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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended May 28, 1995
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[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
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Commission File Number 1-11344
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INTERMAGNETICS GENERAL CORPORATION
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(Exact name of registrant as specified in its charter.)
New York 14-1537454
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 Old Niskayuna Road,
Latham, New York 12110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (518) 782-1122
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock - $.10 par value American Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $181,356,604. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the American Stock Exchange on August 11, 1995. 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 as of August
11, 1995 was 11,151,975.
DOCUMENTS INCORPORATED BY REFERENCE
The information required for Part III hereof is incorporated by reference from
the registrant's Proxy Statement for its 1995 Annual Meeting of Shareholders to
be filed within 120 days after the end of the registrant's fiscal year.
ii
TABLE OF CONTENTS
Part I
ITEM 1. BUSINESS DESCRIPTION ...................................... 1
MAGNETIC PRODUCTS ....................................... 1
CRYOGENIC PRODUCTS ...................................... 7
RESEARCH AND DEVELOPMENT ................................ 9
INVESTMENTS ............................................. 12
PERSONNEL ............................................... 13
EXECUTIVE OFFICERS OF THE REGISTRANT .................... 13
ITEM 2. PROPERTIES ................................................ 14
ITEM 3. LEGAL PROCEEDINGS ......................................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....... 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ....................................... 16
ITEM 6. SELECTED FINANCIAL DATA ................................... 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ................................. 18
RESULTS OF OPERATIONS -- 1995 COMPARED TO 1994 .......... 18
RESULTS OF OPERATIONS -- 1994 COMPARED TO 1993 .......... 20
LIQUIDITY AND CAPITAL COMMITMENTS ....................... 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............... 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE .................................. 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ....... 22
ITEM 11. EXECUTIVE COMPENSATION ................................... 22
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ............................................... 22
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........... 23
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K ...................................... 23
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS ... 23
(b) REPORTS ON FORM 8-K ............................ 26
SIGNATURES ........................................................ 27
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Part I
ITEM 1. BUSINESS DESCRIPTION
Intermagnetics General Corporation ("the Company") designs, develops
and manufactures its products through two significant segments: Magnetic
Products and Cryogenic Products. Magnetic Products consist primarily of low
temperature superconducting ("LTS") magnets, wires and cable. These are
developed and sold through the Company's Magnet Business Unit, and IGC Advanced
Superconductors Division. As a part of its Magnetic Products segment, the
Company also sells permanent magnet products through its Field Effects Division,
and high temperature superconducting ("HTS") products through its Technology
Development Operations. The Company's Cryogenic Products segment consists of low
and extremely low temperature refrigeration equipment, which is designed,
developed, manufactured and sold through the Company's wholly-owned subsidiary,
APD Cryogenics Inc.
MAGNETIC PRODUCTS
General Background
Superconductivity is the phenomenon in which certain materials lose all
resistance to the flow of electrical current when cooled below a critical
temperature. Consequently, devices made with superconductive materials require
special refrigeration equipment, known as cryogenic systems, to maintain the
materials at the very cold temperatures at which superconductivity occurs.
Superconductors offer advantages over conventional conductors by carrying
electricity with virtually no energy loss, and generating comparatively more
powerful magnetic fields.
There are two broad classes of superconductive materials. LTS materials
are metals and alloys that become superconductive when cooled to temperatures
near absolute zero (4.2 Kelvin or minus 452 degrees Fahrenheit). Because of
their superior ductile characteristics, LTS materials are generally used in the
form of flexible wire or tape ("Wire/Tape"). HTS materials are composed of
specific compounds that become superconductive when cooled to temperatures close
to that of liquid nitrogen (77 Kelvin or minus 320 degrees Fahrenheit). Although
large scale commercial applications have not yet emerged for HTS materials, the
Company is currently doing development work on various applications of HTS
technology in the form of less flexible Wire/Tape. See "Research and Development
- New Products" below.
Applications of Superconductivity Technology
The single largest existing commercial application for
superconductivity is the magnetic resonance imaging ("MRI") medical diagnostic
system ("MRI System"). MRI Systems are used in hospitals and clinics for
non-invasive, diagnostic imaging of a patient's body. At the core of an MRI
System is a large, highly engineered magnet system. The magnet system can be
based upon a conventional resistive electro-magnet, a permanent magnet or a
superconductive magnet. Although more expensive to manufacture, superconductive
magnets offer far more powerful, high quality magnetic fields with virtually no
power loss. Higher magnetic field strengths correlate with improved
"signal-to-noise" ratios which can in turn lead to higher quality images. The
commercial market for MRI Systems is estimated at approximately $1.5 billion
worldwide. The worldwide market for MRI Systems has been essentially flat in
recent years as declines in the U.S. market are offset by gains in overseas
markets. The decline in sales in the U.S. market has generally been attributed
to the impact of the national debate on health care reform within the U.S., and
general economic conditions. The MRI industry is increasingly dominated by a
small number of systems integrators worldwide who sell MRI Systems to end-users.
The General Electric Company ("GE"), Siemens Corporation, Philips Medical
Systems Nederlands B.V. ("Philips"), Hitachi Medical Corporation, Toshiba Corp.,
and Picker International Ltd. are the major MRI System integrators. The Company
is a supplier of key components to MRI Systems integrators.
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A less significant but well-developed application for superconductivity
is nuclear magnetic resonance ("NMR") spectroscopy. NMR spectroscopy is used in
the research and testing of the composition and structure of non-ferrous
materials. The Company does not currently compete in this market, although it is
considering doing so in the future. See "Principal Products - Other
Superconductive Magnet Systems" below.
Superconductivity is also applicable to other scientific, defense and
research applications including particle accelerators and light sources. As with
MRI and NMR, superconductive magnets generally compete in these areas on price
and field strength with resistive or permanent magnets.
The Company believes that superconductive Wire/Tape may have
significant application in several other emerging areas. For example, the
electric power industry, the Department of Defense and certain other users of
electric power are currently exploring superconductive magnetic energy storage
("SMES") systems as a means of solving electricity transmission problems such as
power sags and surges. See "Research and Development - New Product Development:
SMES" below. HTS and novel permanent magnet materials may soon permit the
commercially viable manufacture of motors, generators and other power devices
that are more compact yet just as powerful as their conventional counterparts.
See "Research and Development - New Product Development: HTS" below. In
addition, superconductive magnets have transportation uses, which include the
magnetic levitation of vehicles ("MAGLEV") including high-speed trains.
Although the potential applications of superconductivity outlined above
would incorporate technology currently in use or in development by the Company,
there can be no assurances that commercially usable applications will emerge in
the future or that the Company will be able to participate successfully in them.
Principal Products
Within its Magnetic Products segment, the Company produces four
distinct, significant types of products: Superconductive MRI Magnet Systems,
Other Superconductive Magnet Systems, Superconductive Wire and Permanent Magnet
Products.
* Superconductive MRI Magnet Systems. Through its Magnet Business Unit,
the Company sells superconductive MRI magnet systems to MRI Systems
integrators for use in mobile and stationary MRI Systems. During fiscal
years 1995, 1994 and 1993, MRI magnet systems (excluding the cryogenic
shield cooler component) accounted for 46%, 31% and 34%, respectively,
of the Company's net sales.
The Company's superconductive MRI magnet systems are solenoid magnets.
These systems include a superconductive magnet, a cryostat (insulation
device) to maintain the very cold environment necessary to support
superconductivity, and an electronic system that energizes, monitors,
controls and protects the magnet and the cryostat. The Company's
magnets for MRI Systems are fitted with cryogenic refrigerators
supplied by its subsidiary, APD Cryogenics Inc. ("APD"). In fact, the
Company is the only vertically integrated manufacturer of
superconductive MRI magnet systems, which the Company believes is an
important source of competitive strength.
In November, 1993, the Company began introduction of its latest
generation of superconductive MRI magnet systems, which by November,
1994 included three new MRI magnet systems with field strengths of 0.5,
1.0 and 1.5 Tesla (the "New Magnets"). Because the Company's previous
superconductive MRI magnet system, the TM-5, was available only at a
field strength of 0.5 Tesla ("T"), the New Magnets substantially
broadened the Company's product line. Additionally, the Company
believes that the New Magnets offer customers a substantial
technological improvement over other MRI magnet systems currently
available in commercial quantities from its competitors. Specifically,
the Company believes that the New Magnets are lighter, more compact,
easier to site in a hospital or clinic and may have lower maintenance
costs than other available superconductive MRI magnet systems - all
factors that the Company believes are important in an end-user's
selection of an MRI System. To date, these New Magnets have been
favorably received in the marketplace, with the Company's customers
reporting substantial success in selling products incorporating the New
Magnets to the end-user market.
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* Superconductive Wire. Through its IGC Advanced Superconductors
("IGC-AS") Division, the Company manufactures the two principal LTS
materials that are commercially available for the construction of
superconductive magnets: niobium-titanium ("Nb-Ti") wire, and
niobium-tin ("Nb3Sn") wire. In contrast to the relatively large market
for Nb-Ti wire, Nb3Sn multi-filamentary wire, which has been under
development for many years, is sold only in limited quantities. During
fiscal years 1995, 1994 and 1993, sales of superconductive wire
accounted for 24%, 26% and 23%, respectively, of the Company's net
sales.
Nb-Ti superconductive wire is composed of hundreds to thousands of
continuous Nb-Ti filaments embedded in a matrix of copper or other
nonferrous material. The process of manufacturing Nb-Ti wire is
exacting, and some fabrication losses may be incurred.
* Other Superconductive MRI Magnet Systems. Through its Magnet Business
Unit, the Company also designs and builds superconductive magnet
systems for various scientific and defense applications. These special
purpose superconductive magnet systems are typically one of a kind,
custom built systems. In the past several years, these have included a
Large Gap Magnetic Suspension System for NASA, and a prototype ship
propulsion system (similar to that found in the popular novel Hunt for
Red October by Tom Clancy) for the Naval Undersea Warfare Center. The
Company is currently manufacturing a portion of a 45 Tesla Hybrid
Magnet for the National High Magnetic Field Laboratory at Florida State
University ("NHMFL"). The Company is also designing and building a SMES
System which it hopes will ultimately lead to a much larger market for
multiple systems. See "Research and Development - New Product
Development: SMES" below. The Company is also in advanced negotiations
with NHMFL regarding the design and manufacture of a technology-leading
900 MHz superconductive magnet for NMR. Although the Company is not
currently a significant player in the NMR market, it believes that the
successful manufacture of such a cutting edge, 900 MHz superconductive
magnet could position it to enter the high end of the NMR market if it
so chooses.
* Permanent Magnet Products. The Company's Field Effects Division ("Field
Effects") develops and manufactures permanent magnet devices for
various scientific and government defense applications. Field Effects
recently delivered what the Company believes is the world's highest
field permanent magnet "wiggler" for use at Stanford University's
Synchrotron Radiation Laboratory.
Field Effects also sells permanent magnet systems for use in low
field-strength MRI Systems. A maintenance-free magnet and a
self-contained magnetic field with small fringe fields are among the
advantages of these magnet systems. The potentially lower costs of
certain permanent magnet MRI Systems may enable many smaller community
hospitals and hospitals located in developing countries to provide MRI
diagnostic services to their patients. The imaging quality of such
systems is adequate for many diagnostic purposes, but it may not, under
current technology, be comparable to images obtained with higher
field-strength superconductive systems. Sales of such magnet systems to
date have not been significant.
Marketing
The Company markets its magnetic products and technology through its
own personnel, and licenses the manufacture and marketing of superconductive MRI
magnet systems for certain customers to its European joint venture. The Company
also has a wholly-owned European marketing and service subsidiary located in
England, as well as a foreign sales corporation located in Barbados. See Note J
of Notes to Consolidated Financial Statements, included in response to Item 8
hereto.
Export Sales. MRI magnets sold to Philips, a Dutch company, and Hitachi
Medical Systems, a Japanese company, were accounted for as export sales even if
installed in the U.S. On that basis, the Company's net export sales (including
the Cryogenics segment) for fiscal years 1995, 1994 and 1993 totaled $51.6
million, $22.0 million and $31.8 million, respectively, most of which were to
European customers.
5
European Joint Venture. The Company and GEC Alsthom S.A.
("GEC-Alsthom"), a leading French industrial group in the areas of electrical
and electromechanical equipment, have participated since 1987 in a joint venture
named GEC Alsthom Intermagnetics S.A. ("AISA"). AISA manufactures and markets in
France, under license from the Company, superconductive MRI magnet systems. AISA
also manufactures and markets, under license from the Company and GEC-Alsthom,
superconductive wire. The licenses pursuant to which AISA manufactures
superconductive MRI magnet systems and superconductive wire are set to expire in
May, 1997. The Company currently owns twenty five percent (25%) of AISA. The
Company's investment in AISA has been accounted for using the equity method of
accounting. Accordingly, the Company's share of AISA's losses have been charged
to operations to the extent of the Company's investment in AISA.
The Company and GEC Alsthom are currently re-negotiating the agreement
pursuant to which the parties created AISA, and the various licenses under which
AISA conducts its business. The Company does not currently believe that a
failure to reach agreement with GEC Alsthom prior to expiration of the licenses
would have a material adverse impact on the Company's business.
