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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 27, 2001
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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:
None
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(Title of Class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $.10 par value
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(Title of each Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _____
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i
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]
ii
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $497,560,358. Such aggregate market value was
computed by reference to the closing price of the Common Stock based on quoted
market prices on August 14, 2001. It assumes that all directors and officers of
the registrant are affiliates. In making such calculation, the registrant does
not determine whether any director, officer or other holder of Common Stock is
an affiliate for any other purpose.
The number of shares of the registrant's Common Stock outstanding, net of
Treasury shares, as of August 14, 2001 was 15,808,063.
DOCUMENTS INCORPORATED BY REFERENCE
The information required for Part III below is incorporated by reference from
the registrant's Proxy Statement for its 2001 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............................................................................................................1
ITEM 1. BUSINESS DESCRIPTION.....................................................................................1
MAGNETIC RESONANCE IMAGING SEGMENT.............................................................................2
INSTRUMENTATION SEGMENT........................................................................................9
ENERGY TECHNOLOGY SEGMENT.....................................................................................12
RESEARCH AND DEVELOPMENT......................................................................................18
INVESTMENTS...................................................................................................18
PERSONNEL.....................................................................................................18
EXECUTIVE OFFICERS OF THE REGISTRANT..........................................................................19
ITEM 2. PROPERTIES..............................................................................................20
ITEM 3. LEGAL PROCEEDINGS.......................................................................................21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................21
PART II..........................................................................................................22
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................................22
ITEM 6. SELECTED FINANCIAL DATA.................................................................................23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK..............................................28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................28
PART III.........................................................................................................28
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................................28
ITEM 11. EXECUTIVE COMPENSATION..................................................................................29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................................29
PART IV..........................................................................................................29
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.................................................................................33
SIGNATURES.......................................................................................................34
iv
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Intermagnetics General Corporation ("Intermagnetics", "Company", "we" or "us")
makes forward-looking statements in this document. Typically, we identify
forward-looking statements with words like "believe," "anticipate," "perceive,"
"expect," "estimate" and similar expressions. Unless a passage describes an
historical event, it should be considered a forward-looking statement. These
forward-looking statements are not guarantees of future performance and involve
important assumptions, risks, uncertainties and other factors that could cause
the Company's actual results for fiscal year 2002 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 throughout this report.
Except for our continuing obligations to disclose material information
under federal securities laws, we are not obligated to update these
forward-looking statements, even though situations may change in the future. We
qualify all of our forward-looking statements by these cautionary statements.
PART I
ITEM 1. BUSINESS DESCRIPTION
Intermagnetics is a worldwide leading developer and manufacturer of
superconducting materials, electromagnetic components and cryogenic
refrigeration systems. These products are sold separately, or are combined
together and sold as integrated sub-systems primarily in the magnetic resonance
imaging (MRI), instrumentation and energy technology markets.
Superconductivity is the phenomenon in which certain materials lose all
resistance to the flow of electrical current when cooled below a critical
temperature. Superconductors offer advantages over conventional conductors, such
as copper or aluminum, by carrying electricity with virtually no energy loss,
and generating comparatively more powerful magnetic fields. The current
principal commercial applications for the Company's technology are MRI and
analytical instrumentation. The Company also leverages its expertise in
superconductivity and cryogenics to develop materials and products for the
electric utility market.
Our continued focus on commercial market applications for our core
technologies resulted in a realignment of our reportable segments at the end of
fiscal year 2001. The Company designs, develops, manufactures and sells products
in three segments: Magnetic Resonance Imaging ("MRI") (formerly Electromagnetics
and Low Temperature Superconducting Materials), Instrumentation (formerly
Refrigeration) and Energy Technology.
The MRI segment primarily provides products to the diagnostic imaging
market. This segment includes low temperature superconducting ("LTS") magnets
manufactured and sold by the IGC-Magnet Business Group ("IGC-MBG"), LTS wire and
cable manufactured and sold by the IGC-Advanced Superconductor division
("IGC-AS") and radio frequency ("RF") coils manufactured and sold by its
wholly-owned subsidiary, IGC-Medical Advances Inc. ("IGC-MAI").
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Instrumentation provides cryogenic refrigeration equipment used
primarily in ultra-high vacuum applications, industrial coatings, analytical
instrumentation and semiconductor processing and testing through two
wholly-owned subsidiaries: IGC-APD Cryogenics Inc. ("IGC-APD") and IGC-Polycold
Systems Inc. ("IGC-Polycold").
In Energy Technology, the Company's wholly-owned subsidiary,
IGC-SuperPower, LLC ("IGC-SuperPower") is developing second generation
high-temperature superconducting materials and devices designed to enhance the
capacity, reliability and quality of electrical power transmission and
distribution.
Through May 30, 1999, the activities of the Energy Technology segment
were included in the Electromagnetics segment (now MRI). Through May 28, 2000,
the activities of IGC-AS were reported in the former Low Temperature
Superconducting Materials segment. Segment data for prior years has been
reclassified to conform with current year presentation.
MAGNETIC RESONANCE IMAGING SEGMENT
A. Introduction
1. About MRI and Other Magnets Generally
Currently, the single largest commercial application for
superconductivity is the magnetic resonance imaging system ("MRI System").
Hospitals and clinics use MRI Systems for non-invasive, diagnostic imaging of
anatomy 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 resistive
electromagnet, a permanent magnet or a superconductive magnet. Intermagnetics
designs and manufactures superconductive magnets, which typically offer more
powerful, high-quality magnetic fields with virtually no power loss. Higher
magnetic field strengths (measured in Tesla) 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 new MRI Systems,
upgrades and accessories in calendar year 2001 is estimated to be within the
range of $3 to $3.5 billion worldwide. A small number of system integrators
dominate the MRI industry. They include GE Medical Systems ("GE"), Siemens
Corporation ("Siemens"), Philips Medical Systems Nederlands B.V. ("Philips"),
Hitachi Medical Corporation ("Hitachi"), Toshiba Corporation ("Toshiba") and
Marconi Medical Systems (formerly Picker International Ltd.). On July 4, 2001,
Philips announced that it is acquiring Marconi Medical Systems. Philips stated
that it expects this acquisition to close by the end of calendar year 2001.
Intermagnetics supplies key components to a number of these 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.)
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2. About MRI Radio Frequency (RF) Coils Generally
All MRI Systems use RF coils placed inside the bore of the magnet, or
more generally placed onto the patient. The RF coil acts as an antenna to
transmit and/or receive radio frequency signals from the human body as it lies
inside the strong magnetic field of the MRI System. These 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 brain, liver, knee, neck, back, wrist, 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 economically justify the
acquisition of that system. In addition, specialized RF coils designed to image
a specific part of the human body will yield a sharper, more detailed image that
typically is more clinically useful than a similar image produced with a
multi-purpose full body RF coil. The Company believes most MRI Systems benefit
from an array of seven to ten separate specialized RF coils.
Each MRI System model creates the opportunity for development of a new
array of RF coils. This is the case because an RF coil must work 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 be moved easily between MRI Systems manufactured by
different companies, from one field strength magnet to another, or even among
different models manufactured by a single company.
3. About Low Temperature Superconductors Generally
There are two broad classes of superconductive materials: low
temperature ("LTS") and high temperature ("HTS") superconductors. 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 generally are used in the form of
flexible wire or cable (LTS cable is made up of bundles of LTS wire). 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) and primarily are manufactured in the form of tape (basically, flat
wire). HTS materials are discussed in the Energy Technology Segment below.
LTS wire is used today mainly in the manufacture of MRI and NMR
Spectroscopy magnet systems and for high-energy physics applications.
B. Principal Products
The Company derived approximately 68% and 69% of its net sales in
fiscal years 2001 and 2000, respectively, from the sale of products in its MRI
segment. Those sales consisted primarily of MRI-related products, including
superconductive MRI magnet systems, LTS wire and RF coils. Within its MRI
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 System
integrators for use in stationary and mobile applications. During
fiscal years 2001, 2000 and 1999, MRI magnet systems accounted for 53%,
50% and 43%, respectively, of our 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 ("T").
In fiscal year 2001, IGC-MBG completed the development of a 3.0T magnet
product for Philips Medical Systems. We expect this product to be fully
integrated into our magnet product line in fiscal year 2002. In
addition, IGC-MBG is developing a 1.0T superconducting open magnet
system. We do not expect significant sales of this product in fiscal
year 2002.
3
The Company's MRI magnet systems are made with LTS wire primarily from
IGC-AS and fitted with cryogenic refrigerators (shield coolers)
primarily supplied by IGC-APD.
o Other Superconductive Magnet Systems. Through IGC-MBG, the Company has
the capacity to design and build superconductive magnet systems for
various non-MRI applications should a commercial opportunity that meets
our strategic objectives be identified. To date, the Company has not
had significant sales of non-MRI magnet systems.
o RF Coils for MRI Systems. Through IGC-MAI, the Company manufactures and
sells RF coils for use in MRI Systems. IGC-MAI's current product line
includes ten anatomical applications with more than fifty product
groups available in magnetic field strengths from 0.2T to 3.0T, for a
total of more than 150 products. In fiscal years 2001, 2000 and 1999,
RF coils accounted for 9%, 10% and 13%, respectively, of the Company's
net sales.
o LTS Materials. 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 ("NbTi")
wire, and niobium-tin ("Nb3Sn") wire. In contrast to the relatively
large market for NbTi wire, Nb3Sn multi-filamentary wire is sold only
in limited quantities. This is because NbTi wire is more cost effective
for MRI magnet systems, which is the leading market for LTS wire. The
Company has seen a significant increase in government-sponsored work
for non-MRI applications through its participation in the Large Hadron
Collider project for the European Organization for Nuclear Research
("CERN") in Switzerland, and the Superconducting Tokamak Advanced
Research Project in Korea. These multi-year programs offer potential
for increased non-MRI wire and cable orders. During each of fiscal
years 2001, 2000 and 1999, sales of LTS wire and cable (excluding
intercompany sales) accounted for approximately 5%, 9% and 12% of the
Company's net sales.
C. Marketing
We market our magnet systems and LTS wire through our own personnel. We
also have a wholly-owned European marketing and service subsidiary in the United
Kingdom, as well as a foreign sales corporation located in Barbados. IGC-MAI
markets its RF coils to MRI System integrators on a direct basis in the U.S,
Europe and Japan and to end-users, such as hospitals, clinics and research
facilities with its own U.S.-based sales force. IGC-MAI markets its RF coils
internationally, to end-users through a combination of distributors and direct
contact with customers in selected markets.
4
Export Sales. Products sold to foreign-based companies, such as Philips
in the Netherlands, or Hitachi and Toshiba in Japan, were accounted for as
export sales even if some of the products sold were installed in the U.S. On
that basis, the Company's net export sales (including the Instrumentation
segment) for fiscal years 2001, 2000 and 1999 totaled $102.0, $76.8 and $61.1
million, respectively, most of which were to European customers and primarily
billed in U.S. currency.
Principal Customers. Sales to customers accounting for more than 10% of
the Company's net sales aggregated approximately 56% of net sales in fiscal
2001, 61% of net sales in fiscal 2000 and 54% of net sales in fiscal 1999. (See
Note K of Notes to Consolidated Financial Statements included in response to
Item 8.)
The Company sells a substantial portion of its products in the MRI
industry to four customers, two of which are significant. Philips is the
principal customer for the Company's MRI magnet systems. In fiscal year 1999,
Intermagnetics and Philips executed a new sales agreement with an initial
five-year term. The term is extended each year such that the agreement will
continue in effect on a rolling five-year basis, unless otherwise terminated in
accordance with certain provisions of the agreement. Under this agreement,
Intermagnetics is the sole supplier of certain MRI magnet systems to Philips.
Sales to Philips (including sales by the Instrumentation segment) amounted to
approximately 56%, 50% and 41% of the Company's net sales for fiscal 2001, 2000
and 1999, respectively.
The Company's second principal customer for MRI products is GE Medical
Systems ("GE"). The Company sells LTS wire to GE for use in GE's MRI magnet
systems, as well as RF coils for use with GE's MRI Systems. Under the Company's
current arrangement with GE, GE places orders for LTS wire and RF coils from
time to time with the Company. Sales to GE accounted for approximately 7%, 11%
and 13% of the Company's net sales for fiscal 2001, 2000 and 1999, respectively.
D. Consolidation of European Joint Venture
In 1987, the Company and Alstom Energy, S.A. ("Alstom") created a joint
venture named Alstom Intermagnetics ("AISA") located in France. AISA
manufactured superconductive MRI magnet systems under a license from the
Company, and supplied a portion of Philips' requirements for superconductive MRI
magnet systems under an agreement that terminated on December 31, 1999.
Effective May 30, 1999, the Company sold its interest in AISA to Alstom
for three hundred thousand dollars ($300,000). In fiscal year 2000, the Company
consolidated AISA's magnet production in the Company's Latham, New York
facility, and AISA ceased production of superconductive MRI magnet systems. In
consideration of the contractual rights of AISA and Alstom under the termination
agreement, Intermagnetics paid AISA nine million dollars ($9,000,000). This
consolidation resulted in a significant increase in the number of MRI magnet
systems produced and sold by the Company. (See Note B of Notes to Consolidated
Financial Statements included in response to Item 8.)
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E. Competition/Market
U.S. sales of MRI Systems grew in each of calendar years 1998, 1999 and
2000. 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 such growth will continue in
the future. In addition, healthcare cost control initiatives and regional
economic conditions could negatively impact continued growth.
Two emerging MRI applications could provide additional growth
opportunities for the Company's products in the future. MRI System integrators
are developing systems that can be used as non-invasive diagnostic tools for
cardiac disease. These systems could replace the need for interventional X-rays
in certain cases. Functional MRI (fMRI), in which physicians can monitor brain
activity (function) as well as brain anatomy, is another emerging area. We serve
this market with our newly developed 3.0T magnet system. The Company is
well-positioned to supply specialized MRI magnet systems to address these
emerging markets. There are no assurances that these markets will become
significant or that the Company will be successful in providing commercial
products for these markets.
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. Most large MRI Systems suppliers perceive
higher field strength imaging systems (1.0T or greater) based upon
superconductive magnets to have technical advantages over MRI Systems that use
resistive electromagnets and permanent magnets, which are limited in field
strength either by high power consumption or by basic material properties. Lower
field strength systems generally produce lower quality images, although rapid
gains in computer technology have offset some of this quality loss. In addition,
"open" magnet configurations based on permanent and resistive magnets have
enjoyed rapid growth in market share over the past few years, although this
growth appears to have leveled off in calendar year 1999 and may have declined
somewhat in calendar year 2000 with the introduction of higher field open
superconducting magnet systems. IGC-MBG is developing a 1.0T superconducting
"open" magnet system. It is too soon, however, to assess what impact these
systems may have on market share.
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 MRI System integrators; and (2) MRI System integrators that
manufacture superconductive magnet systems for their own use.
The Company considers Oxford Magnet Technology Limited ("OMT") its
principal competitor in the first category. OMT is a joint-venture
between Siemens (51%) and Oxford Instruments Group, plc ("Oxford")
(49%). OMT supplies MRI magnet systems to at least two MRI system
integrators: Siemens and Marconi. OMT sells substantially more
superconductive MRI magnet systems and has greater production capacity
than the Company; however, the Company believes it can compete
effectively against OMT on the basis of technology and price.
Competitors in the second category include companies like GE and
Toshiba that manufacture MRI magnet systems for use in their own MRI
Systems. While these integrators do not purchase our magnet systems,
they present a market opportunity for our component products. For
example, we sell LTS wire and RF coils to GE. We also sell RF coils to
Toshiba.
6
o Other Superconductive Magnet Systems. Historically, the Company has
competed against many different companies domestically and
internationally (including Oxford, which dominates the worldwide market
for NMR systems) for the opportunity to design and build non-MRI
superconductive magnet systems. To date, the Company's sales of such
systems have not been significant.
o LTS Wire. The single largest commercial market for LTS wire is MRI. In
fact, most of the LTS wire manufactured by the Company is used for
superconductive MRI magnet systems (either internally by IGC-MBG, or
externally by other customers). The Company believes that it, Oxford
Superconducting Technology and VACUUMSCHMELZE GmbH, a division of the
Morgan Crucible Company PLC, are the major suppliers of NbTi wire for
the MRI market, although Alstom, Outokumpu and Europa Metalli also
supply LTS wire to this market. While there are several other foreign
and domestic manufacturers of NbTi superconductive wire, none of them
have been a significant factor in the worldwide MRI market.
