including
direct costs associated with the acquisition and this credit facility and to
provide working capital for general corporate requirements of the Company. We
incurred costs directly associated with obtaining the initial amount of the
credit facility of $1.3 million which have been recorded as deferred financing
costs and are being amortized straight-line over the life of the debt. This
facility replaced our previous unsecured $50.0 million line of credit. As of May
30, 2004, $56.1 million was outstanding under this credit facility. See also
Note D in the Company's notes to consolidated financial statements.
35
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 2005, 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based on in part, the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP). The preparation of
these financial statements requires the Company to make estimates and judgments
that affect assets, liabilities, revenues, expenses and related disclosure of
contingent liabilities.
The Company recognizes revenue and profit on certain long-term
development contracts based upon actual costs incurred plus earned profit when
these costs are less than the milestone value and the milestone has been
achieved or milestone value when the actual costs exceed the milestone value. On
other long-term development contracts revenue is recognized upon actual costs
and earned profit. Both of these types of contracts typically provide
engineering services to achieve a specific scientific result relating to
superconductivity. Some of these contracts require the Company to contribute to
the development effort. The customers for these contracts are both commercial
customers and various state and federal government agencies. When government
agencies are providing revenue we do not expect the government to be a
significant end user of the resulting products. Therefore, the Company does not
reduce Internal Research and Development by the funding received. When it
appears probable that estimated costs will exceed available funding, and the
Company is not successful in securing additional funding, the Company records
the estimated additional expense before it is incurred.
36
In certain instances, the Company recognizes revenue in accordance
with Staff Accounting Bulletin No. 101, 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 30, 2004,
May 25, 2003 and May 26, 2002 these systems comprised approximately 0.0%, 2.7%
and 1.1% of consolidated annual revenue, respectively.
The Company maintains a reserve for inventory that may become damaged
in the manufacturing process or technologically obsolete. If technology advances
more rapidly than expected, manufacturing processes improve substantially or the
market for our products declines substantially, adjustments to reserves may be
required.
Goodwill and other long-lived assets are reviewed for impairment
whenever events such as significant changes in the business climate, plant
closures, changes in product offerings, or other circumstances indicate that the
carrying amount may not be recoverable. The Company performs a test for goodwill
impairment annually during the second quarter of each fiscal year. The
determination of whether these assets are impaired involves significant
judgments based upon short and long-term projections of future performance.
Changes in strategy and/or market conditions may result in adjustments to
recorded asset balances.
The provision for warranty for potential defects with our manufactured
products is based on historical experience for the period the product was under
warranty during the fiscal year. In some cases, when historical warranty
information is not available the Company estimates warranty costs based on
spending related to the cost centers responsible for the warranty repair. The
Company believes these reserves are adequate based on the evaluation criteria,
procedures in place to control the manufacturing process and pre-testing of
newly developed products to ensure their manufacturability prior to commercial
introduction. If product quality declines, the Company may require additional
provisions.
The Company maintains a provision for potential environmental
remediation for businesses disposed of during fiscal 2002. These provisions are
based upon in part, the advice from environmental engineers that have visited
the sites and understand the scope of the project, should a cleanup be required.
These engineers are experienced in such matters and with the appropriate
government rulings in similar circumstances. We have made our provision based on
the estimate provided which 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 based on estimates from
environmental engineers. If unexpected costs related to the environmental issues
are incurred additional provisions will be needed.
The Company records an investment impairment charge on
available-for-sale securities when it believes an investment has experienced a
decline in value that is other than temporary. Future adverse changes in market
conditions or poor operating results of underlying investments could result in
losses or an inability to recover the carrying value of the investment. During
fiscal year 2003 the Company sold all remaining shares of Ultralife Batteries
Inc. During fiscal 2004 the Company sold KryoTech, Inc. securities which were
written down to zero during fiscal 2003. This write down was in accordance with
the belief that the impairment of these securities was other than temporary. As
of May 30, 2004 the Company no longer holds any available for sale securities.
37
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
The Company's exposure to market risk through derivative financial
instruments and other financial instruments, such as investments in short-term
marketable securities and long-term debt, is not material. The financial
instruments of the Company that are interest rate dependent are an unsecured
line of credit and a mortgage payable. The Company manages interest rates
through various methods within contracts. On its mortgage payable, the Company
negotiated an "interest rate swap" agreement that, in effect, fixes the rate at
6.88%. With respect to its unsecured line of credit, the Company may elect to
apply interest rates to borrowings under the line which relate to either the
London Interbank Offered Rate or prime, whichever is most favorable. In
addition, the Company entered into an "interest rate swap" agreement with a
commercial lender that in effect fixes the rate at 2.95%. (See Note D and Note O
of the Notes to Consolidated Financial Statements included in response to Item 8
for more details regarding these instruments.) The Company's objective in
managing its exposure to changes in interest rates is to limit the impact of
changing rates on earnings and cash flow and to lower its borrowing costs.
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.
The Company does not believe that its exposure to commodity and foreign
exchange risks are material. We limit our exposure to these risks by
denominating contracts, such as our contract with PMS, in U.S. dollars.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as part of this report are the consolidated
financial statements and supplementary data listed in the list of Financial
Statements and Schedules included in response to Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our chief executive
officer and chief financial officer, we have evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of
the period covered by this report (the "Evaluation Date"). Based on this
evaluation, our chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures were effective as of the
Evaluation Date in providing a reasonable level of assurance that the
information required to be disclosed by us in the reports that we file or submit
under the Exchange Act, is recorded, processed summarized and reported within
the time periods in Securities and Exchange Commission rules and forms,
including a reasonable level of assurance that information required to be
disclosed by us in such reports is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting
that occurred during the quarter ended May 30, 2004, that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. We are not required at this time to provide the
information specified in Item 308(a) and (b) of the SEC's Regulation S-K
regarding an annual report by management on our internal control over financial
reporting or an attestation report by our independent accountants with regard
thereto.
39
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 2004 Annual Meeting of Shareholders
(the "Proxy Statement"), and is hereby incorporated herein by reference.
The information concerning executive officers called for by Item 10 of
Form 10-K is set forth in "Item 1. Business" of this annual report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information with respect to compensation of certain executive
officers and all executive officers of the Company as a group to be contained
under the headings "Executive Compensation" and "Certain Transactions" in the
Proxy Statement is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information with respect to ownership of the Company's Common Stock
by management and by certain other beneficial owners to be contained under the
heading "Security Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information with respect to certain relationships and related
transactions to be contained under the heading "Certain Transactions" in the
Proxy Statement is hereby incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING 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.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, SCHEDULE AND EXHIBITS
40
Attached hereto and filed as part of this report are the financial statements,
schedule and the exhibits listed below.
1. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of May 30, 2004 and May 25, 2003
Consolidated Income Statements for fiscal years ended May 30, 2004, May
25, 2003 and May 26, 2002
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income (Loss) for fiscal years ended May 30, 2004, May
25, 2003 and May 26, 2002
Consolidated Statements of Cash Flows for the fiscal years ended May
30, 2004, May 25, 2003 and May 26, 2002
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULE
II Valuation and Qualifying Accounts
All other schedules are not required or are inapplicable and,
therefore, have been omitted.
41
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 Shareholders'
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)
Articles of Incorporation and By-laws
3.1 Restated Certificate of Incorporation (1) (Exhibit 3)
3.2 By-laws, as amended (2) (Exhibit 3.1)
Instruments defining the rights of security holders, including indentures
4.1 Form of Common Stock certificate (8) (Exhibit 4.1)
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)
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)
42
# 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 (11)
(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 (7) (Appendix A)
+ 10.10 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Glenn H. Epstein (9) (Exhibit 10.11)
+ 10.11 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Leo Blecher (11) (Exhibit 10.12)
+ 10.12 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Michael K. Burke (11) (Exhibit 10.13)
+ 10.13 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Philip J. Pellegrino (11) (Exhibit 10.14)
+ 10.14 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and David E. Thielman (11) (Exhibit 10.15)
+ 10.15 SuperPower Inc. Equity Compensation Plan (11) (Exhibit 10.16)
+ 10.16 2003 Director Compensation Plan (11) (Exhibit 10.17)
*+ 10.17 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Thomas J. O'Brien
Subsidiaries of the registrant
* 21 Subsidiaries of the Company
43
Consents of experts and counsel
* 23 Consent of 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 and 333-64822 on
Form S-8.
