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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 27, 2005
-----------------
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
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(Exact name of registrant as specified in its charter)
Delaware 14-1537454
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 Old Niskayuna Road, PO Box 461, Latham, NY 12110-0461
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(518) 782-1122
----------------------------------------------------
(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 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 whether the registrant is an accelerated filer (as
defined as Rule 12b-2 of the Exchange Act).
Yes x No .
--- ---
As of March 30, 2005, the registrant had 28,060,586 shares of $.10 par value
Common Stock outstanding.
1
INTERMAGNETICS GENERAL CORPORATION
CONTENTS
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements:
Consolidated Balance Sheets - February 27, 2005 and May 30, 2004................................3
Consolidated Income Statements - Three and Nine Months Ended
February 27, 2005 and February 22, 2004.......................................................5
Consolidated Statements of Cash Flows - Nine Months Ended
February 27, 2005 and February 22, 2004.......................................................6
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income -
Nine Months Ended February 27, 2005 ..........................................................7
Notes to Consolidated Financial Statements......................................................8
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................................22
Item 3: Quantitative and Qualitative Disclosures About Market Risk.....................................32
Item 4: Controls and Procedures........................................................................33
PART II - OTHER INFORMATION.............................................................................34
SIGNATURES..............................................................................................35
CERTIFICATIONS..........................................................................................36
2
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
February 27, May 30,
2005 2004
------------ ------------
ASSETS
Cash and cash equivalents $ 3,719 $ 11,868
Trade accounts receivable, less allowance
(February 27, 2005 - $1,467; May 30, 2004 - $849) 57,901 41,218
Costs and estimated earnings in excess of
billings on uncompleted contracts 692 127
Inventories:
Consigned products 1,889 1,822
Finished products 6,321 2,969
Work in process 10,619 8,291
Materials and supplies 20,713 13,955
------------ ------------
39,542 27,037
Deferred income taxes 4,333 4,333
Prepaid expenses and other 6,893 4,608
Income tax receivable - 4,285
------------ ------------
TOTAL CURRENT ASSETS 113,080 93,476
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 2,128 1,628
Buildings and improvements 19,389 14,972
Machinery and equipment 54,442 48,692
Leasehold improvements 899 4,425
------------ ------------
76,858 69,717
Less accumulated depreciation and amortization 34,887 32,981
------------ ------------
41,971 36,736
INTANGIBLE AND OTHER ASSETS
Goodwill 170,091 118,816
Other intangibles, less accumulated amortization
(February 27, 2005 - $13,976; May 30, 2004 - $10,605) 53,183 32,491
Derivative asset 401 253
Other assets 3,367 3,163
------------ ------------
TOTAL ASSETS $ 382,093 $ 284,935
============ ============
3
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
February 27, May 30,
2005 2004
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 8,169 $ 4,171
Accounts payable 14,874 10,242
Salaries, wages and related items 14,155 10,799
Customer advances and deposits 2,087 1,302
Product warranty reserve 4,276 3,189
Accrued income taxes 17,468
Other liabilities and accrued expenses 8,449 11,753
------------ ------------
TOTAL CURRENT LIABILITIES 69,478 41,456
LONG-TERM DEBT, less current portion 21,202 57,635
DEFERRED INCOME TAXES 19,450 10,050
NOTE PAYABLE 5,000
DERIVATIVE LIABILITY 83 225
COMMITMENTS AND CONTINGENCIES
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 - 80,000,000 shares Issued
(including shares in treasury):
February 27, 2005 - 29,918,782 shares;
May 30, 2004 - 27,076,418 shares 2,992 2,707
Additional paid-in capital 202,881 146,153
Notes receivable from employees (2,542) (3,421)
Retained earnings 79,125 44,944
Accumulated other comprehensive income (loss) 789 (134)
------------ ------------
283,245 190,249
Less cost of Common Stock in treasury
February 27, 2005 - 1,872,546 shares;
May 30, 2004 - 1,789,316 shares (16,365) (14,680)
------------ ------------
266,880 175,569
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 382,093 $ 284,935
============ ============
See notes to consolidated financial statements.
4
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Nine Months Ended
-------------------------- --------------------------
February 27, February 22, February 27, February 22,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net revenues $ 68,974 $ 37,561 $ 186,673 $ 87,332
Cost of revenues 36,535 21,284 99,889 51,806
------------ ------------ ------------ ------------
Gross margin 32,439 16,277 86,784 35,526
Product research and development 6,399 2,952 17,546 8,017
Selling, general and administrative:
Stock based compensation 1,064 201 3,757 442
Non-performance stock based compensation 1,875
Other selling, general and administrative 15,952 6,782 41,439 15,222
Amortization of intangible assets 1,661 774 4,718 1,671
Impairment of intangible assets 913
------------ ------------ ------------ ------------
25,076 10,709 70,248 25,352
------------ ------------ ------------ ------------
Operating income 7,363 5,568 16,536 10,174
Interest and other income 74 176 486 695
Interest and other expense (1,109) (294) (3,238) (519)
Adjustment to gain on prior period sale of division 1,094
------------ ------------ ------------ ------------
Income from continuing operations before income taxes 6,328 5,450 14,878 10,350
Provision for income taxes 1,481 1,891 4,237 3,591
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 4,847 3,559 10,641 6,759
Discontinued operations:
Income from operations of discontinued subsidiary
including gain on sale of $33,375 in FY'05 35,133 1,105 40,727 3,360
Provision for income taxes 15,245 383 17,187 1,166
------------ ------------ ------------ ------------
INCOME FROM DISCONTINUED OPERATIONS 19,888 722 23,540 2,194
------------ ------------ ------------ ------------
NET INCOME $ 24,735 $ 4,281 $ 34,181 $ 8,953
============ ============ ============ ============
Basic Net Income per Common Share:
Continuing operations $ 0.17 $ 0.14 $ 0.39 $ 0.27
Discontinued operations 0.71 0.03 0.85 0.09
------------ ------------ ------------ ------------
Basic Net Income per Common Share $ 0.88 $ 0.17 $ 1.24 $ 0.36
============ ============ ============ ============
Diluted Net Income per Common Share:
Continuing operations $ 0.17 $ 0.14 $ 0.38 $ 0.26
Discontinued operations 0.70 0.03 0.84 0.09
------------ ------------ ------------ ------------
Diluted Net Income per Common Share $ 0.87 $ 0.17 $ 1.22 $ 0.35
============ ============ ============ ============
See notes to consolidated financial statements.
5
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
---------------------------------
February 27, February 22,
2005 2004
------------ ------------
OPERATING ACTIVITIES
Net income $ 34,181 $ 8,953
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 9,825 5,212
Stock based compensation 3,757 442
Loss on sale and disposal of assets 670 16
MRID profit sharing contribution 1,875
Impairment of intangible asset 913
Fair value adjustment to inventory 116
Change in discount on note receivable (41)
Amortization of debt issuance costs 224
Gain on sale of subsidiary (33,375)
Adjustment to prior period gain on sale of division (1,094)
Change in operating assets and liabilities net of effects from the purchase
of MRID:
Increase in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts (9,938) (1,951)
Increase in inventories and prepaid expenses and other assets (10,153) (1,807)
Increase in accounts payable and accrued expenses 27,775 1,469
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,660 12,409
INVESTING ACTIVITIES
Purchases of property, plant and equipment (7,119) (3,320)
Proceeds from sale of property, plant and equipment 29
Collection of note receivable 4,000
Proceeds from sale of subsidiary 48,681
Purchase of Invivo, net of cash acquired (754) (149,280)
Purchase of MRID, net of cash acquired (39,006)
Investment in patent and production rights (124)
Cash in lieu of fractional shares (10)
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 1,668 (148,571)
FINANCING ACTIVITIES
Proceeds from sale of Common Stock, including exercise of stock options 1,026 3,006
Proceeds from employees - Executive Stock Purchase Plan 879 304
Purchase of Treasury Stock (1,685) (1,779)
Payment to obtain debt financing (155) (1,325)
Proceeds from long term borrowings 45,000 67,000
Principal payments on note payable and long-term debt (80,218) (10,106)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (35,153) 57,100
EFFECT OF EXCHANGE RATE CHANGES ON CASH 676 18
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,149) (79,044)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,868 88,514
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,719 $ 9,470
============ ============
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Issuance of note payable as consideration for purchase of MRID due in 2007 $ 5,000
============
Issuance of Company common stock as consideration for purchase of MRID $ 50,222
============
See notes to consolidated financial statements.