Principal Customers. Most of the Company's sales are through its
Magnetic Products segment, and most of those sales consist of MRI related
products - superconductive MRI magnet systems or superconductive wire for use in
such systems. During the past three fiscal years, sales to customers accounting
for more than 10% of the Company's net sales in such years aggregated
approximately 73% of net sales in fiscal 1995, 74% of net sales in fiscal 1994
and 79% of net sales in fiscal 1993. See Notes I and J of Notes to Consolidated
Financial Statements, included in response to Item 8 hereto.
Substantially all of the Company's sales to the MRI industry are to
four customers, two of which are significant. Philips is the current principal
customer for the Company's MRI products. Pursuant to a five-year agreement
(which expires in June, 1997, subject to automatic extension for successive
one-year periods unless previously terminated in accordance with the agreement),
the Company sells to Philips superconductive MRI magnet systems of various field
strengths for incorporation in Philips' proprietary MRI Systems. The agreement
requires Philips to purchase a certain level of its requirements for such
superconductive MRI magnet systems from the Company at annually determined
prices, with the balance to be acquired from AISA, all in accordance with an
agreement between AISA and the Company. See "Marketing - European Joint
Venture" above. Sales to Philips (including sales by the Cryogenic Products
segment) amounted to approximately 52%, 32% and 46% of the Company's net
sales for fiscal 1995, 1994 and 1993, respectively.
The Company's second principal customer for MRI products is GE. The
Company has an agreement (which expires in December 1996) with GE providing for
the sale of superconductive wire for use in MRI magnets manufactured by GE.
Under the agreement, GE retains the right to decrease or cancel orders upon
notice to the Company and payment for work performed prior to such decrease or
cancellation. GE accounted for approximately 21%, 26% and 16% of the Company's
net sales in fiscal 1995, 1994 and 1993, respectively.
Within the Magnetic Products segment as a whole, the Company's third
most significant customer is the U.S. government or its agencies. Approximately
9%, 16% and 17% of the Company's net sales in fiscal 1995, 1994 and 1993,
respectively, involved direct sales to the U.S. government or its agencies. The
Company also has contracts with private parties that are funded under U.S.
government programs and which are not included in the percentages above. Direct
and indirect U.S. government programs are a principal portion of the Company's
externally funded research and development activities. See "Research and
Development" below. In general, direct and indirect U.S. government contracts
are subject to renegotiation or termination under various circumstances. See
"Backlog" below.
Competition/Market
Across its four principal types of products (see "Principal Products"
above), the Company derives more than 79% of its revenue from manufacturing and
selling superconducting MRI magnet systems, superconductive wire and permanent
MRI magnet systems for use in MRI Systems. Although US demand for MRI Systems
6
appears to be declining and non-US demand growing, the Company believes that
worldwide sales of MRI Systems in 1996 will not be significantly different from
1995.
A significant factor affecting the Company is the fact that MRI Systems
compete with other diagnostic imaging methods such as conventional and digital
X-ray systems, nuclear medical systems, ultrasound, and X-ray CT scanners.
Additionally, most large MRI Systems suppliers perceive that there are technical
advantages to higher field-strength (0.5T or greater) imaging systems based upon
superconductive magnets. However, there are MRI Systems that use resistive
electromagnets and permanent magnets, which are limited by high power
consumption or by basic material properties. As a result, these systems produce
lower magnetic field-strengths than do superconductive magnets. Lower field
strengths generally translate into lower signal-to-noise ratios and lower
quality images. The cost of certain cryogenic liquids, such as helium, may cause
markets in developing countries to prefer the lower operating costs that result
from use of resistive or permanent magnets, despite image quality. Moreover,
improved MRI Systems components have improved signal-to-noise ratios and so
reduced the impact of field strength on image quality. Indeed, several
significant MRI Systems integrators have recently introduced MRI Systems based
upon such low field resistive or permanent magnets.
The Company's Magnetic Products are subject to substantial competition
within each of the markets for its principal products. Moreover, practical and
cost-effective conductors developed as a result of new discoveries in the field
of HTS materials could eventually reduce the market for the Company's current
LTS technology, although the Company (based upon the information currently
available to it) does not believe this is likely to happen in the near future.
See "Research and Development - New Product Development: HTS" below.
* Superconductive MRI Magnet Systems. Within the market for MRI magnet
systems, the Company's competitors fall into two categories: (1) magnet
manufacturers that make MRI magnet systems for sale to MRI Systems
integrators, and (2) MRI Systems integrators that manufacture
superconductive magnet systems for their own use.
The Company considers its principal competitor in the manufacture of
superconductive MRI magnet systems to be Oxford Magnet Technology
Limited ("OMT"), a joint-venture between Siemens AG (51%) and Oxford
Instruments Group, plc (49%) ("Oxford"), a United Kingdom company that
formerly owned 100% of OMT. While OMT has sold substantially more
superconductive MRI magnet systems, has greater production capacity,
and greater financial resources than the Company, the Company believes
it can compete effectively against OMT on both technological and cost
bases.
GE and Toshiba are examples of MRI Systems integrators that manufacture
MRI magnet systems for use in their own MRI Systems. Historically,
these integrators have been unavailable to the Company as customers for
its superconductive MRI magnet systems, notwithstanding the fact that
they represent a substantial portion of the potential market for
superconductive MRI magnet systems. The Company has instead treated
these companies as customers or potential customers for the Company's
component products, such as superconductive wire or cryogenic coolers.
The Company believes that as the market for MRI Systems continues to
mature, its specialization in MRI magnet systems will permit it to
offer superior products at highly competitive prices (made possible in
part through the economies of volume production). The Company hopes
that under these circumstances it could persuade one or more of these
competitors to switch to the Company's superconductive MRI magnet
systems. There is no assurance however that the Company's strategy will
succeed in light of the fact that these competitors are
well-capitalized, engaged in substantial research and development, and
appear committed to the manufacture of what they view as an important
and proprietary component of their MRI Systems.
* Superconductive Wires. The single largest market for superconductive
wire is MRI. In fact, most of the superconductive wire manufactured by
the Company is used to manufacture superconductive MRI magnets (either
internally by its own Magnet Business Unit, or externally by other
customers). Regarding its superconductive wire products, the Company
believes that it, Oxford Superconducting Technology, and Supercon, Inc.
are the major suppliers of Nb-Ti in LTS wire form for the domestic
(U.S.) markets. The Company also believes that the three of them along
7
with Teledyne S.C. (a subsidiary of Teledyne Wah Chang) are the major
suppliers of Nb3Sn bulk processed superconductive materials for the
domestic markets. There are several foreign manufacturers of Nb-Ti
superconductive materials in wire form; none of them have been a
significant factor in the domestic market.
The Company's prices for superconductive materials are generally
competitive, and the Company believes that product quality and the
ability to meet delivery schedules are factors important to its market
position.
* Other Superconductive Magnet Systems. With respect to Other
Superconductive Magnet Systems, the Company has no single identifiable
competitor. Historically, the Company has competed against many
different companies, domestically and internationally, for the
opportunity to design and build non-MRI superconductive magnet systems.
The Company expects that competition for such opportunities will vary
on a case to case basis, but that such competition will generally focus
on price and technology. While the Company believes that it can remain
competitive within this area, there can be no assurances that the
Company will continue to be successful.
* Permanent Magnet Products. In the development and manufacture of
permanent magnets for MRI Systems, the principal competitor of the
Company's Field Effects Division is Sumitomo Special Metals Co., Ltd.
("Sumitomo"), a Japanese company which was the first company to market
such magnets utilizing neodymium boron iron (NdBFe) material. The
Company believes that Sumitomo's primary customer for its permanent
magnet products is Hitachi.
The Company believes that patents are not a significant competitive
factor in the conduct of its business in this segment. While the Company does
not have any substantial patent protection in this segment, it owns, or is a
licensee under, a number of patents relating to superconductive materials, the
manufacture of superconductive materials, and the permanent magnet systems
manufactured by the Field Effects Division.
Backlog
The Magnetic Products backlog at July 30, 1995 was approximately $33.7
million, compared to approximately $28.1 million on July 30, 1994. Approximately
24%, 29% and 36% of this segment's backlog at July 30, 1995 were represented by
orders from GE, the U.S. government or its agencies and Philips, respectively.
Most of the July 30, 1995 backlog is expected to be completed in fiscal 1996.
However, the amount of backlog is not necessarily indicative of future revenues
because the Company's backlog in this segment is subject to variations from time
to time as products are manufactured and new orders are received.
Backlog represents orders believed by the Company to be firm on the
date indicated, subject, in certain cases, to future agreement on delivery dates
and technical specifications. The Company's contract with GE for superconductive
wire, which expires December 31, 1996, contains provisions allowing GE to
increase, reduce or cancel orders, or delay delivery dates, subject to certain
restrictions and payments. Direct contracts with the U.S. government (including
cost-plus contracts) are included in the backlog figures at the contract amount
less amounts previously recognized as revenue. Approximately $4,071,000 of such
backlog has not yet been funded by the government. Certain direct and indirect
(as a subcontractor) contracts with the U.S. government have provisions
permitting the government to perform a final audit of such contracts and
possibly seek a downward adjustment of the contract price on the basis of such
audit and also contain provisions permitting termination for the convenience of
the government. Upon such termination, the Company would be entitled to be
compensated for costs incurred, including reasonable termination costs. Certain
of such contracts may also be subject to termination in the event that more than
5% of the Company's outstanding shares become subject to foreign ownership.
Raw Materials and Inventory
The Company's manufacturing process for superconducting and permanent
magnet systems requires production periods of up to six months. Additionally,
certain materials and parts used in production must be ordered well in advance
8
of required delivery dates. The Company's investment in inventories for
production of MRI magnet systems is based primarily on production schedules
required to fill existing and anticipated customer orders. In addition, the
Company maintains sufficient inventories of raw materials in order to produce
small orders of superconductive wire.
Nb-Ti raw material required for production of Nb-Ti superconductive
wire is purchased from several different sources. The Company has not
experienced substantial difficulty in obtaining such materials.
The Company's Field Effects Division obtains its permanent magnet
(ferrite) materials from Arnold Engineering Company located in Sevierville,
Tennessee. There are alternative qualified domestic and international sources
for these ferrite materials, but the industry is currently running at capacity
in response to strong demand from the automotive industry. The principal effect
of this strong demand has been to increase the price for ferrite materials and
lengthen the Company's lead time for ordering the substantial quantities of this
material required for its products. In light of the current low level of demand
for its permanent magnet products and efficient management of its needs, the
Company does not at this time believe that the supply of permanent magnet
materials would have a substantial impact on its business.
Warranty
The expense to the Company to date for performance of its warranty
obligations has not been significant.
CRYOGENIC PRODUCTS
Principal Products
The Company's subsidiary, APD, produces specialty cryogenic
refrigeration equipment for use in medical diagnostic equipment, laboratory
research and semiconductor manufacturing. These products include:
* MRI Products. APD produces specialized shield coolers and recondensers
(refrigerators) that reduce or eliminate liquid helium and liquid
nitrogen boil-off during normal operation of conventional
superconductive MRI magnet systems. Recondensers are particularly
important where helium prices are high because they greatly reduce
periodic charges to replace liquid helium lost through boiling (known
as "boil-off"). The Company's Magnet Business Unit uses APD
refrigerators for its superconductive MRI magnet systems. In addition,
APD sells these refrigerators to other manufacturers of superconducting
MRI magnet systems. APD licensee Daikin Industries, Ltd. ("Daikin"), is
a Japanese company that produces shield coolers and other cryogenic
products for the Japanese market. It has captured a significant portion
of that market for shield coolers.
* Laboratory Cryogenic Systems. Laboratory cryogenic systems are sold to
government, university and industrial research laboratories for use in
applications such as spectroscopy, X-ray diffraction and narrow gap
magnet studies, where they are used to reduce the temperatures of
materials under study. These products generate cryogenic interface
temperatures ranging from 2 Kelvin to 77 Kelvin using liquid nitrogen
or helium open-cycle transfer systems or closed-cycle refrigeration
systems.
* Cryogenic Vacuum Pumps (Cryopumps). Cryopumps are used principally in
the semiconductor industry, but have other industrial and research
applications. APD sells cryopumps principally to manufacturers of
semiconductor production equipment. Through a joint effort with Daikin,
APD recently introduced the Marathon(R) line of cryopumps. The
product line is tailored for semiconductor processing equipment and is
supported by a comprehensive world-wide sales and service network.
* CRYOTIGER(R) Refrigeration Systems. APD also sells a line of
specialized cryogenic refrigeration systems under the registered
tradename "CRYOTIGER". These refrigeration systems are intended to
provide refrigeration optimization in the range of 70 Kelvin to 120
Kelvin for a broad range of applications. The first application of
CRYOTIGER systems has been in electronic detector systems. Because the
CRYOTIGER line is a closed-cycle refrigeration system, it competes
9
principally against liquid nitrogen coolers, which in contrast to the
CRYOTIGER line, requires the continued purchase of liquid nitrogen.
