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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 31, 1998
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or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ___________
Commission File Number 1-11344
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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 _____
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 $82,420,000. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the American Stock Exchange on August 14, 1998. 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.
ii
The number of shares of the registrant's Common Stock outstanding, net of
Treasury shares, as of August 14, 1998 was 12,263,456.
DOCUMENTS INCORPORATED BY REFERENCE
The information required for Part III hereof is incorporated by reference from
the registrant's Proxy Statement for its 1998 Annual Meeting of Shareholders to
be filed within 120 days after the end of the registrant's fiscal year.
iii
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS DESCRIPTION................................................ 1
MAGNETIC
PRODUCTS................................................... 1
REFRIGERATION
PRODUCTS................................................... 8
RESEARCH AND
DEVELOPMENT................................................ 12
INVESTMENTS................................................ 16
PERSONNEL.................................................. 17
EXECUTIVE OFFICERS OF THE
REGISTRANT................................................. 18
ITEM 2. PROPERTIES........................................................... 20
ITEM 3. LEGAL PROCEEDINGS.................................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.............................................................. 21
ITEM 6. SELECTED FINANCIAL DATA.............................................. 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................ 23
RESULTS OF OPERATIONS...................................... 24
LIQUIDITY AND CAPITAL COMMITMENTS.......................... 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE............................................. 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................. 28
ITEM 11. EXECUTIVE COMPENSATION.............................................. 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................................... 28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 28
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..... 29
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS.......... 29
(b) REPORTS ON FORM 8-K.................................... 32
SIGNATURES................................................................... 33
iv
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this report, and any other report filed by
Intermagnetics General Corporation (the "Company") from time to time, which are
not historical fact are "forward-looking statements" that involve various
important assumptions, risks, uncertainties and other factors which could cause
the Company's actual results for 1999 and beyond to differ materially from those
expressed in such forward-looking statements. These important factors include,
without limitation, the assumptions, risks, and uncertainties set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as other assumptions, risks, uncertainties and factors
disclosed elsewhere in this report and the Company's other securities filings.
PART I
ITEM 1. BUSINESS DESCRIPTION
The Company designs, develops, manufactures and sells products in two
significant segments: Magnetic Products and Refrigeration Products. Magnetic
Products consist primarily of low temperature superconducting ("LTS") magnets,
wires and cable, and radio frequency ("RF") coils. These products are developed
and sold through two corporate divisions -- the IGC Magnet Business Group
("IGC-MBG") and IGC Advanced Superconductors ("IGC-AS") -- and through IGC
Medical Advances Inc. ("IGC-MAI"), a wholly-owned subsidiary. The Magnetic
Products segment also includes low-cost, permanent magnet based MRI systems,
other permanent magnet products and high temperature superconducting ("HTS")
products developed and sold through IGC Technology Development ("IGC-TD"), a
division that includes IGC Field Effects. Three wholly-owned subsidiaries make
up the Company's Refrigeration Products segment. APD Cryogenics Inc. ("APD") and
IGC Polycold Systems Inc. ("IGC Polycold") design, develop, manufacture and sell
low and very low temperature refrigeration equipment. This segment also includes
refrigerants for mobile and stationary applications, which are designed,
developed and sold through the Company's wholly-owned subsidiary, InterCool
Energy Corporation ("ICE").
MAGNETIC PRODUCTS
About Superconductivity Generally
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, such as copper,
by carrying electricity with virtually no energy loss, and generating
comparatively more powerful magnetic fields.
There are two broad classes of superconductive materials. Low
temperature superconducting (LTS) materials are metals and alloys that become
superconductive when cooled to temperatures near absolute zero (4.2 Kelvin or
minus 452 F). Because of their superior ductile characteristics, LTS materials
are generally used in the form of flexible wire or tape ("Wire/Tape"). HTS
materials are composed of ceramic-like compounds that become superconductive
when cooled to temperatures close to that of liquid nitrogen (77 Kelvin or minus
321 F). Although HTS materials are not yet economically viable in existing
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superconducting applications, the Company is working to develop practical
materials suitable for various applications of HTS technology. See "Research and
Development - New Products" below.
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 organs within a patient's body. At the core
of an MRI System is a large, highly engineered magnet system. The magnet system
can be based upon a conventional resistive electro-magnet, a permanent magnet or
a more sophisticated superconductive magnet. 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 in shorter acquisition times. The
annual commercial market for MRI Systems is estimated at approximately $2
billion worldwide. 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 ("Hitachi"), Toshiba Corp., Picker
International Ltd., Elscint, Ltd. and Shimadzu Corporation are the major MRI
System integrators. The Company is a supplier of key components to several of
the MRI Systems integrators. See "Principal Products" below.
Other existing applications for superconductivity include nuclear
magnetic resonance ("NMR") spectroscopy (used in biological and chemical
research and testing of the composition and structure of non-ferrous materials)
and other scientific, defense and research applications. See "Principal Products
Other Superconductive Magnet Systems" below. Emerging areas for application of
LTS and/or HTS Wire/Tape include superconductive magnetic energy storage
("SMES") systems, fault current limiters, transformers and other electric power
equipment. See "Research and Development - New Product Development: SMES" below,
and "Research and Development - New Product Development: HTS" below.
Although these potential newer applications for superconductivity 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 in them successfully.
About MRI Radio Frequency (RF) Coils Generally
An RF Coil is a necessary component of an MRI System. An RF coil is
placed inside the bore of the magnet of an MRI System, or more generally placed
onto a human patient. The RF coil acts as an antenna to receive, or transmit and
receive, radio frequency signals from the human body as it lies inside the
strong magnetic field of the MRI System. These radio frequency signals are
transferred electronically to the MRI System computer where they are
reconstructed into a clinically useful diagnostic image.
Specialized RF coils - those dedicated to imaging particular parts of
the human anatomy, such as the knee, neck, wrist, foot, etc. - increase the
number of diagnostic applications for which an MRI System can be used. The
increased number of applications increases the potential utilization rate of a
given MRI System, which typically helps to justify economically the acquisition
of that system. Specialized RF coils also enhance the diagnostic confidence
obtained from the images produced by an MRI System. That is, an RF coil designed
to image a specific part of the human body will yield a sharper, more detailed
image that is typically more clinically useful than a similar image produced
with a multi-purpose RF coil. Consequently, each MRI System could benefit from
multiple RF coils. The Company estimates that each MRI System could benefit from
an array of six to nine separate specialized RF coils.
An RF coil must work very closely with the MRI system in which it is
used. Consequently, RF coils are designed for a specific manufacturer's system
configuration and its related characteristics. Hence, RF coils may not easily be
moved between MRI Systems manufactured by different companies, from one field
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strength magnet to another, or even among different models manufactured by a
single company. The unique characteristics of each MRI System mean that RF Coils
must be engineered and manufactured to meet the needs of a particular model of
an MRI System. Consequently, the market opportunity for any particular RF coil
model usually is limited to the specific system for which it is designed and
built.
Principal Products
Within its Magnetic Products segment, the Company produces the
following:
o Superconductive MRI Magnet Systems. Through IGC-MBG, the Company
manufactures and sells superconductive MRI magnet systems to MRI Systems
integrators for use in stationary and mobile MRI Systems. During fiscal
years 1998, 1997 and 1996, MRI magnet systems accounted for 43%, 43% and
41%, respectively, of the Company's net sales. The Company's latest
generation of superconductive MRI magnet systems consists of three types of
systems with field strengths of 0.5, 1.0 and 1.5 Tesla.
The Company's magnets for MRI Systems are made with wire from its division,
IGC-AS, and fitted with cryogenic refrigerators supplied by its subsidiary,
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.
o Superconductive Wire. Through IGC-AS, the Company manufactures and sells
the two principal LTS materials that are commercially available for the
construction of superconductive magnets: niobium-titanium ("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. This is
because Nb-Ti is more cost effective for MRI magnet systems, which is the
leading market for superconductive wire. During fiscal years 1998, 1997 and
1996, sales of superconductive wire accounted for 12%, 12% and 22%,
respectively, of the Company's net sales.
o Other Superconductive Magnet Systems. Through IGC-MBG, the Company also
designs and builds superconductive magnet systems for various scientific
and defense applications. These special purpose superconductive magnet
systems are often one of a kind, custom built systems. For example, the
Company manufactured a portion of a 45 Tesla Hybrid Magnet for the National
High Magnetic Field Laboratory at Florida State University ("NHMFL"). The
Company also has designed and built a SMES System. See "Research and
Development - New Product Development: SMES" below. In addition, the
Company is working with NHMFL regarding the design and manufacture of a
technology-leading superconductive magnet for NMR for application at 900
MHz.
o RF Coils for MRI Systems. Since March, 1997, when the Company acquired
IGC-MAI, the Company manufactures and sells RF coils for use in MRI
Systems. The Company's current products include ten (10) anatomical
applications with over forty five (45) product groups available in magnetic
field strengths from 0.35T to 2.0T, for a total of more than 150 products.
Typical RF coils have a selling price between $5,000 and $30,000, although
some custom or high end coils may sell for substantially more. RF Coils
accounted for 11% of the Company's sales in fiscal year 1998. Because the
Company acquired IGC-MAI in March, 1997, RF coils accounted for
substantially less than 5% of sales in fiscal year 1997, and no sales in
fiscal year 1996.
o Permanent Magnet Products. Through IGC Field Effects, a part of IGC-TD, the
Company develops, manufactures and sells permanent magnet systems for use
in low field-strength MRI Systems. In connection with the Company's
strategic alliance with the UK-based firm of Surrey Medical Imaging Systems
3
Limited ("SMIS") (see "Investments - Surrey Medical Imaging Systems"
below), IGC Field Effects has combined its MRI permanent magnet and system
components with SMIS' products to create a complete permanent magnet-based
MRI System. Under a distribution agreement entered into in fiscal year
1998, this product is marketed by Trex Medical Corporation, an
internationally recognized manufacturer and distributor of X-ray and other
diagnostic equipment. See "Research And Development - New Product
Development: Low-cost, Permanent Magnet-Based MRI Systems" below.
The potentially lower capital and operating costs of 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. The Company's sales of such magnet systems to date have not been
significant and there can be no assurances this product will gain
wide-spread market acceptance.
Marketing
The Company markets its magnetic products and technology through its
own personnel, and, in addition, licenses the manufacture and marketing of
superconductive MRI magnet systems for certain customers to its European joint
venture. See "European Joint Venture" below. 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. The Company markets its
RF coils through a direct sales force to domestic end-users, such as hospitals,
clinics and research facilities, and to MRI System integrators. The Company also
markets its RF coils internationally to end-users through a distributor network.
Export Sales. Products sold to foreign-based companies, such as
Philips, a Dutch company, Elscint, an Israeli Company or Hitachi, a Japanese
company, were accounted for as export sales even if some of the products sold
were installed in the US. On that basis, the Company's net export sales
(including the Refrigeration Products segment) for fiscal years 1998, 1997 and
1996 totaled $57.3, $53.1 and $46.5 million, respectively, most of which were to
European customers.
Principal Customers. A significant portion 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, superconductive wire for
use in such systems or RF coils 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 55% of net sales in fiscal
1998, 50% of net sales in fiscal 1997 and 62% of net sales in fiscal 1996. See
Notes J and K of Notes to Consolidated Financial Statements, included in
response to Item 8 hereto.
A substantial portion 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 an agreement (which was
extended through December, 2000, and subject to automatic extension for
successive one-year periods thereafter unless previously terminated in
accordance with the agreement), the Company sells to Philips certain
superconductive MRI magnet systems of various field strengths for incorporation
in Philips' proprietary MRI Systems. Sales to Philips (including sales by the
Refrigeration Products segment) amounted to approximately 45%, 50% and 44% of
the Company's net sales for fiscal 1998, 1997 and 1996, respectively.
The Company's second principal customer for MRI products is GE. The
Company sells superconductive wire to GE for use in GE's MRI magnets. Under the
Company's current arrangement with GE, GE places orders from time to time with
4
the Company. This current arrangement supersedes a formal contract between GE
and the Company which expired in December, 1996. GE accounted for approximately
11%, 9% and 18% of the Company's net sales for fiscal 1998, 1997 and 1996,
respectively.
European Joint Venture
The Company and Alstom Energy, S.A. (formerly GEC Alsthom S.A.)
("Alstom"), a leading French industrial group in the areas of electrical and
electromechanical equipment, have participated since 1987 in a joint venture
named Alstom Intermagnetics (formerly GEC Alsthom Intermagnetics S.A) ("AISA").
AISA manufactures in France, under license from the Company, superconductive MRI
magnet systems. AISA is a party to the Company's supply agreement with Philips,
and supplies a portion of Philips' requirements for superconductive MRI magnet
systems.
Under the current agreement between the Company and Alstom, AISA
transferred its capability for the manufacture of superconductive wire to
Alstom, and the Company increased its ownership interest in AISA from 25% to
45%. Additionally, the license from the Company under which AISA manufactures
superconductive MRI magnet systems was extended to May, 2005. AISA pays a
royalty to the Company for licensed technology, and the Company shares in AISA's
profits in proportion to its ownership interest. The Company's investment in
AISA has been accounted for using the equity method of accounting.
Competition/Market
The Company derived more than 70% and 68% of its net sales in its
fiscal years 1998 and 1997, respectively, from the sale of products in its
Magnetic Products segment (see "Principal Products" above). US demand for MRI
Systems appears to have recovered from flat sales recorded in 1995 and 1996.
Non-US demand continues to grow. The Company believes that worldwide sales of
MRI Systems in 1999 should grow over such sales in 1998. The Company's growth in
this segment is dependent on its customers' ability to grow their respective
businesses, and on the Company's ability to attract new customers. There are no
assurances that the such growth will occur. In addition, the economic slowdown
in Asia may adversely impact the overall growth in sales of MRI Systems.
A significant factor affecting the Company is the fact that MRI Systems
compete indirectly with other diagnostic imaging methods such as conventional
and digital X-ray systems, nuclear medical systems, ultrasound, and X-ray CT
scanners. While 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, there are MRI Systems that use resistive
electromagnets and permanent magnets, which are limited in field strength either
by high power consumption or by basic material properties. Lower field strengths
generally translate into lower quality images, although rapid gains in computer
technology have offset some of this quality loss. The cost of certain cryogenic
liquids, such as helium, may cause markets in developing countries to prefer the
use of resistive or permanent magnets, despite image quality. Moreover, improved
MRI System components for low field strength magnet systems have improved image
quality. Indeed, several MRI Systems integrators, including the Company, through
IGC Field Effects, have introduced MRI Systems based upon such low field
resistive or permanent magnets. See "Research And Development - New Product
Development: Low-cost, Permanent Magnet-Based MRI Systems" below.
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 by the Company and others, 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
5
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.
o Superconductive MRI Magnet Systems. Within the market for superconductive
MRI magnet systems, the Company's competitors fall into two categories: (1)
magnet manufacturers that make MRI magnet systems for 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. The Company's joint
venture, AISA, also sells superconductive MRI magnet systems and has one
principal customer, Philips, which it shares with the Company. See
"European Joint Venture" above.
MRI Systems integrators, such as GE, manufacture MRI magnet systems for use
in their own MRI Systems. Historically, such 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.
Within the market for superconductive MRI magnet systems, the Company has
also seen increased competition from low-field "open" MRI magnet systems.