6
INTERMAGNETICS GENERAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
For Nine Months Ended February 27, 2005
(Dollars in Thousands)
(Unaudited)
Accumulated
Additional Other Notes
Common Paid-in Retained Comprehensive Treasury Receivable Comprehensive
Stock Capital Earnings Income (Loss) Stock from Employees Income
--------- ----------- ----------- ------------- --------- -------------- -------------
BALANCES AT MAY 30, 2004 $ 2,707 $ 146,153 $ 44,944 $ (134) $(14,680) $ (3,421)
Comprehensive income:
Net income 34,181 34,181
Unrealized gain on derivatives, net of
tax benefit 189 189
Unrealized gain on foreign currency
translation 734 734
------------
Total comprehensive income $35,104
============
Issuance of 381,475 shares of Common
Stock, related to exercises of stock
options and stock based compensation 39 1,611
Issuance of 2,460,889 shares for purchase
of MRID 246 51,851
Capital transactions of a subsidiary 16
Repayments of notes receivable 879
Restricted Stock 3,260
Cash in lieu of fractional shares (10)
Treasury stock, upon exercise of
stock options (1,685)
--------- ----------- ----------- ------------- --------- -------------
BALANCES AT FEBRUARY 27, 2005 $ 2,992 $ 202,881 $ 79,125 $ 789 $ (16,365) $ (2,542)
========= =========== =========== ============= ========= =============
See notes to consolidated financial statements.
7
INTERMAGNETICS GENERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - General
In the opinion of Management, the accompanying unaudited consolidated
financial statements contain all adjustments, which are of a normal recurring
nature, necessary to present fairly the Company's financial position at February
27, 2005, and the results of its operations, cash flows and changes in
shareholders' equity for the periods presented. The results for the three and
nine months ended February 27, 2005, are not necessarily indicative of the
results to be expected for the entire year. The Consolidated Financial
Statements and Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the Company's
Consolidated Financial Statements for the year ended May 30, 2004, filed on Form
10-K and Form 10-K/A on August 13, 2004, and October 12, 2004, respectively.
It is the Company's policy to reclassify prior period consolidated
financial statements to conform to current year presentation.
Note B - Disposition/Acquisition
On February 15, 2005, the Company completed the sale of its
wholly-owned subsidiary, IGC-Polycold Systems, Inc. ("Polycold") to Helix
Technology Corporation ("Helix"). Helix purchased all of the outstanding capital
stock of Polycold for about $49.7 million in cash, which included a contractual
$500,000 reimbursement representing the Company's estimate for certain tax
obligations of up to a maximum liability of $3.3 million relating to a Section
338(h)(10) election under the Internal Revenue Code. The decision to sell
Polycold was a step in management's overall strategic plan to focus financial
and managerial resources on the Company's growing and more profitable medical
devices business. During the three months ended February 27, 2005, the Company
utilized the net proceeds from the sale of Polycold in addition to available
operating cash to pay off the remaining $58.0 million that was outstanding under
the Company's revolving credit facility. The sale, which resulted in a pre-tax
gain of about $33.4 million, was included in income from discontinued operations
for the three and nine months ended February 27, 2005. The gain was calculated
as follows:
(In thousands)
Cash proceeds received $ 49,714
Less:
Polycold net assets sold 15,343
Costs directly related to the sale 996
-------------
Pre-tax gain on sale $ 33,375
=============
8
The revenues and net operating profit of Polycold, the sole subsidiary in the
Company's Instrumentation segment are included in discontinued operations as
required by SFAS No. 144 "Accounting for the Impairment or Disposal of Long-
Lived Assets" as follows:
(In thousands) Three Months Ended Nine Months Ended
---------------------------- ----------------------------
February 27, February 22, February 27, February 22,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net revenues to external customers $ 6,149 $ 5,572 $ 23,354 $ 17,964
Net operating income 1,761 1,106 7,359 3,365
The assets of Polycold consisted primarily of accounts receivable, inventories,
property and equipment, goodwill and intangible assets and other assets. Under
this stock transaction, Helix assumed Polycold's accounts payable and accrued
liabilities. The following is a summary of the book value of the net assets as
of February 15, 2005, the closing date and May 30, 2004:
(In thousands)
February 15, May 30,
2005 2004
-------------- --------------
Cash $ 38 $ 40
Trade accounts receivable less allowance 4,571 3,210
Inventories 2,672 2,620
Property and equipment, net 3,132 3,448
Goodwill and intangible assets 7,530 7,564
Other assets 94 104
-------------- --------------
Total assets $ 18,037 $ 16,986
============== ==============
Accounts payable $ 365 $ 534
Other liabilities and accrued expenses 2,329 2,205
-------------- --------------
Total liabilities 2,694 2,739
-------------- --------------
Net assets of discontinued operations $ 15,343 $ 14,247
============== ==============
On July 16, 2004, the Company completed its purchase of MRI Devices
Corporation ("MRID"), a privately held company. MRID is a leading manufacturer
of radio frequency (RF) coils and related sub-systems for magnetic resonance
imaging (MRI) systems. As a result of the acquisition, MRID became a
wholly-owned subsidiary of the Company. The deal was structured as a cash and
stock transaction which included a $45.0 million cash payment, a three-year $5
million promissory note and 2,460,889 shares of Company common stock, of which
about 88,500 shares (the "Plan Shares") were allocated to fund an employee
benefit plan for MRID employees. The value of the Plan Shares of about $1.9
million was recorded as compensation expense as a result of accelerating the
vesting requirements during the three months ended November 28, 2004. The
remaining 2,372,389 shares were issued as consideration with a value of $50.2
million based on the average closing stock price for two days prior to and after
the measurement date which was determined to be June 9, 2004, in accordance with
Emerging Issues Task Force (EITF) No. 99-12. Fifty percent of the stock is
restricted from sale for two years from the date of closing and the other fifty
percent for three years. The cash portion of the consideration was financed
through our credit facility that was amended effective May 2004, to expand the
aggregate committed amount by $30 million to $130 million. MRID's results of
9
operations have been included in our consolidated financial statements since the
date of acquisition of July 16, 2004. Management believes that, in addition to
the financial benefits, the acquisition of MRID will provide an expanded high
value product portfolio that will serve the broader MRI market. In addition,
Intermagnetics expects to add incremental value to this acquisition through the
physical consolidation of product development and manufacturing facilities in
Wisconsin, a unified RF coil management team and the integration of direct sales
activities with the global sales team that the Company assumed in its
acquisition of Invivo Corporation. The following represents the initial
allocation of the total purchase price to the assets acquired and liabilities
assumed:
(In thousands)
Consideration:
Cash paid to MRID shareholders $ 44,802
Issuance of Intermagnetics Common Stock to MRID Shareholders
(2,372,389 shares at $21.17) 50,222
Promissory note payable (payable in three years from closing date) 5,000
Transaction costs paid 1,047
------------
Total purchase price $ 101,071
============
Allocated to:
Working capital, less inventory $ 14,253
Inventory 7,351
Property and equipment 6,991
Deferred tax liability (9,400)
Long-term debt (2,783)
Intangible assets:
Trade name/Trademarks 970
Product trade name 3,290
Original equipment manufacturer customer (OEM) relationships 9,300
Know-how and core technology 11,280
Product technology and design 1,960
Goodwill 57,859
------------
Total $ 101,071
============
The allocation of the purchase price is based on initial fair value
estimates of the assets and liabilities acquired. The Company plans on
finalizing the purchase price allocation from its acquisition of MRID by the end
of its fiscal year, which ends May 29, 2005.
The following (unaudited) pro forma consolidated income statements
have been prepared in accordance with SFAS No. 141 "Business Combinations" as if
the acquisition of MRID occurred at the beginning of the earliest period
presented:
10
Three Months Ended Nine Months Ended
------------------ ---------------------------------
February 22 February 27 February 22
2004 2005 2004
------------------ ----------- -----------
Net revenues $ 61,000 $ 193,133 $ 168,084
=========== =========== ===========
Net income $ 5,863 $ 34,850 $ 15,239
=========== =========== ===========
Earnings per share:
Basic $ 0.21 $ 1.25 $ 0.56
=========== =========== ===========
Diluted $ 0.21 $ 1.23 $ 0.55
=========== =========== ===========
In the above pro forma consolidated income statements, net income for
the nine months ended February 27, 2005, includes a $19.3 million gain on sale
of subsidiary, net of tax and $3.2 million of non-recurring charges net of tax
which primarily consists of $1.2 million for a stock contribution made to a
profit sharing plan for original MRID employees prior to change of control;
about $600,000 for an impairment charge on the acquired MRID trade name; and
about $1.4 million for other acquisition related charges. The three and nine
months ended February 22, 2004 includes about $766,000 of acquisition related
charges net of tax.
The above pro forma results do not include any anticipated revenue synergies.
Note C - Earnings Per Common Share
In July 2004, the Company's Board of Directors declared a three-for-two
split on all outstanding shares of its common stock. The split was completed in
the form of a fifty percent stock dividend, effective August 17, 2004, to
shareholders of record on July 23, 2004. The consolidated financial statements
and related notes have been adjusted to retroactively reflect this stock
dividend in all numbers of shares, prices per share and earnings per share.