Certifications of Chief Executive Officer and Chief Financial Officer
* 99.1 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.
* 99.2 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.
_______________________________________________________
(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 Shareholders.
(5) Exhibit incorporated herein by reference to the Annual Report
on Form 10-K filed by the Company for the fiscal year ended
May 30, 1999.
(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 Proxy
Statement dated September 25, 2000 for the 2000 Annual Meeting
of Shareholders.
(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.
44
(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.
* Filed with the Annual Report on Form 10-K for the fiscal year ended
May 30, 2004.
# 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) REPORTS ON FORM 8-K
On May 18, 2004, we filed a report on Form 8-K containing (a) the Plan
of Merger and Reorganization dated May 17, 2004 with respect to the purchase of
all of the outstanding shares of MRI Devices Corporation, and (b) a press
release announcing the definitive agreement to acquire all of the outstanding
shares of MRI Devices Corporation.
On April 28, 2004, we furnished a report on Form 8-K under Item 9
announcing plans to consolidate the manufacturing operations of Invivo
Corporation into one location in Orlando, Florida.
45
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 13, 2004
By: /s/ Glenn H. Epstein
--------------------------------
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 13, 2004
- --------------------------------- Chief Executive Officer
Glenn H. Epstein (principal executive
officer)
/s/ Michael K. Burke Executive Vice President and August 13, 2004
- --------------------------------- Chief Financial
Michael K. Burke Officer (principal financial
and accounting officer)
/s/ John M. Albertine Director August 13, 2004
- ---------------------------------
John M. Albertine
/s/ Larry G. Garberding Director August 13, 2004
- ---------------------------------
Larry G. Garberding
/s/ Michael E. Hoffman Director August 13, 2004
- ---------------------------------
Michael E. Hoffman
/s/ James S. Hyde Director August 13, 2004
- ---------------------------------
James S. Hyde
/s/ Thomas L. Kempner Director August 13, 2004
- ---------------------------------
Thomas L. Kempner
/s/ Sheldon Weinig Director August 13, 2004
- ---------------------------------
Sheldon Weinig
46
1. FINANCIAL STATEMENTS
47
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To Board of Directors and Stockholders
of Intermagnetics General Corporation:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) present fairly, in all material respects, the
financial position of Intermagnetics General Corporation and its subsidiaries at
May 30, 2004 and May 25, 2003, and the results of their operations and their
cash flows for each of the three years in the period ended May 30, 2004 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 14(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 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.
/S/ PRICEWATERHOUSECOOPERS LLP
Albany, NY
July 16, 2004
48
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
May 30, May 25,
2004 2003
-------- --------
ASSETS
Cash and cash equivalents $ 11,868 $ 88,514
Trade accounts receivable, less allowance
(May 30, 2004 - $849; May 25, 2003 - $223) 41,218 23,864
Costs and estimated earnings in excess of
billings on uncompleted contracts 127 188
Inventories:
Consigned products 1,822 339
Finished products 2,969 589
Work in process 8,291 6,002
Materials and supplies 13,955 7,280
-------- --------
27,037 14,210
Deferred income taxes 4,333 619
Note receivable 64 3,959
Prepaid expenses and other 4,544 2,756
Income tax receivable 4,285 --
-------- --------
TOTAL CURRENT ASSETS 93,476 134,110
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 1,628 1,128
Buildings and improvements 14,972 12,172
Machinery and equipment 48,692 38,461
Leasehold improvements 4,425 3,785
-------- --------
69,717 55,546
Less accumulated depreciation and amortization 32,981 27,160
-------- --------
36,736 28,386
INTANGIBLE AND OTHER ASSETS
Goodwill 118,816 13,750
Other intangibles, less accumulated amortization
(May 30, 2004 - $10,605; May 25, 2003 - $7,460) 32,491 6,928
Derivative asset 253
Other assets 3,163 1,881
-------- --------
TOTAL ASSETS $284,935 $185,055
======== ========
49
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
May 30, May 25,
2004 2003
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 4,171 $ 284
Accounts payable 10,242 9,276
Salaries, wages and related items 10,799 7,698
Customer advances and deposits 1,302 544
Product warranty reserve 3,189 1,466
Accrued income taxes -- 821
Other liabilities and accrued expenses 11,753 4,156
--------- ---------
TOTAL CURRENT LIABILITIES 41,456 24,245
LONG-TERM DEBT, less current portion 57,635 4,384
DEFERRED INCOME TAXES 10,050 1,453
DERIVATIVE LIABILITY 225 469
SHAREHOLDERS' EQUITY
Preferred Stock, par value $.10 per share:
Authorized - 2,000,000 shares
Issued and outstanding - None
Common Stock, par value $.10 per share:
Authorized - 40,000,000 shares
Issued and outstanding (including shares in treasury):
May 30, 2004 - 18,051,209 shares;
May 25, 2003 - 17,538,762 shares 1,805 1,754
Additional paid-in capital 146,223 138,974
Notes receivable from employees (3,421) (3,725)
Retained earnings 45,776 30,916
Accumulated other comprehensive loss (134) (514)
--------- ---------
190,249 167,405
Less cost of Common Stock in treasury
May 30, 2004 - 1,192,878 shares;
May 25, 2003 - 1,112,597 shares (14,680) (12,901)
--------- ---------
175,569 154,504
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 284,935 $ 185,055
========= =========
See notes to consolidated financial statements.
50
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
-----------------------------------
May 30, May 25, May 26,
2004 2003 2002
--------- --------- ---------
Net sales $ 164,447 $ 147,405 $ 153,294
Cost of products sold 95,662 90,018 91,393
--------- --------- ---------
Gross margin 68,785 57,387 61,901
Product research and development 12,940 12,490 14,855
Selling, general and administrative 29,021 19,076 24,883
Stock based compensation 575 563 539
Amortization of intangible assets 3,145 1,841 1,979
--------- --------- ---------
45,681 33,970 42,256
--------- --------- ---------
Operating income 23,104 23,417 19,645
Interest and other income 790 1,491 1,957
Interest and other expense (1,252) (493) (652)
Gain (loss) on available-for-sale securities 114 (2,108) 230
Gain on litigation settlement 537
Gain on sale of division 15,385
Write down of investments (6,290)
--------- --------- ---------
Income before income taxes 22,756 22,844 30,275
Provision for income taxes 7,896 7,927 9,686
--------- --------- ---------
NET INCOME $ 14,860 $ 14,917 $ 20,589
========= ========= =========
Net Income per Common Share:
Basic $ 0.89 $ 0.90 $ 1.26
========= ========= =========
Diluted $ 0.87 $ 0.88 $ 1.19
========= ========= =========
See notes to consolidated financial statements.
