-----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, MCCzY13/ZprijFzpzeuq5ZFhgh9WyW6+Ir+P01rEgxof5X8mlNbPP5I/V/WWsd5g XrZMZAmwTsXZt4tQSl4bFA== 0000950116-02-001978.txt : 20020823 0000950116-02-001978.hdr.sgml : 20020823 20020823124308 ACCESSION NUMBER: 0000950116-02-001978 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20020526 FILED AS OF DATE: 20020823 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERMAGNETICS GENERAL CORP CENTRAL INDEX KEY: 0000351012 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED METAL PRODUCTS [3490] IRS NUMBER: 141537454 STATE OF INCORPORATION: NY FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11344 FILM NUMBER: 02746691 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-K 1 p319987_10k.txt ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended May 26, 2002 ------------- or [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________ to ___________ Commission File Number 1-11344 ------- INTERMAGNETICS GENERAL CORPORATION ---------------------------------- (Exact name of registrant as specified in its charter.) New York 14-1537454 ------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 450 Old Niskayuna Road Latham, New York 12110 ---------------------------------------- ---------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (518) 782-1122 -------------- Securities registered pursuant to Section 12(b) of the Act: None ---- (Title of Class) Securities registered pursuant to Section 12(g) of the Act: Common Stock - $.10 par value ----------------------------- (Title of each Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements in Part III of this Form 10-K or any amendment to this Form 10-K. [X] ii The aggregate market value of the voting stock held by non-affiliates of the registrant is approximately $220,191,246. Such aggregate market value was computed by reference to the closing price of the Common Stock based on quoted market prices on August 15, 2002. It assumes that all directors and officers of the registrant are affiliates. In making such calculation, the registrant does not determine whether any director, officer or other holder of Common Stock is an affiliate for any other purpose. The number of shares of the registrant's Common Stock outstanding, net of Treasury shares, as of August 15, 2002 was 16,681,155. DOCUMENTS INCORPORATED BY REFERENCE The information required for Part III below is incorporated by reference from the registrant's Proxy Statement for its 2002 Annual Meeting of Shareholders to be filed within 120 days after the end of the registrant's fiscal year. iii TABLE OF CONTENTS PART I............................................................................................................1 ITEM 1. BUSINESS DESCRIPTION.....................................................................................1 MAGNETIC RESONANCE IMAGING SEGMENT.............................................................................2 INSTRUMENTATION SEGMENT........................................................................................8 ENERGY TECHNOLOGY SEGMENT.....................................................................................11 RESEARCH AND DEVELOPMENT......................................................................................17 INVESTMENTS...................................................................................................18 PERSONNEL.....................................................................................................18 EXECUTIVE OFFICERS OF THE REGISTRANT..........................................................................18 ITEM 2. PROPERTIES..............................................................................................20 ITEM 3. LEGAL PROCEEDINGS.......................................................................................20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....................................................21 PART II..........................................................................................................21 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS...................................21 ITEM 6. SELECTED FINANCIAL DATA.................................................................................22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK..............................................31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................................................31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................31 PART III.........................................................................................................32 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................................32 ITEM 11. EXECUTIVE COMPENSATION..................................................................................32 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................32 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................................32 PART IV..........................................................................................................32 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K..........................................32 (a) FINANCIAL STATEMENTS, SCHEDULE AND EXHIBITS.............................................................32 (b) REPORTS ON FORM 8-K.....................................................................................36 SIGNATURES.......................................................................................................37
iv SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Intermagnetics General Corporation ("Intermagnetics", "Company", "we" or "us") makes forward-looking statements in this document. Typically, we identify forward-looking statements with words like "believe," "anticipate," "perceive," "expect," "estimate" and similar expressions. Unless a passage describes an historical event, it should be considered a forward-looking statement. These forward-looking statements are not guarantees of future performance and involve important assumptions, risks, uncertainties and other factors that could cause the Company's actual results for fiscal year 2003 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 Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other assumptions, risks, uncertainties and factors disclosed throughout this report. Except for our continuing obligations to disclose material information under federal securities laws, we are not obligated to update these forward-looking statements, even though situations may change in the future. We qualify all of our forward-looking statements by these cautionary statements. PART I ITEM 1. BUSINESS DESCRIPTION Intermagnetics has a 30-year history as a leading global developer and manufacturer of superconducting materials, radio-frequency coils, magnets and devices utilizing low- and high-temperature superconductors and cryogenic refrigeration systems. We sell our products primarily in the magnetic resonance imaging (MRI), analytical instrumentation and industrial processing markets. We are also investing in the development of high temperature superconducting materials and products for the Energy Technology market - specifically transmission and distribution of electric power. Superconductive materials lose all resistance to the flow of electrical current when cooled below a critical temperature. Superconductors offer advantages over conventional conductors, such as copper or aluminum, by carrying electricity with virtually no energy loss, and generating comparatively more powerful magnetic fields. The current principal commercial applications for the Company's technology are MRI, analytical instrumentation and industrial processing. The Company also leverages its expertise in superconductivity and cryogenics to develop materials and products for the electric utility market. The Company designs, develops, manufactures and sells products in three segments, which are named to reflect the markets they serve: Magnetic Resonance Imaging ("MRI"), Instrumentation and Energy Technology. 1 The MRI segment primarily provides products to the diagnostic imaging market. Our IGC-Magnet Business Group ("IGC-MBG") develops, manufactures and sells low temperature superconducting ("LTS") magnets. Our wholly-owned subsidiary, IGC-Medical Advances Inc. ("IGC-MAI"), designs, manufactures and sells radio frequency ("RF") coils. Through the second quarter of fiscal year 2002, this segment also included our IGC-Advanced Superconductor ("IGC-AS") division, which manufactured and sold LTS wire. Our Instrumentation segment provides cryogenic refrigeration equipment used primarily in ultra-high vacuum applications, industrial coatings, analytical instrumentation and semiconductor processing and testing through our wholly-owned subsidiary, IGC-Polycold Systems Inc. ("IGC-Polycold"). For the first three quarters of fiscal year 2002, this segment also included IGC-APD Cryogenics Inc. ("IGC-APD"). In Energy Technology, our wholly-owned subsidiary, SuperPower, Inc. ("SuperPower") is developing second generation high-temperature superconducting materials and devices designed to enhance the capacity, reliability and quality of electrical power transmission and distribution. We completed two major divestitures in fiscal year 2002. On October 24, 2001, we sold the assets and business of IGC-AS to Outokumpu Copper Products Oy. On February 5, 2002, we sold all of the outstanding shares of IGC-APD to Sumitomo Heavy Industries, Ltd. These transactions are discussed in more detail in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Through May 28, 2000, the activities of IGC-AS were reported in the former Low Temperature Superconducting Materials segment. Segment data for prior years has been reclassified to conform with current year presentation. MAGNETIC RESONANCE IMAGING SEGMENT A. Introduction 1. About MRI and Other Magnets Generally Currently, the single largest commercial application for superconductivity is the magnetic resonance imaging system ("MRI System"). Hospitals and clinics use MRI Systems for non-invasive, diagnostic imaging. At the core of an MRI System is a large, highly engineered magnet system. The magnet system can be based upon a resistive electromagnet, a permanent magnet or a superconductive magnet. We design and manufacture superconductive magnets, which typically offer more powerful, high-quality magnetic fields with virtually no power loss. Higher magnetic field strengths (measured in Tesla) correlate with improved "signal-to-noise" ratios, which can in turn lead to higher quality images in shorter acquisition times, typically resulting in higher patient throughput and improved economics of system ownership. The annual commercial market for new MRI Systems, upgrades and accessories in calendar year 2002 is estimated to be within the range of $3 to $3.4 billion worldwide. A small number of system integrators dominate the MRI industry. They include GE Medical Systems ("GE"), Philips Medical Systems Nederlands B.V. ("Philips"), Siemens Corporation ("Siemens"), Hitachi Medical Corporation ("Hitachi"), Toshiba Corporation ("Toshiba") and Marconi Medical Systems ("Marconi"). In November of 2001, Philips acquired Marconi. We supply key components to a number of these integrators. 2 Other existing applications for superconductivity include nuclear magnetic resonance ("NMR") spectroscopy, used in biological and chemical research and testing of the composition and structure of non-ferrous materials, and other scientific, defense and research applications. Currently, we do not participate materially in these non-MRI magnet markets. 2. About MRI Radio Frequency (RF) Coils Generally All MRI Systems use RF coils placed inside the bore of the magnet, or more generally placed onto the patient. The RF coil acts as an antenna to transmit and/or receive radio frequency signals from the human body as it lies inside the strong magnetic field of the MRI System. These radio frequency signals are transferred electronically to the MRI System computer where they are reconstructed into a clinically useful diagnostic image. Specialized RF coils -- those dedicated to imaging particular parts of the human anatomy, such as the brain, liver, knee, neck, back, wrist, etc. -- increase the number of diagnostic applications for which an MRI System can be used. The increased number of applications increases the potential utilization rate of a given MRI System. In addition, specialized RF coils designed to image a specific part of the human body will yield a sharper, more detailed image that typically is more clinically useful than a similar image produced with a multi-purpose full body RF coil. We believe most MRI Systems benefit from an array of seven to ten separate specialized RF coils. An RF coil must work closely with the MRI System in which it is used. RF coils cannot be moved easily between MRI Systems manufactured by different companies, from one field strength magnet to another, or even among different models manufactured by a single company. Consequently, each MRI System model creates the opportunity for the development of a new array of RF coils. 3. About Low Temperature Superconductors Generally There are two broad classes of superconductive materials: low temperature ("LTS") and high temperature ("HTS") superconductors. LTS materials are metals and alloys that become superconductive when cooled to temperatures near absolute zero (4.2 Kelvin or minus 452 F). Because of their superior ductile characteristics, LTS materials generally are used in the form of flexible wire or cable. HTS materials are composed of ceramic-like compounds that become superconductive when cooled to temperatures close to that of liquid nitrogen (77 Kelvin or minus 321 F) and primarily are manufactured in the form of tape (basically, flat wire). HTS materials are discussed in the Energy Technology Segment below. 