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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 25, 1997
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from ____________ to
___________
Commission File Number 1-11344
INTERMAGNETICS GENERAL CORPORATION (Exact
------------------------------------------------
name of registrant as specified in its charter.)
New York 14-1537454
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 Old Niskayuna Road,
Latham, New York 12110
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (518) 782-1122
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock - $.10 par value American Stock Exchange
- ------------------------------ -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
----------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The number of shares of the registrant's Common Stock outstanding as of August
15, 1997 was 12,457,034.
DOCUMENTS INCORPORATED BY REFERENCE
The information required for Part III hereof is incorporated by reference from
the registrant's Proxy Statement for its 1997 Annual Meeting of Shareholders to
be filed within 120 days after the end of the registrant's fiscal year.
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $116,758,808. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the American Stock Exchange on August 15, 1997. 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.
TABLE OF CONTENTS
Part I
ITEM 1. BUSINESS
DESCRIPTION............................................... 1
MAGNETIC PRODUCTS......................................... 1
REFRIGERATION PRODUCTS.................................... 9
RESEARCH AND DEVELOPMENT.................................. 12
INVESTMENTS............................................... 16
PERSONNEL................................................. 17
EXECUTIVE OFFICERS OF THE REGISTRANT...................... 18
ITEM 2. PROPERTIES.......................................................... 19
ITEM 3. LEGAL PROCEEDINGS................................................... 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................. 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS............................................................ 21
ITEM 6. SELECTED FINANCIAL DATA............................................. 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.............................................. 23
RESULTS OF OPERATIONS..................................... 24
LIQUIDITY AND CAPITAL COMMITMENTS......................... 26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................... 27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE........................................... 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 27
ITEM 11. EXECUTIVE COMPENSATION............................................. 27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................................ 27
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 27
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.... 28
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS......... 28
(b) REPORTS ON FORM 8-K................................... 30
SIGNATURES ................................................................. 32
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The statements contained in this report, and any other report filed by the
Company from time to time, which are not historical fact are "forward-looking
statements" that involve various important assumptions, risks, uncertainties and
other factors which could cause the Company's actual results for 1998 and beyond
to differ materially from those expressed in such forward-looking statements.
These important factors include, without limitation, the assumptions, risks, and
uncertainties set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations, as well as other assumptions, risks,
uncertainties and factors disclosed elsewhere in this report and the Company's
other securities filings.
Part I
ITEM 1. BUSINESS DESCRIPTION
Intermagnetics General Corporation (the "Company") designs, develops,
manufactures and sells its products through two significant segments: Magnetic
Products and Refrigeration Products. Magnetic Products consist primarily of low
temperature superconducting ("LTS") magnets, wires and cable, and radio
frequency ("RF") coils. These are developed and sold through the Company's
Magnet Business Group, its wholly-owned subsidiary, Medical Advances, Inc.
("MAI"), and its IGC Advanced Superconductors Division. As a part of its
Magnetic Products segment, the Company also sells , low-cost, permanent magnet
based MRI systems through a joint venture, IMiG MRI Systems, LLC, and permanent
magnet products and high temperature superconducting ("HTS") products through
its Technology Development Operations ("TDO"). The Company's Refrigeration
Products segment consists of low and extremely low temperature, refrigerants and
refrigeration equipment, which are designed, developed, manufactured and sold
through the Company's wholly-owned subsidiary, APD Cryogenics Inc., and
refrigerants for mobile and stationary applications, which are designed,
developed and sold through the Company's wholly-owned subsidiary, InterCool
Energy Corporation.
MAGNETIC PRODUCTS
About Superconductivity Generally
Superconductivity is the phenomenon in which certain materials lose all
resistance to the flow of electrical current when cooled below a critical
temperature. Consequently, devices made with superconductive materials require
special refrigeration equipment, known as cryogenic systems, to maintain the
materials at the very cold temperatures at which superconductivity occurs.
Superconductors offer advantages over conventional conductors, such as copper,
by carrying electricity with virtually no energy loss, and generating
comparatively more powerful magnetic fields.
There are two broad classes of superconductive materials. LTS materials
are metals and alloys that become superconductive when cooled to temperatures
near absolute zero (approximately 4.2 Kelvin). Because of their generally
superior ductile characteristics, LTS materials are generally used in the form
of flexible wire or tape ("Wire/Tape"). HTS materials are composed of
ceramic-like compounds that become superconductive when cooled to temperatures
close to that of liquid nitrogen (77 Kelvin). Although HTS materials are not yet
economically viable in existing superconducting applications, the Company is
currently doing development work on various applications of HTS technology in
the form of flexible Wire/Tape as
1
well as demonstration devices for the electric power industry. See "Research and
Development - New Products" below.
The single largest existing commercial application for
superconductivity is the magnetic resonance imaging ("MRI") medical diagnostic
system ("MRI System"). MRI Systems are used in hospitals and clinics for
non-invasive, diagnostic imaging within a patient's body. At the core of an MRI
System is a large, highly engineered magnet system. The magnet system can be
based upon a conventional resistive electro-magnet, a permanent magnet or a
superconductive magnet. Although more expensive to manufacture, superconductive
magnets offer far more powerful, high quality magnetic fields with virtually no
power loss. Higher magnetic field strengths correlate with improved
"signal-to-noise" ratios which can in turn lead to higher quality images. The
annual commercial market for MRI Systems is estimated at approximately $1.5
billion worldwide. The MRI industry is increasingly dominated by a small number
of systems integrators worldwide who sell MRI Systems to end-users. The General
Electric Company ("GE"), Siemens Corporation, Philips Medical Systems Nederlands
B.V. ("Philips"), Hitachi Medical Corporation ("Hitachi"), Toshiba Corp., and
Picker International Ltd. are the major MRI System integrators. The Company is a
supplier of key components to several of the MRI Systems integrators. See
"Principal Products - Superconductive MRI Magnet Systems" below.
A commercially less significant but well-developed application for
superconductivity is nuclear magnetic resonance ("NMR") spectroscopy. NMR
spectroscopy is used in the research and testing of the composition and
structure of non-ferrous materials. See "Principal Products - Other
Superconductive Magnet Systems" below.
Superconductivity is also applicable to other scientific, defense and
research applications including particle accelerators and light sources. As with
MRI and NMR, superconductive magnets generally compete in these areas on price
and field strength with resistive or permanent magnets.
The Company believes that superconductive Wire/Tape may have
significant application in several other emerging areas. For example, the
electric power industry, the Department of Defense and certain other users of
electric power are currently exploring superconductive magnetic energy storage
("SMES") systems as a means of solving electrical power quality problems such as
power sags and surges. See "Research and Development - New Product Development:
SMES" below. HTS and novel permanent magnet materials may soon permit the
commercially viable manufacture of motors, generators, fault current limiters,
transformers and other power devices that have certain advantages over their
conventional counterparts. See "Research and Development - New Product
Development: HTS" below. In addition, superconductive magnets have
transportation uses, which include the magnetic levitation of vehicles
("MAGLEV") including high-speed trains.
Although the potential newer applications of superconductivity outlined
above would incorporate technology currently in use or in development by the
Company, there can be no assurances that commercially usable applications will
emerge in the future or that the Company will be able to participate
successfully in them.
About MRI Radio Frequency (RF) Coils Generally
An RF Coil is a necessary component of an MRI System. An RF coil is
placed inside the bore of the magnet of an MRI System, on a human patient. The
RF coil acts as an antenna to receive, or transmit and receive, radio frequency
signals from the human body as it lies inside the strong magnetic field of the
MRI System. These radio frequency signals are transferred electronically to the
MRI System computer where they are reconstructed into a clinical diagnostic
image.
2
Specialized RF coils - those dedicated to imaging particular parts of
the human anatomy, such as the knee, neck, wrist, foot, etc. - increase the
number of diagnostic applications for which an MRI System can be used. The
increased number of applications increases the potential utilization rate of a
given MRI System, which typically helps to justify the acquisition of that
system. Specialized RF coils also enhance the diagnostic confidence obtained
from the images produced by an MRI System. That is, an RF coil designed to image
a specific part of the human body will yield a sharper, more detailed image that
is typically more clinically useful than a similar image produced with a
multi-purpose RF coil. Consequently, each MRI System could benefit from multiple
RF coils. The Company estimates that each MRI System could benefit from an array
of six to nine specialized RF coils.
An RF coil must work very closely with the MRI system in which it is
used. Consequently, RF coils are designed for a specific system configuration
and related characteristics. Hence, RF coils may not easily be moved between MRI
Systems manufactured by different companies, from one field strength magnet to
another, or even among different models manufactured by a single company. The
unique characteristics of each MRI System mean that RF Coils must be engineered
to meet the needs of a particular model of an MRI System. Consequently, the
market opportunity for any particular RF coil model is limited to the specific
system for which it was designed and built.
Principal Products
Within its Magnetic Products segment, the Company produces several
distinct types of products: Superconductive MRI Magnet Systems, Other
Superconductive Magnet Systems, Superconductive Wire, RF Coils for MRI Systems
and Permanent Magnet Products.
o Superconductive MRI Magnet Systems. Through its Magnet Business Group, the
Company manufactures and sells superconductive MRI magnet systems to MRI
Systems integrators for use in stationary and mobile MRI Systems. During
fiscal years 1997, 1996 and 1995, MRI magnet systems (excluding the
cryogenic shield cooler component) accounted for 43%, 41% and 46%,
respectively, of the Company's net sales. The Company's latest generation
of superconductive MRI magnet systems consists of three MRI magnet systems
with field strengths of 0.5, 1.0 and 1.5 Tesla (the "Superconductive MRI
Magnets").
The Company's superconductive MRI magnet systems consist of a
superconductive magnet, a cryostat (insulation device) to maintain the very
cold environment necessary to support superconductivity, and an electronic
system that energizes, monitors, controls and protects the magnet and the
cryostat. The Company's magnets for MRI Systems are made with wire from its
IGC Advanced Superconductors Division ("IGC-AS"), and fitted with cryogenic
refrigerators supplied by its subsidiary, APD Cryogenics Inc. ("APD"). In
fact, the Company is the only vertically integrated manufacturer of
superconductive MRI magnet systems, which the Company believes is an
important source of competitive strength.
o Superconductive Wire. Through IGC-AS, the Company manufactures and sells
the two principal LTS materials that are commercially available for the
construction of superconductive magnets: niobium-titanium ("Nb-Ti") wire,
and niobium-tin ("Nb3Sn") wire. In contrast to the relatively large market
for Nb-Ti wire, Nb3Sn multi-filamentary wire, which has been under
development for many years, is sold only in limited quantities. During
fiscal years 1997, 1996 and 1995, sales of superconductive wire accounted
for 12%, 22% and 24%, respectively, of the Company's net sales.
Nb-Ti superconductive wire is composed of hundreds to thousands of
continuous Nb-Ti filaments embedded in a matrix of copper or other
nonferrous material. The process of manufacturing Nb-Ti wire is exacting,
and some fabrication losses may be incurred.
3
o Other Superconductive Magnet Systems. Through its Magnet Business Group,
the Company also designs and builds superconductive magnet systems for
various scientific and defense applications. These special purpose
superconductive magnet systems are typically one of a kind, custom built
systems. For example, the Company is currently manufacturing a portion of a
45 Tesla Hybrid Magnet for the National High Magnetic Field Laboratory at
Florida State University ("NHMFL"). The Company is also designing and
building a SMES System. See "Research and Development - New Product
Development: SMES" below. The Company is also working with NHMFL regarding
the design and manufacture of a technology-leading superconductive magnet
for NMR for application at 900 MHz.
o RF Coils for MRI Systems. Since March, 1997, when the Company acquired MAI,
the Company manufactures and sells RF coils for use in MRI Systems. The
Company's current products include ten (10) anatomical applications with
over forty five (45) product groups available in magnetic field strengths
from 0.35T to 2.0T, for a total of 150 products. Typical RF coils have a
selling price between $5,000 and $30,000, although some custom or high end
coils may sell for substantially more. Because the Company acquired MAI in
March, 1997, RF coils accounted for substantially less than 5% of sales in
fiscal year 1997, and no sales in fiscal years 1996 and 1995.
o Permanent Magnet Products. The Company's Field Effects Division ("Field
Effects"), a part of TDO, develops, manufactures and sells permanent magnet
systems for use in low field-strength MRI Systems. A maintenance-free
magnet and a self-contained magnetic field with small fringe fields are
among the advantages of these magnet systems. The potentially lower capital
and operating costs of certain permanent magnet MRI Systems may enable many
smaller community hospitals and hospitals located in developing countries
to provide MRI diagnostic services to their patients. The imaging quality
of such systems is adequate for many diagnostic purposes, but it may not,
under current technology, be comparable to images obtained with higher
field-strength superconductive systems. Sales of such magnet systems to
date have not been significant.
In connection with the Company's strategic alliance with the UK-based firm
of Surrey Medical Imaging Systems Limited ("SMIS") (see "Investments -
Surrey Medical Imaging Systems" below), Field Effects has developed
additional MRI system components, and further developed its MRI permanent
magnet technology, and combined them with SMIS' products to create a
complete, permanent magnet-based MRI system. This product is marketed via a
joint venture with SMIS. (See "Research And Development - New Product
Development: Low-cost, Permanent Magnet-Based MRI Systems" below.) There
have been no significant sales of this new product to date.
Marketing
The Company markets its magnetic products and technology through its
own personnel, and licenses the manufacture and marketing of superconductive MRI
magnet systems for certain customers to its European joint venture. The Company
also has a wholly-owned European marketing and service subsidiary located in
England, as well as a foreign sales corporation located in Barbados. The Company
markets its RF coils through a direct sales force to domestic end-users, such as
hospitals, clinics and research facilities, and to MRI System integrators. The
Company also markets its RF coils internationally to end-users through a
distributor network.
Export Sales. Products sold to foreign-based companies, such as
Philips, a Dutch company, or Hitachi, a Japanese company, were accounted for as
export sales even if the products sold were installed in the U.S. On that basis,
the Company's net export sales (including the Refrigeration Products segment)
for fiscal years 1997, 1996 and 1995 totaled $43.5, $46.5 million and $51.6
million, respectively, most of which were to European customers.
4
European Joint Venture. The Company and GEC Alsthom S.A.
("GEC-Alsthom"), a leading French industrial group in the areas of electrical
and electromechanical equipment, have participated since 1987 in a joint venture
named GEC Alsthom Intermagnetics S.A. ("AISA"). AISA manufactures in France,
under license from the Company, superconductive MRI magnet systems. In addition,
AISA expects to benefit from GEC-Alsthom's participation in construction of the
Large Hadron Collider in Cern, Switzerland with respect to the manufacture of
large superconductive magnets.
In 1996, the Company and GEC Alsthom re-negotiated their agreement with
respect to AISA, and the various licenses under which AISA conducts its
business. Under the renegotiated agreement, AISA transferred its capability for
the manufacture of superconductive wire to GEC Alsthom, and the Company
increased its ownership interest in AISA from 25% to 45%. Additionally, the
license from the Company under which AISA manufactures superconductive MRI
magnet systems was extended from May, 1997 to May, 2005. The Company's
investment in AISA has been accounted for using the equity method of accounting.
Principal Customers. A significant portion of the Company's sales are
through its Magnetic Products segment, and most of those sales consist of MRI
related products - superconductive MRI magnet systems, superconductive wire for
use in such systems or RF coils for use in such systems. During the past three
fiscal years, sales to customers accounting for more than 10% of the Company's
net sales in such years aggregated approximately 50% of net sales in fiscal
1997, 62% of net sales in fiscal 1996 and 73% of net sales in fiscal 1995. See
Notes J and K of Notes to Consolidated Financial Statements, included in
response to Item 8 hereto.