These systems are designed to reduce the feeling of claustrophobia in a
patient undergoing imaging, and may give medical personnel greater access
to the patient during imaging. While the Company does not currently
manufacture such an "open" MRI magnet system, such magnet systems have
represented one of the fastest growing segments of the market. The Company
does manufacture a product for another rapidly growing segment of the
market: compact high field systems.
o 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 system magnets (either
internally by IGC-MBG, or externally by other customers). The Company
believes that it, Oxford Superconducting Technology and, to a smaller
extent, Supercon, Inc. are the major suppliers of Nb-Ti in wire form for
the domestic market. The Company also believes that these three companies
are the major suppliers of Nb3Sn superconductive materials for the domestic
markets. There are several foreign manufacturers of Nb-Ti superconductive
materials in wire form; none of them has been a significant factor in the
domestic market. Because industry capacity for Nb-Ti wire is greater than
current demand, the Company has seen substantial pressure on prices. The
Company's prices for superconductive materials are currently competitive,
and the Company believes that product quality and the ability to meet
delivery schedules are factors important to its market position. There are
no assurances, however, that the Company can remain competitive without
future price reductions, or that the Company can find means to offset price
reductions with further cost reductions.
o 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 (including Oxford, which dominates the
worldwide market for NMR magnets) for the opportunity to design and build
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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.
o RF Coils for MRI Systems. The Company currently believes that the market
for RF coils will grow faster than the market for MRI Systems because: (i)
the number of applications for MRI which use specialized RF coils is
increasing, requiring a higher number of RF coils to be purchased for each
new and existing MRI System; (ii) RF coil technology is being continuously
improved and with an average technology obsolescence rate of approximately
three years, existing coils need to be upgraded to later-generation
products; and (iii) an increasing number of existing MRI Systems are being
upgraded by OEM's, at a much lower cost than replacing an entire MRI
System. An added set of RF coils is typically needed in connection with
each system upgrade.
With respect to RF coils for MRI Systems, the Company's primary competitors
consist of independent manufacturers that make RF coils for sale to MRI
Systems integrators and end-users such as hospitals, clinics and research
facilities. The Company also experiences competition from MRI Systems
integrators that manufacture RF coils for sale with their MRI Systems. Most
MRI Systems integrators outsource RF coil development and manufacture to
companies such as IGC-MAI, though, to the best of the Company's knowledge,
Siemens and Philips have maintained the most extensive in-house coil
development activities of the major MRI Systems integrators. It is
generally felt by the MRI Systems integrators that RF coils can be
outsourced at a lower cost and faster time-to-market than possible with
in-house resources. If the MRI Systems integrators decide to pull all RF
coil development in-house, access to the market for the independent RF coil
manufacturers could be substantially limited. The Company believes this
risk is remote because such a fundamental shift in strategic approach would
substantially increase the cost of future hardware and software upgrades
for existing customers of MRI Systems integrators.
There are several independent RF coil manufacturers of various size that
make RF coils for sale to MRI Systems integrators and end users. The
Company believes that, of these companies, three compete with IGC-MAI
against its full product range. The other competitors offer limited product
lines and generally lack an organizational infrastructure and extensive
product development capabilities to compete across IGC-MAI's broad product
line at this time. Competition is generally based upon price and quality.
To remain competitive, the Company must continue to offer high quality,
technically advanced products while cutting costs. As competition
increases, however, price pressures grow and there are no assurances that
IGC-MAI can remain competitive in the marketplace.
o Permanent Magnet Products. IGC Field Effects has several competitors in the
development and manufacture of permanent magnets for MRI Systems. Sumitomo
Special Metals Co., Ltd. ("Sumitomo"), a Japanese company, produces much of
the neodymium boron iron (NdBFe) materials used in such systems. The
Company believes that Sumitomo's primary customer for its permanent magnet
products is Hitachi Medical, which dominates the market for permanent
magnet based MRI Systems. While the Company believes it offers a product
that is attractive both technically and economically, there are no
assurances it can compete against larger, more experienced companies like
Hitachi Medical.
The Company believes at the present time 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 directly or indirectly either owns, or is a licensee under, a number
of patents relating to RF coils, superconductive materials, the manufacture of
superconductive materials, and the permanent magnet systems manufactured by IGC
7
Field Effects. There are no assurances that changing technology and/or emerging
patents will not adversely impact the Companies current patent position or its
competitiveness.
Backlog
The Company no longer considers backlog to be material to an
understanding of the Magnetic Products segment. The Company has reached this
conclusion based on two main factors: (1) the manufacturing cycle for magnet
products has shortened significantly and the Company believes this trend will
continue and (2) backlog is not a factor in the Company's RF coil business
because of the short manufacturing lead times.
Raw Materials and Inventory
The Company's manufacturing process for superconducting and permanent
magnet systems generally requires production periods of up to twelve weeks. Most
materials and parts used in production are ordered for delivery based on
production needs. The Company's investment in inventories for production of MRI
magnet systems is based primarily on production schedules required to fill
existing and anticipated customer orders.
Nb-Ti raw material required for production of Nb-Ti superconductive
wire is available from several different sources. While the Company has not
experienced substantial difficulty in obtaining such materials, fluctuation in
demand caused by large projects such as the Large Hadron Collider being
constructed at CERN in Switzerland, could create temporary imbalances in supply
and demand and thus adversely impact the price of such raw material.
IGC Field Effects uses primarily permanent magnet (principally ferrite)
materials. There are several qualified domestic and international sources for
these ferrite materials. 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 a decrease in the supply of permanent magnet
materials would have a substantial impact on its business.
IGC-MAI, believes that there are alternative suppliers at competitive
prices for each of the parts, materials and components that it purchases for the
manufacture of its RF coils. The Company does not currently expect any
difficulty in obtaining these parts, materials and components.
Warranty
The expense to the Company to date for performance of its warranty
obligations has not been significant.
REFRIGERATION PRODUCTS
Principal Products
Three wholly-owned subsidiaries comprise the Company's Refrigeration
Products segment. APD Cryogenics Inc. ("APD") and IGC Polycold Systems Inc.
("IGC Polycold") design, manufacture and sell cryogenic refrigeration equipment.
InterCool Energy Corporation ("ICE") designs, develops and sells refrigerants,
and is developing refrigeration equipment.
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APD's product line includes shield coolers (refrigerators) used in the
production of MRI magnet systems. APD also manufactures a specialized cryogenic
refrigeration system sold under the registered tradename CRYOTIGER, specialized
water pump systems sold under the registered tradename AquaTrap, cryopumps used
primarily in the manufacture of semiconductors, and laboratory cryogenic
research systems. Shield coolers make up the largest portion of APD's sales.
IGC Polycold manufactures and sells a line of low temperature
refrigeration systems in the -40 to -160 Celsius range. The Company acquired IGC
Polycold in November 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations: Liquidity and Capital
Commitments" included in response to Item 7 hereto. IGC Polycold's
refrigeration systems are used in several markets, including optical coating,
semiconductor manufacturing, magnetic media, decorative coating, plastic coating
and roll/web coating. The optical coating industry currently is the largest
market for IGC Polycold's products, accounting for approximately 20% of its
sales.
The Company's Refrigeration Products segment also includes proprietary
refrigerants. ICE pursues commercialization of its family of environmentally
acceptable refrigerants, sold under the registered tradename of FRIGC, and
related air conditioning and refrigeration equipment. The Company believes that
FRIGC has broad-based commercial potential to replace ozone-depleting
chlorofluorocarbons ("CFC's") currently being used as refrigerants and scheduled
to be phased out of use globally under the Montreal Protocol, an international
treaty signed by the US and ninety-three other nations.
ICE markets FRIGC FR-12 refrigerant for use as a replacement for R-12
(a CFC) for mobile air conditioning and stationary refrigerant applications. The
formula for FRIGC FR-12 is protected by U.S. Patent 5,425,890 and foreign
patents are pending for certain countries targeted by ICE as potentially viable
markets. The Environmental Protection Agency lists FRIGC FR-12 as an acceptable
substitute for R-12 in mobile air conditioning applications, and as a
replacement for R-12 in certain stationary applications. Use of FRIGC FR-12
refrigerant is subject to certain standard conditions (for example, the use of
special fittings and labels which are required for all refrigerants in mobile
applications) to prevent unintended mixing of different refrigerants and
facilitate recovery of refrigerants for recycling.
Marketing
The Company markets APD's MRI products 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 Reading, England. APD markets
its laboratory systems, cryopump and other products worldwide through scientific
and vacuum equipment sales representatives and distributors. APD has a worldwide
partnership with Daikin Industries, Ltd. ("Daikin"), a Japanese company,
pursuant to which the parties sell common cryopumps under the "Marathon"
trademark in well-defined territories.
IGC Polycold does not employ a direct sales force. Rather, it markets
its line of low temperature refrigeration systems through a worldwide network of
sales representatives and two key distributors located in Japan and Germany. IGC
Polycold's headquarters are based in San Rafael, California.
Because ICE does not have extensive experience distributing and selling
refrigerants, it continues to pursue a strategy of securing distributors,
nationally and internationally, with significantly greater experience in
relevant markets. In the North American market, ICE appointed the Pennzoil
Products Company ("Pennzoil") in 1995 as its primary distributor for all mobile
applications and certain stationary applications. Since March, 1997, ICE has
aggressively sought to add additional distributors in the North American market
to accelerate commercialization of FRIGC FR-12 refrigerant. During calendar year
9
1998, ICE successfully added a number of regional and national distribution
outlets for FRIGC FR-12, including United Refrigerants, Johnstone Supply, and
Dynatemp.
Internationally, ICE signed Sumitomo Corporation of America ("SCOA") in
1997 as the distributor for certain Asian-Pacific markets. The Agreement, which
currently is non-exclusive except for Australia, covers China, Japan, Malaysia,
Korea, Taiwan, Philippines, Indonesia, Singapore, Australia, New Zealand and
Thailand. SCOA, in turn, has added BOC Gases Australia, Ltd. ("BOC Australia"),
as a distributor in Australia. With substantial technical support from ICE, BOC
Australia has succeeded in making FRIGC FR-12 refrigerant the number one
alternative to R-12 in mobile applications during the 1997-1998 Australian
summer. BOC Australia is also beginning to explore stationary application for
FRIGC FR-12 refrigerant. ICE has also signed other international distributors,
and has made sales of FRIGC FR-12 in the Middle East. ICE is continually working
to identify qualified distributors for new and existing territories.
Competition/Market
IGC-MBG uses APD refrigerators for its superconductive MRI magnet
systems. In addition, APD sells these refrigerators to other manufacturers of
superconducting MRI magnet systems. APD licenses Daikin to produce shield
coolers and other cryogenic products for the Japanese market. Daikin has
captured a significant portion of that market for shield coolers.
The Company considers its principal competitor in the manufacture of
shield coolers to be Leybold AG ("Leybold"). Leybold is headquartered in
Germany, and has sold substantially more shield coolers than the Company.
Moreover, Leybold has greater production capacity and financial resources than
the Company, and has successfully locked up many of APD's potential customers in
multi-year supply agreements. In addition, Sumitomo Heavy Industries recently
began supplying shield coolers to a major MRI Systems integrator. The Company
nonetheless believes that it can compete with Leybold and Sumitomo on both
technological and cost bases. There are no assurances, however, that APD will
attract new customers for its shield coolers.
With respect to APD's 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.
With respect to APD's cryopumps, the Company believes Helix Technology
Corporation ("Helix") (which markets its products under the names "CTI
Cryogenics" and "CTI") is the market leader in distributing cryopumps. The
Company believes that Helix controls 80% or more of the world market for
cryopumps. Notwithstanding Helix's market predominance, the Company believes
that it can retain its position in the market on technological and equipment
performance bases.
APD's CRYOTIGER line is based upon proprietary technology developed and
patented by APD. CRYOTIGER refrigeration systems presently compete against
certain closed-cycle machines, known as Stirling 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. 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. The Company feels that
there is a significant opportunity for this product in the marketplace, however,
there are no assurances it will achieve widespread commercial success.
10
APD's AquaTrap Systems are based principally on the Company's
proprietary CRYOTIGER technology, and are protected by US patents. Foreign
patents are pending. The Company sees its single largest competitor as Helix.
Helix dominates the market for cryopumps, and it makes a water pump compatible
with its cryopump. Another significant competitor is Ebara Technologies, Inc.
which sells an integrated turbopump and water pump. Nonetheless, the Company
believes that the superior performance of its water pump, coupled with its
compact design and ease of installation and operation, will enable it to compete
effectively.
IGC Polycold's major competitors include Sanyo and Shin Meiwa in Japan
and Helix domestically. IGC Polycold also competes with the use of liquid
nitrogen as an alternative to IGC Polycold's low temperature refrigeration
systems. The Company generally competes in this area on the basis of price,
availability and product quality.
ICE's FRIGC FR-12 product is offered as an environmentally friendlier
alternative to ozone-depleting R-12. In its mobile application, FRIGC FR-12
refrigerant is a substitute for R-12 in automobile, truck and bus air
conditioning systems. Since 1994, most new mobile air conditioning systems have
been designed to use R-134a (an HCFC). Mobile air conditioning systems
manufactured before 1994 relied on R-12. ICE believes that its FRIGC FR-12
refrigerant is the most cost-effective alternative refrigerant for use in these
systems because its use does not require equipment changes. By contrast, the use
of R-134a refrigerant in such a system entails in most cases substantial
equipment changes to deliver effective and reliable cooling. Although the market
for pre-1994 automobile air conditioning systems is finite in nature, ICE
believes that through its sales in this market it will gain valuable experience
and name recognition that will facilitate future commercialization of other
FRIGC refrigerants.
ICE has recently begun exploiting the potential for FRIGC FR-12 as a
direct substitute for R-12 in stationary applications, exemplified by building
air conditioning systems, refrigeration systems, and food chillers. The
stationary market employs a wide variety of refrigerants. R-12 sales in the
stationary market accounted for approximately 12 million pounds of refrigerant
sold nationally in 1997. Since 1994, vendors and end-users have been looking for
alternative refrigerants that provide effective, cost efficient cooling. The
Company believes that end-users with R-12-based equipment who wish to end their
use of ozone-depleting R-12 face three choices: (1) make an expensive hardware
purchase of either new equipment (that uses other refrigerants) or major new
components that convert existing systems to R-134a refrigerant, (2) purchase an
R-22-based alternative blended refrigerant, such as R-401A offered by DuPont, or
(3) purchase FRIGC FR-12. The Company believes that FRIGC FR-12 refrigerant
provides a superior alternative to items (1) and (2) above. With respect to item
(1) above, FRIGC FR-12 requires little to no investment in hardware upgrades.
This is particularly true for medium temperature refrigeration applications such
as vending and ice machines. With respect to item (2) above, FRIGC FR-12
provides superior operating performance relative to R-22-based refrigerant
blends, primarily in the form of significant operating savings and potentially
less wear and tear on refrigeration equipment.
The Company believes that ICE's FRIGC refrigerants still face
significant challenges ahead, and there are no assurances they will win
wide-spread acceptance. For example, notwithstanding the phase-out of domestic
production of R-12 refrigerant at the end of 1996, there remain substantially
greater stocks of such refrigerant today than previously anticipated. Moreover,
to a smaller extent, the success of FRIGC FR-12 and other alternative
refrigerants in displacing R-12 has had the twin effect of reducing demand for
R-22 and returning recycled R-12 into national stockpiles. The relatively easy
access to R-12 has had an adverse impact on the near-term ability of ICE to
market FRIGC FR-12 refrigerant in both the mobile and stationary markets.
Moreover, there are other alternative refrigerants offered by
competitors as substitutes for R-12. In mobile applications, there are several
alternative refrigerants, including several that sell at lower prices. The
Company believes that FRIGC FR-12's superior technical performance and safety
record give it a strategic advantage. In fact, within the mobile market, the
11
Company believes that its biggest competitive challenges come from the
continuing availability of R-12, and low cost (incomplete or "dirty") retrofit
kits to adapt R-12 systems to the use of R-134a.