The Company has a contract to supply nearly 100 tons of LTS cable to
CERN for the Large Hadron Collider Project, a European
government-sponsored program. European companies (Alstom,
VACUUMSCHMELZE and Outokumpu) will supply an additional 1,400 tons of
cable to CERN and Furukawa Electric, a Japanese company, will supply
100 tons of cable. The Company believes that the quantity of wire
required for this project exceeds that required for the global MRI
market. Even with this significant project, industry capacity for NbTi
wire is greater than current demand, and the Company has seen
substantial pressure on prices. The Company believes its prices for LTS
wire/cable currently are competitive, and 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. In
addition, the CERN program is technically challenging and there are no
assurances that IGC-AS will succeed in meeting CERN's specification and
delivery requirements.
The Company is also a major U.S. supplier of Nb3Sn superconducting
wire. Oxford Superconducting Technology participates in the domestic
market, and there are a number of manufacturers of Nb3Sn wire in Japan
and Europe. Nb3Sn wire is used in the commercial nuclear magnetic
resonance and high field magnet markets, as well as in
government-sponsored programs. The Company believes that it and one
other Company in Japan, Mitsubishi Electric, are the only companies
supplying substantial quantities of Nb3Sn material needed for the
Superconducting Tokamak Advanced Research Project in Korea.
In the area of LTS wire/cable, practical and more cost-effective HTS
materials developed by the Company and others could eventually reduce
the market for the Company's current LTS products, although the Company
does not, at this time, believe this is likely to happen in the near
future. (See "Energy Technology Segment" below.)
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o RF Coils for MRI Systems. The Company believes that the market for RF
coils will grow faster than the market for MRI Systems because: (i) the
number of MRI applications using specialized RF coils is increasing;
(ii) RF coil technology is being improved continuously, with an average
technology obsolescence rate of approximately three years; and (iii) an
increasing number of existing MRI Systems are being upgraded by MRI
System integrators at a much lower cost than replacing an entire MRI
System. An added set of RF coils typically is needed in connection with
each upgrade.
The Company's primary RF coil competitors consist of independent
manufacturers that make RF coils for sale to MRI System integrators and
end-users. The Company also experiences competition from MRI System
integrators that manufacture RF coils for sale with their MRI Systems.
Most MRI System integrators outsource RF coil development and
manufacture to companies such as IGC-MAI; although, the Company
believes Siemens and Philips have maintained the most extensive
in-house coil development activities of the major MRI System
integrators. If the MRI System integrators decide to pull RF coil
development in-house, access to the market for independent RF coil
manufacturers could be limited. The Company believes this risk is
remote, however, because outsourcing specialized RF coils generally
results in lower cost and faster time-to-market than with in-house
resources. For these reasons and pressure on technical resources, we
believe even Siemens and Philips are now outsourcing more RF coil
products.
There are several independent RF coil manufacturers of various size.
The Company believes that, of these companies, two compete with IGC-MAI
against its full product range. Competition generally is based upon
capacity for volume production, price and diagnostic image quality. To
remain competitive, the Company must continue to offer high quality,
technically advanced products while reducing costs. In fiscal year
2001, IGC-MAI continued to face increased competitive pressures on both
price and new technology. Its two main competitors grew in both size
and market share, mainly as a result of their supply relationship with
one major MRI System integrator. While the Company is responding to
these challenges with new products, there are no guarantees that
IGC-MAI will be successful in regaining significant market share.
F. Patents
The Company believes at the present time that patents are not a
significant competitive factor in the conduct of its business in the MRI
segment. The Company directly or indirectly either owns, or is a licensee under
a number of patents relating to RF coils, magnet systems and LTS wire. There are
no assurances that changing technology and/or emerging patents will not
adversely impact the Company's current patent position or its competitiveness.
In addition, while the Company is focusing on developing and patenting new
technologies, there are no assurances that there will not be competing patents
issued, or that such technology will become commercially significant.
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G. Raw Materials and Inventory
Most materials and parts used in the manufacturing process for
superconducting magnet systems are ordered for delivery based on production
needs. Generally, the Company's investment in inventories for production of MRI
magnet systems is based primarily on production schedules required to fill
existing and anticipated customer orders. In addition, the Company has entered
into consignment programs with its two largest customers. We believe these
arrangements enable us and our primary customers to better respond to market
demand and capture additional market share.
IGC-MAI believes that there are alternative suppliers at competitive
prices for most of the parts, materials and components that it purchases for the
manufacture of its RF coils. There are, however, discrete electrical components
and mechanical housings that are sole sourced because of the uniqueness of their
specifications. In the event that a sole source supplier cannot meet demand, a
re-engineering or re-tooling of the sourced component would be required.
There are two sources for NbTi raw material required for production of
LTS NbTi wire. While IGC-AS has not experienced difficulty in obtaining such
materials, fluctuation in demand caused by large projects such as the Large
Hadron Collider being constructed by CERN in Switzerland, could create temporary
imbalances in supply and demand and thus adversely impact the price of such raw
material. The Company has negotiated a multi-year contract with a key supplier
in order to reduce this risk and stabilize supply and price.
H. Warranty
The expense to the Company to date for performance of its warranty
obligations in the MRI segment has not been significant.
INSTRUMENTATION SEGMENT
A. Introduction
Two wholly-owned subsidiaries comprise the Company's Instrumentation
segment: IGC-APD and IGC-Polycold design, manufacture and sell low temperature
(semi-cryogenic) and very low temperature (cryogenic) refrigeration equipment.
In the second quarter of fiscal year 2001, the Company divested a third
subsidiary, InterCool Energy Corporation ("ICE"), which sold refrigerants (see
Note C of the Notes to Consolidated Financial Statements included in response to
Item 8).
The Company derived approximately 31% of its net sales in fiscal year
2001 and 30% of its net sales in each of fiscal years 2000 and 1999,
respectively, from the sale of products in its Instrumentation segment.
B. Principal Products
IGC-Polycold manufactures and sells a line of low temperature
refrigeration systems in the -40 to -90 Celsius range. 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. In fiscal 2001, sales to the optical coating industry made
up the largest single market for IGC-Polycold's products. In addition,
IGC-Polycold released several new products that are positioned for the next
semiconductor market upturn. In fiscal 2001, there was a large demand for
optical filters used to increase capacity of the data transmitted on fiber optic
cable networks. This demand generated an increase in the sale of Polycold
systems used by optical filter manufacturers to enhance the performance of the
filter manufacturing equipment.
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IGC-APD's product line includes shield coolers (refrigerators) used in
the production of MRI magnet systems, a specialized cryogenic refrigeration
system sold under the registered tradename CryoTiger (R) and specialized water
pump systems and cryopumps sold under the registered tradenames AquaTrap (R) and
Marathon (R) that are used primarily in the manufacture of semiconductors.
Historically, the semiconductor market has been cyclical based on
demand for technology products such as personal computers and cellular phones.
The instrumentation segment has typically not derived significant sales from
semiconductor manufacturers in the past, but has targeted new product
development for this market. Accordingly, the growth of product lines from
IGC-APD and IGC-Polycold that serve this market may be adversely affected by a
downturn in the semiconductor industry. More recently, demand for the Company's
products in the telecommunications industry for equipment used in the
manufacture of optical filters has developed, which could also be subject to
cyclical fluctuations.
IGC-APD and IGC-Polycold also license certain mixed gas refrigerant
technology to third parties for use in markets in which the Company does not
otherwise participate.
C. Marketing
IGC-APD markets its shield coolers through a direct sales force located
in its Allentown, Pennsylvania headquarters, its office in Sunnyvale, California
and its office in the U.K. IGC-APD's other cryogenic products are marketed
worldwide through its direct sales force and through scientific and vacuum
equipment sales representatives and distributors. In addition, IGC-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 markets its line of refrigeration systems through a direct
sales force based in its San Rafael, California headquarters, two key
distributors located in Japan and Germany, and through a worldwide network of
sales representatives. In addition, IGC-APD and IGC-Polycold share common direct
sales and marketing teams. In fiscal year 2000, IGC-APD and IGC-Polycold began
marketing their combined product lines as "Cool Solutions" to OEM's. As a result
of this effort, the companies secured two new OEM customers for two new product
platforms.
10
D. Competition/Market
IGC-APD supplies shield coolers to IGC-MBG for its superconductive MRI
magnet systems. In addition, IGC-APD sells these refrigerators to other
manufacturers of superconducting MRI magnet systems. IGC-APD licenses Daikin to
produce shield coolers and other cryogenic products for the Japanese market. The
Company considers its principal competitors in the manufacture of shield coolers
to be Leybold AG ("Leybold") and Sumitomo Heavy Industries ("SHI"). Both Leybold
and SHI have greater production capacity and financial resources than the
Company, and have successfully locked up many of IGC-APD's potential customers
in multi-year supply agreements.
IGC-APD's principal competitors in its other markets include Helix
Technology Corporation ("Helix") (which markets its products under the names
"CTI Cryogenics" and "CTI") and Ebara Technologies, Inc. Helix is believed to
control 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 the basis of technology and equipment performance. In addition,
IGC-APD's CryoTiger refrigeration system competes against machines known as
Stirling refrigerators (which the Company believes are more costly and less
reliable than CryoTiger), and 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 is offset by lower operating
and maintenance costs and greater ease of use. The Company believes there is a
significant opportunity for this product in the marketplace, however, there are
no assurances it will achieve widespread commercial success.
IGC-Polycold's major competitors include Sanyo and Shin Meiwa in Japan,
and Helix domestically. In fiscal year 2001, a new competitor emerged as the
market for optical coating equipment grew at a record rate. IGC-Polycold was
able to substantially increase its production capacity to meet most demand from
the large OEM's serving this market. 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 efficiency and/or cycle time, as well as price, availability and product
quality. In addition, with respect to both IGC-APD and IGC-Polycold, there are
no assurances that emerging technology will not adversely impact their
competitiveness.
E. Patents
Patents are a significant competitive factor in some areas of the
Company's Instrumentation segment. IGC-APD's CryoTiger line is based upon its
patented proprietary technology. IGC-APD's AquaTrap systems are based
principally on IGC-APD's proprietary CryoTiger technology. While IGC-Polycold
does have some patent protection for its products, patents currently are not a
significant competitive factor for IGC-Polycold. Patents may become more
significant in the future, however, as IGC-Polycold develops new products. The
Company's success in marketing its refrigeration products will depend on its
continued ability to obtain patents, maintain trade secret protection and
operate without infringing on the proprietary rights of others. No assurance can
be given that any additional patents will issue with respect to patent
applications filed or to be filed by the Company. Furthermore, even if such
patents issue, there can be no assurance that any issued patents will protect
against competitive products or otherwise be commercially valuable. No patents
that the Company considers significant expire during the next five years.
11
F. Raw Materials and Inventory
IGC-APD purchases certain major components from single sources, but the
Company believes alternate sources are available. IGC-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. IGC-Polycold generally maintains a
sufficient inventory of raw materials, assembled parts and partially and fully
assembled major components to meet production requirements.
G. Warranty
In fiscal year 1999, IGC-APD experienced significant warranty
obligations, which adversely affected its overall financial performance. IGC-APD
addressed the warranty issue and its warranty obligations in fiscal year 2000
were not significant. In fiscal year 2001, the introduction of new products
resulted in an increase in warranty obligations.
ENERGY TECHNOLOGY SEGMENT
A. Introduction
The U.S. Department of Energy has reported that much of the nation's
electrical transmission and distribution infrastructure is rapidly becoming
incapable of meeting the demands of our modern economy. Energy Technology is an
emerging industry dedicated to providing more efficient, reliable and
environmentally responsible means of generating, transmitting and distributing
electricity. High-temperature superconducting (HTS) materials--discovered in the
mid-1980's, but only recently approaching technological and economic
feasibility--could become a key solution. We are focusing on HTS-based devices
that address a potential multi-billion dollar market for more efficient,
reliable and environmentally friendly electric transmission and distribution.
HTS materials are composed of ceramic-like compounds that become
superconducting at higher temperatures than those required to maintain
superconductivity in LTS materials. For example, HTS materials typically remain
superconducting when cooled to temperatures similar to that of liquid nitrogen
(77 Kelvin or minus 321 F). Accordingly, HTS materials usually require less
sophisticated and less costly cryogenic refrigeration systems than LTS
materials, making them well-suited for use in devices such as HTS cables,
transformers and fault current controllers.
12
We have maintained an HTS program since shortly after these materials
were first identified in 1986. Initially, the Company and others pursued the
development of "First Generation" HTS wires and tapes using Bismuth-based
materials. The Company and others have incorporated these First Generation
conductors into successful prototype products. Despite improvements in these
First Generation wires and tapes, we believe that the high cost of raw materials
required for First Generation conductors (notably, high-purity silver), the high
labor content and certain performance limitations will prevent widespread
commercialization.
More recently, we shifted our focus to "Second Generation" HTS
conductors. These conductors are based on less expensive metal alloy substrates
(e.g., nickel) and can be manufactured using a far less labor-intensive process
than First Generation conductors. Based on these factors, and the superior
performance demonstrated by Second Generation conductors, we believe these
conductors can reach cost and performance levels necessary for commercialization
of electric power devices. Accordingly, in fiscal year 2000, the Company formed
a new subsidiary, IGC-SuperPower, LLC, to develop and commercialize electric
power devices that utilize HTS materials. IGC-SuperPower intends to incorporate
HTS wire products (initially, First- and subsequently, Second-Generation) into
electric power devices (see "Principal Products" below) for sale primarily into
the electric power utility marketplace.
We believe that Second Generation HTS conductors can be made in
sufficient quantity and length, and with cost and performance attributes that
will meet the commercial requirements of the applications we are pursuing.
However, we expect that it will take at least three to five years to reach such
commercial thresholds. To date, Second Generation HTS conductors have been
demonstrated successfully by the Company or other entities only in short lengths
on a laboratory scale. There can be no assurance that we will be successful in
extending the laboratory results to a manufacturing scale with cost and
performance levels adequate for successful commercialization or that end-user
utilities will accept the new products we are developing.
B. Principal Products
(i) HTS-Based Electric Power Devices
Using initially First Generation and, subsequently, Second Generation
HTS conductor, the Company intends to develop electric power devices for sale
primarily into the electric power utility marketplace. IGC-SuperPower would
manufacture and sell HTS components and devices for products such as:
(a) HTS Transformer: Conventional copper-wound, oil-filled
transformers are heavy, costly and of massive size relative to
output. They are also susceptible to fire and explosion and
can damage the environment should the oil leak. HTS technology
has the potential to enhance operating cost, performance and
flexibility while offering reductions in both size and weight.
Specifically, HTS transformers would eliminate the fire,
explosion and environmental hazard associated with
conventional oil-filled transformers, run indefinitely at
rated and above rated power without reduction of transformer
life, provide more power per unit volume in existing
substations, and increase operational electrical efficiency.
Initially, HTS will have to compete against conventional
copper-based transformer technology to gain acceptance and
market share.
13
Together with its partner Waukesha Electric Systems
(an operating unit of SPX Corporation), the Company in 1998
successfully developed and tested a 1 MVA HTS transformer
prototype using First Generation conductor. The Company and
Waukesha are currently developing a 5/10 MVA HTS transformer
prototype. The ultimate goal of the program is to develop a
30/60 MVA HTS transformer for the commercial market. The
Company has a Product Development Agreement with Waukesha to
commercialize HTS transformers.
(b) HTS Fault Current Controller: HTS Fault Current
Controllers ("FCC") are a new type of device enabled by HTS
technology that potentially provide the ability to limit
damaging, high-current transients to power station and
substation components. By avoiding the damage to equipment
created by such surges in power level, electric utilities can
defer or eliminate the need for several types of equipment
upgrades or replacement, such as additional parallel bus,
switchgear, transformers, etc. FCC's can potentially also be
used as power valves in the transmission network, allowing
loads to be shifted from higher to lower loaded lines,
significantly increasing network efficiency.