3 LTS wire is used today mainly in the manufacture of MRI and NMR Spectroscopy magnet systems and for high-energy physics applications. B. Principal Products We derived approximately 80% and 68% of our net sales in fiscal years 2002 and 2001, respectively, from the sale of products in the MRI segment. The increased percentage of MRI segment sales resulted from the divestiture of IGC-APD, reduced sales within the Instrumentation segment and increased sales within the MRI segment. Segment data is provided in Note K of the Notes to Consolidated Financial Statements included in response to Item 8. Our principal MRI products include: o Superconductive MRI Magnet Systems. Through IGC-MBG, we manufacture and sell superconductive MRI magnet systems to MRI System integrators for use in stationary and mobile applications. We offer a full line of superconductive MRI magnet systems with field strengths of 0.5, 1.0, 1.5 and 3.0 Tesla ("T"). In addition, IGC-MBG is developing a 1.0T superconducting open magnet system. We do not expect significant sales of this product in fiscal year 2003. o RF Coils for MRI Systems. Through IGC-MAI, we manufacture and sell RF coils for use in MRI Systems. IGC-MAI's current product line includes ten anatomical applications with several product groups available in magnetic field strengths from 0.2T to 3.0T, leading to a total of more than 100 products. o LTS Materials. Through the second quarter of fiscal year 2002, IGC-AS manufactured and sold the two principal LTS materials that are commercially available for the construction of superconductive magnets: niobium-titanium ("NbTi") wire, and niobium-tin ("Nb3Sn") wire. We divested this business on October 24, 2001. C. Marketing We market our magnet systems through our own personnel. IGC-MAI markets its RF coils to MRI System integrators on a direct basis in the U.S, Europe and Japan and to end-users, such as hospitals, clinics and research facilities with its own U.S.-based sales force. IGC-MAI markets its RF coils to end-users outside the U.S. through a combination of distributors and direct contact with customers in selected markets. Export Sales. Products sold to foreign-based companies, such as Philips in the Netherlands, or Hitachi and Toshiba in Japan, were accounted for as export sales even if some of the products sold were installed in the U.S. On that basis, the Company's net export sales (including the Instrumentation segment) for fiscal years 2002, 2001 and 2000 totaled $127.3, $102.0 and $76.8 million, respectively, most of which were to European customers billed in U.S. currency. 4 Principal Customers. Sales to customers accounting for more than 10% of our net sales aggregated approximately 72% in fiscal year 2002, 56% of net sales in fiscal 2001 and 61% of net sales in fiscal 2000. (See Note K of Notes to Consolidated Financial Statements included in response to Item 8.) We sell a substantial portion of our products in the MRI industry to four customers, one of which is significant. Philips is the principal customer for our MRI magnet systems. In fiscal year 1999, Intermagnetics and Philips executed a new sales agreement with an initial five-year term. The term extends each year such that the agreement will continue in effect on a rolling five-year basis, unless otherwise terminated in accordance with certain provisions of the agreement. Under this agreement, Intermagnetics is the sole supplier of certain MRI magnet systems to Philips. Sales to Philips (including sales by the Instrumentation segment) amounted to approximately 72%, 56% and 50% of our net sales for fiscal 2002, 2001 and 2000, respectively. D. Competition/Market U.S. sales of MRI Systems grew in each of calendar years 1999, 2000 and 2001. Our growth in this segment is dependent on our customers' ability to grow their respective businesses, and on our ability to attract new customers. There are no assurances that such growth will continue in the future. In addition, healthcare cost control initiatives and regional economic conditions could negatively impact continued growth. MRI Systems compete indirectly with other diagnostic imaging methods such as conventional and digital X-ray systems, nuclear medical systems, ultrasound, PET scans and X-ray CT scanners. Two emerging MRI applications could provide additional growth opportunities for our products in the future. MRI System integrators are developing systems that can be used as non-invasive diagnostic tools for cardiac disease. These systems could replace the need for interventional X-rays in certain cases. Functional MRI (fMRI), in which physicians can monitor brain activity (function) as well as brain anatomy, is another emerging area. We serve this market with our newly developed 3.0T magnet system. We are well-positioned to supply specialized MRI magnet systems to address these emerging markets. There are no assurances that these markets will become significant or that we will be successful in providing commercial products for these markets. Most large MRI Systems suppliers perceive higher field strength imaging systems (1.0T or greater) that use superconductive magnets to have technical advantages over MRI Systems that use resistive electromagnets and permanent magnets, which are limited in field strength either by high power consumption or by basic material properties. Lower field strength systems generally produce lower quality images, although rapid gains in computer technology have offset some of this quality loss. Low field (0.2 to 0.3T) "open" magnet configurations based on permanent and resistive magnets enjoyed rapid growth in market share over the past few years. This growth appears to have leveled off and is expected to decline with the continued introduction of higher field open MRI Systems based on superconducting magnets. Two such systems have entered the market at 0.7T with another entry at 0.6T. IGC-MBG is developing a more powerful 1.0T superconducting "open" magnet system for this market segment. 5 o Superconductive MRI Magnet Systems. Within the market for superconductive MRI magnet systems, our competitors fall into two categories: (1) magnet manufacturers that make MRI magnet systems for MRI System integrators; and (2) MRI System integrators that manufacture superconductive magnet systems for their own use. Oxford Magnet Technology Limited ("OMT") is our principal competitor in the first category. OMT is a joint-venture between Siemens (51%) and Oxford Instruments Group, plc ("Oxford") (49%). OMT supplies MRI magnet systems to at least two MRI system integrators: Siemens and Marconi (now owned by Philips). OMT sells more superconductive MRI magnet systems and has greater production capacity than us; however, we believe we compete effectively against OMT on the basis of technology and price and that we are capable of ramping our production capacity to meet opportunities for business expansion as they arise. Competitors in the second category include GE and Toshiba. These companies manufacture MRI magnet systems for use in their own MRI Systems (although Toshiba also purchases some magnets from third parties). While these integrators do not purchase our magnet systems, they present a market opportunity for our component products. For example, we sell RF coils to GE and Toshiba, and until our divestiture of IGC-AS in October 2001, we sold LTS wire to GE. o RF Coils for MRI Systems. Our primary competitors for RF coils are other independent RF coil manufacturers. We also experience competition from MRI System integrators that manufacture RF coils for sale with their own MRI Systems. Most MRI System integrators outsource RF coil development and manufacturing to companies such as IGC-MAI. Siemens and Philips have maintained the most extensive in-house coil development activities of the major MRI System integrators. Based on input from our customers, we believe that outsourcing specialized RF coils generally results in lower cost and faster time-to-market than with in-house resources. There are several independent RF coil manufacturers of various size. Of these companies, we believe that two compete with IGC-MAI against its full product range. Competition generally is based upon capacity for volume production, price and diagnostic image quality. To remain competitive, we must continue to offer high quality, technically advanced products while reducing costs. In fiscal year 2002, IGC-MAI continued to face increased competitive pressures on both price and new technology. Its two main competitors grew in both size and market share, mainly as a result of their supply relationship with one major MRI System integrator. We are responding to these challenges with increased new product development efforts. There are no assurances, however, that IGC-MAI will be successful in its commercialization of these products. 6 o LTS Wire. The single largest commercial market for LTS wire is MRI. In fact, most of the LTS wire manufactured by IGC-AS prior to the divestiture of this business was used for superconductive MRI magnet systems (either internally by IGC-MBG, or externally by other customers). We do not anticipate that high temperature superconducting wire will be cost-effective for the MRI market at any time in the foreseeable future. F. Patents We do not believe that patents are a significant competitive factor in the conduct of our business in the MRI segment. We directly or indirectly either own, or license a number of patents relating to RF coils and magnet systems. There are no assurances that changing technology and/or emerging patents will not adversely impact our current patent position or competitiveness. In addition, while we focus on developing and patenting new technologies, there are no assurances that this technology will become commercially significant or that competing patents will not be issued. G. Raw Materials and Inventory Most materials and parts used in the manufacturing process for superconducting magnet systems are ordered for delivery based on production needs. We have long-term supply agreements with Outokumpu Advanced Superconductors (formerly IGC-AS) for the supply of LTS wire and with SHI-APD Cryogenics Inc. (formerly IGC-APD) for the supply of shield coolers - a key component of our MRI magnet systems. Sumitomo Heavy Industries, which owns SHI-APD, is now the leading manufacturer of shield coolers. In addition, LTS wire generally requires long lead times for order placement. An unplanned loss or severe reduction in supply of either of these components could result in added cost and temporary production delays. Generally, we invest in inventories for production of MRI magnet systems based on production schedules required to fill existing and anticipated customer orders. During fiscal years 2001 and 2002, we had a consignment program with our largest customer. We believe this arrangement enabled us, and our primary customer, to better respond to market demand and capture additional market share during a period of very high growth. This program was scaled back at the end of fiscal year 2002 and we plan to suspend it in fiscal year 2003. IGC-MAI believes that there are alternative suppliers at competitive prices for most of the parts, materials and components that it purchases for the manufacture of its RF coils. There are, however, discrete electrical components and mechanical housings that are sole sourced because of the uniqueness of their specifications. In the event that a sole source supplier cannot meet demand, a re-engineering or re-tooling of the sourced component would be required. 7 H. Warranty We have not had significant expense to date for performance of our warranty obligations in the MRI segment. INSTRUMENTATION SEGMENT ----------------------- A. Introduction Our Instrumentation segment provides low-temperature solutions primarily to original equipment manufacturers (OEM's) in a variety of industries. In fiscal year 2002, we made a number of changes in this segment aimed at maximizing strategic value. These changes included moving IGC-Polycold from multiple locations in San Rafael to one larger facility in Petaluma, California; transferring the manufacturing and sales of two mixed-gas refrigeration product lines from IGC-APD to IGC-Polycold; and divesting IGC-APD's remaining business through a sale of the outstanding shares of IGC-APD to Sumitomo Heavy Industries, Ltd. As a result of these changes, this segment now consists of one wholly-owned subsidiary, IGC-Polycold, which designs, manufactures and sells low temperature refrigeration equipment. Results for the first three quarters of fiscal year 2002 also include sales from IGC-APD. In addition, in the second quarter of fiscal year 2001, the Company divested a third subsidiary formerly included in this segment, InterCool Energy Corporation ("ICE"), which sold refrigerants (see Note C of the Notes to Consolidated Financial Statements included in response to Item 8). Segment data is provided in Note K of the Notes to Consolidated Financial Statements included in response to Item 8. B. Principal Products IGC-Polycold manufactures and sells a line of low temperature refrigeration systems in the -40 to -203 Celsius range. IGC-Polycold's refrigeration systems are used in several markets, including optical coating, semiconductor manufacturing, magnetic media, decorative coating, optical networking, flat panel display, detector cooling and roll/web coating. The Instrumentation segment has typically not derived significant sales from semiconductor manufacturers in the past, but has targeted new product development for this market. Historically, the semiconductor market has been cyclical based on demand for technology products such as personal computers and cellular phones. Accordingly, while our traditional recurring revenue base of the business has not been affected by the downturn in the semiconductor industry, we have not experienced the incremental growth we anticipated from our product lines that serve the semiconductor market. In fiscal year 2001, we experienced a significant increase in demand for our products from the telecommunications industry for equipment used in the manufacture of optical filters. This demand decreased significantly after the first quarter of fiscal year 2002 resulting from a downturn in this market. 