In stationary applications, FRIGC FR-12 refrigerant faces competition
from alternative refrigerant blends based on R-22 such as R-409A and R-401A.
These two products are each marketed by companies with significantly greater
resources and access to better-established distribution systems than those
currently available to ICE. Nonetheless, the Company believes that the technical
and operating advantages of FRIGC FR-12 refrigerant are such that it can compete
effectively against these alternative refrigerants.
Backlog
Due to the relatively short production cycle for products in this
segment, the Company does not consider backlog to be material to an
understanding of the Refrigeration Products business.
Raw Materials and Inventory
For its cryogenics products, APD purchases certain major components
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.
IGC Polycold purchases certain major standard components for its
products from a single source. While alternative sources are available, an
unplanned loss or severe reduction in supply from this source could result in
added cost and temporary production delays to the Company. The Company generally
maintains a sufficient inventory of raw materials, assembled parts and partially
and fully assembled major components to meet production requirements.
With respect to its refrigerant products, ICE has an agreement with
Schenectady International, Inc. ("SII") for the purchase of FRIGC FR-12
refrigerant for the domestic market. SII's ability to supply commercial
quantities of FRIGC FR-12 refrigerant, however, will depend on the availability
of certain raw materials, which are manufactured by a small number of companies.
On March 7, 1997, SII announced that it had secured an agreement with
AlliedSignal, a major chemical production company, for the supply of FRIGC
FR-12 refrigerant. AlliedSignal is a world leader in the production and supply
of environmentally safer CFC substitutes for refrigeration, air conditioning,
foam insulation, sterilization and precision cleaning applications.
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
12
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 had been covered by external funding, principally from the US
government. In fiscal 1998, approximately 37% of total research and development
activities were paid by such external programs compared to approximately 47% and
56% in fiscal years 1997 and 1996, respectively. During fiscal years 1998, 1997
and 1996, product research and development expenses, including those of the
Refrigeration Products segment, were $13,072,000, $13,012,000 and $11,678,000,
respectively. The Company expects total research and development expenditures to
continue to increase somewhat in absolute dollar amounts, but the percentage of
these activities funded by external sources to decrease.
The Company believes that, apart from continued reductions in federal
spending on research and development, two other trends will limit external
funding from US 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 has placed it outside the
definition of a "small business" for certain government-sponsored research and
development programs for small businesses, such as Small Business Innovation
Research ("SBIR") grants. "Small businesses" are defined, for this purpose, as
concerns which employ fewer than 500 employees.
The Company can experience, in any given year, significant increases or
decreases in external funding depending on its success in obtaining funded
contracts.
New Product Development: HTS
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. The
Company's activities in this area have been funded in part through
government-supported research and development programs, including joint research
agreements.
The Company's research and development activities are focused on: (1)
converting HTS materials into usable Wire/Tape with acceptable electrical
current densities and competitive pricing levels, and (2) creating devices and
equipment based upon such Wire/Tape. The Company has primarily focused on
bismuth-based HTS materials, but may broaden its technology base by developing
wires using yttrium-based materials, which show promise of even higher
superconducting performance than their bismuth-based counterparts.
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.
13
The Company has continued to develop applications of HTS materials and
advanced devices in partnership with various utilities, manufacturers and
government laboratories, including a 1 MVA HTS transformer, a 15-kV HTS Fault
Current Limiter, HTS RF coils for low field MRI systems, and HTS current leads.
All of these products are in the development stage, and as yet remain
technologically and economically unproven. The Company has established a
dedicated facility for the manufacture and sale of bismuth-based HTS tape for
use in sufficient quantities to develop certain of these prototype devices.
The Company does not believe its current operations depend upon
successful market acceptance of HTS-based products or devices, nor are the
Company's continued operations necessarily dependent on its success in the HTS
marketplace even if HTS-based products or devices do become commercially viable.
However, if technical problems are solved and HTS materials become economically
feasible for commercial applications in fields in which the Company competes,
then the Company could be adversely affected unless it is able to develop
products or devices using HTS materials. Accordingly, while representing a
relatively high-risk, long-term investment of its resources, the Company
perceives HTS technology as an important future commercial opportunity of
significance. Consequently, the Company expects to continue to work and invest
research and development efforts 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 around the world 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
The Company is seeking to participate in the potential commercial
opportunity for superconductive magnetic energy storage ("SMES") systems. A SMES
system acts as an electro-magnetic storage system that can protect critical
electrical power loads from interruptions, spikes and sags. End users currently
minimize power interruptions through use of Uninterruptible Power Supplies
("UPS"), which may use hundreds or even thousands of conventional lead acid
batteries per system, require costly maintenance, and present an environmental
hazard upon disposal. By contrast, a SMES system is more energy efficient, has a
life of more than 20 years, and is environmentally friendly. The Company has
developed an advanced micro-SMES unit under a contract it won in fiscal year
1996 to build a self-contained micro SMES system for the US Air Force. That
system was delivered and installed in fiscal year 1998.
While SMES may be commercially viable in the future, 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. At this time the cost of
SMES is significantly higher than for other energy storage systems.
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 and Refrigeration Equipment
ICE currently expects that, over the long run, it will introduce other
refrigerants from its FRIGC family of refrigerants for other carefully targeted
market opportunities. ICE 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 HCFC-based refrigerants. Many of these companies are larger, better
14
financed, better staffed and more experienced in the refrigerant business than
ICE. There can be no assurances that ICE's future refrigerants will win market
acceptance.
Moreover, ICE's success in developing FRIGC refrigerants 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 others. ICE 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 ICE. 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.
ICE is also developing refrigeration equipment and has recently
obtained a patent for an advanced subcooler device. ICE is in the process of
Beta Site testing this device for the stationary market. This hardware could
dramatically increase the energy efficiency of existing and new stationary
refrigeration systems, such as low temperature display case systems (typically
found in supermarkets), refrigerated warehouses and ice rinks. ICE will be
competing in this market with other larger companies with potentially greater
resources, and there are no assurances that the Company can create a device with
sufficient technical and cost advantages to compete against such larger
companies.
New Product Development: Low-cost, Permanent Magnet-Based MRI Systems
The Company has been working through IGC Field Effects with SMIS (see
"Investments - Surrey Medical Imaging Systems Limited" below) to develop a
low-cost, permanent magnet-based MRI System. In May, 1996, the Company formally
entered a joint venture with SMIS through the formation of a limited liability
company, IMiG MRI Systems LLC ("IMiG LLC"). Under the joint venture agreement,
the Company initially owned a 50% share of IMiG. As a result of the application
of certain provisions of that agreement, however, the Company acquired a 90%
percent share of IMiG LLC and the balance was owned by SMIS. In fiscal year
1998, IMiG LLC was dissolved and its operations merged into IGC Field Effects.
IGC Field Effects will continue to market products developed jointly by
the Company and SMIS, including a permanent magnet-based MRI system for clinical
diagnostic use. In fiscal year 1997, IMiG LLC won FDA approval of this system
for sale as a medical diagnostic device in the US market. The Company believes
that FDA approval will also help it market this system in non-US markets. In
November, 1997, the Company entered into an exclusive, worldwide distribution
agreement with Trex Medical Corporation ("Trex") to market this system under the
Trex name. Trex is an internationally recognized manufacturer and distributor of
X-ray and other diagnostic equipment. While the Company believes that it has
developed a product which is especially attractive in certain niche markets by
virtue of its relatively low purchase, operating and maintenance costs, there
can be no assurance that it will be able to compete successfully in markets
which have until now been largely dominated by the major MRI systems integrators
referenced earlier. Sales of this new product to date have not been significant.
New Product Development: MR-Based Materials Inspection Systems
The Company has been working with SMIS (see "Investments - Surrey
Medical Imaging Systems Limited", below) to develop materials inspection systems
("Inspection System") using Magnetic Resonance ("MR") technology. The Inspection
System employs magnetic resonance to examine various product or material
parameters for quality assurance and/or process control purposes. The Company
sees the need for such a non-destructive inspection system stemming from the
unrelenting drive for improved productivity, higher product quality and greater
product yield in nearly all manufacturing industries worldwide. The Company
believes that Inspection Systems based on MR may be well suited for a variety of
15
industries, including food and beverages, plastics and rubbers, petrochemicals,
ceramics, explosives and narcotics, fuel propellants and even timber. While
sales of this new class of products to date have not been significant, the
Company has developed and sold two systems which are installed on line at
manufacturing facilities to inspect food cartons.
Successful sales of Inspection Systems will depend on a variety of
factors. Most significantly, the Company must find a cost effective means of
tailoring each Inspection System to meet the highly specific needs of each
application. This tailoring process may include both the magnet (which in the
systems already sold, were developed and manufactured by the Company through IGC
Field Effects) but also the electronic hardware and software components
currently made by its partner SMIS. Additionally, given the relatively high cost
of the critical components of an Inspection System, the Company must find and
gain entree to markets in which the additional value-added provided by the
highly accurate Inspection System exceeds the substantial capital and operating
cost of such a System. There can be no assurances that the Company can
successfully meet these challenges.
INVESTMENTS
ULTRALIFE BATTERIES, INC.
The Company owns 975,753 shares of the common stock (approximately 9.3%
of the outstanding common stock) of Ultralife Batteries, Inc. ("Ultralife"),
acquired at a cost of $7,015,000. Headquartered in Newark, N.Y., Ultralife
focuses on markets which require increased energy density and extended shelf
life. 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. In
addition, Ultralife produces advanced rechargeable batteries that are being
commercialized for notebook computers, cellular telephones and other portable
electronic products.
The Company is represented on Ultralife's Board of Directors.
Ultralife's common stock is traded on the NASDAQ National Market System under
the symbol ULBI. The market value of the Company's total investment in
Ultralife, the sale of which is restricted under US securities laws, was
$11,221,000 and $10,123,000 at May 31, 1998 and May 25, 1997, respectively.
During fiscal year 1996, the Company sold, in a series of transactions, 85,000
shares of its Ultralife holdings on which it reported an aggregate gain of
$1,414,000. The Company sold no shares of its Ultralife holdings in its fiscal
years 1998 and 1997. The Company may in the future sell additional Ultralife
shares as market conditions warrant.
SURREY MEDICAL IMAGING SYSTEMS LIMITED
As of May 31, 1998, the Company owns 354,223 of the outstanding
ordinary shares (approximately 23%) of Surrey Medical Imaging Systems Limited
("SMIS"), acquired at a cost of $3,530,000. The Company adopted the equity
method of accounting for its investment during the first quarter of fiscal 1996.
The acquisition cost exceeded the underlying equity in net assets by $3,298,000,
which is being amortized over a period of 40 years. At May 31, 1998 and May 25,
1997, accumulated amortization was approximately $247,000 and $164,000,
respectively. As SMIS is privately held, the market value of this investment is
not readily determinable. As a result of amortization and recognition of a
portion of SMIS' losses, the carrying value of the investment has been reduced
to $2,854,000 at May 31, 1998.
The Company also owns 980,000 redeemable preference shares of SMIS
purchased at a cost of $1,511,000, and has provided additional loans to SMIS
which are convertible into capital stock of SMIS. For a discussion of these
16
loans see Note C of the Notes of Consolidated Financial Statement included in
response to Item 8 hereto. During the year ended May 31, 1998, SMIS obtained a
line of credit financing in the amount of 2,500,000 British Pounds Sterling
("Pounds") ($4,177,000). The Company has guaranteed repayment of one half of the
outstanding balance up to 1,250,000 Pounds ($2,088,500) in the event of default
by SMIS. As of May 31, 1998, SMIS has drawn approximately 1,880,000 Pounds
(approximately $3,141,000) against the line.
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 Ultrasonics for use
in the non-destructive testing of a variety of materials.
The Company and SMIS have worked together closely to develop complete
magnetic resonance system products combining SMIS' electronics and software with
the Company's permanent magnet systems. In this way, the Company and SMIS are
able to access certain niche markets in both the clinical and industrial sectors
which would be largely unavailable to each party separately. See "Research and
Development - New Product Development: Low-cost, Permanent Magnet-Based MRI
Systems" above.
KRYOTECH, INC.
On March 23, 1998, the Company acquired 1,172,840 shares (the "B
Shares") of the Series B Convertible Preferred Stock, $.01 par value per share
(the "Series B Stock"), of KryoTech, Inc., a privately-held, South Carolina
corporation ("KryoTech"), and a warrant (the "Warrant") to purchase an
additional 237,416 shares (the "Warrant Shares") of Series B Stock. The Company
paid $4,750,000 for the B Shares. The Warrant may be exercised, in whole or in
part, at any time on or before it expires on March 23, 2008. The Warrant may be
exercised at a price equal to $1.053 per Warrant Share. On an as-converted
basis, the Company's holdings represent 20.7% of the outstanding equity, on a
fully diluted basis, of KryoTech.
KryoTech was formed on March 15, 1996 for the purpose of developing,
marketing, manufacturing and selling thermal management products which are
designed specifically for the computer industry. More specifically, KryoTech has
successfully demonstrated that active cooling of computer chips can improve chip
performance.
As partial consideration for the Warrant, Intermagnetics granted to
KryoTech an exclusive, worldwide, fully paid up, irrevocable right (the "Right")
to represent and sell products for application to, and use in, computer chip
cooling, based upon APD's and IGC Polycold's refrigeration technology (including
mixed gas technology). Unless otherwise renewed or extended by agreement of the
parties, the Right has a term ending on the later of (1) the seventh anniversary
of March 28, 1998, or (2) the date on which Intermagnetics' equity ownership
interest in KryoTech falls below 15% on a fully diluted basis. KryoTech may not
sublicense, sell or transfer the Right. The scope of the Right expressly
excludes the cryo-cooling of other electronic devices, such as communications
equipment of any type.
PERSONNEL
On May 31, 1998, the Company employed 591 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"). In fiscal year 1998, the Company and the United Steelworkers
negotiated a five year collective bargaining agreement, effective June 1, 1998.
Within the Refrigeration Products segment, the production employees of the
17
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 23, 1997.
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.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are:
Name Position Age
- ---- -------- ---
Carl H. Rosner Chairman of the Board of Directors, 69
and Chief Executive Officer
Glenn H. Epstein President and Chief Operating Officer 40
Michael C. Zeigler Senior Vice President - Finance 52
& Chief Financial Officer
Leo Blecher Vice President and General Manager - 52
IGC Magnet Business Group
Gary L. Hamilton Senior Vice President and General Manager - 48
InterCool Energy Corporation
Ian L. Pykett Vice President - IGC Technology 45
Development
Robert S. Sokolowski Vice President and General Manager - 45
IGC Advanced Superconductors
Richard J. Stevens Vice President and General Manager - 56
IGC Medical Advances Inc.
Ronald W. Sykes Vice President and General Manager - 66
IGC Polycold Systems Inc.
Bruce A. Zeitlin Corporate Vice President and General Manager - 55
APD Cryogenics Inc.
A principal founder of the Company, 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 the General
Electric Company. Mr. Rosner also serves as the Company's Chief Executive
Officer.
18
Mr. Epstein was named President and Chief Operating Officer on May 5,
1997. Prior to joining the Company, Mr. Epstein worked for Oxford Instruments
Group, plc in various capacities between 1986 and April, 1997. He most recently
held the position of President of the Nuclear Measurements Group, Inc., a
wholly-owned subsidiary of Oxford Instruments, plc. Mr. Epstein also worked for
the General Electric Company between 1981 and 1986.
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. Blecher was appointed Vice President and General Manager - IGC
Magnet Business Group in April, 1997. He previously held the title of Deputy
Manager of IGC-MBG. He originally joined the Company in 1988 as Manager of
Technology Projects. Prior to joining the Company, Mr. Blecher held various
positions of responsibility with Israel Aircraft Industry, most recently holding
the title of Manager Engineering and Project Manager, for the Space Technology
Division.