As part of a team lead by General Atomics,
Intermagnetics participated in the development of a 15kV
class, 1,200A HTS FCC using First Generation HTS conductor.
The complete FCC assembly was installed and tested at Southern
California Edison in July of 1999. The Company's HTS coils met
and exceeded specifications. The FCC system currently is at
Los Alamos National Laboratory for insulation upgrading and
cooling system modification (we did not supply the insulation
design and cooling system). The DOE and Los Alamos National
Laboratory indicate that single-phase tests of the FCC system
will be completed in calendar year 2001.
(c) HTS Transmission Cable: An HTS transmission cable can
carry three to five times more power than a conventional
copper cable system. This has potential advantages in
circumstances where new underground installation is too
expensive, the terrain too difficult or where overhead right
of way is not available. Given their high current-carrying
capacity and other attractive characteristics, HTS cables may
open up new alternatives in network design. A superconducting
cable would also eliminate environmental concerns because it
does not use oil like conventional cables. HTS cables provide
increased operating efficiency and could be retrofitted into
existing conventional cable ducts allowing for the delivery of
more power as well as creating conduit space for
telecommunications cable. HTS cables could also provide
improved power quality by overriding peak loads and improved
operating efficiency through lower line losses.
In collaboration with Southwire Company,
Intermagnetics provided First Generation HTS conductor for a
30m, 12.5kV, 1,250A HTS power cable that was commissioned in
February 2000. This is the first known "real world"
demonstration of an HTS cable. The cable currently provides
power to three Southwire manufacturing plants.
In August, 2001, we announced that IGC-SuperPower
will develop and install a First Generation power cable in an
urban right-of-way in Albany, New York. Our cable project
partners include Niagara Mohawk Power Corporation, an energy
services company serving upstate New York and Nexans, a
worldwide leader in the cable industry. The New York State
Energy Research and Development Authority awarded
IGC-SuperPower six million dollars ($6,000,000) for this
project, which is expected to be completed in approximately
three years. As part of the project, IGC-SuperPower will test
Second Generation material by designing, building and testing
a small cable core made with this material.
14
(ii) Second Generation HTS Conductor
As a pre-requisite to developing commercially successful HTS-based
electric power devices, we intend to develop, manufacture and sell (both
internally and externally) Second Generation HTS conductor. To that end, in
March 2000 the Company entered into a three-year collaborative technology
transfer agreement (the "LANL/ANL Agreement") with two U.S. Department of Energy
national laboratories (the Los Alamos National Laboratory ("LANL") and the
Argonne National Laboratory ("ANL")). Under this agreement, LANL and ANL are
assisting us in scaling up to commercial manufacturing levels certain promising
HTS deposition processes developed by LANL. In May, 2001, we negotiated an
exclusive license with LANL to certain HTS technology that we believe will
provide a competitive advantage in the manufacture and sale of Second Generation
HTS material. We also have exclusive access to technology developed under the
technology transfer agreement, and the first right to negotiate an exclusive
license within a field of use, for reasonable terms and conditions, to
additional inventions made by LANL and ANL under the agreement. The Company will
bear approximately half of the estimated $2.5 million development cost and the
laboratories will share the other half. In addition, the Company announced in
June 2000 the signing of a contract with the U.S. Department of Energy ("DOE
Agreement") for the first phase of a three-year, $4.5 million project to
commercialize the manufacturing process for Second Generation HTS conductors.
This contract will complement the LANL/ANL Agreement. In the DOE Agreement,
Intermagnetics and DOE will share the costs of developing the new manufacturing
process. The first phase, with costs of approximately $500,000, was completed in
March 2001. The Company expects the program to continue for one more two-year
phase, bringing total expenditures to about $4.5 million over the term of the
program.
C. Marketing
The Company intends to reach the electric utility marketplace via
strategic relationships with existing suppliers of electric power equipment.
While a strategic relationship already exists with Waukesha Electric Systems,
the Company believes it will be necessary to obtain additional strategic
partners in order for it to compete successfully. There can be no assurance that
such strategic marketing partners will be found, or that such partners will be
successful in bringing any of the Company's products to market.
D. Competition/Market
With respect to HTS-based products, the Company anticipates that it
will participate principally as a developer and manufacturer of HTS cable,
transformer and fault current controller coils, and associated cryogenic
refrigeration systems and also as a developer and supplier of Second Generation
HTS conductors (i.e., wires/tapes). The Company believes that it can compete
effectively by leveraging its experience in superconducting materials and
cryogenic refrigeration systems, and its long track record of world-class
technical achievements and profitable commercialization of LTS products.
15
The Company believes its most significant U.S.-based competitor for HTS
materials is American Superconductor Corporation, which has established
strategic development and/or marketing relationships with a number of existing
suppliers and users of electric power equipment. Internationally, competitors
include NKT, Pirelli, Sumitomo and Furukawa for cables, and Siemens and ABB for
transformers and FCC's. The Company also competes with 3M, Sumitomo and Fujikura
on Second Generation conductor.
The underlying economics for HTS-based products appear to be
attractive. However, potential commercial end-users lack experience with such
products in field operations. This, along with the cost of currently existing
First Generation HTS materials, has tended to limit the adoption rate,
especially in the context of larger, more expensive applications such as those
for utility power plants and electric networks. Managers of electric utilities
focus on issues of long-term reliability, compatibility and maintenance, and
must make investments with a 40-year time horizon. For this reason, only the
most forward-looking utilities have begun to test prototype HTS systems.
HTS-based products ultimately will need to justify themselves in economic and
performance terms before widespread adoption can take place. Before HTS wire or
cables can replace conventional conductors available today, the
price/performance relationship of HTS must be demonstrated reliably. On the
basis of forecasted improved performance in Second Generation HTS conductor, the
Company expects to achieve HTS conductor selling prices that will stimulate
broad, commercial demand. However, there are many technical hurdles that must be
overcome before this goal can be attained and there are no assurances that a
market for these products will develop.
The Company does not believe its current overall 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 being of important strategic interest.
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. There can be no assurances that the Company will
have sufficient resources to bring HTS products to market or that emerging
patents will not adversely impact the Company's competitiveness. In addition,
there can be no assurance that we will achieve a commercially significant
position in this emerging marketplace.
E. Patents
We believe that our current patent position, together with our expected
ability to obtain licenses from other parties to the extent necessary, will
provide us with sufficient access to relevant intellectual property to develop
and sell HTS wires and system components consistent with our business plan.
However, the patent situation in HTS is unusually complex, and many participants
are continuously filing new patents aggressively. Since the discovery of high
temperature superconductors in 1986, rapid technical advances have resulted in
the filing of a large number of patent applications relating to
superconductivity worldwide. Many patents and patent applications overlap and
are contested. A protracted interference proceeding in the U.S. regarding the
fundamental Second Generation HTS composition (YBCO) recently reached its
conclusion in favor of Lucent Technologies Inc. However, a considerable number
of intellectual property ownership issues with respect to HTS materials and
processes remain contested. A number of patents and patent applications of third
parties relate to the Company's current and future products. The Company may
need to acquire licenses for those patents, successfully contest the scope or
validity of those patents, or design around patented processes or applications.
16
We have obtained a non-exclusive license to Lucent Technology's HTS
patent portfolio, including a license to the patent application covering YBCO,
one of the key raw materials the Company is developing for use in Second
Generation HTS conductors. Lucent's YBCO patent application is expected to issue
as a U.S. patent. The Company believes that the Lucent patent portfolio has
been, or will be, licensed broadly on a non-exclusive basis to other HTS
technology participants, including several of the Company's competitors.
The Company is developing a manufacturing process for Second Generation
HTS conductor using the combination of Buffer Layer Deposition and
Superconductor Deposition coating processes developed by LANL. We have obtained
exclusive licenses to LANL's relevant patents and patent applications in this
area and we have the right to obtain a license to technology developed by LANL
under our existing technology transfer agreement. The Company believes that it
will be able to obtain such licenses on commercially reasonable terms, but there
can be no assurance that this will be the case. Other companies that compete
with the Company are also developing Second Generation HTS using competing
processes. There is no guarantee that the process the Company is developing will
be the most commercially viable one.
A number of other companies (including HTS competitors) have filed
patent applications, and in some instances have been issued patents, on various
aspects of HTS composition of matter, HTS wire processing, HTS wire
architecture, and HTS component and subsystem design and fabrication. To the
extent that any of these issued or pending patents might cover the materials,
processes, architectures, components or devices that the Company wishes to use,
develop or sell, the Company would be required to obtain licenses under those
patents.
F. Raw Materials and Inventory
First Generation conductors currently require relatively high
proportions of silver in the manufacturing process. This adds significant
expense to the cost of the conductor and is one of the reasons the Company does
not believe First Generation conductors will achieve widespread commercial
success. IGC-SuperPower expects to order parts and components for demonstration
devices based on needs, utilizing multiple sources. For early demonstration
prototypes, and prior to the availability of Second Generation material,
IGC-SuperPower expects that First Generation HTS conductor will be available
from multiple sources. However, the manufacturing of even First Generation
material is not yet an established business for the current suppliers, and
IGC-SuperPower's ability to procure such materials in adequate quantities and
with acceptable prices cannot be assured. IGC-SuperPower anticipates purchasing
raw materials that include precursors and nickel alloy tape for scaling up the
manufacture of Second Generation conductor. These materials are available from
multiple sources. The Company currently does not maintain significant quantities
of inventory of any of the supplies used in Second Generation conductor or for
its device development needs.
G. Warranty
The Energy Technology Segment has not experienced any warranty
obligations to date.
17
RESEARCH AND DEVELOPMENT
The Company believes its research and development activities are
important to its continued success in new and existing markets. Externally
funded development programs have directly increased sales of design services and
products and, at the same time, assisted in expanding the Company's technical
capabilities without burdening operating expenses. Under many of the Company's
government contracts, it must share any new technology resulting from such
contracts with the government, which includes the right to transfer such
technology to other government contractors; however, the Company currently does
not expect such rights to have a material adverse impact on its future
operations.
A substantial portion of the Company's research and development
expenditures has been covered by external funding, principally from the U.S.
government. In fiscal 2001, approximately 43% of total research and development
activities were paid by such external programs compared to approximately 43% in
fiscal years 2000 and 1999, respectively. During fiscal years 2001, 2000 and
1999, product research and development expenses in all segments, including
externally funded amounts, were $16,591,000, $11,038,000 and $10,886,000,
respectively.
The Company can experience, in any given year, significant increases or
decreases in external funding depending on its success in obtaining funded
contracts.
INVESTMENTS
See Note D of the Notes to Consolidated Financial Statements included in
response to Item 8 for a description of the Company's investments.
PERSONNEL
On May 27, 2001, the Company employed 767 people. We have continued to
increase our total number of employees and as of July 31, 2001, we employed 822
people.
Within the MRI segment, the production and maintenance employees of
IGC-AS, in Waterbury, Connecticut, are represented by the United Steelworkers of
America ("United Steelworkers"). The Company's collective bargaining agreement
with the United Steelworkers initially was scheduled to expire on May 30, 2003,
but in January 2001, the parties negotiated certain changes to the agreement,
including an extension of the contract to May 30, 2005. Within the
Instrumentation segment, the production employees at IGC-APD in Allentown,
Pennsylvania, are represented by the International Association of Machinists and
Aerospace Workers ("IAMAW"). The Company and IAMAW have a three-year collective
bargaining agreement that expires on August 22, 2003.
18
There is great demand for trained scientific and technical personnel as
well as for key management 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
As of the date of this report, the executive officers of the Company
were:
Name Position Age
- ---- -------- ---
Glenn H. Epstein President and Chief Executive Officer 43
Michael C. Zeigler Senior Vice President - Finance and 55
Chief Financial Officer
Leo Blecher Vice President and General Manager -- 55
IGC-Magnet Business Group
David Dedman Vice President and General Manager -- 47
IGC-APD Cryogenics Inc.
and IGC-Polycold Systems Inc.
Ian L. Pykett Chief Technology Officer 48
Richard J. Stevens Vice President and General Manager -- 59
IGC-Medical Advances Inc.
Glenn H. Epstein was named President and Chief Operating Officer on May
5, 1997. Effective June 1, 1999, he was appointed Chief Executive Officer. Prior
to joining the Company, Mr. Epstein worked for Oxford Instruments Group, plc in
various capacities between 1986 and April 1997, and 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.
Michael C. Zeigler was appointed Chief Financial Officer of the Company
in June, 1987. Prior to that, he served as the Company's Controller from June
1985 through June 1987. In fiscal year 2001, Mr. Zeigler announced that he is
planning to retire.
Leo Blecher was appointed Vice President and General Manager of IGC-MBG
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, holding the title of Manager - Engineering and
Project Manager, for the Space Technology Division.
19
David Dedman was appointed Vice President and General Manager of
IGC-APD and IGC-Polycold in September, 1998. Prior to joining the Company, Mr.
Dedman served as Executive Vice President, Global Business Development for
SubMicron Systems Corporation and has held various executive management
positions in a range of technology companies including EI DuPont de Nemours,
Emerson Electric and Tylan General.
Ian L. Pykett, Ph.D. was appointed Chief Technology Officer in
February, 2000. He had served as Vice President of the IGC-Technology
Development division since 1991. That division was dissolved in fiscal year
2000. Prior to joining the Company, Dr. Pykett had been President and Chief
Executive Officer of Advanced NMR Systems, Inc., a diagnostic imaging company he
co-founded in 1983.
Richard J. Stevens became Vice President and General Manager - IGC-MAI
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.
ITEM 2. PROPERTIES
The Company's corporate offices and IGC-MBG offices and manufacturing
facility 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 mortgage. (See Note E of the Notes to Consolidated
Financial Statements included in response to Item 8 hereto.)
In fiscal year 1999, the Company entered into a lease agreement for up
to approximately 65,000 square feet of office and manufacturing space in nearby
Schenectady, New York. At the beginning of fiscal year 2001, IGC-SuperPower
occupied approximately 33,000 square feet of that space. In the last quarter of
the fiscal year, it expanded into the remaining 32,000 square feet. The facility
contains both offices and manufacturing space. The lease has a 20 year term
ending in October 2019.
IGC-AS' 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
that 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-APD operates out of a building, which it owns, in Allentown,
Pennsylvania totaling approximately 56,550 square feet. See Note E of the Notes
to Consolidated Financial Statements included in response to Item 8 hereto for a
description of IGC-APD's obligations under revenue bonds issued in connection
with the purchase of this building.
20
IGC-MAI leases approximately 21,200 square feet in a multi-tenant
building located in the Milwaukee County Research Park's Technology Innovation
Center (the "Research Park"). Approximately 9,000 square feet are used for
office space with the remaining space dedicated to lab, assembly, shipping and
material storage. The lease expires in August 2002, and may be renewed for a
successive one-year term. IGC-MAI is studying the possibility of building, or
moving to, a new facility.
IGC-Polycold Systems Inc. leases approximately 27,900 square feet of
manufacturing and office space in three buildings located in San Rafael,
California. The lease for one building expires in October 2001. Leases for the
two other buildings expire in 2002. IGC-Polycold believes that additional space
will be needed to meet its needs and anticipates that it will lease a new
facility in fiscal year 2002.
The Company believes its current facilities, and facilities it
anticipates it will lease, 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. The Company is, from time to time, a party to
litigation arising in the normal course of its business.
To the Company's knowledge, no director, officer, affiliate of the
Company, holder of 5% or more of the Company's Common Stock, or associate of any
of the foregoing, is a party adverse to, or has a material interest adverse to,
the Company or any of its subsidiaries in any proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
During fiscal year 2001, the Company's Common Stock was 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, based
on quoted market prices, are shown below.