Marketing
The Company markets its MRI products in this segment through a direct
sales force based in APD's Allentown, Pennsylvania headquarters, APD's West
Coast office in Sunnyvale, California and a European office near Oxford,
England. APD also markets its laboratory systems and cryopump products through
scientific and medical equipment sales representatives and distributors. APD
also has a world-wide partnership with Daikin pursuant to which the parties sell
common cryopumps under the "Marathon" trademark in well-defined territories.
CRYOTIGER refrigeration systems are sold through APD's direct sales force, as
noted above, and through scientific equipment sales representatives.
Competition/Market
The Company's Cryogenic Products are subject to substantial competition
within each of the markets for its principal products.
* MRI Products. The Company considers its principal competitor in the
manufacture of recondensers and shield coolers to be Leybold AG
("Leybold"). Leybold is headquartered in Germany, and has sold
substantially more recondensers and shield coolers than the Company.
Moreover, Leybold has greater production capacity, greater financial
resources than the Company, and successfully locked up many of APD's
potential customers in multi-year supply agreements. The Company
nonetheless believes that it can compete with Leybold on both
technological and cost bases.
* Laboratory Cryogenic Systems. With respect to Laboratory Cryogenic
Systems, the Company has no single identifiable competitor.
Historically, the Company has competed against many different
companies, domestically and internationally. The Company generally
competes in this area on the basis of price and product quality.
* Cryogenic Vacuum Pumps (Cryopumps). The Company believes Helix
Technology Corporation ("Helix") (which markets its products under the
names "CTI Cryogenics" and "CTI") to be the world leader in marketing
cryopumps. The Company believes that Helix controls 50% or more of the
world market for cryopumps. Notwithstanding Helix's market
predominance, the Company believes that it can compete with Helix on
technological and equipment performance bases.
* CRYOTIGER Refrigeration Systems. Because the CRYOTIGER line is based
upon proprietary technology recently developed and patented by APD, the
Company feels that there is a significant opportunity for this product
in the marketplace. CRYOTIGER refrigeration systems presently compete
against certain closed-cycle machines, known as Sterling refrigerators,
which the Company believes are more costly and less reliable than its
CRYOTIGER product. Additionally, CRYOTIGER refrigerators, which are
closed-cycle refrigeration systems, compete principally against
open-cycle coolers that rely on reservoirs of liquid nitrogen which
must be replenished periodically. Consequently, although the initial
purchase price for a CRYOTIGER refrigerator may exceed the price of a
comparable liquid nitrogen cooler, this higher initial cost will be
offset by lower operating and maintenance costs and greater ease of
use.
Backlog
Due to APD's relatively short production cycle, the Company does not
consider backlog to be material to an understanding of APD's business.
Raw Materials and Inventory
APD purchases certain major components for its products from single
sources, but the Company believes alternate sources are available. APD generally
maintains a sufficient inventory of raw materials, assembled parts, and
partially and fully assembled major components to meet production requirements.
10
Warranty
The expense to the Company to date for the performance of its warranty
obligations has not been significant.
RESEARCH AND DEVELOPMENT
General Research and Development
The Company believes its research and development activities are
important to its continued success in new and existing markets.
Externally-funded development programs have directly increased sales of design
services and products and, at the same time, assisted in expanding the Company's
technical capabilities without burdening operating expenses. Under many of the
Company's government contracts, the Company must share any new technology
resulting from such contracts with the government, which would include the
rights to transfer such technology to other government contractors; however, the
Company does not currently expect such rights to have a material adverse effect
on it.
Previously, a substantial portion of research and development
expenditures have been covered by external funding, principally from the U.S.
government. In fiscal 1995, approximately 53% of total research and development
activities were paid by such external programs compared to approximately 78% and
86% in fiscal years 1994 and 1993, respectively. During fiscal years 1995, 1994
and 1993, product research and development expenses, including those of the
Cryogenic Products segment, were as follows:
Fiscal Year Ended
May 28, 1995 May 29, 1994 May 30, 1993
----------------- ------------- ------------
Internally-funded $ 5,005,000 $ 2,603,000 $ 2,021,000
Externally-funded 5,539,000 7,483,000 12,203,000
------------------ ------------- ------------
Total $ 10,544,000 $ 10,086,000 $ 14,224,000
================== ============= ============
The Company believes that, apart from continued reductions in federal
spending on research and development, two other trends may limit external
funding from U.S. government sources. First, and especially in the context of
HTS technology, government contracts are emphasizing cost-sharing, which
requires the awardee to contribute 20% to 50% of the total cost of the
development effort. This cost-sharing requirement may limit the Company's
reliance on the government as a significant source of research and development
funds.
Second, the Company's continued growth will soon place it outside the
definition of a "small business" for U.S. government funding purposes. "Small
businesses" are defined as concerns which employ fewer than 500 employees. While
a sign of the Company's overall success, the growing employee count will make
the Company ineligible for certain government-sponsored research and development
programs for small businesses, such as Small Business Innovation Research
("SBIR") grants. The Company completed fiscal year 1995 as a small business with
an employee count of 494. During its fiscal year 1995, the Company won SBIR
grants totaling approximately $5,004,000, all of which will be completed even if
the Company loses its small business status prior to such completion.
Although external funding for research and development has declined in
recent years, the Company can experience, in any given year, significant
increases or decreases in external funding depending on its success in obtaining
large dollar funded contracts.
11
New Product Development: HTS Materials.
The Company believes that HTS materials in the form of Wire/Tape may,
in the future, have a substantial impact on commercial markets and applications
for superconductors. In particular, the Company believes HTS materials could be
suitable for larger scale specialized electric power applications and high field
magnets in five to ten years, depending upon further advances. Accordingly, the
Company's research and development activities are focused on: (1) converting HTS
materials into usable Wire/Tape with acceptable current densities, and (2)
creating devices and equipment based upon such Wire/Tape.
Because the Company believes that its expertise in processing LTS
materials into wire and tape is applicable to the processing of HTS materials,
the Company has focused its efforts on the development of HTS Wire/Tape. The
Company does not currently conduct substantial research and development on the
use of HTS materials in the form of thin films. Additionally, although the
Company has done some basic research on identifying new HTS materials, the
Company does not believe it currently has the resources to make a meaningful
contribution in the highly competitive and costly endeavor of identifying new
HTS materials.
The Company's activities in this area have been funded primarily
through government-supported research and development programs, including joint
research agreements. Near the end of the 1995 fiscal year, the Company's joint
development agreement with the U.S. Department of Energy's Argonne National
Laboratory to develop commercial HTS wire products from Bismuth-based materials
was extended. As part of the two-year project, the Department of Energy will
provide the Company with $500,000 in research and development funds, which the
Company will match. The project's goal is to implement a prototype manufacturing
process that would improve the properties and reproducibility, and reduce the
costs of manufacturing longer HTS wire lengths. An earlier collaboration between
the Company and Argonne resulted in the successful manufacture of up to
800-meter lengths of multifilament conductor and high-performance monofilament
tape conductors in lengths exceeding 100 meters. The long lengths of conductor
were used to fabricate an engineering model magnet that generated a then-world
record of 2.6T.
While the Company expects to continue its focus on Bismuth-based HTS
materials, it is seeking to broaden its technology base by developing wires
using Thallium-based materials, which show promise of even higher
superconducting performance than their Bismuth-based counterparts.
The Company does not believe its current operations depend upon
successful market acceptance of HTS-based products, nor are the Company's
continued operations necessarily dependent on its success in the HTS marketplace
even if HTS-based products do become commercially viable. However, if technical
problems are solved and HTS materials become feasible for commercial
applications in fields in which the Company competes, then the Company could be
adversely affected unless it is able to develop products using HTS materials.
Accordingly, while representing a relatively high-risk, long-term investment of
its resources, the Company perceives HTS technology as an important future
commercial opportunity of major strategic significance. Consequently, the
Company expects to continue to work in this area.
Because of the perceived high commercial potential of HTS materials,
HTS research is a highly competitive field, and currently involves many
commercial and academic institutions that may have more substantial economic and
human resources to devote to HTS research and development than the Company. In
addition, due to the proliferation of patents and patent applications, there can
be no assurance that the Company will be able to compete effectively in this
area due to the potential patent position of competitors.
New Product Development: SMES
As referenced above, the Company recently was awarded a contract to
build a micro superconductive magnetic energy storage ("SMES") system for the
U.S. Air Force. The Company believes the contract award represents an
opportunity to enter a new market with promising commercial applications for
superconductive magnets. A SMES acts as an electro-magnetic storage system that
protects critical power loads from interruptions, spikes and sags. Utilities
currently minimize power interruptions through use of Uninterruptible Power
Supplies (UPS), which may use tens of hundreds of conventional lead acid
batteries per system, require costly maintenance, and present an environmental
hazard upon disposal. By contrast, a micro SMES is more energy efficient, easier
to maintain, has a life of more than 20 years, and is environmentally friendly.
12
While the potential SMES market appears substantial, there can be no assurances
that the market will develop or that the Company will be able to successfully
build on its entrance into that market through the award of the micro SMES
system contract. Additionally, the Company faces other competitors interested in
the SMES market, some of which may have superior resources and patent positions.
New Product Development: Refrigerants
The Company believes that its FRIGC(R) family of environmentally
acceptable refrigerants has broad-based commercial potential as replacements for
ozone-depleting chlorofluorocarbons ("CFC's") currently being used as
refrigerants. FRIGC refrigerants consist of various blends of refrigerant
chemicals, each custom designed for a specific application. The Company has
demonstrated various custom tailored blends of its FRIGC refrigerant under
different operating conditions in automobiles, household refrigerators, home and
commercial air conditioners and commercial freezers.
The Company's FR-12(R) refrigerant is the first commercial product
from its FRIGC family of refrigerants. The Company developed FR-12 refrigerant
for use as a replacement for Freon R-12 in the after-market for automobile air
conditioning refrigerants. (Most post-1994 automobile air conditioning systems
have been designed for use with HFC-134a refrigerant. HFC-134a, however, cannot
be used in most pre-1994 R-12 automotive air conditioning systems without
substantial and costly changes - changes not required for use of FR-12
refrigerant.) Although this market for pre-1994 automobile air conditioning
systems is finite in nature, the Company believes that by entering a niche but
substantial market with limited interest to its competitors now, it will gain
valuable experience and name recognition that will greatly facilitate future
commercialization of other FRIGC refrigerants for other applications. The
Company also believes that this market niche could prove significant as
production of R-12 in the United States ceases after December 31, 1995, and
existing stockpiles of R-12 are steadily depleted over the next several years.
The Company has identified at least four important factors upon which
successful commercialization of FRIGC FR-12 refrigerant will depend. There can
be no assurances, however, that even if the Company succeeds with respect to
these four factors that FRIGC FR-12 refrigerant will be accepted by the market
or otherwise prove a commercial success. The Company believes that to
successfully commercialize FR-12 refrigerant it must secure:
* EPA listing of FR-12 refrigerant as an acceptable substitute for R-12.
Effective as of July 13, 1995, the Company successfully obtained final
EPA listing of FRIGC FR-12 refrigerant as an acceptable substitute for
R-12 in mobile air conditioning applications. In this regard, FR-12
refrigerant met or exceeded the EPA's listing requirements, including
proof that FR-12 refrigerant meets ozone depletion and global warming
targets, and that FR-12 refrigerant is neither toxic nor flammable
under use conditions. Use of FR-12 refrigerant is nonetheless subject
to certain standard conditions (primarily the use of special fittings
which are required for all refrigerants) to prevent unintended mixing
of different refrigerants and facilitate recovery of refrigerants for
recycling.
* Patent protection for FR-12 refrigerant. In June, 1995, the U.S. Patent
Office issued to the Company U.S. Patent # 5,425,890 entitled
Substitute Refrigerant For Dichlorodifluoromethane Refrigeration
Systems. This patent, which broadly protects FRIGC FR-12 refrigerant,
covers the specific formula approved for listing by the EPA. The
Company is currently pursuing foreign protection in targeted markets.
* A reliable, high quality source of FR-12 refrigerant. On May 11, 1995,
the Company signed an agreement with Schenectady International, Inc.
("SII") for the manufacture of FR-12 refrigerant. The Company believes
that the agreement with SII, a privately held, multinational chemical
company with thirteen (13) manufacturing facilities in ten (10)
countries, will assure a quality supply of FR-12 refrigerant. SII's
ability to produce commercial quantities of FR-12 refrigerant will
depend on the availability of raw materials, which are manufactured by
a small number of companies, including E.I. du Pont de Nemours & Co.
("duPont"), Allied Signal Corporation and Ausimont (Italy). Due to the
small number of suppliers, there are no assurances the Company will be
able to produce FR-12 refrigerant at a competitive cost.
13
* A marketing and distribution network targeted on identified niche
opportunities. With respect to marketing and distribution, the Company
has initially targeted automobile and truck fleet operators for the
first commercial introduction of FRIGC FR-12 refrigerant. In fact, the
Company delivered FR-12 refrigerant against its first significant order
on May 6, 1995 to Tinker Air Force Base ("Tinker"). Tinker is using the
refrigerant in its vehicle fleet, and is exploring its use in other
applications, including aircraft, ground support equipment and
temperature carts. The Company believes that sales of FR-12 refrigerant
to fleet operators will accelerate its market penetration by
concentrating its sales efforts on customers that will realize the most
significant cost savings.