A summary of the shares used in the calculation of net income per
Common Share is shown below:
(Dollars in Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
-------------------------- --------------------------
February 27, February 22, February 27, February 22,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Income available to
Common shareholders $ 24,735 $ 4,281 $ 34,181 $ 8,953
============ ============ ============ ============
Weighted average shares 28,020,094 25,120,424 27,563,179 24,971,697
Dilutive potential Common
Shares:
Warrants 81,433 33,153 76,570 24,695
Restricted stock 8,270 2,703 2,824 1,847
Stock options 417,129 470,689 386,297 429,509
------------ ------------ ------------ ------------
Adjusted weighted average
shares 28,526,926 25,626,969 28,028,870 25,427,748
Net income per Common Share:
Basic $ 0.88 $ 0.17 $ 1.24 $ 0.36
============ ============ ============ ============
Diluted $ 0.87 $ 0.17 $ 1.22 $ 0.35
============ ============ ============ ============
11
As of February 27, 2005, the Company had 1,264,950 shares of restricted
stock, net of forfeitures, outstanding to key employees. These shares are
restricted units, which will convert into common stock only upon the achievement
of compounded growth in the Company's pre-tax diluted earnings per share greater
than eight percent over the next five fiscal years. For 1,131,000 of these
shares, the vesting schedule in fiscal years 2003 through 2007 is 0%, 0%, 15%,
20% and 65% respectively. For 133,950 of these shares, the vesting schedule in
fiscal years 2003 through 2007 is 0%, 0%, 0%, 40% and 60% respectively. In the
current year, management has determined that it is probable that performance
targets will be met, and has recognized expense in the three and nine months
ended February 27, 2005, of $858,000 and $3,260,000. Additional shares of
restricted stock may be granted to newly hired key employees.
As of February 27, 2005, the Company had outstanding 21,869 shares of
restricted stock to the Board of Directors. These shares are vesting over 5 year
timeframes of 10%, 10%, 10%, 10%, and 60%, respectively. For the three months
ended February 27, 2005 and February 22, 2004, and the corresponding nine months
ended, the Company recognized expense of $77,500, $7,500 and $92,500 and
$15,000, respectively.
As of February 27, 2005, the Company had outstanding 13,750 shares of
restricted stock to certain employees. These shares are vesting over time
ranging from 1 to 3 years. For the three months ended February 27, 2005 and
February 22, 2004 and the corresponding nine months ended, the Company
recognized expense of $24,000, $65,000 and $81,000 and $99,000, respectively.
Note D - Product Warranty
The Company accrues for possible future claims arising under terms of
various warranties (one to three years) made in connection with the sale of
products. The following table is a reconciliation of the change in the aggregate
accrual for product warranty for the nine months ended February 27, 2005:
Three Months Nine Months
Ended Ended
(Dollars in thousands) February 27, 2005 February 27, 2005
------------------ ------------------
Balance at beginning of period $ 3,179 3,189
Reserves acquired from
acquisition of MRID Corp. - 87
Reserves released from sale of
Polycold (651) (651)
Warranty expense 2,385 2,990
Cost of warranty performed (637) (1,339)
------------------ ------------------
Balance at February 27, 2005 $ 4,276 4,276
================== ==================
Note E - Long-term Debt
On July 16, 2004, the Company borrowed $45.0 million from its amended
unsecured credit facility to partially finance the acquisition of MRID. As a
result of the acquisition, the Company assumed from MRID a $3.1 million term
loan note due in October 2007. The term loan is unsecured, except for a negative
pledge that the Company will not use MRID's Gainesville, Florida facility as
collateral for any additional financing. The note also includes a prepayment
penalty of 2% to 5%, depending on the year of prepayment. Up to 20% of the note
payable can be prepaid annually without penalty. The note bears interest at
5.85% and is payable in monthly installments of about $11,000 with the balance
due in October 2007.
12
On December 13, 2004, the Company amended its credit facility with its
existing group of commercial lenders to effectively release the Company from the
provision that required the Company to apply the net cash proceeds from its sale
of Polycold as a mandatory prepayment of first the term loan and then revolving
credit facility. This amendment also effectively releases Polycold from its
obligations as a guarantor under the credit agreement. This amendment shall be
effective solely with respect to the specific circumstances of the Polycold
divestiture. During the three months ended February 27, 2005, the Company
utilized the net proceeds from the sale of Polycold in addition to available
operating cash to pay off the remaining $58.0 million that was outstanding under
the Company's revolving credit facility.
The Company's unsecured Credit Facility contains mandatory prepayment
provisions whereby certain amounts borrowed must be repaid upon the occurrence
of certain specified events and conditions. The Company shall make mandatory
prepayments in an amount equal to (a) 100% of net insurance proceeds not applied
to the repair or replacement of damaged properties; (b) 100% of net proceeds
from asset sales except for assets sold in the normal course of business or
proceeds from asset sales to be reinvested in a like asset within six months;
(c) 100% of the net proceeds from the issuance of any debt or equity (other than
certain permitted debt or equity issuances if the leverage ratio of the Company
after giving effect thereto is less than or equal to 2.25 to 1.0) and 50% of
annual excess cash flow, with such percentage to be reduced to 0% in the event
the Company's leverage ratio is reduced to or below 2.00 to 1.0.
As of February 27, 2005, the Company had the following long-term debt
outstanding:
As of
-----------------------------
(In thousands) February 27, May 30,
2005 2004
---- ----
Long-Term Debt:
Mortgages and notes payable $ 8,121 $ 5,744
Term loan ($25 million) 21,250 24,062
Revolving line of credit ($105 million) - 32,000
------------ ------------
Total long-term debt 29,371 61,806
Less current maturities 8,169 4,171
------------ ------------
Long-term debt excluding current maturities $ 21,202 $ 57,635
============ ============
In addition to the long-term debt noted above, the Company issued a
$5.0 million three-year note payable that accrues interest at LIBOR plus 0.5% in
conjunction with the acquisition of MRI Devices.
As of February 27, 2005, the Company had $104.4 million additional
borrowing capacity under its unsecured credit facility which is net of $565,000
of standby letters of credit issued to the Company's insurance agent as
collateral for potential workers' compensation claims.
13
Note F - New Accounting Pronouncements
On March 29, 2005, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the Staff's
interpretation of Share-Based Payments. This interpretation expresses the views
of the staff regarding the interaction between Statement of Financial Accounting
Standards Statement No. 123 (revised 2004) Share-Based Payment (Statement 123R)
and certain SEC rules and regulations and provide the staff's views regarding
the valuation of share-based payment arrangements for public companies. In
particular, this SAB provides guidance related to share-based payment
transactions with nonemployees, the transition from nonpublic to public entity
status, valuation methods, the accounting for certain redeemable financial
instruments issued under share-based payment arrangements, the classification of
compensation expense, non-GAAP financial measures, first-time adoption of
Statement 123R in an interim period, capitalization of compensation cost related
to share-based payment arrangements, the accounting for income tax effects of
share-based payment arrangements upon adoption of Statement 123R, the
modification of employee share options prior to adoption of Statement 123R and
disclosures in Management's Discussion and Analysis ("MD&A") subsequent to
adoption of Statement 123R. The Company will adopt SAB 107 in connection with
its adoption of Statement 123R which could have a material impact on our
consolidated financial position, results of operations and cash flows.
In March 2005, the FASB issued FASB Staff Position (FSP) FIN 46(R)-5
"Implicit Variable Interests under FASB Interpretation No. 46, Consolidation of
Variable Interest Entities." FSP FIN 46(R)-5 provides guidance for a reporting
enterprise that holds an implicit variable interest in a variable interest
entity (VIE) and is also a related party to other variable interest holders.
This guidance requires that if the aggregate variable interests held by the
reporting enterprise and its related parties would, if held by a single party,
identify that party as the primary beneficiary, then the party within the
related party group that is most closely associated with the VIE is the primary
beneficiary. The effective date of FSP FIN 46(R)-5 is the first reporting period
beginning after March 3, 2005, with early application permitted for periods for
which financial statements have not been issued. Management does not believe
that implementation of this FSP will have a material effect on the Company's
results of operations or financial position.
On December 16, 2004, the FASB issued Statement No. 123 (revised
2004), Share-Based Payment. Statement 123(R) would require us to measure all
employee stock-based compensation awards using a fair value method and record
such expense in our consolidated financial statements. In addition, the adoption
of Statement 123(R) will require additional accounting related to the income tax
effects and additional disclosure regarding the cash flow effects resulting from
share-based payment arrangements. Statement 123(R) is effective beginning in our
second quarter of fiscal 2006. The adoption of Statement 123(R) could have a
material impact on our consolidated financial position, results of operations
and cash flows.
On December 16, 2004, the FASB issued Statement No. 153, Exchanges of
Non-monetary Assets, an amendment of APB Opinion No. 29. Statement 153 addresses
the measurement of exchanges of non-monetary assets and redefines the scope of
transactions that should be measured based on the fair value of the assets
exchanged. Statement 153 is effective for non-monetary asset exchanges beginning
in our second quarter of fiscal 2006. Management is in the process of evaluating
the effect SFAS 153 will have on the Company's financial position and results of
operations.