Closing Prices(1)
-----------------
Fiscal Year 2000 High Low
- ---------------- ---- ---
Quarter Ended August 29, 1999 $ 7.6147 $5.3539
Quarter Ended November 28, 1999 6.7818 5.2946
Quarter Ended February 27, 2000 19.0962 5.8300
Quarter Ended May 28, 2000 32.6002 9.6374
Fiscal Year 2001
- ----------------
Quarter Ended August 27, 2000 19.2747 10.5892
Quarter Ended November 26, 2000 29.1667 16.6054
Quarter Ended February 25, 2001 25.4289 13.2353
Quarter Ended May 27, 2001 29.1667 19.5980
________________________
(1) The closing prices have been adjusted to reflect a three percent stock
dividend distributed on August 25, 2000, to stockholders of record on
August 4, 2000, and a two percent stock dividend to be distributed on
August 31, 2001 to shareholders of record on August 14, 2001.
On July 11, 2001, the Company's stock began trading on the Nasdaq
National Market under the ticker symbol IMGC. There were approximately 1,500
holders of record of Common Stock as of August 14, 2001. The Company has not
paid cash dividends in the past ten years, and it does not anticipate that it
will pay cash dividends or adopt a cash dividend policy in the near future. On
July 26, 2001, the Company announced that after August 2001, it was
discontinuing its policy of granting annual stock dividends. 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.
22
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been taken
from the consolidated financial statements of the Company. The selected
statement of operations data and the selected balance sheet data set forth below
should be read in conjunction with, and is qualified in its entirety by,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and related Notes included
in response to Items 7 and 8.
(Dollars in Thousands Except Per Share Amounts)
-----------------------------------------------------------------
For the Fiscal Year Ended May 27, 2001 May 28, 2000 May 30, 1999 May 31, 1998 May 25, 1997
------------ ------------ ------------ ------------ ------------
Net sales $138,157 $112,772 $102,871 $95,894 $87,052
Gross Margin 58,528 40,766 32,739 35,685 26,200
Income (loss) before 18,026 10,506 (8,241) 4,744 4,035
Income taxes
Net income (loss) 11,067 6,452 (7,029) 2,753 2,615
Per common share:
Basic 0.72 0.48 (0.54) 0.21 0.21
Diluted 0.67 0.45 (0.54) 0.20 0.20
At End of Fiscal Year 2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Working capital $60,370 $44,816 $34,389 $45, 493 $49,346
Total assets 152,158 127,977 125,458 127,776 115,889
Long-term debt
(net of current maturities) 6,185 26,524 26,631 28,833 29,105
Accumulated deficit (4,590) (6,159) (8,061) (1,081) (1,643)
Shareholders' equity 115,015 78,463 72,173 83,801 73,087
- ----------------------
(a) Income (loss) per common share has been computed during each period
based on the weighted average number of shares of Common Stock
outstanding plus dilutive potential common shares (where applicable).
(b) The Company did not pay a cash dividend on its Common Stock during any
of the periods indicated.
(c) Net income (loss) per common share has been restated to give effect to
the 2% stock dividend distributed in August 2001, 3% stock dividend
distributed in August 2000, and 2% stock dividend distributed in
September 1998, September 1997 and August 1996.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 fiscal year 2002 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.
COMPANY OVERVIEW
Intermagnetics General Corporation ("we" or the "Company") operates in
three reportable segments: Magnetic Resonance Imaging ("MRI"), Instrumentation,
and Energy Technology. The MRI segment consists primarily of the manufacture and
sale of magnets (by the IGC-Magnet Business Group), radio frequency coils (by
IGC-Medical Advances, Inc), and low-temperature superconducting wire (by
IGC-Advanced Superconductors, also known as IGC-AS), all of which are used
principally in the medical diagnostic imaging market. The Instrumentation
segment consists of refrigeration equipment produced by two subsidiaries, IGC-
APD Cryogenics Inc. (IGC-APD) and IGC-Polycold Systems Inc. (IGC-Polycold), used
primarily in ultra-high vacuum applications, industrial coatings, analytical
instrumentation, medical diagnostics and semiconductor processing and testing.
The Energy Technology segment, operated through IGC SuperPower LLC, a
wholly-owned entity, is developing second generation, high-temperature
superconducting materials that we expect to use in devices designed to enhance
capacity, reliability and quality of transmission and distribution of electrical
power. The Company operates on a 52/53 week fiscal year ending the last Sunday
in May.
During fiscal 2000, the Company decided to exit its refrigerant
business, because the business did not fit the Company's strategic direction,
and developed an exit plan. Under this plan, which was expected to be completed
within 15 months, the Company terminated all but two employees and continued the
business through a master distributor while attempting to find a buyer for the
business. As a result of this exit plan, we recorded a restructuring charge of
$2 million, including $1.8 million of inventory write-offs during fiscal 2000.
During fiscal 2001, we sold the remaining assets for approximately $1.8 million
and recorded a recovery of the restructuring charge of approximately $1.3
million.
In fiscal 1999, we discontinued our Field Effects division which had
been engaged in the manufacture and sale of clinical MRI systems. We recorded a
total restructuring charge of $4.7 million, including inventory write-offs of
$1.8 million in connection with the closure, of which approximately $0.4 million
was recovered in fiscal 2000.
In fiscal 2000, the Company reported its operations in four segments:
Electromagnetics, Low-Temperature Superconductors, Refrigeration, and Energy
Technology. The change in the current year reflects our continued focus on
commercial market applications of core technology. The resulting reporting
segments are intended to relate to the primary markets which each serve, rather
than the technologies that give rise to individual products. Prior year segment
data has been reclassified to conform with current year presentation.
As of May 30, 1999, the Company completed an agreement with Alstom, SA
("Alstom") to terminate the parties' joint venture, Alstom Intermagnetics
("AISA"), which previously manufactured MRI magnet systems under a license from
the Company. As part of the agreement, AISA's magnet production has been
transferred to our factory in Latham, New York. We paid Alstom about $9 million
for certain assets, most of which represented intangible assets, including
production rights. The cost of the intangible assets is being amortized over the
remaining term of AISA's license.
24
RESULTS OF OPERATIONS
For the year ended May 27, 2001, sales increased by 22.5%, to $138.2
million, compared with an increase of 9.6% for the preceding year.
Sales of the MRI segment increased by $16.4 million, or 21.2%, led by a
$17.0 million, or 30.2% increase in sales of magnet systems due to continued
strong demand by the Company's major customer and the transfer of magnet
production from AISA for the entire year, versus only a partial year in fiscal
2000. Sales of RF coils increased by $2.2 million, or 20.0%, offsetting a
decline experienced last year. These increases more than offset a decline of
$2.8 million (26.9%) in sales of low-temperature superconducting wire to
external customers, as more of the total wire production was devoted to internal
needs. In the prior year, segment sales were up about $8.5 million, or about
12%, with an increase in magnet system sales resulting from higher demand and
the additional volume resulting from the purchase of AISA's production rights
being offset by declines in RF coil and superconducting wire sales of $2.0
million and $1.8 million, respectively.
Sales of Instrumentation products increased by $9.0 million, or 26.9%,
due to a large increase in demand for the Company's refrigeration equipment for
use in areas such as optical filters used to increase capacity of the data
transmitted on fiber optic cable networks. This was partially offset by a
decline in the sale of refrigerants of $3.8 million, or 75.1%, due to the
previously discussed decision to exit the refrigerant business.
Sales in the Energy Technology segment were essentially unchanged at
$1.6 million, after declining in the previous year by over $1.0 million, due to
the Company's decision to de-emphasize first generation conductors. The Company
believes, in general, that first generation conductors (consisting of ceramic
compounds in a silver matrix) will be unable to achieve cost and performance
targets necessary to make devices produced with this material economically
feasible. Accordingly, we refocused our efforts on conductors in which the
superconducting compounds are deposited on a lower-cost substrate. While they
have not yet resulted in increased sales, we have developed important
relationships and cooperative agreements for the pursuit of this approach, and
we continue to seek additional partners to assist in the development and
marketing of these products.
Excluding the effects of inventory written off in restructurings in
fiscal 2000 and recoveries in fiscal 2001, gross margins increased to $57.2
million, or 41.4% of sales, from $42.2 million, or 37.4% last year. This
increase is due principally to the large increase in sales, coupled with an
improved mix of sales in both RF coils and instrumentation. In addition, the
substantial reduction in refrigerant sales resulting from the previously
described decision to exit that business helped improve gross margins as these
were low-margin sales. In the previous year, margins, before the effect of
inventory written off in restructurings, increased to $42.2 million, or 37.4% of
sales, from $34.6 million, or 33.6%, due mainly to the substantial increase in
magnet system sales, as well as the effect of operational improvements in the
Instrumentation segment.
25
Product research and development increased by 52.1% to $9.5 million,
from $6.3 million last year. Substantially all of the increase was due to:
1. Programs to develop new magnet systems for MRI applications, notably a
new 3.0T magnet system, which we expect to begin to produce
incremental sales in our next fiscal year;
2. Programs to develop new refrigeration applications to broaden the
Instrumentation product line; and,
3. A substantial increase in our HTS activities in the Energy Technology
segment. In contrast to the previous two areas, these expenditures are
longer-term in nature and not expected to result in meaningful product
sales for several years.
In the prior year, research and development expenses had been
essentially unchanged from the year before.
Marketing, general and administrative expenses increased by about $4.2
million, or 18.0%. In addition to a substantial increase in the level of
expenditures devoted to the Energy Technology segment, we also had higher
compensation costs due to both increased staff levels and higher incentive
compensation due to the improved overall performance. In addition, we had higher
consulting and stock-based compensation costs and pension plan termination
costs. In fiscal 2000, these expenses increased by about 7.6% due largely to
settlement of a claim by a former distributor and associated legal costs, and
the fact that expenses in fiscal 1999 were reduced by a one-time pension
curtailment gain.
Amortization of intangible assets increased by about $1.1 million in
the current year due to a full year of amortization of the intangible assets
acquired in connection with the termination of our AISA joint venture. We intend
to adopt the provisions of Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," which we expect to result in a reduction
of amortization of goodwill recognized in connection with our acquisitions of
IGC-Polycold Inc. and IGC-Medical Advances Inc. of about $1.3 million in our
next fiscal year.
Operating income more than doubled to $18.6 million in the current year
due primarily to the much higher level of sales and gross margins.
In the prior year, we recorded our portion of the loss of an investment
that we accounted for using the equity method of accounting for the period that
our ownership interest exceeded 20%. During fiscal 2000, our ownership was
diluted below 20%, and, accordingly, we ceased applying the equity method. Also,
in the prior year, we recorded a recovery of a portion ($1.6 million) of a
fiscal 1999 provision for guarantees of indebtedness of a UK company in which we
had an investment. The investment had also been written off in fiscal 1999, and
in fiscal 2000, proceeds from the company's liquidation reduced our obligation
under the guarantee.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income and capital
gains during the periods in which those temporary differences become deductible.
Management considers projected future taxable income, the character of such
income and tax planning strategies in making this assessment. The Company had
Federal taxable income (loss) of approximately $13,500,000 in fiscal 2001,
$6,500,000 in fiscal 2000, and ($3,250,000) in fiscal 1999. Based upon the level
of historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of the remaining
deductible differences. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.
26
Looking forward, we expect to continue to increase our investment in
Energy Technology in order to be ready when the market for these products begins
to develop, which we believe will be about the middle of the decade. In spite of
this increased investment, we expect earnings to increase in the current fiscal
year as the result of an anticipated 17-18% growth in sales. A portion of this
growth is expected to come from sales of high (3.0T) field magnet systems
developed in the last fiscal year. These expectations are based on the following
assumptions, among others:
o The market for MRI systems continues to grow;
o We are able to continue the growth experienced last year in RF
coils;
o Current order trends for MRI magnets continue;
o The slowing economy doesn't cause a major pullback in
Instrumentation orders; and,
o We are able to maintain gross margins through continued production
cost reductions.
LIQUIDITY AND CAPITAL COMMITMENTS
We generated approximately $18 million in cash from operating
activities. We were able to achieve this in spite of a substantial increase in
inventories. The inventory increases include a large investment in finished
magnets and increases in wire and other components used in magnet manufacture to
support rapid growth by our major customer, and inventory in support of an
approximately $18 million contract to supply low-temperature superconducting
cable for the Large Hadron Collider being built in Europe. We also generated
$3.5 million from net financing activities, as a result of $4.7 million received
for exercise of stock options. We used $6.1 million of this cash on investing
activities, principally purchases of property, plant and equipment ($5.2
million) and purchase of patent rights ($1.1 million). We had a net increase in
our cash position of $15.1 million, bringing our cash balance to $27.7 million.
See the consolidated statement of cash flows, located elsewhere in this
report, for further details on sources and uses of cash.
During the year, the final $18.9 million of our 5 3/4% convertible
subordinated debentures were converted into 1,369,217 shares of our Common Stock
at $13.584 per share. Additionally, we issued 80,988 shares of Common Stock
valued at an average of $19.200 per share to induce early conversion and in lieu
of all accrued interest.
Our capital and resource commitments at August 14, 2001 consisted of
capital equipment commitments of $304,000.
We have a $27 million unsecured line of credit with two banks.
Borrowings under the line bear interest at the London Interbank Offered Rate
(LIBOR) plus 0.5% or prime less 0.5% at our option. The line expires in November
2002. We have received commitments from three banks to increase the line to $50
million on similar terms, and extend its expiration to 2004.
We believe we have adequate resources to meet our needs for the
short-term from our existing cash balances, our expected cash generation in the
current fiscal year, and our line of credit. Longer-term, with substantial
increases in sales volume and/or unusually large research and development or
capital expenditure requirements to pursue new opportunities in the Energy
Technology segment, we could need to raise additional funds. We would expect to
be able to do so through additional lines of credit, public offerings or private
placements. However, in the event funds were not available from these sources,
or on acceptable terms, we would expect to manage our growth within the
financing available.
27
Inflation has not had a material impact on our financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK
The Company's exposure to market risk through derivative financial
instruments and other financial instruments, such as investments in short-term
marketable securities and long-term debt, is not material. The financial
instruments of the Company that are interest rate dependent are revenue bonds
issued in connection with the acquisition of certain land, building and
equipment, an unsecured line of credit and a mortgage payable. The Company
manages interest rates through various methods within contracts. For the revenue
bonds, the Company negotiated variable rates with the option to set fixed rates.
On its mortgage payable, the Company negotiated an "interest rate swap"
agreement that, in effect, fixes the rate at 6.88%. With respect to its
unsecured line of credit, the Company may elect to apply interest rates to
borrowings under the line which relate to either the London Interbank Offered
Rate or prime, whichever is most favorable. (See Note E of the Notes to
Consolidated Financial Statements included in response to Item 8 for more
details regarding these instruments.) The Company's objective in managing its
exposure to changes in interest rates is to limit the impact of changing rates
on earnings and cash flow and to lower its borrowing costs.
The Company does not believe that its exposure to commodity and foreign
exchange risks are material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as part of this report are the consolidated
financial statements and supplementary data listed in the list of Financial
Statements and Schedules included in response to Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On February 7, 2000, Intermagnetics General Corporation (the "Company")
engaged PricewaterhouseCoopers LLP to replace KPMG LLP as the Company's
independent auditors. The Company filed a report on Form 8-K with the Securities
and Exchange Commission with respect to this matter.
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 2001 Annual Meeting of Shareholders
(the "Proxy Statement"), and is hereby incorporated herein by reference.
28
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.
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 Accountants
Independent Auditors' Report
Consolidated Balance Sheets as of May 27, 2001 and May 28, 2000
Consolidated Statements of Operations for fiscal years ended May 27,
2001, May 28, 2000 and May 30, 1999
29
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income (Loss) for fiscal years ended May 27, 2001, May
28, 2000 and May 30, 1999
Consolidated Statements of Cash Flows for the fiscal years ended May
27, 2001, May 28, 2000 and May 30, 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
II Valuation and Qualifying Accounts
All other schedules are not required or are inapplicable and,
therefore, have been omitted.