51
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Fiscal Year Ended
-----------------------------------
May 30, May 25, May 26,
2004 2003 2002
--------- --------- ---------
OPERATING ACTIVITIES
Net income $ 14,860 $ 14,917 $ 20,589
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 8,225 6,017 5,803
Gain on sale of division (15,385)
Write down of investments 6,290
Provision for deferred taxes 2,455 2,345 (532)
Stock based compensation 575 563 539
Loss on sale and disposal of assets 82 60 173
Realized (gain) loss on available-for-sale securities (114) 2,108 (230)
Change in discount on note receivable (41) (98) (57)
Amortization of debt issuance costs 88
Change in operating assets and liabilities:
Increase in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts (3,908) (3,012) (1,583)
(Increase) decrease in inventories and prepaid expenses and other assets (1,961) 4,656 (1,688)
Increase (decrease) in accounts payable and accrued expenses (884) (963) 731
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 19,377 26,593 14,650
INVESTING ACTIVITIES
Purchases of property, plant and equipment (6,277) (4,312) (11,598)
Collection of note receivable 4,000
Purchase of Invivo, net of cash acquired (150,222)
Investment in patent rights (28)
Proceeds from sale of available-for-sale securities 114 1,363 1,300
Proceeds from sale of property, plant and equipment 38 17
Proceeds from sale of division 39,002
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (152,375) (2,932) 28,704
FINANCING ACTIVITIES
Proceeds from sale of Common Stock, including exercise of stock options 3,307 1,050 4,328
Proceeds from (advances to) employees - Executive Stock Purchase Plan 304 (2,926) 702
Purchase of Treasury Stock (1,779) (6,521)
Payment to obtain debt financing (1,325)
Proceeds from long term borrowings 67,000
Principal payments on note payable and long-term debt (11,147) (267) (2,445)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 56,360 (8,664) 2,585
EFFECT OF EXCHANGE RATE CHANGES ON CASH (8) (97)
--------- --------- ---------
(DECREASES) INCREASE IN CASH AND CASH EQUIVALENTS (76,646) 14,997 45,842
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 88,514 73,517 27,675
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,868 $ 88,514 $ 73,517
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Exchange of Common Stock in partial payment of exercise price on options $ 328 $ 231
========= =========
Tax benefit from exercise of stock options $ 3,493 $ 126 $ 3,690
========= ========= =========
See notes to consolidated financial statements.
52
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Fiscal Years Ended May 30, 2004, May 25, 2003 and May 26, 2002
(Dollars in Thousands)
Accumulated Notes
Additional Retained Other Receivable
Common Paid-in (Deficit) Comprehensive Treasury from Comprehensive
Stock Capital Earnings Income (Loss) Stock Employees Income (Loss)
---------- ---------- ---------- -------------- --------- ---------- -------------
BALANCES AT MAY 27, 2001 $1,671 $ 127,305 $ (4,590) $ (2,047) $ (5,821) $ (1,501)
Comprehensive income:
Net income 20,589 $ 20,589
Reclassification adjustments - write down
of investments 1,583 1,583
Reclassification adjustments - available
for sale securities (311) (311)
Reclassification adjustments - foreign
currency translation 1,051 1,051
Unrealized loss on available for sale
securities, net (750) (750)
Unrealized gain on foreign currency
translation (164) (164)
Transitional adjustment - on derivatives (128) (128)
Loss on derivative (140) (140)
-----------
Total comprehensive income $ 21,730
===========
Net repayments 702
Tax benefit from exercise of stock options 3,690
Stock based compensation 1,928
Issurance of 639,583 shares of Common Stock,
including exercise of stock options and
sale of 7,673 shares to IGC Savings Trust 62 4,285
Treasury stock, upon exercise of stock options 231 (231)
Stock dividend adjustment of (121) shares
and payments for fractional shares (20)
---------- ---------- ---------- ------------- --------- --------
BALANCES AT MAY 26, 2002 1,733 137,419 15,999 (906) (6,052) (799)
Comprehensive income:
Net income 14,917 14,917
Unrealized loss on available-for-sale
securities, net of tax 10 10
Minimum pension liability adjustment (209) (209)
Reclassification adjustment -
available-for-sale securities 628 628
Loss on derivative, net of tax benefit (37) (37)
-----------
Total comprehensive income $ 15,309
===========
Tax benefit from exercise of stock options 126
Loans to employees for purchase of common stock (2,926)
Issuance of 205,303 shares of Common Stock,
rewarded to exercises of stock options 21 1,101
Treasury stock, upon exercise of stock options 328 (328)
Treasury stock purchase (6,521)
---------- ---------- ---------- ------------- --------- --------
BALANCES AT MAY 25, 2003 1,754 138,974 30,916 (514) (12,901) (3,725)
Comprehensive income:
Net income 14,860 14,860
Gain on derivatives, net of tax benefit 323 323
Minimum pension liability adjustment 65 65
Unrealized loss on foreign currency
translation (8) (8)
-----------
Total comprehensive income $ 15,240
===========
Issuance of 512,447 shares of Common Stock,
related to exercises of stock options and
stock based compensation 51 3,756
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 $1,805 $ 146,223 $ 45,776 $ (134) $(14,680) $ (3,421)
========== ========== ========== ============= ========= ========
See notes to consolidated financial statements.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERMAGNETICS GENERAL CORPORATION
NOTE A - ACCOUNTING POLICIES
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant 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 2004 had 53 weeks, fiscal 2003 and 2002 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.
REVENUE RECOGNITION:
Sales are recognized as of the date of shipment or upon customer acceptance,
after the product has been tested.
In certain instances, the Company records revenue in accordance with Staff
Accounting Bulletin No. 101 as amended by Staff Accounting Bulletin No. 104, on
products that are complete and ready to ship for which our customer has
requested a delay in delivery. In these instances, all of the criteria for
revenue recognition have been met, including, but not limited to: the delay is
requested by the customer for a substantial business purpose, there is a fixed
delivery date, title and risk of loss have 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 30, 2004,
May 25, 2003 and May 26, 2002 these products comprised approximately 0.0%, 2.7%
and 1.1% of consolidated annual revenue respectively.
Sales to the United States Government or its contractors under research and
development cost reimbursement contracts are recorded as costs are incurred and
include estimated earned profits.
The Company recognizes revenue on long-term development contracts based upon
actual costs incurred plus earned profit when these costs are less than the
milestone value and the milestone has been achieved or milestone value when the
actual costs exceed the milestone value. When it appears probable that estimated
costs will exceed available funding, and the Company is not successful in
securing additional funding, the Company records the estimated additional
expense before it is incurred.
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 2004, 2003 and 2002, was $1,508,000, $1,123,000 and
$677,000, respectively. The following table represents the activity in product
warranty reserve:
Fiscal Year Fiscal Year
(Dollars in thousands) 2004 2003
------- -------
Balance at May 25, 2003 $ 1,466 $ 1,326
Reserves acquired from
acquisition of Invivo Corp. 1,602 --
Warranty expense 1,514 1,117
Cost of warranty performed (1,393) (977)
------- -------
Balance at May 30, 2004 $ 3,189 $ 1,466
======= =======
54
INVENTORIES:
Inventories are stated at the lower of cost (first-in, first-out) or market
value. At May 30, 2004 and May 25, 2003 the Company had reserves for excess and
obsolete inventory of $2,853,000 and $1,272,000, 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
for the fiscal years ended May 30, 2004, May 25, 2003, and May 26, 2002 was
$5,080,000, $4,176,000 and $3,824,000 respectively.
INVESTMENTS:
Certain investments are categorized as available for sale securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Available
for sale securities are reported at fair value, with unrealized gains and losses
included in shareholders' equity. Realized gains and losses and other than
temporary losses for securities classified as available for sale are included in
earnings and are determined using the specific identification method for
determining the cost of securities sold. Effective during fiscal 2004, the
Company sold its remaining AFS investment security which was written down to
zero during fiscal 2002. (See footnote C.)
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.
FOREIGN CURRENCY TRANSLATION:
Foreign currency translation adjustments arise from conversion of the Company's
foreign subsidiary's financial statements to US currency for reporting purposes,
and are included in Other Comprehensive Income (Loss) in shareholders' equity on
the accompanying consolidated balance sheets. Realized foreign currency
transaction gains and losses are included in interest and other expense in the
accompanying consolidated income statements.
55
GOODWILL AND OTHER INTANGIBLES:
Goodwill and other intangibles with indefinite lives are periodically tested for
impairment and identifiable intangible assets other than goodwill are amortized
over their estimated useful lives in accordance with SFAS No. 142 Goodwill and
Other Intangible Assets.
IMPAIRMENT OF LONG-LIVED ASSETS:
Long-lived assets, used in the Company's operations are reviewed for impairment
when circumstances indicate that the carrying amount of an asset may not be
recoverable. The primary indicators of recoverability are the associated current
and forecasted undiscounted operating cash flows.