14
In December 2004, the FASB issued Staff Position No. FAS 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004. This Staff Position clarifies that the tax deduction for
qualified domestic production activities provided by the American Jobs Creation
Act of 2004 (the Act) should be accounted for as a special deduction under FAS
109 as opposed to a tax-rate deduction. The phase-in of the tax deduction begins
with qualifying production activities for the year ending December 31, 2005. The
American Jobs Creation Act of 2004 replacing the extraterritorial income (ETI)
tax incentive with a domestic manufacturing deduction. In the long term we
expect this new deduction to provide a similar tax benefit as the ETI tax
incentive has in the past. We may have a small reduction in our fiscal year 2005
tax benefit as the transition rules create a short-term gap in the benefit we
receive.
In November 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 151, "Inventory costs - An
Amendment of ARB No. 43 Chapter 4" ("SFAS No. 151"). SFAS No. 151 amends the
guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs, and wasted material (spoilage). This Statement requires that those items
be recognized as current-period charges. In addition, this Statement requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The provisions of
this statement shall be effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. Management is in the process of evaluating
the effect SFAS 151 will have on the Company's financial position and results of
operations.
Note G - Stock Compensation
The Company accounts for its stock compensation arrangements using the
intrinsic value method under the provisions of APB No. 25, accounting for stock
issued to employees. The following pro forma net income and earnings per share
information has been determined as if the Company had accounted for stock-based
compensation awarded under its stock option plans using the fair value-based
method.
(Dollars in Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
February 27, February 22, February 27, February 22,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net income (as reported) $ 24,735 $ 4,281 $ 34,181 $ 8,953
Add recorded non-cash stock compensation, net of tax 695 131 3,678 288
Less non-cash stock compensation
under SFAS No. 123, net of tax (1,233) (769) (4,908) (1,779)
------------- ------------- ------------- -------------
Pro forma Net Income $ 24,197 $ 3,643 $ 32,951 $ 7,462
Earnings per Common Share (as reported):
Basic $ 0.88 $ 0.17 $ 1.24 $ 0.36
============= ============= ============= =============
Diluted $ 0.87 $ 0.17 $ 1.22 $ 0.35
============= ============= ============= =============
Earnings per Common Share (pro forma):
Basic $ 0.86 $ 0.15 $ 1.20 $ 0.30
============= ============= ============= =============
Diluted $ 0.85 $ 0.14 $ 1.18 $ 0.29
============= ============= ============= =============
15
Note H - Segment and Related Information
As a result of the sale of Polycold, the sole subsidiary in its
Instrumentation segment, the Company's continuing operations now consists of
three reportable segments: Magnetic Resonance Imaging (MRI), Medical Devices,
and Energy Technology. The MRI segment consists primarily of the manufacture and
sale of low temperature superconducting ("LTS") magnets (by the IGC-Magnet
Business Group). Previously, this segment also included the manufacture and sale
of radio frequency coils. All prior year data has been restated to reflect this
change.
The Medical Devices segment now consists of one collectively managed
entity, Invivo Corporation, with a universal brand identity of "Invivo".
Invivo's management team concentrates on the collective growth, revenues and
profitability of its two divisions; Invivo Patient Care (IPC) and Invivo
Diagnostic Imaging (IDI). Invivo Patient Care designs and manufactures patient
monitors, primarily for use in MRI suites. IPC also designs and manufactures
bedside monitors and central station monitoring systems. Invivo Diagnostic
Imaging (formerly IGC-MAI and MRID) designs and manufactures Radio Frequency
(RF) coils, which are used to enhance the image quality of MRI systems. Invivo
sells its products to original equipment manufacturers such as Philips Medical
Systems, GE Healthcare, Siemens Medical Solutions, Toshiba Medical Systems and
Hitachi Medical Systems. Invivo also distributes its products directly through a
global sales network that serves both IDI and IPC. In addition, Invivo sells its
products to group purchasing organizations, research hospitals, universities and
other luminary sites.
The Energy Technology segment, operated through SuperPower Inc., is
developing second generation, high-temperature superconducting (HTS) materials
that we expect to use in devices designed to enhance capacity, reliability and
quality of transmission and distribution of electrical power.
The Company evaluates the performance of its reportable segments based
on operating income (loss).
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
16
SEGMENT DATA
(Dollars in Thousands)
Three Months Ended
----------------------------------------------------------------
February 27, 2005
----------------------------------------------------------------
Magnetic Resonance Medical Energy
Imaging Devices Technology Total
------------------ -------------- -------------- ---------------
Net revenues to external customers:
Magnet systems $ 30,128 $ 30,128
Patient Monitors and RF Coils $ 35,290 35,290
Other $ 3,556 3,556
------------------ -------------- -------------- ---------------
Total 30,128 35,290 3,556 68,974
Segment operating income (loss) 5,745 2,945 (1,327) 7,363
Goodwill 170,091 170,091
Total assets $ 120,708 $ 249,895 $ 11,490 $ 382,093
Three Months Ended
----------------------------------------------------------------
February 22, 2004
------------------------------------------------ ---------------
Magnetic Resonance Medical Energy
Imaging Devices Technology Total
------------------ -------------- -------------- ---------------
Net revenues to external customers:
Magnet systems $ 27,515 $ 27,515
Patient Monitors and RF Coils $ 8,527 8,527
Other $ 1,519 1,519
------------------ -------------- -------------- ---------------
Total 27,515 8,527 1,519 37,561
Segment operating income (loss) 6,633 639 (1,704) 5,568
Goodwill 109,523 109,523
Total assets $ 97,783 148,604 9,324 255,711
17
Nine Months Ended
----------------------------------------------------------------
February 27, 2005
----------------------------------------------------------------
Magnetic Resonance Medical Energy
Imaging Devices Technology Total
------------------ -------------- -------------- ---------------
Net revenues to external customers:
Magnet systems $ 83,736 $ 83,736
Patient Monitors and RF Coils $ 94,806 94,806
Other $ 8,131 8,131
------------------ -------------- -------------- ---------------
Total 83,736 94,806 8,131 186,673
Segment operating income (loss) 10,123 11,587 (5,174) 16,536
Goodwill 170,091 170,091
Total assets $ 120,708 $ 249,895 $ 11,490 $ 382,093
Nine Months Ended
----------------------------------------------------------------
February 22, 2004
----------------------------------------------------------------
Magnetic Resonance Medical Energy
Imaging Devices Technology Total
------------------ -------------- -------------- ---------------
Net revenues to external customers:
Magnet systems $ 67,586 $ 67,586
Patient Monitors and RF Coils $ 15,218 15,218
Other $ 4,528 4,528
------------------ -------------- -------------- ---------------
Total 67,586 15,218 4,528 87,332
Segment operating income (loss) 13,064 1,229 (4,141) 10,152
Goodwill 109,523 109,523
Total assets $ 97,783 $ 148,604 $ 9,324 $ 255,711
18
The following are reconciliations of the information used by the chief
operating decision maker to the Company's consolidated totals:
Dollars in thousands Three Months Ended
---------------------------------------
Reconciliation of income from continuing operations before income taxes: February 27, 2005 February 22, 2004
----------------- -----------------
Total operating income from reportable segments $ 7,363 $ 5,568
----------------- -----------------
Net operating income 7,363 5,568
Interest and other income 74 176
Interest and other expense (1,109) (294)
----------------- -----------------
Income from continuing operations before income taxes $ 6,328 $ 5,450
================= =================
Nine Months Ended
---------------------------------------
Reconciliation of income from continuing operations before income taxes: February 27, 2005 February 22, 2004
----------------- -----------------
Total operating income from reportable segments
Intercompany income in ending inventory 16,536 10,152
Net operating income 22
----------------- -----------------
16,536 10,174
Interest and other income
Interest and other expense 486 695
Adjustment to gain on prior period sale of division (3,238) (519)
Income from continuing operations before income taxes 1,094
----------------- -----------------
Income before income taxes $ 14,878 $ 10,350
================= =================
Note I - Goodwill and Other Intangible Assets
The Company follows the provisions of Statement of Financial Accounting
Standards No. 142 (FAS No. 142), "Goodwill and Other Intangible Assets". FAS No.
142 changed the accounting for goodwill from an amortization method to an
impairment-only approach.
19
The components of other intangibles are as follows:
(Dollars in Thousands)
As of February 27, 2005
------------------------------------------------
Weighted
Gross Carrying Accumulated Average Life
Amount Amortization in Years
-------------- ------------ -------------
Amortized intangible assets
Production rights $ 8,750 $ 8,220 5.5
Patents 3,899 1,142 17.7
Trade names/trademarks 11,510 499 25.0
Product name/trademark 4,640 310 12.6
Know-how and core technology 17,940 1,607 9.3
Product technology and design 4,930 664 6.6
OEM customer relationships 14,950 994 10.5
Order backlog 540 540 0.3
------------- ----------- -------------
$ 67,159 $ 13,976 12.5
============= ===========
Aggregate amortization expense from continuing operations for the three
months ended February 27, 2005 and February 22, 2004 and the corresponding nine
month periods was $1,661,000 and $774,000 and $4,718,000 and $1,671,000,
respectively. During the Company's second fiscal quarter, the Company, through
re-branding exercises and market analysis, determined that the acquired MRI
Devices trade name will no longer be utilized in future branding. As a result,
the Company reduced the net book value of the acquired MRI Devices trade name
originally valued at $970,000 to zero resulting in an impairment charge of
$913,000.