A substantial portion of the Company's sales to the MRI industry are to
four customers, two of which are significant. Philips is the current principal
customer for the Company's MRI products. Pursuant to an agreement (which was
recently extended through December, 2000, and subject to automatic extension for
successive one-year periods thereafter unless previously terminated in
accordance with the agreement), the Company sells to Philips certain
superconductive MRI magnet systems of various field strengths for incorporation
in Philips' proprietary MRI Systems. The agreement requires Philips to purchase
all of its requirements for such superconductive MRI magnet systems from the
Company and AISA. See "Marketing - European Joint Venture" above. Sales to
Philips (including sales by the Refrigeration Products segment) amounted to
approximately 50%, 44% and 52% of the Company's net sales for fiscal 1997, 1996
and 1995, respectively.
The Company's second principal customer for MRI products is GE. The
Company sells superconductive wire to GE for use in GE's MRI magnets. Under the
Company's current arrangement with GE, GE places orders from time to time with
the Company. This current arrangement supersedes a formal contract between GE
and the Company which expired in December, 1996. GE accounted for approximately
9%, 18% and 21% of the Company's net sales for fiscal 1997, 1996 and 1995,
respectively.
5
Competition/Market
Across the principal types of products for its Magnetic Products
segment (see "Principal Products" above), the Company derived more than 68% and
74% of its net sales in its fiscal year 1997 and 1996, respectively, from
manufacturing and selling superconducting MRI magnet systems, superconductive
wire, permanent MRI magnet systems and RF coils for use in MRI Systems. US
demand for MRI Systems appears to have recovered from flat sales recorded in the
last two years, although the extent of the increase in demand is not yet clear.
Non-US demand continues to grow. The Company believes that worldwide sales of
MRI Systems in 1998 should grow over such sales in 1997.
A significant factor affecting the Company is the fact that MRI Systems
compete indirectly with other diagnostic imaging methods such as conventional
and digital X-ray systems, nuclear medical systems, ultrasound, and X-ray CT
scanners. While, most large MRI Systems suppliers perceive that there are
technical advantages to higher field-strength (0.5T or greater) imaging systems
based upon superconductive magnets, there are MRI Systems that use resistive
electromagnets and permanent magnets, which are limited by high power
consumption or by basic material properties. As a result, these systems produce
lower magnetic field-strengths than do superconductive magnets. Lower field
strengths generally translate into lower quality images. The cost of certain
cryogenic liquids, such as helium, may cause markets in developing countries to
prefer the use of resistive or permanent magnets, despite image quality.
Moreover, improved MRI System components for low field strength magnet systems
have improved image quality. Indeed, several MRI Systems integrators, including
the Company's joint venture with SMIS, have recently introduced MRI Systems
based upon such low field resistive or permanent magnets. (See "Research And
Development - New Product Development: Low-cost, Permanent Magnet-Based MRI
Systems" below.)
The Company's Magnetic Products are subject to substantial competition
within each of the markets for its principal products. Moreover, practical and
cost-effective conductors developed as a result of new discoveries in the field
of HTS materials could eventually reduce the market for the Company's current
LTS technology, although the Company (based upon the information currently
available to it) does not believe this is likely to happen in the near future.
See "Research and Development - New Product Development: HTS" below.
o Superconductive MRI Magnet Systems. Within the market for superconductive
MRI magnet systems, the Company's competitors fall into two categories: (1)
magnet manufacturers that make MRI magnet systems for sale to MRI Systems
integrators, and (2) MRI Systems integrators that manufacture
superconductive magnet systems for their own use.
The Company considers its principal competitor in the manufacture of
superconductive MRI magnet systems to be Oxford Magnet Technology Limited
("OMT"), a joint-venture between Siemens AG (51%) and Oxford Instruments
Group, plc (49%) ("Oxford"), a United Kingdom company that formerly owned
100% of OMT. While OMT has sold substantially more superconductive MRI
magnet systems, has greater production capacity, and greater financial
resources than the Company, the Company believes it can compete effectively
against OMT on both technological and cost bases.
GE is an example of an MRI Systems integrator that manufactures MRI magnet
systems for use in its own MRI Systems. Historically, such integrators have
been unavailable to the Company as customers for its superconductive MRI
magnet systems, notwithstanding the fact that they represent a substantial
portion of the potential market for superconductive MRI magnet systems. The
Company has instead treated these companies as customers or potential
customers for the Company's component products, such as superconductive
wire or cryogenic coolers.
6
Within the market for superconductive MRI magnet systems, the Company has
also seen increased competition from low-field "open" MRI magnet systems,
designed to reduce the feeling of claustrophobia in a patient undergoing
imaging and give medical personnel greater access to the patient during
imaging. While the Company does not currently manufacture such an open MRI
magnet system, such magnet systems have represented one of the fastest
growing segments of the market.
o Superconductive Wires. The single largest market for superconductive wire
is MRI. In fact, most of the superconductive wire manufactured by the
Company is used to manufacture superconductive MRI system magnets (either
internally by its own Magnet Business Group, or externally by other
customers). Regarding its superconductive wire products, the Company
believes that it, Oxford Superconducting Technology and, to a smaller
extent, Supercon, Inc. are the major suppliers of Nb-Ti in LTS wire form
for the domestic market. The Company also believes that these three
companies are the major suppliers of Nb3Sn superconductive materials for
the domestic markets. There are several foreign manufacturers of Nb-Ti
superconductive materials in wire form; none of them has been a
significant factor in the domestic market. Because industry capacity for
Nb-Ti wire is greater than current demand, the Company has seen substantial
pressure on prices. The Company's prices for superconductive materials are
currently competitive, and the Company believes that product quality and
the ability to meet delivery schedules are factors important to its market
position. There are no assurances, however, that the Company can remain
competitive without future price reductions, or that the Company can find
means to offset price reductions with further cost reductions.
o Other Superconductive Magnet Systems. With respect to Other Superconductive
Magnet Systems, the Company has no single identifiable competitor.
Historically, the Company has competed against many different companies
domestically and internationally (including Oxford, which dominates the
worldwide market for NMR magnets) for the opportunity to design and build
non-MRI superconductive magnet systems. The Company expects that
competition for such opportunities will vary on a case to case basis, but
that such competition will generally focus on price and technology. While
the Company believes that it can remain competitive within this area, there
can be no assurances that the Company will continue to be successful.
o RF Coils for MRI Systems. The Company currently believes that the market
for RF coils will grow faster than the market for MRI Systems because : (i)
the number of applications for MRI which use specialized RF coils is
increasing, requiring a higher number of RF coils to be purchased for each
new and existing MRI System; (ii) RF coil technology is being continuously
improved and with an average technology obsolescence rate of approximately
three years, existing coils need to be upgraded to later-generation
products; and (iii) an increasing number of existing MRI Systems are being
upgraded by OEM's, at a much lower cost than replacing an entire MRI
System. A new set of RF coils is typically needed in connection with each
system upgrade.
With respect to RF coils for MRI Systems, the Company's primary competitors
consist of independent manufacturers that make RF coils for sale to MRI
Systems integrators and end-users such as hospitals, clinics and research
facilities. The Company also experiences competition from MRI Systems
integrators that manufacture RF coils for sale with their MRI Systems. All
MRI Systems integrators outsource RF coil development and manufacture to
companies such as MAI, though, to the best of the Company's knowledge,
Siemens and Philips have maintained the most extensive in-house coil
development activities of the major MRI Systems integrators. The reason
that the MRI Systems integrators outsource development and manufacture of
RF coils is that their available technical resources are typically applied
to more demanding tasks, such as designing new MRI Systems and developing
software and hardware upgrades for existing systems. Furthermore, it is
generally felt by the MRI Systems integrators that RF coils can be
outsourced at a
7
lower cost and faster time-to-market than possible with in-house resources.
If the MRI Systems integrators, however, decide to pull all RF coil
development in-house and in doing so change the RF coil/MRI System
interface to narrow the RF coil compatibilities in their favor, the access
to the market for the independent RF coil manufacturers could be
substantially limited. The Company believes, however, that there is only a
remote possibility of this happening because, if they were to make such a
fundamental shift in their strategic approach to RF coils, the MRI Systems
integrators would substantially increase the cost of future hardware and
software upgrades for their existing customers.
With respect to independent manufacturers that make RF coils for sale to
MRI Systems integrators and end users, the Company is aware of only a few
RF coil manufacturers that are independent of MRI System integrators. The
Company believes that, of these companies, only one competes with MAI
against the full product range offered by MAI. All other competitors offer
limited product lines and generally lack an organizational infrastructure
and extensive product development capabilities at this time to compete
across MAI's broad product line at this time.
o Permanent Magnet Products. In the development and manufacture of permanent
magnets for MRI Systems, the principal competitor of the Company's Field
Effects Division is Sumitomo Special Metals Co., Ltd. ("Sumitomo"), a
Japanese company which was the first company to market such magnets
utilizing neodymium boron iron (NdBFe) material. The Company believes that
Sumitomo's primary customer for its permanent magnet products is Hitachi.
The Company believes that patents are not a significant competitive
factor in the conduct of its business in this segment. While the Company does
not have any substantial patent protection in this segment, it directly or
indirectly either owns, or is a licensee under, a number of patents relating to
RF coils, superconductive materials, the manufacture of superconductive
materials, and the permanent magnet systems manufactured by the Field Effects
Division.
Backlog
The Magnetic Products backlog at July 27, 1997 was approximately $22.3
million, compared to approximately $23.7 million on July 28, 1996, and
approximately $33.7 million on July 30, 1995. Approximately 14% and 67% of
this segment's backlog at July 27, 1997 were represented by orders from the
U.S. government or its agencies and Philips, respectively. Most of the July 27,
1997 backlog is expected to be completed in fiscal 1998. However, the amount of
backlog is not necessarily indicative of future revenues because the Company's
backlog in this segment is subject to variations from time to time as products
are manufactured and new orders are received.
Backlog represents orders believed by the Company to be firm on the
date indicated, subject, in certain cases, to future agreement on delivery dates
and technical specifications. Direct contracts with the U.S. government
(including cost-plus contracts) are included in the backlog figures at the
contract amount less amounts previously recognized as revenue. Approximately
$2.6 million of such backlog has not yet been funded by the government. Certain
direct and indirect (as a subcontractor) contracts with the U.S. government have
provisions permitting the government to perform a final audit of such contracts
and possibly seek a downward adjustment of the contract price on the basis of
such audit and also contain provisions permitting termination for the
convenience of the government. Upon such termination, the Company would be
entitled to be compensated for costs incurred, including reasonable termination
costs. Certain of such contracts may also be subject to termination in the event
that more than 5% of the Company's outstanding shares become subject to foreign
ownership.
8
Raw Materials and Inventory
The Company's manufacturing process for superconducting and permanent
magnet systems requires production periods of up to six months. Additionally,
certain materials and parts used in production must be ordered well in advance
of required delivery dates. The Company's investment in inventories for
production of MRI magnet systems is based primarily on production schedules
required to fill existing and anticipated customer orders.
Nb-Ti raw material required for production of Nb-Ti superconductive
wire is purchased from several different sources. The Company has not
experienced substantial difficulty in obtaining such materials.
The Company's Field Effects Division uses primarily permanent magnet
(ferrite) materials. There are several qualified domestic and international
sources for these ferrite materials, but the industry is currently running at
capacity in response to strong demand from the automotive industry. The
principal effect of this strong demand has been to increase the price for
ferrite materials and lengthen the Company's lead time for ordering the
substantial quantities of this material required for its products. In light of
the current low level of demand for its permanent magnet products and efficient
management of its needs, the Company does not at this time believe that the
supply of permanent magnet materials would have a substantial impact on its
business.
The Company's wholly-owned subsidiary, MAI, believes that there are
numerous suppliers at competitive prices for each of the parts, materials and
components that it purchases for the manufacture of its RF coils. The Company
does not currently expect any difficulty in obtaining these parts, materials and
components.
Warranty
The expense to the Company to date for performance of its warranty
obligations has not been significant.
REFRIGERATION PRODUCTS
Principal Products
The Company's subsidiary, APD, produces specialty cryogenic
refrigeration equipment for use in medical diagnostic equipment, laboratory
research and semiconductor manufacturing. The Company's subsidiary, InterCool
Energy Corporation ("ICE"), designs, develops and sells its proprietary
refrigerants.
APD produces five distinct products. First APD produces specialized
shield coolers and recondensers (refrigerators) that reduce or eliminate liquid
helium boil-off during normal operation of conventional superconductive MRI
magnet systems. The Company's Magnet Business Group uses APD refrigerators for
its superconductive MRI magnet systems. In addition, APD sells these
refrigerators to other manufacturers of superconducting MRI magnet systems. APD
licenses Daikin Industries, Ltd. ("Daikin"), a Japanese company, to produce
shield coolers and other cryogenic products for the Japanese market. It has
captured a significant portion of that market for shield coolers.
Secondly, APD produces laboratory cryogenic systems. These systems are
sold to government, university and industrial research laboratories for use in
applications such as spectroscopy, X-ray diffraction and narrow gap magnet
studies, where they are used to reduce the temperatures of materials under
study.
9
These products generate cryogenic interface temperatures ranging from 2 Kelvin
to 77 Kelvin using liquid nitrogen or helium open-cycle transfer systems or
closed-cycle refrigeration systems.
Thirdly, APD manufactures cryopumps, which are used principally in the
semiconductor industry, but have other industrial and research applications. APD
sells cryopumps principally to manufacturers of semiconductor proess equipment.
Through a joint effort with Daikin, APD manufactures and sells the Marathon(R)
line of cryopumps. The product line is tailored for semiconductor processing
equipment and is supported by APD and Daikin with a comprehensive world-wide
sales and service network.
Fourthly, APD also sells a line of specialized cryogenic refrigeration
systems under the registered tradename "CRYOTIGER". These refrigeration systems
are intended to provide refrigeration optimization in the range of 70 Kelvin to
120 Kelvin for a broad range of applications. The first application of CRYOTIGER
systems has been in electronic detector systems. Because the CRYOTIGER line is a
closed-cycle refrigeration system, it competes principally against liquid
nitrogen coolers, which in contrast to the CRYOTIGER line, require the continued
purchase of liquid nitrogen.
Finally, APD recently began selling a line of specialized water pump
systems designed to efficiently draw out water vapor from a vacuum chamber, and
makes use of the Company's proprietary CRYOTIGER technology. An AquaTrap
System(TM) would find application in the same industries served by the Company's
Cryopump products, and in fact the Company targeted the semiconductor industry
for its first sales.
In addition to these cryogenic products made by APD, the Refrigeration
Products segment includes the Company's proprietary refrigerants. The Company
believes that its FRIGC(R) family of environmentally acceptable refrigerants has
broad-based commercial potential to replace ozone-depleting chlorofluorocarbons
("CFC's") currently being used as refrigerants. In June, 1995, the Company
created a new subsidiary, InterCool Energy Corporation ("ICE") through which it
pursues commercialization of FRIGC refrigerants.
ICE's FR-12(R) refrigerant is the first commercial product from its
FRIGC family of refrigerants. ICE markets FR-12 refrigerant for use as a
replacement for R-12 (also known as CFC-12) for mobile air conditioning
applications and stationary refrigerant applications.
ICE has made significant progress with respect to commercializing FRIGC
FR-12 refrigerant. ICE successfully obtained final EPA listing of FRIGC FR-12
refrigerant as an acceptable substitute for R-12 in mobile air conditioning
applications effective as of July 13, 1995, and as a replacement for R-12 in
certain stationary applications in November, 1995. In this regard, FR-12
refrigerant met or exceeded the EPA's listing requirements, including proof that
FR-12 refrigerant meets ozone depletion and global warming targets, and that
FR-12 refrigerant is neither toxic nor flammable with respect to the conditions
under which it is used. Use of FR-12 refrigerant is nonetheless subject to
certain standard conditions (for example, the use of special fittings and labels
which are required for all refrigerants in mobile applications) to prevent
unintended mixing of different refrigerants and facilitate recovery of
refrigerants for recycling.
In June, 1995, the U.S. Patent Office issued to ICE a patent, which
broadly protects FRIGC FR-12 refrigerant, and covers the specific formula
accepted for listing by the EPA. ICE is currently pursuing foreign protection in
targeted markets.
Notwithstanding ICE's significant progress to date in initiating
commercializing FRIGC FR-12 refrigerant, there can be no assurances that FRIGC
FR-12 will win wide-spread acceptance in the market or otherwise prove a
commercial success.
