-----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, P22BbFgZTK5AA5XqJPNaV25mbDv7ZyBj1D0m5V8z7DifNjVulqoA4ZDLQBQSazqc RV9jAUgv33Nxys7U3Lm8vw== 0000950116-05-003165.txt : 20051007 0000950116-05-003165.hdr.sgml : 20051007 20051007161637 ACCESSION NUMBER: 0000950116-05-003165 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050828 FILED AS OF DATE: 20051007 DATE AS OF CHANGE: 20051007 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: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11344 FILM NUMBER: 051129823 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 August 28, 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 September 30, 2005, the registrant had 28,218,509 shares of $.10 par value Common Stock outstanding. 1
INTERMAGNETICS GENERAL CORPORATION CONTENTS PART I - FINANCIAL INFORMATION Item 1: Financial Statements: Consolidated Balance Sheets - August 28, 2005 and May 29, 2005..................................3 Consolidated Income Statements - Three Months Ended August 28, 2005 and August 29, 2004...........................................................5 Consolidated Statements of Cash Flows - Three Months Ended August 28, 2005 and August 29, 2004...........................................................6 Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income - Three Months Ended August 28, 2005 ...........................................................7 Notes to Consolidated Financial Statements......................................................8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................18 Item 3: Quantitative and Qualitative Disclosures About Market Risk.....................................27 Item 4: Controls and Procedures........................................................................27 PART II - OTHER INFORMATION.............................................................................28 SIGNATURES..............................................................................................29 CERTIFICATIONS..........................................................................................30
2 INTERMAGNETICS GENERAL CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, Except Per Share Amounts) (Unaudited)
August 28, May 29, 2005 2005 --------- --------- ASSETS Cash and cash equivalents $ 5,014 $ 6,970 Trade accounts receivable, less allowance (August 28, 2005 - $1,330; May 29, 2005 - $1,549) 64,407 60,682 Costs and estimated earnings in excess of billings on uncompleted contracts 790 718 Inventories: Consigned products 725 1,158 Finished products 8,483 7,349 Work in process 16,714 11,261 Materials and supplies 24,726 20,497 --------- --------- 50,648 40,265 Deferred income taxes 6,042 6,042 Prepaid expenses and other 7,084 6,961 --------- --------- TOTAL CURRENT ASSETS 133,985 121,638 PROPERTY, PLANT AND EQUIPMENT Land and improvements 2,128 2,128 Buildings and improvements 19,378 19,410 Machinery and equipment 47,986 45,186 Leasehold improvements 1,014 935 --------- --------- 70,506 67,659 Less accumulated depreciation and amortization 26,247 24,685 --------- --------- 44,259 42,974 INTANGIBLE AND OTHER ASSETS Goodwill 169,910 169,910 Other intangibles, less accumulated amortization (August 28, 2005 - $16,497; May 29, 2005 - $15,100) 50,148 51,519 Derivative asset 479 396 Other assets 3,518 3,211 --------- --------- TOTAL ASSETS $ 402,299 $ 389,648 ========= =========
3 INTERMAGNETICS GENERAL CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, Except Per Share Amounts) (Unaudited)
August 28, May 29, 2005 2005 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 22,611 $ 12,404 Accounts payable 21,101 22,136 Salaries, wages and related items 18,481 16,029 Customer advances and deposits 1,321 1,951 Product warranty reserve 3,973 4,073 Accrued income taxes 2,831 3,305 Other liabilities and accrued expenses 8,654 10,189 --------- --------- TOTAL CURRENT LIABILITIES 78,972 70,087 LONG-TERM DEBT, less current portion 18,596 19,885 DEFERRED INCOME TAXES 19,782 19,618 NOTE PAYABLE 5,000 5,000 DERIVATIVE LIABILITY 22 52 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' 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): August 28, 2005 - 30,174,846 shares; May 29, 2005 - 29,970,403 shares 3,018 2,997 Additional paid-in capital 210,386 208,074 Notes receivable from employees (2,542) (2,542) Retained earnings 87,574 82,490 Accumulated other comprehensive income (loss) 562 352 --------- --------- 298,998 291,371 Less cost of Common Stock in treasury August 28, 2005 - 1,963,967 shares; May 29, 2005 - 1,872,546 shares (19,071) (16,365) --------- --------- 279,927 275,006 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 402,299 $ 389,648 ========= =========
See notes to consolidated financial statements. 4 INTERMAGNETICS GENERAL CORPORATION CONSOLIDATED INCOME STATEMENTS (Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Three Months Ended --------------------------- August 28, August 29, 2005 2004 -------- -------- Net revenues $ 71,016 $ 51,524 Cost of revenues 39,870 28,408 -------- -------- Gross margin 31,146 23,116 Product research and development 7,336 4,959 Selling, general and administrative: Stock based compensation 2,076 1,127 Other selling, general and administrative 12,707 10,680 Amortization of intangible assets 1,397 1,384 -------- -------- 23,516 18,150 Operating income 7,630 4,966 Interest and other income 154 201 Interest and other expense (646) (1,012) Gain on litigation settlement 600 Adjustment to gain on prior period sale of division 1,094 -------- -------- Income from continuing operations before income taxes 7,738 5,249 Provision for income taxes 2,654 1,822 -------- -------- INCOME FROM CONTINUING OPERATIONS 5,084 3,427 Discontinued operations: Income from operations of discontinued subsidiary 2,886 Provision for income taxes 1,001 -------- -------- INCOME FROM DISCONTINUED OPERATIONS - 1,885 -------- -------- NET INCOME $ 5,084 $ 5,312 ======== ======== Basic Net Income per Common Share: Continuing operations $ 0.18 $ 0.13 Discontinued operations 0.07 -------- -------- Basic Net Income per Common Share $ 0.18 $ 0.20 ======== ======== Diluted Net Income per Common Share: Continuing operations $ 0.18 $ 0.13 Discontinued operations 0.07 -------- -------- Diluted Net Income per Common Share $ 0.18 $ 0.20 ======== ========
See notes to consolidated financial statements. 5 INTERMAGNETICS GENERAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
Three Months Ended -------------------------------- August 28, August 29, 2005 2004 ---------- ---------- OPERATING ACTIVITIES Net income $ 5,084 $ 5,312 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,131 2,988 Stock based compensation 2,076 1,127 Loss on sale and disposal of assets 164 Amortization of debt issuance costs 75 163 Adjustment to prior period gain on sale of division (1,094) Change in operating assets and liabilities net of effects from acquisitions: Increase in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts (3,789) (4,508) Increase in inventories and prepaid expenses and other assets (13,442) (141) Increase (decrease) in accounts payable and accrued expenses (1,322) 2,097 -------- -------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (8,023) 5,944 INVESTING ACTIVITIES Purchases of property, plant and equipment (3,183) (1,693) Purchase of Invivo, net of cash acquired (71) Purchase of MRID, net of cash acquired (38,212) Cash in lieu of shares (10) Investment in patent rights (26) (258) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (3,209) (40,244) FINANCING ACTIVITIES Proceeds from sale of Common Stock, including exercise of stock options 399 481 Proceeds from employees - Executive Stock Purchase Plan 20 Purchase of Treasury Stock (1,603) Payment to obtain debt financing (155) Proceeds from borrowings 10,000 45,000 Principal payments on note payable and long-term debt (1,082) (10,764) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 9,317 32,979 EFFECT OF EXCHANGE RATE CHANGES ON CASH (41) 278 -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (1,956) (1,043) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,970 11,868 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,014 $ 10,825 ======== ======== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of Common Stock as consideration for purchase of MRID $ 49,597 ======== Issuance of note payable as consideration for purchase of MRID due in 2007 $ 5,000 ========