8 IGC-APD's product line included shield coolers (refrigerators) used in the production of MRI magnet systems, a specialized cryogenic refrigeration system sold under the registered tradename CryoTiger (R) and specialized water pump systems and cryopumps sold under the registered tradenames AquaTrap (R) and Marathon (R) that are used primarily in the manufacture of semiconductors. We transferred the CryoTiger and AquaTrap product lines to IGC-Polycold prior to the sale of IGC-APD. IGC-Polycold also licenses certain mixed gas refrigerant technology to third parties for use in markets in which the Company does not otherwise participate. C. Marketing IGC-Polycold markets refrigeration systems through a direct sales force managed from Petaluma, California, two key distributors located in Japan and Germany, and through a worldwide network of sales representatives. In fiscal year 2000, IGC-APD and IGC-Polycold began marketing combined product lines as "Cool Solutions (TM)". IGC-Polycold has retained the rights to the "Cool Solutions" trademark application. IGC-APD marketed shield coolers through a direct sales force located in Allentown, Pennsylvania, its office in Sunnyvale, California and its office in the U.K. IGC-APD's other cryogenic products were marketed worldwide through its direct sales force and through scientific and vacuum equipment sales representatives and distributors. Prior to the sale to Sumitomo Heavy Industries, IGC-APD and Daikin Industries, Ltd., a Japanese company, agreed to terminate their worldwide partnership pursuant to which the parties sold common cryopumps under the "Marathon" trademark in well-defined territories. D. Competition/Market IGC-Polycold believes its major competitors include some small manufacturers in the Far East and one small manufacturer in Europe. In addition, IGC-Polycold experiences some competition from Helix Technology Corporation (which markets its products under the names "CTI Cryogenics" and "CTI") in limited applications. IGC-Polycold also competes with the use of liquid nitrogen as an alternative to IGC-Polycold's low temperature refrigeration systems. The Company generally competes in this area on the basis of total cost of ownership, as well as price, availability and product quality. In addition, the CryoTiger refrigeration system competes against alternative technologies including Stirling refrigerators and open-cycle coolers that rely on reservoirs of liquid nitrogen, which must be replenished periodically. Although the initial purchase price for a CryoTiger refrigerator may exceed the price of a comparable liquid nitrogen cooler, we believe lower operating and maintenance costs and greater ease of use offset this higher initial cost. Finally, there are no assurances that emerging technology will not adversely impact IGC-Polycold's competitiveness. 9 E. Patents Patents are a significant competitive factor in some areas of our Instrumentation segment. Our CryoTiger and AquaTrap lines are based upon patented proprietary technology. While IGC-Polycold does have some patent protection for its products, patents currently are not a significant competitive factor for its other products. Patents may become more significant in the future, however, as IGC-Polycold develops new products. One of the Company's keys to success in marketing its refrigeration products will depend on its continued ability to obtain patents, maintain trade secret protection and operate without infringing on the proprietary rights of others. There are no assurances that changing technology and/or emerging patents will not adversely impact our current patent position or competitiveness. In addition, while we focus on developing and patenting new technologies, there are no assurances that this technology will become commercially significant or that competing patents will not be issued. No patents that the Company considers significant expire during the next five years. F. Raw Materials and Inventory IGC-Polycold generally maintains a sufficient inventory of raw materials, assembled parts and partially and fully assembled major components to meet production requirements. IGC-Polycold purchases certain major standard components for its products from a single source. While alternative sources are available, an unplanned loss or severe reduction in supply from this source could result in added cost and temporary production delays. G. Warranty Warranty reserves were increased in fiscal year 2002 as a result of the introduction of product lines from IGC-APD and the introduction of new products from IGC-Polycold. 10 ENERGY TECHNOLOGY SEGMENT ------------------------- A. Introduction The U.S. Department of Energy has reported that much of the nation's electrical transmission and distribution infrastructure is rapidly becoming incapable of meeting the demands of our modern economy. This is because there has been a material decline in investment in this infrastructure by service providers, largely due to deregulation of the electric utility industry. Deregulation has also resulted in exponential growth in electricity transactions at the wholesale level, which has placed a burden on the existing infrastructure. Increasing congestion indicates that the ability to move electricity over the existing wires is limited. Energy Technology is an emerging industry dedicated to providing more efficient, reliable and environmentally responsible means of generating, transmitting and distributing electricity. High-temperature superconducting (HTS) materials could become a key solution. We are focusing on HTS-based devices that address a potential market for more efficient, reliable and environmentally friendly electric transmission and distribution, which we expect will be easier to permit and license than the conventional counterparts. HTS materials are composed of ceramic-like compounds that become superconducting at higher temperatures than those required to maintain superconductivity in LTS materials. HTS materials typically remain superconducting when cooled to temperatures similar to that of liquid nitrogen (77 Kelvin or minus 321 F). Accordingly, HTS materials usually require less sophisticated and less costly cryogenic refrigeration systems than LTS materials, making them well-suited for use in devices such as HTS cables, transformers and fault current limiters and controllers. We have maintained an HTS program since shortly after these materials were first identified in 1986. Initially, the Company and others pursued the development of "First Generation" HTS wires and tapes using Bismuth-based materials. The Company and others have incorporated First Generation conductors into successful prototype products. Despite improvements in First Generation wires and tapes, we believe that the high cost of raw materials required for these conductors (notably, high-purity silver), the high labor content and certain performance limitations will prevent widespread commercialization. More recently, we shifted our focus to "Second Generation" HTS conductors. These conductors are based on less expensive metal alloy substrates (e.g., nickel) and can be manufactured using a far less labor-intensive process than First Generation conductors. Based on these factors, and the superior performance demonstrated by Second Generation conductors, we believe these conductors can reach cost and performance levels necessary for commercialization of electric power devices. Our wholly-owned subsidiary, SuperPower, Inc., develops Second Generation materials and electric power devices that utilize HTS materials. SuperPower intends to incorporate HTS wire products (initially, First- and subsequently, Second-Generation) into electric power devices (see "Principal Products" below) for sale primarily into the electric power utility marketplace. We believe that Second Generation HTS conductors can be made in sufficient quantity and length, and with cost and performance attributes that will meet the commercial requirements of the applications we are pursuing. However, we expect that it will take at least until mid-decade to reach such commercial thresholds. To date, Second Generation HTS conductors have been demonstrated successfully by us or other entities only in short lengths on a laboratory scale. There can be no assurance that we will be successful in extending the laboratory results to a manufacturing scale with cost and performance levels adequate for successful commercialization or that end-user utilities will accept the new products we are developing. 11 B. Principal Products (i) Second Generation HTS Conductor As a pre-requisite to developing commercially successful HTS-based electric power devices, we intend to develop, manufacture and sell (both internally and externally) Second Generation HTS conductor. To that end, in January 2000 we entered into a three-year Cooperative Research and Development Agreement (CRADA) (the "LANL/ANL Agreement") with two U.S. Department of Energy national laboratories (the Los Alamos National Laboratory ("LANL") and the Argonne National Laboratory ("ANL")). Under this agreement, LANL and ANL are assisting us in scaling up certain promising HTS deposition processes to commercial manufacturing levels. We are responsible for approximately half of the $2.5 million cost under the LANL/ANL Agreement, with the laboratories sharing the other half. In May, 2001, we negotiated an exclusive license with LANL to certain HTS technology that we believe will provide a competitive advantage in the manufacture and sale of Second Generation HTS material. We also have exclusive access to technology developed under the CRADA, and the first right to negotiate an exclusive license within a field of use, for reasonable terms and conditions, to additional inventions made by LANL and ANL under the agreement. In addition, we announced in June 2000 the signing of a contract with UT-Battelle for the U.S. Department of Energy ("DOE Agreement") for the first phase of a three-year project to commercialize the manufacturing process for Second Generation HTS conductors. We currently expect the project to be extended to April 2004. This contract complements the LANL/ANL Agreement. SuperPower and DOE will share the costs of $4.5 million project. The first phase was completed in March 2001 and the second phase was begun in March 2001. The Company expects the program to continue for two more phases, comprising a total of 18 months. Also, in February 2001 the Company received $800,000 from the Dual Use Science & Technology (DUST) office and the Air Force Research Laboratory (AFRL) at Wright Patterson Air Force Base to assist in the scale up of Second Generation HTS manufacturing. During this 33 month program, SuperPower will match the $800,000 in funding. We expect the DUST office to add $450,000 for this program this year, which SuperPower will also match. In August 2001, the Company executed a 3-year CRADA with the AFRL at Wright Patterson Air Force Base also related to Second Generation HTS manufacturing. (ii) HTS-Based Electric Power Devices Using initially First Generation and, subsequently, Second Generation HTS conductor, we intend to develop electric power devices for sale primarily into the electric power utility marketplace. IGC-SuperPower would manufacture and sell HTS materials and components for integration into products such as HTS cables, transformers and fault current limiters. 12 (a) HTS Transmission Cable: An HTS transmission cable can carry three to five times more power than a conventional copper cable system. This has potential advantages in circumstances where new underground installation is too expensive, the terrain too difficult or where overhead right of way is not available, or is difficult to license. Given their high current-carrying capacity and other attractive characteristics, HTS cables may open up new alternatives in network design. A superconducting cable would also eliminate environmental concerns caused by leaks, fires or explosions because it does not use oil like conventional cables. HTS cables could be retrofitted into existing conventional cable ducts allowing for the delivery of more power as well as creating conduit space for telecommunications cable. HTS cables could also ensure that service reliability will be maintained as the demand for electricity grows and would improve operating efficiency through lower line losses. We participated in the first known "real world" demonstration of an HTS cable in a project led by Southwire Company. The 30m, 12.5kV, 1,250A HTS power cable was commissioned in February 2000 and currently provides power to three Southwire plants. In August, 2001, we announced that SuperPower would develop and install a First Generation power cable in an urban right-of-way in Albany, New York. The New York State Energy Research and Development Authority awarded IGC-SuperPower six million dollars ($6,000,000) for this project. We believe it is critical to the success of this project to engage a cable partner rather than just a cable component supplier. Once a partner is secured, we expect the project to take approximately four years to complete. While we initially targeted this as a three year project, we have decided to expand the project to include an additional phase in which we will design, build and test a Second Generation cable prototype. (b) HTS Fault Current Limiter: In the electrical transmission and distribution system, a short circuit (fault condition) may result from events such as lightning striking a power line, or downed trees or utility poles. Such events create a surge of current through the electric power grid system that can cause serious damage to grid equipment. Circuit breakers are deployed within electric distribution and transmission substations to protect equipment from damage. However, due to continuing growth of power demands and increased interconnections between power distribution networks, transmission networks, and power generation sources, fault current levels are increasing to levels that exceed the original fault current interrupting capabilities of the circuit breakers. Application of high-temperature superconducting (HTS) fault current limiters (FCL), would reduce the available fault current to a safer level within the operating limit of existing circuit breakers, without resorting to other expensive measures such as breaker or transformer replacement, bus splitting or construction of new substations. 