10
Marketing
The Company markets its MRI products in this segment through a direct
sales force based in APD's Allentown, Pennsylvania headquarters, APD's West
Coast office in Sunnyvale, California and a European office near Reading,
England. APD also markets its laboratory systems and cryopump products through
scientific and medical equipment sales representatives and distributors. APD
also has a world-wide partnership with Daikin pursuant to which the parties sell
common cryopumps under the "Marathon" trademark in well-defined territories.
CRYOTIGER refrigeration systems are sold through APD's direct sales force, as
noted above, and through scientific equipment sales representatives.
With respect to FRIGC Refrigerants, ICE has begun an advertising
campaign to increase awareness and direct sales FRIGC FR-12 refrigerant among
mobile air conditioning installers nationwide. As a part of the campaign, ICE
has also sought to increase brand awareness among consumers through direct mail
and general advertising. Nonetheless, because it does not have extensive
experience distributing and selling refrigerants, ICE continues to pursue its
strategy of securing, nationally and internationally, distributors with
significant experience in relevant consumer and other end-user markets. In
September, 1995, ICE signed Pennzoil Products Company ("Pennzoil") as the
exclusive North American Master Distributor for mobile applications and certain
stationary markets. In March, 1997, the Company and Pennzoil agreed to change
Pennzoil's distributorship from exclusive to non-exclusive. The change permits
the parties to accelerate commercialization of FRIGC FR-12 refrigerant in North
America by allowing the Company to sign up directly additional distributors for
its products. The Company has been pursuing such additional distributors since
that time. Internationally, the Company signed Sumitomo Corporation of America
as the distributor for certain Asian-Pacific markets. Specifically, the
Agreement covers China, Japan, Malaysia, Korea, Taiwan, Philippines, Indonesia,
Singapore, Australia, New Zealand and Thailand. ICE has signed other
international distributors, and has made sales of FRIGC FR-12 refrigerant in the
Middle East. ICE is continually working to identify qualified distributors for
new and existing territories.
Competition/Market
The Company's Refrigeration Products are subject to substantial
competition within each of the markets for its principal products. The Company
considers its principal competitor in the manufacture of recondensers and shield
coolers to be Leybold AG ("Leybold"). Leybold is headquartered in Germany, and
has sold substantially more recondensers and shield coolers than the Company.
Moreover, Leybold has greater production capacity and financial resources than
the Company, and has successfully locked up many of APD's potential customers in
multi-year supply agreements. The Company nonetheless believes that it can
compete with Leybold on both technological and cost bases.
With respect to laboratory cryogenic systems, the Company has no single
identifiable competitor. Historically, the Company has competed against many
different companies, domestically and internationally. The Company generally
competes in this area on the basis of price and product quality.
With respect to Cryogenic Vacuum Pumps (Cryopumps), the Company
believes Helix Technology Corporation ("Helix") (which markets its products
under the names "CTI Cryogenics" and "CTI") to be the world leader in marketing
cryopumps. The Company believes that Helix controls 80% or more of the world
market for cryopumps. Notwithstanding Helix's market predominance, the Company
believes that it can compete with Helix on technological and equipment
performance bases.
The CRYOTIGER line is based upon proprietary technology recently
developed and patented by APD. The Company feels that there is a significant
opportunity for this product in the marketplace. CRYOTIGER refrigeration systems
presently compete against certain closed-cycle machines, known as Stirling
refrigerators, which the Company believes are more costly and less reliable than
its CRYOTIGER product. Additionally, CRYOTIGER refrigerators, which are
closed-cycle refrigeration systems, compete
11
principally against open-cycle coolers that rely on reservoirs of liquid
nitrogen which must be replenished periodically. Consequently, although the
initial purchase price for a CRYOTIGER refrigerator may exceed the price of a
comparable liquid nitrogen cooler, this higher initial cost will be offset by
lower operating and maintenance costs and greater ease of use.
AquaTrap Systems are based principally on the Company's proprietary
CRYOTIGER technology, and are protected by U.S. patents and other foreign
patents are pending. The Company sees its single largest competitor as CTI. CTI
dominates the market for cryopumps, and it makes a water pump compatible with
its cryopump. Another significant competitor is Ebara Technologies, Inc. which
sells an integrated turbopump and water pump. Nonetheless, the Company believes
that the superior performance of its water pump, coupled with its compact design
and ease of installation and operation, will enable it to compete effectively.
With respect to the mobile applications for FRIGC refrigerants, most
post-1994 automobile air conditioning systems have been designed for use with
R-134a refrigerant (also known as HFC-134a). R-134a, however, cannot be used in
most pre-1994 R-12 automotive air conditioning systems without substantial
changes - changes not required for use of the company's FRIGC FR-12 refrigerant.
Although this market for pre-1994 automobile air conditioning systems is finite
in nature, ICE believes that by entering this market now it will gain valuable
experience and name recognition that will greatly facilitate future
commercialization of other FRIGC refrigerants for other applications. ICE also
believes that this market opportunity could prove significant in future years as
production of R-12 in the United States ceased after December 31, 1995, and
existing stockpiles of R-12 may become depleted over the next several years.
There are other alternative refrigerants offered by competitors as substitutes
for R-12, but ICE does not currently view these alternatives as posing a
significant competitive threat. ICE currently believes that its most significant
competitive challenges are posed by the cost and availability of R-12, and low
cost (incomplete or "dirty") retrofit kits to adapt mobile air conditioning
systems from R-12 to the use of R-134a.
R-12 is also used in many stationary applications such as commercial
refrigeration and air conditioning equipment, ice machines and food chillers.
ICE believes that FR-12 refrigerant may also find market acceptance in one or
more of these applications. However, there are other alternative refrigerants
currently or soon to be marketed as R-12 substitutes in these stationary
applications, and there are no assurances that ICE's FR-12 will succeed in
winning any significant portion of these markets.
Backlog
Due to the relatively short production cycle, the Company does not
consider backlog to be material to an understanding of the Refrigeration
Products business.
Raw Materials and Inventory
For its cryogenics products, APD purchases certain major components for
its products from single sources, but the Company believes alternate sources are
available. APD generally maintains a sufficient inventory of raw materials,
assembled parts, and partially and fully assembled major components to meet
production requirements.
With respect to its refrigerant products, on May 11, 1995, ICE signed
an agreement with Schenectady International, Inc. ("SII") for the manufacture of
FR-12 refrigerant. ICE believes that the agreement with SII, a privately held,
multinational chemical company with thirteen (13) manufacturing facilities in
ten (10) countries, will assure a quality supply of FR-12. SII's ability to
supply commercial quantities of FR-12 refrigerant, however, will depend on the
availability of certain raw materials, which are manufactured by a small number
of companies. On March 7, 1997, SII announced that it had secured an agreement
with AlliedSignal, a major chemical production company, for the supply of FRIGC
FR-12
12
refrigerant. AlliedSignal is a world leader in the production and supply of
environmentally safer CFC substitutes for refrigeration, air conditioning, foam
insulation, sterilization and precision cleaning applications.
Warranty
The expense to the Company to date for the performance of its warranty
obligations has not been significant.
RESEARCH AND DEVELOPMENT
General Research and Development
The Company believes its research and development activities are
important to its continued success in new and existing markets.
Externally-funded development programs have directly increased sales of design
services and products and, at the same time, assisted in expanding the Company's
technical capabilities without burdening operating expenses. Under many of the
Company's government contracts, the Company must share any new technology
resulting from such contracts with the government, which would include the
rights to transfer such technology to other government contractors; however, the
Company does not currently expect such rights to have a material adverse effect
on it.
Previously, a substantial portion of research and development
expenditures had been covered by external funding, principally from the U.S.
government. In fiscal 1997, approximately 47% of total research and development
activities were paid by such external programs compared to approximately 56% and
53% in fiscal years 1996 and 1995, respectively. During fiscal years 1997, 1996
and 1995, product research and development expenses, including those of the
Refrigeration Products segment, were $13,012,000, $11,678,000 and $10,544,000,
respectively. The Company expects total research and development expenditures to
continue to increase in absolute dollar amounts, but the percentage of these
activities funded by external sources to decrease.
The Company believes that, apart from continued reductions in federal
spending on research and development, two other trends will limit external
funding from U.S. government sources. First, and especially in the context of
HTS technology, government contracts are emphasizing cost-sharing, which
requires the awardee to contribute 20% to 50% of the total cost of the
development effort. This cost-sharing requirement may limit the Company's
reliance on the government as a significant source of research and development
funds.
Second, the Company's continued growth has now placed it outside the
definition of a "small business" for certain government-sponsored research and
development programs for small businesses, such
13
as Small Business Innovation Research ("SBIR") grants. "Small businesses" are
defined, for this purpose, as concerns which employ fewer than 500 employees. .
During its fiscal year 1995, the Company won SBIR grants totaling approximately
$5,004,000, all of which will be completed even though the Company is no longer
eligible for new SBIR grants.
The Company can experience, in any given year, significant increases or
decreases in external funding depending on its success in obtaining funded
contracts.
New Product Development: HTS
The Company believes that HTS materials in the form of Wire/Tape may,
in the future, have a substantial impact on commercial markets and applications
for superconductors. In particular, the Company believes HTS materials could be
suitable for larger scale, specialized electric power applications and high
field magnets in five to ten years, depending upon further advances. The
Company's activities in this area have been funded primarily through
government-supported research and development programs, including joint research
agreements.
The Company's research and development activities are focused on: (1)
converting HTS materials into usable Wire/Tape with acceptable current
densities, and (2) creating devices and equipment based upon such Wire/Tape.
Because the Company believes that its expertise in processing LTS
materials into wire and tape is applicable to the processing of HTS materials,
the Company has focused its efforts on the development of HTS Wire/Tape. The
Company does not currently conduct substantial research and development on the
use of HTS materials in the form of thin films, but relies instead on pursuing
strategic alliances with some of the national laboratories. Additionally,
although the Company has done some basic research on identifying new HTS
materials, the Company does not believe it currently has the resources to make a
meaningful contribution in the highly competitive and costly endeavor of
identifying new HTS materials.
The Company has continued to develop applications of HTS materials and
advanced devices in partnership with various utilities, manufacturers and
government laboratories, including a 1 MVA HTS transformer, a 15-KV HTS Fault
Current Limiter, HTS pick-up coils for low field MRI and high field NMR systems,
and HTS flux trap high field insert magnets for NMR spectrometers. All of these
products are in the development stage, and as yet remain technologically and
economically unproven. The Company has established a dedicated facility for the
manufacture of Bismuth-based HTS tape for use in sufficient quantities to
develop these prototype devices.
The Company does not believe its current operations depend upon
successful market acceptance of HTS-based products or devices, nor are the
Company's continued operations necessarily dependent on its success in the HTS
marketplace even if HTS-based products or devices do become commercially viable.
However, if technical problems are solved and HTS materials become feasible for
commercial applications in fields in which the Company competes, then the
Company could be adversely affected unless it is able to develop products or
devices using HTS materials. Accordingly, while representing a relatively
high-risk, long-term investment of its resources, the Company perceives HTS
technology as an important future commercial opportunity of significance.
Consequently, the Company expects to continue to work in this area.
Because of the perceived high commercial potential of HTS materials,
HTS research is a highly competitive field, and currently involves many
commercial and academic institutions that may have more substantial economic and
human resources to devote to HTS research and development than the Company.
14
In addition, due to the proliferation of patents and patent applications, there
can be no assurance that the Company will be able to compete effectively in this
area due to the potential patent position of competitors.
New Product Development: SMES
The Company is seeking to participate in the commercial opportunity for
superconductive magnetic energy storage ("SMES") systems. A SMES system acts as
an electro-magnetic storage system that protects critical electrical power loads
from interruptions, spikes and sags. End users currently minimize power
interruptions through use of Uninterruptible Power Supplies ("UPS"), which may
use hundreds or even thousands of conventional lead acid batteries per system,
require costly maintenance, and present an environmental hazard upon disposal.
By contrast, a SMES System is more energy efficient has a life of more than 20
years, and is environmentally friendly. The Company is pursuing a two pronged
strategy to participate in the potential commercialization of SMES applications.
First, it is developing a micro -SMES unit internally under a contract it won in
fiscal year 1996 to build a micro SMES system for the U.S. Air Force. Secondly,
the Company was selected by Babcock & Wilcox to supply a large quantity of
superconductor for its first mid-sized SMES unit. The Company understands that
Babcock & Wilcox is currently negotiating with its first, prospective customer -
Anchorage Municipal Light & Power. The unit's primary function would be to
correct for transmission and generation disturbances along Alaska's utility
grid. Because significant issues remain to be resolved between Babcock & Wilcox
and its customer, there can be no assurances that this contract will ultimately
be funded or that the company will actually have the opportunity to supply the
superconductor.
While the potential SMES market appears substantial, there can be no
assurances that the market will develop or that the Company will be able to
successfully build on its entrance into that market. Additionally, the Company
faces other competitors interested in the SMES market, some of which may have
superior resources and patent positions.
New Product Development: Refrigerants
ICE currently expects that, over the long run, it will introduce other
refrigerants from its FRIGC family of refrigerants for other carefully targeted
market opportunities. ICE believes that its refrigerant technology - which is an
outgrowth of its expertise in cryogenic technology - may give it a superior
insight into refrigerant design and more flexibility in designing refrigerating
hardware. Nonetheless, many other companies and research facilities currently
are working to identify environmentally acceptable alternatives to the existing
CFC- and HFC-based refrigerants. Many of these companies are larger, better
financed, better staffed and more experienced in the refrigerant business than
ICE. There can be no assurances that ICE's future refrigerants will meet all
relevant regulatory and commercial requirements or that they will be accepted in
the market.
Moreover, ICE's success in developing and commercializing FRIGC
refrigerants and associated technology will depend on its continued ability to
obtain patents, maintain trade secret protection and operate without infringing
on the proprietary rights of third parties. ICE expects to continue filing
additional patent applications relating to its new refrigerant technology in the
near future. No assurance can be given that any additional patents will issue
with respect to patent applications filed or to be filed by ICE. Furthermore,
even if such patents issue, there can be no assurance that any issued patents
will protect against competitive products or otherwise be commercially valuable.
New Product Development: Low-cost, Permanent Magnet-Based MRI Systems
The Company has been working through its Field Effects Division with
SMIS (see "Investments Surrey Medical Imaging Systems Limited", below) to
develop a low-cost, permanent magnet-based MRI System. In May, 1996, the Company
formally entered a joint venture with SMIS through the formation of a limited
15
liability company, IMiG MRI Systems LLC ("IMiG LLC"). Under the joint venture
agreement, the Company owns a 90% percent share of IMiG LLC and the balance is
owned by SMIS.
IMiG LLC will market products developed jointly by the parent
companies, including a permanent magnet-based MRI system for clinical diagnostic
use. In fiscal year 1997, IMiG LLC won FDA approval of this system for sale as a
medical diagnostic device in the U.S. market. IMiG LLC believes that FDA
approval will also help it market this system in non-U.S. markets. While IMiG
LLC believes that it has developed a product which is especially attractive in
certain niche markets by virtue of its relatively low purchase, operating and
maintenance costs, there can be no assurance that it will be able to compete
successfully in markets which have until now been largely dominated by the major
MRI systems integrators referenced earlier. At the end of fiscal year 1997, the
Company had an installed base consisting of one system installed in a hospital
in the UK, for clinical demonstration purposes, and one system installed in a
hospital in Russia.
New Product Development: MR-Based Materials Inspection Systems
The Company has been working with SMIS (see "Investments - Surrey
Medical Imaging Systems Limited", below) to develop materials inspection systems
("Inspection System") using Magnetic Resonance ("MR") technology. The Inspection
System employs magnetic resonance to examine various product or material
parameters for quality assurance and/or process control purposes. The Company
sees the need for such a non-destructive inspection system stemming from the
unrelenting drive for improved productivity, higher product quality and greater
product yield in nearly all manufacturing industries worldwide. The Company
believes that Inspection Systems based on MR may be well suited for a variety of
industries, including food and beverages, plastics and rubbers, petrochemicals,
ceramics, explosives and narcotics, fuel propellants and even timber.