See notes to consolidated financial statements. 6
INTERMAGNETICS GENERAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) Three Months Ended August 28, 2005 (Dollars in Thousands) (Unaudited) Accumulated Additional Other Common Paid-in Retained Comprehensive Treasury Stock Capital Earnings Income (Loss) Stock ---------- ----------- ----------- --------------- ------------ BALANCES AT May 29, 2005 $2,997 $208,074 $82,490 $ 352 $ (16,365) Comprehensive income: Net income 5,084 Unrealized gain on derivatives, net of tax benefit 83 Unrealized loss on foreign currency translation (22) Minimum pension liability adjustment, net of tax 149 Total comprehensive income Issuance of 204,443 shares of Common Stock, related to exercises of stock options and stock based compensation 21 378 Accrual for Stock based compensation 1,934 Employee shares held by the Company's Deferred Compensation Plan (2,706) ---------- ----------- ----------- --------------- ------------ BALANCES AT AUGUST 28, 2005 $ 3,018 $ 210,386 $87,574 $ 562 $(19,071) ========== =========== =========== =============== ============
Notes Receivable Comprehensive from Employees Income --------------- ---------------- BALANCES AT May 29, 2005 $ (2,542) Comprehensive income: Net income 5,084 Unrealized gain on derivatives, net of tax benefit 83 Unrealized loss on foreign currency translation (22) Minimum pension liability adjustment, net of tax 149 ---------------- Total comprehensive income $5,294 ================ Issuance of 204,443 shares of Common Stock, related to exercises of stock options and stock based compensation Accrual for Stock based compensation Employee shares held by the Company's Deferred Compensation Plan --------------- BALANCES AT AUGUST 28, 2005 $ (2,542) ===============
See notes to consolidated financial statements. 7 INTERMAGNETICS GENERAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: In the opinion of Management, the accompanying unaudited Consolidated Financial Statements contain all adjustments, which are of a normal recurring nature, necessary to state fairly the Company's financial position at August 28, 2005, and the results of its operations, cash flows and changes in stockholders' equity for the periods presented. The results for the three months ended August 28, 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 29, 2005, filed on Form 10-K on August 12, 2005. The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant inter-company transactions have been eliminated in consolidation. It is the Company's policy to reclassify prior year consolidated financial statements to conform to current year presentation. CASH EQUIVALENTS: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company records an allowance for doubtful accounts for estimated receivable losses. Management considers historical collection experience and reviews aging reports on its outstanding receivable balances on a regular basis to assess the collectibility of these balances, and adjusts the allowance for doubtful accounts accordingly. Increases to the allowance are expensed and included in operating expenses. The allowance and the related receivable are reduced when the account is deemed uncollectible. 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 August 28, 2005 and August 29, 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. 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 three months ended August 28, 2005: 8
Three Months Three Months Ended Ended (Dollars in thousands) August 28, 2005 August 29, 2004 --------------- --------------- Balance at beginning of period $ 4,073 $ 3,189 Reserves acquired from acquisition of MRID Corp. 87 Warranty expense 252 258 Cost of warranty performed (352) (389) ------- ------- Ending Balance $ 3,973 $ 3,145 ======= =======
INVENTORIES: Inventories are stated at the lower of cost or market value. Cost is determined on a standard cost basis that approximates the first-in, first-out (FIFO) method. Variances from standard costs are accumulated as they are incurred and are included in the carrying value of inventory to the extent appropriate. Market value is determined based on the net realizable value. Appropriate consideration is given to obsolescence, excessive levels and other factors in evaluating net realizable value. At August 28, 2005 and May 29, 2005 the Company had reserves for excess and obsolete inventory of $2,868,000 and $2,801,000, respectively. PROPERTY, PLANT AND EQUIPMENT: Land and improvements, buildings and improvements, machinery and equipment and leasehold improvements are recorded at cost. Depreciation is computed using the straight-line method in a manner that is intended to amortize the cost of such assets over their estimated useful lives. Leasehold improvements are amortized on a straight-line basis over the remaining initial term of the lease or estimated useful life, whichever is shorter. For financial reporting purposes, the Company provides for depreciation of property, plant and equipment over the following estimated useful lives: Land improvements 25 years Buildings and improvements 7 - 40 years Machinery and equipment 3 - 15 years Leasehold improvements 2 - 15 years Significant additions or improvements extending assets' useful lives are capitalized; normal maintenance and repair costs are expensed as incurred. The cost of fully depreciated assets remaining in use is included in the respective asset and accumulated depreciation accounts. When items are sold or retired, related gains or losses are included in income. INCOME TAXES: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Investment and other tax credits are included in income when realized. FOREIGN CURRENCY TRANSLATION: Foreign currency translation adjustments arise from conversion of the Company's foreign subsidiary's financial statements to US currency for reporting purposes, and are included in Other Comprehensive Income (Loss) in stockholders' equity on the accompanying consolidated balance sheets. Realized foreign currency transaction gains and losses are included in interest and other expense in the accompanying consolidated income statements. 9 GOODWILL AND OTHER INTANGIBLES: In accordance with Statement of Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets", the Company performs a test for goodwill impairment annually during the second fiscal quarter of each year (or at an interim date if certain events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount). A determination of impairment is made based upon the estimated discounted future cash flows of the operations associated with the related reporting unit. If goodwill is determined to be impaired the Company would be required to record a charge to its results of operations. IMPAIRMENT OF LONG-LIVED ASSETS: In accordance with SFAS No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets", the Company reviews long-lived assets 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. 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. PRODUCT RESEARCH AND DEVELOPMENT: Product research and development costs which include, labor, materials, external contractor fees and applicable overhead allocations are charged to operations when incurred and are included in operating expenses. STOCK-BASED COMPENSATION: The intrinsic value method of accounting under the provisions of APB No. 25, "Accounting for Stock Issued to Employees", is used for stock-based compensation plans. Under the intrinsic value method, compensation cost is measured as the excess, if any, of the quoted market price of the stock at the grant date over the amount an employee must pay to acquire the stock. Under SFAS 123, "Accounting for Stock-Based Compensation" (SFAS 123) as amended, compensation costs for stock option grants would be based on the fair value at the grant date and the resulting compensation expense would be shown as an expense on the consolidated income statements as the option vests. 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 under SFAS 123: (Dollars in Thousands, Except Per Share Amounts)