13 Together with General Atomics, SuperPower participated in the demonstration of an HTS fault current limiter/controller in 1999. Los Alamos National Laboratory recently refurbished this distribution level FCL unit with SuperPower's assistance. It has undergone several successful tests, which proved the FCL design concept and also validated the modified component designs. SuperPower believes that a market for the HTS fault current limiting technologies exists at higher voltage levels typical of transmission substations. We have recently initiated a program to develop, design, manufacture and demonstrate a 138kV HTS fault current limiter. The completion of this effort is dependent upon partial funding from private and government sources. Although SuperPower has received verbal offers of such support, there is no guarantee that formal agreements committing these funds will be signed. (c) HTS Transformer: Conventional copper-wound, oil-filled transformers are heavy, costly and of massive size relative to output. They are also susceptible to fire and explosion and can damage the environment should the oil leak. HTS technology has the potential to enhance operating cost, performance and flexibility while offering reductions in both size and weight. Specifically, HTS transformers would eliminate the fire, explosion and environmental hazard associated with conventional oil-filled transformers, run indefinitely at rated and above rated power without reduction of transformer life, provide more power per unit volume in existing substations, and increase operational electrical efficiency. Initially, HTS will have to compete against conventional copper-based transformer technology to gain acceptance and market share. Together with our partner Waukesha Electric Systems (an operating unit of SPX Corporation), we successfully developed and tested a 1 MVA HTS transformer prototype using First Generation conductor. This project was completed in 1999. We currently are working with Waukesha to complete a 5/10 MVA HTS transformer prototype. Our expectation is that this prototype will be installed in Waukesha's switchyard early in 2003. This will be after extensive factory acceptance testing, which will be completed by the end of 2002. Once energized, the prototype is expected to remain in Waukesha's switchyard for a sufficient period to obtain important operating data and to demonstrate reliability for utility application. The ultimate goal of the program is to develop a 30/60 MVA HTS transformer for the commercial market. We believe that Second Generation material will be required for commercial success. In the interim, until this occurs, further research and development is contemplated to address high voltage dielectric insulation requirements and the introduction of load tap changing capability. We have a Product Development Agreement with Waukesha to commercialize HTS transformers. 14 The company maintains a long-term perspective on the development of the market for HTS technology and the described devices. The company plans to continue to pace its rate of investment based on the progress of the requisite technology and the perceived willingness of industry to adopt HTS devices. As a result, any or all of the described devices and their product development schedules will be examined on a regular basis and may result in readjustment to later dates or be cancelled altogether. C. Marketing The Company intends to reach the electric utility marketplace via strategic relationships with existing suppliers of electric power equipment. While a strategic relationship already exists with Waukesha Electric Systems, we believe it will be necessary to obtain additional strategic partners covering cable manufacturing, refrigeration systems and device integration in order for us to compete successfully. There can be no assurance that such strategic partners will be found, or that such partners will be successful in bringing any of our products to market. D. Competition/Market With respect to HTS-based products, we anticipate that we will participate principally as a developer and manufacturer of materials and components. These materials and components are necessary to enable HTS cable, transformer and fault current limiting technologies, and associated cryogenic refrigeration systems to succeed. We will also be a developer and supplier of Second Generation HTS conductors (i.e., wires/tapes). We believe that we can compete effectively by leveraging Intermagnetics' experience in superconducting materials and cryogenic refrigeration systems, and its long track record of world-class technical achievements and profitable commercialization of LTS products. We believe our most significant U.S.-based competitor for HTS conductor is American Superconductor Corporation, which has established strategic development and/or marketing relationships with a number of existing suppliers and users of electric power equipment. Internationally, competitors include NKT, Pirelli, Sumitomo and Furukawa for cables, and Siemens and ABB for transformers and FCL's. We also compete with 3M, Sumitomo and Fujikura on Second Generation conductor. The underlying economics for HTS-based products appear to be attractive. However, potential commercial end-users lack experience with such products in field operations. This, along with the cost of currently existing First Generation HTS materials, has tended to limit the adoption rate, especially in the context of larger, more expensive applications such as those for utility power plants and electric networks. Managers of electric utilities focus on issues of long-term reliability, compatibility and maintenance, and must make investments with a 40-year time horizon. For this reason, only the most forward-looking utilities have begun to test prototype HTS systems. HTS-based products ultimately will need to justify themselves in economic and performance terms before widespread adoption can take place. Before HTS wire or cables can replace conventional conductors available today, the price/performance relationship of HTS must be demonstrated reliably. On the basis of forecasted improved performance in Second Generation HTS conductor, we expect to achieve HTS conductor selling prices that will stimulate broad, commercial demand. However, there are many technical hurdles that must be overcome before this goal can be attained and there are no assurances that a market for these products will develop. 15 We do not believe our current overall operations depend upon successful market acceptance of HTS-based products or devices, nor are the Company's continued operations necessarily dependent on its success in the HTS marketplace. If HTS-based products or devices do become commercially viable, however, we believe that, as a leader in superconductivity, we would benefit from participating in that market. Accordingly, while representing a relatively high-risk, long-term investment of its resources, we perceive HTS technology as being of important strategic interest. Because of the perceived commercial potential of HTS materials, HTS research is a highly competitive field, and currently involves many commercial and academic institutions around the world that may have more substantial economic and human resources to devote to HTS research and development than the Company. There can be no assurances that we will have sufficient resources to bring HTS products to market or that emerging patents will not adversely impact our competitiveness. In addition, there can be no assurance that we will achieve a commercially significant position in this emerging marketplace. E. Patents We believe that our current patent position, together with our expected ability to obtain licenses from other parties, will provide us with sufficient access to relevant intellectual property to develop and sell HTS wires and system components consistent with our business plan. However, the patent situation in HTS is unusually complex, and many participants are continuously filing new patents aggressively. Since the discovery of high temperature superconductors in 1986, rapid technical advances have resulted in the filing of a large number of patent applications relating to superconductivity worldwide. Many patents and patent applications overlap and are contested. A protracted interference proceeding in the U.S. regarding the fundamental Second Generation HTS composition Yttrium Barium Copper Oxygen (YBCO) reached its conclusion in favor of Lucent Technologies Inc. However, a considerable number of intellectual property ownership issues with respect to HTS materials and processes remain contested. A number of patents and patent applications of third parties relate to our current and future products. We may need to acquire licenses for those patents, successfully contest the scope or validity of those patents, or design around patented processes or applications. We have obtained a non-exclusive license to Lucent Technology's HTS patent portfolio, including a license to the patent application covering YBCO, one of the key raw materials we are developing for use in Second Generation HTS conductors. Lucent's YBCO patent application is expected to issue as a U.S. patent. We believe that the Lucent patent portfolio has been, or will be, licensed broadly on a non-exclusive basis to other HTS technology participants, including several of our competitors. We are developing a manufacturing process for Second Generation HTS conductor using the combination of Buffer Layer Deposition and Superconductor Deposition coating processes developed by LANL. We have obtained exclusive licenses to LANL's relevant patents and patent applications in this area and we have the right to obtain a license to technology developed by LANL under our existing CRADA. We believe that we will be able to obtain such licenses on commercially reasonable terms, but there can be no assurance that this will be the case. We have also applied for patents in related process and equipment technology invented by SuperPower employees. Other companies that compete with us are also developing Second Generation HTS using competing processes. There is no guarantee that the process we are developing will be the most commercially viable one. 16 A number of other companies (including HTS competitors) have filed patent applications, and in some instances have been issued patents, on various aspects of HTS composition of matter, HTS wire processing, HTS wire architecture, and HTS component and subsystem design and fabrication. We would be required to obtain licenses under any patents issued or pending patents that might cover the materials, processes, architectures, components or devices that we wish to use, develop or sell. F. Raw Materials and Inventory First Generation conductors currently require relatively high proportions of silver in the manufacturing process. This adds significant expense to the cost of the conductor and is one of the reasons we believe First Generation conductors will not achieve widespread commercial success. We expect to order parts and components for demonstration devices based on needs, utilizing multiple sources. For early demonstration prototypes, and prior to the availability of Second Generation material, we expect that First Generation HTS conductor will be available from multiple sources. However, the manufacturing of even First Generation material is not yet an established business for the current suppliers, and our ability to procure such materials in adequate quantities and with acceptable prices cannot be assured. We anticipate purchasing raw materials that include precursors and nickel alloy tape for scaling up the manufacture of Second Generation conductor. These materials are available from multiple sources. We currently do not maintain significant quantities of inventory of any of the supplies used in Second Generation conductor or for our device development needs. G. Warranty The Energy Technology Segment has not experienced any warranty obligations to date. RESEARCH AND DEVELOPMENT ------------------------ Our research and development activities are important to our continued success in new and existing markets. Externally funded development programs have directly increased sales of design services and products and, at the same time, assisted in expanding our technical capabilities without burdening operating expenses. While many of our government contracts require that we share any new technology resulting from the contract with the government, which includes the right to transfer such technology to other government contractors, we currently do not expect such rights to have a material adverse impact on our future operations. 