Notwithstanding its success to date with FR-12 refrigerant, the Company
does not have extensive experience marketing, selling and distributing
refrigerants. Consequently, the Company continues to examine its need
for a strategic partner to assist it with commercialization of FRIGC
FR-12 refrigerant. There can be no assurances that the Company will be
successful in marketing and distributing FR-12 refrigerant, either on
its own or with the assistance of a strategic partner, or that the
market will accept FR-12 refrigerant as a viable alternative to R-12.
Under a letter of intent with the Chrysler Corporation ("Chrysler")
entered early in fiscal year 1994, Chrysler indicated its interest in purchasing
quantities of FRIGC refrigerant, although such purchases were contingent upon
the Company meeting regulatory approvals as well as performance and price
targets. While the Company has recently made substantial progress in initiating
commercialization of its FRIGC refrigerant, as noted above, there can be no
assurances that the Company will meet the various remaining contingencies set
forth in the letter of intent, or that Chrysler's requirements for FRIGC
refrigerant will materialize as envisioned in light of duPont's extension of the
production of R-12 refrigerant through December, 1995. The Company does not
currently believe that Chrysler will purchase material quantities of FRIGC
refrigerant during the Company's fiscal year 1996.
The Company currently expects that, over the long run, it will
introduce other refrigerants from its FRIGC family of refrigerants for other
carefully targeted market opportunities. The Company believes that its
refrigerant technology - which is an outgrowth of its expertise in cryogenic
technology - may give it a superior insight into refrigerant design and more
flexibility in designing refrigerating hardware. Nonetheless, many other
companies and research facilities currently are working to identify
environmentally acceptable alternatives to the existing CFC- and HFC-based
refrigerants. Many of these companies are larger, better financed, better
staffed and more experienced in the refrigerant business than the Company. There
can be no assurances that the Company's future refrigerants will meet all
relevant regulatory and commercial requirements or that they will be accepted in
the market.
Moreover, the Company's success in developing and commercializing FRIGC
refrigerant and associated technology will depend on its continued ability to
obtain patents, maintain trade secret protection and operate without infringing
on the proprietary rights of third parties. The Company expects to continue
filing additional patent applications relating to its new refrigerant technology
in the near future. No assurance can be given that any additional patents will
issue with respect to patent applications filed or to be filed by the Company.
Furthermore, even if such patents issue, there can be no assurance that any
issued patents will protect against competitive products or otherwise be
commercially valuable.
INVESTMENTS
ULTRALIFE BATTERIES, INC.
The Company owns 1,060,753 shares of the common stock (approximately
14% of the outstanding common stock) of Ultralife Batteries, Inc. ("Ultralife").
Headquartered in Newark, N.Y., Ultralife produces lithium batteries that are the
same size and voltage as standard batteries, but have double the operating life
and a longer shelf life (up to 10 years) than alkaline or zinc carbon batteries.
These batteries currently command a premium price in the market for long-life
batteries.
14
Ultralife focuses on markets which require increased energy density and
extended shelf life. The Company is represented on Ultralife's Board of
Directors, and the companies have entered an agreement under which the Company
is paid for providing certain technical advice and consulting services to
Ultralife. To date, the amount of money received by the Company under this
agreement has not been material.
Ultralife completed an initial public offering of its common stock on
December 31, 1992, and a second public offering on December 9, 1994. Although
the Company elected to offer a portion of its Ultralife shares in connection
with the underwriter's overallotment right in Ultralife's second public
offering, this overallotment right was never exercised, and the Company
ultimately sold none of these shares. The Company may in the future seek to sell
all or a portion of these Ultralife shares.
Ultralife's common stock is traded on the NASDAQ National Market System
under the symbol ULBI. On July 31, 1995, Ultralife's common stock closed at a
price of $16.50 per share.
SURREY MEDICAL IMAGING SYSTEMS LIMITED
As of July 31, 1995, the Company owns 354,223 shares of the outstanding
ordinary shares (approximately 23%) of Surrey Medical Imaging Systems Limited
("SMIS"). Located in Guildford, England, SMIS focuses on developing and
marketing electronics and software for MRI and nuclear magnetic resonance
spectroscopy applications. It also supplies equipment using X-ray and gamma ray
Computerized Tomography ("CT") and Ultrasonics for use in non-destructive
testing of a variety of materials.
The Company believes that complete magnetic resonance system products
can be built by combining SMIS' systems electronics and software with
Intermagnetics' magnet systems. In this way, Intermagnetics and SMIS are able to
address certain niche markets in both the clinical and industrial sectors which
would be largely unavailable to the parties separately. Further, access of each
party to a broader customer base, and augmented market intelligence, are
expected to provide a greater sales potential for each of the parties' products
individually. To date, the parties have collaborated on a variety of different
opportunities including most recently a successful joint bid to develop a
non-destructive NMR System for food analysis.
As SMIS is privately held, the market value of this investment is not
readily determinable.
PERSONNEL
At May 28, 1995, the Company employed 494 people.
Within the Magnetic Products segment, the production and maintenance
employees of the Company's IGC-AS Division, which is located in Waterbury,
Connecticut, are represented by the United Steelworkers of America ("United
Steelworkers"). The Company and the United Steelworkers negotiated a five year
collective bargaining agreement, effective May 31, 1993. Within the Cryogenic
Product segment, the production employees of the Company's subsidiary, APD,
which is located in Allentown, Pennsylvania, are also represented by a labor
union, the International Association of Machinists and Aerospace Workers
("IAMAW"). The Company and IAMAW negotiated a three-year collective bargaining
agreement, effective August 8, 1994.
There is great demand for trained scientific and technical personnel,
and the Company's growth and success will require it to attract and retain such
personnel. Many of the prospective employers of such personnel are larger and
have greater financial resources than the Company and may be in a better
position to compete with the Company for prospective employees.
15
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are:
Name Position Age
---- -------- ---
Carl H. Rosner Chairman of the Board of Directors, 66
President and Chief Executive Officer
Charles J. Dannemann Senior Vice President-Operations 55
Michael C. Zeigler Senior Vice President-Finance 48
& Chief Financial Officer
Bruce A. Zeitlin Vice President-Materials Technology 52
Gary L. Hordeski APD Cryogenics Inc. - Vice President, 45
General Manager
Ian L. Pykett Technology Development Operations 42
- Vice President
Richard L. Rhodenizer Magnet Business Unit - Vice President 58
Mr. Rosner has been Chairman of the Board of Directors of the Company
since the Company's formation in 1971 and before that headed the Superconductive
Products Operation of GE. A principal founder of the Company, he also served as
the Company's President and Chief Executive Officer until December 1978 and
October 1981, respectively. He was renamed President and Chief Executive Officer
in 1984, and has held such position since then.
Mr. Dannemann was named Senior Vice President-Operations on May 1,
1995. Before joining the Company he was a corporate Vice President at Spar
Aerospace, Ltd., in Toronto, Canada from May, 1984, and before that spent
seventeen years at General Electric in aerospace marketing and business
development.
Mr. Zeigler was appointed Senior Vice President-Finance and Chief
Financial Officer of the Company in September 1993. He previously served as Vice
President-Finance and Chief Financial Officer of the Company from June 1987
until his appointment as a Senior Vice President, and served as the Company's
Controller from June 1985 through June 1987.
Mr. Zeitlin has been employed by the Company in various capacities
since 1974. He has been responsible for marketing superconductive materials
since 1982, and became Vice President-Materials Technology of the Company in
1985. Mr. Zeitlin has also headed the Company's superconductive materials
operations (now IGC-AS) since 1987.
Mr. Hordeski was appointed APD Cryogenics Inc. - Vice President and
General Manager in 1990. Before joining the Company, he was employed by Leybold
Vacuum Products, Inc. from 1982 to 1990, most recently as Vice President of
Marketing.
Dr. Pykett was appointed Technology Development Operations - Vice
President in 1991. Prior to joining the Company, he had been President and Chief
Executive Officer of Advanced NMR Systems, Inc., a diagnostic imaging company he
co-founded in 1983.
Mr. Rhodenizer was appointed Magnet Business Unit - Vice President in
1991. He originally joined the Company in 1971 as a project engineer and then
served as Manager of Cryomagnetics and Manager of Projects until 1977. Between
1977 and 1990, Mr. Rhodenizer was employed by General Electric in a succession
of management positions, culminating with the position of Manager,
Superconducting Applications Program.
16
ITEM 2. PROPERTIES.
Since March, 1994, the Company's corporate offices, MBU and HTS
Laboratory have been located in 145,810 square feet of newly constructed or
newly renovated space located in Latham, New York (the "Latham Facility"). The
Company financed the construction of the Latham Facility using existing cash
reserves. In April, 1994, the Company executed a promissory note in the
principal amount of $6,500,000 payable to a bank, which note was secured by a
collateral assignment of a deposit account containing proceeds from a $6,500,000
loan from the bank. In August, 1994, the Company executed a mortgage in favor of
the bank on the Latham Facility (including the land on which it is sited, and
certain fixtures associated with the Latham Facility) in the amount of the
unpaid principal due on the promissory note and the collateral assignment on the
deposit account was released. The loan which is secured by the mortgage bears
interest at the rate of 7.5%, and matures in May, 2001.
The Company's production facilities for superconductive materials are
located in Waterbury, Connecticut in premises of approximately 212,700 square
feet (of which 57,900 square feet are presently being used) pursuant to a thirty
year prepaid lease which expires in December 2021. The facility's equipment
includes a drawbench with a pulling force of up to 150,000 pounds and a length
of approximately 400 feet. The Company believes that this drawbench is one of
the largest in the world.
The Field Effects Division operates out of leased premises totaling
12,600 square feet in Acton, Massachusetts. Field Effects' facilities are
subject to a one year lease expiring July 1, 1996. The Company does not believe
that Field Effects' facility is significant to the Company's operations, and the
Company does not believe that the failure to renew, or the loss of, this lease
would have a material adverse effect on the Company's operations.
APD operates out of a building, which it owns, in Allentown,
Pennsylvania totaling 56,550 square feet.
The Company believes its facilities are adequate and suitable for its
current and near-term needs.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor any of its subsidiaries is a party to any
material legal proceeding. To the Company's knowledge, no director, officer,
affiliate of the Company, holder of 5% or more of the Company's Common Stock, or
associate of any of the foregoing, is a party adverse to, or has a material
interest adverse to, the Company or any of its subsidiaries in any proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the American Stock Exchange
under the symbol IMG. The high and low sales prices of the Common Stock for each
quarterly period for the last two fiscal years, as reported on the American
Stock Exchange, are shown below.
Closing Prices(1)
----------------------------
High Low
---- ---
Fiscal Year 1994
Quarter Ended August 29, 1993 $ 15 7/8 $ 5 7/8
Quarter Ended November 28, 1993 13 3/4 10 3/4
Quarter Ended February 27, 1994 12 3/4 9 3/8
Quarter Ended May 29, 1994 18 1/2 11 1/8
Fiscal Year 1995
Quarter Ended August 28, 1994 $ 18 1/8 $ 13 1/4
Quarter Ended November 27, 1994 16 1/2 13 1/2
Quarter Ended February 26, 1995 14 1/4 11
Quarter Ended May 28, 1995 14 7/8 10 1/4
-------------
(1) The closing prices have been adjusted to reflect a five-for-four stock
split that was distributed on September 8, 1994 to stockholders of
record as of August 25, 1994 rounded to the nearest $1/8, and a three
percent stock dividend distributed on June 15, 1995 to stockholders of
record on May 31, 1995, rounded to the nearest $1/8.
There were 2006 holders of record of Common Stock as of August 11,
1995. 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 such a cash dividend
policy in the near future. The Board of Directors of the Company has declared a
policy of granting annual stock dividends where, and to the extent that, the
performance of the Company warrants such a declaration. 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.
18
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 hereto.
(Dollars in Thousands, Except Per Share Amounts)
For the Fiscal Year Ended May 28, 1995 May 29, 1994 May 30, 1993 May 31, 1992 May 26, 1991
------------ ------------ ------------ ------------ ------------
Net sales $83,877 $51,238 $56,308 $58,219 $60,777
Total revenue 85,747 52,257 57,295 59,179 61,508
Cost of products sold 60,174 34,894 40,030 41,256 46,411
Income before income taxes 6,512 2,099 3,901 4,774 3,135
Net income 4,007 2,148 3,140 4,264 2,810
Per primary share:
Income before
cumulative effect of
accounting change .35 .11 .32 .43 .29
Cumulative effect of .08
accounting change
Net income .35 .19 .32 .43 .29
At End of Fiscal Year 1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Working capital $52,655 $49,339 $19,601 $24,966 $22,866
Total assets 103,706 93,787 58,359 53,187 49,325
Long-term debt
(net of current maturities) 39,807 39,859 4,991 10,650 9,708
Retained earnings (deficit) (2,495) (2,595) (2,735) (5,873) (5,714)
Shareholders' equity 53,305 46,935 41,765 35,081 30,131
---------------
(a) Income per primary share has been computed during each period based on
the weighted average number of shares of Common Stock outstanding plus
dilutive common stock equivalents (where applicable).
(b) The Company did not pay a cash dividend on its Common Stock during any
of the periods indicated.