Three Months Ended --------------------------- August 28, August 29, 2005 2004 ---------- ---------- Net income (as reported) $ 5,084 $ 5,312 Add recorded non-cash stock compensation, net of tax 1,364 736 Less non-cash stock compensation under SFAS No. 123, net of tax (1,665) (1,138) ------- ------- Pro forma Net Income $ 4,783 $ 4,910 Earnings per Common Share (as reported): Basic $ 0.18 $ 0.20 ======= ======= Diluted $ 0.18 $ 0.20 ======= ======= Earnings per Common Share (pro forma): Basic $ 0.17 $ 0.18 ======= ======= Diluted $ 0.17 $ 0.18 ======= =======
PER SHARE AMOUNTS: Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the Company. 10 COMPREHENSIVE INCOME: Comprehensive income (loss) currently consists of net income, foreign currency translation adjustments, minimum pension liability adjustments and gain (loss) on derivative activity and is presented in the consolidated statements of changes in stockholders' equity and comprehensive income (loss), net of tax. USE OF ESTIMATES: In order to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities. Actual results could differ from those estimates. NEW ACCOUNTING PRONOUNCEMENTS: In June 2005, the FASB's Emerging Issues Task Force reached a consensus on Issue No. 05-6, "Determining the Amortization Period for Leasehold Improvements" ("EITF 05-6"). The guidance requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. The guidance is effective for periods beginning after June 29, 2005. The Company does not believe that the adoption of EITF 05-6 will have a significant effect on its financial statements. In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections--A Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to prior periods' financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in non-discretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement is issued. The Company is required to adopt the provision of SFAS 154, as applicable, beginning in fiscal 2007. 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 is expected to have a material impact on the Company's results of operations. 11 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. In April 2005, the SEC issued a Final Rule amending Rule 4-01(A) of Regulation S-X which amends the effective date of this statement to fiscal years beginning after June 15, 2005. Therefore this Statement applies to the Company beginning with the quarter ending August 27, 2006. The Company has not completed its analysis of the impact of this statement, however, it is expected that the application of this Statement will have a material impact on the Company's results of operations. 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 does not anticipate it will have a material impact on the Company's financial position and results of operations. 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 B - Disposition/Acquisition During the third quarter of fiscal year 2005, the Company completed the sale of its wholly-owned subsidiary, IGC-Polycold Systems, Inc. ("Polycold") the sole subsidiary in the Company's Instrumentation segment. The revenues and net operating profit of Polycold, for the three months ended August 29, 2004 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 August 29, 2004 ---------------------- Net revenues to external customers $ 8,224 Net operating income 2,886 During the first quarter of fiscal year 2005, the Company completed its purchase of MRI Devices Corporation ("MRID"). The following (unaudited) pro forma consolidated income statement has been prepared in accordance with SFAS No. 141 "Business Combinations" as if the acquisition of MRID occurred at the beginning of fiscal year 2005: Three Months Ended August 29, 2004 ---------------------- Net revenues $ 58,005 ======== Net income $ 6,137 ======== Earnings per share: Basic $ 0.22 ======== Diluted $ 0.22 ======== The above pro forma results do not include revenue synergies. In addition, the pro-forma net income includes $1.9 million of income, net of tax from discontinued operations. Note C - Long-term Debt During the quarter ended August 28, 2005, the Company borrowed $10.0 million from its unsecured revolving credit facility primarily for working capital requirements. 12 As of August 28, 2005 and May 29, 2005, the Company had the following long-term debt outstanding:
As of -------------------------- (In thousands) August 28, May 29, -------------- 2005 2005 ---- ---- Long-Term Debt: Mortgages and notes payable $ 7,832 $ 7,976 Term loan ($25 million) 19,375 20,313 Revolving line of credit ($105 milllion) 14,000 4,000 -------- -------- Total long-term debt 41,207 32,289 Less current maturities 22,611 12,404 -------- -------- Long-term debt excluding current maturities $ 18,596 $ 19,885 ======== ========
In addition to the long-term debt noted above, during the first quarter of fiscal year 2005, 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 August 28, 2005, the Company had $90.4 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. See also Note H - "Subsequent Event" to the consolidated financial statements. Note D - Per Share Information A summary of the shares used in the calculation of net income per Common Share is shown below: Three Months Ended ------------------------------ August 28, August 29, 2005 2004 ----------- ----------- Income available to Common shareholders $ 5,084 $ 5,312 =========== =========== Weighted average shares 28,143,685 26,689,907 Dilutive potential Common Shares: Warrants 88,216 69,430 Stock options and Awards 429,942 478,240 ----------- ----------- Adjusted weighted average shares 28,661,843 27,237,577 Net income per Common Share: Basic $ 0.18 $ 0.20 =========== =========== Diluted $ 0.18 $ 0.20 =========== =========== As of August 28, 2005, the Company had 1,069,800 shares of restricted stock, net of vesting and forfeitures, outstanding to key employees for a performance-based program that ends in fiscal year 2007. 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 five fiscal years. For 1,131,000 shares, the vesting schedule in fiscal years 2003 through 2007 is 0%, 0%, 15%, 20% and 65% respectively. For 109,950 shares, the vesting schedule in fiscal years 2003 through 2007 is 0%, 0%, 0%, 40% and 60% respectively. In the current year, based upon forecasted performance management has determined that it is probable that performance targets will be met, and has recognized expense in the three months ended August 28, 2005 and August 29, 2004, of $1,817,000 and $981,000, respectively. 13 As of August 28, 2005, the Company had an additional 1,137,000 shares of restricted stock outstanding to key employees for a performance-based program that ends in fiscal year 2010. 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. The vesting schedule in fiscal years 2006 through 2010 is 0%, 0%, 15%, 20% and 65% respectively. In the current year, the stock is not considered dilutive. The Company will record expense for the restricted stock when management determines it will be probable that the performance targets will be met. At that time the expense will be recorded and treated as variable through the date that the restriction lapses. Additional shares of restricted stock may be granted to newly hired key employees. As of August 28, 2005 the Company had outstanding 73,825 shares of time-based restricted stock to certain employees. These shares are vesting over time ranging from 1 to 5 years. For the three months ended August 28, 2005 and August 29, 2004, the Company had recorded expense of $97,000 and $29,000, respectively. As of August 28, 2005 the Company had outstanding 21,869 shares of restricted stock to the Board of Directors. These shares are vesting over a five year time frame at 10%, 10%, 10%, 10%, and 60%, respectively. For the three months ended August 28, 2005 and August 29, 2004 the Company had recorded expense of $20,000 and $7,500, respectively. As of August 28, 2005, the Company had issued 16,350 shares of Common Stock at a fair market value of $25.29 per