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.
PER SHARE AMOUNTS:
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue Common Stock
were exercised or converted into Common Stock or resulted in the issuance of
Common Stock that then shared in the earnings of the Company.
COMPREHENSIVE INCOME:
Comprehensive income (loss) consists of net income, net unrealized gains
(losses) on available-for-sale securities, foreign currency translation
adjustments, minimum pension liability adjustments and gain (loss) on derivative
activity and is presented in the consolidated statements of changes in
shareholders' 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 December 2003, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 104 (SAB 104), "Revenue Recognition", which supercedes SAB 101,
"Revenue Recognition in Financial Statements". SAB 104's primary purpose is to
rescind accounting guidance contained in SAB 101 related to multiple element
arrangements, superceded as a result of the issuance of EITF 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables". The Company's adoption of
SAB 104 did not have a material effect on its financial statements.
56
NOTE B - ACQUISITIONS AND DISPOSITIONS
On January 27, 2004, the Company completed its purchase of Invivo Corp.
("Invivo"), a publicly traded company that designs, manufactures and markets
patient monitoring systems that measure and display vital signs of patients in
medical settings, particularly during magnetic resonance imaging procedures. The
Company acquired 100% of the outstanding common stock of Invivo for a total
purchase price of $159.2 million which includes professional fees and other
acquisition costs. As a result of the acquisition, Invivo became a wholly-owned
subsidiary of the Company and accordingly, Invivo's results of operations have
been included in the Company's consolidated financial statements since the date
of acquisition. Management believes that the acquisition of Invivo provides the
Company with an enhanced platform for future growth, a substantially expanded
sales team and customer base. The source of funds for the acquisition was a
combination of the Company's available cash and borrowings totaling $67.0
million under its existing $100.0 million unsecured credit facility. The
following represents the allocation of the total purchase price to the assets
acquired and liabilities assumed:
(Dollars in thousands)
----------------------
Consideration:
Cash paid:
Outstanding common shares of Invivo (5,948,323 at $22.00/share) $ 130,863
Outstanding options of Invivo ($22.00/share net of exercise price) 20,141
Transaction costs 5,426
Accruals:
Estimated remaining transaction costs 2,756
---------
Total purchase price $ 159,186
=========
Allocated to:
Working capital, less inventory $ 9,179
Inventory 12,418
Other non-current assets 282
Deferred tax asset, net (2,428)
Property and equipment 7,273
Long-term debt (1,284)
Intangible assets:
Trade name/Trademarks 11,510
Product trade names/trademarks 1,350
Original equipment manufacturer customer (OEM) relationships 5,650
Know-how and core technology 6,660
Product technology and design 2,970
Order backlog 540
Goodwill 105,066
---------
Total $ 159,186
=========
The allocation of the purchase price is based on an estimate of the fair value
of the assets acquired and liabilities assumed. The Company obtained an
independent valuation from a nationally recognized valuation firm to assist in
the allocation of the purchase price.
During the three month period ended May 30, 2004, the Company adjusted its
initial valuation of the assets acquired and liabilities assumed. These changes
resulted in an increase to goodwill of $2.3 million.
As of May 30, 2004, Invivo has manufacturing sites located in Arleta, California
and Orlando, Florida. The Arleta manufacturing operation will be consolidated
into the Orlando plant with the physical relocation expected to commence near
the end of our first quarter of fiscal 2005. 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 associated with ceasing
manufacturing operations in Arleta and the relocation and start-up in Orlando
will be expensed as incurred. The company expects to complete the consolidation
by the end of the calendar year.
57
The following (unaudited) pro forma consolidated income statements have been
prepared in accordance with SFAS No. 141 "Business Combinations" as if the
acquisition of Invivo had occurred on May 27, 2002. The table below includes
$2.5 of acquisition related costs that would not have been incurred by either
company had the acquisition not occurred:
Fiscal Year Ended
-------------------------
May 30, May 25,
2004 2003
----------- -----------
Net sales $ 209,518 $ 200,745
=========== ===========
Net income $ 17,367 $ 9,108
=========== ===========
Earnings per share:
Basic $ 1.04 $ 0.55
=========== ===========
Diluted $ 1.02 $ 0.54
=========== ===========
On October 25, 2001, the Company sold substantially all of the assets of
IGC-Advanced Superconductors (IGC-AS), a division that manufactured low
temperature superconducting wire and tape. The sale was subject to a purchase
agreement, dated October 4, 2001, between the Company and Outokumpu Copper
Products Oy and Outokumpu Advanced Superconductors Inc. (together, the
"Purchasers"). The purchase consideration was arrived at by arms length
negotiation and consisted of $29.8 million in cash paid on October 25, 2001 and
the recording of a note receivable of $4 million, due two years from the closing
date. The net pretax gain from the sale was $15.4 million. The agreement also
includes a six-year strategic supply arrangement under which the Company will
purchase from Outokumpu a substantial portion of the LTS wire it requires
internally, primarily for manufacturing superconducting magnet systems.
In connection with the sale of IGC-AS, the Company has recorded a $1.5 million
liability related to environmental investigation and potential remediation costs
to be incurred by the Company under certain property transfer laws of the State
of Connecticut. Management has estimated this liability based upon information
provided by environmental consultants. The Company is complying with the
requirements of the property transfer laws and believes that the recorded
liability continues to be appropriate. Additionally, the Company recorded an
expense of about $795,000 in fiscal 2002 for stock based compensation related to
the sale.
On February 5, 2002, the Company sold the stock of its subsidiaries IGC-APD
Cryogenics, Inc. and IG-Europe, Ltd. The sale was subject to a stock purchase
agreement between the Company and Sumitomo Heavy Industries (SHI) of Japan dated
January 7, 2002. The sale to SHI included only the helium related business. The
purchase consideration was arrived at by arms length negotiation and consisted
of $9.5 million in cash paid on February 5, 2002. The Company was also able to
withdraw an additional $1.2 million in cash prior to closing. The net pretax
gain from the sale was $10,000. The agreement includes a six-year strategic
supply agreement under which the Company will purchase from SHI shield coolers
it requires internally, primarily for manufacturing superconducting magnet
systems. The mixed-gas portion of the refrigeration systems business previously
conducted at IGC-APD was transferred and integrated into IGC-Polycold, Inc.
Additionally, the Company recorded a $540,000 environmental remediation
liability and stock based compensation expense of $528,000 in fiscal 2002
related to the sale.
58
NOTE C - INVESTMENTS
AVAILABLE FOR SALE SECURITIES:
During fiscal 2004, the Company sold its 1,172,840 shares in KryoTech, Inc. a
privately-held corporation for total proceeds and a gross realized gain of
$114,000. The original investment which was acquired in 1998 at a cost of
$4,750,000 was written down to zero during fiscal 2002 due to a decline in fair
value, which, in the opinion of management was other than temporary.
During fiscal 2003, the Company sold its remaining 850,753 shares of Ultralife
Batteries Inc. for total proceeds of $1,363,000 with a gross realized loss of
$2,108,000. In connection with the sale, a net unrealized holding loss of
$628,000 has been reclassified from accumulated other comprehensive income.
During fiscal 2002, the Company wrote this investment down to fair market value.
The write down amounted to a loss of $2.8 million which in the opinion of
management was other than temporary.
During fiscal 2002, the Company sold its 1,354,785 shares in Powercold
Corporation for total proceeds of $1,300,000 with a gross realized gain on the
sale of $230,000. The gross realized gain was based on specific identification
of such securities. In connection with the sale, a net unrealized holding gain
of $311,000 has been reclassified from accumulated other comprehensive income.
NOTE D - LONG-TERM DEBT
Credit Facility:
On December 17, 2003, the Company entered into a Credit Facility with a group of
commercial lenders under which 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. Both
facilities have maturity dates five years from the effective date of these
loans. Proceeds of this facility were used for the acquisition of Invivo
Corporation including direct costs associated with the acquisition and this
credit facility. This facility replaced the Company's existing unsecured $50.0
million line of credit.