(c) Net income per primary share has been restated to give effect to the
five-for-four stock split effected September 8, 1994, and the 3% stock
dividends distributed in September, 1991, September, 1992, September,
1993, and June, 1995.
(d) Net income for the fiscal year ended May 29, 1994 reflects a cumulative
effect of accounting change in the amount of $888,000 or $.08 per
primary share.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
The following tables set forth, for the periods indicated, the
percentages which certain items reflected in the financial data bear to total
revenues of the Company and the percentage change of such items from period to
period. See the Consolidated Financial Statements included in response to Item 8
hereto, for financial information to which the percentages set forth below
relate.
Period to Period
Relationship to Total Revenues Increase (Decrease)
-------------------------------------- -------------------
Fiscal Year Ended Fiscal Years
-------------------------------------- -------------------
May 28, May 29, May 30, 1994- 1993-
1995 1994 1993 1995 1994
------- ------- ------- ------ ------
Net sales 97.8% 98.1% 98.3% 63.7% (9.0%)
Other revenue 2.2 1.9 1.7 83.5 3.0
---- ---- ----
Total revenue 100.0 100.0 100.0 64.1 (8.8)
Costs and expenses:
Cost of products sold 70.2 66.8 69.9 72.4 (12.8)
Product research and
development 5.8 5.0 3.5 92.3 28.8
Marketing, general and
administrative 13.2 20.7 17.6 4.0 7.8
Interest and other
expenses 3.2 3.5 2.2 53.1 41.5
---- ---- ----
92.4 96.0 93.2 58.0 (6.1)
---- ---- ----
Income before income
taxes 7.6 4.0 6.8 210.2 (46.2)
Provision for income
taxes 2.9 1.6 1.3 198.6 10.2
---- ---- ----
Income before cumula-
tive effect of accounting
change 4.7 2.4 5.5 218.0 (59.9)
Cumulative effect of
change in method of
accounting for income
taxes -- 1.7 -- ** **
---- ---- ----
Net income 4.7% 4.1% 5.5% 86.5% (31.6%)
==== ==== ====
--------------
** Not applicable for purposes of this table.
20
RESULTS OF OPERATIONS -- 1995 COMPARED TO 1994
In fiscal 1995 total revenues increased approximately 64% compared to
fiscal 1994. Sales of Magnetic Products increased approximately 79% while sales
of Cryogenic Products increased approximately 18%. Gross margin, as a percentage
of sales, decreased in the Magnetic Products segment by 4.2% and by 2.8% in the
Cryogenic Products segment. See Note I of Notes to Consolidated Financial
Statements, included in response to Item 8 hereto, for financial information by
industry segment.
The substantial increase in revenues was due primarily to increased
sales of a new family of magnet systems for MRI. These new magnet systems range
in field strength from 0.5T to 1.5T and the Company delivered a large quantity
(more than 50% of shipments) of the higher field strength magnets. Previously,
the Company mainly sold 0.5T magnets. Gross margin, as a percentage of net
sales, declined slightly reflecting the higher than normal costs associated with
the initial production of new products.
Because the Company's growth in fiscal 1995 came substantially from an
increase in market share achieved by its largest customer, based in part on the
Company's new family of magnet systems, it is not expected that a similar
extraordinary rate of growth will be experienced in the coming year.
In June, 1995, the Company received EPA final acceptance of its CFC
refrigerant replacement with the trademark "FRIGC FR-12" refrigerant for use in
mobile air conditioning systems and also received a US Patent for FRIGC FR-12.
The Company also signed agreements with Schenectady International, Inc. to
manufacture FRIGC FR-12 refrigerant, with Aeroquip to manufacture the necessary
field couplings, adapters and hose assemblies for FR-12 refrigerant adaptation
and with Robinair for the necessary FR-12 refrigerant installation equipment.
The first commercial order of FR-12 refrigerant was shipped to a military base
and the Company announced that FR-12 refrigerant was being made available to the
fleet vehicle market.
Company-funded product research and development increased approximately
92% in fiscal 1995 compared to fiscal 1994 as the Company continued its
engineering effort on internally-funded development programs related to
cryogenic products, high temperature superconductors, FRIGC refrigerants and
other highly proprietary product areas. The higher levels of Company
expenditures were required since third party contracts and government programs
to conduct research and development projects, continued to decline. These
externally-funded contracts which are included in net sales, decreased
approximately 26% in fiscal 1995 compared to fiscal 1994. Total research and
development (internally and externally funded) rose from approximately $10.1
million to approximately $10.5 million. Because the Company's continued growth
may disqualify it for small business research awards at some point in the near
future, the ability of the Company to look to the government as a significant
source of external funds for research and development activities will continue
to diminish.
Marketing, general and administrative expenses increased a modest 4% in
fiscal 1995 compared to fiscal 1994, all of which was in the marketing area, as
the Company continued tight control over general and administrative
expenditures. Interest expense was higher in fiscal 1995 due to the issuance of
the convertible, subordinated debentures in September, 1993 and the mortgage on
the Company's new facility in April, 1994.
The Company's effective income tax rate decreased slightly in fiscal
1995 due primarily to the tax benefits derived from the establishment of a
foreign sales corporation. See Note F of Notes to Consolidated Financial
Statements, included in response to Item 8 hereto, for detailed information
regarding income taxes, and information regarding the adoption (and impact) of
the Statement of Financial Accounting Standards 109 during the first quarter of
fiscal 1994.
Magnetic Products Segment. Sales in this segment, which consists of the
design, development and manufacture of superconductive magnets and
materials, permanent magnets and other magnetic products, increased
approximately 79% in fiscal 1995 compared to the prior year. Magnet
sales increased by approximately 116% and material sales increased
approximately 27% due to strong demand for the new family of magnet
systems for MRI and increased demand for superconductive wire for MRI
magnets. Gross profit margin, as a percentage of net sales, declined
for magnet systems, reflecting the higher costs associated with the
initial production phase of a newly designed product line.
21
Cryogenic Products Segment. This segment, which consists of the design,
development and manufacture of cryogenic refrigeration equipment and
refrigerants had increased sales of approximately 18% in fiscal 1995.
This increase was primarily the result of a substantial increase in
sales of shield coolers for MRI magnet systems and sales of a new line
of cryogenic refrigeration equipment (CRYOTIGER(tm)). Gross profit
margin, as a percentage of net sales decreased slightly in fiscal 1995
compared to fiscal 1994 due to price reductions for shield coolers and
higher initial production costs for the new CRYOTIGER(tm) line.
RESULTS OF OPERATIONS -- 1994 COMPARED TO 1993
In fiscal 1994 total revenues declined approximately 9% compared to
fiscal 1993. Sales of Cryogenic Products increased approximately 7% while sales
of Magnetic Products declined approximately 10%. Gross margin, as a percentage
of sales, increased in the Cryogenic Products segment by 4.3% but declined 0.6%
in the Magnetic Products segment.
The revenue decline in fiscal 1994 (as well as fiscal 1993) was caused
principally by reduced demand for MRI magnets resulting from health care cost
concerns and poor general economic conditions worldwide. However, sales of
superconducting materials did increase in fiscal 1994 due to increased customer
demands resulting from newer, more materials intensive magnet designs.
Product research and development increased approximately 29% in fiscal
1994 compared to fiscal 1993 as the Company continued its engineering effort on
internally-funded development programs related to FRIGC refrigerants, high
temperature superconductors, cryogenic products and other highly proprietary
product areas. The Company continued to benefit from third party contracts and
government programs to conduct research and development projects, although at a
lower level. These externally-funded contracts which are included in net sales,
decreased approximately 39% in fiscal 1994 compared to fiscal 1993. As a result,
total research and development (internally and externally funded) decreased to
approximately $10.1 million from approximately $14.2 million.
Marketing, general and administrative expenses increased approximately
8% in fiscal 1994 compared to fiscal 1993 due to increased costs for public
relations, bid and proposal efforts, executive compensation, the addition of
selected personnel as well as general increased costs of doing business.
Interest expense was higher in fiscal 1994 due to the issuance of convertible,
subordinated debentures in September 1993.
The Company's effective income tax rate increased in fiscal 1994 to
approximately 40% (up from approximately 20% in fiscal 1993) due primarily to
the utilization in prior years of the remaining net operating loss
carryforwards. See Note F of Notes to Consolidated Financial Statements,
included in response to Item 8 hereto, for detailed information regarding income
taxes, and information regarding the adoption (and impact) of Statement of
Financial Accounting Standards 109 during the first quarter of fiscal 1994.
Magnetic Products Segment. Sales in this segment decreased
approximately 10% in fiscal 1994 compared to the prior year. A 23%
increase in materials sales was offset by a 24% decline in magnet sales
which was due principally to reduced customer delivery requirements for
MRI magnets. Gross profit margin, as a percentage of net sales,
increased approximately 4% with a significant increase in materials due
to increased sales and productivity improvements. Magnet margins had a
slight decline due to lower sales. In this segment, the Company
recorded a favorable $400,000 governmental billing rate adjustment
(which is subject to audit) in the first quarter of fiscal 1993 which
was mostly offset by a $300,000 contract price reduction for the
Superconducting Super Collider program in the second quarter of fiscal
1993.
Cryogenic Products Segment. This segment had decreased sales of
approximately 7% in fiscal 1994. All product lines experienced a
decrease in sales except cryopumps, spares, service and other revenue.
Gross profit margin, as a percentage of net sales increased nominally
in fiscal 1994 compared to fiscal 1993.
22
The Company had planned to be an active bidder for, and supplier under,
contracts to be awarded by the Superconducting Super Collider ("SSC") Laboratory
for the development and manufacture of superconducting wire, cable, magnets and
accessories. In September 1993, Congress voted to terminate this project. The
cancellation of this program had no material effect on the Company in fiscal
1994. However, the Company did lose a substantial opportunity to significantly
increase its superconducting business over a period of five to eight years.
LIQUIDITY AND CAPITAL COMMITMENTS
In fiscal 1995 the Company generated net cash of approximately
$3,828,000 from operating activities and $440,000 from financing activities
which was used to purchase property, plant and equipment and to make an
additional investment in Surrey Medical Imaging Systems, Limited, a UK company
engaged in the manufacture and sale of systems electronics and software for MRI
and Nuclear Magnetic Resonance (NMR) spectroscopy. During the first quarter of
fiscal 1995, the Company adopted SFAS No. 115 which had the effect of increasing
the carrying value of certain investments to market value. The amount of this
increase at May 28, 1995 was $2,979,000 with corresponding increases in deferred
taxes payable of $1,192,000 and shareholders' equity of $1,787,000. These
investments, which are shown on the balance sheet at May 28, 1995 as "Available
for sale securities", have a cost basis of $2,121,000 and market value of
$5,100,000. In March 1995, the Company announced a stock buy-back program under
which the Company may, from time-to-time through December 31, 1995, repurchase
up to 1,000,000 shares of its Common Stock depending on market conditions. The
repurchases are expected to be financed from working capital and would be used,
among other things, to meet future obligations under stock option plans and
outstanding convertible securities. As of May 28, 1995 the Company had
repurchased a total of 88,100 shares for approximately $1,000,000. See the
Consolidated Statements of Cash Flows in the Consolidated Financial Statements,
included in response to Item 8 hereto, for a detailed description of the sources
and uses of cash during fiscal 1995 as well as the two preceding years.
The Company's capital resource commitments as of July 30, 1995
consisted principally of capital equipment commitments of approximately
$850,000.
The Company has a three year, unsecured $10,000,000 line of credit with
a bank which bears interest at the London Interbank Offered Rate (LIBOR) plus
1.25% or prime and will expire in November 1997, none of which was in use on
July 30, 1995.
The Company believes that it will have sufficient working capital to
meet its needs for the short-term by using internally generated funds and
existing credit facilities. However, on a longer-term basis with substantial
increases in sales volume and/or unusually large expenditure requirements to
commercialize the FRIGC family of refrigerants, the Company may be required to
obtain additional lines of credit for working capital purposes and possibly make
periodic public offerings or private placements in order to meet the liquidity
needs of such growth. While the Company does not believe it will be restricted
in financing such growth, there can be no assurances that such sources of
financing will be available to the Company in sufficient amounts or on
acceptable terms. Under such circumstances, the Company would expect to manage
its growth within the financing available.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Attached hereto and filed as part of this report are the financial
statements and supplementary data listed in the list of Financial Statements and
Schedules included in response to Item 14 of this report.
23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective September 1, 1994, the Company's certifying accountant, the
firm of Ernst & Young, LLP ("Ernst & Young"), closed their Albany, New York
practice. As of September 12, 1994, the client-auditor relationship between the
Company and Ernst & Young ceased.
Ernst & Young had been the Company's auditors since the Company's
initial public offering. The reports of Ernst & Young on the Company's financial
statements for fiscal 1994 and 1993 did not contain an adverse opinion or a
disclaimer of opinion, and were not qualified or modified as to uncertainty,
audit scope or accounting principles.
In connection with the audits of the Company's financial statements for
each of the two fiscal years ended May 29, 1994 and May 30, 1993, and in the
subsequent interim period, there were no disagreements on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of Ernst &
Young, would have caused Ernst & Young to make reference to the matter in their
report. In connection with the filing by the Company of a Report on Form 8-K,
dated September 12, 1994, Ernst & Young submitted a letter addressed to the
Securities and Exchange Commission in which it agreed with the Company's
foregoing statements.