The Company has already developed and sold one Inspection System for
food quality, and has received an order for a second. This Inspection System is
a "100% inspection system", meaning that it can inspect all product coming off a
single line. This Inspection System can inspect food cartons - containing
multiple packages of product - at the rate of one carton every six seconds, on a
24 hour-a-day, 7 day-a-week basis with a high degree of sensitivity.
Successful sales of Inspection Systems will depend on a variety of
factors. Most significantly, the Company must find a cost effective means of
tailoring each Inspection System to meet the highly specific needs of each
application. This tailoring process may include both the magnet (which in the
system already sold, was developed and manufactured by the Company through Field
Effects) but also the electronic hardware and software components currently made
by its partner SMIS. Additionally, given the relatively high cost of the
critical components of an Inspection system, the Company must work hard to find
and gain entree to markets in which the additional value-added provided by the
highly accurate Inspection System exceeds the capital and operating cost of such
a System. There can be no assurances that the Company can successfully meet
these challenges.
INVESTMENTS
ULTRALIFE BATTERIES, INC.
The Company owns 975,753 shares of the common stock (approximately 12%
of the outstanding common stock) of Ultralife Batteries, Inc. ("Ultralife"),
acquired at a cost of $7,015,000.. Headquartered in Newark, N.Y., Ultralife
produces lithium batteries that are the same size and voltage as standard
batteries, but have double the operating life and a longer shelf life (up to 10
years) than alkaline or zinc carbon batteries. These batteries currently command
a premium price in the market for long-life batteries.
16
Ultralife focuses on markets which require increased energy density and
extended shelf life. The Company is represented on Ultralife's Board of
Directors.
Ultralife's common stock is traded on the NASDAQ National Market System
under the symbol ULBI. The market value of the Company's total investment in
Ultralife, the sale of which is restricted under US securities laws, was
$10,123,000 and $14,636,000 at May 25, 1997 and May 26, 1996, respectively.
During fiscal year 1996, the Company sold, in a series of transactions, 85,000
shares of its Ultralife holdings on which it reported an aggregate gain of
$1,414,000. The Company sold no shares of its Ultralife holdings in its fiscal
year 1997. The Company may in the future sell additional Ultralife shares as
market conditions warrant.
SURREY MEDICAL IMAGING SYSTEMS LIMITED
As of July 31, 1997, the Company owns 354,223 of the outstanding
ordinary shares (approximately 23%) of Surrey Medical Imaging Systems Limited
("SMIS"), acquired at a cost of $3,530,000. The Company adopted the equity
method of accounting for its investment during the first quarter of fiscal 1996.
The acquisition cost exceeded the underlying equity in net assets by $3,298,000,
which is being amortized over a period of 40 years. At May 25, 1997 and May 26,
1996, accumulated amortization was approximately $165,000 and $82,000. As SMIS
is privately held, the market value of this investment is not readily
determinable.
In addition, the Company purchased 980,000 redeemable preference shares
of SMIS during the year ended May 26, 1996 at a cost of $1,511,000. These shares
are non-voting unless SMIS is unable to attain certain specified financial
targets. These preference shares are redeemable on the earlier of October 31,
1997 or the date of a public offering. Additionally, these preference shares
carry a cumulative redemption premium of 15% per annum. The purchase of the
preference shares included the acquisition of an option to purchase an
additional 2.5% of the ordinary shares of SMIS at a price of approximately $6
per share.
During the year ended May 25, 1997, the Company provided approximately
$972,000 of additional funding in the form of convertible notes to SMIS. The
notes are non-interest bearing until February 27, 1998, and thereafter bear
interest at the rate of 15% per annum. They are immediately repayable, with
accrued interest, in the event of certain conditions as outlined in a related
note agreement, and are redeemable by SMIS at any time. The noteholders may
require redemption at any time after February 26, 1998. The noteholders have the
right at any time prior to redemption, to convert the notes plus accrued
interest into capital stock of SMIS.
In July, 1997, the Company committed to participate with other
shareholders of SMIS in extending to SMIS through March, 1998 a line of credit
aggregating 1 million British Pounds. Any outstanding principal under the line
of credit bears interest at the rate of 11% per annum. Interest and principal
are due and payable on March 31, 1998, but may be prepaid by SMIS with no
penalty. The Company's share of the line of credit is 740,000 British Pounds, of
which 370,000 British Pounds (approximately $609,000 based upon conversion rates
applicable at the time) has already been advanced.
Located in Guildford, England, SMIS focuses on developing and
marketing electronics and software for MRI and nuclear magnetic resonance
spectroscopy applications. It also supplies equipment using X-ray and gamma-ray
Computerized Tomography ("CT") and Ultrasonics for use in non-destructive
testing of a variety of materials.
The Company believes that complete magnetic resonance system products
can be built by combining SMIS' systems electronics and software with the
Company's magnet systems. In this way,
17
the Company and SMIS are able to address certain niche markets in both the
clinical and industrial sectors which would be largely unavailable to the
parties separately. The recently formed joint venture, IMiG LLC, is one such
example. (See "Research And Development - New Products: Low-cost, Permanent
Magnet-Based MRI Systems" above.) Further, access of each party to a broader
customer base, and augmented market intelligence, are expected to provide a
greater sales potential for each of the parties' products individually. To date,
the parties have collaborated on a variety of different opportunities including
a successful joint bid to develop and sell a non-destructive MR Inspection
System for food analysis.
PERSONNEL
On May 25, 1997, the Company employed 537 people.
Within the Magnetic Products segment, the production and maintenance
employees of the Company's IGC-AS Division, which is located in Waterbury,
Connecticut, are represented by the United Steelworkers of America ("United
Steelworkers"). The Company and the United Steelworkers negotiated a five year
collective bargaining agreement, effective May 31, 1993. Within the
Refrigeration Products segment, the production employees of the Company's
subsidiary, APD, which is located in Allentown, Pennsylvania, are also
represented by a labor union, the International Association of Machinists and
Aerospace Workers ("IAMAW"). The collective bargaining agreement between the
Company and IAMAW was to expire on August 22, 1997, but was recently extended to
October 10, 1997.. Although the Company and the IAMAW have begun negotiating a
new contract, there are no assurances that such a contract can be negotiated
before the expiration of the existing agreement.
There is great demand for trained scientific and technical personnel,
and the Company's growth and success will require it to attract and retain such
personnel. Many of the prospective employers of such personnel are larger and
have greater financial resources than the Company and may be in a better
position to compete with the Company for prospective employees.
18
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are:
Name Position Age
- ---- -------- ---
Carl H. Rosner Chairman of the Board of Directors, 68
and Chief Executive Officer
Glenn H. Epstein President and Chief Operating Officer 39
Michael C. Zeigler Senior Vice President- Finance 50
& Chief Financial Officer
Leo Blecher Magnet Business Group - Vice President 51
and General Manager
Gary L. Hamilton InterCool Energy Corporation - 47
Senior Vice President and General Manager
Ian L. Pykett Technology Development Operations 44
- Vice President
Robert S. Sokolowski IGC-AS - Vice President, 44
General Manager
Richard J. Stevens President, MAI 55
Bruce A. Zeitlin Corporate Vice President, 54
APD Cryogenics Inc. - General Manager
A principal founder of the Company, Mr. Rosner has been Chairman of the
Board of Directors of the Company since the Company's formation in 1971 and
before that headed the Superconductive Products Operation of GE. Mr. Rosner also
serves as the Company's Chief Executive Officer.
Mr. Epstein was named President and Chief Operating Officer on May 5,
1997. Prior to joining the Company, Mr. Epstein worked for Oxford Instruments
Group, plc in various capacities between 1986 and April, 1997. He most recently
held the position of President of the Nuclear Measurements Group, Inc., a
wholly-owned subsidiary of Oxford Instruments, Plc. Mr. Epstein also worked for
the General Electric Company between 1981 and 1986.
Mr. Zeigler was appointed Senior Vice President-Finance and Chief
Financial Officer of the Company in September 1993. He previously served as Vice
President-Finance and Chief Financial Officer of the Company from June 1987
until his appointment as a Senior Vice President, and served as the Company's
Controller from June 1985 through June 1987.
Mr. Blecher was appointed Magnet Business Group - Vice President and
General Manager in December, 1996. He previously held the title of Deputy
Manager of the Magnet Business Group. He originally joined the Company in 1988
as Manager of Technology Projects. Prior to joining the Company,
19
Mr. Blecher held various positions of responsibility with Israel Aircraft
Industry, most recently holding the title of Manager -Engineering and Project
Manager, for the Space Technology Division.
Mr. Hamilton, formerly Hordeski, was appointed InterCool Energy
Corporation - Senior Vice President and General Manager in February, 1995. Prior
to that appointment, Mr. Hamilton served as APD Cryogenics Inc. - Vice President
and General Manager since 1990. Before joining the Company, he was employed by
Leybold Vacuum Products, Inc. from 1982 to 1990, most recently as Vice President
of Marketing.
Dr. Pykett was appointed Technology Development Operations - Vice
President in 1991. Prior to joining the Company, he had been President and Chief
Executive Officer of Advanced NMR Systems, Inc., a diagnostic imaging company he
co-founded in 1983.
Dr. Sokolowski was appointed Vice President and General Manager of the
Company's IGC-Advanced Superconductors division in February, 1996. Dr.
Sokolowski served as the Company's Manager of High Temperature Superconductor
Operations, a part of the Company's Technology Development Operations, between
November, 1992 and February, 1996.
An original founder of MAI, Mr. Stevens has been its President since
its founding in 1985. Prior to founding, 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, and held the title of
Manager of Computed Tomography Marketing in the Medical Systems Group from 1981
to 1985.
Mr. Zeitlin has been employed by the Company in various capacities
since 1974. He was responsible for marketing superconductive materials between
1982 and 1996, and became Vice President-Materials Technology of the Company in
1985. Mr. Zeitlin has also headed the Company's superconductive materials
operations (now IGC-AS) between 1987 and February, 1996. In February, 1996, Mr.
Zeitlin was appointed Corporate Vice President and APD Cryogenics, Inc. -
General Manager.
ITEM 2. PROPERTIES.
The Company's corporate offices, Magnet Business Group and HTS offices
are located in 145,810 square feet of space located in Latham, New York (the
"Latham Facility"). The Company owns the Latham Facility, which is subject to a
$6.5 million mortgage bearing interest at the rate of 7.5%, and maturing in May,
2001.
The Company's HTS Laboratory is located in 19,000 square feet of leased
space located in Cohoes, New York. The lease is a three (3) year lease that
expires on January 31, 2000, with two consecutive three year renewal terms.
The Company's production facilities for superconductive materials are
located in Waterbury, Connecticut in premises of approximately 212,700 square
feet (of which 57,900 square feet are presently being used) pursuant to a thirty
year prepaid lease which expires in December, 2021. The facility's equipment
includes a drawbench with a pulling force of up to 150,000 pounds and a length
of approximately 400 feet. The Company believes that this drawbench is one of
the largest in the world.
The Field Effects Division currently operates out of premises, shared
with IMiG MRI, LLC, totaling 21,906 square feet in Tyngsboro, Massachusetts. The
facilities are subject to a five year lease expiring in the fall of 2001.
20
APD operates out of a building, which it owns, in Allentown,
Pennsylvania totaling 56,550 square feet.
MAI leases approximately 17,000 square feet in a building located in
the Milwaukee County Research Park's Technology Innovation Center. Approximately
8,500 square feet are used for office space with the remaining space dedicated
to lab, assembly, shipping and material storage. The lease expires in September,
1998 and may be renewed for a successive one year term. The Company currently
believes that it will be able to renew this lease. The Company believes that MAI
has sufficient room to expand in this facility to meet its currently projected
needs through the balance of the lease term.
The Company believes its facilities are adequate and suitable for its
current and near-term needs.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor any of its subsidiaries is a party to any
material legal proceeding.
To the Company's knowledge, no director, officer, affiliate of the
Company, holder of 5% or more of the Company's Common Stock, or associate of any
of the foregoing, is a party adverse to, or has a material interest adverse to,
the Company or any of its subsidiaries in any proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the American Stock Exchange
under the symbol IMG. The high and low sales prices of the Common Stock for each
quarterly period for the last two fiscal years, as reported on the American
Stock Exchange, are shown below.
Closing Prices(1)
-------------------------------
High Low
---- ---
Fiscal Year 1996
Quarter Ended August 27, 1995 $ 18 5/8 $ 13 1/2
Quarter Ended November 26, 1995 20 16
Quarter Ended February 25, 1996 24 3/4 17 1/4
Quarter Ended May 26, 1996 19 3/4 14 1/2
Fiscal Year 1997
Quarter Ended August 25, 1996 $ 18 5/8 $ 13 1/8
Quarter Ended November 24, 1996 14 7/8 12 7/8
Quarter Ended February 23, 1997 13 5/8 11 1/8
Quarter Ended May 25, 1997 12 1/4 7 3/4
- ----------
(1) The closing prices have been adjusted to reflect a two percent stock
dividend distributed on August 22, 1996 to stockholders of record on August
1, 1996, rounded to the nearest $1/8, and a two percent stock dividend to
be distributed on September 16, 1997 to stockholders of record on August
26, 1997, rounded to the nearest $1/8.
There were 1,926 holders of record of Common Stock as of August 7,
1997. The Company has not paid cash dividends in the past ten years, and it does
not anticipate that it will pay cash dividends or adopt such a cash dividend
policy in the near future. The Board of Directors of the Company has declared a
policy of granting annual stock dividends where, and to the extent that, the
performance of the Company warrants such a declaration. Under the Company's bank
agreements, prior bank approval is required for cash dividends in excess of the
Company's net income for the year to which the dividend pertains.
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 hereto.
(Dollars in Thousands, Except Per Share Amounts)
----------------------------------------------------------------------------------
For the Fiscal Year Ended May 25, 1997 May 26, 1996 May 28, 1995 May 29, 1994 May 30, 1993
------------ ------------ ------------ ------------ ------------
Net sales $87,052 $88,467 $83,877 $51,238 $56,308
Total revenue 90,013 94,019 85,747 52,257 57,295
Cost of products sold 61,022 66,188 60,174 34,894 40,030
Income before income taxes 4,035 6,882 6,512 2,099 3,901
Net income 2,615 4,427 4,007 2,148 3,140
Per primary share:
Income before
cumulative effect of
accounting change 0.21 0.35 0.34 0.11 0.30
Cumulative effect of
accounting change 0.07
Net income
0.21 0.35 0.34 0.18 0.30
---- ----
At End of Fiscal Year 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Working capital $49,346 $53,642 $52,655 $49,339 $19,601
Total assets 115,989 112,397 103,706 93,787 58,359
Long-term debt
(net of current maturities) 29,105 29,364 39,807 39,859 4,991
Retained earnings (deficit) (1,643) (1,727) (2,495) (2,595) (2,735)
Shareholders' equity 73,087 67,296 53,305 46,935 41,765
- ------------------
(a) Income per primary share has been computed during each period based on the
weighted average number of shares of Common Stock outstanding plus dilutive
common stock equivalents (where applicable).
(b) The Company did not pay a cash dividend on its Common Stock during any of
the periods indicated.
(c) Net income per primary share has been restated to give effect to the 2%
stock dividend declared July 22, 1997, the 2% stock dividend distributed in
August, 1996, the five-for-four stock split effected September 8, 1994, and
the 3% stock dividends distributed in September, 1993, and June, 1995.
(d) Net income for the fiscal year ended May 29, 1994 reflects the cumulative
effect of an accounting change in the amount of $888,000 or $.07 per
primary share.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY
The following tables set forth, for the periods indicated, the
percentages which certain items reflected in the financial data bear to total
revenues of the Company and the percentage change of such items from period to
period. See the Consolidated Financial Statements, located elsewhere in this
report, for financial information to which the percentages set forth below
relate.