share as compensation to the Board of Directors. For the three months ended August 28, 2005 and August 29, 2004 the Company had recorded expense of $103,000 and $109,000, respectively. As of August 28, 2005, the Company had issued 29,500 shares to fund employee benefit plans for MRID employees with a value of $624,000 being recognized as compensation expense ratably over a contractual four year vesting period. For the three months ended August 28, 2005, the Company had recorded expense of $39,000. In addition to the Company stock and award plans, the Company also maintains a deferred compensation plan ("the plan") in which certain management and highly compensated employees are eligible to defer a maximum of 25% of the participant's salary and up to 100% of the participant's bonus. The compensation deferred under this plan is credited with earnings or losses based upon changes in values of the investments elected by the plan participant. Each plan participant is fully vested in all deferred compensation and any earnings credited to their accounts. The deferrals are invested by the Company through a Rabbi trust ("the trust"). The trust invests these deferred amounts based upon elections made by the plan participants into various funds designated by the plan, one of which includes Company common stock. Any Company common stock held by the trust is treated as treasury shares. The Company accounts for the plan in accordance with Emerging Issues Task Force (EITF) No. 97-14 whereby the deferred compensation obligation is classified as a liability and adjusted, with a corresponding charge or credit to compensation cost, to reflect changes in the fair value of amounts owed to employees under the plan. The equal and offsetting assets held by the trust are recorded as an other asset with equal and offsetting fluctuations in fair value being charged or credited to other non-operating income. As of August 28, 2005, the liability under the plan and the equal and offsetting fair value of the trust assets amounted to $7,296,000. For the three months ended August 28, 2005, the amount recognized as additional compensation expense and the equal and offsetting credit to other non-operating income was $66,000. Note E- Segment and Related Information The Company operates in three reportable segments: Magnetic Resonance Imaging (MRI), Medical Devices, and Energy Technology. During the third quarter of fiscal year 2005, the Company sold IGC- Polycold Systems, Inc. the sole subsidiary in its Instrumentation segment. In addition, during the first quarter of fiscal year 2005, the MRI segment included OEM sales of Radio Frequency (RF) coils, which are now included in the Medical Devices segment As a result, all prior year data has been restated to reflect these changes. The MRI segment consists primarily of the manufacture and sale of low temperature superconducting ("LTS") magnets (by the IGC-Magnet Business Group). The Medical Devices segment 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. In addition, IDI manufactures visualization and analysis systems which are software based products used in conjunction with RF coils in diagnostic imaging and interventional diagnostic procedures. 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. 14 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 accounting policies of the reportable segments are the same as those described in Note A of the Notes to Consolidated Financial Statements. 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: SEGMENT DATA (Dollars in Thousands)
Three Months Ended ------------------------------------------------------------------ August 28, 2005 ------------------------------------------------------------------ Magnetic Resonance Medical Energy Imaging Devices Technology Total --------------------- -------------- --------------- ------------- Net revenues to external customers: Magnet systems $ 28,115 $ 28,115 Patient Monitors and RF Coils $ 39,866 39,866 Other $ 3,035 3,035 --------------------- -------------- --------------- ------------- Total 28,115 39,866 3,035 71,016 Segment operating income (loss) 4,728 4,647 (1,745) 7,630 Goodwill 169,910 169,910 Total assets $ 131,007 $ 258,687 $ 12,605 $ 402,299
Three Months Ended ------------------------------------------------------------------ August 29, 2004 ------------------------------------------------------------------ Magnetic Resonance Medical Energy Imaging Devices Technology Total --------------------- -------------- --------------- ------------- Net revenues to external customers: Magnet systems $ 24,103 $ 24,103 Patient Monitors and RF Coils $ 25,871 25,871 Other $ 1,550 1,550 --------------------- -------------- --------------- ------------- Total 24,103 25,871 1,550 51,524 Segment operating income (loss) 3,061 4,007 (2,102) 4,966 Goodwill 169,062 169,062 Total assets $ 134,730 $ 234,131 $ 10,099 $ 378,960
15 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 --------------------------------------------- August 28, 2005 August 29, 2004 -------------------- --------------------- Reconciliation of income from continuing operations before income taxes: Total operating income from reportable segments $ 7,630 $ 4,966 -------------------- --------------------- Net operating income 7,630 4,966 Interest and other income 154 201 Interest and other expense (646) (1,012) Gain on litigation settlement 600 Adjustment to gain on prior period sale of division 1,094 -------------------- --------------------- Income from continuing operations before income taxes $ 7,738 $ 5,249 ==================== =====================
Note F - 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. The components of other intangibles are as follows: (Dollars in Thousands)
As of August 28, 2005 --------------------------------------------------------- Weighted Gross Carrying Accumulated Average Life Amount Amortization in Years -------- ------------ -------- Amortized intangible assets Production rights $ 8,750 $ 8,750 5.5 Patents 3,925 1,252 17.8 Trade names/trademarks 11,510 729 25.0 Product name/trademark 4,640 523 10.5 Know-how and core technology 17,940 2,587 9.3 Product technology and design 4,930 1,039 6.6 OEM customer relationships 14,950 1,617 12.0 -------- -------- $ 66,645 $ 16,497 12.5 ======== ========
Aggregate amortization expense from continuing operations for the three months ended August 28, 2005 and August 29, 2004 for continuing operations was $1,397,000 and $1,384,000, respectively. All intangibles are amortized on a straight line basis. Estimated Amortization Expense: For the year ending May 2006 $ 5,196 For the year ending May 2007 $ 5,063 For the year ending May 2008 $ 5,063 For the year ending May 2009 $ 5,051 For the year ending May 2010 $ 5,016 There were no changes to recorded goodwill during the three months ended August 28, 2005. 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. Management will perform the next annual goodwill impairment test during the quarter ended November 27, 2005 unless an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Note G - 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 by SFAS No.138, "Accounting for Certain Derivative and Certain Hedging Activities", 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 stockholders' equity as other comprehensive income (loss). 