ESTIMATED AMORTIZATION EXPENSE:
For the year ending May 2005 $6,418
For the year ending May 2006 $5,202
For the year ending May 2007 $5,070
For the year ending May 2008 $5,070
For the year ending May 2009 $5,058
All intangibles are amortized on a straight line basis.
The changes in the carrying amount of goodwill between May 30, 2004 and February
27, 2005, are as follows:
(In thousands)
Goodwill as of May 30, 2004 $ 118,816
Goodwill acquired on July 16, 2004 with the acquisition of
MRI Devices Corp. (preliminary purchase price allocation) 57,859
Adjustments to purchase price allocation of Invivo 380
Goodwill disposed of from sale of IGC-Polycold Systems, Inc. (6,964)
----------
Goodwill as of February 27, 2005 $ 170,091
==========
Management has evaluated goodwill for impairment during the quarter ended
November 28, 2004, in accordance with SFAS No. 142 and determined that no
impairment exists.
20
Note J - Environmental Remediation
In connection with the sale of IGC-AS in October 2001, the Company had
recorded a $1.5 million liability related to environmental investigation and
potential remediation costs to be incurred by the Company under certain property
transfer laws of the State of Connecticut. As a result of recent developments
and environmental site assessments, the Company reduced its current liability
resulting in an adjustment to the gain on a prior period sale of a division of
$1.1 million. As of February 27, 2005, the total remaining reserve for
environmental remediation relating to the divestitures of IGC-APD and IGC-AS was
approximately $545,000.
Note K - Derivative Instruments and Hedging Activities
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities"
effective May 28, 2001. SFAS No. 133, as amended, requires that all derivative
instruments be recognized on the balance sheet at their fair value and changes
in fair value be recognized immediately in earnings, unless the derivatives
qualify as hedges in accordance with the Standard. The change in fair value for
those derivatives that qualify as hedges is recorded in shareholders' equity as
other comprehensive income (loss).
The Company has entered into interest rate swap agreements to reduce
the effect of changes in interest rates on its floating rate long-term debt. On
February 27, 2005, the Company had outstanding interest rate swap agreements
with a commercial bank, having a notional principal amount of approximately $4.2
million. Those agreements effectively change the Company's interest rate
exposure on its mortgages due in November 2005, to a fixed 6.88%. The interest
rate swap agreement matures at the time the related notes mature. The fair value
of this interest rate swap increased $142,000 to $(83,000) during the nine
months ended February 27, 2005.
On February 5, 2004, the Company entered into a separate interest rate
swap agreement with a commercial bank, having a current notional principal
amount of $21.3 million. This agreement effectively hedges the Company's
interest rate exposure on its $25 million term loan due on December 31, 2008 to
a fixed rate of 2.95% plus applicable margins as defined in our credit
agreement. The interest rate swap agreement corresponds with the repayment terms
of the term loan and matures on December 31, 2008. The fair value of this
interest rate swap increased $148,000 to $401,000 during the nine months ended
February 27, 2005.
The Company is exposed to credit loss in the event of non-performance
by the other parties to the interest rate swap agreements. However, the Company
does not anticipate non-performance by the counterparties.
Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. For the nine months ended February 27, 2005, the Company
recorded an other comprehensive gain of $189,000 net of tax for the two interest
rate swap agreements.
21
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Intermagnetics General Corporation ("Intermagnetics", "Company", "we"
or "us") makes forward-looking statements in this document. Typically, we
identify forward-looking statements with words like "believe," "anticipate,"
"perceive," "expect," "estimate" and similar expressions. Unless a passage
describes a historical event, it should be considered a forward-looking
statement. These forward-looking statements are not guarantees of future
performance and involve important assumptions, risks, uncertainties and other
factors that could cause the Company's actual results for fiscal year 2005 and
beyond to differ materially from those expressed in the forward-looking
statements. These important factors include, without limitation, the
assumptions, risks, and uncertainties set forth in this Management's Discussion
and Analysis of Financial Condition and Results of Operations, as well as other
assumptions, risks, uncertainties and factors disclosed throughout this report.
Except for our continuing obligations to disclose material information
under federal securities laws, we are not obligated to update these
forward-looking statements, even though situations may change in the future. We
qualify all of our forward-looking statements by these cautionary statements.
OVERVIEW OF SIGNIFICANT EVENTS
On February 15, 2005, we completed the sale of our wholly-owned
subsidiary, IGC-Polycold Systems, Inc. ("Polycold"), to Helix Technology
Corporation ("Helix"). Helix purchased all of the outstanding capital stock of
Polycold for about $49.7 million in cash, which included a contractual $500,000
reimbursement representing the Company's estimate for certain tax obligations of
up to a maximum liability of $3.3 million relating to a Section 338(h)(10)
election under the Internal Revenue Code. The decision to sell Polycold was a
step in our overall strategic plan to focus financial and managerial resources
on the Company's growing and more profitable medical devices business. The sale,
which resulted in a pre-tax gain of about $33.4 million, was included in income
from discontinued operations for the three and nine months ended February 27,
2005. During the three months ended February 27, 2005, we utilized the net
proceeds from the sale of Polycold and a portion of existing cash balances to
pay off the remaining $58.0 million that was outstanding under the Company's
revolving credit facility.
On July 16, 2004, we completed our purchase of MRI Devices
Corporation ("MRID"), a privately held company. MRID is a leading manufacturer
of radio frequency (RF) coils and related sub-systems for magnetic resonance
imaging (MRI) systems. As a result of the acquisition, MRID became a
wholly-owned subsidiary of the Company. The deal was structured as a cash and
stock transaction which included a $45.0 million cash payment, a three-year $5
million promissory note and 2,460,889 shares of Company common stock, of which
about 88,500 shares (the "Plan Shares") were allocated to fund an employee
benefit plan for MRID employees. The value of the Plan Shares of about $1.9
million was recorded as compensation expense as a result of accelerating the
vesting requirements during the three months ended November 28, 2004. The
remaining 2,372,389 shares were issued as consideration with a value of $50.2
million based on the average closing stock price for two days prior to and after
the measurement date which was determined to be June 9, 2004, in accordance with
Emerging Issues Task Force (EITF) No. 99-12. Fifty percent of the stock is
restricted from sale for two years from the date of closing and the other fifty
percent for three years. The cash portion of the consideration was financed
through our credit facility that was recently amended to expand the aggregate
committed amount by $30 million to $130 million. MRID's results of operations
have been included in our consolidated financial statements since the date of
acquisition and are included in our discussion on the Results of Operations
below. Since the acquisition, we have combined MRID and our pre-existing RF coil
subsidiary (IGC-Medical Advances) into one entity: Invivo Diagnostic Imaging, a
22
division of Invivo Corporation. This has resulted in adding incremental value to
this acquisition through the physical consolidation of product development and
manufacturing facilities in Wisconsin, a unified RF coil management team and the
integration of direct sales activities with Invivo Corporation's world-class
global sales team.
On July 15, 2004, our Board of Directors declared a three-for-two
split on all outstanding shares of our common stock. The split was completed in
the form of a fifty percent stock dividend, effective August 17, 2004, to
shareholders of record on July 23, 2004. All share and per share data included
in this filing have been adjusted to retroactively reflect this stock dividend.
On January 27, 2004, we completed our purchase of Invivo Corporation,
which was acquired through a public tender offer. Invivo designs, manufactures
and markets patient monitoring systems. These monitoring systems measure and
display vital signs of patients in medical settings, particularly during
magnetic resonance imaging procedures. As a result of the acquisition, Invivo
became a wholly-owned subsidiary of the Company. The acquisition of Invivo
substantially expanded our direct sales team and customer base. Invivo's results
of operations have been included in our consolidated financial statements since
the date of acquisition and are included in our discussion on Results of
Operations below.
SEGMENT STRUCTURE
As a result of the sale of Polycold, the sole subsidiary in our
Instrumentation segment, our reportable segments from continuing operations now
consist of: Magnetic Resonance Imaging ("MRI"), Medical Devices, and Energy
Technology. The MRI segment consists of IGC-MBG which manufactures and sells low
temperature superconducting ("LTS") magnets that are used in MRI systems.
Previously this segment included OEM sales of Radio Frequency (RF) coils, which
are now included in the Medical Devices segment. All prior year data has been
restated to reflect this change.
Our Medical Devices segment now consists of one collectively managed
entity, Invivo Corporation with a universal brand identity of "Invivo". Invivo's
management team concentrates on the collective growth, revenues and
profitability of its two divisions: Invivo Patient Care (IPC) and Invivo
Diagnostic Imaging (IDI). Invivo Patient Care designs and manufactures patient
monitors, primarily for use in MRI suites. IPC also designs and manufactures
bedside patient monitors and central station monitoring systems. Invivo
Diagnostic Imaging designs and manufactures RF coils and associated sub-systems,
which are used to enhance the image quality of MRI systems. Invivo sells its
products to original equipment manufacturers such as Philips Medical Systems, GE
Healthcare, Siemens Medical Solutions, Toshiba Medical Systems and Hitachi
Medical Systems. Invivo also distributes its products directly through a global
sales network that serves both IDI and IPC. In addition, Invivo sells its
products to group purchasing organizations, research hospitals, universities and
other luminary sites.