Mr. Hamilton was appointed Senior Vice President and General Manager -
InterCool Energy Corporation in February, 1995. Prior to that appointment, Mr.
Hamilton had served as Vice President and General Manager - APD Cryogenics Inc.,
since 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 Vice President of IGC Technology Development
in 1991. Prior to joining the Company, he had been President and Chief Executive
Officer of Advanced NMR Systems, Inc. (now Caprius, Inc.), a diagnostic imaging
company he co-founded in 1983.
Dr. Sokolowski was appointed Vice President and General Manager of the
Company's IGC Advanced Superconductors division in February, 1996. Dr.
Sokolowski served as the Company's Manager of High Temperature Superconductor
Operations, a part of IGC Technology Development, between November, 1992 and
February, 1996.
Mr. Stevens became Vice President and General Manager - IGC Medical
Advances Inc. upon its acquisition by the Company in March, 1997. An original
founder of Medical Advances, Inc., Mr. Stevens had been its President since
1985. Prior to that, Mr. Stevens was a marketing and advertising executive for
seventeen years with the General Electric Company. He spent twelve years of his
career at the General Electric Company in the Medical Systems Group and five
years in materials technologies businesses, and held the title of Manager of
Computed Tomography Marketing in the Medical Systems Group from 1981 to 1985.
Mr. Sykes became Vice President and General Manager - IGC Polycold
Systems Inc. upon its acquisition by the Company in November, 1997. Mr. Sykes
had been President of Polycold Systems International, Inc. since December, 1991.
Prior to that, he held executive level positions in the electronic scale
industry, holding the title of Senior Vice President at Weigh - Tronix, Inc.
from 1987 to 1991, and CEO of National Controls from 1984 to 1986. Mr. Sykes
also worked for several years in the optical coating industry.
Mr. Zeitlin has been employed by the Company in various capacities
since 1974. He was responsible for marketing superconductive materials between
1982 and 1996, and became Vice President Materials Technology in 1985. Mr.
Zeitlin also headed the Company's superconductive materials operations (now
IGC-AS) between 1987 and February, 1996 when Mr. Zeitlin was appointed Corporate
Vice President and General Manager - APD Cryogenics, Inc.
19
ITEM 2. PROPERTIES.
The Company's corporate offices, IGC Magnet Business Group, IGC
Technology Development and InterCool Energy Corporation offices are located in
approximately 146,000 square feet of space located in Latham, New York (the
"Latham Facility"). The Company owns the Latham Facility, which is subject to a
$5.8 million mortgage bearing interest at the rate of 7.5%, and maturing in May,
2001.
The Company's HTS facility dedicated to the manufacture of
Bismuth-based HTS Wire/Tape is located in approximately 19,000 square feet of
leased space located in Cohoes, New York. The lease is a three (3) year lease
that expires on January 31, 2000, with two consecutive three year renewal terms.
IGC Advanced Superconductors' offices and production facilities are
located in Waterbury, Connecticut in premises of approximately 212,700 square
feet (of which 57,900 square feet are presently being used) pursuant to a thirty
year prepaid lease 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.
IGC Field Effects currently operates out of premises totaling
approximately 21,900 square feet in Tyngsboro, Massachusetts. The facilities are
subject to a five year lease expiring in the fall of 2001.
APD Cryogenics, Inc. operates out of a building, which it owns, in
Allentown, Pennsylvania totaling approximately 56,550 square feet.
IGC Medical Advances Inc. leases approximately 20,800 square feet in a
building located in the Milwaukee County Research Park's Technology Innovation
Center. Approximately 9,000 square feet are used for office space with the
remaining space dedicated to lab, assembly, shipping and material storage. The
lease expires in September, 1998 and may be renewed for a successive one year
term. The Company currently believes that it will be able to renew this lease.
The Company believes that IGC-MAI has sufficient room to expand in this facility
to meet its currently projected needs through the balance of the lease term.
IGC Polycold Systems Inc. leases approximately 27,900 square feet of
manufacturing and office space in three buildings located in San Rafael,
California. The leases expire in 1999 (for one building) and 2002 (for two of
the buildings). The Company believes that IGC Polycold has sufficient room in
these facilities to meet its current projected needs through the balance of the
lease terms.
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.
20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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 1997
- ----------------
Quarter Ended August 25, 1996 $ 18 1/4 $ 12 13/16
Quarter Ended November 24, 1996 14 1/2 12 5/8
Quarter Ended February 23, 1997 13 5/16 10 15/16
Quarter Ended May 25, 1997 12 7 9/16
Fiscal Year 1998
- ----------------
Quarter Ended August 24, 1997 $ 13 7/16 $ 9 15/16
Quarter Ended November 23, 1997 11 7/8 8 7/16
Quarter Ended February 22, 1998 9 3/16 7 3/4
Quarter Ended May 31, 1998 11 1/2 9
------------------------
(1) The closing prices have been adjusted to reflect a two percent stock
dividend distributed on September 16, 1997 to stockholders of record on
August 26, 1997, rounded to the nearest $1/16, and a two percent stock
dividend to be distributed on September 17, 1998, to stockholders of
record on August 27, 1998.
There were 2,048 holders of record of Common Stock as of August 14,
1998. 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.
21
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. (Prior years have been reclassified to
conform with the current year presentation.)
(Dollars in Thousands, Except Per Share Amounts)
----------------------------------------------------------------------------------
For the Fiscal Year Ended May 31, 1998 May 25, 1997 May 26, 1996 May 28, 1995 May 29, 1994
------------ ------------ ------------ ------------ ------------
Net sales $95,894 $87,052 $88,467 $83,877 $51,238
Gross Margin 35,685 26,200 22,279 23,703 16,344
Income before income taxes 4,744 4,035 6,882 6,512 2,099
Net income 2,753 2,615 4,427 4,007 2,148
Per common share - diluted:
Income before
cumulative effect of
accounting change 0.21 0.20 0.35 0.33 0.11
Cumulative effect of
accounting change 0.07
Net income 0.21 0.20 0.35 0.33 0.18
----
At End of Fiscal Year 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Working capital $45, 493 $49,346 $53,642 $52,655 $49,339
Total assets 127,776 115,889 112,397 103,706 93,787
Long-term debt
(net of current maturities) 28,833 29,105 29,364 39,807 39,859
Accumulated deficit (1,081) (1,643) (1,727) (2,495) (2,595)
Shareholders' equity 83,801 73,087 67,296 53,305 46,935
- ----------
(a) Income per common share - diluted has been computed during each period
based on the weighted average number of shares of Common Stock outstanding
plus dilutive potential common shares (where applicable).
(b) The Company did not pay a cash dividend on its Common Stock during any of
the periods indicated.
(c) Net income per common share-diluted has been restated to give effect to the
2% stock dividend declared July 21, 1998, the 2% stock dividend distributed
in September, 1997 and August, 1996, the five-for-four stock split effected
September 8, 1994, and the 3% stock dividend distributed in 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 $.07 per common
share-diluted.
22
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 net
sales of the Company and the percentage change of such items from period to
period. See the Consolidated Financial Statements, located elsewhere in this
report, for financial information to which the percentages set forth below
relate. (Prior years have been reclassified to conform with the current year
presentation.)
Period to Period
Relationship to Net Sales Increase (Decrease)
-------------------------------------------- --------------------------
Fiscal Year Ended Fiscal Years
-------------------------------------------- --------------------------
May 31, May 25, May 26, 1997- 1996-
1998 1997 1996 1998 1997
------------ ------------ ------------ ----------- -----------
Net sales 100.0% 100.0% 100.0% 10.2% (1.6%)
Cost of products sold 62.8 69.9 74.8 (1.1) (8.1)
------ ------ ------
Gross margin 37.2 30.1 25.2 36.2 17.6
Product research and
development 8.4 7.8 5.7 19.9 35.5
Marketing, general and
administrative 21.7 18.2 14.0 31.6 27.5
Amortization of
intangible assets 1.3 0.4 0.3 261.3 31.6
------ ------ ------
31.4 26.4 20.0 31.5 29.8
------ ------ ------
Operating income 5.8 3.7 5.2 69.6 (29.4)
Interest and other
income 2.5 3.4 4.7 (20.2) (28.4)
Realized gain on sale of
available for sale -- -- 1.6 ** **
securities
Interest and other
expense (2.2) (2.3) (2.9) 6.5 (21.0)
Equity in net loss of
unconsolidated affiliates (1.1) (0.2) (0.8) 454.4 (75.7)
------ ------ ------
Income before income
taxes 5.0 4.6 7.8 17.6 (41.4)
Provision for income
taxes 2.1 1.6 2.8 40.2 (42.2)
------ ------ ------
Net income 2.9% 3.0% 5.0% 5.3% (40.9%)
====== ====== ======
- ----------
** Not applicable for purposes of this table.
23
The statements contained in this annual report which are not historical
fact are "forward-looking statements" that involve various important
assumptions, risks, uncertainties and other factors which could cause the
Company's actual results for 1999 and beyond to differ materially from those
expressed in such forward-looking statements. These important factors include,
without limitation, the assumptions, risks, and uncertainties set forth herein,
as well as other assumptions, risks, uncertainties and factors disclosed
elsewhere in this report and in the Company's press releases, shareholders'
reports and filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS -- FISCAL 1998 and FISCAL 1997
Consolidated
Net sales increased 10.2% in fiscal 1998 compared to a decrease of 1.6%
in fiscal 1997. Sales for fiscal 1998 grew mainly due to the inclusion of full
year results from the acquisition of Medical Advances, Inc. ("MAI") and half
year results from the November, 1997 acquisition of Polycold Systems
International, Inc. ("Polycold"). In fiscal 1997, increases in sales of both
magnet systems and refrigeration products were offset by a substantial reduction
in sales of superconducting materials.
As a percentage of net sales, gross margins improved again in fiscal
1998 after a good recovery in fiscal 1997. The increase in both years was due to
continuing cost-reduction efforts and a more favorable product mix, primarily in
the Magnetic Products segment, despite continuing competitive pressure on
selling prices for magnets and superconducting materials. The recent
acquisitions, MAI and Polycold, had a favorable impact on gross margins, as did
improvements in fiscal 1998 for the superconducting magnets and wire businesses.
Looking forward, the Company expects greater sales and earnings in
fiscal 1999. This expectation is based on the following assumptions, among
others:
-the market for MRI systems continues to grow;
-the Company can successfully contend with continued competitive
pressure on selling prices in the MRI marketplace for magnets and
materials;
-anticipated sales of refrigerants occur; and,
-reductions in production costs in both business segments continue.
In addition, fiscal 1999 will include the operations of Polycold for the full
year. Polycold was acquired in November, 1997 as described in "Liquidity and
Capital Commitments".
Company-funded product research and development expenses increased
19.9% in fiscal 1998, almost all of which resulted from the recent acquisitions,
compared to a 35.5% increase in fiscal 1997. Company-funded product research and
development spending increased in all business segments. Because the Company is
no longer qualified as a small business and thus is not eligible for certain
government-funded research awards, external funding for research and development
expenses continues to decline, and has been replaced by internal funding.
Marketing, general and administrative expenses grew 31.6% in fiscal
1998 compared with growth of 27.5% in fiscal 1997. This was due primarily to the
recent acquisitions, increased marketing expenses for APD Cryogenics, and a
non-cash charge of $600,000 associated with the issuance of a warrant to
Sumitomo Corporation of America in connection with a distribution agreement. The
increase in fiscal 1997 was due to the creation of two separate organizations:
InterCool Energy Corporation ("ICE") in fiscal 1996, and, IMiG MRI, LLC
("IMiG"), a joint venture with Surrey Medical Imaging Systems Limited ("SMIS"),
in fiscal 1997. ICE's purpose is to develop and market FRIGC(R) refrigerants.
IMiG was formed to commercialize a new, low-cost permanent magnet-based magnetic
24
resonance imaging system. In fiscal 1998, the Company discontinued IMiG and
named Trex Medical Corporation as the exclusive world-wide distributor for the
IMiG MRI system.
In fiscal 1998 the Company began to separately report the amortization
of intangible assets due to the significance of such expense resulting from the
acquisitions of MAI and Polycold. The excess of the purchase price over the fair
market value of net assets acquired for these acquisitions is being written off
over 15 years.
Interest income declined in fiscal 1998 because a substantial portion
of invested cash was used for acquisitions and investments in and advances to
affiliates. Equity in net loss of unconsolidated affiliates increased because
the affiliates had higher losses in the current fiscal year.
Interest expense was slightly higher in fiscal 1998 principally due to
the issuance of a short-term note as part of the Polycold acquisition and was
lower in fiscal 1997 due to the repayment of $2,167,000 of installment notes in
December, 1996.
The Company's effective income tax rate increased in fiscal 1998 to
42%, up from 35% in fiscal 1997, due mainly to the effect of non-deductible
amortization of intangible assets associated with the recent acquisitions.
Fiscal 1997 benefited from the utilization of certain tax credits. See Note G of
Notes to Consolidated Financial Statements, located elsewhere in this report,
for detailed information regarding income taxes.
In May, 1997, the Company entered into a distributorship agreement with
Sumitomo Corporation of America to market FR-12 refrigerant in the Asia-Pacific
market. In June, 1997, the Company entered into a Warrant Agreement with
Sumitomo under which Sumitomo could purchase up to 1,200,000 shares of Common
Stock. Sumitomo paid $120,000 for the rights to the warrants. The Company issued
an initial warrant (which expires on November 16, 1998) to purchase 500,000
shares at $12.50 per share. In connection with the initial Warrant, the Company
incurred a non-cash charge of $600,000 in fiscal 1998.
In July, 1998, the Company announced that it was extending the
near-term marketing emphasis of FRIGC(R) refrigerants to commercial stationary
applications because of the unsatisfactory penetration of the U.S. mobile market
and the larger-than-projected availability of Freon R-12. It also announced that
it had appointed three additional North American distributors and was
restructuring its international distribution plan to have several non-exclusive
international distributors.
Segment Discussion
Magnetic Products Segment. This segment consists of the design,
development, manufacture and sale of superconductive magnets and
materials, permanent magnets, RF coils, and other magnetic products.
Sales for the segment increased 13.4% in fiscal 1998 compared to a
decline of 9.2% in fiscal 1997, principally due to the inclusion of MAI
for the full year. Magnet system sales (including MAI) increased by
15.5% in fiscal 1998 compared with an increase of 6.8% in fiscal 1997.
Material sales increased approximately 4% in fiscal 1998 compared to a
decline of approximately 46% in fiscal 1997. The sales decline in this
segment in fiscal 1997 was principally due to substantially lower
superconducting material sales to a major customer who decided not to
renew a long-term supply agreement. Sales to this customer increased in
fiscal 1998. In fiscal 1998 gross profit margins increased for both
magnet products and superconducting materials due to continued cost
improvements, higher sales and improved product mix, including MAI's
impact on the full year. Gross margins in fiscal 1997 increased for
magnet products due to a more favorable product mix and improved
production costs, but declined substantially for materials due to lower
sales volume and continued yield losses in wire manufacturing.
25
Refrigeration Products Segment. This segment, which consists of the
design, development, manufacture and sale of cryogenic refrigeration
equipment and refrigerants, had increased sales of approximately 3% in
fiscal 1998 and 20% in fiscal 1997. Fiscal 1998 includes Polycold sales
for six months, which slightly exceeded the reduction in sales of
FRIGC(R) refrigerants and APD Cryogenics' refrigeration equipment due
to reduced demand for both product lines. The increase in fiscal 1997
was primarily the result of sales of FR-12(TM) refrigerant and a
substantial increase in sales of laboratory and Cryotiger systems.