At a meeting held on November 9, 1994, the Audit Committee of the Board
of Directors of the Company approved the engagement as of that date of KPMG Peat
Marwick LLP ("KPMG") as the Company's independent auditors for the fiscal year
ending May 28, 1995.
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 1995 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.
24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information with respect to certain relationships and related
transactions to be contained under the heading "Certain Transactions" in the
Proxy Statement is hereby incorporated herein by reference.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS.
Attached hereto and filed as part of this report are the financial statements,
schedules and the exhibits listed below.
1. Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets as of May 28, 1995 and May 29, 1994
Consolidated Statements of Income for the fiscal years ended May 28,
1995, May 29, 1994 and May 30, 1993
Consolidated Statements of Shareholders' Equity for the fiscal years
ended May 28, 1995, May 29, 1994 and May 30, 1993
Consolidated Statements of Cash Flows for the fiscal years ended May
28, 1995, May 29, 1994 and May 30, 1993
Notes to Consolidated Financial Statements
2. Schedules
II Valuation and Qualifying Accounts
All other schedules are not required or are inapplicable and,
therefore, have been omitted.
3. Exhibits
Articles of Incorporation and By-laws
3(i) Restated Certificate of Incorporation (4) (Exhibit 3.1)
3(ii) By-laws, as amended (5) (Exhibit 3.2)
Instruments defining the rights of security holders, including indentures
4.1 Form of Common Stock certificate (8) (Exhibit 4.1)
4.2 Amended and Restated Loan Agreement dated as of
December 23, 1991 among Meridian Bank, Intermagnetics
General Corporation, APD Cryogenics Inc., Magstream
Corporation and IGC Advanced Superconductors Inc.(8)
(Exhibit 4.3)
4.3 First Amendment dated as of February 26, 1992 to the
Amended and Restated Loan Agreement dated as of
December 23, 1991 among Meridian Bank, Intermagnetics
General Corporation, APD Cryogenics Inc., Magstream
Corporation and IGC Advanced Superconductors Inc. (8)
(Exhibit 4.4)
25
4.4 Second Amendment dated as of June 14, 1994 to the
Amended and Restated Loan Agreement dated as of
December 23, 1991 among Meridian Bank, Intermagnetics
General Corporation, APD Cryogenics Inc. and Magstream
Corporation. (11)
4.5 Third Amendment dated as of August 1, 1994 to the
Amended and Restated Loan Agreement dated as of
December 23, 1991 among Meridian Bank, Intermagnetics
General Corporation, APD Cryogenics Inc. and
Magstream Corporation (11)
Material Contracts
10.1 Agreement Restating and Superseding Lease and Granting
Rights to Use Common Areas and Other Rights dated as of
December 23, 1991 between Waterbury Industrial Commons
Associates, IGC Advanced Superconductors Inc. and
Intermagnetics General Corporation (8) (Exhibit 10.1)
+ 10.2 1990 Stock Option Plan (7) (Appendix A)
+ 10.3 1981 Stock Option Plan, as amended (2) (Exhibit 10.7)
+ 10.4 Supplemental Executive Benefit Agreement (1)
(Exhibit 10.37)
+ 10.5 Stock Option Plan for Non-Employee Directors, as
amended (2) (Exhibit 10.21)
10.6 Agreement dated June 9, 1992 between Philips Medical
Systems Nederlands B.V. and Intermagnetics General
Corporation for sales of magnet systems (12)
(Exhibit 10.6)
10.7 Purchase Agreement dated as of January 1, 1994
between Intermagnetics General Corporation and
General Electric Company (12) (Exhibit 10.7)
+ 10.8 Employment Agreement between Intermagnetics General
Corporation and Carl H. Rosner (8) (Exhibit 10.8)
10.9 Share Purchase Agreement, dated January 23, 1992, by and
between Ultralife Batteries, Inc. and Intermagnetics
General Corporation (9) (Exhibit 10.1)
10.10 Letter of Intent, dated as of May 23, 1993, by and
between Chrysler Corporation and APD Cryogenics Inc., a
wholly-owned subsidiary of Intermagnetics General
Corporation (1") (Exhibit 10.11)
Letter regarding change in certifying accountant
16.1 Letter, dated September 12, 1994, to the Securities and
Exchange Commission from Ernst & Young LLP, the
registrant's former certifying accountant (13)
(Exhibit 16.1)
16.2 Letter, dated November 10, 1994, to the Securities and
Exchange Commission from Ernst & Young LLP, the
registrant's former certifying accountant (14)
(Exhibit 16.1)
26
Subsidiaries of the registrant
* 21 Subsidiaries of the Company
Consents of experts and counsel
* 23 Consent of KPMG Peat Marwick, 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 and 33-72160 on Form S-8.
------------------
(1) Exhibit incorporated herein by reference to the
Registration Statement on Form S-2 (Registration No.
2-99408) filed by the Company on August 2, 1985.
(2) Exhibit incorporated herein by reference to the Annual
Report on Form 10-K filed by the Company for the fiscal
year ended May 31, 1987.
(3) Exhibit incorporated herein by reference to the
Quarterly Report on Form 10-Q filed by the Company
for the six months ended November 29, 1987.
(4) Exhibit incorporated herein by reference to the Annual
Report on Form 10-K filed by the Company for the fiscal
year ended May 28, 1989.
(5) Exhibit incorporated by reference to the Annual Report
on Form 10-K filed by the Company for the fiscal year
ended May 27, 1990.
(6) Exhibit incorporated by reference to the Annual
Report on Form 10-K filed by the Company for the
fiscal year ended May 26, 1991, as amended by
Amendment No. 2 on Form 8 dated October 22, 1991.
(7) Exhibit incorporated by reference to the Proxy Statement
dated October 4, 1991 for the 1991 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 31, 1992, as amended by Amendment No. 1
on Form 8 dated November 17, 1992.
(9) Exhibit incorporated herein by reference to the
Quarterly Report on Form 10-Q filed by the Company
for the six months ended November 29, 1992.
(10) Exhibit incorporated herein by reference to the Annual
Report on Form 10-K/A1 for the fiscal year ended May 30,
1993. Portions of this Exhibit were omitted and filed
separately with the Secretary of the Securities and
Exchange Commission pursuant to an Application for
Confidential Treatment under Rule 24b-2 of the Securities
Exchange Act of 1934, as amended.
(11) Exhibit incorporated herein by reference to the Annual
Report on Form 10-K for the fiscal year ended May 29,
1994.
(12) Exhibit incorporated herein by reference to the Annual
Report on Form 10-K/A2 for the fiscal year ended May 29,
1994. Portions of this Exhibit were omitted and filed
separately with the Secretary of the Securities and
Exchange Commission pursuant to an Application for
Confidential Treatment under Rule 24b-2 of the Securities
Exchange Act of 1934, as amended.
27
(13) Exhibit incorporated herein by reference to the Report
on Form 8-K filed by the Company on September 12, 1994.
(14) Exhibit incorporated herein by reference to the Report
on Form 8-K filed by the Company on November 11, 1994.
* Filed with the Annual Report on Form 10-K for the fiscal year ended May 28,
1995.
+ 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
None.
28
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 24, 1995 By: /s/ Carl H. Rosner
-----------------------
Carl H. Rosner
President
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
Carl H. Rosner, Chairman, President and Chief Executive Officer, Michael C.
Zeigler, Senior Vice President - Finance and Chief Financial Officer, and each
of them, his true and lawful attorneys-in-fact, in his name, place and stead to
execute and cause to be filed with the Securities and Exchange Commission any or
all amendments to this report.
Name Capacity Date
---- -------- ----
/s/Carl H. Rosner Chairman, President, August 24, 1995
------------------------- Chief Executive Officer
Carl H. Rosner (principal executive
officer) and Director
/s/Michael C. Zeigler Senior Vice President- August 24, 1995
------------------------- Finance; Chief Financial
Michael C. Zeigler Officer (principal financial
and accounting officer)
/s/Joseph C. Abeles Director August 24, 1995
-------------------------
Joseph C. Abeles
/s/Edward E. David, Jr. Director August 24, 1995
-------------------------
Edward E. David, Jr.
/s/Jack E. Goldman Director August 24, 1995
-------------------------
Jack E. Goldman
/s/Thomas L. Kempner Director August 24, 1995
-------------------------
Thomas L. Kempner
/s/Sheldon Weinig Director August 24, 1995
-------------------------
Sheldon Weinig
29
1. Financial Statements
30
KPMG PEAT MARWICK LLP
74 North Pearl Street
Albany, NY 12207
Independent Auditors' Report
Board of Directors and Shareholders
Intermagnetics General Corporation
We have audited the accompanying consolidated balance sheet of Intermagnetics
General Corporation as of May 28, 1995, and the related consolidated statements
of income, shareholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The accompanying consolidated financial statements of Intermagnetics
General Corporation as of May 29, 1994, were audited by other auditors whose
report thereon dated July 18, 1994, except for Note C, as to which the date is
August 1, 1994, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Intermagnetics
General Corporation as of May 28, 1995, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
July 14, 1995
/s/KPMG Peat Marwick LLP
Member Firm of
Klymveld Peat Marwick Goerdeler
31
Ernst & Young, LLP 1800 One MONY Plaza Phone: 315 425 8011
Syracuse, New York 13202 Fax: 315 422 5226
Report of Independent Auditors
Board of Directors and Shareholders
Intermagnetics General Corporation
We have audited the accompanying consolidated balance sheet of Intermagnetics
General Corporation as of May 29, 1994, and the related consolidated statements
of income, shareholders' equity, and cash flows for each of the two fiscal years
in the period ended May 29, 1994. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Intermagnetics
General Corporation at May 29, 1994, and the consolidated results of its
operations and its cash flows for each of the two fiscal years in the period
ended May 29, 1994, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note A to the consolidated financial statements, in 1994 the
Company changed its method of accounting for income taxes.
/s/ Ernst & Young LLP
Albany, New York
July 18, 1994, except for Note C,
as to which the date is August 1, 1994
32
CONSOLIDATED BALANCE SHEETS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands)
ASSETS May 28, 1995 May 29, 1994
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $13,009 $13,196
Trade accounts receivable, less allowance
(1995 - $145; 1994 - $100) 20,267 12,957
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,144 2,704
Inventories:
Finished products 605 733
Work in process 16,960 16,067
Materials and supplies 8,828 9,313
-------- ---------
26,393 26,113
Prepaid expenses and other 1,244 1,362
-------- ---------
TOTAL CURRENT ASSETS 62,057 56,332
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 1,502 1,502
Buildings and improvements 16,214 15,540
Machinery and equipment 27,364 24,171
Leasehold improvements 233 233
-------- ---------
45,313 41,446
Less allowances for depreciation and
amortization 22,766 19,832
-------- ---------
22,547 21,614
Equipment in process of construction 2,632 2,564
-------- ---------
25,179 24,178
INTANGIBLE AND OTHER ASSETS
Available for sale securities 5,100
Other investments 8,502 10,052
Purchased technology, less accumulated
amortization (1995 - $1,108; 1994 - $1,011) 483 580
Royalties receivable 68
Other assets 2,385 2,577
-------- ---------
TOTAL ASSETS $103,706 $93,787
-------- ---------
See notes to consolidated financial statements.
33
CONSOLIDATED BALANCE SHEETS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY May 28, 1995 May 29, 1994
------------ ------------
CURRENT LIABILITIES
Note payable $94
Current portion of long-term debt $238 279
Accounts payable 4,032 2,552
Salaries, wages and related items 2,402 1,919
Customer advances and deposits 496 764
Product warranty reserve 822 562
Accrued interest expense 323 367
Other liabilities and accrued expenses 1,089 456
-------- ---------
TOTAL CURRENT LIABILITIES 9,402 6,993
LONG-TERM DEBT, less current portion 39,807 39,859
DEFERRED INCOME TAXES, on unrealized
gain on available for sale securities 1,192
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 - 20,000,000 shares
Issued and outstanding (including
shares in treasury):
1995 - 11,081,303 shares
1994 - 10,865,483 shares 1,108 1,055
Additional paid-in capital 55,166 49,133
Retained earnings (deficit) (2,495) (2,595)
Unrealized gain on available
for sale securities 1,787
Foreign currency translation adjustments (46) 194
-------- ---------
55,520 47,787
Less cost of Common Stock in treasury
(1995 - 242,768 shares; 1994
- 126,812 shares) (2,215) (852)
-------- ---------
53,305 46,935
-------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $103,706 $93,787
======== =========
See notes to consolidated financial statements.