3. Exhibits
Articles of Incorporation and By-laws
3.1 Restated Certificate of Incorporation (11) (Exhibit 3)
3.2 By-laws, as amended (11) (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 (11) (Exhibit 4.1)
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 (11) (Exhibit 4.2)
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
(11) (Exhibit 4.3)
4.5 Fourth Amendment dated as of March 31, 2000 to the Second
Amended and Restated Loan Agreement dated as of October 23,
1997, among Intermagnetics General Corporation, IGC APD
Cryogenics Inc. Magstream Corporation, IGC Medical Advances
Inc., Intercool Energy Corporation, and IGC Polycold
Systems Inc., First Union National Bank (successor by
merger to CoreStates Bank, N.A.), and The Chase Manhattan
Bank (12)
30
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 Agreements dated April 29, 1999 between Philips Medical
Systems Nederlands B.V. and Intermagnetics General
Corporation for sales of magnet systems (3) (Exhibit 10.7)
+ 10.8 Employment Agreement dated April 20, 1998 between
Intermagnetics General Corporation and Carl H. Rosner (11)
(Exhibit 10.1)
+ 10.9 Employment Agreement dated June 1, 1999 between
Intermagnetics General Corporation and Glenn H. Epstein (3)
(Exhibit 10.9)
+ 10.10 Enhanced Benefit Plan (12) (Exhibit 10.10)
10.11 Executive Stock Purchase Plan (12) (Exhibit 10.11)
10.12 Share Purchase Agreement, dated January 23, 1992, by and
between Ultralife Batteries, Inc. and Intermagnetics
General Corporation (6) (Exhibit 10.1)
10.13 Patent License Agreement dated June 30, 2000 between
Intermagnetics General Corporation and Lucent Technologies
GRL Corporation (13) (Exhibit 10.2)
31
+ 10.14 2000 Stock Option and Stock Award Plan (14) (Appendix A)
Subsidiaries of the registrant
* 21 Subsidiaries of the Company
Consents of experts and counsel
* 23 Consent of KPMG LLP with respect to the Registration
Statements Numbers 2-80041, 2-94701, 33-2517, 33-12762,
33-12763, 33-38145, 33-44693, 33-50598, 33-55092, 33-72160,
333-10553, 333-42163, 333-75269 and 333-64822 on Form S-8.
* 24 Consent of PricewaterhouseCoopers LLP with respect to the
Registration Statements Numbers 2-80041, 2-94701, 33-2517,
33-12762, 33-12763, 33-38145, 33-44693, 33-50598,
33-55092, 33- 72160, 333-10553, 333-42163, 333-75269 and
333-64822 on Form S-8.
- -------------------------------------------------
(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 30, 1999.
(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.
32
(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 on Form 8-K filed by the Company on March 10, 1997.
(10) Exhibit incorporated herein by reference to the Current
Report on Form 8-K filed by the Company on November 24,
1997.
(11) Exhibit incorporated herein by reference to the Annual
Report on Form 10-K filed by the Company for the fiscal
year ended May 31, 1998.
(12) Exhibit incorporated herein by reference to the Annual
Report on Form 10-K filed by the Company for the fiscal
year ended May 28, 2000.
(13) Exhibit incorporated herein by reference to the Quarterly
Report on Form 10-Q filed by the Company for the quarter
ended August 27, 2000.
(14) Exhibit incorporated herein by reference to the Proxy
Statement dated September 25, 2000 for the 2000 Annual
Meeting of Shareholders.
* Filed with the Annual Report on Form 10-K for the fiscal year ended May
27, 2001.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this annual report on Form 10-K.
The Company agrees to provide the SEC upon request with copies of
certain long-term debt obligations which have been omitted pursuant to the
applicable rules.
The Company agrees to furnish supplementally a copy of omitted
Schedules and Exhibits, if any, with respect to Exhibits listed above upon
request.
(b) REPORTS ON FORM 8-K
None.
33
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, 2001
By: /s/ Glenn H. Epstein
-----------------------------------------
Glenn H. Epstein
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints
Glenn H. Epstein, President and Chief Executive Officer, Michael 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/ Glenn H. Epstein President and August 27, 2001
- --------------------------- Chief Executive Officer
Glenn H. Epstein (principal executive
officer) and Director
/s/ Michael C. Zeigler Senior Vice President- August 27, 2001
- --------------------------- Finance; Chief Financial
Michael C. Zeigler Officer (principal financial
and accounting officer)
/s/ Carl H. Rosner Chairman of the Board August 27, 2001
- --------------------------- of Directors
Carl H. Rosner
/s/ John M. Albertine Director August 27, 2001
- ---------------------------
John M. Albertine
34
/s/ James S. Hyde Director August 27, 2001
- ---------------------------
James S. Hyde
/s/ Thomas L. Kempner Director August 27, 2001
- ---------------------
Thomas L. Kempner
/s/ Stuart A. Shikiar Director August 27, 2001
- ---------------------------
Stuart A. Shikiar
/s/ Sheldon Weinig Director August 27, 2001
- ---------------------------
Sheldon Weinig
35
1. Financial Statements
36
Report of Independent Accountants
To the Board of Directors and Shareholders
of Intermagnetics General Corporation:
In our opinion, the 2001 and 2000 consolidated financial statements listed in
the index appearing under Item 14(a)(1) present fairly, in all material
respects, the financial position of Intermagnetics General Corporation and its
subsidiaries at May 27, 2001 and May 28, 2000 and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the 2001 and 2000 financial statement schedule listed
in the index appearing under Item 14(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Albany, New York
July 17, 2001
37
Independent Auditors' Report
The Board of Directors and Shareholders
Intermagnetics General Corporation:
We have audited the consolidated statements of operations, shareholders' equity
and comprehensive income (loss), and cash flows of Intermagnetics General
Corporation and subsidiaries for the year ended May 30, 1999. In connection with
our audit of these consolidated financial statements, we also have audited the
financial statement schedule for the year ended May 30, 1999. 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
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Intermagnetics General Corporation and subsidiaries for the year ended May
30, 1999, in conformity with accounting principles generally accepted in the
United States of America. 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 LLP
---------------------------------
Albany, New York
July 16, 1999
38
CONSOLIDATED BALANCE SHEETS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
May 27, May 28,
2001 2000
----------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 27,675 $ 12,527
Trade accounts receivable, less allowance
(May 27, 2001 - $496; May 28, 2000 - $478) 21,615 21,319
Costs and estimated earnings in excess of
billings on uncompleted contracts 642 1,525
Inventories:
Consigned products 7,176 1,076
Finished products 2,142 524
Work in process 12,768 10,174
Materials and supplies 12,337 9,436
----------------- -----------------
34,423 21,210
Deferred income taxes 3,362 6,187
Prepaid expenses and other 1,228 1,442
----------------- -----------------
TOTAL CURRENT ASSETS 88,945 64,210
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 1,479 1,479
Buildings and improvements 18,243 16,639
Machinery and equipment 41,604 39,470
Leasehold improvements 923 910
----------------- -----------------
62,249 58,498
Less allowances for depreciation and amortization 37,787 35,342
----------------- -----------------
24,462 23,156
Equipment in process of construction 2,801 3,110
----------------- -----------------
27,263 26,266
INTANGIBLE AND OTHER ASSETS
Available for sale securities 6,145 6,806
Other investments 3,500 4,544
Excess of cost over net assets acquired, less accumulated
amortization (May 27, 2001 - $5,365; May 28, 2000 - $4,017) 14,918 16,270
Other intangibles, less accumulated amortization
(May 27, 2001- $2,409; May 28, 2000 - $663) 9,524 8,087
Other assets 1,863 1,794
----------------- -----------------
TOTAL ASSETS $ 152,158 $ 127,977
================= =================
39
May 27, May 28,
2001 2000
----------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 2,445 $ 1,428
Accounts payable 10,749 7,121
Salaries, wages and related items 5,777 2,988
Accrual for compensated absences 1,063 1,014
Customer advances and deposits 2,054 1,753
Product warranty reserve 1,474 2,059
Accrued income taxes 2,143 1,220
Other liabilities and accrued expenses 2,870 1,811
----------------- -----------------
TOTAL CURRENT LIABILITIES 28,575 19,394
LONG-TERM DEBT, less current portion 6,185 26,524
DEFERRED INCOME TAXES 2,383 3,596
Commitments and Contingencies -- Note J
SHAREHOLDERS' EQUITY
Preferred Stock, par value $.10 per share:
Authorized - 2,000,000 shares
Issued and outstanding - May 27, 2001 - None;
May 28, 2000 - None
Common Stock, par value $.10 per share:
Authorized - 40,000,000 shares
Issued and outstanding (including shares in treasury):
May 27, 2001 - 16,707,223 shares;
May 28, 2000 - 14,714,428 shares; 1,671 1,471
Additional paid-in capital 127,305 90,914
Notes receivable from employees (1,501) (1,666)
Accumulated deficit (4,590) (6,159)
Accumulated other comprehensive loss (2,047) (276)
----------------- -----------------
120,836 84,284
Less cost of Common Stock in treasury
May 27, 2001 and May 28, 2000 - 661,282 shares (5,821) (5,821)
----------------- -----------------
115,015 78,463
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $152,158 $127,977
================= =================
See notes to consolidated financial statements.
40
CONSOLIDATED STATEMENTS OF OPERATIONS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
----------------------------------------------------------
May 27, May 28, May 30,
2001 2000 1999
----------------- ----------------- -----------------
Net sales $138,157 $112,772 $102,871
Cost of products sold 80,990 70,616 68,312
Inventory (recovered) written off in restructuring (1,361) 1,390 1,820
----------------- ----------------- -----------------
Total cost of products sold 79,629 72,006 70,132
----------------- ----------------- -----------------
Gross margin 58,528 40,766 32,739
Product research and development 9,541 6,271 6,220
Marketing, general and administrative 27,255 23,107 21,472
Amortization of intangible assets 3,094 2,011 1,348
Restructuring charges, net of recoveries 80 2,919
----------------- ----------------- -----------------
39,890 31,469 31,959
----------------- ----------------- -----------------
Operating income 18,638 9,297 780
Interest and other income 1,374 1,790 1,942
Interest and other expense (1,986) (1,965) (2,172)
Recovery (write off) of investment in unconsolidated affiliate 1,620 (7,300)
Equity in net loss of unconsolidated affiliates (236) (1,491)
----------------- ----------------- -----------------
Income (loss) before income taxes 18,026 10,506 (8,241)
Provision for income taxes (benefit) 6,959 4,054 (1,212)
----------------- ----------------- -----------------
NET INCOME (LOSS) $ 11,067 $ 6,452 $ (7,029)
================= ================= =================
Net Income (loss) per Common Share:
Basic $0.72 $0.48 $(0.54)
================= ================= =================
Diluted $0.67 $0.45 $(0.54)
================= ================= =================
See notes to consolidated financial statements.
41
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
INTERMAGNETICS GENERAL CORPORATION
Fiscal Years Ended May 27, 2001, May 28, 2000, May 30, 1999
(Dollars in Thousands)
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive
Stock Capital Deficit Income (Loss)
------------ --------------- ------------- -----------------
Balances at May 31, 1998 $1,334 $81,008 $(1,081) $496
Comprehensive income:
Net loss (7,029)
Unrealized loss on available for
sale securities, net (1,358)
Unrealized gain on foreign currency
translation 194
Total comprehensive loss
Tax benefit from exercise of stock options 185
Issuance of 207,279 shares of Common Stock,
including receipt of 69,015 shares of
Treasury Stock, upon exercise of stock
options and sale of 9,183 shares to IGC Savings Trust 19 969
Stock dividend adjustment of 9,115 shares and
payments for fractional shares (1) (48) 49
Stock based compensation 61
Purchase of 530,500 shares of Treasury Stock
------------ --------------- ------------- ----------------
Balances at May 30, 1999 1,352 82,175 (8,061) (668)
Comprehensive income:
Net Income 6,452
Unrealized gain on available for
sale securities, net 874
Unrealized loss on foreign currency
translation (482)
Total comprehensive income
Tax benefit from exercise of stock options 84
Issuance of 440,160 shares of Common Stock,
including receipt of 24,345 shares of
Treasury Stock and recognition of $386,000 of
compensation expense, upon exercise of stock options
and sale of 32,865 shares to IGC Savings Trust 42 4,158
Issuance of 64,113 shares upon conversion of debentures 6 865
Issuance of 631,128 Treasury shares upon conversion of
Series A Preferred Stock. (885)
Stock based compensation 37
Purchase of 114,000 shares of Treasury Stock
Notes recievable from employees for purchase of
Common Stock.
Stock dividend 71 4,480 (4,550)
------------ --------------- ------------- ----------------
Balances at May 28, 2000 1,471 90,914 (6,159) (276)
Comprehensive income:
Net Income 11,067
Unrealized loss on available for
sale securities (1,527)
Unrealized loss on foreign currency
translation (244)
Total comprehensive income
Repayment of note receivable from employees
Tax benefit from exercise of stock options 586
Issuance of 527,290 shares of Common Stock, upon exercise
of stock options and sale of 6,400 shares to IGC Savings
Trust 53 4,667
Issuance of 15,300 shares of Common Stock and other
stock based compensation 2 538
Issuance of 1,450,205 shares of Common Stock upon
conversion of debentures and write-off of deferred
financing costs. 142 20,019
Issuance of warrants to acquire 105,600 shares of Common Stock 1,097
Stock dividend adjustment including payment in lieu of
fractional shares (11)
Stock dividend 3 9,495 (9,498)
------------ --------------- ------------- ----------------
Balances at May 27, 2001 $1,671 $127,305 ($4,590) ($2,047)
============ =============== ============= ================
[RESTUB]
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
INTERMAGNETICS GENERAL CORPORATION
Fiscal Years Ended May 27, 2001, May 28, 2000, May 30, 1999
(Dollars in Thousands)
Notes
Treasury Receivable Comprehensive
Stock from Employees Income (Loss)
------------- -------------------------------------
Balances at May 31, 1998 $(4,955)
Comprehensive income:
Net loss $(7,029)
Unrealized loss on available for
sale securities, net (1,358)
Unrealized gain on foreign currency
translation 194
------------------
Total comprehensive loss $(8,193)
==================
Tax benefit from exercise of stock options
Issuance of 207,279 shares of Common Stock,
including receipt of 69,015 shares of
Treasury Stock, upon exercise of stock
options and sale of 9,183 shares to IGC Savings Trust (623)
Stock dividend adjustment of 9,115 shares and
payments for fractional shares
Stock based compensation
Purchase of 530,500 shares of Treasury Stock (4,046)
----------- ----------------
Balances at May 30, 1999 (9,624)
Comprehensive income:
Net Income $ 6,452
Unrealized gain on available for
sale securities, net 874
Unrealized loss on foreign currency
translation (482)
------------------
Total comprehensive income $ 6,844
==================
Tax benefit from exercise of stock options
Issuance of 440,160 shares of Common Stock,
including receipt of 24,345 shares of
Treasury Stock and recognition of $386,000 of
compensation expense, upon exercise of stock options (643)
and sale of 32,865 shares to IGC Savings Trust
Issuance of 64,113 shares upon conversion of debentures.
Issuance of 631,128 Treasury shares upon conversion of
Series A Preferred Stock. 5,011
Stock based compensation 162
Purchase of 114,000 shares of Treasury Stock (727)
Notes recievable from employees for purchase of
Common Stock. (1,666)
Stock dividend
----------- ----------------
Balances at May 28, 2000 (5,821) (1,666)
Comprehensive income:
Net Income $ 11,067
Unrealized loss on available for
sale securities (1,527)
Unrealized loss on foreign currency
translation (244)
------------------
Total comprehensive income $ 9,296
==================
Repayment of note receivable from employees 165
Tax benefit from exercise of stock options
Issuance of 527,290 shares of Common Stock, upon exercise
of stock options and sale of 6,400 shares to IGC Savings
Trust
Issuance of 15,300 shares of Common Stock and other
stock based compensation
Issuance of 1,450,205 shares of Common Stock upon
conversion of debentures and write-off of deferred
financing costs.
Issuance of warrants to acquire 105,600 shares of Common Stock
Stock dividend adjustment including payment in lieu of
fractional shares
Stock dividend
----------- ----------------
Balances at May 27, 2001 ($5,821) ($1,501)
=========== ================
See notes to consolidated financial statements.