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 is obligated 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 will be deferred and amortized using the straight-line
method over the remaining life of the debt. The proceeds of this increase will
be used for the acquisition of MRI Devices Corporation including costs
associated with the acquisition. See also Footnote B.
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 Credit Facility contains a prepayment provision whereby certain amounts
borrowed must be repaid upon the occurrence of certain specified events and
conditions, including under certain circumstances issuance of any equity,
proceeds from the issuance of any additional debt, certain asset sales,
insurance proceeds and excess cash flows, subject to debt leverage ratios, as
defined in the Credit Facility.
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 agreement
effectively changes the interest rate exposure to a fixed 2.95%. (See also
Footnote O.)
59
In addition, the Company is obligated to pay a commitment fee on the unutilized
portion of the Revolving Loan of 0.30% per annum. 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 various debt to EBITDA, tangible
net worth and fixed charge coverage ratios as defined in the Credit Facility.
Mortgages Payable:
The mortgage payable relating to the Latham, NY facility bears interest at the
rate of LIBOR (2.08% at May 30, 2004 and 1.22% at May 25, 2003) 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 O.)
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
30, 2004, $1.4 million was included in total long-term debt of which $113,000
was payable within one year.
As of May 30, 2004, the Company had the following long-term debt outstanding:
As of
--------------------
(In thousands) May 30, May 25,
2004 2003
------- -------
Long-Term Debt:
Mortgages payable $ 5,744 $ 4,668
Term loan ($25 million) 24,062 --
Revolving line of credit ($105 million) 32,000 --
------- -------
Total long-term debt 61,806 4,668
Less current maturities 4,171 284
------- -------
Long-term debt excluding current maturities $57,635 $ 4,384
======= =======
As of May 30, 2004, the Company had $73 million available under its unsecured
credit facility.
Aggregate maturities of long-term debt as of May 30, 2004 are as follows:
Fiscal year ending:
2005 $ 4,171
2006 8,252
2007 5,426
2008 6,363
2009 36,800
Thereafter 794
--------
$ 61,806
========
60
Interest paid for the years ended May 30, 2004, May 25, 2003, and May 26, 2002,
amounted to $898,000 $410,000, and $479,000, respectively.
NOTE E - SHAREHOLDERS' EQUITY
During fiscal 2003 the Company established a stock option plan for SuperPower
Inc., a wholly-owned subsidiary. The value of the options has been determined by
an independent valuation consultant contracted by the Company. The plan has
authorized 1,200,000 shares at a market value of $1.00 each, as of May 30, 2004,
1,200,000 options were issued. Options granted under the plan will have lives
ranging from five to ten years and vest over periods ranging from one to five
years.
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 3,668,913 shares had been authorized for grant under the 1990
plan and 2,034,000 shares have been authorized under the 2000 Plan. All
remaining grants under the 1981 Plan were exercised during the year ended May
28, 2000. Options granted under the 1990 and 2000 Stock Option and Stock Award
Plans have lives ranging from three to ten years and vest over periods ranging
from one to five years.
Option activity under these plans was as follows:
Fiscal Year Ended
--------------------------------------------------------------------------------
May 30, 2004 May 25, 2003 May 26, 2002
------------------------- -------------------------- -------------------------
Outstanding, beginning of year 1,548,261 $14.361 1,781,515 $ 13.406 2,022,452 $ 9.325
Granted 137,000 26.280 124,188 18.799 448,546 25.272
Exercised (538,886) 8.323 (183,608) 5.738 (644,318) 8.808
Forfeited (35,728) 22.538 (173,834) 16.850 (45,165) 14.055
-------------- -------------- --------------
Outstanding, end of year 1,110,647 18.498 1,548,261 14.361 1,781,515 13.406
============== ============== ==============
Exercisable, end of year 628,197 $14.806 980,227 $ 10.393 801,366 $ 8.746
============== ============== ==============
61
May 30, 2004
----------------------------------------------------------------------------------
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
-------------- ----------------------------------- -----------------------------
$5.7110 - $6.414 24,635 $ 5.8124 3.9 22,533 $ 5.8052
$6.4141 - $9.621 303,898 7.5076 1.5 291,066 7.3714
$9.6211 - $12.828 7,881 10.5424 1.6 7,881 10.0119
$12.8281 - $16.035 10,202 13.6975 1.9 9,151 13.5557
$16.0351 - $19.242 96,018 16.9652 7.3 36,022 16.8754
$19.2421 - $22.449 137,185 20.4300 7.2 79,083 20.5551
$22.4491 - $25.656 293,246 23.8875 7.7 122,316 23.4264
$25.6561 - $28.863 218,086 26.9182 8.5 49,841 25.8356
$28.8631 - $31.402 19,496 30.2833 7.2 10,304 29.4445
-------------- ----------------------------------- -----------------------------
1,110,647 $ 18.4982 5.9 628,197 $ 14.8055
============== ==============
In connection with the license of patent rights, in fiscal 2001 the Company
issued warrants to purchase 105,060 shares of its Common Stock at a price of
$18.98 per share. These warrants were valued at $1,097,000, which was
capitalized as part of the cost of the patent rights and expire in 2007.
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 30, 2004:
Number Exercise Price
of Shares Per Share
--------------- ---------------
2000 Stock Option and Stock Award Plan:
Restricted Stock Awards 842,866 $0.00
Stock Options 740,541 $16.12-$31.40
1990 Stock Option Plan 370,106 $5.71-$26.10
Warrants 105,060 $18.98
---------------
Shares reserved for issuance 2,058,573
===============
62
The following pro forma net income and earnings per share information has been
determined as if the Company had accounted for stock-based compensation awarded
under its stock option plans using the fair value-based method.
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
--------------------------------------
May 30, May 25, May 26,
2004 2003 2002
---------- ---------- ----------
Net income (as reported) $ 14,860 $ 14,917 $ 20,589
Add recorded non-cash stock compensation 375 368 367
Less non-cash stock compensation under SFAS No. 123, net of tax (2,345) (2,211) (2,329)
---------- ---------- ----------
Pro forma Net Income $ 12,890 $ 13,074 $ 18,627
Earnings per Common Share (as reported):
Basic $ 0.89 $ 0.90 $ 1.26
========== ========== ==========
Diluted $ 0.87 $ 0.88 $ 1.19
========== ========== ==========
Earnings per Common Share (pro forma):
Basic $ 0.77 $ 0.79 $ 1.14
========== ========== ==========
Diluted $ 0.76 $ 0.77 $ 1.08
========== ========== ==========
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 2004,
2003 and 2002 was $18.452, $12.565 and $15.647, 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 2004, 2003 and 2002 were 4.7%, 3.0%, and 3.2%,
respectively. The expected volatility of the market price of the Company's
Common Stock for fiscal years 2004, 2003 and 2002 grants was 65.1%, 68.6% and
73.3%, respectively. The expected average term of the granted options for fiscal
2004, 2003 and 2002 was 7.9 years, 7.1 years and 5.1 years, respectively. There
was no expected dividend yield for the options granted for fiscal years 2004,
2003 and 2002.
During the year ended May 30, 2004, the Company issued 17,334 shares of Common
Stock at a fair market value of $25.12 per share as compensation to the Board of
Directors. During the year ended May 25, 2003, the Company issued 19,248 shares
of Common Stock at a fair market value of $19.00 per share as compensation to
the Board of Directors. During the year ended May 26, 2002 the Company issued
15,756 shares of Common Stock at a fair market value of $26.26 per share as
compensation to the Board of Directors.
Equity compensation plan information follows:
63
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......... 1,966,573 $ 10.949 434,593
Equity compensation plans
not approved by shareholders.....