Period to Period
Relationship to Total Revenues Increase (Decrease)
-------------------------------------------- --------------------------
Fiscal Year Ended Fiscal Years
-------------------------------------------- --------------------------
May 25, May 26, May 28, 1996- 1995-
1997 1996 1995 1997 1996
------------ ------------ ------------ ----------- -----------
Net sales 96.7% 94.1% 97.8% (1.6%) 5.5%
Other revenue 3.3 4.4 2.2 (28.4) 121.3
Realized gain on sale
of marketable securities -- 1.5 -- ** **
------- ------- -------
Total revenue 100.0 100.0 100.0 (4.3) 9.6
Costs and expenses:
Cost of products sold 67.8 70.4 70.2 (7.8) 10.0
Product research and
development 7.6 5.4 5.8 35.0 1.4
Marketing, general and
administrative 17.6 13.3 13.2 26.7 10.9
Interest and other
expense 2.3 2.8 3.2 (20.5) (5.6)
Equity in net loss of
unconsolidated affiliate 0.2 0.8 -- (75.7) **
------- ------- -------
95.5 92.7 92.4 (1.3) 10.0
------ ------ ------
Income before income
taxes 4.5 7.3 7.6 (41.4) 5.7
Provision for income
taxes 1.6 2.6 2.9 (42.2) (2.0)
------- ------- -------
Net income 2.9% 4.7% 4.7% (40.9%) 10.5%
======= ======= =======
- --------------------
** Not applicable for purposes of this table.
24
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 1998 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 filings with the Securities and
Exchange Commission.
RESULTS OF OPERATIONS -- FISCAL 1997 and FISCAL 1996
Consolidated
Consolidated revenue decreased 4.3% in fiscal 1997 compared to an
increase of 9.6% in fiscal 1996. In fiscal 1997, increases in sales of both
magnet systems and refrigeration products were offset by a substantial reduction
in sales of superconducting materials. Additionally, revenues in fiscal 1996
included much higher royalty and interest income, and a $1,414,500 gain on the
sale of an investment. These factors, together with a substantial increase in
sales of Refrigeration Products, accounted for the revenue increase in fiscal
1996.
As a percentage of net sales, gross margins, which had declined in
fiscal 1996, recovered in fiscal 1997. The 1997 increase was due to continuing
cost-reduction efforts and a more favorable product mix, partially offset by
yield losses in the wire operation and substantial competitive pressure on
selling prices for magnets and superconducting materials. In fiscal 1996, these
last two factors, together with rework costs associated with certain new
Refrigeration Products and slower than planned magnet production costs
reductions, accounted for the lower gross margin.
Looking forward, the Company expects greater sales and earnings in
fiscal 1998. This expectation is based on the following assumptions, among
others:
-the market for MRI systems continues to grow;
-the Company can successfully contend with continued competitive
pressure on selling prices in the MRI marketplace;
-anticipated sales of refrigerants occur; and,
-reductions in production costs in both business segments continue. In
addition, fiscal 1998 will include the operations of Medical Advances, Inc.
("MAI") for the full year. MAI was acquired in March, 1997 as described in
"Liquidity and Capital Commitments"
Company-funded product research and development expenses increased 35%
in fiscal 1997 with increased spending in all business segments. These expenses
had increased slightly in fiscal 1996. These spending trends are due to the fact
that the Company's average employment level increased in fiscal 1996 to the
point where it no longer qualified as a small business and thus was no longer
eligible for certain government funded research awards. In the absence of these
funding sources, the percentage of internally funded research and development
expenses has increased.
Marketing, general and administrative expenses grew 26.7% in fiscal
1997 compared with growth of 10.9% in fiscal 1996. This was due primarily to the
creation of two separate organizations: InterCool Energy Corporation in fiscal
1996, and, IMiG MRI, LLC (IMiG), a joint venture with Surrey Medical Imaging
Systems Limited ("SMIS"), in fiscal 1997. ICE's purpose is to develop and market
FRIGC(R) refrigerants. IMiG was formed to commercialize a new, low-cost
permanent magnet-based magnetic resonance imaging system. Additionally, fiscal
1997 reflects the inclusion of MAI's expenses from the date of its acquisition
in March, 1997.
Interest expense was lower in both fiscal 1997 and fiscal 1996 due to
the conversion of $8,375,000 of the Company's convertible, subordinated
debentures in September, 1995 and the repayment of $2,167,000 of installment
notes in December, 1996.
25
During the first quarter of fiscal 1996, the Company made an additional
investment in SMIS, bringing its ownership to approximately 23%. SMIS is a UK
Company engaged in the manufacture and sale of electronics and software for
magnetic resonance imaging and nuclear magnetic resonance spectroscopy
applications. Due to its increased ownership, the Company adopted the equity
method of accounting for its investment. As a result, the Company recorded a
loss on its investment of $748,000 in fiscal 1996 and $182,000 in fiscal 1997.
The Company's effective income tax rate decreased slightly in both
years. Fiscal 1997 benefited from the utilization of certain tax credits. The
reduction in fiscal 1996 taxes was due to lower state income taxes and the
effects of establishing a foreign sales corporation. See Note G of Notes to
Consolidated Financial Statements, located elsewhere in this report, for
detailed information regarding income taxes.
In May, 1997, the Company entered into a distributorship agreement with
Sumitomo Corporation of America to market FR-12 refrigerant in the Asia-Pacific
market including China, Japan, Malaysia, Korea, Taiwan, Philippines, Indonesia,
Singapore, Australia, New Zealand and Thailand. In June, 1997, the Company
announced that, as part of a long-term strategic alliance, it entered into a
Warrant Agreement with Sumitomo under which Sumitomo could purchase up to
1,200,000 shares of Common Stock. Sumitomo paid $120,000 for the rights to the
warrants. The Company issued an initial warrant (which expires on November 16,
1998) to purchase 500,000 shares at $12.50 per share. The issuance of future
warrants depends on Sumitomo meeting specified performance levels. Additional
warrants would be issued at market prices at the time the warrants were issued.
In connection with the initial Warrant, the Company will incur a non-cash charge
of approximately $600,000 in fiscal 1998 to be recorded as marketing expenses.
In September, 1995, the Company entered into a long-term master
distributorship agreement with Pennzoil Products Company ("Pennzoil") to market
FR-12 refrigerant in North America. In fiscal 1997, the parties modified the
agreement to change Pennzoil's status from an exclusive to a non-exclusive
distributor. Since that time, the Company has been actively seeking additional
distributors.
In March, 1996, the Company announced that it had reached an agreement
with Al-Murjan Environmental Management and Technology Co., Ltd. (of Jeddah,
Saudi Arabia) to be its sales representative for FR-12 refrigerant in the Middle
East.
Segment Discussion
Magnetic Products Segment. This segment consists of the design,
development, manufacture and sale of superconductive magnets and
materials, permanent magnets, RF coils, and other magnetic products.
The dollar value of sales for the segment as a whole, decreased 9.2%
in fiscal 1997 and 4.4% in fiscal 1996. Magnet system sales (including
MAI) increased by 6.8% in fiscal 1997 compared with a decline of 6.2%
in fiscal 1996. Material sales were lower by 46% in fiscal 1997 with a
nominal increase in fiscal 1996. The sales decline in this segment in
fiscal 1997 was principally due to substantially lower superconducting
material sales to a major customer who decided not to renew a
long-term supply agreement. While this customer continues to purchase
some of its requirements from the Company, future sales growth will
depend on securing new orders and additional customers. The sales
reduction in fiscal 1996 reflected the effect of reduced selling
prices for MRI products and a leveling off in the growth of the MRI
market. Gross profit margins in fiscal 1997, as a percentage of net
sales, increased for magnet products due to a more favorable product
mix (including MAI) and improved production costs, but declined
substantially for materials due to lower sales volume and continued
yield losses in wire manufacturing. Gross profit margins declined in
fiscal 1996 due to lower selling prices, slower than planned magnet
cost reductions and yield losses in wire manufacturing.
Refrigeration Products Segment. This segment, which consists of the
design, development, manufacture and sale of cryogenic refrigeration
equipment and refrigerants, had increased sales of
26
approximately 20% in fiscal 1997 and 49% in fiscal 1996. These
increases were primarily the result of sales of FR-12(TM) refrigerant
in both years and a substantial increase in sales of laboratory and
Cryotiger systems in fiscal 1997 and shield coolers in fiscal 1996.
Gross profit margin, as a percentage of net sales increased 9.3% in
fiscal 1997 and decreased slightly in fiscal 1996. The fiscal 1997
increase was due to cost reductions for refrigerants and cryogenic
refrigeration equipment. The fiscal 1996 decline reflected price
reductions for shield coolers and rework costs associated with certain
new cryogenic refrigeration products.
See Note J of Notes to Consolidated Financial Statements, located
elsewhere in this report, for financial information by industry
segment.
LIQUIDITY AND CAPITAL COMMITMENTS
In fiscal 1997 the Company generated net cash of $8,531,000 from
operating activities, which, together with available cash, was used to purchase
property, plant and equipment, to make additional investments in SMIS, to
purchase Treasury Stock, repay debt and to acquire MAI. MAI is a manufacturer of
RF coils, which are sold to end users of MRI systems as well as to original
equipment manufacturers of MRI systems. These RF coils are used to obtain organ
specific MRI signals for improved image quality and are used on many parts of
the body. The Company paid $4,139,000 in cash (net of cash acquired) and issued
665,213 shares of Common Stock (including 474,895 shares of Treasury Stock) for
all of the outstanding shares of MAI stock. The acquisition agreement provides
for the issuance of up to 99,782 additional shares of Common Stock as part of
the purchase price if the average of the Company's closing price on the American
Stock Exchange, during the ninety calendar day period following the release of
earnings for fiscal 1997, falls below $11.274.
During fiscal 1997, under the Company's stock buy-back program, the
Company repurchased a total of 291,100 shares of Common Stock for $3,358,000. In
December, 1996 the Company repaid $2,167,000 of maturing installment notes and
in February, 1997 increased its investment in SMIS by purchasing $972,000 of
convertible debt.
In July, 1997, the Company committed to participate with other
shareholders of SMIS in extending to SMIS through March, 1998 a line of credit
aggregating 1 million British Pounds. Any outstanding principal under the line
bears interest at the rate of 11% per annum. Interest and principal are due and
payable on March 31, 1998, but may be prepaid by SMIS without penalty. The
Company's share of the line of credit is 740,000 British Pounds, of which
370,000 British Pounds ($609,000 based upon conversion rates applicable at the
time) has already been advanced.
See the Consolidated Statements of Cash Flows in the Consolidated
Financial Statements, located elsewhere in this report, for a detailed
description of the sources and uses of cash during fiscal 1997 as well as the
two preceding years.
The Company's capital resource commitments as of July 27, 1997
consisted principally of capital equipment commitments of $1,590,000.
The Company has a three year, unsecured $10,000,000 line of credit with
a bank which bears interest at the London Interbank Offered Rate (LIBOR) plus
1.25% or prime and will expire in November, 1997, none of which was in use on
July 27, 1997. The company is negotiating a new line of credit.
The Company believes that it will have sufficient working capital to
meet its needs for the short-term by using internally generated funds and
existing credit facilities. However, on a longer-term basis with substantial
increases in sales volume and/or unusually large expenditure requirements to
commercialize the FRIGCAE family of refrigerants, the Company may be required to
obtain additional lines of credit for
27
working capital purposes and possibly make periodic public offerings or private
placements in order to meet the liquidity needs of such growth. While the
Company does not believe it will be restricted in financing such growth, there
can be no assurances that such sources of financing will be available to the
Company in sufficient amounts or on acceptable terms. Under such circumstances,
the Company would expect to manage its growth within the financing available.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Attached hereto and filed as part of this report are the financial
statements and supplementary data listed in the list of Financial Statements and
Schedules included in response to Item 14 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning directors called for by Item 10 of Form 10-K
will be set forth under the heading "Election of Directors" in the Company's
definitive proxy statement relating to the 1997 Annual Meeting of Shareholders
(the "Proxy Statement"), and is hereby incorporated herein by reference.
The information concerning executive officers called for by Item 10 of
Form 10-K is set forth in "Item 1. Business" of this annual report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information with respect to compensation of certain executive
officers and all executive officers of the Company as a group to be contained
under the headings "Executive Compensation" and "Certain Transactions" in the
Proxy Statement is hereby incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information with respect to ownership of the Company's Common Stock
by management and by certain other beneficial owners to be contained under the
heading "Security Ownership of Certain Beneficial Owners and Management" in the
Proxy Statement is hereby incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information with respect to certain relationships and related
transactions to be contained under the heading "Certain Transactions" in the
Proxy Statement is hereby incorporated herein by reference.
28
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS.
Attached hereto and filed as part of this report are the financial statements,
schedules and the exhibits listed below.
1. Financial Statements
Report of Independent Auditors
Consolidated Balance Sheets as of May 25, 1997 and May 26, 1996
Consolidated Statements of Income for the fiscal years ended May 25,
1997, May 26, 1996 and May 28, 1995
Consolidated Statements of Shareholders' Equity for the fiscal years
ended May 25, 1997, May 26, 1996 and May 28, 1995
Consolidated Statements of Cash Flows for the fiscal years ended May
25, 1997, May 26, 1996 and May 28, 1995
Notes to Consolidated Financial Statements
2. Schedule
II Valuation and Qualifying Accounts
All other schedules are not required or are inapplicable and,
therefore, have been omitted.
3. Exhibits
Articles of Incorporation and By-laws
3(i) Restated Certificate of Incorporation (3) (Exhibit 3.1)
3(ii) By-laws, as amended (4) (Exhibit 3.2)
Instruments defining the rights of security holders, including indentures
4.1 Form of Common Stock certificate (6) (Exhibit 4.1)
4.2 Amended and Restated Loan Agreement dated as of December 23, 1991
among Meridian Bank, Intermagnetics General Corporation, APD
Cryogenics Inc., Magstream Corporation and IGC Advanced
Superconductors Inc. (6) (Exhibit 4.3)
29
4.3 First Amendment dated as of February 26, 1992 to the Amended and
Restated Loan Agreement dated as of December 23, 1991 among Meridian
Bank, Intermagnetics General Corporation, APD Cryogenics Inc.,
Magstream Corporation and IGC Advanced Superconductors Inc. (6)
(Exhibit 4.4)
4.4 Second Amendment dated as of June 14, 1994 to the Amended and
Restated Loan Agreement dated as of December 23, 1991 among Meridian
Bank, Intermagnetics General Corporation, APD Cryogenics Inc. and
Magstream Corporation. (8)
4.5 Third Amendment dated as of August 1, 1994 to the Amended and
Restated Loan Agreement dated as of December 23, 1991 among Meridian
Bank, Intermagnetics General Corporation, APD Cryogenics Inc. and
Magstream Corporation (8)
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 (6)
(Exhibit 10.1)
+ 10.2 1990 Stock Option Plan (5) (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 (9) (Exhibit 10.6)
# 10.6 Amendment No. 3 to the Agreement of June 2, 1992 between between
Philips Medical Systems Nederlands B.V. and Intermagnetics General
Corporation for sales of magnet systems.
+ 10.7 Employment Agreement between Intermagnetics General Corporation and
Carl H. Rosner (6)
10.8 Share Purchase Agreement, dated January 23, 1992, by and between
Ultralife Batteries, Inc. and Intermagnetics General Corporation (7)
(Exhibit 10.1)
Subsidiaries of the registrant
* 21 Subsidiaries of the Company
30
Consents of experts and counsel
* 23 Consent of KPMG Peat Marwick LLP with respect to the Registration
Statements Numbers 2-80041, 2-94701, 33-2517, 33-12762, 33-12763,
33-38145, 33-44693, 33-50598, 33-55092, 33-72160 and 333-10553 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 28, 1989.
(4) Exhibit incorporated by reference to the Annual Report on Form 10-K
filed by the Company for the fiscal year ended May 27, 1990.
(5) Exhibit incorporated by reference to the Proxy Statement dated October
4, 1991 for the 1991 Annual Meeting of Shareholders.
(6) 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.
(7) 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.
(8) Exhibit incorporated herein by reference to the Annual Report on Form
10-K for the fiscal year ended May 29, 1994.
(9) 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.