Gross margin, as a percentage of net sales, increased slightly in
fiscal 1998 and 9.3% in fiscal 1997. The fiscal 1997 increase was due
to cost reductions for refrigerants and cryogenic refrigeration
equipment.
See Note J of Notes to Consolidated Financial Statements, located
elsewhere in this report, for financial information by industry
segment.
Year 2000 Compliance
The Company has developed and is implementing an assessment and
remediation plan to identify and fix any potential problems that could occur
because of a computer's failure to properly deal with the Year 2000 and beyond.
This plan encompasses all of the Company's business entities, business partners
and all suppliers of materials and services. While, at present, the Company
believes that the cost of completing the plan will not be material, and that the
risks to the Company with respect to Year 2000 issues are not significant, the
Company cannot, at this time, fully assess the potential impact. If risks are
identified during the Company's Year 2000 review, the Company will take steps to
eliminate or reduce such risks.
The Company is in the process of installing a new computer software
system common to all its operating locations together with additional hardware
at a cost estimated to be between $1,500,000 and $2,000,000. The implementation
of this software is expected to be completed during the Company's current fiscal
year. Most of these costs will be capitalized.
LIQUIDITY AND CAPITAL COMMITMENTS
In fiscal 1998 the Company generated net cash of $6,422,000 from
operating activities, which, together with available cash, was used to purchase
property, plant and equipment, to make additional investments in SMIS and an
investment in KryoTech, Inc., to purchase Treasury Stock, repay debt and to
acquire Polycold.
On November 24, 1997, the Company acquired Polycold of San Rafael, CA.,
a manufacturer of low-temperature refrigeration systems including water vapor
cryopumps, cryocoolers, cold trap chillers and gas chillers, for an aggregate
consideration of approximately $16,500,000 consisting of a 90-day promissory
note for $6,821,000, 281,568 shares of the Company's Common Stock and 69,992
shares of Series A Preferred Stock, which is redeemable in cash or Common Stock
at the option of the Company. The $10,175,000 excess of purchase price over the
fair market value of net assets acquired is being amortized over 15 years. The
Preferred Stock is redeemable in cash by the Company at any time at $100 per
share. Also, the Company may convert some or all of the Preferred Stock into
Common Stock at any time after December 11, 1998, but before December 1, 1999.
If any of the Preferred Stock is not so converted by the Company, it shall
automatically convert into Common Stock as of December 1, 1999. The conversion
shall be effected by dividing the conversion price ($100 per share) by the
average of the closing prices of the Common Stock on the ten trading days
preceding the date of conversion. The promissory note was paid in March 1998
using working capital and $3,706,000 of cash acquired from Polycold.
During fiscal 1998, under the Company's stock buy-back program, the
Company repurchased a total of 465,500 shares of Common Stock for $4,066,000.
26
During fiscal 1998, the Company increased its loans to SMIS by 900,000
British Pounds Sterling ("Pounds") ($1,479,000) at dates of advances and
repayments, net of repayments. These loans bear interest at the rate of 11% per
annum. Interest and principal are due and payable on December 31, 1998, but may
be prepaid by SMIS without penalty. Subsequent to December 31, 1998, if the
loans are not repaid, the Company has the right to tender the loans to SMIS in
exchange for 1% of the "enlarged equity" of SMIS for each 100,000 Pounds of
loans tendered. The "enlarged equity" equals the shares outstanding prior to the
tender, plus those issued as a result of the tender. The amount of loans
available for tender is equal to approximately 900,000 Pounds ($1,503,720) at
May 31, 1998.
During the year ended May 31, 1998, SMIS obtained line of credit
financing in the amount of 2,500,000 Pounds ($4,177,000). The Company has
guaranteed (by issuing a letter of credit) repayment of one half of the
outstanding balance, up to 1,250,000 Pounds ($2,088,500) in the event of default
by SMIS. Another of SMIS' shareholders guaranteed the balance. As of May 31,
1998, SMIS has drawn approximately 1,880,000 Pounds (approximately $3,141,000)
against the line.
In March 1998, the Company acquired 1,172,840 shares of the Series B
Convertible Preferred Stock, $.01 par value per share of KryoTech, Inc., a
privately-held corporation ("KryoTech"), and a warrant to purchase an additional
237,416 shares of the Series B Convertible Preferred Stock at $1.053 per share.
The warrant expires in March, 2008. On an "as converted" basis, the Series B
Convertible Preferred Shares equal approximately 21% of KryoTech.
KryoTech, located in Columbia, S.C., develops, manufactures and markets
value-added thermal management solutions for the computer industry. In
connection with this investment, the Company has granted KryoTech exclusive
worldwide rights to sell computer chip cooling equipment using the Company's
refrigeration technology.
See the Consolidated Statements of Cash Flows in the Consolidated
Financial Statements, located elsewhere in this report, for a detailed
description of the sources and uses of cash during fiscal 1998 as well as the
two preceding years.
The Company's capital resource commitments as of August 2, 1998
consisted principally of capital equipment commitments of approximately $970,000
and outstanding bank loans.
The Company has a three year, unsecured $25,000,000 line of credit with
two banks that bears interest at the London Interbank Offered Rate (LIBOR) plus
.50%, or prime less .50%, and will expire in November, 2000, of which $2,000,000
was in use on August 2, 1998.
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(R) 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.
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
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 1998 Annual Meeting of Shareholders
(the "Proxy Statement"), and is hereby incorporated herein by reference.
The information concerning executive officers called for by Item 10 of
Form 10-K is set forth in "Item 1. Business" of this annual report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information with respect to compensation of certain executive
officers and all executive officers of the Company as a group to be contained
under the headings "Executive Compensation" and "Certain Transactions" in the
Proxy Statement is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information with respect to ownership of the Company's Common Stock
by management and by certain other beneficial owners to be contained under the
heading "Security Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information with respect to certain relationships and related
transactions to be contained under the heading "Certain Transactions" in the
Proxy Statement is hereby incorporated herein by reference.
28
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 31, 1998 and May 25, 1997
Consolidated Statements of Income for the fiscal years ended May 31,
1998, May 25, 1997 and May 26, 1996
Consolidated Statements of Shareholders' Equity for the fiscal years
ended May 31, 1998, May 25, 1997 and May 26, 1996
Consolidated Statements of Cash Flows for the fiscal years ended May
31, 1998, May 25, 1997 and May 26, 1996
Notes to Consolidated Financial Statements
2. Schedule
II Valuation and Qualifying Accounts
All other schedules are not required or are inapplicable and,
therefore, have been omitted.
3. Exhibits
Articles of Incorporation and By-laws
* 3(i) Restated Certificate of Incorporation
3(ii) By-laws, as amended (3) (Exhibit 3.2)
Instruments defining the rights of security holders, including indentures
4.1 Form of Common Stock certificate (5) (Exhibit 4.1)
* 4.2 Intermagnetics General Corporation Indenture dated as of
September 15, 1993
* 4.3 Second Amended and Restated Loan and Agency Agreement dated as
of October 23, 1997 among Corestates Bank, N.A. and
Intermagnetics General Corporation, APD Cryogenics Inc.,
Magstream Corporation, Medical Advances, Inc. and InterCool
Energy Corporation
* 4.4 First Amendment dated as of May 18, 1998 to the Second Amended
and Restated Loan Agreement dated as of October 23, 1997 among
Corestates Bank, N.A. and Intermagnetics General Corporation,
APD Cryogenics Inc., Magstream Corporation, Medical Advances,
Inc. and InterCool Energy Corporation
29
Material Contracts
10.1 Agreement Restating and Superseding Lease and Granting Rights
to Use Common Areas and Other Rights dated as of December 23,
1991 between Waterbury Industrial Commons Associates, IGC
Advanced Superconductors Inc. and Intermagnetics General
Corporation (5) (Exhibit 10.1)
+ 10.2 1990 Stock Option Plan (4) (Appendix A)
+ 10.3 1981 Stock Option Plan, as amended (2) (Exhibit 10.7)
+ 10.4 Supplemental Executive Benefit Agreement (1) (Exhibit 10.37)
10.5 Agreement dated June 2, 1992 between Philips Medical Systems
Nederlands B.V. and Intermagnetics General Corporation for
sales of magnet systems (7) (Exhibit 10.6)
10.6 Amendment No. 3 dated January 1, 1997 to the Agreement of June
2, 1992 between Philips Medical Systems Nederlands B.V. and
Intermagnetics General Corporation for sales of magnet systems
(8) (Exhibit 10.6)
+* 10.7 Employment Agreement dated April 20, 1998 between
Intermagnetics General Corporation and Carl H. Rosner
+* 10.8 Employment Agreement dated April 1, 1997 between
Intermagnetics General Corporation and Glenn H. Epstein
+ 10.9 Employment Agreement dated March 10, 1997 between
Intermagnetics General Corporation and Richard J. Stevens (9)
(Exhibit 10.1)
+ 10.10 Employment Agreement dated November 24, 1997 between
Intermagnetics General Corporation and Ronald W. Sykes (10)
(Exhibit 10.1)
10.11 Share Purchase Agreement, dated January 23, 1992, by and
between Ultralife Batteries, Inc. and Intermagnetics General
Corporation (6) (Exhibit 10.1)
Subsidiaries of the registrant
* 21 Subsidiaries of the Company
30
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,
33-72160, 333-10553 and 333-42163 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 Annual Report
on Form 10-K filed by the Company for the fiscal year ended
May 27, 1990.
(4) Exhibit incorporated herein by reference to the Proxy
Statement dated October 4, 1991 for the 1991 Annual Meeting
of Shareholders.
(5) Exhibit incorporated herein by reference to the Annual Report
on Form 10-K filed by the Company for the fiscal year ended
May 31, 1992, as amended by Amendment No. 1 on Form 8 dated
November 17, 1992.
(6) Exhibit incorporated herein by reference to the Quarterly
Report on Form 10-Q filed by the Company for the six months
ended November 29, 1992.
(7) Exhibit incorporated herein by reference to the Annual Report
on Form 10-K/A2 for the fiscal year ended May 29, 1994.
Portions of this Exhibit were omitted and filed separately
with the Secretary of the Securities and Exchange Commission
pursuant to an Application for Confidential Treatment under
Rule 24b-2 of the Securities Exchange Act of 1934, as amended.
(8) Exhibit incorporated herein by reference to the Annual Report
on Form 10-K/A filed by the Company for the fiscal year ended
May 25, 1997.
(9) Exhibit incorporated herein by reference to the Current Report
of Form 8-K filed by the Company on March 10, 1997.
(10) Exhibit incorporated herein by reference to the Current Report
of Form 8-K filed by the Company on November 24, 1997.
* Filed with the Annual Report on Form 10-K for the fiscal year ended May 31,
1998.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this annual report on Form 10-K.
31
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.
32
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 27, 1998 By: /s/ Carl H. Rosner
------------------------------------
Carl H. Rosner
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints
Carl H. Rosner, Chairman 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 and August 27, 1998
--------------------------- Chief Executive Officer
Carl H. Rosner (principal executive
officer) and Director
/s/ Glenn H. Epstein President, Chief Operating August 27, 1998
--------------------------- Officer and Director
Glenn H. Epstein
/s/ Michael C. Zeigler Senior Vice President- August 27, 1998
--------------------------- Finance; Chief Financial
Michael C. Zeigler Officer (principal financial
and accounting officer)
/s/ Joseph C. Abeles Director August 27, 1998
---------------------------
Joseph C. Abeles
/s/ John M. Albertine Director August 27, 199
---------------------------
John M. Albertine
/s/ Edward E. David, Jr. Director August 27, 1998
---------------------------
Edward E. David, Jr.
/s/ James S. Hyde Director August 27, 1998
---------------------------
James S. Hyde
/s/ Thomas L. Kempner Director August 27, 1998
---------------------------
Thomas L. Kempner
/s/ Stuart A. Shikiar Director August 27, 1998
---------------------------
Stuart A. Shikiar
/s/ Sheldon Weinig Director August 27, 1998
---------------------------
Sheldon Weinig
33
1. Financial Statements
34
Independent Auditors' Report
The Board of Directors and Shareholders
Intermagnetics General Corporation:
We have audited the consolidated financial statements of Intermagnetics General
Corporation and subsidiaries, as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Intermagnetics General Corporation and subsidiaries as of May 31, 1998 and May
25, 1997, and the results of their operations and their cash flows for each of
the years in the three-year period ended May 31, 1998, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Albany, New York
July 14, 1998
35
CONSOLIDATED BALANCE SHEETS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
May 31, May 25,
1998 1997
--------- ---------
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 2,993 $ 12,667
Trade accounts receivable, less allowance
(1998 - $350; 1997 - $302) 14,802 16,899
Costs and estimated earnings in excess of
billings on uncompleted contracts 4,660 3,543
Inventories:
Finished products 1,045 811
Work in process 18,313 14,196
Materials and supplies 13,491 11,410
-------- --------
32,849 26,417
Deferred income taxes 3,583 2,453
Prepaid expenses and other 1,423 819
-------- --------
TOTAL CURRENT ASSETS 60,310 62,798
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 1,479 1,479
Buildings and improvements 16,604 16,425
Machinery and equipment 39,421 36,181
Leasehold improvements 649 35
-------- --------
58,153 54,120
Less allowances for depreciation and amortization 32,445 28,616
-------- --------
25,708 25,504
Equipment in process of construction 2,231 3,048
-------- --------
27,939 28,552
INTANGIBLE AND OTHER ASSETS
Available for sale securities 3,450 3,112
Other investments 9,888 4,986
Investment in affiliate 2,854 3,946
Notes receivable from affiliate 2,476 972
Excess of cost over net assets acquired, less
accumulated amortization (1998 - $1,166; 1997 - $169) 18,966 9,538
Other assets 1,893 1,985
-------- --------
TOTAL ASSETS $127,776 $115,889
======== ========
(Continued)
36
May 31, May 25,
1998 1997
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 272 $ 259
Accounts payable 6,076 6,441
Salaries, wages and related items 3,647 2,660
Customer advances and deposits 298 811
Product warranty reserve 996 911
Accrued income taxes 2,411 1,453
Other liabilities and accrued expenses 1,117 917
--------- ---------
TOTAL CURRENT LIABILITIES 14,817 13,452
LONG-TERM DEBT, less current portion 28,833 29,105
DEFERRED INCOME TAXES 325 245
SHAREHOLDERS' EQUITY
Preferred Stock, par value $.10 per share:
Authorized - 2,000,000 shares
Issued and outstanding - 69,992 shares 6,999
Common Stock, par value $.10 per share:
Authorized - 40,000,000 shares
Issued and outstanding (including shares in treasury):
1998 - 13,334,280 shares
1997 - 12,892,084 shares 1,334 1,264
Additional paid-in capital 81,008 74,378
Accumulated deficit (1,081) (1,643)
Unrealized gain on available for sale securities, net 850 613
Foreign currency translation adjustments (354) (16)
--------- ---------
88,756 74,596
Less cost of Common Stock in treasury
(1998 - 562,175 shares; 1997 - 163,700 shares) (4,955) (1,509)
--------- ---------
TOTAL SHAREHOLDERS EQUITY 83,801 73,087
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 127,776 $ 115,889
========= =========
See notes to consolidated financial statements.