In Energy Technology, our wholly-owned subsidiary, SuperPower, Inc.
("SuperPower") is developing high-temperature superconducting materials and
devices designed to enhance the capacity, reliability and quality of electrical
power transmission and distribution.
23
The Company evaluates the performance of its reportable segments
based on operating income (loss). The Company operates on a 52/53-week fiscal
year ending the last Sunday during the month of May.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon, in part, the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America (GAAP). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect assets, liabilities, revenues, expenses and related
disclosure of contingent liabilities.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with Staff Accounting
Bulletin No. 101 as amended by Staff Accounting Bulletin No. 104, on product
that has been shipped. In these cases, all the criteria for revenue recognition
have been met including, but not limited to: persuasive evidence of an
arrangement exists; the arrangement includes a product price that is fixed and
determinable; the company has accomplished what it must do to satisfy the terms
of the arrangement including passing title and risk of loss to our customer upon
shipment; and collection from our customer is reasonably assured in accordance
with the terms in the arrangement.
In other instances, the Company recognizes revenue in accordance with
Staff Accounting Bulletin No. 101 as amended by Staff Accounting Bulletin No.
104, on product that is complete and ready to ship for which our customer has
requested a delay in delivery. In these cases, all the criteria for revenue
recognition have been met including, but not limited to: the customer has a
substantial business purpose; there is a fixed delivery date; title and risk of
loss has transferred to our customer; the product is complete and ready for
shipment; and the product has been segregated and is not available to be used to
fill other orders. Upon notification from our customer the product is shipped to
the stated destination. As of February 27, 2005 and February 22, 2004, there
were no bill and hold sales.
The Company recognizes revenue and profit on long-term development
contracts based upon actual time and material costs incurred plus contractual
earned profit. These types of contracts typically provide engineering services
to achieve a specific scientific result relating to superconductivity. The
customers for these contracts are both commercial customers and various state
and federal government agencies. When government agencies are providing revenue
we do not expect the government to be a significant end user of the resulting
products. Therefore, the Company does not reduce Internal Research and
Development by the funding received.
INVENTORY RESERVES
The Company maintains a reserve for inventory that has become damaged
in the manufacturing process or technologically obsolete. If technology advances
more rapidly than expected, manufacturing processes improve substantially or the
market for our products declines substantially, adjustments to reserves may be
required.
24
GOODWILL AND INTANGIBLE ASSET IMPAIRMENTS
Goodwill and other long-lived assets are reviewed for impairment
whenever events such as significant changes in the business climate, plant
closures, changes in product offerings, or other circumstances indicate that the
carrying amount may not be recoverable. Additionally, the Company performs a
test for goodwill impairment annually during the second quarter of each fiscal
year. The determination of whether these assets are impaired involves
significant judgments such as long term revenue projections, weighted average
cost of capital, product cost reductions, market penetration and sufficient
product research and development to keep pace with market demand. Changes in
strategy and/or market conditions may result in adjustments to recorded asset
balances.
WARRANTY RESERVES
The provision for warranty for potential defects with our manufactured
products is based on historical experience for the period the product was under
warranty during the fiscal year. In some cases, when historical warranty
information is not available the Company estimates warranty costs based on
spending related to the cost centers responsible for the warranty repair. The
Company believes these reserves are adequate based on the evaluation criteria,
procedures in place to control the manufacturing process and pre-testing of
newly developed products to ensure their manufacturability prior to commercial
introduction. If product quality declines, the Company may require additional
provisions.
RESERVE FOR ENVIRONMENTAL REMEDIATION
The Company maintains a provision for potential environmental
remediation for businesses disposed of during fiscal 2002 (see also Note J in
the notes to the consolidated financial statements included herein). These
provisions are based upon management's best estimate under the given
circumstances and available information. Our provision did not include any range
of loss. Therefore, we are unable to identify or estimate any additional loss
that is reasonably possible. The Company believes these provisions are adequate.
If unexpected costs related to the environmental issues are incurred additional
provisions will be needed.
RESULTS OF OPERATIONS
Revenues from continuing operations increased about $31.4 million or
nearly 84%, to $69 million, for the three months ended February 27, 2005, from
$37.6 million for the same period last year. This increase was the result of
improved revenues from all of our segments and the inclusion of MRI Devices, now
Invivo Diagnostic Imaging or "IDI", and two additional months of revenues from
Invivo Patient Care or "IPC" (formerly InvivoMDE). Our three month period ended
February 22, 2004, included only one month of revenues from IPC.
For the nine months ended February 27, 2005, revenues from continuing
operations increased $99.3 million or 113.8% to $186.7 million from $87.3
million for the same period last year. Again, this increase was the result of
improved revenues from all of our segments and the inclusion of MRID in Invivo
Diagnostic Imaging and two additional months of revenues from Invivo Patient
Care.
Our recent reorganization of our RF coil businesses made it necessary
to review the way our chief operating decision maker receives information and
all the other criteria required by FAS 131 regarding segment reporting. As a
result of this review we found it necessary to revise our segment presentation
as described in the section entitled "Segment Structure" above. This change took
place in our second quarter of our current fiscal year. All prior periods have
been restated to reflect this change.
25
MRI SEGMENT REVENUES
MRI segment revenues during the three month period ended February 27,
2005, increased $2.6 million or nearly 10% to nearly $30.1 million compared to
$27.5 million in the prior year. This increase is primarily the result of
improved product mix and overall increase in magnet volumes combined with an
increase of product development revenues of about $1 million. Reduced selling
prices on the 1.5T magnet were more than offset by improved shipments of the
higher field 3.0T magnet.
For the nine months ended February 27, 2005, MRI segment revenues
increased $16.2 million or 23.9% to $83.7 million from the $67.6 million in same
nine month period last year. This increase is related to increased volume
resulting from an abnormally low first quarter in fiscal 2004 due to the
contractual transition of managing supply chain logistics for Philips Medical
Systems in return for an enhanced and extended exclusive supply contract.
Additionally, reduced selling prices on the 1.5T were more than offset by
improved shipments of the higher field 3.0T magnet and the introduction of our
new 1.0T open architecture magnet.
MEDICAL DEVICES REVENUES
Our Medical Devices segment provided $35.3 million of revenues for the
quarter ended February 27, 2005, an increase of $26.9 million over the same
period last year. Invivo provided about $18.8 million from OEM RF coil and
patient monitor revenues an increase of about $14.9 million from the same period
last year primarily due to the addition of RF coil sales from the MRID
acquisition combined with an increase in overall OEM demand for RF coils. Invivo
provided about $16.5 million of revenues relating to direct sales of patient
monitors and RF coils, an increase of $12 million over the same period last
year. Revenue for the three and nine months ended February 22, 2004, included
one month of Invivo patient monitoring revenues.
For the nine months ended February 27, 2005, the Medical Devices
segment provided $94.8 million of revenues, an increase of $79.7 million over
the same period last year. Invivo OEM RF coil and patient monitoring revenues
increased about $35.1 million to $44 million, primarily the result of our
acquisition of MRID combined with an increase in OEM demand. Invivo also
contributed $50.8 million of direct sales of patient monitors and RF coils, an
increase of $44.6 million over the same period last year.
ENERGY TECHNOLOGY SEGMENT REVENUES
Revenues of the Energy Technology segment increased $2.0 to $3.6
million and $3.6 million to $8.1 million for the three and nine months ended
February 27, 2005, respectively, over the corresponding periods last year. The
increase over prior year periods resulted from a net increase in government and
third-party billable revenue on HTS device programs.
GROSS MARGIN
Consolidated gross margin from continuing operations for the three
months ended February 27, 2005, increased $16.2 million to $32.4 million or
47.0% of net revenues compared to the same period last year of $16.3 million or
43.3% of net revenues. The MRI segment increased $854,000 which corresponds to
26
the increase in revenues, improved product mix as well as the continued benefits
of this segment's cost savings efforts, partially offset by reduced selling
prices on the 1.5T magnets. The higher margin sales in our Medical Devices
segment contributed $15.1 million of the increase in consolidated gross margin
primarily through the inclusion of MRID and Invivo, partially offset by an
increase in warranty expense. Our Energy Technology segment contributed about
$174,000 of the increase related to increased revenues.
During the nine months ended, gross margin increased $51.3 million to
$86.8 million or 46.5% of net revenues from $35.5 million or 40.7% of net
revenues for the same nine month period last year. All segments contributed to
this increase. Our MRI segment contributed about $6.8 million to the increase as
a result of increased volume, improved mix and continued cost reduction efforts
partially offset by negotiated selling price reductions. Our Medical Devices
sector increased $44.2 million primarily from the contribution of our
acquisitions. Partially offsetting the increase in our Medical Device segment is
about $200,000 of costs incurred for relocating manufacturing operations from
our Arleta, CA facility to our Orlando, FL facility. Finally, Energy Technology
contributed about $331,000 to the increase resulting from improved revenue.