* Filed with the Annual Report on Form 10-K for the fiscal year ended May 25,
1997.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this annual report on Form 10-K.
# To be filed by amendment.
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.
31
(b) REPORTS ON FORM 8-K(b) REPORTS ON FORM 8-K
Current Report on Form 8-K,. filed March 7, 1997, in connection with
Corporate revenues and earnings through the Company's third quarter ended
February 23, 1997, and information with respect to the agreement in principle
for the acquisition, changes in the FRIGC refrigerant distributor terms with
Pennzoil Products, Co., the supply of FRIGC refrigerant by AlliedSignal Inc.,
the extension of a major supply agreement for Magnet products with Philips
Medical Systems.
Current Report on Form 8-K, filed March 21, 1997, in connection with
the merger on March 11, 1997 of Medical Advances, Inc. ("MAI") into
Intermagnetics Merger Sub, Inc., a wholly-owned subsidiary of Intermagnetics
General Corporation, including financial statements of MAI and pro financial
information filed, pursuant to a Confidential Treatment Request, by Amendment on
May 23, 1997.
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
INTERMAGNETICS GENERAL CORPORATION
Date: August 22, 1997 By: /s/Carl H. Rosner
-----------------------------------------
Carl H. Rosner
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Each person in so signing also makes, constitutes and appoints
Carl H. Rosner, Chairman and Chief Executive Officer, Michael C. Zeigler, Senior
Vice President - Finance and Chief Financial Officer, and each of them, his true
and lawful attorneys-in-fact, in his name, place and stead to execute and cause
to be filed with the Securities and Exchange Commission any or all amendments to
this report.
Name Capacity Date
- ---- -------- ----
/s/Carl H. Rosner Chairman, and August 22, 1997
--------------------------- Chief Executive Officer
Carl H. Rosner (principal executive
officer) and Director
/s/Michael C. Zeigler Senior Vice President- August 22, 1997
- ---------------------------- Finance; Chief Financial
Michael C. Zeigler Officer (principal financial
and accounting officer)
/s/Joseph C. Abeles Director August 22, 1997
- ----------------------------
Joseph C. Abeles
/s/John M. Albertine Director August 22, 1997
- ----------------------------
John M. Albertine
/s/Edward E. David, Jr. Director August 22, 1997
- ----------------------------
Edward E. David, Jr.
/s/Jack E. Goldman Director August 22, 1997
- ----------------------------
Jack E. Goldman
33
Name Capacity Date
- ---- -------- ----
/s/Thomas L. Kempner Director August 22, 1997
- ----------------------------
Thomas L. Kempner
/s/Stuart A. Shikiar Director August 22, 1997
- ----------------------------
Stuart A. Shikiar
/s/Sheldon Weinig Director August 22, 1997
- ----------------------------
Sheldon Weinig
34
1. Financial Statements
35
10-K
TENTATIVE AND PRELIMINARY DRAFT
FOR DISCUSSION PURPOSES ONLY
Independent Auditors' Report
The Board of Directors and Shareholders
Intermagnetics General Corporation:
We have audited the consolidated financial statements of Intermagnetics General
Corporation and subsidiaries, as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Intermagnetics General Corporation and subsidiaries as of May 25, 1997 and May
26, 1996, and the results of their operations and their cash flows for each of
the years in the three-year period ended May 25, 1997, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
------------------------------
KPMG Peat Marwick LLP
Albany, New York
July 11, 1997
SELECTED FINANCIAL DATA
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
May 25, May 26, May 28, May 29, May 30,
For the Fiscal Year Ended 1997 1996 1995 1994 1993
--------- -------- --------- -------- --------
Net sales $87,052 $88,467 $83,877 $51,238 $56,308
Total revenue 90,013 94,019 85,747 52,257 57,295
Cost of products sold 61,022 66,188 60,174 34,894 40,030
Income before income taxes 4,035 6,882 6,512 2,099 3,901
Net income 2,615 4,427 4,007 2,148 3,140
Per primary share:
Income before cumulative
effect of accounting change 0.21 0.35 0.34 0.11 0.30
Cumulative effect of accounting
change 0.07
======= ======= ======= ======= =======
Net income 0.21 0.35 0.34 0.18 0.30
======= ======= ======= ======= =======
At End of Fiscal Year 1997 1996 1995 1994 1993
--------- -------- --------- -------- --------
Working capital $ 49,346 $ 53,642 $ 52,655 $ 49,339 $ 19,601
Total assets 115,989 112,397 103,706 93,787 58,359
Long-term debt
(net of current maturities) 29,105 29,364 39,807 39,859 4,991
Retained earnings (deficit) (1,643) (1,727) (2,495) (2,595) (2,735)
Shareholders' equity 73,087 67,296 53,305 46,935 41,765
(a) Income per primary share has been computed during each period based on the
weighted average number of shares of Common Stock outstanding plus dilutive
common stock equivalents (where applicable).
(b) The Company did not pay a cash dividend on its Common Stock during any of
the periods indicated.
(c) Net income per primary share has been restated to give effect to the 2%
stock dividend declared July 22, 1997 and the 2% stock dividend distributed
in August, 1996, the five-for-four stock split effected September 8, 1994,
and the 3% stock dividends distributed in September 1993, and June 1995.
(d) Net income for the fiscal year ended May 29, 1994 reflects the cumulative
effect of an accounting change in the amount of $888,000 or $.07 per
primary share.
CONSOLIDATED BALANCE SHEETS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
May 25, May 26,
1997 1996
---------------- ----------------
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 12,667 $ 18,696
Trade accounts receivable, less allowance
(1997 - $302; 1996 - $169) 16,899 20,587
Costs and estimated earnings in excess of
billings on uncompleted contracts 3,543 2,094
Inventories:
Finished products 811 477
Work in process 14,196 13,933
Materials and supplies 11,410 10,447
-------- --------
26,417 24,857
Prepaid expenses and other 3,272 1,581
-------- --------
TOTAL CURRENT ASSETS 62,798 67,815
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 1,479 1,479
Buildings and improvements 16,425 16,610
Machinery and equipment 36,181 31,321
Leasehold improvements 35 233
-------- --------
54,120 49,643
Less allowances for depreciation and amortization 28,616 25,648
-------- --------
25,504 23,995
Equipment in process of construction 3,048 2,381
-------- --------
28,552 26,376
INTANGIBLE AND OTHER ASSETS
Available for sale securities 3,112 7,500
Other investments 8,932 7,760
Excess of cost over net assets acquired, less
accumulated amortization in 1997 $169 9,538 0
Other assets 3,057 2,946
-------- --------
TOTAL ASSETS $115,989 $112,397
======== ========
(Continued)
May 25, May 26,
1997 1996
---------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 259 $ 2,277
Accounts payable 6,441 5,806
Salaries, wages and related items 2,660 2,373
Customer advances and deposits 811 539
Product warranty reserve 911 1,100
Accrued income taxes 1,453 1,203
Other liabilities and accrued expenses 917 875
--------- ---------
TOTAL CURRENT LIABILITIES 13,452 14,173
LONG-TERM DEBT, less current portion 29,105 29,364
DEFERRED INCOME TAXES, on unrealized gain
on available for sale securities 345 1,564
SHAREHOLDERS' EQUITY
Preferred Stock, par value $.10 per share:
Authorized - 2,000,000 shares
Issued and outstanding - None
Common Stock, par value $.10 per share:
Authorized - 20,000,000 shares
Issued and outstanding (including shares in treasury):
1997 - 12,642,508 shares
1996 - 12,311,578 shares 1,264 1,208
Additional paid-in capital 74,378 69,040
Retained earnings (deficit) (1,643) (1,727)
Unrealized gain on available for sale securities, net 613 2,346
Foreign currency translation adjustments (16) (96)
--------- ---------
74,596 70,771
Less cost of Common Stock in treasury
(1997 - 163,700 shares; 1996 - 322,540 shares) (1,509) (3,475)
--------- ---------
73,087 67,296
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 115,989 $ 112,397
========= =========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
-----------------------------------------------------
May 25, May 26, May 28,
1997 1996 1995
--------------- ------------------ --------------
Net sales $87,052 $88,467 $83,877
Other revenue 2,961 4,138 1,870
Realized gain on sale of available for sale securities 1,414
------- ------- -------
Total revenue 90,013 94,019 85,747
Costs and expenses:
Cost of products sold 61,022 66,188 60,174
Product research and development 6,851 5,075 5,005
Marketing, general and administrative 15,836 12,502 11,275
Interest and other expense 2,087 2,624 2,781
Equity in net loss of unconsolidated affiliate 182 748
------- ------- -------
Total costs and expenses 85,978 87,137 79,235
------- ------- -------
Income before income taxes 4,035 6,882 6,512
Provision for income taxes 1,420 2,455 2,505
------- ------- -------
NET INCOME $ 2,615 $ 4,427 $ 4,007
======= ======= =======
PER SHARE AMOUNTS:
Primary $ .21 $ .35 $ .34
======= ======= =======
Fully diluted $ .21 $ .35 $ .33
======= ======= =======
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
INTERMAGNETICS GENERAL CORPORATION
Fiscal Years Ended May 25, 1997, May 26, 1996, May 28, 1995
(Dollars in Thousands)
Unrealized
Gain on Foreign
Additional Retained Available Currency
Common Paid-In Earnings For Sale Translation Treasury
Stock Capital (Deficit) Securities, net Adjustments Stock
---------- ------------ ------------ --------------- ------------- --------
Balances at May 29, 1994 $ 1,055 $49,133 $(2,595) $ 194 $ (852)
Net income 4,007
Tax benefit from exercise of stock options 1,025
Sale of 214,833 shares of Common Stock,
including receipt of 27,856 shares of
Treasury Stock, upon exercise of stock
options 18 1,124 (329)
Sale of 16,201 shares of Common Stock
to IGC Savings Trust 2 26
Stock dividends and payment for
fractional shares 33 3,858 (3,907)
Unrealized gain on available for
sale securities, net $ 1,787
Unrealized loss on foreign currency
translation (240)
Purchase of 88,100 shares of Treasury Stock (1,034)
------- ------- ------- ------- ------- ------
Balances at May 28, 1995 1,108 55,166 (2,495) 1,787 (46) (2,215)
Net income 4,427
Tax benefit from exercise of stock options 837
Sale of 213,167 shares of Common Stock,
including receipt of 17,072 shares of
Treasury Stock, upon exercise of stock
options 21 1,236 (275)
Sale of 7,721 shares of Common Stock
to IGC Savings Trust 1 140
Stock dividends and payments for
fractional shares 23 3,623 (3,659)
Unrealized gain on available for
sale securities, net 559
Unrealized loss on foreign currency
translation (50)
Purchase of 62,700 shares of Treasury Stock (985)
Conversion of $8,375,000 of 5.75% convertible
subordinated debentures 55 8,038
------- ------- ------- ------- ------- -------
Balances at May 26, 1996 1,208 69,040 (1,727) 2,346 (96) (3,475)
Net income 2,615
Tax benefit from exercise of stock options 412
Sale of 129,378 shares of Common Stock,
including receipt of 15,644 shares of
Treasury Stock, upon exercise of stock
options 13 669 (185)
Sale of 8,193 shares of Common Stock
to IGC Savings Trust 1 116
Stock dividends and payments for
fractional shares 23 2,495 (2,531)
Unrealized loss on available for
sale securities, net (1,733)
Unrealized gain on foreign currency
translation 80
Purchase of 291,100 shares of Treasury Stock (3,358)
Issuance of 665,213 shares, including
474,895 Treasury Shares in payment
for acquisition 19 1,646 5,509
------- ------- ------- ------- ------- -------
Balances at May 25, 1997 $ 1,264 $74,378 $(1,643) $ 613 $ (16) $(1,509)
======= ======= ======= ======= ======= =======
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands)
Fiscal Year Ended
-------------------------------------------------
May 25, May 26, May 28,
1997 1996 1995
------------- -------------- --------------
OPERATING ACTIVITIES
Net income $ 2,615 $ 4,427 $ 4,007
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,964 3,165 3,270
Provision for deferred taxes (589) (533) 18
Other non-cash activity (255)
Imputed interest on royalties receivable (29)
Imputed interest on unsecured notes 137 210 189
Equity in net loss of unconsolidated affiliate 182 748
Gain on sale of available for sale securities (1,414)
Gain on sale of assets (374)
Change in operating assets and liabilities, net of effect of acquisition:
(Increase) decrease in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts 3,299 (1,270) (5,750)
(Increase) decrease in inventories and prepaid expenses and other (1,447) 1,482 (162)
Increase in accounts payable and accrued expenses 919 3,365 3,550
Change in foreign currency translation adjustments 80 (50) (240)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,531 10,130 4,853
INVESTING ACTIVITIES
Purchases of property, plant and equipment (5,446) (4,079) (3,935)
Proceeds from sale of assets 935
Payments received on royalties receivable 97
Proceeds from sale of available for sale securities 1,927
Acquisition, net of cash acquired (4,139)
Investment in unconsolidated affiliate (972) (2,070) (445)
(Increase) decrease in other assets 83 (121) (172)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (9,539) (4,343) (4,455)
FINANCING ACTIVITIES
Proceeds from note payable and long-term borrowing 1,914
Purchase of Treasury Stock (3,358) (985) (1,034)
Proceeds from sales of Common Stock 614 1,123 825
Principal payments on note payable and long-term debt (2,277) (238) (2,290)
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES (5,021) (100) (585)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS (6,029) 5,687 (187)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 18,696 13,009 13,196
--------- --------- ---------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $12,667 $18,696 $13,009
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Exchange of Common Stock in partial payment of exercise
price on options $ 185 $ 275 $ 329
========= ========= =========
Issuance of Common Stock and Treasury Stock for acquisition $ 7,174
=========
Tax benefit from exercise of stock options $ 412 $ 837 $ 1,025
========= ========= =========
Stock dividends $ 2,531 $ 3,659 $ 3,907
========= ========= =========
Conversion of debt to equity, net of deferred debt issue
cost reduction of $282 $ 8,093
=========
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERMAGNETICS GENERAL CORPORATION
NOTE A - ACCOUNTING POLICIES
Description of Business:
Intermagnetics General Corporation ("Company") operates in two industry
segments: Magnetic Products and Refrigeration Products. The Magnetic Products
segment consists primarily of the manufacture and sale of superconductive
materials, radio frequency coils, and magnets and permanent magnets used mainly
in Magnetic Resonance Imaging (MRI) for medical diagnostics. The majority of the
Company's sales in this segment are to European and US customers. The
Refrigeration Products segment consists of cryogenic refrigeration equipment
produced by a subsidiary, APD Cryogenics Inc., and refrigerants which are sold
by another subsidiary, InterCool Energy Corporation. Cryogenic refrigeration
equipment is used in the semi-conductor manufacturing process, MRI, and in a
variety of research applications. Refrigerants consist of a family of
environmentally friendly refrigerants designed to replace recently banned CFC
refrigerants. Sales of this segment are primarily to US and European customers.
The Company operates on a 52/53 week year ending the last Sunday during the
month of May. See Notes J and K for additional information regarding financial
information by segment and sales to principal customers.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions have been eliminated
in consolidation. The Company's 45% investment in GEC Alsthom Intermagnetics and
23% investment in Surrey Medical Imaging Systems Limited ("SMIS") are accounted
for using the equity method of accounting. Prior to the fiscal year ended May
26, 1996, the Company's investment in SMIS was recorded at cost.
Cash Flows:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Short-term investments ($5,974,000 at May 25, 1997 and $15,796,000 at May 26,
1996) consist primarily of US Government and Agency obligations, commercial
paper, and other corporate obligations and are stated at market. The Company
considers these short-term investments to be cash equivalents for purposes of
the Consolidated Statements of Cash Flows.
Sales:
Sales are generally recognized as of the date of shipment or in accordance with
customer agreements.
Sales to the United States Government or its contractors under cost
reimbursement contracts are recorded as costs are incurred and include estimated
earned profits.