37
CONSOLIDATED STATEMENTS OF INCOME
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
---------------------------------------------------------------
May 31, May 25, May 26,
1998 1997 1996
---------------- ----------------- -----------------
Net sales $ 95,894 $ 87,052 $ 88,467
Cost of products sold 60,209 60,852 66,188
-------- -------- --------
Gross margin 35,685 26,200 22,279
Product research and development 8,128 6,779 5,003
Marketing, general and administrative 20,840 15,836 12,420
Amortization of intangible assets 1,203 333 154
-------- -------- --------
30,171 22,948 17,577
-------- -------- --------
Operating income 5,514 3,252 4,702
Interest and other income 2,364 2,961 4,138
Realized gain on sale of available for sale securities 1,414
Interest and other expense (2,125) (1,996) (2,624)
Equity in net loss of unconsolidated affiliates (1,009) (182) (748)
-------- -------- --------
Income before income taxes 4,744 4,035 6,882
Provision for income taxes 1,991 1,420 2,455
-------- -------- --------
NET INCOME $ 2,753 $ 2,615 $ 4,427
======== ======== ========
Earnings per Common Share:
Basic $ .22 $ .21 $ .37
======== ======== ========
Diluted $ .21 $ .20 $ .35
======== ======== ========
See notes to consolidated financial statements.
38
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
INTERMAGNETICS GENERAL CORPORATION
Fiscal Years Ended May 31, 1998, May 25, 1997, May 26, 1996
(Dollars in Thousands)
Unrealized
Gain/(Loss) on Foreign
Additional Available Currency
Common Paid-in Accumulated For Sale Translation Treasury
Stock Capital Deficit Securities, net Adjustments Stock
------------ ------------ ----------- ---------------- ------------ ---------
Balances at May 28, 1995 $1,108 $55,166 $(2,495) $1,787 $(46) $(2,215)
Net income 4,427
Tax benefit from exercise of stock options 837
Sale of 217,778 shares of Common Stock,
including receipt of 17,072 shares of
Treasury Stock, upon exercise of stock
options 21 1,236 (275)
Sale of 7,875 shares of Common Stock
to IGC Savings Trust 1 140
Stock dividends and payment for
fractional shares 23 3,623 (3,659)
Unrealized gain on available for
sale securities, net 559
Unrealized loss on foreign currency
translation (50)
Purchase of 62,700 shares of Treasury Stock (985)
Conversion of $8,375,000 of 5.75% convertible
subordinated debentures 55 8,038
------------ ------------ ----------- ------------- ------------- ----------
Balances at May 26, 1996 1,208 69,040 (1,727) 2,346 (96) (3,475)
Net income 2,615
Tax benefit from exercise of stock options 412
Sale of 133,024 shares of Common Stock,
including receipt of 15,644 shares of
Treasury Stock, upon exercise of stock
options 13 669 (185)
Sale of 8,356 shares of Common Stock
to IGC Savings Trust 1 116
Stock dividends and payments for
fractional shares 23 2,495 (2,531)
Unrealized loss on available for
sale securities, net (1,733)
Unrealized gain on foreign currency
translation 80
Purchase of 291,100 shares of Treasury Stock (3,358)
Issuance of 678,517 shares of Common Stock,
including 474,895 Treasury Shares in
payment for acquisition 19 1,646 5,509
------------ ------------ ----------- ------------- ------------- ----------
Balances at May 25, 1997 1,264 74,378 (1,643) 613 (16) (1,509)
Net income 2,753
Tax benefit from exercise of stock options 177
Sale of 132,214 shares of Common Stock,
including receipt of 21,993 shares of
Treasury Stock, upon exercise of stock
options 13 739 (226)
Sale of 7,023 shares of Common Stock
to IGC Savings Trust 1 69
Stock dividends and payments for
fractional shares 25 2,157 (2,191)
Unrealized gain on available for
sale securities, net 237
Unrealized loss on foreign currency
translation (338)
Purchase of 465,800 shares of Treasury Stock (4,065)
Issuance of 312,650 shares of Common Stock
and 69,992 shares of Series A Preferred Stock
in payment for acquisitions 31 2,719
Issuance of 89,018 shares of Treasury Stock
for purchase of inventory 25 845
Issuance of warrant to acquire 500,000
shares of Common Stock 720
Other 24
------------ ------------ ----------- ------------- ------------- ----------
Balances at May 31, 1998 $1,334 $81,008 $(1,081) $ 850 $ (354) $(4,955)
============ ============ =========== ============= ============= ==========
See notes to consolidated financial statements.
39
CONSOLIDATED STATEMENTS OF CASH FLOWS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands)
Fiscal Year Ended
-----------------------------------------------
May 31, May 25, May 26,
1998 1997 1996
------------- -------------- --------------
OPERATING ACTIVITIES
Net income $ 2,753 $ 2,615 $ 4,427
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 5,424 3,964 3,165
Provision for deferred taxes (1,028) (589) (533)
Other non-cash activity (255)
Non-cash expense from warrants issued 600
Imputed interest on unsecured notes 137 210
Equity in net loss of unconsolidated affiliates 1,009 182 748
Gain on sale of available for sale securities (1,414)
Loss (gain) on sale and disposal of assets 60 (374)
Change in operating assets and liabilities, net of effects of acquisitions:
(Increase) decrease in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts 3,494 3,299 (1,270)
(Increase) decrease in inventories and prepaid expenses and other (5,579) (1,447) 1,482
Increase in accounts payable and accrued expenses 27 919 3,365
Change in foreign currency translation adjustments (338) 80 (50)
------------- -------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,422 8,531 10,130
INVESTING ACTIVITIES
Purchases of property, plant and equipment (3,146) (5,446) (4,079)
Proceeds from sale of assets 92 935
Proceeds from sale of available for sale securities 1,927
Acquisitions, net of cash acquired (3,115) (4,139)
Investment in and advances to unconsolidated affiliates (6,855) (972) (2,070)
Repayment of advances by unconsolidated affiliate 470
(Increase) decrease in other assets 66 83 (121)
------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (12,488) (9,539) (4,343)
FINANCING ACTIVITIES
Proceeds from sale of warrants 120
Purchase of Treasury Stock (4,065) (3,358) (985)
Proceeds from sales of Common Stock 596 614 1,123
Principal payments on note payable and long-term debt (259) (2,277) (238)
------------- -------------- --------------
NET CASH USED IN FINANCING ACTIVITIES (3,608) (5,021) (100)
------------- -------------- --------------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (9,674) (6,029) 5,687
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 12,667 18,696 13,009
------------- -------------- --------------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 2,993 $12,667 $18,696
============= ============== ==============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Exchange of Common Stock in partial payment of exercise
price on options $ 226 $ 185 $ 275
============= ============== ==============
Issuance of Common Stock, Preferred Stock, and Treasury Stock
for acquisitions $ 9,749 $ 7,174
============= ==============
Issuance of Treasury Stock for purchase of inventory $ 870
=============
Tax benefit from exercise of stock options $ 177 $ 412 $ 837
============= ============== ==============
Stock dividends $ 2,191 $ 2,531 $ 3,659
============= ============== ==============
Conversion of debt to equity, net of deferred debt issue
cost reduction of $282 $ 8,093
==============
See notes to consolidated financial statements.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERMAGNETICS GENERAL CORPORATION
NOTE A - ACCOUNTING POLICIES
Description of Business:
Intermagnetics General Corporation (the "Company") operates in two industry
segments: Magnetic Products and Refrigeration Products. The Magnetic Products
segment consists primarily of the manufacture and sale of superconductive
materials, magnets, permanent magnets and radio frequency coils used mainly
in Magnetic Resonance Imaging ("MRI") for medical diagnostics. The majority of
the Company's sales in this segment are to US and European customers. The
Refrigeration Products segment consists of cryogenic refrigeration equipment
produced by two subsidiaries, APD Cryogenics Inc. and IGC Polycold Systems Inc.,
and refrigerants which are sold by another subsidiary, InterCool Energy
Corporation. Cryogenic refrigeration equipment is used in the vacuum deposition
industry, the semiconductor manufacturing process, MRI, and in a variety of
research applications. Refrigerants consist of a family of environmentally
friendly refrigerants designed to replace recently banned CFC refrigerants.
Sales of this segment are primarily to US and European customers. The Company
operates on a 52/53 week year ending the last Sunday during the month of May.
See Notes J and K for additional information regarding financial information by
segment and sales to principal customers.
Basis of Presentation:
The Company is presenting its consolidated statements of income in a multi-step
format and, accordingly, certain reclassifications of prior year amounts have
been made to conform to this presentation.
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 45% investment in ALSTOM Intermagnetics, 23%
investment in Surrey Medical Imaging Systems Limited ("SMIS"), and 21%
investment in KryoTech, Inc. ("KryoTech") are accounted for using the equity
method of accounting.
41
Cash Flows:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Short-term investments ($68,000 at May 31, 1998 and $5,974,000 at May 25, 1997)
consist primarily of US Government and Agency obligations, commercial paper, and
other corporate obligations and are stated at market. The Company considers
these short-term investments to be cash equivalents for purposes of the
Consolidated Statements of Cash Flows.
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 profits.
Sales of products involving long-term production periods and manufactured to
customer specifications are generally recognized by the percentage-of-completion
method, by multiplying the total contract price by the percentage that incurred
costs to date bear to estimated total job costs, except when material costs are
substantially incurred at the beginning of a contract, in which case material
costs are charged to the contract as they are placed into production. At the
time a loss on a contract is indicated, the Company accrues the entire amount of
the estimated ultimate loss.
The Company accrues for possible future claims arising under terms of various
warranties made in connection with the sale of products.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market
value.
Property, Plant and Equipment:
Land and improvements, buildings and improvements, machinery and equipment and
leasehold improvements are recorded at cost. Provisions for depreciation are
computed using straight-line and accelerated methods in a manner that is
intended to amortize the cost of such assets over their estimated useful lives.
42
Leasehold improvements are amortized on a straight-line basis over the remaining
initial term of the lease. For financial reporting purposes, the Company
provides for depreciation of property, plant and equipment over the following
estimated useful lives:
Land improvements 25 years
Buildings and improvements 7 - 40 years
Machinery and equipment 3 - 15 years
Leasehold improvements 2 - 15 years
Investments:
Certain investments are categorized as available for sale securities in
accordance with Statement of Financial Accounting Standards ("SFAS") 115,
"Accounting for Certain Investments in Debt and Equity Securities". Available
for sale securities are reported at fair value, with unrealized gains and losses
included in shareholders' equity.
A decline in the market value of any available for sale security below cost that
is deemed other than temporary is charged to earnings, resulting in the
establishment of a new cost basis for the security.
Dividend and interest income are recognized when earned. Realized gains and
losses for securities classified as available for sale are included in earnings
and are derived using the specific identification method for determining the
cost of securities sold.
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
43
Foreign Currency Translation:
Foreign currency translation adjustments arise from conversion of the Company's
foreign subsidiary's financial statements to US currency for reporting purposes,
and are reflected in shareholders' equity in the accompanying consolidated
balance sheets. Realized foreign currency transaction gains and losses are
included in interest and other expense in the accompanying consolidated
statements of income.
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 on an annual basis.
Excess of Cost Over Net Assets Acquired:
Excess of cost over the fair value of net assets acquired in acquisitions is
being amortized on a straight-line basis over 15 years. The Company periodically
assesses recoverability, and impairments would be recognized in operating
results if a permanent diminution in value were to occur.
Impairment of Long-Lived Assets:
Long-lived assets, including intangible assets, used in the Company's operations
are reviewed for impairment when circumstances indicate that the carrying amount
of an asset may not be recoverable. The primary indicators of recoverability are
the associated current and forecasted undiscounted operating cash flows.
Stock-Based Compensation:
The intrinsic value method of accounting is used for stock-based compensation
plans. Under the intrinsic value method, compensation cost is measured as the
excess, if any, of the quoted market price of the stock at the grant date over
the amount an employee must pay to acquire the stock.
44
Use of Estimates:
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, and the disclosure of
contingent assets and liabilities, to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
Per Share Amounts:
During the year ended May 31, 1998, the Company adopted the provisions of SFAS
No. 128, "Earnings Per Share". SFAS No. 128 establishes standards for computing
and presenting "Earnings Per Share" ("EPS"). SFAS No. 128 supersedes Accounting
Principles Board Opinion No. 15, "Earnings Per Share" and related
interpretations. SFAS No. 128 requires dual presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures and specifies additional disclosure requirements.
Basic EPS excludes dilution and is computed by dividing income available to
common shareholders by the weighted average number of Common Shares outstanding
for the period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue Common Stock were exercised or converted
into Common Stock or resulted in the issuance of Common Stock that then shared
in the earnings of the entity (such as stock options). All prior-period EPS data
have been restated to conform to the provisions of SFAS No. 128.
New Accounting Pronouncements:
In June, 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, "Reporting Comprehensive Income". SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed in
equal prominence with the other financial statements.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Comparative financial statements provided for earlier periods are required to be
reclassified to reflect the provisions of this Statement. The Company will
comply with the reporting requirements of SFAS 130 beginning with the quarter
ending August 30, 1998.
45
In June, 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131 establishes standards for the way
public business enterprises are to report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS 131 focuses on a "management approach" concept as the basis
for identifying reportable segments. The management approach is based on the way
that management organizes the segments within the enterprise for making
operating decisions and assessing performance.
SFAS 131 is effective for fiscal years beginning after December 15, 1997. The
Company will comply with the reporting requirements of SFAS 131 for the fiscal
year ending May 30, 1999. Management anticipates that the effect of the adoption
of SFAS 131 will not significantly impact the current presentation of the
Company's segment disclosure as the current reportable segments are consistent
with the "management approach" methodology outlined in SFAS 131.
In February, 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS 132 revises employers'
disclosures about pension and other postretirement benefit plans, but does not
change the measurement or recognition of those plans. SFAS 132 is effective for
fiscal years beginning after December 15, 1997. The Company will comply with the
reporting requirements of SFAS 132 for the fiscal year ending May 30, 1999.
In March, 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 also requires that costs related to the preliminary project stage and
post-implementation/operations stage of an internal-use computer software
development project be expensed as incurred. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998. The Company will comply with the
reporting requirements of SOP 98-1 for the fiscal year ending May 28, 2000.
Management anticipates that the effect of adoption of SOP 98-1 will not have a
material effect on the Company's consolidated financial statements.
In March, 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up
Activities." SOP 98-5 requires the expensing of certain costs such as
pre-operating expenses and organizational costs associated with a company's
46
start-up activities. SOP 98-5 is effective for fiscal years beginning after
December 15, 1998. The effect of adoption is required to be accounted for as a
cumulative change in accounting principle. The Company will comply with the
reporting requirements of SOP 98-5 for the fiscal year ending May 30, 1999.
Management anticipates that the effect of adoption of SOP 98-5 will not have a
material effect on the Company's consolidated financial statements.
In June, 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. Management is
currently evaluating the impact of SFAS 133 on the Company's consolidated
financial statements.
NOTE B - ACQUISITIONS
On November 24, 1997, the Company issued a note for, and on March 11, 1998, paid
$3,115,000 in cash, net of cash acquired, and issued 281,568 shares of Common
Stock, valued at $8.879 per share, and 69,992 shares of Series A Preferred
Stock, valued at $100 per share, for all of the outstanding shares of Polycold
Systems International, Inc. ("Polycold") Common Stock.
The acquisition has been accounted for using the purchase method of accounting,
and the results of operations of Polycold have been included in the consolidated
financial statements since November 24, 1997, the date of acquisition. The
excess of cost over the fair value of net assets acquired of approximately
$10,175,000 is being amortized on a straight-line basis over 15 years.