34
CONSOLIDATED STATEMENTS OF INCOME
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
-----------------------------------
May 28, May 29, May 30,
1995 1994 1993
------- ------- -------
Net sales $83,877 $51,238 $56,308
Other revenue 1,870 1,019 987
------- ------- -------
Total revenue 85,747 52,257 57,295
Costs and expenses:
Cost of products sold 60,174 34,894 40,030
Product research and development 5,005 2,603 2,021
Marketing, general and administrative 11,275 10,844 10,059
Interest and other expense 2,781 1,817 1,284
------- ------- -------
79,235 50,158 53,394
------- ------- -------
Income before income taxes 6,512 2,099 3,901
Provision for income taxes 2,505 839 761
------- ------- -------
Income before cumulative effect of
accouting change 4,007 1,260 3,140
Cumulative effect of change in method of
accounting for income taxes 888
------- ------- -------
NET INCOME $4,007 $2,148 $3,140
======= ======= =======
PER SHARE:
Primary and fully diluted:
Income before cumulative effect of
accounting change $ .35 $ .11 $ .32
Cumulative effect of accounting change .08
------- ------- -------
Net income $ .35 $ .19 $ .32
======= ======= =======
See notes to consolidated financial statements.
35
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
INTERMAGNETICS GENERAL CORPORATION
Fiscal Years Ended May 28, 1995, May 29, 1994 and May 30, 1993
(Dollars in Thousands, Except Per Share Amounts)
Unrealized
Gain on Foreign
Additional Retained Available for Currency
Common Paid-In Earnings Sale Translation Treasury
Stock Capital (Deficit) Securities Adjustments Stock
--------- --------- --------- ---------- ----------- --------
BALANCES AT MAY 31, 1992 $717 $40,362 ($5,873) ($11) ($114)
Net Income 3,140
Sale of 310,481 shares of Common Stock,
including receipt of 81,770 shares of
Treasury Stock, upon exercise of stock
options at $2.642 to $3.905 per share 24 1,110 (507)
Sale of 11,294 shares of Common Stock
to IGC Savings Trust at $4.996 to
$6.969 per share 1 62
Insurance of 455,569 shares of Common
Stock on purchase of equity securities 34 2,918
Stock dividends and payment for
fractional shares (3) (2)
Unrealized loss on foreign currency
translation (93)
--------- -------- -------- ------- --------
BALANCES AT MAY 30, 1993 776 44,449 (2,735) (104) (621)
Net income 2,148
Tax benefit from exercise of stock options 491
Sale of 572,757 shares of Common Stock,
including receipt of 23,400 shares of
Treasury Stock, upon exercise of stock
options at $2.666 to $8.511 per share 44 2,402 (231)
Sale of 3,642 shares of Common Stock to
IGC Savings Trust at $6.046 to
$17.417 per share 17
Stock dividends and payment for
fractional shares 24 1,985 (2,008)
Adjustment for five-for-four stock split
2,173,857 shares 211 (211)
Unrealized gain on foreign currency
translation 298
--------- -------- -------- ------- --------
BALANCES AT MAY 29, 1994 1,005 49,133 (2,595) (194) (852)
Net income 4,007
Tax benefit from exercise of stock options 1,025
Sale of 207,027 shares of Common Stock,
including receipt of 27,856 shares of
Treasury Stock, upon exercise of stock
options at $3.465 to $11.165 per share 18 1,124 (329)
Sale of 15,573 shares of Common Stock
to IGC Savings Trust at $10.437 to
$16.893 per share 2 26
Stock dividends and payment for
fractional shares 33 3,858 (3,907)
Unrealized gain on available for sale securities $1,787
Unrealized loss on foreign currency
translation (240)
Purchase of 88,100 shares of Treasury
Stock at $10.75 to $14.625 (1,034)
--------- -------- -------- ------- ------- --------
BALANCES AT MAY 29, 1995 $1,108 $55.166 ($2,495) $1,787 ($46) $(2,215)
========= ======== ======== ======= ======= ========
See notes to consolidated financial statements.
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands)
Fiscal Year Ended
-----------------------------------
May 28, May 29, May 30,
1995 1994 1993
------- ------- -------
OPERATING ACTIVITIES
Net Income $4,007 $2,148 $3,140
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Cumulative effect of accounting change (888)
Depreciation and amortization 3,270 3,266 2,948
Provision for deferred taxes 18 (486) (58)
Imputed interest on royalties receivable (29) (45) (66)
Imputed interest on unsecured notes 189 169 152
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable
and costs and estimated earnings in excess
of billings on uncompleted contracts (5,750) (3,436) 708
(Increase) decrease in inventories and
prepaid expenses (162) (9,314) 1,210
Increase (decrease) in accounts payable and
accrued expenses 3,550 1,318 (707)
Change in foreign currency translation
adjustments (240) 305 (93)
Other 2
------- ------- -------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES 4,853 (6,961) 7,234
INVESTING ACTIVITIES
Purchases of property, plant and equipment (3,935) (9,443) (3,031)
Payments received on royalties receivable 97 190 213
Acquistions of equity securities (570) (2,525) (3,048)
Increase in other assets (47) (52) (441)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (4,455) (11,830) (6,307)
FINANCING ACTIVITIES
Proceeds from note payable and long-term borrowing 1,914 45,719 1,319
Debt issue costs (1,161) (13)
Purchase of Treasury Stock (1,034)
Proceeds from sales of Common Stock 825 2,233 685
Principal payments on note payable and
long-term debt (2,290) (16,457) (2,276)
------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (585) 30,334 (285)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (187) 11,543 642
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 13,196 1,653 1,011
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $13,009 $13,196 $1,653
======= ======= =======
See notes to consolidated financial statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERMAGNETICS GENERAL CORPORATION
NOTE A - ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions have been eliminated
in consolidation. The Company's 25% investment in a joint venture (GEC Alsthom
Intermagnetics, a European manufacturer of magnetic products) is accounted for
using the equity method of accounting.
Cash Flows:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Sales:
Sales are generally recognized as of the date of shipment or in accordance with
customer agreements.
Sales to the United States Government or its contractors under cost
reimbursement contracts are recorded as costs are incurred and include estimated
earned fees.
Sales of products involving long-term production periods and manufactured to
customer specifications are generally recognized by the percentage-of-completion
method, by multiplying the total contract price by the percentage that incurred
costs to date bear to estimated total job costs, except when material costs are
substantially incurred at the beginning of a contract, in which case material
costs are charged to the contract as they are placed into production. At the
time a loss on a contract is indicated, the Company accrues the entire amount of
the estimated ultimate loss.
The Company accrues for possible future claims arising under terms of various
warranties made in connection with the sale of products.
38
Inventories:
Inventories are priced at the lower of cost (first-in, first-out) or market
value.
Property, Plant and Equipment:
Land and improvements, buildings and improvements, machinery and equipment and
leasehold improvements are recorded at cost. Provisions for depreciation are
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.
Income Taxes:
Effective May 31, 1993, the Company adopted Statement of Financial Accounting
Standards (SFAS) 109, "Accounting for Income Taxes." Under SFAS 109, the
liability method is used in accounting for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and income tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. As permitted under this new standard, prior
years' financial statements have not been restated. The cumulative effect of
adopting SFAS 109 on the Company's financial statements was to increase net
income by $888,000 for the year ended May 29, 1994.
Pension Plan:
The Company has a pension plan covering all eligible employees. Prior service
costs are amortized over a period of 30 years. It is the policy of the Company
to fund pension costs accrued.
Purchased Technology:
The Company has acquired technology in connection with business acquisitions.
The cost of such purchased technology is amortized over the estimated useful
life (ten to fifteen years) using the straight-line method.
39
Capitalized Interest:
The Company capitalizes interest costs on certain assets constructed for its own
use. No interest was capitalized during fiscal 1993 or fiscal 1995. In fiscal
1994 $186,000 ($.02 per share) of the $1,999,000 interest incurred was
capitalized as part of buildings.
NOTE B - INVESTMENTS
As of May 28, 1995, the Company owned 1,060,753 shares (approximately 14%) of
the common stock of Ultralife Batteries, Inc., a manufacturer of lithium
batteries, acquired at a total cost of $7,527,000 including 429,417 shares of
the Company's Common Stock valued at $2,952,000 (based on a Stock Purchase
Agreement). The market value of these securities at May 28, 1995 was
$18,033,000, the sale of which is restricted under US Securities laws. As of May
28, 1995, the cost and market value of "Available for Sale" securities,
representing those salable under Securities laws were $2,121,000 and $5,100,000,
respectively. During fiscal 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) 115, "Accounting for
Certain Investments in Debt and Equity Securities". Application of SFAS 115
resulted in an increase in the carrying value of the Ultralife investment of
$2,979,000 and corresponding increases in the deferred tax liability and
shareholders' equity of $1,192,000 and $1,787,000, respectively.
As of May 28, 1995, the Company owned 292,612 shares (approximately 19%) of
Surrey Medical Imaging Systems Limited (SMIS), a UK company engaged in the
manufacture and sale of electronics and software for magnetic resonance imaging
and nuclear magnetic resonance spectroscopy applications. During fiscal 1994,
249,902 shares were acquired for cash of $2,525,000. The remaining 42,710 shares
were acquired in fiscal 1995 for cash of $445,000. The investment is carried at
cost ($3,526,000). As SMIS is privately held, the market value of this
investment is not readily determinable. In June of 1995, the Company acquired an
additional 61,611 shares for cash of $558,000. Beginning in fiscal 1996, the
Company will be required to adopt the equity method of accounting for this
investment.
40
NOTE C - NOTE PAYABLE AND LONG-TERM DEBT
The Company has a three year, unsecured $10,000,000 bank line of credit which is
scheduled to expire in November, 1997. Borrowings under the line (none at May
28, 1995) bear interest at either the London Interbank Offered Rate (LIBOR)
(6.06% at May 28, 1995) plus 1.25% or prime (9% at May 28, 1995), at the
Company's option. Borrowings under the line at May 29, 1994 bore interest at
prime (7.25%) plus .25%.
Long-term debt consists of the following:
(In Thousands) May 28, May 29,
1995 1994
------- -------
Revenue bonds $ 1,875 $ 1,950
Mortgage payable 6,343 6,492
Installment notes 6 63
Unsecured notes 1,821 1,633
Convertible debentures 30,000 30,000
------- -------
40,045 40,138
Less current portion 238 279
------- -------
Long-term debt $39,807 $39,859
======= =======
Revenue bonds consist of a subsidiary's (APD Cryogenics Inc.) obligation under
an agreement with an Economic Development Authority with respect to revenue
bonds issued in connection with the acquisition of certain land, building and
equipment acquired at a total cost of approximately $2,408,000. The bonds bear
interest at a weekly adjustable rate (convertible to fixed rate at the option of
the Company) which averaged 3.74% for the year ended May 28, 1995 (2.69% for the
year ended May 29, 1994). The bonds mature serially in amounts ranging from
$75,000 in December 1995 to $200,000 in December 2009. In the event of default
or upon the occurrence of certain conditions, the bonds are subject to mandatory
redemption at prices ranging from 100% to 103% of face value. As long as the
interest rate on the bonds is adjustable weekly, the bonds are redeemable at the
option of the Company at face value. The Company makes monthly advance payments
to restricted cash accounts in amounts sufficient to meet the interest and
principal payments on the bonds when due. The balances of these accounts,
included in "Cash and Cash Equivalents" on the accompanying consolidated balance
sheets, were $32,000 at May 28, 1995, and May 29, 1994.
The mortgage payable bears interest at the rate of 7.5%, is payable in monthly
installments of $52,000, including principal and interest through April, 2001
with a final payment of $5,155,000 due in May 2001. The loan is secured by land
and buildings and certain equipment acquired at a cost of approximately
$10,800,000.
41
The installment note bears an interest rate of 12.5% and is payable in monthly
installments, including principal and interest, totaling $500 through August
1995 with a final payment of $5,000 in September 1995. This note is secured by
equipment acquired at a cost of approximately $24,000.
Unsecured notes consist of ten-year notes payable in one installment on December
30, 1996, in the principal amount of $1,700,000 issued in connection with an
acquisition. Such notes were non-interest bearing through May 31, 1992, and
thereafter bear interest at 6% per annum payable on December 30, 1996. The notes
have been discounted to reflect a market rate of interest.
Convertible debentures at May 28, 1995 consist of $30,000,000 of 5.75%
convertible subordinated debentures due September 2003, issued in a private
placement, which are convertible into Common Stock at approximately $15.15 per
share. Interest on the debentures is payable semi-annually. The debentures are
redeemable, in whole or in part, at the option of the Company at any time on or
after September, 1996 at prices ranging from 104.025% to 100.575% and mature in
September 2003. The debentures also provide for redemption at the option of the
holder upon a change in control of the Company, as defined, and are subordinated
to senior indebtedness, as defined.
Aggregate maturities of long-term debt for the next five fiscal years are: 1996
- $238,000; 1997 - $2,277,000; 1998 - $283,000; 1999 - $298,000 and 2000 -
$212,000.
Interest paid for the years ended May 28, 1995, May 29, 1994, and May 30, 1993
amounted to $2,461,000, $1,434,000 and $931,000, respectively.
42
NOTE D - SHAREHOLDERS' EQUITY
In March 1995, the Company declared a 3% stock dividend which was distributed on
all outstanding shares, except Treasury Stock, on June 15, 1995. The financial
statements have been adjusted retroactively to reflect this stock dividend in
all numbers of shares, price per share and earnings per share.