16 The Company has entered into interest rate swap agreements designated as cash flow hedges to reduce the effect of changes in interest rates on its floating rate long-term debt. On August 28, 2005, the Company had outstanding interest rate swap agreements with a commercial bank, having a current notional principal amount of approximately $4 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 $30,000 to $(22,000) during the three months ended August 28, 2005. On February 5, 2004, the Company entered into an interest rate swap agreement designated as a cash flow hedge with a commercial bank, having a notional principle amount of $19.4 million as of August 28, 2005. This agreement effectively hedges the Company's interest rate exposure on a portion of its long term debt due on December 31, 2008 to a fixed rate of 2.95% plus applicable margins. This interest rate swap agreement matures on December 31, 2008. The fair value of this interest rate swap increased $83,000 to $479,000 during the three months ended August 28, 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 three months ended August 28, 2005 and August 29, 2004, the Company recorded net other comprehensive gains (losses) of $83,000 and $(89,000), respectively net of tax for the two interest rate swap agreements. Note H - Subsequent Event On September 1, 2005, the Company executed an amended and restated Credit Agreement with its existing group of commercial lenders. The Amended and Restated Credit Agreement effectively increases the Company's unsecured revolving credit facility from $105 million to $200 million and eliminates the amortizing term loan portion of the facility, which had been $25 million. The maturity date of the Agreement has been extended from December 2008 until August 2010. In addition, the Company received more favorable financial covenants including improved debt leverage and interest coverage ratios. In conjunction with this amendment, the Company was required to pay a non-refundable commitment fee and other direct costs to administer the amendment totaling $318,000. These costs were deferred and will be amortized straight-line over the remaining life of the debt. In connection with the execution of the Agreement, the Company borrowed $55 million under the amended and restated facility. The proceeds were used principally to retire amounts borrowed under the original credit agreement including the entire $19.4 million balance remaining on the term loan and the $14 million borrowed under the revolving portion of the facility. An additional $4 million will be used to retire the mortgage on its Latham, New York manufacturing facility which matures in November 2005. The balance of the proceeds will be used to meet working capital requirements. On September 2, 2005, the Company entered into an interest rate swap agreement with a commercial bank in connection with the $55 million borrowing under its recently amended and restated credit facility. This interest rate swap is designated as a cash flow hedge, having an initial notional principle amount of $35.6 million. This agreement will effectively hedge the Company's interest rate exposure on a portion of its long term debt to a fixed rate of 4.27%. This interest rate swap agreement will mature on September 1, 2010. 17 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 2006 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 and in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on August 12, 2005. 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 September 1, 2005 subsequent to our first quarter end, we executed an amended and restated Credit Agreement with our existing group of commercial lenders. The Amended and Restated Credit Agreement effectively increases our unsecured revolving credit facility from $105 million to $200 million and eliminates the amortizing term loan portion of the facility, which had been $25 million. The maturity date of the Agreement has been extended from December 2008 until August 2010. In addition, we received more favorable financial covenants including improved debt leverage and interest coverage ratios. In conjunction with this amendment, we were required to pay a non-refundable commitment fee and other direct costs to administer the amendment totaling $318,000. These costs were deferred and will be amortized straight-line over the remaining life of the debt. In connection with the execution of the Agreement, we borrowed $55 million under the amended and restated facility. The proceeds were used principally to retire amounts borrowed under the original credit agreement including the entire $19.4 million balance remaining on the term loan and the $14 million borrowed under the revolving portion of the facility. An additional $4 million will be used to retire the mortgage on its Latham, New York manufacturing facility which matures in November 2005. The balance of the proceeds was used to meet working capital requirements. On September 2, 2005, we entered into an interest rate swap agreement with a commercial bank in connection with the $55 million borrowing under our recently amended and restated credit facility. This interest rate swap is designated as a cash flow hedge, having an initial notional principle amount of $35.6 million. This agreement will effectively hedge our interest rate exposure on a portion of our long term debt to a fixed rate of 4.27%. This interest rate swap agreement will mature on September 1, 2010. In addition, effective September 1, 2005 the Executive Committee of the Company's Board of Directors authorized the Company to re-purchase up to 2,500,000 shares of the Company's stock. This authorization supersedes the Board's previous re-purchase authorization, which was approved in July of 2002. On February 15, 2005, during the third quarter of fiscal year 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. 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 operations of Polycold are included in income from discontinued operations for the three months ended August 29, 2004. On July 16, 2004, during the first quarter of fiscal year 2005 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. 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 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. 18 SEGMENT STRUCTURE ----------------- We operate in three reportable segments: Magnetic Resonance Imaging (MRI), Medical Devices, and Energy Technology. During the third quarter of fiscal year 2005, we sold IGC-Polycold Systems, Inc. the sole subsidiary in our Instrumentation segment. In addition, during the first quarter of fiscal year 2005, the MRI segment included OEM sales of Radio Frequency (RF) coils, which are now included in the Medical Devices segment As a result, all prior year data has been restated to reflect these changes. The MRI segment consists primarily of the manufacture and sale of low temperature superconducting ("LTS") magnets (by the IGC-Magnet Business Group). Our Medical Devices segment 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 portfolio of products including RF-coils, vital sign patient monitors, visualization and analysis products and service for these products. RF-coils are application-specific devices that work as a part of the overall MRI system to create images of specific anatomical areas of the body. Examples include breast, head, knee and wrist RF-coils. These products are sold directly to major original equipment manufacturers (OEM's) including Philips Medical Systems ("Philips"), GE Healthcare ("GE"), Siemens Medical Solutions ("Siemens") and Toshiba Medical Systems ("Toshiba"). These products are also sold directly to healthcare providers through Invivo's direct global sales network comprised of direct sales representatives and independent distributors. Vital sign monitoring products are devices used throughout hospital acute care departments, ambulatory surgical outpatient centers, hospital based radiology departments, and free-standing diagnostic imaging centers. These products monitor and display respiratory and cardiac vital signs such as temperature, heart rate and blood pressure. Invivo offers both MRI-compatible monitors for use in the MRI imaging suite and bedside monitors with central viewing systems at central nurse stations. Visualization and analysis systems are software based products used in conjunction with RF coils in diagnostic imaging and interventional diagnostic procedures. Invivo provides service through company operated repair centers. An integral part of Invivo's sales and marketing strategy is a corporate and national account program. Invivo enters into supply agreements with Group Purchasing Organizations (GPO) to sell products to the GPO member hospitals or healthcare facilities. 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. 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. 