PRODUCT RESEARCH AND DEVELOPMENT
Product research and development increased $3.4 million or 116.8% to
$6.4 million for the three months ended February 27, 2005, from $3 million for
the same period last year. This increase is primarily due to new product
development programs in our MRI segment ($432,000) and the contribution of new
product development for both RF coils and patient monitors in our Medical
Devices segment ($3.2 million) partially offset by a net decrease in spending on
various HTS projects in our Energy Technology segment ($188,000) as a result of
increased funding from governmental agencies.
For the nine months ended, product research and development increased
$9.5 million or 118.9% to $17.5 million from $8.0 million for the same period
last year. This increase is related to additional spending from the MRI segment
of about $1.1 million relating to new magnet development and about $1.5 million
from our Energy Technology segment relating to existing HTS programs and
additional cost share relating to increased revenue. Our Medical Devices segment
contributed the remaining $6.9 million of the increase primarily as a result of
our acquisitions and new product development for both RF coils and patient
monitors.
SELLING, GENERAL AND ADMINISTRATIVE
For the three months ended February 27, 2005, selling general and
administrative expenses, including stock based compensation, increased $10
million to $17 million from $7 million for the same period last year. Our recent
acquisitions of Invivo and MRID account for $7.4 million of the increase.
Performance based stock compensation increased $863,000 over the same period
last year. This expense is calculated on forecasted performance. Acquisition and
integration related expenses were about $1.5 million. Finally, audit and tax
fees increased about $250,000 over the same period last year.
Selling, general and administrative expenses including stock based
compensation increased about $31.4 million or 201% to nearly $47.1 million for
the nine months ended February 27, 2005, from $15.7 million for the same period
last year. The majority of this increase, $21.9 million, is related to our
acquisitions of Invivo and MRID. In addition, a stock contribution to a profit
sharing plan for original MRID employees made, prior to change in control was
recorded as a non-cash expense of $1.9 million during our second fiscal quarter.
27
Performance based stock compensation increased $3.3 million over the same period
last year and $1.4 million related to increases in incentive compensation. These
accruals are based on forecasted performance. Acquisition and integration
related expenses increased about $2.4 million. Finally, spending increased on
other operating costs relating to audit and tax fees, information system expense
and insurance. These expenses were partially offset by reductions in other
operating expenses, resulting in a net increase of about $600,000 over the same
period last year.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization expense of $1.7 million and $4.7 million for the three and
nine month periods ended February 27, 2005, increased about $887,000 and about
$3 million, respectively, from the three and nine month periods last year. The
increase is due to the addition of the amortizable intangible assets resulting
from our acquisition of Invivo on January 27, 2004 and MRID on July 16, 2004.
Our three and nine month periods in fiscal year 2004 included only one month of
amortization relating to Invivo.
IMPAIRMENT OF INTANGIBLE ASSET
During our second fiscal quarter, management, through re-branding
exercises and market analysis, determined that the acquired MRI Devices trade
name will no longer be utilized. As a result, the company reduced the net book
value of the acquired MRI Devices trade name to zero resulting in an impairment
charge of $913,000.
OPERATING INCOME
For the three and nine month periods of fiscal year 2005, operating
income from continuing operations increased $1.8 million to $7.4 million, and
$6.4 million to $16.5 million, respectively, over the corresponding prior year
periods. This increase is primarily due to improved revenues and margins as well
as the inclusion of operations from our acquisition of MRID in July of 2004 and
our acquisition of Invivo in January 2004. These increases were partially offset
by internal acquisition and integration costs combined with the increases in
amortization and stock based compensation.
INTEREST AND OTHER
Interest and other income of $74,000 and $486,000 for the three and
nine months ended February 27, 2005, decreased $102,000 and $209,000,
respectively from the corresponding periods last year. This decrease is
primarily driven by our lower cash balances resulting from funding our
acquisitions of Invivo and MRID, combined with utilization of surplus cash to
consistently make accelerated pre-payments on our revolving credit facility,
partially offset by an improvement in the interest rate environment on invested
cash balances.
Interest and other expense of $1.1 million and $3.2 million for the
three and nine months ended February 27, 2005, increased $815,000 and $2.7
million, respectively, from the corresponding three and nine month periods last
year. This increase is primarily driven by the interest expense from the $112
million borrowed under our $130 million unsecured credit facility used to
partially finance our acquisition of Invivo and MRID, combined with about $4.4
million of debt assumed in our acquisitions and a $5.0 million three year note
payable accruing interest at LIBOR plus 0.5% issued in conjunction with the MRID
acquisition. As of February 27, 2005, we had fully paid off our revolving credit
facility using the proceeds received from the sale of Polycold effective
February 15, 2005, leaving only $21.2 million of our term loan outstanding under
our unsecured credit facility.
28
During the nine months ended February 27, 2005, $1.1 million of other
income was recognized resulting from a reduction in the provision for potential
environmental remediation relating to a business disposed of during fiscal 2002
(see also Note J in the notes to the consolidated financial statements included
herein). Management originally estimated this liability based upon information
received from site assessments. During the first fiscal quarter ended August 29,
2004, management determined that the probable risk of loss was only $100,000
which resulted in a net reduction in the accrual of $1.1 million.
Our effective tax rate for continuing operations of 23.4% and 28.5% for
the three and nine months ended February 27, 2004, decreased 11.3% and 6.2% from
the same three and nine month periods ended last year. The decrease in the
effective tax rate resulted from one-time reversals of certain tax accruals
amounting to about $530,000 and $810,000 for the three and nine month periods
ended February 27, 2005, respectively, based upon management's review of certain
discreet events and the resulting impact to historical tax requirements. We do
not expect our effective tax rate to remain this low for the fourth quarter of
fiscal 2005 or the entire year of fiscal 2006, due to our acquisitions which are
registered to do business in additional states, the reduced benefit of the Extra
Territorial Income Regime being partially phased out by the American Jobs
Creation Act of 2004 (the "Act"), and not yet receiving any benefit from the
Qualified Production Activity deductions of the Act until Fiscal 2006. We
continue to review effective tax strategies to minimize our effective tax rate.
DISCONTINUED OPERATIONS
As a result of the sale of our wholly owned subsidiary, IGC-Polycold
Systems, Inc., effective February 15, 2005, and in accordance with SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets", we have
classified the income from operations and the related gain on sale as
discontinued operations. All prior periods have been restated to reflect this
treatment. Polycold's revenues and net operating profit included in discontinued
operations is as follows:
(In thousands) Three Months Ended Nine Months Ended
---------------------------- ---------------------------
February 27, February 22, February 27, February 22,
2005 2004 2005 2004
----------- ------------ ------------ ------------
Net revenues to external customers $ 6,149 $ 5,572 $ 23,354 $ 17,964
Net operating income 1,761 1,106 7,359 3,365
Polycold's revenues for the quarter and the nine month period through
February 15, 2005, increased $577,000 or 10.4% to $6.1 million and $5.4 million
or 30% to $23.4 million over the corresponding periods last year despite having
two fewer weeks of operations. This increase is primarily due to product
revenues and service growth for vacuum-related products across a broad range of
non-semiconductor customers in the United States and the Pacific Rim.
Polycold's net operating income for the quarter and the nine month
period through February 15, 2005, increased $655,000 or 59% to $1.8 million and
$4 million or 118.7% to $7.4 million, respectively over the corresponding
periods last year despite having two fewer weeks of operations. The increases
are primarily driven by increased revenue and improved margins due to
manufacturing cost reductions through successful lean manufacturing initiatives
in addition to relatively stable operating expenses.
29
Effective with the sale of Polycold and also included in discontinued
operations for both the three and nine month periods ended February 27, 2005,
was the $33.4 million gain on sale which is calculated as follows:
(In thousands)
Cash proceeds received $ 49,714
Less:
Polycold net assets sold 15,343
Costs directly related to the sale 996
----------------
Pre-tax gain on sale $ 33,375
================
LIQUIDITY AND CAPITAL COMMITMENTS
OPERATING ACTIVITIES
For the nine months ended February 27, 2005, we generated about $24.7
million in cash from operating activities compared to $12.4 million in the same
period last year. The increase in cash from operating activities is primarily
the result of improved earnings partially offset by an unfavorable cash impact
of increased working capital usage in the newly acquired businesses.
INVESTING ACTIVITIES
For the nine months ended February 27, 2005, investing activities
resulted in cash generated of $1.7 million compared to cash used of $148.6
million in the same period last year. The cash generated during the nine months
ended February 27, 2005, is primarily due to the $48.7 million, net of
transaction costs and taxes received from the sale of Polycold, nearly offset by
the cash used to acquire MRID of $39 million, purchases of property and
equipment of $7.1 million and $888,000 for other investing activity
requirements. The significant use of cash during the same period last year was
primarily due to the cash used to fund our acquisition of Invivo combined with
purchases of property and equipment of $3.3 million partially offset by the
collection of a $4.0 million note receivable relating to a disposition in fiscal
2002.