New Hire Incentive Plan 92,000 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 from 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 F - 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 30, 2004 and May 25, 2003, the Company recorded a minimum pension
liability for Bargaining Unit plan of $93,000 and $134,000, respectively. The
following tables set forth the Bargaining Unit plan's funded status at May 30,
2004 and May 25, 2003:
64
(Dollars in Thousands) Bargaining Unit Plan
Fiscal Year Ended
-------------------------------------
May 30, 2004 May 25, 2003
--------------- ---------------
Change in benefit obligation during year:
Benefit obligation at beginning of year $ 802 $ 625
Service cost -- --
Interest cost 45 39
Benefit payments (32) (51)
Administrative expenses -- --
Actuarial (gain) or loss (39) 189
-------- --------
Benefit obligation at end of year $ 776 $ 802
======== ========
Change in plan assets during year:
Fair value of plan assets at beginning of year $ 667 $ 678
Employer contributions -- --
Benefit payments (32) (51)
Administrative expenses -- --
Actual return on plan assets 47 40
-------- --------
Fair value of plan assets at end of year $ 682 $ 667
======== ========
Reconciliation of funded status at end of year:
Funded status $ (93) $ (135)
Unrecognized prior service cost (133) (148)
Unrecognized net (gain) or loss 287 335
-------- --------
Net amount recognized $ 61 $ 52
======== ========
Amounts recognized in the Consolidated Balance Sheet at end of year:
Prepaid benefit cost $ 61 $ 52
Accrued benefit liability, after recognition of additional
minimum liability (154) (187)
Accumulated other comprehensive income, due to
change in additional minimum libility recognition 154 187
Net periodic benefit cost recognized for year:
Service cost $ -- $ --
Interest cost 45 39
Expected return on plan assets (48) (47)
Amortization of net transition obligation -- --
Amortization of prior service cost (15) (15)
Amortization of net gain 10 7
-------- --------
Net periodic benefit cost (income) $ (8) $ (16)
======== ========
Weighted-average assumptions at end of year:
Discount rate 6.25% 5.75%
Expected long-term rate of return on plan assets 7.50% 8.00%
65
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 30, 2004, May 25, 2003 and May 26, 2002 aggregated $566,000, $523,000
and $633,000, respectively.
The Company also maintains supplemental retirement and disability plans for
certain of its executive officers. These plans utilize life insurance contracts
for funding purposes. Expenses under these plans were $21,000, $21,000 and
$28,000 for the fiscal years ended May 30, 2004, May 25, 2003 and May 26, 2002,
respectively. As of May 30, 2004 and May 25, 2003, the Company recorded a
minimum pension liability for this plan of $51,000 and $75,000, respectively.
NOTE G - INCOME TAXES
The components of the provision for income taxes (benefit) are as follows:
Fiscal Year Ended
-------------------------------------------
(Dollars in Thousands) May 30, 2004 May 25, 2003 May 26, 2002
- -------------------------------------------------------------------------------
Current
Federal $ 6,674 $ 5,129 $ 9,303
State 590 453 870
Foreign - - 45
------------- ------------------------------
Total current 7,264 5,582 10,218
Deferred
Federal 573 2,126 (486)
State 59 219 (46)
------------- ------------------------------
Total deferred 632 2,345 (532)
------------- ------------------------------
Provision for income taxes $ 7,896 $ 7,927 $ 9,686
------------- ------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
66
Fiscal Year Ended
-------------------------------
(Dollars in Thousands) May 30, 2004 May 25, 2003
- --------------------------------------------------------------------------------------------
Deferred tax assets:
Inventory reserves $ 1,554 $ 192
Non-deductible accruals 1,443 48
Product warranty reserve 1,044 379
Equity in net loss of unconsolidated affiliate -- 469
Restructuring and other accruals 292 89
Net operating losses and credit carryforwards 4,798 --
------------ --------------
Total gross deferred tax assets 9,131 1,177
Less valuation allowance (191) (191)
------------ --------------
Deferred tax assets 8,940 986
Deferred tax liabilities:
Depreciation and amortization differences (2,485) (220)
Intangibles (11,716) (1,149)
Other, net (456) (451)
------------ --------------
Total gross deferred tax liabilities (14,657) (1,820)
------------ --------------
Net deferred tax (liabilities) assets $ (5,717) $ (834)
============ ==============
67
The foregoing assets and liabilities are classified in the accompanying
consolidated balance sheets as follows:
Fiscal Year Ended
-------------------------------
(Dollars in Thousands) May 30, 2004 May 25, 2003
- --------------------------------------------------------------------------------------------
Net current deferred tax assets $ 4,333 $ 619
Net long-term deferred tax liabilities (10,050) (1,453)
------------ --------------
$ (5,717) $ (834)
------------ --------------
There were no changes to the valuation allowance during fiscal 2004, 2003
or 2002
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 of approximately $23,200,000 in Fiscal 2004, $24,100,000 in Fiscal 2003
and $28,800,000 in Fiscal 2002. 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 30, 2004, as a result of the acquisition of Invivo, the Company acquired
net operating loss carryforwards of $10,240,000 which will expire through 2024.
The Company also has federal credit carryforwards of $367,000 of which $107,000
will expire in 2022 and $260,000 which are not subject to expiration.
The reasons for the differences between the provision of income taxes (benefit)
and the amount of income tax (benefit) determined by applying the applicable
statutory Federal tax rate to income (loss) before income taxes are as follows:
Fiscal Year Ended
(Dollars in Thousands) May 30, 2004 May 25, 2003 May 26, 2002
- ---------------------------------------------------------------------------------------------------------------------
Pretax income (loss) at statutory tax rate
(34.7% for 2004, 34.6% for 2003, and 34.5% for 2002) $ 7,973 $ 7,904 $ 10,446
State taxes, net of Federal benefit 383 443 548
Benefit of Extraterritorial Income exclusion (850) (700) (759)
Amortization of intangibles & other permanent adjustments 136 36 73
Capital loss carryforward used -- -- (1,120)
Change in valuation allowance -- -- --
Other, net 254 244 498
-------- -------- --------
Provision for income taxes $ 7,896 $ 7,927 $ 9,686
======== ======== ========
The company paid income taxes, net of cash refunds received of $4,735,000,
$6,883,000 and $6,200,000 during the years ended May 30, 2004, May 25,2003 and
May 26, 2002 respectively.
68
NOTE H - PER SHARE INFORMATION
The following table provides calculations of basic and diluted earnings per
share:
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
------------------------------------------------------
May 30, 2004 May 25, 2003 May 26, 2002
--------------- --------------- ----------------
Income available to
Common shareholders $ 14,860 $ 14,917 $ 20,589
=============== =============== ================
Weighted average shares 16,697,812 16,519,152 16,336,181
Dilutive potential Common
Shares:
Warrants 19,518 31,404
Stock Options and Awards 278,256 492,605 881,027
--------------- --------------- ----------------
Adjusted weighted average
shares 16,995,586 17,011,757 17,248,612
Net income (loss) per Common Share:
Basic $ 0.89 $ 0.90 $ 1.26
=============== =============== ================
Diluted $ 0.87 $ 0.88 $ 1.19
=============== =============== ================
As of May 30, 2004 the Company had 812,000 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. The vesting schedule in fiscal years
2003 through 2007 is 0%, 0%, 15%, 20% and 65%, respectively. In the current year
the stock is not considered dilutive, as the performance criteria has not been
met. 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 30, 2004 the Company had granted 13,866 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 2004, 2003
and 2002 the Company had recorded expense of $22,500, $7,500, and $0
respectively.
As of May 30, 2004 the Company had outstanding 17,000 shares of restricted stock
to certain employees. These shares are vesting over time ranging from 1 to 3
years. For the fiscal year ended 2004, 2003, and 2002 the Company had recorded
expense of $135,000, $88,000 and $32,000, respectively.
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company leases certain manufacturing facilities and equipment under
operating lease agreements expiring at various dates through October 2019.
