-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PlvvNC1Sv5w9wzEcp0lNCF0kPjRtXniTBku2Jj/QHRVE78JLP8pmW33pje2N13FF AmL8nLP+xKmKBXABVx8/jA== 0000950116-05-001331.txt : 20050408 0000950116-05-001331.hdr.sgml : 20050408 20050408171439 ACCESSION NUMBER: 0000950116-05-001331 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050227 FILED AS OF DATE: 20050408 DATE AS OF CHANGE: 20050408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERMAGNETICS GENERAL CORP CENTRAL INDEX KEY: 0000351012 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED METAL PRODUCTS [3490] IRS NUMBER: 141537454 STATE OF INCORPORATION: NY FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11344 FILM NUMBER: 05742196 BUSINESS ADDRESS: STREET 1: 450 OLD NISKAYUNA RD STREET 2: PO BOX 461 CITY: LATHAM STATE: NY ZIP: 12110-0461 BUSINESS PHONE: 5187821122 MAIL ADDRESS: STREET 1: 450 OLD NISKAYUNA ROAD STREET 2: PO BOX 461 CITY: LATHAM STATE: NY ZIP: 12110-0461 10-Q 1 tenq.txt 10-Q 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 ------------------------------------------------------ (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) --------------------------------------------------------------- (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 EX-10 2 ex10-1.txt EXHIBIT 10.1 THIRD AMENDMENT TO CREDIT AGREEMENT ----------------------------------- CONSENT AND RELEASE OF GUARANTOR -------------------------------- THIS THIRD AMENDMENT TO CREDIT AGREEMENT CONSENT AND RELEASE OF GUARANTOR, dated as of December 13, 2004 (this "Amendment"), is entered into by and among INTERMAGNETICS GENERAL CORPORATION, a Delaware corporation (successor in interest to Intermagnetics General Corporation, a New York corporation) (the "Borrower"), certain Domestic Subsidiaries of the Borrower as Guarantors (the "Guarantors" and together with the Borrower, the "Credit Parties"), the Lenders identified on the signature pages hereto and WACHOVIA BANK, NATIONAL ASSOCIATION, as administrative agent for the Lenders (the "Administrative Agent"). W I T N E S S E T H WHEREAS, the Borrower, the Guarantors, the Administrative Agent and the Lenders are parties to that certain Credit Agreement dated as of December 17, 2003 (as previously amended and modified and as further amended, modified, supplemented or restated from time to time, the "Credit Agreement"; capitalized terms used herein shall have the meanings ascribed thereto in the Credit Agreement unless otherwise defined herein); WHEREAS, subsequent to the closing of the Credit Agreement, Intermagnetics General Corporation, a New York corporation, reincorporated in the State of Delaware as Intermagnetics, Inc., changed its legal name to Intermagnetics General Corporation, a Delaware corporation, and assumed, as successor in interest, all the rights and obligations of the Borrower under the Credit Agreement; WHEREAS, the Borrower has notified the Lenders that it intends to sell its wholly-owned Subsidiary, IGC-Polycold Systems Inc. ("Polycold"), for approximately $52,400,000 in each consideration (the "Polycold Divestiture"); WHEREAS, the Borrower has requested that the Lenders consent to the Polycold Divestiture and agree to release Polycold from its obligations as a Guarantor under the Credit Agreement; and WHEREAS, the Lenders have agreed to the amendment, consent and release requested by the Borrower, subject to the terms and conditions set forth herein. NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: SECTION 1 AMENDMENT --------- 1.1 Amended Definition. The definition of "Borrower" set forth in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety to read as follows: "Borrower" shall mean Intermagnetics General Corporation, a Delaware corporation (successor in interest to Intermagnetics General Corporation, a New York corporation). SECTION 2 CONSENT ------- 2.1 Notwithstanding the terms of Sections 6.4(a)(iv) and 6.7 of the Credit Agreement and any other terms to the contrary contained in the Credit Agreement, the Lenders hereby consent to the Polycold Divestiture. Notwithstanding the terms of 2.7(b) of the Credit Agreement, the Lenders hereby agree that the Credit Parties shall not be required to apply the Net Cash Proceeds derived from the Polycold Divestiture as a mandatory prepayment of the outstanding Loans. The consents set forth in this Section 2 shall be effective solely with respect to the specific circumstances of the Polycold Divestiture and, except as specifically agreed to in this Section 2, the Credit Agreement shall remain in full force and effect according to its terms. SECTION 3 RELEASE ------- 3.1 The Lenders hereby release Polycold from all of its obligations as a Guarantor under the Credit Agreement and the other Credit Documents. SECTION 4 CLOSING CONDITIONS ------------------ 4.1 Closing Conditions. This Amendment shall be effective as of the date hereof upon satisfaction of the following conditions precedent, in form and substance reasonably acceptable to the Administrative Agent: (a) Amendment. The Administrative Agent shall have received a copy of this Amendment duly executed by each of the Credit Parties and the Lenders. 