42
CONSOLIDATED STATEMENTS OF CASH FLOWS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands)
Fiscal Year Ended
----------------------------------------------------
May 27, May 28, May 30,
2001 2000 1999
----------------- ------------------ ---------------
OPERATING ACTIVITIES
Net income (loss) $11,067 $6,452 $(7,029)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 7,086 6,380 5,636
Proceeds from the sale of assets 1,812
Non-cash restructuring charges 2,000 4,739
(Recovery) write off of investment in unconsolidated affiliate (1,341) 7,300
Gain on debt redemption (275)
Premium on debt conversion 1,037
Provision for deferred taxes 1,790 708 227
Equity in net loss of unconsolidated affiliates including amortization 236 1,491
Loss on sale and disposal of assets 21 248 306
Gain on sale of available for sale securties (615)
Gain on sale of joint venture (300)
Stock based compensation 470 460 61
Change in operating assets and liabilities, net of effects of restructuring:
(Increase) decrease in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts 587 1,719 (4,858)
(Increase) decrease in inventories and prepaid expenses and other (14,831) 5,875 2,583
Increase (decrease) in accounts payable and accrued expenses 8,999 2,851 (1,362)
--------------- -------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,038 24,973 8,519
INVESTING ACTIVITIES
Purchases of property, plant and equipment (5,192) (5,287) (3,139)
Proceeds from sale of equipment 174 51
Proceeds from sale of available for sale securties 1,369
AISA termination payments (4,750) (4,250)
Payments on financial guarantee, net (623)
Purchase of patent rights (1,085)
Purchase of other investments (1,043)
Investment in and advances to unconsolidated affiliates (1,015)
Repayment of advances by unconsolidated affiliate 611
Decrease in other assets 41
--------------- -------------- -------------
NET CASH USED IN INVESTING ACTIVITIES (6,103) (9,291) (8,744)
FINANCING ACTIVITIES
Net proceeds from (repayment of) short-term borrowings (4,850) 4,850
Repayments from (loans to) employees 165 (1,666)
Early debt redemption (1,550)
Redemption of Preferred Stock (682)
Purchase of Treasury Stock (727) (4,046)
Proceeds from sales of Common Stock 4,720 3,286 365
Principal payments on note payable and long-term debt (1,428) (317) (298)
--------------- -------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,457 (4,956) (679)
EFFECT OF EXCHANGE RATES ON CASH (244) (482) 194
--------------- -------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,148 10,244 (710)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,527 2,283 2,993
--------------- -------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27,675 $ 12,527 $ 2,283
=============== ============== =============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of Warrants to purchase Common Stock $ 1,097
===============
Issuance of Note Payable for redemption of Preferred Stock $ 2,192
==============
Issuance of Treasury Stock for redemption of Preferred Stock $ 4,126
==============
Issuance of Common Stock upon conversion of principal amount of debentures $ 18,894 $ 871
=============== ==============
Exchange of Common Stock in partial payment of exercise
price on options $ 643 $ 623
============== =============
Tax benefit from exercise of stock options $ 586 $ 84 $ 185
=============== ============== =============
Accrual of termination payment $ 4,750
=============
See notes to consolidated financial statements.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERMAGNETICS GENERAL CORPORATION
NOTE A - ACCOUNTING POLICIES
Basis of Presentation:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions have been eliminated
in consolidation. Affiliated companies (20 to 50% owned) are accounted for on
the equity method. It is the Company's policy to reclassify prior year
consolidated financial statements to conform to current year presentation.
The Company operates on a 52/53 week fiscal year ending the last Sunday during
the month of May.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Revenue Recognition:
Sales are recognized as of the date of shipment or upon customer acceptance,
which is based on product test results. In addition, certain goods are shipped
on consignment to locations designated by the customer and are recorded as
revenue when the goods are removed by the customer and placed in production or
at the end of the consignment period.
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 (one to three years) 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. Depreciation is computed using the
straight-line method in a manner that is intended to amortize the cost of such
assets over their estimated useful lives. Leasehold improvements are amortized
on a straight-line basis over the remaining initial term of the lease. For
financial reporting purposes, the Company provides for depreciation of property,
plant and equipment over the following estimated useful lives:
Land improvements 25 years
Buildings and improvements 7 - 40 years
Machinery and equipment 3 - 15 years
Leasehold improvements 2 - 15 years
Significant additions or improvements extending assets' useful lives are
capitalized; normal maintenance and repair costs are expensed as incurred.
The cost of fully depreciated assets remaining in use are included in the
respective asset and accumulated depreciation accounts. When items are sold or
retired, related gains or losses are included in net income.
44
Investments:
Certain investments are categorized as available for sale securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Available
for sale securities are reported at fair value, with unrealized gains and losses
included in shareholders' equity. Realized gains and losses for securities
classified as available for sale are included in earnings and are determined
using the specific identification method for determining the cost of securities
sold.
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Investment and other tax credits are included in net income when realized.
Foreign Currency Translation:
Foreign currency translation adjustments arise from conversion of the Company's
foreign subsidiary's financial statements to US currency for reporting purposes,
and are included in Other Comprehensive Income (Loss) in shareholders' equity on
the accompanying consolidated balance sheets. Realized foreign currency
transaction gains and losses are included in interest and other expense in the
accompanying consolidated statements of operations.
Excess of Cost Over Net Assets Acquired and Other Intangibles:
Excess of cost over the fair value of net assets acquired in acquisitions is
being amortized on a straight-line basis over 15 years. Other intangibles are
being amortized on a straight-line basis over 5 years. Patent rights are
amortized on a straight-line basis over the life of the patent.
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.
Per Share Amounts:
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue Common Stock
were exercised or converted into Common Stock or resulted in the issuance of
Common Stock that then shared in the earnings of the entity.
Comprehensive Income:
Comprehensive income (loss) consists of net income (loss), net unrealized gains
(losses) on available-for-sale securities and foreign currency translation
adjustments and is presented in the consolidated statements of changes in
shareholders' equity and comprehensive income (loss).
45
Derivative Financial Instruments:
The Company enters into interest rate hedge agreements which involve the
exchange of fixed and floating rate interest payments periodically over the life
of the agreement, without the exchange of underlying principal amounts. The
differential to be paid or received is accrued as interest rates change and is
recognized over the life of the agreements as an adjustment to interest expense.
Use of Estimates:
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenue and expenses and the
disclosure of contingent assets and liabilities, to prepare these consolidated
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
New Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 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 No. 133 has subsequently been amended by SFAS No. 137,
issued in June, 1999, which delayed the effective date for implementation of
SFAS No. 133 until fiscal quarters of fiscal years beginning after June 15,
2000. Management believes the impact of SFAS No. 133 on the Company's
consolidated financial statements will not be material.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB 101),
"Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the
SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. The Company adopted SAB 101 in the quarter
ended May 27, 2001. The adoption of SAB 101 has not had a material effect on the
Company's financial condition or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions Involving
Stock Compensation - an Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25 and, among other issues clarifies the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a non-compensatory plan;
the accounting consequence of various modifications to the terms of previously
fixed stock options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events that occurred after
either December 15, 1998 or January 12, 2000. The Company has applied the
applicable provisions of FIN 44 which did not have a material impact on the
Company's consolidated financial statements.
In June 2001, the Financial Accounting Standards Board issued FASB No. 141,
"Business Combinations," which addresses financial accounting and reporting for
business combinations and supersedes APB Opinion No. 16, "Business
Combinations," and FASB Statement No. 38, "Accounting for Preacquisitions
Contingencies of Purchased Enterprises." Additionally, FASB No. 141 establishes
that all business combinations in the scope of the Statement are to be accounted
for using the purchase method. The provisions of this Statement apply to all
business combinations initiated after June 30, 2001.
In June 2001, The Financial Accounting Standards Board issued FASB No. 142,
which addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets."
It addresses how intangible assets that are acquired individually or with a
group of other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. This Statement
also addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. The
provisions of this Statement are required to be applied starting with fiscal
years beginning after December 15, 2001. Early application is permitted for
entities with fiscal years beginning after March 15, 2001, provided that the
first interim financial statements have not previously been issued. The Company
plans to adopt FASB No. 142 in the quarter ending August 25, 2001. Management
expects this to result in a reduction of amortization of goodwill recognized in
connection with our acquisition of IGC-Polycold Inc. and IGC-Medical Advances
Inc. of about $1.3 million in our next fiscal year.
46
NOTE B - ACQUISITIONS AND OTHER INTANGIBLES
ALSTOM Intermagnetics
Effective May 30, 1999, the Company completed an agreement with Alstom, S.A.
("Alstom") to terminate the parties' joint venture, ALSTOM Intermagnetics
("AISA"). AISA, a previously 45% owned unconsolidated joint venture located in
Belfort, France, was created for the manufacture and sale of superconductive MRI
magnet systems under license from the Company. Effective December 31, 1999,
AISA's magnet production was consolidated in the Company's Latham, New York
facility, and AISA ceased production of superconductive MRI magnet systems.
Under the termination agreement, the Company sold its interest in AISA to Alstom
for $300,000. In consideration of the contractual rights of AISA and Alstom
under the termination agreement, the Company paid AISA $9,000,000 for the
purchase of certain assets with an approximate fair value of $250,000, and other
intangibles, comprising future production rights, as well as technology and a
covenant not to compete, with a total value of $8,750,000. The intangible assets
are being amortized over a period of five years.
On June 30, 2000, the Company entered into a non-exclusive, royalty-free
agreement to license certain US and international patents and pending patents
related to superconducting materials and devices. In connection with the
agreement, the Company agreed to pay a lump sum fee payable in two installments.
Additionally, the Company granted the licensor warrants to purchase 105,060
shares of the Company's Common Stock at a price of $18.98 per share.
Amortization of patents in fiscal 2001 was $142,000. Total costs of $3,097,000
are included in Other Intangibles on the accompanying balance sheets.
Total amortization of Other Intangibles for the years ended May 27, 2001, May
28, 2000 and May 30, 1999 amounted to $1,746,000, $663,000 and $147,000,
respectively.
During fiscal 1997, the Company acquired IGC-Medical Advances Inc. and in fiscal
1998, IGC-Polycold Inc. In connection with the acquisition, approximately
$20,300,000 was recorded as excess of cost over net assets acquired.
Total amortization of excess of cost over the fair value of net assets acquired
for the fiscal years ended May 27, 2001, May 28, 2000 and May 30, 1999 amounted
to $1,348,000 in each year.
47
NOTE C - RESTRUCTURING
Refrigerant Business
In February 2000, the Company decided to exit its refrigerant business, a part
of the Instrumentation segment, over a 15 month period. As a result, the Company
recorded a restructuring charge of $2,000,000 including liabilities recorded of
$191,000, comprised of the following:
(Dollars in Thousands)
Inventory write-down $1,770
Write-down of equipment 39
Severance costs 191
------
$2,000
======
Under the exit plan, the Company terminated all but two of its employees. The
plan involved continuing operations through a master distributor while
attempting to find a buyer for the business, and contemplated sales of product
through May 2001, at which time operations would cease. The Company paid a total
of $92,000 and $99,000 in fiscal 2001 and 2000, respectively, in severance
costs.
In October 2000, the Company sold the remaining assets for approximately
$1,800,000. These assets consisted primarily of inventory. As a result, the
Company recorded a recovery of the restructuring charge of approximately
$1,300,000.
Selected financial data for this business follows:
(Dollars in Thousands)
FY 2001 FY 2000 FY 1999
----------- ----------- ------------
Sales $ 1,253 $ 5,031 $ 2,794
Net Income (loss) (including
restructuring charges or recovery) 728 (2,938) (4,320)
Field Effects Division
In October 1998, the Company received notice from Trex Medical Corporation
("Trex") that it was not prepared to continue operating under a distributor
agreement under which Trex was to distribute the Company's permanent
magnet-based clinical MRI systems. The Company has filed suit against Trex for
breaching and repudiating the agreement. In November 1998, the Company decided
to exit this business and restructured its operations through the closure of its
Field Effects division, which was engaged in the manufacture and sale of
clinical MRI systems. As a result, the Company recorded a total restructuring
charge of $4,739,000 ($3,952,000 in November 1998 and $787,000 in May 1999),
including liabilities recorded of $1,277,000 ($922,000 in November 1998 and
$355,000 in May 1999), comprised of the following:
(Dollars in Thousands)
Inventory write-down included in cost of products sold $ 1,820
Restructuring charges:
Write-down of equipment to fair value $ 1,267
Write-off of accounts receivable and other assets 375 1,642
--------
Liabilities for:
Severance and lease obligations 722
Other 555 1,277
-------- --------
2,919
--------
Total $ 4,739
========
The Company vacated the premises and moved existing equipment and inventory to
storage near its corporate headquarters. All usable equipment was transferred to
other operations at its book value. Other equipment and inventory was written
down to estimated realizable value.
48
In December 1999, the Company negotiated a settlement of the lease obligation
with the landlord, which resulted in a gain of $150,000 that was shown as the
reversal of restructuring charges in the accompanying Statements of Operations.
Additionally, the Company sold certain inventory resulting in a $380,000 gain,
also shown as a reversal of restructuring charges.
Selected financial data for this business follows:
(Dollars in Thousands)
FY 1999
------------
Sales $ 36
Net Loss (5,728)
An analysis of the restructuring events for the year ended May 28, 2000 follows:
(Dollars in Thousands)
Components
----------------------
Cost of
Field Net Goods Operating
Refrigerant Effects Restructuring Sold Expenses
----------- ------- ------------- ---- --------
Inventory written off in
restructuring (recovery) $1,770 $(380) $1,390 $1,390
Severance obligations 191 191 $ 191
Write-down of equipment 39 39 39
Lease accrual recovery (150) (150) (150)
------ ----- ------ ------ -----
$2,000 $(530) $1,470 $1,390 $ 80
====== ===== ====== ====== =====
NOTE D - INVESTMENTS
Available for Sale Securities:
The Company owns 850,753 shares of the Common Stock of Ultralife Batteries Inc.,
as of May 27, 2001 and May 28, 2000, which are accounted for as "Available for
Sale Securities." Realized gains from the sale of such securities amounted to
$615,000 in fiscal 2000. There were no sales in fiscal 2001 or fiscal 1999.
The Company owns 1,354,785 shares of Powercold Corporation, as of May 27, 2001,
which are accounted for as "Available for Sale Securities." The sale of such
securities was restricted under US securities laws as of May 28, 2000 and,
accordingly, such securities were included in Other Investments. The restriction
has since lapsed, and, accordingly, the entire investment has been included in
Available for Sale Securities as of May 27, 2001.
The cost and market value of the Company's Available for Sale Securities as of
May 27, 2001 and May 28, 2000 were:
(Dollars in Thousands)
May 27, 2001 May 28, 2000
------------ ------------
Cost $ 7,306 $ 6,262
Gross unrealized (loss) gain (1,161) 544
------- -------
Market value $ 6,145 $ 6,806
======= =======
Other Investments:
The Company owns approximately 15% of the Common Stock of KryoTech, a
privately-held corporation, acquired at a cost of $4,750,000. Until December
1999, the Company accounted for its investment in KryoTech using the equity
method of accounting because it owned more than 20% of the common shares. The
initial acquisition cost exceeded the underlying equity in net assets by
$3,645,000, which was being amortized over a period of 15 years. Accumulated
amortization at May 27, 2001 and May 28, 2000 was $404,000 in each year. In
December 1999, the Company's ownership position fell below 20%. As a result,
during the quarter ended February 27, 2000, the Company began accounting for the
remaining investment value of approximately $3.5 million using the cost method.
The market value of this investment is not readily determinable.
NOTE E - NOTES PAYABLE AND LONG-TERM DEBT
The Company has an unsecured line of credit of $27,000,000, which expires in
October 2002, of which none was in use at May 27, 2001 or May 28, 2000. The
Company may elect 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. The line of credit agreement provides for various
covenants, including requirements that the Company maintain specified financial
ratios. The Company has obtained commitments to increase the line to $50
million, on similar terms, and extend its expiration date to 2004.