Sales of products involving long-term production periods and manufactured to
customer specifications are generally recognized by the percentage-of-completion
method, by multiplying the total contract price by the percentage that incurred
costs to date bear to estimated total job costs, except when material costs are
substantially incurred at the beginning of a contract, in which case material
costs are charged to the contract as they are placed into production. At the
time a loss on a contract is indicated, the Company accrues the entire amount of
the estimated ultimate loss.
The Company accrues for possible future claims arising under terms of various
warranties made in connection with the sale of products.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market
value.
Property, Plant and Equipment:
Land and improvements, buildings and improvements, machinery and equipment and
leasehold improvements are recorded at cost. Provisions for depreciation are
computed using straight-line and accelerated methods in a manner that is
intended to amortize the cost of such assets over their estimated useful lives.
Leasehold improvements are amortized on a straight-line basis over the remaining
initial term of the lease. For financial reporting purposes, the
Company provides for depreciation of property, plant and equipment over the
following estimated useful lives:
Land Improvements 25 years
Buildings and Improvements 7 - 40 years
Machinery and Equipment 3 - 15 years
Leasehold Improvements 2 - 15 years
Investments:
Certain investments are categorized as available for sale securities in
accordance with Statement of Financial Accounting Standards (SFAS) 115,
"Accounting for Certain Investments in Debt and Equity Securities". Available
for sale securities are reported at fair value, with unrealized gains and losses
included in shareholders' equity.
A decline in the market value of any available for sale security below cost that
is deemed other than temporary is charged to earnings, resulting in the
establishment of a new cost basis for the security.
Dividend and interest income are recognized when earned. Realized gains and
losses for securities classified as available for sale are included in earnings
and are derived using the specific identification method for determining the
cost of securities sold.
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Foreign Currency Translation:
Foreign currency translation adjustments arise from conversion of the Company's
foreign subsidiary's financial statements to US currency for reporting purposes,
and are reflected in
shareholders' equity in the accompanying consolidated balance sheets. Realized
foreign currency transaction gains and losses are included in interest and other
expense in the accompanying consolidated statements of income.
Pension Plan:
The Company has a pension plan covering all eligible employees. Prior service
costs are amortized over a period of 30 years. It is the policy of the Company
to fund pension costs accrued.
Excess of Cost Over Net Assets Acquired
Excess of cost over net assets of an acquisition is being amortized on a
straight-line basis over 15 years. The Company periodically assesses the
recoverability, and impairments would be recognized in operating results if a
permanent diminution in value were to occur. Amortization for the fiscal years
ended May 25, 1997, May 26, 1996, and May 28, 1995 amounted to $169,000, $0, and
$0, respectively.
Capitalized Interest:
The Company capitalizes interest costs on certain assets constructed for its own
use. No interest was capitalized during the fiscal years ended May 25, 1997, May
26, 1996 or May 28, 1995.
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.
Use of Estimates:
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, and the disclosure of
contingent assets and liabilities, to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
New Accounting Pronouncements:
In February, 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 128, "Earnings Per Share".
SFAS 128 supersedes APB Opinion 15, "Earnings Per Share" (APB 15) and specifies
the computation, presentation, and disclosure requirements for earnings per
share (EPS) for entities with publicly held common stock or potential common
stock. It replaces the concept of "primary" and "fully diluted" EPS with "basic"
and "diluted" EPS. Basic EPS, unlike primary EPS, excludes all dilution and is
computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS under APB 15.
SFAS 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. After adoption, all prior-period EPS
data presented shall be restated to conform with SFAS 128. The Company will
present its EPS information in accordance with SFAS 128 beginning with the
fiscal quarter ended February 22, 1998. Management anticipates that the effect
of the adoption of SFAS 128 will result in a basic EPS amount greater than the
current reported primary EPS, within the range of $.01 to $.03 per share and
diluted EPS should be comparable with the Company's current reported fully
diluted amounts.
In June, 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income". SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. SFAS 130
requires all items that are required to be recognized under accounting standards
as components of comprehensive income
be reported in a financial statement that is displayed in equal prominence with
the other financial statements.
SFAS 130 is effective for both interim and annual periods beginning after
December 15, 1997. Comparative financial statements provided for earlier periods
are required to be reclassified to reflect the provisions of this Statement. The
Company will comply with the reporting requirements of SFAS 130 beginning with
the quarter ended May 31, 1998.
In June, 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131 establishes standards for the way
public business enterprises are to report information about operating segments
in annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS 131 focuses on a "management approach" concept as the basis
for identifying reportable segments. The management approach is based on the way
that management organizes the segments within the enterprise for making
operating decisions and assessing performance.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. The Company will comply with the reporting requirements of
SFAS 131 for the fiscal year ending May 30, 1999. Management anticipates that
the effect of the adoption of SFAS 131 will not significantly impact the current
presentation of the Company's segment disclosure as the current reportable
segments are consistent with the "management approach" methodology outlined in
SFAS 131.
NOTE B - ACQUISITIONS
On March 11, 1997, the Company paid $4,139,000 in cash, net of cash acquired,
and issued 665,213 shares of Common Stock, valued at $10.784 per share,
including 474,895 shares of Treasury Stock, for all of the outstanding shares of
Medical Advances, Inc. (MAI) Common Stock. The acquisition agreement provides
for the issuance of up to 99,782 additional shares as part of the purchase price
if the average of the Company's closing price on the American Stock Exchange,
during the ninety calendar day period following the release of earnings for
fiscal 1997, is less than $11.274.
The acquisition has been accounted for using the purchase method of accounting
and the results of operations of MAI have been included in the consolidated
financial statements since March 11, 1997, the date of acquisition. The excess
of cost over net assets acquired of approximately
$9,700,000 is being amortized on a straight-line basis over 15 years.
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company and MAI as if the acquisition had occurred
at the beginning of fiscal year 1996, with pro forma adjustments to give effect
to amortization of the excess of cost over net assets acquired and interest
income on short-term investments, together with related income tax effects.
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
--------------------------------------
May 25, 1997 May 26, 1996
------------------- ---------------
Total revenue $96,206 $99,784
Net income 3,539 4,183
Earnings per primary share .28 .32
NOTE C - INVESTMENTS
Available for Sale Securities:
As of May 25, 1997 and May 26, 1996, the Company owned 975,753 shares
(approximately 12%) of the common stock of Ultralife Batteries, Inc.
("Ultralife"), a manufacturer of lithium batteries, acquired at a cost of
$7,015,000. The market value of the Company's total investment in Ultralife, the
sale of which is restricted under US Securities laws, was $10,123,000 and
$14,636,000 at May 25, 1997 and May 26, 1996, respectively. The cost and market
value of "Available for Sale" securities, representing those shares saleable
under Securities laws, were as shown below:
May 25, 1997 May 26, 1996
------------ ------------
Cost $2,154,000 $3,590,000
Gross Unrealized Holding Gain 958,000 3,910,000
---------- -----------
Market Value $3,112,000 $7,500,000
========== ===========
During fiscal 1996, the Company sold 85,000 shares, with proceeds from the sale
totaling $1,927,000, resulting in a pretax gain of $1,414,000. The cost of the
securities sold was based on specific identification of the securities held at
the time of sale
The balance of the Ultralife investment is included at cost in other
investments.
Other Investments:
Investments in other securities at May 25, 1997 and May 26, 1996 consist of:
(Dollars in Thousands)
1997 1996
---- ----
SMIS $3,946 $4,210
Ultralife 4,861 3,425
Other 125 125
------- ------
$8,932 $7,760
======= =======
As of May 25, 1997 and May 26, 1996 the Company owned 354,223 shares
(approximately 23%) of SMIS acquired at a cost of $3,530,000. SMIS is a European
company engaged in the manufacture and sale of electronics and software for
magnetic resonance imaging and nuclear magnetic resonance spectroscopy
applications. The Company adopted the equity method of accounting for its
investment during the first quarter of fiscal 1996. The acquisition cost
exceeded the underlying equity in net assets by $3,298,000, which is being
amortized over a period of 40 years. At May 25, 1997 and May 26, 1996,
accumulated amortization was $164,000 and $82,000, respectively. As SMIS is
privately held, the market value of this investment is not readily determinable.
In addition, the Company purchased 980,000 SMIS redeemable preference shares
during the year ended May 26, 1996 at a cost of $1,511,000. These shares are
non-voting unless SMIS is unable to attain certain specified financial targets,
are redeemable on the earlier of October 31, 1997 or the date of a public
offering and carry a cumulative redemption premium of 15% per annum. The
purchase of the preference shares included the acquisition of an option to
purchase 2.5% of SMIS' Common Stock at a price of approximately $6 per share.
During the year ended May 25, 1997, the Company provided $972,000 of additional
funding in the form of convertible notes to SMIS. The notes are non-interest
bearing until February 27, 1998; thereafter, they bear interest at the rate of
15% per annum. They are immediately repayable, with accrued interest, in the
event of certain conditions as outlined in the note agreement and are redeemable
by SMIS. The noteholders may require redemption at any time after February 26,
1998. The noteholders have the right at any time prior to
redemption, to convert the notes plus accrued interest into capital stock of
SMIS. The notes are included in"Other Assets" on the accompanying Consolidated
Balance Sheets.
NOTE D - NOTES PAYABLE AND LONG-TERM DEBT
The Company has an unsecured $10,000,000 bank line of credit which is scheduled
to expire in November, 1997. Borrowings under the line (none at May 25, 1997 and
May 26, 1996) bear interest at either the London Interbank Offered Rate (LIBOR)
for the applicable term (for example, the one year rate: 6.25% at May 25, 1997
and 5.91% at May 26, 1996) plus 1.25% or prime (8.5% at May 25, 1997 and 8.25%
at May 26, 1996), at the Company's option.
Long-term debt consists of the following:
(Dollars in Thousands) May 25, May 26,
1997 1996
------- -------
Revenue bonds $ 1,725 $ 1,800
Mortgage payable 6,014 6,185
Unsecured notes 2,031
Convertible debentures 21,625 21,625
------- -------
29,364 31,641
Less current portion 259 2,277
------- -------
Long-term debt $29,105 $29,364
======= =======
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 3.88% for the year ended May 25, 1997 (3.95% for the year ended May 26,
1996). The bonds mature serially in amounts ranging from $75,000 in December,
1997 to $200,000 in December, 2009. In the event of default or upon the
occurrence of certain conditions, the bonds are subject to mandatory redemption
at prices ranging from 100% to 103% of face value. As long as the interest rate
on the bonds is adjustable weekly, the bonds are redeemable at the option of the
Company at face value. The Company makes monthly advance payments to restricted
cash accounts in amounts sufficient to meet the interest and principal payments
on the bonds when due. The balances of these accounts, included in "Cash and
Short-Term Investments" on the accompanying Consolidated Balance Sheets, were
$32,000 at May 25, 1997 and $33,000 at May 26, 1996.
The mortgage payable bears interest at the rate of 7.5%, and is payable in
monthly installments of $52,000, including principal and interest through April,
2001 with a final payment of $5,155,000 due in May, 2001. The loan is secured by
land and buildings and certain equipment acquired at a cost of approximately
$10,800,000.
Convertible debentures at May 25, 1997 consist of $21,625,000 of 5.75%
convertible subordinated debentures due September, 2003, issued in a private
placement. The debentures are convertible into Common Stock at approximately
$14.56 per share. Interest on the debentures is payable semi-annually. The
debentures are redeemable, in whole or in part, at the option of the Company at
any time at prices ranging from 104.025% to 100.575%. The debentures also
provide for redemption at the option of the holder upon a change in control of
the Company, as defined, and are subordinated to senior indebtedness, as
defined.
Aggregate maturities of long-term debt for the next five fiscal years are:
1998 - $259,000, 1999 - $298,000, 2000 - $312,000, 2001 - $5,521,000, and
2002 - $100,000.
Interest paid for the years ended May 25, 1997, May 26, 1996, and May 28, 1995
amounted to $1,800,000, $2,214,000, and $2,461,000, respectively.
NOTE E - SHAREHOLDERS' EQUITY
In July, 1997, the Company declared a 2% stock dividend to be distributed on all
outstanding shares, except Treasury Stock, on September 16, 1997. The
consolidated financial statements have been adjusted retroactively to reflect
this stock dividend in all numbers of shares, prices per share and earnings per
share.
The Company has established two stock option plans: the 1981 Stock Option Plan
and the 1990 Stock Option Plan. Shares and prices per share have been adjusted
to reflect the 2% stock dividends declared in July, 1997 and May, 1996,
respectively. During fiscal 1997 the Compensation Committee of the Board of
Directors approved an increase of 612,000 shares available for grant under the
1990 Stock Option Plan. The total shares authorized for grant under the 1981 and
1990 plans are 1,463,722 and 2,582,556, respectively.
Option activity under these plans was as follows:
Fiscal Year Ended
----------------------------------------------------------------------------------------------
May 25, 1997 May 26, 1996 May 28, 1995
------------------------------ ------------------------------- -------------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number of Exercise
of Shares Price of Shares Price Shares Price
------------ ------------- ------------ ------------ ------------ ------------
Outstanding,
beginning of year 1,521,870 $8.829 1,522,703 $7.553 1,418,153 $6.019
Granted 358,060 11.001 218,500 14.795 326,896 12.297
Exercised (130,416) 5.227 (213,508) 5.873 (215,390) 4.637
Forfeited (94,634) 10.193 (5,825) 7.304 (6,956) 8.138
------------ ---------- -------
Outstanding,
end of year 1,654,880 9.505 1,521,870 8.829 1,522,703 7.553
========= ========= =========
Exercisable,
end of year 853,266 $7.999 676,497 $6.818 611,712 $5.478
========== ======= =======
May 25, 1997
------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
--------------------------------------------------- -----------------------------------------
Weighted Weighted Weighted
Average Average Average
Range of Option Number Exercise Remaining Number Exercise
Exercise Price Outstanding Price Contractual Life Exercisable Price
- --------------- ----------- -------- ---------------- ----------- ------------
$3.330 to $9.565 694,844 $5.266 4.2 years 527,226 $5.092
$9.865 to $20.545 960,036 12.573 6.4 years 326,040 12.698
--------- -------
1,654,880 9.505 5.5 years 853,266 7.999
========= =======
The Company uses the intrinsic value based method of accounting for
stock-based compensation, under which compensation cost is measured as the
excess, if any, of the quoted market price of the stock at the grant date over
the amount an employee must pay to acquire the stock. Since the exercise price
of stock options granted under the 1981 and 1990 Stock Option Plans is not less
than the market price of the underlying stock on the date of grant, no
compensation cost has been recognized for such grants.
The following pro forma net income and earnings per share information has been
determined as if the Company had accounted for stock-based compensation awarded
under the 1981 and 1990 Stock Option Plans using the fair value based method.
Under the fair value method, the estimated fair value of awards would be charged
against income ratably by installments over
the vesting period. The pro forma effect on net income for fiscal years 1997 and
1996 is not representative of the pro forma effect on net income in future years
because, as required by SFAS 123, "Accounting for Stock Based Compensation", no
consideration has been given to awards granted prior to fiscal 1996.
(Dollars in thousands, except Per Share Amounts)
May 25, 1997 May 26, 1996
------------------------------------- --------------------------------------
As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- ---------
Net income $2,615 $1,886 $4,427 $4,311
Earnings per primary share .21 .15 .35 .34
The weighted average fair value of options granted under the 1981 and 1990 Stock
Option Plans during fiscal years 1997 and 1996 were $10.234 and $6.681,
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 1997 and 1996 were
6.3% and 6.6%, respectively. The expected volatility of the market price of the
Company's Common Stock for fiscal years 1997 and 1996 grants was 58.4% and
56.8%, respectively. The expected average term of the granted options for fiscal
years 1997 and 1996 was 6.4 years and 6.2 years, respectively. There was no
expected dividend yield for the options granted for fiscal years 1997 and 1996.