2 (b) Material Terms. The Administrative Agent and the Lenders shall have received a description of the material terms of the Polycold Divestiture, in form and detail reasonably satisfactory to the Lenders. All legal, tax, accounting, business and other matters relating to the Polycold Divestiture shall be reasonably satisfactory in all material respects to the Administrative Agent. (c) Balance Sheet. The Administrative Agent and the Lenders shall have received a consolidated balance sheet of the Borrower and its consolidated Subsidiaries, prepared on a pro forma basis after giving effect to the Polycold Divestiture. (d) Other Documents. The Administrative Agent and the Lenders shall have received such other documentation as the Administrative Agent or any Lender may reasonably request in connection with the foregoing. SECTION 5 MISCELLANEOUS ------------- 5.1 Representation and Warranties of the Credit Parties. Each of the Credit Parties represents and warrants to the Lenders as follows: (a) It has taken all necessary action to authorize the execution, delivery and performance of this Amendment. (b) This Amendment has been duly executed and delivered by such Person and constitutes such Person's legal, valid and binding obligations, enforceable in accordance with its terms, except as such enforceability may be subject to (i) bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). (c) No consent, approval, authorization or order of, or filing, registration or qualification with, any court or Governmental Authority or third party is required in connection with the execution, delivery or performance by such Person of this Amendment. (d) The representations and warranties of such Person set forth in Article III of the Credit Agreement are, subject to the limitations set forth therein, true and correct as of the date hereof (except for those which expressly relate to an earlier date). 5.2 Reaffirmation of Credit Party Obligations. (a) Intermagnetics General Corporation, a Delaware corporation (successor in interest to Intermagnetics General Corporation, a New York corporation), hereby ratifies the Credit Agreement (as amended 3 the Credit Agreement (as amended and modified by this Amendment) and the other Credit Documents and acknowledges and reaffirms (i) that, as the Borrower, it is bound by all terms of the Credit Agreement (as amended and modified by this Amendment) and the other Credit Documents applicable to it and (ii) that, as the Borrower, it is responsible for the observance and full performance of its respective Credit Party Obligations. (b) Each Guarantor hereby ratifies the Credit Agreement (as amended by this Second Amendment) and the other Credit Documents and acknowledges and reaffirms (i) that it is bound by all terms of the Credit Agreement (as amended by this Second Amendment) and the other Credit Documents applicable to it and (ii) that it is responsible for the observance and full performance of its respective Credit Party Obligations. 5.3 Credit Document. This Amendment shall constitute a Credit Document under the terms of the Credit Agreement. 5.4 Expenses. The Borrower agrees to pay all reasonable costs and expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Amendment, including, without limitation, the reasonable fees and expenses of Moore & Van Allen, PLLC, and any previously incurred fees and expenses which remain outstanding on the date hereof. 5.5 Entirety. This Amendment and the other Credit Documents embody the entire agreement between the parties hereto and supersede all prior agreements and understandings, oral or written, if any, relating to the subject matter hereof. 5.6 Counterparts/Telecopy. This Amendment may be executed and delivered (A) in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute one contract and (B) by facsimile or electronic signature, which shall be deemed for all purposes to be an original signature. 5.7 Governing Law. This Amendment and the rights and obligations of the parties under this Amendment shall be governed by, and construed and interpreted in accordance with, the law of the State of New York. 5.8 Consent to Jurisdiction; Service of Process; Waiver of Jury Trial. The jurisdiction, services of process and waiver of jury trial provisions set forth in Sections 9.14 and 9.17 of the Credit Agreement are hereby incorporated by reference, mutatis mutandis. 