49
Long-term debt consists of the following:
(Dollars in Thousands)
May 27, 2001 May 28, 2000
------------- -------------
Revenue bonds $1,350 $1,450
Notes payable 2,096 2,192
Mortgage payable 5,184 5,416
Convertible debentures 18,894
------ ------
8,630 27,952
Less current portion 2,445 1,428
------ --------
Long-term debt $6,185 $ 26,524
====== ========
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 4.51% for the year ended May 27, 2001 (3.72% for the year ended May 28,
2000). The bonds mature serially in amounts ranging from $100,000 in December
1999 to $200,000 in December 2009. In the event of default or upon the
occurrence of certain conditions, the bonds are subject to mandatory redemption
at prices ranging from 100% to 103% of face value. As long as the interest rate
on the bonds is adjustable weekly, the bonds are redeemable at the option of the
Company at face value. The Company makes monthly advance payments to restricted
cash accounts in amounts sufficient to meet the interest and principal payments
on the bonds when due. The balances of these accounts, included in "Cash and
Cash Equivalents" on the accompanying consolidated balance sheets, were $43,000
at May 27, 2001 and $41,000 at May 28, 2000.
Notes payable at May 27, 2001 consist of $1,000,000 due for the purchase of
certain patent rights and $1,096,000 representing the final installment of the
purchase price of Polycold Systems, Inc. The note relating to patent rights is
non-interest bearing and is due September 1, 2001. The note relating to Polycold
Systems Inc. bore interest at three-month LIBOR (3.99% at May 27, 2001 and 6.83%
at May 28, 2000) and was paid in June 2001.
The mortgage payable bears interest at the rate of LIBOR (4.259% at May 27, 2001
and 7.45% at May 28, 2000) plus 0.9%, and is payable in monthly installments of
$50,000, including principal and interest, through October 2005 with a final
payment of $3,943,000 due in November 2005. The loan is secured by land and
buildings and certain equipment acquired at a cost of approximately $10,800,000.
The Company has entered into an interest rate swap agreement, the effect of
which is to fix the rate on this loan at 6.88%.
Convertible debentures at May 28, 2000 consisted of $18,894,000 of 5.75%
convertible subordinated debentures due September 2003, issued in a private
placement. The debentures were convertible into Common Stock at approximately
$13.584 per share. Interest on the debentures was payable semi-annually. The
debentures were redeemable, in whole or in part, at the option of the Company at
any time at prices ranging from 102.3% to 100.575%. The debentures also provided
for redemption at the option of the holder upon a change in control of the
Company, as defined, and were subordinated to senior indebtedness, as defined.
In February 1999, the Company paid $1,550,000 for the early retirement of
Convertible Subordinated Debentures with a carrying value of $1,860,000. As a
result of the early retirement of debt, the Company recognized a gain of
approximately $275,000 in fiscal year 1999. In March 2000, the holders of the
Convertible Subordinated Debentures converted $871,000 of debt for 62,249 shares
of Common Stock.
On July 12, 2000, $10,090,000 of the Company's 5.75% Convertible Subordinated
Debentures were converted into 721,117 shares of the Company's Common Stock at
$13.992 per share. The Company issued an additional 31,110 shares of the
Company's Common Stock valued at approximately $614,000, or $19.730 per share,
which was included in interest expense to induce early conversion and in lieu of
all accrued interest.
On September 7, 2000, $8,765,000 of the Company's 5.75% Convertible Subordinated
Debentures were converted into 645,229 shares of the Company's Common Stock at
$13.584 per share. The Company issued an additional 49,878 shares of the
Company's Common Stock valued at approximately $941,000, or $18.873 per share,
which is included in interest expense, to induce early conversion and in lieu of
all accrued interest.
On November 1, 2000 the remaining $39,000 of the Company's 5.75% Convertible
Subordinated Debentures were converted into 2,870 shares of the Company's Common
Stock at $13.584 per share.
50
Aggregate maturities of long-term debt for the next five fiscal years are: 2002
- - $2,445,000; 2003 - $391,000; 2004 - $409,000; 2005 - $432,000; and 2006 -
$4,201,000.
Interest paid for the years ended May 27, 2001, May 28, 2000, and May 30, 1999,
amounted to $1,151,000, $1,725,000, and $1,961,000, respectively.
NOTE F - SHAREHOLDERS' EQUITY
In July 2001, the Company declared a 2% stock dividend to be distributed on all
outstanding shares, except Treasury Stock, on August 31, 2001 to holders of
record on August 14, 2001. 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.
In June 2000, the Company declared a 3% stock dividend to be distributed on all
outstanding shares, except Treasury Stock, on August 25, 2000 to holders of
record on August 4, 2000. 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 three stock option plans: the 1981 Stock Option
Plan, the 1990 Stock Option Plan, and the 2000 Stock Option and Stock Award
Plan. Shares and prices per share have been adjusted to reflect the 2% stock
dividend declared in July 2001 and the 3% stock dividend declared June 2000. A
total of 3,562,052 shares had been authorized for grant under the 1990 plan and
714,000 shares have been authorized under the 2000 Plan. All remaining grants
under the 1981 Plan were exercised during the year ended May 28, 2000. Options
granted under the 1990 and 2000 Stock Option and Stock Award Plans have lives
ranging from five to ten years and vest over periods ranging from one to five
years.
Option activity under these plans was as follows:
Fiscal Year Ended
-------------------------------------------------------------------------------------------------
May 27, 2001 May 28, 2000 May 30, 1999
--------------------------------- -------------------------------- ------------------------------
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 2,365,552 $ 8.308 1,981,340 $ 8.713 1,856,785 $ 9.200
Granted 251,759 21.038 967,924 8.018 495,324 6.568
Exercised (552,328) 9.529 (399,330) 8.915 (194,213) 4.854
Forfeited (82,187) 10.294 (184,382) 9.813 (176,556) 12.082
--------- --------- ---------
Outstanding,
end of year 1,982,796 9.511 2,365,552 8.308 1,981,340 8.713
========= ========= =========
Exercisable,
end of year 792,537 $ 8.153 837,838 $ 9.145 1,073,626 $ 9.265
========= ========= =========
May 27, 2001
-----------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------ -------------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Option Number Exercise Remaining Number Exercise
Exercise Prices Outstanding Price Contractual Life Exercisable Price
--------------- ------------------------------------------------------- -------------------------------------
$2.75 to $5.50 134,998 $ 4.670 1.4 years 134,998 $ 4.670
$5.50 to $8.25 1,048,831 7.080 4.5 years 353,129 7.151
$8.25 to $11.00 439,708 9.222 4.7 years 203,348 9.471
$11.00 to $13.75 57,560 11.768 2.3 years 56,809 11.751
$13.75 to $16.50 47,725 15.401 5.8 years 30,784 14.963
$16.50 to $19.25 38,032 17.551 4.1 years 11,166 17.088
$19.25 to $22.00 176,700 20.800 9.9 years 0 0
$22.00 to $24.75 13,818 22.360 9.8 years 0 0
$24.75 to $27.50 25,424 26.866 5.8 years 2,303 26.625
--------- ------- --------- ------- -------
1,982,796 $ 9.511 4.8 years 792,537 $ 8.153
========= =======
51
In connection with the license of patent rights, the Company issued warrants to
purchase 105,060 shares of its Common Stock at a price of $18.98 per share.
These warrants were valued at $1,097,000, which was capitalized as part of the
cost of the patent rights.
Following are the shares of Common Stock reserved for issuance and the related
exercise prices for the outstanding stock options and outstanding warrants at
May 27, 2001:
Number Exercise Price
Of Shares Per Share
---------- --------------
2000 Stock Option and Stock Award Plan 29,010 $2.75
1990 Stock Option Plan 1,953,786 to $26.960
Warrants 105,060 $18.98
----------
Shares reserved for issuance 2,085,796
=========
The following pro forma net income (loss) and earnings (loss) per share
information has been determined as if the Company had accounted for stock-based
compensation awarded under its stock option plans using the fair value-based
method. The pro forma effect on net income for fiscal years 2001, 2000 and 1999
is not representative of the pro forma effect on net income in future years
because, as required by SFAS No. 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 27, 2001 May 28, 2000 May 30, 1999
-------------------------- --------------------------- --------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
------------- ------------ ------------- ------------- ------------- ------------
Net income (loss) $11,067 $9,425 $6,452 $4,595 $ (7,029) $ (8,359)
Earnings (loss) per Common
Share:
Basic $ 0.72 $ 0.61 $ 0.48 $ 0.34 $ (0.54) $ (0.64)
======= ====== ====== ====== ========= =========
Diluted $ 0.67 $ 0.57 $ 0.45 $ 0.32 $ (0.54) $ (0.64)
======= ====== ====== ====== ========= =========
The weighted average fair value of each option granted under the 1990 Stock
Option Plan and the 2000 Stock Option and Award Plan during fiscal years 2001,
2000 and 1999 was $14.123, $4.385 and $3.808, 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 2001, 2000 and 1999 were 4.8%, 6.1% and 5.1%,
respectively. The expected volatility of the market price of the Company's
Common Stock for fiscal years 2001, 2000 and 1999 grants was 68.8%, 55.1%, and
51.3%, respectively. The expected average term of the granted options for fiscal
years 2001, 2000 and 1999 was 6.5 years, 4.8 years and 6.6 years, respectively.
There was no expected dividend yield for the options granted for fiscal years
2001, 2000 and 1999.
During the years ended May 27, 2001, May 28, 2000 and May 30, 1999, in
connection with the grant of stock options to consultants, the Company has
recognized compensation cost in the amount of $293,000, $37,000 and $61,000,
respectively. Also, in connection with the exercise of certain stock options in
fiscal 2000, the Company recognized $386,000 of compensation expense. During the
year ended May 27, 2001, the Company issued 15,759 shares of Common Stock at a
fair market value of $16.147 per share as compensation to the Board of
Directors. In addition, during the year ended May 28, 2000 the Company issued
631,128 shares of Treasury Stock for partial redemption of Preferred Stock and
21,012 shares at a fair market value of $8.321 per share as compensation to the
Board of Directors.
52
NOTE G - RETIREMENT PLANS
The Company had a non-contributory, defined benefit plan covering all eligible
employees. Benefits under the plan were based on years of service and employees'
career average compensation. The Company's funding policy was to contribute
annually an amount sufficient to meet or exceed the minimum funding standard
contained in the Internal Revenue Code. Contributions were intended to provide
not only for benefits attributable to service to date, but also for those
expected to be earned in the future. As of December 31, 1998, the Company froze
all pension benefits except for approximately 50 bargaining unit employees at a
subsidiary. In September 2000, the Company received approval from the Internal
Revenue Service to terminate the plan. In November 2000, the Company terminated
the plan and settled nearly all its obligations by purchasing annuity contracts
or making lump-sum distributions in an amount determined by the plan's actuary.
The remaining plan assets will be distributed to the plan participants on a
pro-rata basis. Such distributions are expected to be completed during August,
2001. The Company recorded termination and settlement costs of approximately
$588,000 during the fiscal year ended May 27, 2001, and curtailment gain of
$1,465,000 in the fiscal year ended May 28, 2000.
53
The following tables set forth the plan's funded status at May 27, 2001 and the
funded status and amounts recognized in the Company's consolidated balance
sheets at May 27, 2001 and May 28, 2000:
(Dollars in Thousands)
Bargaining Terminated Plan
Unit Plan Fiscal Year Ended
---------- ----------------------------------
May 27, 2001 May 27, 2001 May 28, 2000
-------------- --------------- --------------
Change in benefit obligation during year:
Benefit obligation at beginning of year $ 4,093 $ 8,146
Service cost $ 25 - 59
Interest cost 38 145 472
Benefit payments (2) - (248)
Administrative expenses - - (100)
Actuarial (gain) or loss 49 - 32
Acquisitions or (divestitures) 471 (470) -
Settlements - - (4,268)
Curtailments - (3,768) -
-------------- --------------- --------------
Benefit obligation at end of year $581 $ 0 $ 4,093
============== =============== ==============
Change in plan assets during year:
Fair value of plan assets at beginning of year $ - $ 6,277 $10,956
Employer contributions - - 5
Benefit payments (2) - (248)
Administrative expenses - - (100)
Actual return on plan assets 91 225 605
Acquisitions or (divestitures) 664 (664) -
Settlements - (5,838) (4,941)
-------------- --------------- --------------
Fair value of plan assets at end of year $ 753 $ 0 $ 6,277
============== =============== ==============
Reconciliation of funded status at end of year:
Funded status $ - $ - $ 2,183
Unrecognized net transition (asset) or obligation 172 - 17
Unrecognized prior service cost (178) - 69
Unrecognized net (gain) or loss 11 - (1,570)
-------------- --------------- --------------
Net amount recognized $ 5 $ 0 $ 699
============== =============== ==============
Amounts recognized in the Consolidated Balance Sheet
at end of year:
-------------- --------------- --------------
Prepaid benefit cost $ 5 $ 0 $ 699
============== =============== ==============
Net periodic benefit cost recognized for year $ 25 $ - $ 59
Interest cost 38 145 472
Expected return on plan assets (53) (225) (673)
Amortization of net transition obligation - 3 6
Amortization of prior service cost (15) 3 29
Amortization of net gain - (27) (70)
-------------- --------------- --------------
Net periodic benefit cost $ (5) $ (101) $ (177)
============== =============== ==============
Additional amounts recognized for year:
Settlement (gain) or loss $ 800 $ 19
Weighted -average assumptions for year:
Discount rate 8.00% 8.00% 7.50%
Rate of compensation increases 4.50% 4.50% 4.50%
Expected long-term rate of return on plan assets 8.00% 8.00% 8.00%
Weighted-average assumptions at end of year:
Discount rate 7.50% - 8.00%
Rate of compensation increases 4.50% - 4.50%
54
The Company also maintains an employee savings plan, covering substantially all
employees, under Section 401(k) of the Internal Revenue Code. Under this plan,
the Company makes a contribution for all employees and matches a portion of
participants' contributions. Expenses under the plan during the fiscal years
ended May 27, 2001, May 28, 2000 and May 30, 1999 aggregated $663,000, $588,000
and $348,000, respectively.
The Company also maintains supplemental retirement and disability plans for
certain of its executive officers. These plans utilize life insurance contracts
for funding purposes. Expenses under these plans were $21,000, $21,000 and
$56,000 for the fiscal years ended May 27, 2001, May 28, 2000 and May 30, 1999,
respectively.
NOTE H - INCOME TAXES
The components of the provision for income taxes (benefit) are as follows:
(Dollars in Thousands)
Fiscal Year Ended
----------------------------------------------------------------
May 27, 2001 May 28, 2000 May 30, 1999
--------------- --------------- ---------------
Current
Federal $4,532 $2,573 $(1,727)
State 560 611 176
Foreign 77 162 112
--------------- --------------- ---------------
Total current 5,169 3,346 (1,439)
Deferred
Federal 1,522 664 (57)
State 268 44 284
--------------- --------------- ---------------
Total deferred 1,790 708 227
--------------- --------------- ---------------
Provision for income taxes (benefit) $6,959 $4,054 $(1,212)
=============== =============== ===============
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 27, 2001 May 28, 2000
--------------- ---------------
Deferred tax assets:
Inventory reserves $1,175 $3,163
Non-deductible accruals 1,372 1,058
Product warranty reserve 649 756
Equity in net loss of unconsolidated affiliate 469 469
Restructuring and other accruals 917 1,582
Capital loss carryforward 1,120 1,120
--------------- ---------------
Total gross deferred tax assets 5,702 8,148
Less valuation allowance (1,311) (1,311)
--------------- ---------------
Deferred tax assets 4,391 6,837
--------------- ---------------
Deferred tax liabilities:
Unrealized gain on available for sale securities (178)
Depreciation and amortization differences (447) (479)
Intangibles (2,342) (2,939)
Pension curtailment gain (549) (549)
Other, net (74) (101)
--------------- ---------------
Total gross deferred tax liabilities (3,412) (4,246)
--------------- ---------------
Net deferred tax assets $979 $2,591
=============== ===============
55
The foregoing assets and liabilities are classified in the accompanying
consolidated balance sheets as follows:
(Dollars in Thousands) May 27, 2001 May 28, 2000
--------------- ---------------
Net current deferred tax assets $3,362 $6,187
Net long-term deferred tax liabilities 2,383 3,596
--------------- ---------------
$ 979 $2,591
=============== ===============
During the years reported, the Company adjusted the valuation allowance to an
amount it believes is necessary to reduce deferred taxes to an amount which is
more likely than not to be realized.