Following are the shares of Common Stock reserved for issuance and the related
exercise prices for the outstanding stock options, convertible subordinated
debentures and contingent shares issuable under the purchase agreement for
Medical Advances, Inc., (see Note B) at May 25, 1997:
Number Exercise Price
of Shares Per Share
--------- --------------
1981 Stock Option Plan 59,767 $3.330 to 4.697
1990 Stock Option Plan 1,595,113 $4.185 to 20.545
Convertible subordinated debentures 1,485,498 $14.557
Contingent Shares under Medical Advances, Inc.
purchase agreement 99,782
---------
Shares reserved for issuance 3,240,160
=========
In June 1997, the Company, as part of a long-term strategic alliance, entered
into a Warrant Agreement with a distributor under which the distributor could
purchase up to 1,200,000 shares of Common Stock. The distributor paid $120,000
for the rights to the warrants and an initial warrant (which expires on November
16, 1998) to purchase 500,000 shares at $12.50
per share was issued. Future warrants are conditioned on the distributor meeting
specified performance levels and would be issued at market prices at that time.
In connection with the initial warrant, the Company will incur a non-cash charge
of approximately $600,000 in fiscal 1998 to be recorded as marketing expenses.
NOTE F - RETIREMENT PLANS
The Company has a non-contributory, defined benefit plan covering all eligible
employees. Benefits under the plan are based on years of service and employees'
career average compensation. The Company's funding policy is to contribute
annually an amount sufficient to meet or exceed the minimum funding standard
contained in the Internal Revenue Code. Contributions are intended to provide
not only for benefits attributable to service to date, but also for those
expected to be earned in the future.
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated balance sheets at May 25, 1997 and May 26, 1996:
(Dollars in Thousands) 1997 1996
---- ----
Actuarial present value of benefit obligation: Accumulated benefit obligation,
including vested benefits of $4,949 and $3,911 as of May 25, 1997 and May 26,
1996, respectively $ (5,125) $ (4,039)
======== =========
Projected benefit obligation for service rendered to date $ (7,065) $ (5,937)
Plan assets (consisting of common stock, US Government and
corporate debt obligations and money funds), at fair value 7,114 5,794
-------- ---------
Plan assets in excess of (less than) projected benefit obligation 49 (143)
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions (506) (241)
Prior service cost not yet recognized in net periodic pension cost 73 82
Unrecognized net transition obligation 34 39
---------- ----------
Accrued pension cost included in salaries, wages and related items $ (350) $ (263)
========== ==========
Net pension cost includes the following components:
Fiscal Year Ended
-------------------------------------------------
May 25, May 26, May 28,
(Dollars in Thousands) 1997 1996 1995
-------- ------ ------
Service cost - benefits earned during the period $ 495 $ 468 $ 447
Interest cost on projected benefit obligation 453 410 353
Actual return on plan assets (474) (398) (528)
Net amortization and deferral 15 15 219
------ ------- ------
Net pension cost $ 489 $ 495 $ 491
===== ======= ======
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.5% in the fiscal year ended May
25, 1997 and 8.0% in each of the fiscal years ended May 26, 1996 and May 28,
1995. The rate of increase in future compensation levels used in determining the
aforementioned obligation was 4.5% in the fiscal year ended May 25, 1997 and
6.0% in each of the fiscal years ended May 26, 1996 and May 28, 1995. The
expected long-term rate of return on plan assets in the fiscal years ended May
25, 1997, May 26, 1996 and May 28, 1995, was 8.0%.
The Company also maintains an employee savings plan, covering substantially all
employees, under Section 401(k) of the Internal Revenue Code. Under this plan,
the Company matches a portion of employees' contributions. Expenses under the
plan during the fiscal years ended May 25, 1997, May 26, 1996 and May 28, 1995
aggregated $277,000, $249,000 and $232,000, respectively.
The Company maintains supplemental retirement and disability plans for certain
of its executive officers. These plans utilize life insurance contracts for
funding purposes. Expenses under these plans were $22,000, $37,000 and $35,000
for the fiscal years ended May 25, 1997, May 26, 1996, and May 28, 1995,
respectively.
During fiscal 1997, in connection with the acquisition of MAI (see Note B), the
Company has recorded $75,000 of deferred tax assets.
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 during the periods in
which those temporary differences become deductible. Management considers
projected future taxable income and tax planning strategies in making this
assessment. The Company had Federal taxable income of approximately $3,700,000
in fiscal 1997, $5,600,000 in fiscal 1996, and $4,500,000 in fiscal 1995. Based
upon the level of historical taxable income and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates
of future taxable income are reduced.
The reasons for the differences between the provision for income taxes and the
amount of income tax determined by applying the applicable statutory Federal tax
rate to income before income taxes are as follows:
(Dollars in Thousands) Fiscal Year Ended
--------------------------------------------------------
May 25, 1997 May 26, 1996 May 28, 1995
------------- ------------- -------------
Pre-tax income at statutory tax rate (34%) $1,372 $2,340 $2,214
State taxes, net of Federal benefit 200 259 317
Benefit of Foreign Sales Corporation (186) (172) (113)
Amortization of intangibles 110 42 42
Loss on equity investment 151
Benefit of tax credits (257)
Other 30 (14) 45
------- -------- ------
Provision for income taxes $1,420 $2,455 $2,505
======= ====== ======
The Company paid income taxes, net of cash refunds received, of $1,347,000,
$1,153,000, and $1,118,000 during the years ended May 25, 1997, May 26, 1996,
and May 28, 1995, respectively.
NOTE G - INCOME TAXES
The components of the provision for income taxes are as follows:
(Dollars in Thousands) Fiscal Year Ended
--------------------------------------------------------------
May 25, 1997 May 26, 1996 May 28, 1995
--------------- ---------------- --------------
Current
Federal $ 1,513 $ 2,356 $ 1,932
State 280 448 481
Foreign 216 184 74
------- ------- -------
2,009 2,988 2,487
Deferred
Federal (527) (477) 16
State (62) (56) 2
------- ------- -------
(589) (533) 18
------- ------- -------
Provision for income taxes $ 1,420 $ 2,455 $ 2,505
======= ======= =======
Significant components of the net current and non-current deferred tax assets,
which are included in "Prepaid Expenses and Other" and "Other Assets",
respectively, in the Consolidated Balance Sheets, are as follows:
(Dollars in Thousands)
May 25, 1997 May 26, 1996
------------ ------------
Current
Inventory reserves $ 2,056 $ 1,043
Non-deductible accruals 576 392
Product warranty reserve 388 489
Other (50) (307)
Less: Valuation allowance (517) (517)
------- -------
Total current 2,453 1,100
------- -------
Non-Current
Depreciation (294) (44)
Foreign subsidiaries 317 317
Equity in net loss of unconsolidated
affiliate 353 284
Other 41 549
Less: Valuation allowance (317) (317)
------- -------
Total non-current 100 789
------- -------
TOTAL $ 2,553 $ 1,889
======= =======
There was no change in the valuation allowance during fiscal 1996.
The preceding table does not include the deferred tax liability of $345,000 and
$1,564,000 at May 25, 1997 and May 26, 1996, respectively, associated with the
unrealized gain on the available for sale securities discussed in Note C.
NOTE H - PER SHARE INFORMATION
Income per share amounts are based on the weighted average number of common
shares outstanding during the year plus common stock equivalents as shown below:
Fiscal Year Ended
------------------------------------------------------------------
Primary May 25, 1997 May 26, 1996 May 28,1995
- ------- ------------------- ------------------- --------------------
Weighted average shares
outstanding 12,083,335 11,741,860 11,263,976
Common stock equivalents 459,741 826,627 689,200
=========== =========== ===========
TOTAL 12,543,076 12,568,487 11,953,176
=========== =========== ===========
Fully Diluted
Weighted average shares
outstanding 12,083,335 11,741,860 11,263,976
Common stock equivalents 459,741 826,627 710,132
=========== =========== ===========
TOTAL 12,543,076 12,568,487 11,974,108
=========== =========== ===========
Both primary and fully diluted shares include the dilutive effect (common stock
equivalents) of outstanding stock options based on the treasury stock method
using average market price for primary and closing market price (unless the
average market price is higher) for fully diluted. Shares issuable upon
conversion of the $21,625,000 convertible subordinated debentures are considered
in calculating fully diluted earnings per share, but have been excluded as the
effect would be antidilutive.
The Company declared a 2% stock dividend on July 22, 1997 to be distributed to
shareholders on September 16, 1997. The Company distributed a 2% stock dividend
and a 3% stock dividend to shareholders on August 22, 1996 and June 15, 1995,
respectively. The distributions have been made from the Company's authorized but
unissued shares. All data with respect to earnings per share, weighted average
shares outstanding and common stock equivalents have been adjusted to reflect
these stock dividends.
NOTE I - LEASE COMMITMENTS
The Company leases certain manufacturing facilities and equipment under
operating lease agreements expiring at various dates through September, 2001.
Certain of the leases provide for renewal options. Total rent expense was
$331,000 for the year ended May 25, 1997, $266,000 for the year ended May 26,
1996, and $302,000 for the year ended May 28, 1995.
Future minimum rental commitments, excluding renewal options, under the
noncancellable leases covering certain manufacturing facilities and equipment
through the term of the lease are as follows:
Fiscal Year
1998 $288,000
1999 244,000
2000 203,000
2001 131,000
2002 44,000
----------
Total $910,000
========
NOTE J - INFORMATION BY INDUSTRY SEGMENT
Net sales by business segment represent sales to unaffiliated customers. No
significant transfers between segments have occurred. Income (loss) from
operations represents net sales less operating expenses.
Identifiable assets are those used specifically in each segment's operations.
Income of foreign subsidiaries, primarily in the Refrigeration Products segment,
amounted to $565,000, $171,000, and $66,000 in fiscal 1997, 1996 and 1995,
respectively.
The Company's segment information is as follows:
(Dollars in Thousands) Fiscal Year Ended
-------------------------------------------------------------------------------------------------
May 25, 1997 May 26, 1996
-------------------------------------------- ---------------------------------------------
Magnetic Refrigeration Magnetic Refrigeration
Products Products Total Products Products Total
-------- ------------- ------- ---------- ------------- -------
Net sales:
Magnet systems $48,675 $48,675 $45,562 $45,562
Superconductive wire 10,698 10,698 19,822 19,822
Refrigeration products $27,679 27,679 $23,083 23,083
--------- ------- ------- ------- ------- -------
Total 59,373 27,679 87,052 65,384 23,083 88,467
Income (loss) from
operations 1,236 2,107 3,343 5,200 (498) 4,702
Net income (loss) 1,074 1,541 2,615 3,998 429 4,427
Identifiable assets 94,919 21,070 115,989 94,139 18,258 112,397
Depreciation and
amortization expense 3,441 523 3,964 2,736 429 3,165
Additions to property,
plant and equipment 4,564 882 5,446 3,623 456 4,079
RESTUBBED TABLE
(Dollars in Thousands) Fiscal Year Ended
--------------------------------------------------
May 28, 1995
--------------------------------------------------
Magnetic Refrigeration
Products Products Total
------------- -------------- ----------
Net sales:
Magnet systems $48,581 $48,581
Superconductive wire 19,790 19,790
Refrigeration products $15,506 15,506
------- ------- -------
Total 68,371 15,506 83,877
Income (loss) from
operations 7,242 181 7,423
Net income (loss) 4,306 (299) 4,007
Identifiable assets 91,255 12,451 103,706
Depreciation and
amortization expense 2,854 416 3,270
Additions to property,
plant and equipment 3,532 403 3,935
NOTE K - PRINCIPAL CUSTOMERS AND EXPORT SALES
Sales to significant customers, substantially all of which were sales by the
Magnetic Products segment, during the last three fiscal years are as follows:
(Dollars in Thousands)
1997 1996 1995
----------------------------- ---------------------------- ----------------------------
% of % of % of
Sales Sales Sales Sales Sales Sales
------------- ----------- ------------- ----------- ------------- ----------
Customer A $43,548 50.0% $38,971 44.1% $43,868 52.3%
Customer B 7,378 8.5% 15,634 17.7% 17,708 21.1%
======= ==== ======= ==== ======= ====
Total $50,926 58.5% $54,605 61.8% $61,576 73.4%
======= ==== ======= ==== ======= ====
The Company's net export sales for the fiscal years ended May 25, 1997, May 26,
1996, and May 28, 1995 totaled $53,137,000, $46,543,000 and $51,600,000,
respectively, substantially all of which were to European customers.
NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of SFAS 107. Although the estimated
fair value amounts have been determined by the Company using available market
information and appropriate valuation methodologies, the estimates presented are
not necessarily indicative of the amounts that the Company could realize in
current market exchanges.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and short-term investments, receivables, and accounts payable: The carrying
amounts reported in the consolidated balance sheets approximate their fair
value.
Available for sale securities and other investments: The fair value of the
Ultralife investment is estimated from market prices (see Note C). The fair
value of the SMIS investment is not readily determinable as the company is
privately held.
The carrying value of long term-debt including current portion, was
approximately $29,400,000 and $31,600,000 at May 25, 1997 and May 26, 1996,
respectively, while the estimated fair
value was $28,200,000 and $30,500,000, respectively, based upon interest rates
available to the Company for issuance of similar debt with similar terms and
remaining maturities.
NOTE M - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for fiscal 1997 and 1996 are as follows:
(Dollars in Thousands, Except Share and Per Share Amounts)
Weighted Average
Common and
Common
Gross Net Earnings Per Equivalent
Net Sales Profit Income Primary Share Shares
--------- ------ ------ ------------- ---------------
1997 Quarter Ended
August 25, 1996 $ 21,370 $6,429 $1,053 $ .08 12,679,734
November 24, 1996 23,260 7,092 827 .07 12,478,940
February 23, 1997 17,325 4,595 24 .00 12,385,118
May 25, 1997 25,097 7,914 711 .06 12,791,524
1996 Quarter Ended
August 27, 1995 20,725 5,802 723 .06 12,024,867
November 26, 1995 21,745 5,239 1,127 .09 12,555,868
February 25, 1996 20,022 5,010 725 .06 12,843,089
May 26, 1996 25,975 6,228 1,852 .15 12,776,716
2. Schedule
INTERMAGNETICS GENERAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
COL. A COL. B COL. C COL. D COL. E
- ------------------------------------------------------------------------------------------------------------------------------------
Additions
-------------------------------
Balance at Charged to Charged to
Beginning Costs and Other Accounts- Deductions- Balance at
DESCRIPTION of Period Expenses Describe Describe End of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended May 25, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $ 169 $ 92 $ 2 (6) $ 1 (3) $ 302
40 (7)
Reserve for inventory obsolescence 5,225 1,465 1 (6) 58 (5) 6,653
20 (7)
Included in liability accounts:
Product warranty reserve 1,100 724 29 (7) 942 (1) 911
Contract adjustment reserve (4) 234 81 41 (2) 274
Upgrade Reserve (4) 0 8 60 (7) 8 (8) 60
Year Ended May 26, 1996
Deducted from asset accounts:
Allowance for doubtful accounts $ 145 $ 30 $ (4)(6) $ 2 (3) $ 169
Reserve for inventory obsolescence 4,404 1,208 387 (5) 5,225
Included in liability accounts:
Product warranty reserve 822 1,159 881 (1) 1,100
Contract adjustment reserve (4) 149 85 234
Year Ended May 28, 1995
Deducted from asset accounts:
Allowance for doubtful accounts $ 100 $ 59 $ 14 (3) $ 145
Reserve for inventory obsolescence 4,073 663 332 (5) 4,404
Included in liability accounts:
Product warranty reserve 562 776 516 (1) 822
Contract adjustment reserve (4) 103 46 149
(1) Cost of warranty performed.
(2) Settlement of contracts adjustments.
(3) Write-off uncollectible accounts.
(4) Classified in the Balance Sheet with other liabilities and accrued
expenses.
(5) Write-off or sale of obsolete inventory.
(6) Foreign currency translation
(7) Balance at date of acquisition of subsidiary
(8) Cost of upgrade work performed
3. Exhibits
Exhibit Index
Page Exhibit
- ---- -------
21 Subsidiaries of Intermagnetics General Corporation
23 Consent of KPMG Peat Marwick LLP with respect to the
Registration Statements Numbers 2-80041, 2-94701,
33-2517, 33-12762, 33-12763, 33-38145, 33-44693,
33-50598, 33-55092, 33-72160 and 333-10553 on Form
S-8