17 External funding covers a substantial portion of our research and development expenditures, principally from the U.S. government. In fiscal 2002, approximately 34% of total research and development activities were paid by such external programs compared to approximately 43% in fiscal years 2001 and 2000, respectively. During fiscal years 2002, 2001 and 2000, product research and development expenses in all segments, including externally funded amounts, were $22,482,000, $16,591,000 and $11,038,000, respectively. We can experience, in any given year, significant increases or decreases in external funding depending on our success in obtaining funded contracts. INVESTMENTS ----------- See Note D of the Notes to Consolidated Financial Statements included in response to Item 8 for a description of our investments. PERSONNEL --------- On May 26, 2002, we employed 546 people. We experienced a significant reduction in our workforce as a result of the divestiture of IGC-AS and IGC-APD, as well as from reduced demand in our Instrumentation segment. There is great demand for trained scientific and technical personnel as well as for key management personnel, and our growth and success will require us to attract and retain such personnel. Many of the prospective employers of such personnel are larger and have greater financial resources than the Company and may be in a better position to compete for prospective employees. EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------ At the end of fiscal 2002, the executive officers of the Company were: Name Position Age - ---- -------- --- Glenn H. Epstein Chairman and Chief Executive Officer 44 Michael K. Burke Executive Vice President and 44 Chief Financial Officer Leo Blecher Sector President - MRI 56 Philip J. Pellegrino Sector President - Energy Technology 53 David Thielman Vice President and General Manager - 46 IGC-Polycold Systems Inc. 18 Glenn H. Epstein was elected Chairman of the Board effective May 26, 2002. He became the Company's Chief Executive Officer on June 1, 1999. Mr. Epstein joined the Company on May 5, 1997 as its President and Chief Operating Officer. Prior to joining the Company, Mr. Epstein worked for Oxford Instruments Group, plc in various capacities between 1986 and April 1997, including the position of President of Nuclear Measurements Group, Inc., a wholly-owned subsidiary of Oxford. Mr. Epstein also worked for the General Electric Company between 1981 and 1985. Michael K. Burke was appointed Executive Vice President and Chief Financial Officer on December 17, 2001. He is also the Company's Treasurer. In May 2000, Mr. Burke became the chief financial officer at Hydrogen Burner Technology, Inc., a manufacturer of onsite hydrogen generators and integrated fuel processors for fuel-cell applications. Prior to that, he was a managing director in the U.S. investment banking department of CIBC Oppenheimer Corp. (now CIBC World Markets) having joined the firm in 1995. Prior to joining CIBC Oppenheimer he was a director within the global investment banking division of Barclays Bank Group and was team leader of its New York-based infrastructure finance unit. Leo Blecher was appointed Sector President - MRI on October 16, 2001. He previously held the title of Vice President and General Manager of IGC-MBG. He originally joined the Company in 1988 as Manager of Technology Projects. Prior to joining the Company, Mr. Blecher held various positions of responsibility with Israel Aircraft Industry, holding the title of Manager - Engineering and Project Manager, for the Space Technology Division. Philip J. Pellegrino joined the Company as Sector President - Energy Technology on October 19, 2001. He is also the President of SuperPower, Inc. Mr. Pellegrino was president, chief executive officer and a director of the Independent System Operator in New England, which administers the region's wholesale electricity markets, centrally dispatches power generation and exercises operational control over the bulk transmission system. Prior to joining ISO New England, Mr. Pellegrino worked for more than 21 years at the New York Power Authority (NYPA) in increasingly responsible positions, including his final position as Senior Vice President, Transmission Business Unit, and for 6 years at the American Electric Power Service Corporation, where he began his career. David Thielman was appointed Vice President and General Manager of IGC-Polycold Systems Inc. on January 8, 2002. Mr. Thielman previously served in progressively responsible engineering and senior management positions in his 13 year career with Milwaukee-based APW Corporation. At APW, he was appointed general manager of the company's Dallas and Austin, Texas, facilities. Prior to APW, he worked for 10 years at The Trane Company in LaCrosse, Wisconsin, where he began his career. 19 ITEM 2. PROPERTIES Our corporate headquarters and IGC-MBG are located in approximately 146,000 square feet of space located in Latham, New York (the "Latham Facility"). We own the Latham Facility, which is subject to a mortgage. (See Note E of the Notes to Consolidated Financial Statements included in response to Item 8 hereto.) We lease approximately 65,000 square feet of office and manufacturing space in nearby Schenectady, New York, which SuperPower currently occupies. The lease has a 20 year term ending in October 2019. IGC-MAI leases approximately 24,000 square feet in a multi-tenant building located in the Milwaukee County Research Park's Technology Innovation Center (the "Research Park"). Approximately 9,000 square feet are used for office space with the remaining space dedicated to lab, assembly, shipping and material storage. The lease expires in August 2003. IGC-Polycold Systems Inc. leases approximately 70,000 square feet of manufacturing and office space in Petaluma, California. The lease expires in October of 2011. Upon the divestiture of IGC-AS, we assigned our lease to IGC-AS' office and production facility located in Waterbury, Connecticut. The thirty-year prepaid lease, which expires in December, 2021, includes approximately 212,700 square feet (of which 57,900 square feet are presently being used). IGC-APD operated out of a building, which it owns, in Allentown, Pennsylvania totaling approximately 56,550 square feet. This property transferred to the new owners upon our sale of all of the outstanding shares of IGC-APD in February, 2002. See Note E of the Notes to Consolidated Financial Statements included in response to Item 8 hereto for a description of IGC-APD's obligations under revenue bonds issued in connection with the purchase of this building and our guarantee under that bond. We believe our current facilities are adequate and suitable for our current and near-term needs. ITEM 3. LEGAL PROCEEDINGS Neither the Company nor any of its subsidiaries is a party to any material legal proceeding. The Company is, from time to time, a party to litigation arising in the normal course of its business. To our knowledge, no director, officer, affiliate of the Company, holder of 5% or more of the Company's Common Stock, or associate of any of the foregoing, is a party adverse to, or has a material interest adverse to, the Company or any of its subsidiaries in any proceedings. 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS At the beginning of fiscal year 2002, our Common Stock was traded on the American Stock Exchange under the symbol IMG. On July 11, 2001, the Company's stock began trading on the Nasdaq National Market under the ticker symbol IMGC. The high and low sales prices of the Common Stock for each quarterly period for the last two fiscal years, based on quoted market prices, are shown below. Closing Prices(1) ----------------- Fiscal Year 2002 High Low - ---------------- ---- --- Quarter Ended August 26, 2001 36.6000 25.4900 Quarter Ended November 25, 2001 32.7500 18.2600 Quarter Ended February 25, 2002 28.4200 21.9600 Quarter Ended May 26, 2002 27.2500 22.1000 Fiscal Year 2001 - ---------------- Quarter Ended August 27, 2000 19.2747 10.5892 Quarter Ended November 26, 2000 29.1667 16.6054 Quarter Ended February 25, 2001 25.4289 13.2353 Quarter Ended May 27, 2001 29.1667 19.5980 - ------------------ (1) The closing prices have been adjusted to reflect a three percent stock dividend distributed on August 25, 2000, to stockholders of record on August 4, 2000, and a two percent stock dividend distributed on August 31, 2001 to shareholders of record on August 14, 2001. There were approximately 1,439 holders of record of Common Stock as of August 15, 2002. The Company has not paid cash dividends in the past ten years, and it does not anticipate that it will pay cash dividends or adopt a cash dividend policy in the near future. On July 26, 2001, the Company announced that after August 2001, it was discontinuing its policy of granting annual stock dividends. Under the Company's bank agreements, prior bank approval is required for cash dividends in excess of the Company's net income for the year to which the dividend pertains. 21 ITEM 6. SELECTED FINANCIAL DATA The following selected financial information has been taken from the consolidated financial statements of the Company. The selected statement of operations data and the selected balance sheet data set forth below should be read in conjunction with, and is qualified in its entirety by, Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and related Notes included in response to Items 7 and 8.
(Dollars in Thousands Except Per Share Amounts) ---------------- --------------- ---------------- --------------- ---------------- For the Fiscal Year Ended May 26, 2002 May 27, 2001 May 28, 2000 May 30, 1999 May 31, 1998 ------------ ------------ ------------ ------------ ------------ Net sales $ 153,294 $ 138,157 $ 112,772 $ 102,871 $ 95,894 Gross Margin 61,901 58,528 40,766 32,739 35,685 Income (loss) before Income taxes 30,275 18,026 10,506 (8,241) 4,744 Net income (loss) 20,589 11,067 6,452 (7,029) 2,753 Per common share: Basic 1.26 0.72 0.48 (0.54) 0.21 Diluted 1.19 0.67 0.45 (0.54) 0.20 At End of Fiscal Year 2002 2001 2000 1999 1998 --------- --------- --------- --------- --------- Working capital $ 93,113 $ 60,370 $ 44,816 $ 34,389 $ 45,493 Total assets 177,225 152,158 127,977 125,458 127,776 Long-term debt (net of current maturities) 4,668 6,185 26,524 26,631 28,833 Retained earnings/(accumulated deficit) 15,999 (4,590) (6,159) (8,061) (1,081) Shareholders' equity 147,394 115,015 78,463 72,173 83,801
- ---------- (a) Income (loss) per common share has been computed during each period based on the weighted average number of shares of Common Stock outstanding plus dilutive potential common shares (where applicable). (b) The Company did not pay a cash dividend on its Common Stock during any of the periods indicated. (c) Net income (loss) per common share has been restated to give effect to the 2% stock dividend distributed in August 2001, 3% stock dividend distributed in August 2000, and 2% stock dividend distributed in September 1998 and September 1997. 22 ITEM 7. 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 an historical event, it should be considered a forward-looking statement. These forward-looking statements are not guarantees of future performance and involve important assumptions, risks, uncertainties and other factors that could cause the Company's actual results for fiscal year 2003 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 our Annual Report on Form 10-K. 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. 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. The Company recognizes revenue and profit on long-term development contracts based upon the lesser of, milestones achieved or costs incurred plus earned profit. Some of these contracts require the Company to contribute to the development effort. Should the actual costs exceed the estimates for these development efforts and the Company was not successful in securing additional funding it may be necessary to record additional expense. The Company maintains a reserve for inventory that may 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, additional reserves may be required. 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. The Company believes this reserve is 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. 23 The Company maintains a provision for potential environmental remediation for businesses disposed of during the current fiscal year. These provisions are based upon estimates from environmental engineers that have visited the sites and understand the scope of the project, should a cleanup be required. The Company believes these provisions are adequate based on estimates from environmental engineers. The Company records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investment. Should this occur the Company would be required to record an impairment charge in the future. COMPANY OVERVIEW - ---------------- We operate in three reportable operating segments: Magnetic Resonance Imaging (MRI), Instrumentation, and Energy Technology. The MRI segment consists primarily of the manufacture and sale of magnet systems (by the IGC-Magnet Business Group) and radio frequency coils (by IGC-Medical Advances Inc.). These products are used principally in the medical diagnostic imaging market. Until October 24, 2001 this segment also included the manufacture and sale of low-temperature superconducting wire by our IGC-Advanced Superconductor division ("IGC-AS"). The Instrumentation segment consists of refrigeration equipment produced by IGC-Polycold Systems Inc. ("IGC-Polycold"). These systems are used primarily in ultra-high vacuum applications, industrial coatings, analytical instrumentation, medical diagnostics and semiconductor processing and testing. For the first three quarters of fiscal year 2002, this segment also included IGC-APD Cryogenics Inc ("IGC-APD"). The Energy Technology segment, operated through SuperPower, Inc. is developing second generation, high-temperature superconducting materials that we expect to use in devices designed to enhance capacity, reliability and quality of transmission and distribution of electrical power. We completed two major divestitures in fiscal year 2002. On October 24, 2001, we sold the assets and business of IGC-AS to Outokumpu Copper Products Oy. On February 5, 2002, we sold all of the outstanding shares of IGC-APD to Sumitomo Heavy Industries, Ltd. These transactions are discussed in more detail below. Through February 25, 2001, the Company reported its operations in four segments: Electromagnetics, Low-Temperature Superconductors, Refrigeration, and Energy Technology. The change to these segments reflects our continued focus on commercial market applications of core technology. The resulting reporting segments are intended to relate to the primary markets which each serves, rather than the technologies that give rise to individual products. Prior year segment data has been reclassified to conform to current year presentation. Through October 2000, the Refrigeration Segment included a refrigerant business that we exited for strategic reasons. 