The change made to the valuation allowance during fiscal 2000 was a decrease of
$209,000.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income and capital gains during
the periods in which those temporary differences become deductible. Management
considers projected future taxable income, the character of such income and tax
planning strategies in making this assessment. The Company had Federal taxable
income (loss) of approximately $13,500,000 in fiscal 2001, $6,500,000 in fiscal
2000, and ($3,250,000) in fiscal 1999. Based upon the level of historical
taxable income and projections for future taxable income over the periods in
which the deferred tax assets are deductible, management believes it is more
likely than not the Company will realize the benefits of the remaining
deductible differences. The amount of the deferred tax assets considered
realizable, however, could be reduced in the near term if estimates of future
taxable income are reduced.
The reasons for the differences between the provision for income taxes (benefit)
and the amount of income tax (benefit) determined by applying the applicable
statutory Federal tax rate to income (loss) before income taxes are as follows:
(Dollars in Thousands)
Fiscal Year Ended
----------------------------------------------------------------
May 27, 2001 May 28, 2000 May 30, 1999
--------------- --------------- ---------------
Pretax income (loss) at statutory
tax rate (34%) $6,184 $3,572 $(2,802)
State taxes, net of Federal benefit 546 432 304
Benefit of Foreign Sales Corporation (600) (425) (210)
Amortization of intangibles 539 539 539
Benefit of tax credits (45)
Capital loss carryforward used (209)
Change in valuation allowance 916
Other, net 290 145 86
--------------- --------------- ---------------
Provision for income taxes $6,959 $4,054 $(1,212)
=============== =============== ===============
The Company has available capital loss carryforwards of approximately $3.3
million which expire in fiscal 2004 and have a full valuation allowance.
The Company paid income taxes, net of cash refunds received, of $3,650,000
during the year ended May 27, 2001; received $50,000 in net tax refunds during
May 28, 2000; and paid income taxes, net of cash refunds received, of $2,504,000
during the year ended May 30, 1999.
56
NOTE I - 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 27, 2001 May 28, 2000 May 30, 1999
------------ ------------ ------------
Income (loss) available to
Common shareholders $ 11,067 $ 6,452 $ (7,029)
========= ======== =========
Weighted average shares 15,363,208 13,378,100 13,057,948
Dilutive potential Common
Shares:
Warrants 7,817
Convertible Preferred Stock 544,004
Stock options 1,124,004 447,876
---------- ---------- ----------
Adjusted weighted average
Shares 16,495,029 14,369,980 13,057,948
========== ========== ==========
Net income (loss) per Common Share:
Basic $ 0.72 $ 0.48 $ (0.54)
======== ======== ==========
Diluted $ 0.67 $ 0.45 $ (0.54)
======== ======== ==========
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. Shares issuable upon conversion of Convertible Preferred
Stock and exercise of stock options have been excluded from the year ended May
30, 1999 as their effect would be anti-dilutive.
In July 2001 the Company declared a 2% stock dividend to be distributed on all
outstanding shares, except Treasury Stock, on August 31, 2001 to holders of
record on August 14, 2001. The Company distributed a 3% stock dividend on August
25, 2000. The distribution has been made from the Company's authorized but
unissued shares. All data with respect to earnings per share, weighted average
shares outstanding and Common Stock equivalents have been adjusted to reflect
these stock dividends.
NOTE J - COMMITMENTS AND CONTINGENCIES
The Company leases certain manufacturing facilities and equipment under
operating lease agreements expiring at various dates through October 2019.
Certain of the leases provide for renewal options. Total rent expense was
$907,000, $731,000 and $519,000 for the years ended May 27, 2001, May 28, 2000,
and May 30, 1999, respectively.
Future minimum rental commitments, excluding renewal options, under the
noncancellable leases covering certain manufacturing facilities and equipment
through the term of the leases are as follows:
Fiscal Year
2002 $ 1,129,000
2003 791,000
2004 550,000
2005 540,000
2006 466,000
-----------
Total $ 3,476,000
===========
In addition to operating lease agreements, the Company also has a maintenance
agreement for $113,000 per year, through January 2004, for a computer system.
57
At May 27, 2001, the Company's capital equipment commitments were approximately
$2,882,000.
In connection with the termination of AISA (see Note B), the Company has agreed
to purchase approximately $3,000,000 of superconducting wire from Alstom for use
in producing MRI Magnets. As of May 27, 2001, approximately $746,000 of the
commitment remains outstanding. The Company expects to fulfill this commitment
in fiscal 2002.
The Company is subject to certain claims and lawsuits arising in the normal
course of business. Based on information currently available, it is the opinion
of management, based upon advice of counsel, that the ultimate resolution of
these matters would not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows. However,
based on future developments and as additional information becomes known, it is
possible that the ultimate resolution of such matters could have a material
adverse effect on the Company's financial statements in future periods.
NOTE K - SEGMENT AND RELATED INFORMATION
The Company operates in three reportable segments: Magnetic Resonance Imaging
("MRI"), Instrumentation, and Energy Technology. The MRI segment consists
primarily of the manufacture and sale of magnets (by the IGC-Magnet Business
Group), radio frequency coils (by IGC-Medical Advances, Inc), and
low-temperature superconducting wire (by IGC-Advanced Superconductors, also
known as IGC-AS), all of which are used principally in the medical diagnostic
imaging market. The Instrumentation segment consists of refrigeration equipment
produced by two subsidiaries, IGC-APD Cryogenics Inc. (IGC-APD) and IGC-Polycold
Systems Inc. (IGC-Polycold), used primarily in ultra-high vacuum applications,
industrial coatings, analytical instrumentation, medical diagnostics and
semiconductor processing and testing. The Energy Technology segment, operated
through IGC SuperPower LLC, a wholly-owned entity, is developing second
generation, high-temperature superconducting materials that we expect to use in
devices designed to enhance capacity, reliability and quality of transmission
and distribution of electrical power.
In fiscal 2000, the Company reported its operations in four segments:
Electromagnetics, Low-Temperature Superconductors, Refrigeration, and Energy
Technology. The change in the current year reflects our continued focus on
commercial market applications of core technology. The resulting reporting
segments are intended to relate to the primary markets which each serve, rather
than the technologies that give rise to individual products. Prior year segment
data has been reclassified to conform with current year presentation.
The accounting policies of the reportable segments are the same as those
described in Note A of the Notes to Consolidated Financial Statements.
Intersegment sales and transfers are accounted for as if the sales or transfers
were to third parties, that is, at current market prices. The Company evaluates
the performance of its reportable segments based on operating income (loss).
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
58
(Dollars in Thousands)
Fiscal Year Ended May 27, 2001
----------------------------------------------------------------------------------------
Magnetic Energy
Resonance Imaging Instrumentation Technology Total
---------------------------- ------------------ ------------------- --------------
Net sales to external customers:
Magnet systems $73,387 $73,387
RF Coils 13,041 13,041
Superconductive wire 7,549 7,549
Refrigeration equipment $41,313 41,313
Refrigerants 1,253 1,253
Other $1,614 1,614
-------- ------- ------ --------
Total 93,977 42,566 1,614 138,157
Intersegment net sales 4,029 4,029
Segment operating profit (loss) 18,925 5,121 (4,292) 19,754
Total assets 123,559 23,084 5,515 152,158
Additions to plant, property and equipment 3,111 586 1,495 5,192
Depreciation and amortization expense $ 6,135 $ 608 $ 343 $ 7,086
Fiscal Year Ended May 28, 2000
----------------------------------------------------------------------------------------
Magnetic Energy
Resonance Imaging Instrumentation Technology Total
---------------------------- ------------------ ------------------- --------------
Net sales to external customers:
Magnet systems $56,358 $56,358
RF Coils 10,865 10,865
Superconductive wire 10,337 10,337
Refrigeration equipment $28,515 28,515
Refrigerants 5,030 5,030
Other $1,667 1,667
------- ------- ------ --------
Total 77,560 33,545 1,667 112,772
Intersegment net sales 2,414 2,414
Segment operating profit (loss) 14,063 (3,329) (1,732) 9,002
Total assets 103,637 21,562 2,778 127,977
Additions to plant, property and equipment 4,083 472 732 5,287
Depreciation and amortization expense 4,516 1,514 350 6,380
Other significant non-cash items:
Restructuring charges $ $ 2,000 $ $ 2,000
59
Fiscal Year Ended May 30, 1999
----------------------------------------------------------------------------------------
Magnetic Energy
Resonance Imaging Instrumentation Technology Total
---------------------------- --------------------------------------- --------------
Net sales to external customers:
Magnet systems $43,925 43,925
RF Coils 12,926 12,926
Superconductive wire 12,160 12,160
Refrigeration equipment $28,268 28,268
Refrigerants 2,794 2,794
Other $2,798 2,798
------- ------- ------- --------
Total 69,011 31,062 2,798 102,871
Intersegment net sales 2,223 2,223
Segment operating profit (loss) 9,080 (5,877) (1,500) 1,703
Total assets 75,834 47,707 1,917 125,458
Investments in unconsolidated affiliates 3,736 3,736
Additions to plant, property and equipment 2,417 620 102 3,139
Additions to long lived assets 8,750 8,750
Depreciation and amortization expense 3,877 1,471 288 5,636
Other significant non-cash items:
Restructuring charges $ 4,739 $ $ $ 4,739
Fiscal Year Ended
--------------------------------------------------------------
May 27, 2001 May 28, 2000 May 30, 1999
------------------ ------------------- -------------------
Reconciliation of income before income taxes:
Total operating profit from reportable segments $ 19,754 $ 9,002 $ 1,703
Intercompany profit in ending inventory (1,116) 295 (923)
-------- ------- -------
Net operating profit 18,638 9,297 780
Interest and other income 1,374 1,790 1,942
Interest and other expense (1,986) (1,965) (2,172)
Equity in net loss of unconsolidated affiliates (236) (1,491)
Recovery (write off) of investment in unconsolidated
affiliates 1,620 (7,300)
-------- -------- --------
Income before income taxes $ 18,026 $ 10,506 $ (8,241)
======== ======== ========
60
Net sales to two customers of the Company's MRI segments were each in excess of 10% of the Company's total net sales.
Net sales to each of these customers during the last three fiscal years were as follows:
Fiscal Year Ended
-------------------------------------------------------------
May 27, May 28, May 30,
(Dollars in Thousands) 2001 2000 1999
----------------- ------------------- -------------------
Customer A $ 76,824 $ 56,098 $ 41,652
Customer B 10,000 12,286 13,747
-------- -------- --------
Total $ 86,824 $ 68,384 $ 55,399
======== ======== ========
Net sales by country, based on the location of the customer, for the last three fiscal years
were as follows:
Fiscal Year Ended
-------------------------------------------------------------
May 27, May 28, May 30,
(Dollars in Thousands) 2001 2000 1999
----------------- ------------------- -------------------
United States $ 36,114 $ 35,992 $ 41,771
Netherlands 76,824 56,860 41,652
Other countries 25,219 19,920 19,448
-------- -------- --------
Total $138,157 $112,772 $102,871
======== ======== ========
All significant long-lived assets of the Company are located within the United States.
61
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 No. 107, "Disclosures About
Fair Value of Financial Instruments". Although the estimated fair value amounts
have been determined by the Company using available market information and
appropriate valuation methodologies, the estimates presented are not necessarily
indicative of the amounts that the Company could realize in current market
exchanges.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents, receivables, and accounts payable and accrued
expenses: The carrying amounts reported in the consolidated balance sheets
approximate their fair values because of the short maturities of these
instruments.
Available for sale securities and other investments: The fair value of available
for sale securities is estimated based on quoted market prices (see Note D) at
the balance sheet date. The fair value of other investments is not readily
determinable.
Long-term debt: The carrying value of long-term debt, including current portion,
was approximately $8,630,000 at May 27, 2001, while the estimated fair value was
$8,630,000, based upon interest rates available to the Company for issuance of
similar debt with similar terms and discounted cash flows for remaining
maturities.
Letter of credit: The letter of credit reflects fair value and is subject to
fees competitively determined in the market place. The contract value and fair
value of the letter of credit at May 27, 2001 was $1,645,000.
62
Note M - Accumulated Other Comprehensive Income (Loss)
The accumulated balances for each classification of accumulated other
comprehensive income (loss) are as follows:
Unrealized Accumulated
Foreign Gains (Losses) Other
Currency on Available for Sale Comprehensive
Items Securities, Net of Tax Income (Loss)
----------- ---------------------------------------
Balances at May 31, 1998 $(354) $850 $496
Current period change - 1999 194 (1,358) (1,164)
----------- -------------------- ----------------
Balances at May 30, 1999 (160) (508) (668)
Current period change - 2000 (482) 874 392
----------- -------------------- ----------------
Balances at May 28, 2000 (642) 366 (276)
Current period change - 2001 (244) (1,527) (1,771)
----------- -------------------- ----------------
Balances at May 27, 2001 $(886) $ (1,161) $ (2,047)
=========== ==================== ================
The related tax effects allocated to each component of accumulated other
comprehensive income (loss) are as follows:
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
----------- -------------------- ----------------
Balance at May 31, 1998 $942 $(446) $496
Foreign currency translation
adjustments 194 - 194
Unrealized gains (losses) on
available for sale securities (2,084) 726 (1,358)
----------- -------------------- ----------------
Balance at May 30, 1999 (948) 280 (668)
Foreign currency translation
adjustments (482) - (482)
Unrealized gains (losses) on
available for sale securities 1,332 (458) 874
----------- -------------------- ----------------
Balance at May 28, 2000 (98) (178) (276)
Foreign currency translation
adjustments (244) - (244)
Unrealized gains (losses) on
available for sale securities (1,705) 178 (1,527)
----------- -------------------- ----------------
Balance at May 27, 2001 $(2,047) $-0- $(2,047)
=========== ==================== ================
63
NOTE N - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for fiscal 2001 and 2000 are as follows:
(Dollars in Thousands, Except Per Share Amounts)
Earnings Per
---------------------
Net Gross Net Basic Diluted
Sales Margin Income Share Share
------- ------- ------- ----- -------
2001 Quarter Ended
August 27, 2000 $31,711 $12,843 $ 2,427 $ .15 $ .15
November 26, 2000 32,425 15,185 3,139 .21 .19
February 25, 2001 34,297 14,060 2,890 .19 .17
May 27, 2001 39,724 16,440 2,611 .17 .16
2000 Quarter Ended
August 29, 1999 $26,838 $9,810 $ 1,199 $ .09 $ .09
November 28, 1999 28,490 10,192 1,503 .12 .11
February 27, 2000 28,081 9,600 1,676 .13 .12
May 28, 2000 29,363 11,164 2,074 .14 .13
64
2. Schedule
65
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 27, 2001
Deducted from asset accounts:
Allowance for doubtful accounts $ 478 $ 206 $ 188 (3) $ 496
Reserve for inventory obsolescence 10,470 1,725 8,170 (5) $ 4,025
Included in liability accounts:
Product warranty reserve 2,059 458 1,043 (1) 1,474
Contract adjustment reserve (4) 221 7 228
Year Ended May 28, 2000
Deducted from asset accounts:
Allowance for doubtful accounts $ 401 $ 166 $ 89 (3) $ 478
Reserve for inventory obsolescence 8,282 2,665 1,770 (7) 2,247 (5) 10,470
Included in liability accounts:
Product warranty reserve 1,577 808 40 (2) 366 (1) 2,059
Contract adjustment reserve (4) 301 80 (6) 221
Upgrade Reserve (4) 40 40 (2) 0
Year Ended May 30, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $ 350 $ 206 $ 119 (8) $ 412 (3) $ 401
138 (7)
Reserve for inventory obsolescence 6,843 3,732 1,820 (7) 4,113 (5) 8,282
Included in liability accounts:
Product warranty reserve 996 2,152 1,571 (1) 1,577
Contract adjustment reserve (4) 458 70 227 (6) 301
Upgrade Reserve (4) 60 20 (2) 40
(1) Cost of warranty performed.
(2) Adjustments to 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) Cost to finalize contracts.
(7) Restructuring charges
(8) SMIS write-off
66
3. Exhibits
67
3. Exhibits
Exhibit Index
Exhibit
- -------
21 Subsidiaries of the Company
23 Consent of Independent Auditors (KPMG LLP)
24 Consent of Independent Auditors (PricewaterhouseCoopers LLP)
68