Certain of the leases provide for renewal options. Total rent expense was
$1,518,000, $1,238,000 and $1,267,000 for the years ended May 30, 2004 May 25,
2003 and May 26, 2002, 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:
69
(Dollars in Thousands)
Fiscal year:
2005 $ 1,577
2006 1,307
2007 1,283
2008 1,297
2009 1,327
Thereafter 5,960
--------
$ 12,751
========
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 30, 2004, the Company's capital equipment commitments were approximately
$1,917,000.
The Company is subject to certain claims and lawsuits arising in the normal
course of business. In addition, the Company maintains a provision for potential
environmental remediation for businesses disposed of during fiscal 2002. These
provisions are based upon in part, the advice from environmental engineers that
have visited the sites and understand the scope of the project, should a cleanup
be required. These engineers are experienced in such matters and with the
outcome of government rulings in similar circumstances. We have made our
provision based on the estimate provided which did not include any range of
loss. Therefore, we are unable to identify or estimate any additional loss that
is reasonably possible. As of May 30, 2004 and May 25, 2003, the Company had
liabilities for these environmental remediation, penalties and related costs of
$1,853,000 and $1,874,000, respectively. The Company believes these provisions
are adequate based on estimates from environmental engineers. If unexpected
costs related to the environmental issues are incurred additional provisions
will be needed.
NOTE J - SEGMENT AND RELATED INFORMATION
The Company operates in four reportable segments: Magnetic Resonance Imaging
(MRI), Medical Devices, Instrumentation, and Energy Technology. The MRI segment
consists primarily of the manufacture and sale of magnets (by the IGC-Magnet
Business Group) and radio frequency coils (by IGC-Medical Advances Inc.). Until
October 25, 2001 this segment also included the manufacture and sale of
low-temperature superconducting wire (by IGC-Advanced Superconductors, also
known as IGC-AS). The Company sold substantially all of the assets of IGC-AS on
October 25, 2001. The new formed Medical Devices segment includes the design,
manufacture and sale of patient monitoring systems (by recently acquired Invivo
Corp.). These products are used principally in the medical diagnostic imaging
market. The Instrumentation segment consists of the manufacture and sale of
refrigeration equipment (by IGC-Polycold Systems Inc.), used primarily in
ultra-high vacuum applications, industrial coatings, analytical instrumentation,
medical diagnostics and semiconductor processing and testing. This segment also
included IGC-APD Cryogenics Inc., which manufactured and sold refrigeration
equipment. The Company transferred the mixed-gas portion of IGC-APD to
IGC-Polycold and sold the remaining IGC-APD business in a stock sale effective
February 5, 2002. 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.
Inter-segment sales and transfers are accounted for as if the sales or transfers
were to third parties, that is, at current market prices. The Company evaluates
the performance of its reportable segments based on operating income (loss).
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
70
---------------------------------------------------------------------------------
May 30, 2004
---------------------------------------------------------------------------------
Magnetic
Resonance Medical Energy
Imaging Devices Instrumentation Technology Total
-------------- --------------- ---------------- --------------- --------------
Net sales to external customers:
Magnet systems & components $ 110,744 $ 110,744
Patient Monitors $ 22,538 22,538
Refrigeration equipment $ 24,707 24,707
Other $ 6,458 6,458
-------------- --------------- ---------------- --------------- --------------
Total 110,744 22,538 24,707 6,458 164,447
Segment operating profit (loss) 23,018 3,065 3,163 (6,164) 23,082
Total assets 234,048 31,687 9,421 9,779 284,935
Additions to plant, property and equipment 2,510 543 388 2,836 6,277
Depreciation and amortization expense $ 5,923 $ 356 $ 567 $ 1,379 $ 8,225
----------------------------------------------------------------------------------
May 25, 2003
----------------------------------------------------------------------------------
Magnetic
Resonance Medical Energy
Imaging Devices Instrumentation Technology Total
-------------- --------------- ---------------- --------------- --------------
Net sales to external customers:
Magnet systems & components $ 125,081 $ 125,081
Refrigeration equipment $ 20,564 20,564
Other $ 1,760 1,760
-------------- --------------- ---------------- --------------- --------------
Total 125,081 -- 20,564 1,760 147,405
Segment operating profit (loss) 29,771 587 (6,969) 23,389
Total assets 166,570 10,125 8,360 185,055
Additions to plant, property and equipment 2,596 743 973 4,312
Depreciation and amortization expense $ 4,560 $ -- $ 483 $ 974 $ 6,017
71
----------------------------------------------------------------------------------
May 26, 2002
----------------------------------------------------------------------------------
Magnetic
Resonance Medical Energy
Imaging Devices Instrumentation Technology Total
-------------- -------------- ---------------- --------------- --------------
Net sales to external customers:
Magnet systems & components $ 120,738 $ 120,738
Refrigeration equipment $ 26,891 26,891
Other 2,092 $ 3,573 5,665
-------------- -------------- ---------------- --------------- --------------
Total 122,830 -- 26,891 3,573 153,294
Intersegment net sales 3,481 3,481
Segment operating profit (loss) 27,776 (3,272) (6,719) 17,785
Total assets 158,332 10,128 8,765 177,225
Additions to plant, property and equipment 4,544 3,391 3,663 11,598
Depreciation and amortization expense $ 4,522 $ -- $ 568 $ 713 $ 5,803
May 30, 2004 May 25, 2003 May 26, 2002
--------------- ---------------- ----------------
Reconciliation of income before income taxes:
Total operating profit from reportable segments $ 23,082 23,389 17,785
Intercompany profit in ending inventory 22 28 1,860
--------------- ---------------- ----------------
Net operating profit 23,104 23,417 19,645
Interest and other income 790 1,491 1,957
Interest and other expense (1,252) (493) (652)
Gain on sale of division 15,385
Gain on litigation settlement 537
Write down of investments (6,290)
Gain (loss) on available for sale securities 114 (2,108) 230
--------------- ---------------- ----------------
Income before income taxes $ 22,756 $ 22,844 $ 30,275
=============== ================ ================
During fiscal 2004, 2003 and 2002, 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
------------------------------------------
May 30, May 25, May 26,
(Dollars in Thousands) 2004 2003 2002
-------- --------- ---------
Customer A $ 99,297 $ 116,310 $ 110,483
======== ========= =========
72
Net sales by country, based on the location of the customer, for the last three
fiscal years were as follows:
Fiscal Year Ended
------------------------------------------
May 30, May 25, May 26,
(Dollars in Thousands) 2004 2003 2002
-------- --------- ---------
United States $ 48,588 $ 17,983 $ 26,042
Netherlands 95,539 111,915 107,891
Other countries 20,320 17,507 19,361
-------- --------- ---------
Total $164,447 $ 147,405 $ 153,294
======== ========= =========
All significant long-lived assets of the Company are located within the United
States.
NOTE K - 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, including current portion,
was approximately $61,806,000 at May 30, 2004, while the estimated fair value
was $61,806,000, based upon interest rates available to the Company for issuance
of similar debt with similar terms and discounted cash flows for remaining
maturities.