24 Intersegment sales and transfers are accounted for as if the sales or transfers were to third parties, that is, at current market prices. The Company evaluates the performance of its reportable segments based on operating income (loss). The Company operates on a 52/53-week fiscal year ending the last Sunday during the month of May. We also have a foreign sales corporation located in Barbados, which we plan to discontinue as a result of the Extraterritorial Income Exclusion Act of 2000. The Act provides for an exclusion from gross income of a percentage of income attributable to certain activities performed outside the United States. This exclusion is designed to parallel the treatment of foreign-sourced income by other countries and contains no requirement for a separate foreign entity to obtain the benefit. RESULTS OF OPERATIONS - --------------------- During fiscal 2002 we completed two major divestitures. On October 24, 2001, we sold the assets and business of IGC-AS to Outokumpu Copper Products Oy. On February 5, 2002, we sold all of the outstanding shares of IGC-APD to Sumitomo Heavy Industries, Ltd. Additionally the Company had non-recurring expenses of about $1.5 million related to moving our San Rafael California plant and our mixed gas product line to Petaluma, California. Throughout the following analysis reference will be made to on-going operations. When we refer to on-going operations we are excluding the effect of IGC-AS and IGC-APD in both fiscal 2001 and 2002 as well as the effect of the nonrecurring expense in fiscal 2002. For the year ended May 26, 2002, sales increased by 11.0% or $15.1 million, to $153.3 million, compared with an increase of 22.5% for the preceding year. On-going operations had sales increase of $24.3 million to $144.3 million, or 20.2%. Sales of the MRI segment increased by $28.9 million, or 31.0%, primarily a result of increased product demand, by Philips Medical Systems (PMS) as well as other customers. This increase more than offset a decline in sales of low-temperature superconducting wire resulting from the sale of essentially all of the assets of IGC-AS. Sales from on-going operations in the MRI segment increased $34.3 million or nearly 40.0%. In the prior year, MRI segment sales increased by $16.4 million, or 21.2%, most of which was a result of strong demand by PMS and the transfer of magnet production from our former French joint venture (AISA) for the entire year, versus only a partial year in fiscal 2000. These increases more than offset a decline in sales of low-temperature superconducting wire to external customers, as more of the total wire production was devoted to internal needs. Sales of the Instrumentation segment decreased by $15.7 million, or 36.8%, to $26.9 million from $42.6 million. Approximately $8.0 million or 51.0% of the total decline from fiscal 2001 resulted from a decrease in product demand for refrigeration equipment caused, in part, from a slow down in the economy. In addition, we experienced unusually high sales in this segment in the prior fiscal year. Another $6.4 million or 40.8% of the decline was related to the sale of IGC-APD and the relocation of our San Rafael, California plant to a new modern facility in Petaluma, California. Sales from on-going operations in this segment declined $10.7 million or about 35% relating to decreased customer demand and unusually high sales in the prior fiscal year. In the prior fiscal year, sales of Instrumentation products increased by $9.0 million, or 26.9%, resulting from a large increase in demand for the Company's refrigeration equipment in areas such as optical filters used to increase capacity of the data transmitted on fiber optic cable networks. This increase was partially offset by a $3.8 million, or 75.1% decline in the sale of refrigerants resulting from our decision to exit the refrigerant business. 25 Sales in the Energy Technology segment increased by $2.0 million, or 121.4%, to $3.6 million primarily from increased outside funding for superconducting devices. The Company continues to focus its efforts on successfully manufacturing second-generation superconductor and first generation devices. In the prior year sales in the Energy Technology segment were essentially unchanged at $1.6 million. The Company believes, in general, that first generation conductors (consisting of ceramic compounds in a silver matrix) will be unable to achieve cost and performance targets necessary to make devices produced with this material economically feasible. Accordingly, we are developing conductors in which the superconducting compounds are deposited on a lower-cost substrate. While they have not yet resulted in increased sales, we have developed important relationships and cooperative agreements for the pursuit of this approach, and we continue to seek additional partners to assist in the development and marketing of these products. Gross margin in fiscal 2002 increased $3.4 million to $61.9 million. About $14.4 million is related to increased customer demand, active cost reduction programs and improved product mix from magnet systems and additional customer funding for research and development. These increases were offset by a reduction of $4.6 million resulting from disposed businesses mentioned previously as well as a decrease of about $5.9 million relating to reduced demand for instrumentation products. Additionally, prior year margin had the benefit of $1.4 million of inventory recovered from the related restructuring recorded in fiscal 2000. As a percent of sales, margins decreased to 40% from 42%. Margins on an on-going basis would have increased $5.8 million to $56.1 million primarily as a result of increased demand for magnet systems, active cost reduction programs and improved product mix as well as additional customer funding for research and development. Again, increased margins on an on-going basis were offset by reduced contribution related to decreased customer demand within the Instrumentation Sector. In the previous years, excluding the effects of inventory written off in restructurings in fiscal 2000 and recoveries in fiscal 2001, gross margins increased to $57.2 million, or 41% of sales, from $42.2 million, or 37% in fiscal 2000. This increase was due principally to the large increase in sales, coupled with an improved mix of sales in both RF coils and instrumentation. In addition, the substantial reduction in refrigerant sales resulting from the previously described decision to exit that business helped improve gross margins, as these were low-margin sales. 26 Product research and development increased $5.3 million or 56% to $14.9 million. Approximately $2.4 million of this increase was a result of increased efforts of the MRI segment relating to new magnet and RF coil designs. The Company expects to generate initial sales from these development activities within the coming fiscal year. Another $2.6 million is related to our efforts to develop second-generation superconductor and first-generation devices for the Energy Technology market. We view this as a longer-term investment that is not expected to generate near-term sales. Finally, in fiscal 2002 the Company increased research and development in the Refrigeration segment by about $300,000. This effort is dedicated to understanding our customer's needs and creating a product to satisfy those needs. We expect the results of this effort will generate initial sales in fiscal 2003. In the prior fiscal year product research and development increased by 52.1% to $9.5 million, from $6.3 million in fiscal 2000. Substantially all of the increase was due to programs to develop new magnet systems, new refrigeration applications to broaden the Instrumentation product line and a substantial increase in our HTS activities in the Energy Technology segment. Marketing, general and administrative expenses decreased by about $1.8 million, or 6.7%. The majority of this decrease is related to the sale of IGC-AS and IGC-APD. Spending in the MRI segment declined from prior year as a result of reduced selling expenses and legal fees related to patent defense. These reductions were partially offset by increased spending for information technology, primarily related to increased staffing. Marketing expense in the Instrumentation segment increased in accordance with our business model to focus on customer intimacy. Finally, there was modest increased spending from the Energy Technology segment in fiscal 2002 related to increased staffing. On an on-going basis marketing, general and administrative would have increased about $1.3 million or 6.6% had the sale of businesses not occurred. In fiscal 2001 these expenses increased by about $4.2 million or 18.0%. In addition to a substantial increase in the level of expenditures devoted to the Energy Technology segment, we also had higher compensation costs resulting from both increased staff levels and higher incentive compensation resulting from the improved overall performance. In addition, we had higher consulting and stock-based compensation costs and certain expenditures associated with a termination of the company's traditional defined benefit pension plan and subsequent transition to a fixed, defined contribution plan. Amortization of intangible assets decreased $1.1 million as a result of the adoption of Statement of Accounting Standard No. 142, "Goodwill and Other Intangible Assets." In the prior year amortization of intangible assets increased by about $1.1 million resulting from a full year of amortization of the intangible assets acquired in connection with the termination of our AISA joint venture. Overall for fiscal 2002, operating income increased about $1.0 million or 5.4% to $19.6 million. This increase includes the effect of the disposition of certain businesses, expenses related to the transfer of mixed gas and the move of our San Rafael California plant to Petaluma California. On an on-going basis, operating income would have increased approximately $760,000 or 3.9%. It is important to note that prior year includes the benefit of $1.2 million of operating income related to the recovery of a restructuring charge. Without that benefit in the prior year, operating income from on-going operations would have increased $1.9 million or 10.6%. In the prior year operating income more than doubled to $18.6 million due primarily to the much higher level of sales and gross margins. 27 Interest income increased about $600,000 or 42% to nearly $2.0 million. This increase is due primarily to increased cash. Interest expense decreased $1.3 million or 67% to nearly $700,000 related primarily to the conversion of our subordinated debentures. During fiscal 2000 our ownership in an investment that was accounted for using the equity method of accounting was diluted below 20%, and, accordingly, we ceased applying the equity method. Also, in fiscal 2000, we recorded a recovery of a portion ($1.6 million) of a fiscal 1999 provision for guarantees of indebtedness of a UK company in which we had an investment. The investment had also been written off in fiscal 1999, and in fiscal 2000, proceeds from the company's liquidation reduced our obligation under the guarantee. On October 24, 2001, we divested our low-temperature superconducting (LTS) materials business, IGC-Advanced Superconductors of Waterbury, Connecticut, for more than $33.5 million. The purchase price consisted of a $4 million note, payable over two years, which was recorded at present value of $3.8 million, and the balance in cash. The agreement between Intermagnetics and Outokumpu Copper Products Oy, a subsidiary of the Outokumpu Group of Finland, also includes a six-year strategic supply arrangement that will expand Outokumpu's existing superconducting materials business. Intermagnetics will purchase from Outokumpu a substantial portion of the LTS wire it requires internally, primarily for manufacturing superconducting magnet systems for magnetic resonance imaging systems. Intermagnetics will receive up to an additional $4 million if it attains specified levels of LTS wire purchases over the first two years of the agreement. Excluding that payment, the sale resulted in a one-time pre-tax gain of approximately $15.4 million. Additionally, the Company recorded stock based compensation expense of $795,000 related to the sale. On February 5, 2002, the Company sold the stock of its subsidiaries IGC-APD Cryogenics, Inc and IG-Europe, Ltd. The sale was subject to a stock purchase agreement between the Company and Sumitomo Heavy Industries (SHI) of Japan dated January 7, 2002. The sale to SHI included only the helium related assets of these subsidiaries and the assumption of related liabilities. The purchase consideration was arrived at by arms length negotiation and consisted of $9.5 million in cash paid on February 5, 2002. The Company was also able to withdraw an additional $1.2 million in cash prior to closing. The net pretax gain from the sale was $10,000. The agreement includes a six-year strategic supply agreement under which the Company will purchase from SHI shield coolers it requires internally, primarily for manufacturing superconducting magnet systems. The mixed-gas portion of the refrigeration systems business, previously conducted at IGC-APD, was transferred and integrated into IGC-Polycold, Inc. Additionally, the Company recorded stock based compensation expense of $528,000 related to the sale. 28 In connection with these dispositions the Company has established a liability for environmental remediation and penalties of approximately $2.0 million. Essentially all of this liability remains on our balance sheet at the end of fiscal 2002. During fiscal 2002 the Company evaluated the probability of realizing the value of our investments in Ultralife Batteries Inc. and Kryotech. As a result, the Company determined these investments were impaired and accordingly wrote down Ultralife Batteries Inc. to current market value as of November 23, 2001 and Kryotech to zero, its estimated value. The write down amounted to $6.3 million and was due to a decline in fair market value of these investments, which, in the opinion of management, is other than temporary. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of our deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and capital gains during the periods in which those temporary differences become deductible. Management considers projected future taxable income, the character of such income and tax planning strategies in making this assessment. The Company had Federal taxable income of approximately $18,900,000 in fiscal 2002, $13,500,000 in fiscal 2001 and $6,500,000 in fiscal 2000. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of the remaining deductible differences. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. Looking forward, we expect to continue to maintain our investment in Energy Technology in order to be ready when the market for these products begins to develop, which we believe will be about the middle of the decade. Despite this investment, and relatively flat sales from on-going operations, we expect net operating profit to increase in fiscal 2003 by about 10% compared to reported fiscal 2002 as a result of our streamlined business focus, cost containment and manufacturing efficiencies. A portion of this growth is expected to come from sales of high (3.0T) field and open magnet systems as well as new products being developed at IGC-Medical Advances and IGC-Polycold. These products were being developed at the end of last fiscal year and continue to be developed now. Our customers are intimately involved in the definition and development of these products. Additionally, the Company has an active cost cutting program in each of its divisions to increase earnings. These expectations are based on the following assumptions, among others: o The market for MRI systems continues to grow; o Customer acceptance of the new products being developed throughout the Company; 29 o Current order trends for MRI magnets to continue; o New products achieve the level of growth and market acceptance expected; o The slowing economy doesn't cause any further pullback in Instrumentation orders; and, o We are able to maintain gross margins through continued production cost reductions and manufacturing efficiencies. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- We generated approximately $15 million in cash from operating activities. Primarily this cash is a result of continued proactive management of our balance sheet, which is also reflected in our operating efficiency. Investing activities provided approximately $29 million, primarily from the sale of divisions partially offset by cash used for the purchase of plant property and equipment for machinery and tooling required for new product introduction and research and development as well as increased capacity. Additionally we received $4.3 million from the exercise of stock options and $700,000 as repayments of employee loans. We used $2.5 million of this cash on financing activities, as principal payments for long-term debt. We had a net increase in cash of $45.8 million, bringing our cash balance to $73.5 million. See the consolidated statement of cash flows, located elsewhere in this report, for further details on sources and uses of cash. During fiscal year 2001, the final $18.9 million of our 5 3/4% convertible subordinated debentures were converted into 1,369,217 shares of our Common Stock at $13.584 per share. Additionally, we issued 80,988 shares of Common Stock valued at an average of $19.200 per share to induce early conversion and in lieu of all accrued interest. Our capital and resource commitments at August 1st, 2002 consisted of capital equipment commitments of $725,000. We have a $50 million unsecured line of credit with three banks. Borrowings under the line bear interest at the London Interbank Offered Rate (LIBOR) or prime plus an applicable margin at our option. The credit line expires in October 2004. There are currently no borrowings under the credit line. We believe we have adequate resources to meet our needs for the short-term from our existing cash balances, our expected cash generation in the current fiscal year, and our line of credit. Longer-term, with substantial increases in sales volume and/or unusually large research and development or capital expenditure requirements to pursue new opportunities in the Energy Technology segment, we could need to raise additional funds. We would expect to be able to do so through additional lines of credit, public offerings or private placements of securities. However, in the event funds were not available from these sources, or on acceptable terms, we would expect to manage our growth within the financing available. 30 Inflation has not had a material impact on our financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK The Company's exposure to market risk through derivative financial instruments and other financial instruments, such as investments in short-term marketable securities and long-term debt, is not material. The financial instruments of the Company that are interest rate dependent are revenue bonds issued in connection with the acquisition of certain land, building and equipment, an unsecured line of credit and a mortgage payable. The Company manages interest rates through various methods within contracts. On its mortgage payable, the Company negotiated an "interest rate swap" agreement that, in effect, fixes the rate at 6.88%. With respect to its unsecured line of credit, the Company may elect to apply interest rates to borrowings under the line which relate to either the London Interbank Offered Rate or prime, whichever is most favorable. (See Note E of the Notes to Consolidated Financial Statements included in response to Item 8 for more details regarding these instruments.) The Company's objective in managing its exposure to changes in interest rates is to limit the impact of changing rates on earnings and cash flow and to lower its borrowing costs. Additionally, the Company makes certain estimates about inventory value, collectability of accounts receivable, warranty expense and market acceptance and pricing 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. The Company does not believe that its exposure to commodity and foreign exchange risks are material. We limit our exposure to these risks by denominating contracts, such as our contract with PMS, in dollars. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Attached hereto and filed as part of this report are the consolidated financial statements and supplementary data listed in the list of Financial Statements and Schedules included in response to Item 14 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning directors called for by Item 10 of Form 10-K will be set forth under the heading "Election of Directors" in the Company's definitive proxy statement relating to the 2002 Annual Meeting of Shareholders (the "Proxy Statement"), and is hereby incorporated herein by reference. The information concerning executive officers called for by Item 10 of Form 10-K is set forth in "Item 1. Business" of this annual report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information with respect to compensation of certain executive officers and all executive officers of the Company as a group to be contained under the headings "Executive Compensation" and "Certain Transactions" in the Proxy Statement is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information with respect to ownership of the Company's Common Stock by management and by certain other beneficial owners to be contained under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is hereby incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information with respect to certain relationships and related transactions to be contained under the heading "Certain Transactions" in the Proxy Statement is hereby incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) FINANCIAL STATEMENTS, SCHEDULE AND EXHIBITS 32 Attached hereto and filed as part of this report are the financial statements, schedule and the exhibits listed below. 1. Financial Statements Report of Independent Accountants Consolidated Balance Sheets as of May 26, 2002 and May 27, 2001 Consolidated Statements of Operations for fiscal years ended May 26, 2002, May 27, 2001 and May 28, 2000 Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income (Loss) for fiscal years ended May 26, 2002, May 27, 2001 and May 28, 2000 Consolidated Statements of Cash Flows for the fiscal years ended May 26, 2002, May 27, 2001 and May 28, 2000 Notes to Consolidated Financial Statements 2. Financial Statement Schedule II Valuation and Qualifying Accounts All other schedules are not required or are inapplicable and, therefore, have been omitted. 3. Exhibits Articles of Incorporation and By-laws 3.1 Restated Certificate of Incorporation (1) (Exhibit 3) 3.2 By-laws, as amended (2) (Exhibit 3.1) Instruments defining the rights of security holders, including indentures * 4.1 Form of Common Stock certificate * 4.2 Loan and Agency Agreement among Intermagnetics General Corporation, IGC-APD Cryogenics Inc., IGC-Polycold Systems, Inc., IGC-Superpower, LLC, Medical Advances, Inc. and First Union National Bank and the other banks party hereto with First Union National Bank, as agent and JP Morgan Chase Bank, as successor to the Chase Manhattan Bank, as syndication agent and Keybank National Association, as documentation agent dated September 19, 2001. 33 Material Contracts *+ 10.1 Employment Agreement dated July 23, 2002 between Intermagnetics General Corporation and Glenn H. Epstein *+ 10.2 Employment Agreement dated October 19, 2001 between Intermagnetics General Corporation and Philip J. Pellegrino 10.3 Purchase Agreement dated October 4, 2001 between Intermagnetics General Corporation as Seller and Outokumpu Copper Products Oy and Outokumpu Advanced Superconductors Inc. as Buyer (3) (Exhibit 2.1) + 10.4 1990 Stock Option Plan (4) (Appendix A) 10.5 Agreements dated April 29, 1999 between Philips Medical Systems Nederlands B.V. and Intermagnetics General Corporation for sales of magnet systems (5) (Exhibit 10.7) + 10.6 Employment Agreement dated April 20, 1998 between Intermagnetics General Corporation and Carl H. Rosner (11) (Exhibit 10.1) + 10.7 Enhanced Benefit Plan (2) (Exhibit 10.10) + 10.8 Executive Stock Purchase Plan (2) (Exhibit 10.11) 10.9 Patent License Agreement dated June 30, 2000 between Intermagnetics General Corporation and Lucent Technologies GRL Corporation (6) (Exhibit 10.2) + 10.10 2000 Stock Option and Stock Award Plan (7) (Appendix A) Subsidiaries of the registrant * 21 Subsidiaries of the Company Consents of experts and counsel * 24 Consent of PricewaterhouseCoopers LLP with respect to the Registration Statements Numbers 2-80041, 2-94701, 33-2517, 33-12762, 33-12763, 33-38145, 33-44693, 33-50598, 33-55092, 33-72160, 333-10553, 333-42163, 333-75269 and 333-64822 on Form S-8. 34 Certifications of Chief Executive Officer and Chief Financial Officer * 99.1 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. * 99.2 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. - ------------------------------------------------------------------------- (1) Exhibit incorporated herein by reference to the Annual Report on Form 10-K filed by the Company for the fiscal year ended May 31, 1998. (2) Exhibit incorporated herein by reference to the Annual Report on Form 10-K filed by the Company for the fiscal year ended May 28, 2000. (3) Exhibit incorporated herein by reference to the Current Report on Form 8-K filed by the Company on November 8, 2001. (4) Exhibit incorporated herein by reference to the Proxy Statement dated September 27, 1999 for the 1999 Annual Meeting of Shareholders. (5) Exhibit incorporated herein by reference to the Annual Report on Form 10-K filed by the Company for the fiscal year ended May 30, 1999. (6) Exhibit incorporated herein by reference to the Quarterly Report on Form 10-Q filed by the Company for the quarter ended August 27, 2000. (7) Exhibit incorporated herein by reference to the Proxy Statement dated September 25, 2000 for the 2000 Annual Meeting of Shareholders. * Filed with the Annual Report on Form 10-K for the fiscal year ended May 26, 2002. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report on Form 10-K. 35 The Company agrees to provide the SEC upon request with copies of certain long-term debt obligations which have been omitted pursuant to the applicable rules. The Company agrees to furnish supplementally a copy of omitted Schedules and Exhibits, if any, with respect to Exhibits listed above upon request. (b) REPORTS ON FORM 8-K None. 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INTERMAGNETICS GENERAL CORPORATION Date: August 23, 2002 By: /s/ Glenn H. Epstein --------------------------------------- Glenn H. Epstein Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person in so signing also makes, constitutes and appoints Glenn H. Epstein, President and Chief Executive Officer, Michael K. Burke, Executive Vice President and Chief Financial Officer, and each of them, his true and lawful attorneys-in-fact, in his name, place and stead to execute and cause to be filed with the Securities and Exchange Commission any or all amendments to this report.