19 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 August 28, 2005 and August 29, 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. ALLOWANCE FOR DOUBTFUL ACCOUNTS - ------------------------------- The Company records an allowance for doubtful accounts for estimated receivable losses. Management considers historical collection experience and reviews aging reports on its outstanding receivable balances on a regular basis to assess the collectibility of these balances, and adjusts the allowance for doubtful accounts accordingly. Increases to the allowance are expensed and included in operating expenses. The allowance and the related receivable are reduced when the account is deemed uncollectible. 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. 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 is calculated using estimated discounted future cash flows of the operations associated with the related reporting unit and 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. 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. As of August 28, 2005 the total remaining reserve for environmental remediation relating to the divestitures of IGC-AS and IGC-APD was approximately $545,000. RESULTS OF OPERATIONS - --------------------- Consolidated revenues increased about $19.5 million or nearly 38%, to $71.0 million, for the three months ended August 28, 2005, from continuing operations revenues of $51.5 million for the same period last year. This increase was the result of improved revenues from all of our segments partially due to the inclusion of MRI Devices, now Invivo Diagnostic Imaging or "IDI", for a full quarter versus only six weeks of revenue included during the first quarter of fiscal year 2005. 20 MRI SEGMENT REVENUES -------------------- MRI segment revenues during the three month period ended August 28, 2005, increased $4.0 million or nearly 17% to $28.1 million compared to $24.1 million during the same period last year. This increase is a combination of increased magnet shipments and improved product mix partially offset by the reduced contractual selling prices on the 1.5T magnets. MEDICAL DEVICES REVENUES ------------------------ Our Medical Devices segment revenues of $39.9 million increased nearly $14.0 million or 54.1% over the same period ended last year. Invivo provided about $19.0 million from OEM RF coil and patient monitor revenues, an increase of about $9.9 million due to a full quarter of RF coil sales from the MRID acquisition combined with an increase in overall OEM demand for RF coils. Invivo provided about $20.9 million of revenues from direct sales of patient monitors and RF coils, an increase of $4.1 million over the same period last year. This increase is driven by Invivo's global direct sales force having access to sell MRID's RF-coils for full quarter. ENERGY TECHNOLOGY SEGMENT REVENUES ---------------------------------- Revenues of the Energy Technology segment increased $1.5 million or 95.8% to $3.0 million for the three months ended August 28, 2005, over the corresponding period last year. The increase over prior year period resulted from a net increase in government and third-party billable revenue on HTS device programs. GROSS MARGIN ------------ Consolidated gross margin for the three months ended August 28, 2005, increased $8 million to $31.1 million or 43.9% of net revenues compared to $23.1 million or 44.9% of net revenues last year. The MRI segment increased about $1.7 million which corresponds to the increase in revenues, as well as the continued benefits of this segment's cost savings efforts, partially offset by reduced selling prices on the 1.5T magnets. Increased sales in our Medical Devices segment contributed $6.2 million of the increase in consolidated gross margin which grew to $20.2 million. Inclusion of MRID for a full quarter and an over all increase in the demand for RF-coils was primarily responsible for this segment's gross margin growth. As a percent of revenues, gross margin from our Medical Devices segment declined 3.3% from the same period last year to 50.8% primarily due to increases in lower margin OEM sales. Gross margins in our Energy Technology segment were consistent with the same period last year. PRODUCT RESEARCH AND DEVELOPMENT -------------------------------- Product research and development increased nearly $2.4 million or 47.9% to $7.3 million for the three months ended August 28, 2005. About $2.9 million of this increase is primarily due to the development of the next generation RF coils and patient monitors as well as new products in our Medical Devices segment. This increase was partially offset by a net decrease in spending on various HTS projects in our Energy Technology segment. SELLING, GENERAL AND ADMINISTRATIVE ----------------------------------- For the three months ended August 28, 2005, selling general and administrative expenses, including stock based compensation, increased $2.9 million to $14.8 million from $11.8 million for continuing operations of the same period last year. This increase is partially due to increased selling and marketing expenses in our Medical Device segment of about $1.8 million resulting from the increase in revenues combined with a full quarter contribution from MRID. In addition, performance based stock compensation increased about $950,000 over the same period last year. This expense is calculated on forecasted performance. Finally, $66,000 of additional compensation was recognized resulting from the appreciation on the Company's tax deferred compensation plan. An equal and offsetting gain was recognized in interest income having no impact on net income. 21 AMORTIZATION OF INTANGIBLE ASSETS --------------------------------- Amortization expense for both the three months ended August 28, 2005 and August 29, 2004 was $1.4 million. During June 2005, the first month of our first quarter, the amortization of the production rights at our Magnet Business Group was completed. Offsetting this decrease is a full quarter of amortization from the amortizable intangible assets resulting from our acquisition of MRID on July 16, 2004. OPERATING INCOME ---------------- For the three month period of fiscal year 2006, operating income increased $2.7 million to $7.7 million. This increase is primarily due to improved revenues and margins as well as the full quarter inclusion of operations from our acquisition of MRID in July of 2004. These increases were partially offset by increases in product research and development spending combined with increases in selling and marketing costs and the increase in stock based compensation. INTEREST AND OTHER ------------------ Interest and other income of $154,000 for the three months ended August 28, 2005, decreased about $50,000 from the corresponding period last year. This decrease is primarily driven by our lower cash balances during the current quarter. In addition, about $40,000 of grant income was recognized by IDI in the prior year, partially offset by a $66,000 increase in earnings from the Company's income tax deferred compensation plan. An equal and offsetting compensation charge was recorded as an operating expense in accordance with Emerging Issues Task Force (EITF) No. 97-14. During the three months ended August 28, 2005, the Company received $600,000 resulting from a favorable patent litigation settlement. Interest and other expense of $646,000 for the three months ended August 28, 2005, decreased $366,000 from the corresponding three month period last year. This decrease is primarily driven by lower average borrowings outstanding under our credit facility combined with favorable pricing. During the first quarter of last year, $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. Our effective tax rate of 34.3% for the three months ended August 28, 2005, decreased slightly from 34.7% for the three month period ended last year. The decrease in our rate is primarily due to benefits from New York State Empire Development Zone credits and the Qualified Production Activity deductions of the American Jobs Creation Act which became effective during the first quarter of this year. 