The Company has established three Stock Option Plans: the 1981 Stock Option
Plan, the Stock Option Plan for Non-Employee Directors and the 1990 Stock Option
Plan. Shares and prices per share have been adjusted to reflect the 3% stock
dividend distributed in June 1995. During fiscal 1995, the Board of Directors
authorized an increase of 500,000 shares available for grant under the 1990
Stock Option Plan and granted options therefrom, all of which is subject to
shareholders' approval at the 1995 Annual Meeting. The total shares authorized
for grant under such plans are 1,406,885, 492,409 and 1,879,035, respectively.
Option activity under these plans was as follows:
Fiscal Year Ended
----------------------------------------------------------------------
May 28, 1995 May 29, 1994
------------------------------- --------------------------------
Number Option Price Number Option Price
of Shares Per Share of Shares Per Share
----------- ----------------- ------------ ------------------
Options outstanding
at beginning of year 1,363,086 $2.666 to 13.010 1,624,712 $2.666 to 9.951
Options granted 314,203 $11.408 to 14.927 394,614 $5.528 to 13.010
Options exercised (207,027) $3.465 to 11.165 (572,757) $2.666 to 8.511
Options cancelled (6,686) $3.465 to 13.010 (83,483) $3.465 to 12.621
--------- ---------
Options outstanding
at end of year 1,463,576 1,363,086
========= =========
As of May 28, 1995, options under the Plans were exercisable as follows:
1981 Stock Option Plan 127,809
1990 Stock Option Plan 460,150
-------
Exercisable options 587,959
=======
Following are the shares of Common Stock reserved for issuance and the related
exercise prices for the outstanding stock options at May 28, 1995:
Number Exercise Price
of Shares Per Share
--------- ---------------
1981 Stock Option Plan 129,216 $2.666 to 4.887
1990 Stock Option Plan 1,334,360 $4.354 to 14.927
---------
Shares reserved for issuance 1,463,576
=========
NOTE E - RETIREMENT PLANS
The Company has a non-contributory, defined benefit plan covering all eligible
employees. Benefits under the plan are based on years of service and employees'
career average compensation. The Company's funding policy is to contribute
annually an amount sufficient to meet or exceed the minimum funding standard
contained in the Internal Revenue Code.
43
Contributions are intended to provide not only for benefits attributable to
service to date, but also for those expected to be earned in the future.
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated balance sheets at May 28, 1995 and May 29, 1994:
(In Thousands) 1995 1994
------ ------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$3,515 and $2,886 as of May 28, 1995 and May 29, 1994,
respectively. $ 3,692 $ 3,031
======== ========
Projected benefit obligation for service rendered to dat $ (5,163) $ (4,130)
Plan assets (consisting of common stock, US Government and
corporate debt obligations and money funds) at fair value 4,770 3,854
-------- --------
Projected benefit obligation in excess of plan assets (393) (276)
Unrecognized net (gain) loss from past experience different
from that assumed and effects of changes in assumptions 27 (84)
Prior service cost not yet recognized in net periodic
pension cost 91 100
Unrecognized net transition obligation 45 50
-------- --------
Accrued pension cost included in salaries, wages and related
items $ (230) $ (210)
======== ========
44
Net pension cost includes the following components:
Fiscal Year Ended
------------------------------------
May 28, May 29, May 30,
(In Thousands) 1995 1994 1993
------- ------- -------
Service cost - benefits earned during the period $ 447 $ 458 $ 451
Interest cost on projected benefit obligation 353 275 238
Actual return on plan assets (528) (285) (290)
Net amortization and deferral 219 15 83
----- ----- -----
Net pension cost $ 491 $ 463 $ 482
===== ===== =====
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 8% in each of the three years
ended May 28, 1995, May 29, 1994, and May 30, 1993. The rate of increase in
future compensation levels used in determining the aforementioned obligation was
6% in each of the three years ended May 28, 1995, May 29, 1994, and May 30,
1993. The expected long-term rate of return on plan assets in each of the years
ended May 28, 1995, May 29, 1994 and May 30, 1993 was 8%.
The Company also maintains an employee savings plan, covering substantially all
employees, under Section 401(k) of the Internal Revenue Code. Under this plan,
the Company matches a portion of employees' contributions. Expenses under the
plan during the years ended May 28, 1995, May 29, 1994 and May 30, 1993
aggregated $232,000, $216,000 and $198,000, respectively.
The Company 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 $35,000, $39,000 and $40,000
for the years ended May 28, 1995, May 29, 1994 and May 30, 1993, respectively.
NOTE F - INCOME TAXES
The components of the provision for income taxes are as follows:
(In Thousands) Fiscal Year Ended
--------------------------------------------------
May 28, 1995 May 29, 1994 May 30, 1993
------------ ------------ ------------
Current
Federal $ 2,006 $ 901 $ 585
State 481 424 525
------- ------- -------
2,487 1,325 1,110
Deferred
Federal 16 (437) (48)
State 2 (49) (10)
------- ------- -------
18 (486) (58)
Benefits from use of
operating loss and tax
credit carryforwards (291)
------- ------- -------
Provision for income taxes $ 2,505 $ 839 $ 761
======= ======= =======
In the first quarter of fiscal 1994, the Company adopted the Statement of
Financial Accounting Standards (SFAS) 109. Under provisions of the SFAS the
Company recorded a net deferred tax asset of $888,000 and a corresponding
increase in net income.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
45
Significant components of the net current and non-current deferred tax assets,
which are included in "Prepaid Expenses and Other" and "Other Assets",
respectively, are as follows:
(In Thousands)
May 28, 1995 May 29, 1994
------------ ------------
Current
Inventory reserves $972 $728
Non-deductible accruals 418 442
Product warranty reserve 241 208
Other (26) (26)
Less: Valuation allowance (517) (517)
------ ------
Total current 1,088 835
------ ------
Non-Current
Depreciation 112 32
Foreign subsidiaries 317 317
Other 158 111
Tax credits 398
Less: Valuation allowance (319) (319)
------ ------
Total non-current 268 539
------ ------
TOTAL $1,356 $1,374
====== ======
The reasons for the differences between the provision for income taxes and the
amount of income tax determined by applying the applicable statutory federal tax
rate to income before income taxes are as follows:
(In Thousands)
Fiscal Year Ended
----------------------------------------------------
May 28, 1995 May 29, 1994 May 30, 1993
------------ ------------ ------------
Pre-tax income at statutory tax
rates (34%) $2,214 $714 $1,327
Non-deductible amortization of
intangibles 42 42 42
State taxes, net of federal benefit 317 280 347
Contract income (153) 153
Inventory reserves (816)
Depreciation 78
Warranty reserves and other non-
deductible accruals (143)
Benefit of operating loss and tax
credit carryforwards (291)
Provision for deferred tax assets (58)
Other 45 (44) 122
Benefit of Foreign Sales Corporation (113) 0 0
------ ------ ------
Provision for income taxes $2,505 $839 $761
====== ====== ======
The Company paid income taxes of $1,118,000, $411,000 and $1,365,000 during the
years ended May 28, 1995, May 29, 1994 and May 30, 1993, respectively.
46
NOTE G - PER SHARE INFORMATION
Income per share amounts are based on the weighted average number of common
shares outstanding during the year plus common stock equivalents as shown below:
(In Thousands)
Fiscal Year Ended
----------------------------------------------------
May 28, 1995 May 29, 1994 May 30, 1993
------------ ------------ ------------
Primary
Weighted average shares outstanding 10,826,583 10,532,735 9,579,830
Common stock equivalents 662,438 753,676 380,082
----------- ----------- -----------
TOTAL 11,489,021 11,286,411 9,959,912
=========== =========== ===========
Fully Diluted
Weighted average shares outstanding 10,826,583 10,532,735 9,579,830
Common stock equivalents 682,557 998,681 380,082
----------- ----------- -----------
TOTAL 11,509,140 11,531,416 9,959,912
=========== =========== ===========
Both primary and fully diluted shares include the dilutive effect (common stock
equivalents) of outstanding stock options based on the treasury stock method
using average market price for primary and closing market price (unless the
average market price is higher) for fully diluted. Shares issuable upon
conversion of the $30,000,000 convertible subordinated debentures are considered
in calculating fully diluted earnings per share, but have been excluded as the
effect would be antidilutive.
The Company distributed 3% stock dividends to shareholders on June 15, 1995,
September 1, 1993 and September 2, 1992. In September 1994, the Company
distributed a five-for-four stock split. The distributions have been made from
the Company's authorized but unissued shares. All data with respect to earnings
per share, weighted average shares outstanding and common stock equivalents have
been adjusted to reflect these stock dividends and stock split.
NOTE H - LEASE COMMITMENTS
The Company leases certain equipment under operating lease agreements expiring
at various dates through December, 1999. Through March, 1994, the Company also
leased certain office and manufacturing facilities. Certain of the leases
provide for renewal options. Total rent expense was $208,000 for the year ended
May 28, 1995, $526,000 for the year ended May 29, 1994 and $542,000 for the year
ended May 30, 1993.
Future minimum rental commitments, excluding renewal options, under the
noncancellable leases covering certain equipment through the term of the lease
are as follows:
Fiscal Year
-----------
1996 $ 55,000
1997 45,000
1998 34,000
1999 31,000
2000 18,000
--------
Total $183,000
========
47
NOTE I - INFORMATION BY INDUSTRY SEGMENT
The Company operates in two business segments: superconductive magnets and
materials, permanent magnets and other magnetic products (Magnetic Products) and
cryogenic refrigeration equipment and refrigerants (Cryogenic Products).
Net sales by business segment represent sales to unaffiliated customers. No
significant transfers between segments have occurred. Income (loss) from
operations represents net sales less operating expenses.
Identifiable assets are those used specifically in each segment's operations.
Income of foreign subsidiaries, primarily in the Cryogenic Products segment,
amounted to $66,000, $190,000 and $63,000 in fiscal 1995, 1994 and 1993,
respectively.
48
The Company's segment information is as follows:
(In Thousands)
Fiscal Year Ended
--------------------------------------------------------------------------------------------------------
May 28, 1995 May 29, 1994 May 30, 1993
------------------------------- ------------------------------- ------------------------------
Magnetic Cryogenic Magnetic Cryogenic Magnetic Cryogenic
Products Products Total Products Products Total Products Products Total
-------- ---------- ----- -------- --------- ----- -------- --------- -----
Net Sales:
Magnet systems $48,581 $48,581 $22,481 $22,481 $29,448 $29,448
Superconductive wire 19,790 19,790 15,622 15,622 12,681 12,681
Cryogenic products $15,506 15,506 $13,135 13,135 $14,179 14,179
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total $68,371 15,506 83,877 38,103 13,135 51,238 42,129 14,179 56,308
Income (loss) from
operations 7,242 181 7,423 3,322 (425) 2,897 3,556 642 4,198
Net income (loss) 4,306 (299) 4,007 2,970 (822) 2,148 2,813 327 3,140
Identifiable assets 91,255 12,451 103,706 81,181 12,606 93,787 46,935 11,424 58,359
Depreciation and
amortization expense 2,854 416 3,270 2,895 371 3,266 2,679 269 2,948
Additions to property,
plant and equipment 3,532 403 3,935 8,948 495 9,443 2,567 464 3,031
49
NOTE J - PRINCIPAL CUSTOMERS AND EXPORT SALES
Sales to significant customers, substantially all of which were sales by the
Magnetic Products segment, during the last three fiscal years are as follows:
(Dollars in Thousands)
1995 1994 1993
--------------------- --------------------- ---------------------
% of % of % of
Sales Sales Sales Sales Sales Sales
------- ------- ------- ------- ------- -------
Customer A $43,868 52.3% $16,269 31.8% $25,942 46.1%
Customer B 7,369 8.8% 8,377 16.3% 9,806 17.4%
Customer C 17,708 21.1% 13,108 25.6% 8,978 15.9%
------- ---- ------- ---- ------- ----
Total $68,945 82.2% $37,754 73.7% $44,726 79.4%
======= ==== ======= ==== ======= ====
The Company's net export sales for the fiscal years ended May 28, 1995, May 29,
1994, and May 30, 1993 totaled $51,600,000, $22,022,000 and $31,816,000,
respectively, substantially all of which were to European customers.
50
NOTE K - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for fiscal 1995 and 1994 are as follows:
(In Thousands, Except Per Share Amounts)
Gross Net Earnings Per
Net Sales Profit Income Primary Share
--------- ------ ------ -------------
1995 Quarter Ended
August 28, 1994 $14,900 $4,230 $245 $.02
November 27, 1994 19,787 6,111 830 .07
February 26, 1995 21,653 6,188 1,097 .10
May 28, 1995 27,537 7,174 1,835 .16
1994 Quarter Ended
August 29, 1993 $11,008 $3,840 $1,110 $.10
November 28, 1993 12,007 3,753 176 .02
February 27, 1994 12,278 3,891 330 .02
May 29, 1994 15,945 4,860 532 .05
In the quarter ended August 29, 1993, net income and earnings per primary share
included $888,000 and $.08, respectively, of cumulative effect of change in
method of accounting for income taxes, see Note F.
51
Exhibit Index
Exhibit Page
------- ----
21 Subsidiaries of the Company 53
23 Consent of KPMG Peat Marwick, LLP with 54
respect to the Registration Statements
Numbers 2-80041, 2-94701, 33-2517,
33-12762, 33-12763, 33-38145, 33-44693,
33-50598 and 33-72160 on Form S-8