On March 11, 1997, the Company paid $4,139,000 in cash, net of cash acquired,
and issued 678,517 shares of Common Stock, valued at $10.573 per share,
including 474,895 shares of Treasury Stock, for all of the outstanding shares of
Medical Advances, Inc. ("MAI") Common Stock. The acquisition agreement provides
for the issuance of up to 101,777 additional shares as part of the purchase
price if the average of the Company's closing price on the American Stock
Exchange during the ninety calendar day period following the release of earnings
for fiscal 1997 is less than $11.053. During fiscal 1998 this contingency was
resolved and the Company issued 31,082 additional Common Shares.
47
The acquisition has been accounted for using the purchase method of accounting,
and the results of operations of MAI have been included in the consolidated
financial statements since March 11, 1997, the date of acquisition. The excess
of cost over the fair value of net assets acquired of approximately $9,700,000
is being amortized on a straight-line basis over 15 years.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company, Polycold and MAI as if the acquisitions
had occurred at the beginning of fiscal year 1997, with pro forma adjustments to
give effect to amortization of the excess of cost over the fair value of net
assets acquired and interest income on short-term investments, together with
related income tax effects.
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
----------------------------------------
May 31, 1998 May 25, 1997
------------ ------------
Total revenue $107,518 $110,722
Net income 2,900 3,687
Earnings per Common Share:
Basic .22 .28
Diluted .21 .26
Total amortization of excess of cost over the fair value of net assets acquired
for the fiscal years ended May 31, 1998, May 25, 1997, and May 26, 1996 amounted
to $997,000, $169,000, and $0, respectively.
NOTE C - INVESTMENTS AND NOTES RECEIVABLE
Available for Sale Securities:
As of May 31, 1998 and May 25, 1997, the Company owned 975,753 shares
(approximately 9%) of the common stock of Ultralife Batteries, Inc.
("Ultralife"), a manufacturer of lithium batteries, acquired at a cost of
$7,015,000. The market value of the Company's total investment in Ultralife, the
sale of which is restricted under US Securities laws, was $11,221,000 and
$10,123,000 at May 31, 1998 and May 25, 1997, respectively. The cost and market
value of "Available for Sale" securities, representing those shares saleable
under Securities laws, were as shown below:
May 31, 1998 May 25, 1997
------------ ------------
Cost $2,154,000 $2,154,000
Gross unrealized holding gain 1,296,000 958,000
--------- ----------
Market value $3,450,000 $3,112,000
========== ==========
48
During fiscal 1996, the Company sold 85,000 shares, with proceeds from the sale
totaling $1,927,000, resulting in a pretax gain of $1,414,000. The cost of the
securities sold was based on specific identification of the securities held at
the time of sale. There were no such sales in fiscal 1998 and 1997.
The balance of the Ultralife investment is included at cost in other
investments.
Other Investments:
Investments in other securities at May 31, 1998 and May 25, 1997 consist of:
(Dollars in Thousands)
1998 1997
------- -------
Ultralife 4,861 4,861
KryoTech 4,710
Other 317 125
------- -------
$ 9,888 $ 4,986
======= =======
On March 23, 1998, the Company acquired 1,172,840 shares of the Series B
Convertible Preferred Stock, $.01 par value per share, of KryoTech, a
privately-held, South Carolina corporation, and a warrant to purchase an
additional 237,416 shares, at a cost of $4,750,000. The warrant may be
exercised, in whole or in part, at any time on or before March 23, 2008 at a
price equal to $1.053 per share. On an as-converted basis, the Company's
holdings represent approximately 20.7% of the outstanding voting securities, on
a fully diluted basis, of KryoTech.
KryoTech was formed on March 15, 1996 for the purpose of developing, marketing,
manufacturing and selling thermal management products, which are designed
specifically for the computer industry. The Preferred shares have the same
voting rights as Common Stock. Accordingly, the Company is accounting for its
investment in KryoTech using the equity method of accounting. The acquisition
cost exceeded the underlying equity in net assets by $3,645,000, which is being
amortized over a period of 15 years. At May 31, 1998, accumulated amortization
was $40,000. As KryoTech is privately held, the market value of this investment
is not readily determinable.
49
Investment and Advances - SMIS:
As of May 31, 1998 and May 25, 1997 the Company owned 354,223 ordinary shares
(approximately 23%) of SMIS acquired at a cost of $3,530,000. SMIS is a European
company engaged in the manufacture and sale of electronics and software for
magnetic resonance imaging and nuclear magnetic resonance spectroscopy
applications. The Company is accounting for its investment in SMIS under the
equity method of accounting. The acquisition cost exceeded the underlying equity
in the net assets by $3,298,000, which is being amortized over a
period of 40 years. At May 31, 1998 and May 25, 1997, accumulated amortization
was $247,000 and $164,000, respectively. As SMIS is privately held, the market
value of this investment is not readily determinable.
In addition, the Company purchased 980,000 SMIS redeemable preference shares
during the year ended May 26, 1996 at a cost of $1,511,000. These shares are
non-voting unless SMIS is unable to attain certain specified financial targets
and are redeemable on the earlier of October 31, 1997 or the date of a public
offering; however, SMIS did not redeem them on their due date. The shares carry
a cumulative redemption premium of 15% per annum. The purchase of the preference
shares included the acquisition of an option to purchase 2.5% of SMIS' Common
Stock at a price of approximately $6 per share.
During the year ended May 25, 1997, the Company provided $972,000 of additional
funding in the form of convertible notes to SMIS. The notes were non-interest
bearing until February 27, 1998; thereafter, they bear interest at the rate of
15% per annum. They are immediately repayable, with accrued interest, in the
event of certain conditions as outlined in the note agreement and are redeemable
by SMIS at any time. The noteholders may require redemption at any time after
February 26, 1998. The noteholders have the right at any time prior to
redemption, to convert the notes plus accrued interest into capital stock of
SMIS.
During the year ended May 31, 1998, the Company provided 900,000 British Pounds
Sterling ("Pounds") (approximately $1,479,000) of additional loans to SMIS, net
of amounts repaid during the year. These loans bear interest at 11% per annum
and are due on December 31, 1998. Subsequent to December 31, 1998, if the loans
are not repaid, the Company has the right to tender the loans to SMIS in
exchange for 1% of the "enlarged equity" of SMIS for each 100,000 Pounds
(approximately $164,000) of loans tendered. The "enlarged equity" equals the
shares outstanding prior to the tender plus those issued as a result of the
tender. The amount of loans available for tender is equal to approximately
900,000 Pounds (approximately $1,504,000) at May 31, 1998.
50
During the year ended May 31, 1998, SMIS obtained line of credit financing in
the amount of 2,500,000 Pounds (approximately $4,177,000). The Company has
guaranteed repayment of one half of the outstanding balance, up to 1,250,000
Pounds (approximately $2,088,500), in the event of default by SMIS. As of May
31, 1998, SMIS has drawn approximately 1,880,000 Pounds (approximately
$3,141,000) against the line.
Following is selected financial information with respect to SMIS, contained in
its internal financial statements as of April 30, 1998 and October 31, 1997
and for the six months and fiscal year then ended, respectively:
(Dollars in Thousands) April 30, October 31,
1998 1997
---------------- -------------
Current assets $5,265 $4,060
Non-current assets 446 576
Current liabilities 5,395 5,040
Non-current liabilities 3,025 2,746
Redeemable Preferred Stock 5,497 5,508
Fiscal Year
Six Months Ended Ended October
April 30, 1998 31, 1997
---------------- -------------
Net sales $1,995 $6,153
Gross margin 652 2,062
Loss from continuing operations 1,496 3,576
Net loss 1,496 3,576
NOTE D - NOTES PAYABLE AND LONG-TERM DEBT
The Company has an unsecured line of credit of $25,000,000, which expires in
November 2000, none of which was in use on May 31, 1998. The Company may elect
51
to apply interest rates to borrowings under the line which relate to either the
London Interbank Offered Rate (LIBOR) or prime, whichever is the most favorable.
Long-term debt consists of the following:
(Dollars in Thousands) May 31, May 25,
1998 1997
------- -------
Revenue bonds $ 1,650 $ 1,725
Mortgage payable 5,830 6,014
Convertible debentures 21,625 21,625
------- -------
29,105 29,364
Less current portion 272 259
------- -------
Long-term debt $28,833 $29,105
======= =======
Revenue bonds consist of a subsidiary's obligation under an agreement with an
Economic Development Authority with respect to revenue bonds issued in
connection with the acquisition of certain land, building and equipment acquired
at a total cost of $2,408,000. The bonds bear interest at a weekly adjustable
annual rate (convertible to fixed rate at the option of the Company) which
averaged 4.04% for the year ended May 31, 1998 (3.88% for the year ended May 25,
1997). The bonds mature serially in amounts ranging from $100,000 in December,
1998 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
Short-Term Investments" on the accompanying Consolidated Balance Sheets, were
$51,000 at May 31, 1998 and $32,000 at May 25, 1997.
The mortgage payable bears interest at the rate of 7.5% and 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.
Convertible debentures at May 31, 1998 consist of $21,625,000 of 5.75%
convertible subordinated debentures due September, 2003, issued in a private
placement. The debentures are convertible into Common Stock at approximately
$14.272 per share. Interest on the debentures is payable semi-annually. The
debentures are redeemable, in whole or in part, at the option of the Company at
any time at prices ranging from 103.450% to 100.575%. The debentures also
52
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: 1999
- - $272,000; 2000 - $312,000; 2001 - $5,521,000; 2002 - $100,000; and 2003 -
$125,000.
Interest paid for the years ended May 31, 1998, May 25, 1997, and May 26, 1996
amounted to $1,910,000, $1,800,000, and $2,214,000, respectively.
NOTE E - SHAREHOLDERS' EQUITY
In July, 1998, the Company declared a 2% stock dividend to be distributed on all
outstanding shares, except Treasury Stock, on September 17, 1998. The
consolidated financial statements have been adjusted retroactively to reflect
this stock dividend in all numbers of shares, prices per share and earnings per
share.
The Company has established two stock option plans: the 1981 Stock Option Plan
and the 1990 Stock Option Plan. Shares and prices per share have been adjusted
to reflect the 2% stock dividends declared in July, 1998, July, 1997 and May,
1996, respectively. The total shares authorized for grant under the 1981 and
1990 plans are 1,492,996 and 2,634,207, respectively.
53
Option activity under these plans was as follows:
Fiscal Year Ended
----------------------------------------------------------------------------------------------
May 31, 1998 May 25, 1997 May 26, 1996
------------------------------ ------------------------------- -------------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
--------- ----- --------- ----- --------- --------
Outstanding,
beginning of year 1,687,977 $ 9.319 1,552,307 $ 8.656 1,553,157 $ 7.405
Granted 353,485 9.567 365,221 10.785 222,870 14.505
Exercised (132,214) 5.684 (133,024) 5.124 (217,778) 5.758
Forfeited (106,544) 11.953 (96,527) 9.993 (5,942) 7.161
---------- ---------- ------------
Outstanding,
end of year 1,802,704 9.477 1,687,977 9.319 1,552,307 8.656
========= ========= =========
Exercisable,
end of year 1,060,485 $ 8.648 870,331 $ 7.842 690,026 $ 6.684
========= ========== ==========
May 31, 1998
------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
---------------------------------------------------- ----------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Option Exercise Number Exercise Contractual Number Exercise
Prices Outstanding Price Life Exercisable Price
---------------- ---------------- ------------------ ------------------- --------------
$3.265 to $6.553 552,972 $ 4.956 3.9 years 496,682 $ 4.823
$7.779 to $10.813 523,528 9.298 7.0 years 144,962 9.791
$11.253 to $13.127 493,754 11.727 4.4 years 297,002 11.571
$13.428 to $20.142 232,450 15.859 5.6 years 121,839 15.752
--------- ----------
1,802,704 $ 9.477 5.1 years 1,060,485 $ 8.648
========= =========
The Company uses the intrinsic value based method of accounting for stock-based
compensation, under which compensation cost is measured as the excess, if any,
of the quoted market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. Since the exercise price of stock
options granted under the 1981 and 1990 Stock Option Plans is not less than the
market price of the underlying stock on the date of grant, no compensation cost
has been recognized for such grants.
54
The following pro forma net income and earnings per share information has been
determined as if the Company had accounted for stock-based compensation awarded
under the 1990 Stock Option Plan using the fair value-based method. Under the
fair value method, the estimated fair value of awards would be charged against
income ratably by installments over the vesting period. The pro forma effect on
net income for fiscal years 1998, 1997 and 1996 is not representative of the pro
forma effect on net income in future years because, as required by SFAS 123,
"Accounting for Stock Based Compensation", no consideration has been given to
awards granted prior to fiscal 1996.
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
-------------------------- -- --------------------------- -- ---------------------------
May 31, 1998 May 25, 1997 May 26, 1996
-------------------------- --------------------------- ---------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- --------- -----------
Net income $2,753 $1,816 $2,615 $1,886 $4,427 $4,311
Earnings per Common
Sshare:
Basic .22 .14 .21 .15 .37 .36
Diluted .21 .14 .20 .15 .35 .34
The weighted average fair value of each option granted under the 1981 and 1990
Stock Option Plans during fiscal years 1998, 1997 and 1996 was $5.446, $6,550
and $10.333, respectively. The fair value of each option grant was estimated on
the date of grant using the Black-Scholes Model with the following weighted
average assumptions. The risk-free interest rates for fiscal years 1998, 1997
and 1996 were 5.9%, 6.3% and 6.6%, respectively. The expected volatility of the
market price of the Company's Common Stock for fiscal years 1998, 1997 and 1996
grants was 55.3%, 58.4% and 56.8%, respectively. The expected average term of
the granted options for fiscal years 1998, 1997 and 1996 was 5.9 years, 6.4
years and 6.2 years, respectively. There was no expected dividend yield for the
options granted for fiscal years 1998, 1997 and 1996.
Following are the shares of Common Stock reserved for issuance and the related
exercise prices for the outstanding stock options, convertible subordinated
debentures, Preferred Stock, and Warrants at May 31, 1998:
55
Number Exercise Price
of Shares Per Share .
--------- -----------
1981 Stock Option Plan 48,233 $3.265 to $4.605
1990 Stock Option Plan 1,754,471 $4.103 to $20.142
Convertible subordinated debentures 1,515,207 $14.272
Preferred Stock 800,000
Warrants 1,200,000
---------
Shares reserved for issuance 5,317,911
=========
In June 1997, the Company, as part of a long-term strategic alliance, entered
into a Warrant Agreement with a distributor under which the distributor could
purchase up to 1,200,000 shares of Common Stock. The distributor paid $120,000
for the rights to the warrants and an initial warrant (which expires on November
16, 1998) to purchase 500,000 shares at $12.50 per share was issued. Future
warrants are conditioned on the distributor meeting specified performance levels
and would be issued at market prices at that time. In connection with the
initial warrant, the Company incurred a non-cash charge of $600,000 in fiscal
1998 which was included as marketing, general and administrative expense in the
accompanying consolidated statement of income.
During the year ended May 31, 1998, the Company issued 69,992 shares of Series A
Preferred Stock, valued at $100 per share, in connection with its acquisition of
Polycold. These shares are redeemable, at the option of the Company, at any
time, for cash of $100 per share, or after the first anniversary of their
issuance, for Common Stock valued at $100 per share. In the event the shares
have not been redeemed by November 30, 1999, or upon the occurrence of certain
change of control events, they will automatically convert to Common Stock. The
price of Common Stock used for redemption or conversion is based on the average
trading price for a specified ten-day period preceding the redemption or
conversion.
The Series A Preferred Stock issued by the Company is non-voting, and has no
dividend or liquidation preference, but is entitled to participate in any cash
dividend or liquidation distribution, on an "as converted" basis, with the
Company's Common Stock.
During the year ended May 31, 1998, the Company issued 89,018 shares of Treasury
Stock at fair market value in connection with the purchase of inventory from a
supplier. In addition, in connection with the grant of a stock option to
consultants, the Company recognized compensation cost of $24,000.