The net cash received from the sale of Polycold effective February 15, 2005,
consisted of the following:
Cash received:
Cash received from sale $ 49,200
Cash received as reimbursement for certain tax obligations 514
Less cash on Polycold's balance sheet (37)
Transaction costs (996)
-------------
$ 48,681
=============
30
The cash used from our acquisition of MRID effective July 16, 2004, consisted
of the following:
Cash paid:
Cash paid to MRID shareholders $ 44,802
Transaction costs 1,047
Less cash acquired from MRID (6,843)
-------------
$ 39,006
=============
FINANCING ACTIVITIES
Financing activities for the nine months ended February 27, 2005, used
about $35.2 million of cash. During the current quarter, the proceeds received
from the sale of Polycold combined with available operating cash were used to
pay down nearly $60 million of our credit facility increasing our total year to
date debt repayments to $80.2 million. These payments were offset by the $45
million of proceeds received from long-term borrowings used to partially finance
the acquisition of MRID. The remaining financing activities reflects the cash
received from the exercise of stock options of $1 million and payments received
from employees under the executive stock purchase plan of $879,000 partially
offset by the purchase of treasury shares of $1.7 million and $155,000 for
payments made to amend our credit facility.
Financing activities during the same period last year consisted of
proceeds from long-term borrowings of $67 million used to partially fund our
acquisition of Invivo reduced by principal payments of $10.1 million and costs
paid to obtain the credit facility of $1.3 million. Other financing activities
consisted of proceeds from the exercise of stock options of $3 million and
payments received from employees under the executive stock purchase plan of
$304,000 partially offset by $1.8 million for the purchase of treasury shares.
See the consolidated statement of cash flows, located elsewhere in this
report for further details on sources and uses of cash.
CAPITAL COMMITMENTS
Our capital and resource commitments as of February 27, 2005, consisted
of capital equipment commitments of approximately $1.6 million. These
commitments consisted of machinery, equipment and tooling used to improve the
production process and in research and development. Additionally, some of the
capital commitment is for computers and computer equipment to improve
engineering efficiency and to update other supporting functions. Individually,
none of these commitments are considered significant.
ADEQUATE RESOURCES
We believe we have adequate resources to meet our needs for the
short-term from our existing cash balances, our expected cash generation in the
current fiscal year, and our available unsecured revolving credit facility.
Longer-term, with substantial increases in sales volume and/or large research
and development or capital expenditure requirements to pursue new opportunities
in the Energy Technology segment, we may need to raise additional funds. We
would expect to be able to do so through additional lines of credit, public
offerings or private placements. However, in the event funds were not available
from these sources, or on acceptable terms, we would expect to manage our growth
within the financing available.
Inflation has not had a material impact on our financial statements.
31
RISK FACTORS
In addition to the risk factors set forth in the Company's annual
report on Form 10-K and 10-K/A for the year ended May 30, 2004, and elsewhere in
this report:
The Company May be Subject to Risk Associated with Acquisitions
The Company acquired Invivo Corporation effective January 27, 2004, MRI
Devices Corporation (MRID) effective July 16, 2004, and may make additional
acquisitions in the future. Acquisitions involve numerous risks, including
difficulties in the integration of the operations, services, technologies,
products and personnel of the acquired companies, diversion of management's
attention from other business concerns, overvaluation of the acquired companies,
potential loss of key employees and customers of the acquired companies and lack
of acceptance by the marketplace of the acquired companies' products or
services. Future acquisitions may also result in dilution to existing
stockholders, the use of a substantial portion of the Company's cash, the
incurrence of debt, large one-time write-offs and the creation of goodwill or
other intangible assets that could result in significant impairment charges or
amortization expense. Moreover, the Company may face exposure to litigation and
other unanticipated contingent liabilities of the acquired companies. Any of
these problems or factors with respect to the acquisition of Invivo and MRID or
any other acquisition completed by the Company could result in a material
adverse effect to the Company's business, financial condition and results of
operations.
The Company May on Occasion be Subject to Significant Litigation
The Company does business in the critical healthcare setting, and may
from time to time be subject to significant litigation arising from actual or
alleged injuries to patients. Litigation is by its nature costly and may divert
management's attention, either of which could adversely affect the Company's
operating results. In addition, if any current or future litigation is
determined adversely, the Company's operating results and financial condition
could be adversely affected.
The Company is Subject to Risk of New Laws Related to Health Care
The Company's customer base includes original equipment manufacturers
of medical diagnostic equipment, imaging centers, small rural hospitals and
other healthcare providers. Changes in the law or new interpretations of
existing laws may have a significant effect on the Company's costs of doing
business and the amount of reimbursement the Company and its customers receive
from both government and third-party payers. In addition, economic forces,
regulatory influences and political initiatives are subjecting the health care
industry to fundamental changes. Federal, state and local government
representatives are likely to continue to review and assess alternative health
care delivery systems and payment methods. The Company expects ongoing public
debate on these issues. Any of these efforts or reforms could have a material
adverse affect on the Company's business and results of operations.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk through foreign currency
exchange, derivative financial instruments and other financial instruments, such
as investments in short-term cash equivalents and long-term debt, is not
material. The Company has minimal exposure to foreign currency exchange risk
with respect to sales as the Company's sales are primarily denominated in U.S.
Dollars. The Company does not currently hedge against foreign currency rate
fluctuations and an immediate 10% change in exchange rates would not have a
material impact on the Company's future operating results or cash flows.
32
The financial instruments of the Company that are interest rate
dependent are mortgages payable and an unsecured $130 million credit facility
consisting of a $105 million revolving line of credit and an amortizing $25
million term loan. The Company manages interest rates through various methods
within existing contracts. On its mortgage payable, the Company negotiated an
"interest rate swap" agreement that, in effect, fixes the rate at 6.88%. With
respect to its unsecured credit facility the Company may elect to apply interest
rates to borrowings under (x) the higher of Wachovia's prime commercial lending
rate or the federal funds rate plus applicable margins or (y) the applicable
London Interbank Offered Rate ("LIBOR") plus applicable margins, whichever is
more favorable. In addition, the Company entered into an "interest rate swap"
agreement that in effect, fixes the rate on its $25 million term loan at 2.95%
plus applicable margins. See also Note K to the Company's consolidated financial
statements.
The Company's objective in managing its exposure to changes in interest
rates is to limit the impact of changing rates on earnings and cash flow and to
lower its borrowing costs. With regards to invested cash the Company invests
only in high quality, low risk securities backed by the full faith of the United
States Government. The duration of these securities are an average weighted
duration of 90 days.
The Company does not believe that its exposure to commodity and foreign
exchange risk is material.
ITEM 4: CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
Our Chief Executive Officer and our Chief Financial Officer, after
evaluating the effectiveness of the Company's "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 (Exchange Act)
Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this
quarterly report, have concluded that our disclosure controls and procedures are
effective based on their evaluation of these controls and procedures required by
paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
(b) Changes in internal controls over financial reporting
There have not been any changes in our internal controls over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
(c) Section 404 of the Sarbanes-Oxley Act of 2002
This Act requires management's annual review and evaluation of our
internal controls, and an attestation of the effectiveness of these controls by
our independent registered public accounting firm beginning with our Form 10-K
for the fiscal year ending on May 29, 2005. We are dedicating significant
resources, including management time and effort, and incurring substantial costs
in connection with our ongoing Section 404 assessment. We are currently
documenting and testing our internal controls and considering whether any
improvements are necessary for maintaining an effective control environment at
our company. The evaluation of our internal controls is being conducted under
the direction of our senior management. In addition, our management is regularly
discussing the results of our testing and any proposed improvements to our
control environment with our Audit Committee. We will continue to work to
improve our controls and procedures, and to educate and train our employees on
our existing controls and procedures in connection with our efforts to maintain
an effective controls infrastructure at our Company.
33
PART II: OTHER INFORMATION
ITEM 6: Exhibits
(a) Exhibits
10.1 Amendment No. 3 effective December 13, 2004, to our Credit
Agreement as amended for $130.0 million dated December 17,
2003 among Intermagnetics General Corporation and its domestic
subsidiaries (borrower) with Wachovia Bank, N.A.
(administrative agent), JP Morgan Chase Bank (syndication
agent) and Key Bank, N.A. (documentation agent)
Certifications of Chief Executive Officer and Chief Financial Officer
31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive
Officer)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial
Officer)
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as added by Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as added by Section 906 of the Sarbanes-Oxley
Act of 2002.
34
Pursuant to the requirements 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
Dated: April 7, 2005 By: /s/Glenn H. Epstein
------------------------------------
Glenn H. Epstein
Chairman and Chief Executive Officer
Dated: April 7, 2005 By: /s/Michael K. Burke
------------------------------------
Michael K. Burke
Executive Vice President and
Chief Financial Officer
35