NOTE L - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The accumulated balances
for each classification of accumulated other comprehensive income (loss) is as
follows:
73
Accumulated
Foreign Available for Minimum Other
Currency Sale Securities, Derivative Pension Comprehensive
Items Net of Tax Liability Liability Income (Loss)
-------------- ----------------- --------------- ------------- ------------------
Balances at May 27, 2001 (886) (1,161) -- -- (2,047)
Current period change - 2002 886 523 (268) 1,141
----- ------- ----- ------- -------
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)
===== ======= ===== ======= =======
74
NOTE M - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for fiscal 2004 and 2003 are as follows:
(Dollars in Thousands, Except Per Share Amounts)
Earnings Per:
-------------------------------------
Net Gross Net Basic Diluted
Sales Margin Income Share Share
----------------- ----------------- ----------------- ----------------- -----------------
2004 Quarter Ended
August 24, 2003 $ 22,269 $ 8,485 $ 262 $ 0.02 $ 0.02
November 23, 2003 $ 39,894 $ 15,578 $ 4,410 $ 0.26 $ 0.26
February 22, 2004 $ 43,133 $ 18,442 $ 4,281 $ 0.26 $ 0.25
May 30, 2004 $ 59,151 $ 26,280 $ 5,907 $ 0.35 $ 0.34
2003 Quarter Ended
August 25, 2002 $ 35,180 $ 13,600 $ 3,668 $ 0.22 $ 0.21
November 24, 2002 $ 36,664 $ 14,143 $ 2,655 $ 0.16 $ 0.16
February 23, 2003 $ 37,837 $ 14,631 $ 4,219 $ 0.26 $ 0.25
May 25, 2003 $ 37,724 $ 15,013 $ 4,375 $ 0.26 $ 0.26
NOTE N - GOODWILL AND OTHER INTANGIBLE ASSETS
Effective May 28, 2001, the Company adopted 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. An initial transition impairment test was required as
of May 28, 2001. The Company completed this initial transition impairment test
during the second quarter of 2002 which did not result in any impairment
charges. For purposes of applying FAS No. 142, the Company has determined that
the reporting units are consistent with the operating segments identified in
Note K, 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 2004, the Company acquired Invivo Corp. In connection with the
acquisition, approximately $105,066,000 was recorded as goodwill and $28,680,000
as definitive lived intangible assets that are amortized using the straight line
method over their respective useful lives. (See also Footnote B)
75
The components of other intangibles are as follows:
(Dollars in Thousands)
As of May 30, 2004
------------------------------------------------------------
Weighted
Gross Carrying Accumulated Average Life
Amount Amortization in Years
------------------- ------------------- ----------------
Amortized intangible assets
Production rights $ 8,750 $ 7,027 5.5
Patents 3,776 986 18.0
Unpatented technology 930 930 5.0
Trade names/trademarks 12,470 514 24.6
Product name/trademark 1,350 32 14.0
Know-how and core technology 6,660 278 8.0
Product technology and design 2,970 141 7.0
OEM customer relationships 5,650 157 12.0
Order backlog 540 540 0.3
---------- -------- -------
$ 43,096 10,605 13.7
========== ========
Aggregate amortization expense for the fiscal years ended May 30, 2004, May 25,
2003 and May 26, 2002 was $3,145,000, $1,841,000 and $1,979,000, respectively.
Estimated Amortization Expense:
For the year ending May 2005 $4,129
For the year ending May 2006 $2,671
For the year ending May 2007 $2,538
For the year ending May 2008 $2,538
For the year ending May 2009 $2,527
All intangibles are amortized on a straight line basis.
The changes in the carrying amount of goodwill between May 25, 2003 and May 30,
2004 are as follows:
Magnetic Resonance
(In thousands) Imaging Segment
------------------
Goodwill as of May 25, 2003 $ 13,750
Goodwill acquired on January 27, 2004 with the acquisition of
Invivo Corp. (preliminary purchase price allocation) 102,737
Adjustments to preliminary purchase price allocation 2,329
---------
Goodwill as of May 30, 2004 $ 118,816
=========
Management has evaluated goodwill excluding the goodwill generated from the
acquisition of Invivo for impairment during the quarter ended November 23, 2003
in accordance with SFAS No. 142 and determined no impairment exists. Management
will perform the next annual goodwill impairment test during the quarter ended
November 28, 2004 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.
76
NOTE O - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities" effective
May 28, 2001. SFAS No. 133, as amended, requires that all derivative instruments
be recognized on the balance sheet at their fair value and changes in fair value
be recognized immediately in earnings, unless the derivatives qualify as hedges
in accordance with the Standard. The change in fair value for those derivatives
that qualify as hedges is recorded in shareholders' equity as other
comprehensive income (loss).
The Company has entered into interest rate swap agreements to reduce the effect
of changes in interest rates on its floating rate long-term debt. On May 30,
2004, the Company had outstanding interest rate swap agreements with a
commercial bank, having a notional principal amount of approximately $4.4
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 $243,000 to $(225,000) during the year ended May
30, 2004.
On February 5, 2004, the Company entered into an interest rate swap agreement
with a commercial bank, having a current notional principle amount of $24.1
million. This agreement effectively hedges the Company's interest rate exposure
on its $25 million term loan due on December 31, 2008 to a fixed rate of 2.95%.
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 was $253,000 as of May 30, 2004.
The Company is exposed to credit loss in the event of non-performance by the
other parties to the interest rate swap agreements. However, the Company does
not anticipate non-performance by the counterparties.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. For the fiscal years ended May 30, 2004 and May 25, 2003, the
Company recorded a net other comprehensive gain of $323,000 and a net other
comprehensive loss of $37,000, respectively net of tax for the two interest rate
swap agreements.
NOTE P - SUBSEQUENT EVENTS (UNAUDITED)
On July 16, 2004, the Company completed its purchase of MRI devices Corporation
("MRID"), a privately held company. MRID is a leading manufacturer of radio
frequency (RF) coils 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 million
cash payment, a three-year $5 million promissory note and 1,624,654 shares of
Company common stock with a value of $60,210,000 based on the closing price of
the stock as of the acquisition date. Fifty percent of the stock is restricted
from sale for two years and the other fifty percent for three years. The cash
portion of the consideration was financed through the Company's credit facility
that was recently amended to expand the aggregate committed amount by $30
million to $130 million. Management believes that, in addition to the financial
benefits, the acquisition of MRID will provide an expanded high value add
product portfolio that will serve the broader MRI market. In addition, this
acquisition is expected to benefit from the world-class sales team that the
Company assumed in its acquisition of Invivo Corp. effective January 27, 2004.
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, to be completed in the
form of a fifty percent stock dividend, will be payable on August 17, 2004 to
shareholders of record on July 23, 2004. The following table presents the effect
of the three-for-two stock split on the consolidated balance sheet and earnings
per share had it been effective as of and for the year ended May 30, 2004.
77
Pro-Forma
(Dollars in thousands, except per share data) May 30, 2004
------------
(Unaudited)
SHAREHOLDERS' EQUITY
Common Stock, par value $.10 per share:
Authorized - 40,000,000 shares
Issued and outstanding (including shares in treasury):
May 30, 2004 - 27,076,814 shares $ 2,708
Additional paid-in capital 146,223
Notes receivable from employees (3,421)
Retained earnings 44,873
Accumulated other comprehensive loss (134)
---------
190,249
Less cost of Common Stock in treasury
May 30, 2004 - 1,192,878 shares; (14,680)
---------
TOTAL SHAREHOLDERS' EQUITY $ 175,569
=========
Fiscal Year
Ended
May 30, 2004
------------
Earnings per share:
Basic $ 0.59
=========
Diluted $ 0.58
=========
78
2. SCHEDULE
INTERMAGNETICS GENERAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
- -----------------------------------------------------------------------------------------------------------------------------
Additions
-------------------------
Charged to
Balance at Charged to Other Balance
Beginning of Costs and Accounts- Deductions- at End
DESCRIPTION Period Expenses Describe Describe of Period
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended May 30, 2004
Deducted from asset accounts:
Allowance for doubtful accounts $ 223 $ 160 $ 788 (6) $ (472)(2) $ 699
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
Year Ended May 26, 2002
Deducted from asset accounts:
Allowance for doubtful accounts $ 496 $ 230 $ (433)(2) $ 293
Reserve for inventory obsolescence 4,025 366 (1,870)(4) 1,064
(1,457)(5)
Included in liability accounts:
Product warranty reserve 1,474 697 (845)(1) 1,326
Contract adjustment reserve (3) 228 (170) 58
(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) Write-off or sale of obsolete inventory relating to divested businesses.
(6) Represents reserves acquired from the acquisition of Invivo Corp. (See
Footnote B to the consolidated financial statements).
79
3. EXHIBITS
80
3. EXHIBITS
Exhibit Index
Exhibit
10.17 Restricted Stock Unit Agreement between Intermagnetics General
Corporation and Thomas J. O'Brien
21 Subsidiaries of the Company
23 Consent of Independent Auditors (PricewaterhouseCoopers LLP)
99.1 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.
99.2 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.