56
NOTE F - RETIREMENT PLANS
The Company has a non-contributory, defined benefit plan covering all eligible
employees. Benefits under the plan are based on years of service and employees'
career average compensation. The Company's funding policy is to contribute
annually an amount sufficient to meet or exceed the minimum funding standard
contained in the Internal Revenue Code. Contributions are intended to provide
not only for benefits attributable to service to date, but also for those
expected to be earned in the future.
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated balance sheets at May 31, 1998 and May 25, 1997:
(Dollars in Thousands) 1998 1997
--------- ---------
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested benefits of $7,096 and $4,949
as of May 31, 1998 and May 25, 1997,
respectively $ (7,325) $ (5,125)
======== ========
Projected benefit obligation for service rendered to date $ (9,399) $ (7,065)
Plan assets (consisting of common stock, US Government and
corporate debt obligations and money funds), at fair value 9,583 7,114
--------- ---------
Plan assets in excess of (less than) projected benefit obligation 184 49
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions (1,454) (506)
Prior service cost not yet recognized in net periodic pension cost 649 73
Unrecognized net transition obligation 28 34
--------- ---------
Accrued pension cost included in salaries, wages and related items $ (593) $ (350)
========= =========
The increase in unrecognized prior service cost at May 31, 1998 in the foregoing
table was due to an update of earnings used for benefit calculations. This
update sets the career average earnings for participants with service dates
prior to 1990 at their average earnings for the period from December 1, 1990
through November 30, 1995.
Net pension cost includes the following components:
Fiscal Year Ended
------------------------------------------
May 31, May 25, May 26,
(Dollars in Thousands) 1998 1997 1996
------- ------- -------
Service cost - benefits earned during the period $ 590 $ 495 $ 468
Interest cost on projected benefit obligation 571 453 410
Actual return on plan assets (2,370) (474) (398)
Net amortization and deferral 1,850 15 15
------- ------- -------
Net pension cost $ 641 $ 489 $ 495
======= ======= =======
57
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.0% in the fiscal year ended May
31, 1998, 7.5% in the fiscal year ended May 25, 1997, and 8.0% in the fiscal
year ended May 26, 1996. The rate of increase in future compensation levels used
in determining the aforementioned obligation was 4.5% in the fiscal years ended
May 31, 1998 and May 25, 1997, and 6.0% for May 26, 1996. The expected long-term
rate of return on plan assets in the fiscal years ended May 31, 1998, May 25,
1997 and May 26, 1996, was 8.0%.
The Company also maintains an employee savings plan, covering substantially all
employees, under Section 401(k) of the Internal Revenue Code. Under this plan,
the Company matches a portion of employees' contributions. Expenses under the
plan during the fiscal years ended May 31, 1998, May 25, 1997 and May 26, 1996
aggregated $350,000, $277,000 and $249,000, 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 $67,000, $22,000 and $37,000
for the fiscal years ended May 31, 1998, May 25, 1997 and May 26, 1996,
respectively.
NOTE G - INCOME TAXES
The components of the provision for income taxes are as follows:
(Dollars in Thousands) Fiscal Year Ended
------------------------------------------------------------------------
May 31, 1998 May 25, 1997 May 26, 1996
--------------------- --------------------- ---------------------
Current
Federal $ 2,487 $ 1,513 $ 2,356
State 352 280 448
Foreign 180 216 184
------- ------- -------
Total current 3,019 2,009 2,988
Deferred
Federal (920) (527) (477)
State (108) (62) (56)
------- ------- -------
Total deferred (1,028) (589) (533)
------- ------- -------
Provision for income taxes $ 1,991 $ 1,420 $ 2,455
======= ======= =======
58
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
(Dollars in Thousands)
May 31, 1998 May 25, 1997
------------ ------------
Deferred tax assets:
Inventory reserves $2,264 $2,056
Non-deductible accruals 1,161 576
Product warranty reserve 431 388
Foreign subsidiaries 317 317
Equity in net loss of unconsolidated
affiliate 736 353
------ ------
Total gross deferred tax assets 4,909 3,690
Less valuation allowance (604) (834)
------ ------
Deferred tax assets 4,305 2,856
Deferred tax liabilities:
Unrealized gain on available for sale securities (446) (345)
Depreciation differences (446) (294)
Other, net (155) (9)
------ ------
Total gross deferred tax liabilities (1,047) (648)
------ ------
Net deferred tax assets $3,258 $2,208
====== ======
The foregoing assets and liabilities are classified in the accompanying
consolidated balance sheets as follows:
(Dollars in Thousands)
May 31, 1998 May 25, 1997
------------ ------------
Net current deferred tax assets $3,583 $2,453
Net long-term deferred tax liabilities 325 245
------ ------
$3,258 $2,208
====== ======
During fiscal 1998, in connection with the acquisition of Polycold, the Company
recorded $123,000 of deferred tax assets. During fiscal 1997, in connection with
the acquisition of MAI, the Company recorded $75,000 of deferred tax assets.
The Company reduced the valuation allowance based on recent levels of taxable
income and reasonable and prudent tax planning strategies. Changes made to the
valuation allowance during fiscal 1998 and 1997 were $230,000 and $0,
respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
59
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
projected future taxable income and tax planning strategies in making this
assessment. The Company had Federal taxable income of approximately $7,000,000
in fiscal 1998, $3,700,000 in fiscal 1997, and $5,600,000 in fiscal 1996. Based
upon the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced.
The reasons for the differences between the provision for income taxes and the
amount of income tax determined by applying the applicable statutory Federal tax
rate to income before income taxes are as follows:
(Dollars in Thousands) Fiscal Year Ended
------------------------------------------------------------------
May 31, 1998 May 25, 1997 May 26, 1996
-------------------- ------------------- -------------------
Pre-tax income at statutory tax rate (34%) $ 1,613 $ 1,372 $ 2,340
State taxes, net of Federal benefit 161 200 259
Benefit of Foreign Sales Corporation (288) (186) (172)
Non-deductible distribution expense 204
Amortization of intangibles 392 110 42
Non-deductible loss on IMiG LLC 36 151
Benefit of tax credits (257)
Change in valuation allowance (230)
Other, net 103 30 (14)
------- ------- -------
Provision for income taxes $ 1,991 $ 1,420 $ 2,455
======= ======= =======
The Company paid income taxes, net of cash refunds received, of $1,815,000,
$1,347,000, and $1,153,000 during the years ended May 31, 1998, May 25, 1997,
and May 26, 1996, respectively.
60
NOTE H - PER SHARE INFORMATION
The following table provides calculations of basic and diluted earnings per
share:
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
---------------- --------------------------- ----- ------ --------
May 31, 1998 May 25, 1997 May 26, 1996
------------ ------------ ------------
Income available to
common stockholders $ 2,753 $ 2,615 $ 4,427
=========== =========== ===========
Weighted average shares 12,755,733 12,325,001 11,976,697
Dilutive potential Common
Shares:
Convertible Preferred Stock 325,925
Stock options 323,519 468,935 843,159
----------- ----------- -----------
Adjusted weighted average
shares 13,405,177 12,793,936 12,819,856
=========== =========== ===========
Earnings per Common Share:
Basic $ 0.22 $ 0.21 $ 0.37
=========== =========== ===========
Diluted $ 0.21 $ 0.20 $ 0.35
=========== =========== ===========
Shares issuable upon conversion of warrants to purchase 500,000 Common Shares
and shares issuable upon conversion of convertible debentures are considered in
calculating "diluted" earnings per share, but have been excluded, as the effect
would be anti-dilutive.
The Company declared a 2% stock dividend on July 21, 1998 to be distributed to
shareholders on September 17, 1998. The Company distributed a 2% stock dividend
to shareholders on September 16, 1997 and August 22, 1996. All data with respect
to earnings per share, weighted average shares outstanding and common stock
equivalents have been adjusted to reflect these stock dividends.
NOTE I - COMMITMENTS
The Company leases certain manufacturing facilities and equipment under
operating lease agreements expiring at various dates through January, 2003.
Certain of the leases provide for renewal options. Total rent expense was
$400,000 for the year ended May 31, 1998, $331,000 for the year ended May 25,
1997, and $266,000 for the year ended May 26, 1996.
61
Future minimum rental commitments, excluding renewal options, under the
noncancellable leases covering certain manufacturing facilities and equipment
through the term of the lease are as follows:
Fiscal Year
-----------
1999 $ 696,000
2000 596,000
2001 504,000
2002 265,000
2003 42,000
----------
Total $2,103,000
==========
In addition to operating lease agreements, the Company also has a five-year
maintenance agreement for $113,000 per year beginning January 1, 1999 for a
newly implemented computer system.
At May 31, 1998, the Company's capital equipment commitments were approximately
$950,000.
NOTE J - INFORMATION BY INDUSTRY SEGMENT
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 Refrigeration Products segment,
amounted to $398,000, $565,000 and $171,000 in fiscal 1998, 1997 and 1996,
respectively.
62
The Company's segment information is as follows:
(Dollars in Thousands) Fiscal Year Ended
--------------------------------------------------------------------------------------------------------
May 31, 1998 May 25, 1997 May 26, 1996
------------------------------- ------------------------------- --------------------------------
Magnetic Refrigeration Magnetic Refrigeration Magnetic Refrigeration
Products Products Total Products Products Total Products Products Total
-------- -------- ----- -------- --------- ----- -------- -------- -----
Net sales:
Magnet systems $45,460 $45,460 $46,694 $46,694 $45,562 $45,562
Superconductive wire 11,131 11,131 10,698 10,698 19,822 19,822
R F Coils 10,746 10,746 1,981 1,981
Refrigeration products $28,557 28,557 $27,679 27,679 $23,083 23,083
--------- -------- -------- -------- --------- --------- -------- -------- --------
Total 67,337 28,557 95,894 59,373 27,679 87,052 65,384 23,083 88,467
Income (loss) from
operations 5,917 (403) 5,514 1,145 2,107 3,252 5,200 (498) 4,702
Net income (loss) 3,037 (284) 2,753 1,074 1,541 2,615 3,998 429 4,427
Identifiable assets 83,479 44,297 127,776 94,819 21,070 115,889 94,139 18,258 112,397
Depreciation and
amortization expense 4,862 562 5,424 3,441 523 3,964 2,736 429 3,165
Additions to property,
plant and equipment,
exclusive of acquisitions 2,721 425 3,146 4,564 882 5,446 3,623 456 4,079
63
NOTE K - 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)
1998 1997 1996
----------------------------- ---------------------------- ----------------------------
% of % of % of
Sales Sales Sales Sales Sales Sales
Customer A $42,751 44.6% $43,548 50.0% $38,971 44.1%
Customer B 10,408 10.8% 7,378 8.5% 15,634 17.7%
------- ---- ------- ---- ------- ----
Total $53,159 55.4% $50,926 58.5% $54,605 61.8%
======= ==== ======= ==== ======= ====
The Company's net export sales for the fiscal years ended May 31, 1998, May 25,
1997, and May 26, 1996 totaled $57,266,000, $53,137,000 and $46,543,000,
respectively, substantially all of which were to European customers.
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS 107, "Disclosures About Fair
Value of Financial Instruments". Although the estimated fair value amounts have
been determined by the Company using available market information and
appropriate valuation methodologies, the estimates presented are not necessarily
indicative of the amounts that the Company could realize in current market
exchanges.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and short-term investments, receivables, and accounts payable: The carrying
amounts reported in the Consolidated Balance Sheets approximate their fair
values.
Available for sale securities and other investments: The fair value of the
Ultralife investment is estimated from market prices (see Note C). The fair
values of the SMIS and KryoTech investments are not readily determinable as the
companies are privately held.
The carrying value of long-term debt, including current portion, was
approximately $29,100,000 and $29,400,000 at May 31, 1998 and May 25, 1997,
64
respectively, while the estimated fair value was $27,900,000 and $28,200,000,
respectively, based upon interest rates available to the Company for issuance of
similar debt with similar terms and remaining maturities.
NOTE M - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for fiscal 1998 and 1997 are as follows:
(Dollars in Thousands, Except Per Share Amounts)
Earnings Per
--------------------
Net Gross Net Basic Diluted
Sales Margin Income Share Share
----- ------ ------ ----- -------
1998 Quarter Ended
August 24, 1997 $21,020 $8,048 $ 461 $ .04 $ .04
November 23, 1997 22,215 7,770 592 .05 .05
February 22, 1998 25,235 9,058 815 .06 .06
May 31, 1998 27,424 10,809 885 .07 .06
1997 Quarter Ended
August 25, 1996 $21,370 $6,429 $1,053 $ .09 $ .08
November 24, 1996 23,260 7,092 827 .07 .06
February 23, 1997 17,325 4,595 24 .00 .00
May 25, 1997 25,097 8,084 711 .06 .05
65
2. Schedule
INTERMAGNETICS GENERAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------
Balance at Charged to Charged to
Beginning Costs and Other Accounts- Deductions- Balance at
DESCRIPTION of Period Expenses Describe Describe End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended May 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $ 302 $ 60 $ 88(2) $ 130(3) $ 350
30(7)
Reserve for inventory obsolescence 6,653 1,266 (9)(6) 1,087(5) 6,843
20(7)
Included in liability accounts:
Product warranty reserve 911 929 70(7) 649(1) 1,261
Contract adjustment reserve (4) 274 184 458
Upgrade Reserve (4) 60 60 60(8) 60
Year Ended May 25, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $ 169 $ 92 $ 2(6) $ 1(3) $ 302
40(7)
Reserve for inventory obsolescence 5,225 1,465 1(6) 58(5) 6,653
20(7)
Included in liability accounts:
Product warranty reserve 1,100 724 29(7) 942(1) 911
Contract adjustment reserve (4) 234 81 41(2) 274
Upgrade Reserve (4) 0 8 60(7) 8(8) 60
Year Ended May 26, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $ 145 $ 30 $(4)(6) $ 2(3) $ 169
Reserve for inventory obsolescence 4,404 1,208 387(5) 5,225
Included in liability accounts:
Product warranty reserve 822 1,159 881(1) 1,100
Contract adjustment reserve (4) 149 85 234
(1) Cost of warranty performed.
(2) Adjustments from accruals.
(3) Write-off uncollectible accounts.
(4) Classified in the Balance Sheet with other liabilities and accrued
expenses.
(5) Write-off or sale of obsolete inventory.
(6) Foreign currency translation.
(7) Balance at date of acquisition of subsidiary.
(8) Cost of upgrade work performed.
66
3. Exhibits
Exhibit Index
Page Exhibit
3 Restated Certificate of Incorporation
4.1 Intermagnetics General Corporation Indenture dated as
of September 15, 1993
4.2 Second Amended and Restated Loan and Agency Agreement
dated as of October 23, 1997 among Corestates Bank,
N.A. and Intermagnetics General Corporation, APD
Cryogenics Inc., Magstream Corporation, Medical
Advances, Inc. and InterCool Energy Corporation
4.3 First Amendment dated as of May 18, 1998 to the
Second Amended and Restated Loan Agreement dated as
of October 23, 1997 among Corestates Bank, N.A. and
Intermagnetics General Corporation, APD Cryogenics
Inc., Magstream Corporation, Medical Advances, Inc.
and InterCool Energy Corporation
10.1 Employment Agreement dated April 20, 1998 between
Intermagnetics General Corporation and Carl H. Rosner
10.2 Employment Agreement dated April 1, 1997 between
Intermagnetics General Corporation and Glenn H.
Epstein
21 Subsidiaries of Intermagnetics General Corporation
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, 33-72160, 333-10553 and 333-42163
on Form S-8
67