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 for the three months ended August 29, 2004 as discontinued operations. Polycold's revenues and net operating profit included in discontinued operations is as follows: (In thousands) Three Months Ended August 29, 2004 ---------------------- Net revenues to external customers $ 8,224 Net operating income 2,886 LIQUIDITY AND CAPITAL COMMITMENTS - --------------------------------- OPERATING ACTIVITIES -------------------- For the three months ended August 28, 2005, we used about $8.0 million in cash from operating activities compared to $5.9 million provided in the same period last year. The decrease in cash from operating activities is primarily due to increases in inventory and accounts receivable combined with decreases in accounts payable and accrued expenses offset by an increase in earnings adjusted for non-cash items. 22 INVESTING ACTIVITIES -------------------- For the three months ended August 28, 2005, investing activities consisted primarily of $3.2 million for purchases of property and equipment. The $40.2 million of cash used during the three months ended August 29, 2004, is primarily due to the $38.2 million of cash used to acquire MRID, purchases of property and equipment of $1.7 million and $339,000 for other investing activity requirements. FINANCING ACTIVITIES -------------------- Financing activities for the three months ended August 28, 2005, provided about $9.3 million primarily from proceeds received from our revolving credit facility of $10.0 million, partially offset by $1.2 million of scheduled payments on our long term debt. In addition, proceeds of $400,000 were received from exercises of stock options. During the same quarter last year, cash provided from financing activities of about $33 million consisted of the $45 million received from borrowings used to partially finance the acquisition of MRID partially offset by $10.8 million of principal payments on long term debt. Additional financing activities during the quarter consisted of $481,000 from the exercise of stock options, partially offset by the $1.6 million of treasury stock purchases. 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 August 28, 2005, consisted of capital equipment commitments of approximately $2.1 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. In order to subsidize longer-term substantial increases in sales volume, large research and development or capital expenditure requirements, or increases in production capacity 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 acceptable financing available including internally generated cash. Inflation has not had a material impact on our financial statements. RISK FACTORS - ------------ You should carefully consider the risks described below before making an investment decision with respect to Intermagnetics' common stock. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our business. Any of these could have a material and negative effect on our business, financial condition or results of operations. In addition to the risk factors included elsewhere in this report: THE COMPANY IS 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. 23 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, 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. A SIGNIFICANT PORTION OF OUR REVENUE CURRENTLY COMES FROM A SMALL NUMBER OF CUSTOMERS, AND ANY DECREASE IN REVENUE FROM THESE CUSTOMERS COULD HARM OUR OPERATING RESULTS. We depend on a small number of customers for a large portion of our business, and changes in our customers' orders may have a significant impact on our operating results. If a major customer significantly reduces the amount of business it does with us, there would be an adverse impact on our operating results. Although we have broadened our customer base over the past fiscal year, we will continue to depend on sales to a relatively small number of major customers. Because it often takes significant time to replace lost business, it is likely that our operating results would be adversely affected if one or more of our major customers were to cancel, delay or reduce significant orders in the future. In addition, we generate significant accounts receivable in connection with the products we sell to our major customers. Although our major customers are large corporations, if one or more of our customers were to become insolvent or otherwise be unable to pay for our products, our operating results and financial condition could be adversely affected. COMPETITION FROM EXISTING OR NEW COMPANIES COULD CAUSE US TO EXPERIENCE DOWNWARD PRESSURE ON PRICES, FEWER CUSTOMER ORDERS, REDUCED MARGINS, THE INABILITY TO TAKE ADVANTAGE OF NEW BUSINESS OPPORTUNITIES AND THE LOSS OF MARKET SHARE. Our MRI and Medical Device segments operate in a highly competitive industry. We are subject to competition based upon product design, performance, pricing, quality and service. While we try to maintain competitive pricing on those products that are directly comparable to products manufactured by others, in many instances our products will conform to more exacting specifications and carry a higher price than analogous products manufactured by others. Our competitors include divisions of much larger, more diversified organizations as well as a number of specialized companies. Some of them have greater resources and larger staffs than we have. Many of our OEM customers and potential OEM customers have the capacity to design and manufacture internally the products we manufacture for them. We face competition from research and product development groups and the manufacturing operations of our current and potential customers, who continually evaluate the benefits of internal research and product development and manufacturing versus outsourcing. WE DEPEND ON OUR SUPPLIERS, SOME OF WHICH ARE THE SOLE SOURCE FOR OUR COMPONENTS, AND OUR PRODUCTION WOULD BE SUBSTANTIALLY CURTAILED IF THESE SUPPLIERS ARE NOT ABLE TO MEET OUR DEMANDS AND ALTERNATIVE SOURCES ARE NOT AVAILABLE. We order raw materials and components to complete our customers' orders, and some of these raw materials and components are ordered from sole-source suppliers. Although we work with our customers and suppliers to minimize the impact of shortages in raw materials and components, we sometimes experience short-term adverse effects due to price fluctuations and delayed shipments. If a significant shortage of raw materials or components were to occur, we might have to delay shipments or pay premium pricing, which could adversely affect our operating results. In some cases, supply shortages of particular components will substantially curtail production of products using these components. We are not always able to pass on price increases to our customers. Accordingly, some raw material and component price increases could adversely affect our operating results. 24 UNCERTAINTIES AND ADVERSE TRENDS AFFECTING THE MEDICAL DEVICE INDUSTRY, INCLUDING THE MARKETS OF ANY OF OUR MAJOR CUSTOMERS MAY ADVERSELY AFFECT OUR OPERATING RESULTS. Our business depends primarily on the MRI market, which is subject to rapid technological change and pricing and margin pressure. In addition, changes in government policy relating to reimbursement for the purchase and use of medical capital equipment could also affect our sales. OUR DELAY OR INABILITY TO OBTAIN ANY NECESSARY UNITED STATES OR FOREIGN REGULATORY CLEARANCES OR APPROVALS FOR OUR NEW PRODUCTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. Our products in the Medical Device segment are subject to a high level of regulatory oversight. A delay or inability to obtain any necessary United States or foreign regulatory clearances or approvals for our new products could have a material adverse effect on our business. The process of obtaining clearances and approvals can be costly and time-consuming. There is a further risk that any approvals or clearances, once obtained, may be withdrawn or modified. Medical devices cannot be marketed in the United States without clearance or approval by the FDA. Medical devices sold in the United States must also be manufactured in compliance with FDA rules and regulations, which regulate the design, manufacture, packing, storage and installation of medical devices. Moreover, medical devices are required to