5.9 Further Assurances. The Credit Parties agree to promptly take such action, upon the request of the Administrative Agent, as is reasonably necessary to carry out the intent of this Amendment. [Signature Pages Follow]] 4 INTERMAGNETICS, INC. THIRD AMENDMENT TO CREDIT AGREEMENT CONSENT AND RELEASE OF GUARANTOR IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed under seal and delivered as of the date and year first above written. BORROWER: INTERMAGNETICS GENERAL CORPORATION, - -------- a Delaware corporation (successor in interest to Intermagnetics General Corporation, a New York corporation) By: /s/ Michael K. Burke ---------------------------------- Name: Michael K. Burke Title: EVP & CFO GUARANTORS: INVIVO CORPORATION, - ---------- a Delaware corporation By: /s/ Michael K. Burke ---------------------------------- Name: Michael K. Burke Title: Treasurer IGC-MEDICAL ADVANCES INC., a Wisconsin corporation By: /s/ Michael K. Burke ---------------------------------- Name: Michael K. Burke Title: Treasurer SUPERPOWER INC., a Delaware corporation By: /s/ Michael K. Burke ---------------------------------- Name: Michael K. Burke Title: Treasurer INTERMAGNETICS, INC. THIRD AMENDMENT TO CREDIT AGREEMENT CONSENT AND RELEASE OF GUARANTOR GUARANTORS cont: INVIVO RESEARCH CORPORATION, - ---------- a California corporation By: /s/ Michael K. Burke ---------------------------------- Name: Michael K. Burke Title: Treasurer MEDICAL DATA ELECTRONICS, INC., a Delaware corporation By: /s/ Michael K. Burke ---------------------------------- Name: Michael K. Burke Title: Treasurer MRI DEVICES CORPORATION, a Delaware corporation By: /s/ Michael K. Burke ---------------------------------- Name: Michael K. Burke Title: Treasurer INTERMAGNETICS, INC. THIRD AMENDMENT TO CREDIT AGREEMENT CONSENT AND RELEASE OF GUARANTOR ADMINISTRATIVE AGENT - -------------------- AND LENDERS: WACHOVIA BANK, NATIONAL ASSOCIATION, - ----------- as Administrative Agent and as a Lender By: /s/ Annette Herber ---------------------------------- Name: Annette Herber Title: Vice President INTERMAGNETICS, INC. THIRD AMENDMENT TO CREDIT AGREEMENT CONSENT AND RELEASE OF GUARANTOR JPMORGAN, CHASE BANK, N.A. (F/K/A JPMORGAN CHASE BANK) By: /s/ James E. Murphy ---------------------------------- Name: James E. Murphy Title: VIP INTERMAGNETICS, INC. THIRD AMENDMENT TO CREDIT AGREEMENT CONSENT AND RELEASE OF GUARANTOR KEYBANK, NATIONAL ASSOCIATION By: /s/ Bryant J. Cassella ---------------------------------- Name: Bryant J. Cassella Title: Senior Vice President INTERMAGNETICS, INC. THIRD AMENDMENT TO CREDIT AGREEMENT CONSENT AND RELEASE OF GUARANTOR COMERICA BANK By: /s/ Sara M. Booms ---------------------------------- Name: Sara M. Booms Title: Account Representative EX-31 3 ex31-1.txt EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECURITIES EXCHANGE ACT OF 1934 RULE 13a-14(a)/15d-14(a) EXHIBIT 31.1 I, Glenn H. Epstein, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Intermagnetics General Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c. Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: April 7, 2005 /s/Glenn H. Epstein ----------------------------------------- Glenn H. Epstein Chairman and Chief Executive Officer EX-31 4 ex31-2.txt EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECURITIES EXCHANGE ACT OF 1934 RULE 13a-14(a)/15d-14(a) EXHIBIT 31.2 I, Michael K. Burke, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Intermagnetics General Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c. Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: April 7, 2005 /s/Michael K. Burke ---------------------------------------- Michael K. Burke Executive Vice President and Chief Financial Officer EX-32 5 ex32-1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADDED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Intermagnetics General Corporation (the "Company") on Form 10-Q for the quarter ending February 27, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Glenn H. Epstein, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as addeD by ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Glenn H. Epstein* - -------------------------- Glenn H. Epstein Chairman and Chief Executive Officer April 7, 2005 * These certifications are being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. These certifications shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing. EX-32 6 ex32-2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADDED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Intermagnetics General Corporation (the "Company") on Form 10-Q for the quarter ending February 27, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Michael K. Burke, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as addeD by ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Michael K. Burke* - ------------------------- Michael K. Burke Executive Vice President and Chief Financial Officer April 7, 2005 * These certifications are being furnished as required by Rule 13a-14(b) under the Securities Exchange Act of 1934 (the "Exchange Act") and Section 1350 of Chapter 63 of Title 18 of the United States Code, and shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. These certifications shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except as otherwise stated in such filing. -----END PRIVACY-ENHANCED MESSAGE-----