comply with FDA regulations relating to investigational research and labeling. States may also regulate the manufacture, sale and use of medical devices. Medical device products are also subject to approval and regulation by foreign regulatory and safety agencies. LOSS OF ANY OF OUR KEY PERSONNEL COULD HURT OUR BUSINESS BECAUSE OF THEIR INDUSTRY EXPERIENCE AND THEIR TECHNOLOGICAL EXPERTISE. We operate in a highly competitive industry and depend on the services of our key senior executives and our technological experts. The loss of the services of one or several of our key employees or an inability to attract, train and retain qualified and skilled employees, specifically engineering and operations personnel, could result in the loss of customers or otherwise inhibit our ability to operate and grow our business successfully. OUR SUCCESS DEPENDS ON NEW PRODUCT DEVELOPMENT. We have continuing development program designed to develop new products and to enhance and improve our products. We are expending significant resources on the development of new products in all of our segments. The successful development of our products and product enhancements are subject to numerous risks, both known and unknown, including: o Unanticipated delays; o access to capital; o budget overruns; o technical problems; and o other difficulties that could result in the abandonment or substantial change in the design, development and commercialization of these new products, including, for example, changes requested by the FDA in connection with pre-market approval applications for our medical device products or lack of government funding for our HTS initiatives. Given the uncertainties inherent with product development and introduction, we cannot assure that any of our product development efforts will be successful on a timely basis or within budget, if at all. Our failure to develop new products and product enhancements on a timely basis or within budget could harm our business and prospects. OUR BUSINESS COULD BE HARMED IF OUR PRODUCTS CONTAIN UNDETECTED ERRORS OR DEFECTS OR DO NOT MEET CUSTOMER SPECIFICATIONS. We are continuously developing new products and improving our existing products. Newly introduced products can contain undetected errors or defects. In addition, these products may not meet their performance specifications under all conditions or for all applications. If, despite our internal testing and testing by our customers, any of our products contains errors or defects or any of our products fails to meet customer specifications, then we may be required to enhance or improve those products or technologies. We may not be able to do so on a timely basis, if at all, and may only be able to do so at considerable expense. In addition, any significant reliability problems could result in adverse customer reaction, negative publicity or legal claims and could harm our business and prospects. 25 THERE ARE A NUMBER OF TECHNOLOGICAL CHALLENGES THAT MUST BE SUCCESSFULLY ADDRESSED BEFORE OUR HTS PRODUCTS CAN GAIN WIDESPREAD COMMERCIAL ACCEPTANCE. Our HTS products are in the early stages of commercialization or development and we must successfully address a number of technological challenges to complete our development and commercialization efforts. We will also need to improve the performance and/or reduce the cost of our HTS wire to expand the number of commercial applications for it. We may be unable to meet such technological challenges. Delays in development, as a result of technological challenges or other factors, may result in the termination of certain HTS product development efforts or delays in the introduction or commercial acceptance of our products. A WIDESPREAD COMMERCIAL MARKET FOR OUR HTS PRODUCTS MAY NOT DEVELOP. To date, there has been no widespread commercial use of HTS products. It is possible that the market demands we currently anticipate for our HTS products will not develop even if technological hurdles are overcome and that HTS products will never achieve widespread commercial acceptance. MANY OF OUR HTS PROJECTS ARE DEPENDENT UPON GOVERNMENT FUNDING, SUBCONTRACTORS AND OTHER BUSINESS PARTNERS. We partner with other companies, including cable manufacturers and suppliers of cryogenic systems on many of our HTS projects, such as our HTS cable installation program. Accordingly, most of our current and planned revenue-generating projects involve business partners on whose performance our revenue and technical success is dependent. If these business partners fail to deliver their products or perform their obligations on a timely basis, our revenue from these projects may be delayed or decreased and our technical success may be jeopardized. A significant source of revenue for our HTS projects is the U.S. government (e.g., the Department of Energy) and this funding is subject to annual appropriations. If the amount committed to each project is not appropriated annually, then our revenue for HTS projects may be substantially impacted. 26 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. 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. (Effective September 1, subsequent to our quarter end, we executed an amended and restated credit agreement. See Footnote H to our consolidated financial statements.) 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 G 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 maximum duration of these securities are an average weighted duration of 90 days or less. Additionally, the Company makes certain estimates about inventory value, collectibility of accounts receivable, warranty expense and market acceptance of new product under development. We use factors such as probability of use, ability of a customer to pay, historical experience of product repair and customer need and or acceptance of new products in making the associated estimates. These estimates are believed to be reasonable and based on information available at the time the estimate is made. 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. 27 PART II: OTHER INFORMATION ITEM 6: Exhibits (a) Exhibits 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. 28 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: October 7, 2005 By: /s/Glenn H. Epstein ----------------------------- Glenn H. Epstein Chairman and Chief Executive Officer Dated: October 7, 2005 By: /s/Michael K. Burke ----------------------------- Michael K. Burke Executive Vice President and Chief Financial Officer 29 EX-31 2 ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 RULE 13a-14(a)/15d-14(a) I, Glenn H. Epstein, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Intermagnetics General Corp. ("the Registrant"); 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) 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 annual report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and d. disclosed in this annual 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: October 7, 2005 /s/Glenn H. Epstein ----------------------------------------- Glenn H. Epstein Chairman and Chief Executive Officer 30 EX-31 3 ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 RULE 13a-14(a)/15d-14(a) I, Michael K. Burke, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Intermagnetics General Corp. ("the Registrant"); 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) 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 annual report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and d. disclosed in this annual 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: October 7, 2005 /s/Michael K. Burke ---------------------------------------------------- Michael K. Burke Executive Vice President and Chief Financial Officer 31 EX-32 4 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 fiscal quarter ending August 28, 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 October 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. 32 EX-32 5 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 fiscal quarter ending August 28, 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 October 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. 33 -----END PRIVACY-ENHANCED MESSAGE-----