Name Capacity Date - ---------------------------------------------------------------------------------------------------------- /s/ Glenn H. Epstein Chairman and August 23, 2002 - --------------------------- Chief Executive Officer Glenn H. Epstein (principal executive officer) /s/ Michael K. Burke Executive Vice President and August 23, 2002 - --------------------------- Chief Financial Michael K. Burke Officer (principal financial and accounting officer) /s/ John M. Albertine Director August 23, 2002 - --------------------------- John M. Albertine /s/ Larry G. Garberding Director August 23, 2002 - ----------------------- Larry G. Garberding /s/ Michael E. Hoffman Director August 23, 2002 - ---------------------- Michael E. Hoffman /s/ James S. Hyde Director August 23, 2002 - --------------------------- James S. Hyde /s/ Thomas L. Kempner Director August 23, 2002 - --------------------- Thomas L. Kempner /s/ Sheldon Weinig Director August 23, 2002 - --------------------------- Sheldon Weinig
37 1. Financial Statements 38 Report of Independent Accountants To the Board of Directors and Stockholders of Intermagnetics General Corporation: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of Intermagnetics General Corporation and its subsidiaries at May 26, 2002 and May 27, 2001, and the results of their operations and their cash flows for each of the three years in the period ended May 26, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Notes O and P to the consolidated financial statements, on May 28, 2001 the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" and Statement of Financial Accounting Standards No. 133, "Accounting For Derivative Instruments and Hedging Activities." /s/ PricewaterhouseCoopers LLP Albany, New York July 12, 2002 39 CONSOLIDATED BALANCE SHEETS INTERMAGNETICS GENERAL CORPORATION (Dollars in Thousands, Except Per Share Amounts)
May 26, May 27, 2002 2001 --------- ---------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 73,517 $ 27,675 Trade accounts receivable, less allowance (May 26, 2002 - $293; May 27, 2001 - $496) 20,612 21,615 Costs and estimated earnings in excess of billings on uncompleted contracts 428 642 Inventories: Consigned products 2,799 7,176 Finished products 659 2,142 Work in process 7,405 12,768 Materials and supplies 9,054 12,337 -------- -------- 19,917 34,423 Deferred income taxes 1,497 3,362 Prepaid expenses and other 2,037 1,228 -------- -------- TOTAL CURRENT ASSETS 118,008 88,945 PROPERTY, PLANT AND EQUIPMENT Land and improvements 1,128 1,479 Buildings and improvements 12,172 18,243 Machinery and equipment 31,788 41,604 Leasehold improvements 3,705 923 -------- -------- 48,793 62,249 Less allowances for depreciation and amortization 23,310 37,787 -------- -------- 25,483 24,462 Equipment in process of construction 2,854 2,801 -------- -------- 28,337 27,263 INTANGIBLE AND OTHER ASSETS Available for sale securities 2,833 6,145 Other investments 3,500 Goodwill 13,750 13,750 Other intangibles, less accumulated amortization (May 26, 2002- $5,746; May 27, 2001 - $3,765) 8,759 10,890 Note receivable 3,861 Other assets 1,677 1,665 -------- -------- TOTAL ASSETS $177,225 $152,158 ======== ========
40
May 26, May 27, 2002 2001 ----------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long-term debt $ 267 $ 2,445 Accounts payable 10,757 10,749 Salaries, wages and related items 6,386 5,777 Accrual for compensated absences 835 1,063 Customer advances and deposits 1,007 2,054 Product warranty reserve 1,326 1,474 Accrued income taxes 2,332 2,143 Other liabilities and accrued expenses 1,985 2,870 --------- --------- TOTAL CURRENT LIABILITIES 24,895 28,575 LONG-TERM DEBT, less current portion 4,668 6,185 DEFERRED INCOME TAXES 2,383 DERIVATIVE LIABILITY 268 SHAREHOLDERS' EQUITY Preferred Stock, par value $.10 per share: Authorized - 2,000,000 shares Issued and outstanding - May 26, 2002 - None; May 27, 2001 - None Common Stock, par value $.10 per share: Authorized - 40,000,000 shares Issued and outstanding (including shares in treasury): May 26, 2002 - 17,333,459 shares; May 27, 2001 - 16,693,997 shares 1,733 1,671 Additional paid-in capital 137,419 127,303 Notes receivable from employees (799) (1,501) Retained earnings/(accumulated deficit) 15,999 (4,590) Accumulated other comprehensive loss (906) (2,047) --------- --------- 153,446 120,836 Less cost of Common Stock in treasury May 26, 2002 - 671,316 shares May 27, 2001 - 661,282 shares (6,052) (5,821) --------- --------- 147,394 115,015 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 177,225 $ 152,158 ========= =========
See notes to consolidated financial statements 41 CONSOLIDATED INCOME STATEMENTS INTERMAGNETICS GENERAL CORPORATION (Dollars in Thousands, Except Per Share Amounts)
Fiscal Year End ----------------------------------------------- May 26, May 27, May 28, 2002 2001 2000 ------------ --------- --------- Net sales $ 153,294 $ 138,157 $ 112,772 Cost of products sold 91,393 80,990 70,616 Inventory (recovered) written off in restructuring (1,361) 1,390 --------- --------- --------- 91,393 79,629 72,006 --------- --------- --------- Gross margin 61,901 58,528 40,766 Product research and development 14,855 9,541 6,271 Marketing, general and administrative 25,422 27,255 23,107 Amortization of intangible assets 1,979 3,094 2,011 Restructuring charges 80 --------- --------- --------- 42,256 39,890 31,469 --------- --------- --------- Operating income 19,645 18,638 9,297 Interest and other income 1,957 1,374 1,175 Interest and other expense (652) (1,986) (1,965) Gain on sale of divisions 15,385 Write down of investments (6,290) Realized gain on available for sale securities 230 615 Recovery of investment in unconsolidated affiliate 1,620 Equity in net loss of unconsolidated affiliates (236) --------- --------- --------- Income before income taxes 30,275 18,026 10,506 Provision for income taxes 9,686 6,959 4,054 --------- --------- --------- NET INCOME $ 20,589 $ 11,067 $ 6,452 ========= ========= ========= Net Income per Common Share: Basic $ 1.26 $ 0.72 $ 0.48 ========= ========= ========= Diluted $ 1.19 $ 0.67 $ 0.45 ========= ========= =========
See notes to consolidated financial statements. 42 CONSOLIDATED STATEMENTS OF CASH FLOWS INTERMAGNETICS GENERAL CORPORATION (Dollars in Thousands)
Fiscal Year Ended ---------------------------------------- May 26, May 27, May 28, 2002 2001 2000 --------- -------- -------- OPERATING ACTIVITIES Net income $ 20,589 $ 11,067 $ 6,452 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,803 7,086 6,380 Proceeds from the sale of assets 1,812 Non-cash restructuring charges 2,000 Recovery of investment in unconsolidated affiliate (1,341) Gain on sale of divisions (15,385) Write down of investments 6,290 Premium on debt conversion 1,037 Provision for deferred taxes (532) 1,790 708 Equity in net loss of unconsolidated affiliates including amortization 236 Loss on sale and disposal of assets 173 21 248 Gain on sale of available for sale securities (230) (615) Change in discount on note receivable (57) Stock based compensation 539 470 460 Change in operating assets and liabilities (excluding changes resulting from sale of divisions and the net effects of restructuring): (Increase) decrease in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts (1,583) 587 1,719 (Increase) decrease in inventories and prepaid expenses and other (1,688) (14,831) 5,875 Increase in accounts payable and accrued expenses 731 8,999 2,851 -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 14,650 18,038 24,973 INVESTING ACTIVITIES Purchases of property, plant and equipment (11,598) (5,192) (5,287) Proceeds from sale of equipment 174 Proceeds from sale of available for sale securities 1,300 1,369 AISA termination payments (4,750) Payments on financial guarantee, net (623) Purchase of patent rights (1,085) Proceeds from sale of divisions 39,002 -------- -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 28,704 (6,103) (9,291) FINANCING ACTIVITIES Repayment of short-term borrowings (4,850) Repayments from (loans to) employees 702 165 (1,666) Redemption of Preferred Stock (682) Proceeds from sales of Common Stock, including the exercise of stock options 4,328 4,720 2,559 Principal payments on note payable and long-term debt (2,445) (1,428) (317) -------- -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,585 3,457 (4,956) EFFECT OF EXCHANGE RATES ON CASH (97) (244) (482) -------- -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 45,842 15,148 10,244 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,675 12,527 2,283 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 73,517 $ 27,675 $ 12,527 ======== ======== ======== SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Issuance of Warrants to purchase Common Stock $ 1,097 ======== Issuance of Note Payable for redemption of Preferred Stock $ 2,192 ======== Issuance of Treasury Stock for redemption of Preferred Stock $ 4,126 ======== Issuance of Common Stock upon conversion of principal amount of debentures $ 18,894 $ 871 ======== ======== Exchange of Common Stock in partial payment of exercise price on options $ 231 $ 643 ======== ======== Tax benefit from exercise of stock options $ 3,690 $ 586 $ 84 ======== ======== ========
See notes to consolidated financial statements. 43 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS) INTERMAGNETICS GENERAL CORPORATION Fiscal Years Ended May 26, 2002, May 27, 2001 and May 28, 2000 (Dollars in Thousands)
Additional Common Paid-in Accumulated Stock Capital Deficit ------------ ------------ ------------ Balances at May 30, 1999 $ 1,352 $ 82,175 $ (8,061) Comprehensive income: Net Income 6,452 Unrealized gain on available for sale securities, net Unrealized loss on foreign currency translation Total comprehensive income Tax benefit from exercise of stock options 84 Issuance of 440,160 shares of Common Stock, including receipt of 24,345 shares of Treasury Stock and recognition of $386,000 of compensation expense, upon exercise of stock options and sale of 32,865 shares to IGC Savings Trust 42 4,158 Issuance of 64,113 shares upon conversion of debentures 6 865 Issuance of 631,128 Treasury shares upon conversion of Series A Preferred Stock (885) Stock based compensation 37 Purchase of 114,000 shares of Treasury Stock Notes receivable from employees for purchase of Common Stock Stock dividend 71 4,480 (4,550) --------- --------- --------- Balances at May 28, 2000 1,471 90,914 (6,159) Comprehensive income: Net Income 11,067 Unrealized loss on available for sale securities Unrealized loss on foreign currency translation Total comprehensive income Repayment of note receivable from employees Tax benefit from exercise of stock options 586 Issuance of 527,290 shares of Common Stock, upon exercise of stock options and sale of 6,400 shares to IGC Savings Trust 53 4,667 Issuance of 15,300 shares of Common Stock and other stock based compensation 2 538 Issuance of 1,450,205 shares of Common Stock upon conversion of debentures and write-off of deferred financing costs 142 20,019 Issuance of warrants to acquire 105,600 shares of Common Stock 1,097 Stock dividend adjustment including payment in lieu of fractional shares (11) Stock dividend 3 9,495 (9,498) --------- --------- --------- Balances at May 27, 2001 1,671 127,305 (4,590) Comprehensive income: Net Income 20,589 Reclassification adjustments - write down of investments Reclassification adjustments - available for sale securites Reclassification adjustments - foreign currency translation Unrealized loss on available for sale securities, net Unrealized gain on foreign currency translation Transitional adjustment - on derivatives Loss on derivative Total comprehensive income Net repayments Deferred taxes 3,690 Stock based compensation 1,928 Issuance of 639,583 shares of Common Stock , including exercise of stock options and sale of 7,673 shares to IGC Savings Trust 62 4,285 Receipt of treasury stock, upon exercise of stock options 231 Stock dividend adjustment of (121) shares and payments for fractional shares (18) --------- --------- --------- Balances at May 26, 2002 $ 1,733 $ 137,421 $ 15,999 ========= ========= ========= Accumulated Other Notes Comprehensive Treasury Receivable Comprehensive Income (Loss) Stock from Employees Income (Loss) -------------- ---------- -------------- ---------------- Balances at May 30, 1999 $ (668) $ (9,624) Comprehensive income: Net Income $ 6,452 Unrealized gain on available for sale securities, net 874 874 Unrealized loss on foreign currency translation (482) (482) --------- Total comprehensive income $ 6,844 ========= Tax benefit from exercise of stock options Issuance of 440,160 shares of Common Stock, including receipt of 24,345 shares of Treasury Stock and recognition of $386,000 of compensation expense, upon exercise of stock options and sale of 32,865 shares to IGC Savings Trust (643) Issuance of 64,113 shares upon conversion of debentures Issuance of 631,128 Treasury shares upon conversion of Series A Preferred Stock 5,011 Stock based compensation 162 Purchase of 114,000 shares of Treasury Stock (727) Notes receivable from employees for purchase of Common Stock (1,666) Stock dividend --------- --------- --------- --------- Balances at May 28, 2000 (276) (5,821) (1,666) Comprehensive income: Net Income $ 11,067 Unrealized loss on available for sale securities (1,527) (1,527) Unrealized loss on foreign currency translation (244) (244) --------- Total comprehensive income $ 9,296 ========= Repayment of note receivable from employees 165 Tax benefit from exercise of stock options Issuance of 527,290 shares of Common Stock, upon exercise of stock options and sale of 6,400 shares to IGC Savings Trust Issuance of 15,300 shares of Common Stock and other stock based compensation Issuance of 1,450,205 shares of Common Stock upon conversion of debentures and write-off of deferred financing costs Issuance of warrants to acquire 105,600 shares of Common Stock Stock dividend adjustment including payment in lieu of fractional shares Stock dividend --------- --------- --------- --------- Balances at May 27, 2001 (2,047) (5,821) (1,501) Comprehensive income: Net Income $ 20,589 Reclassification adjustments - write down of investments 1,583 1,583 Reclassification adjustments - available for sale securites (311) (311) Reclassification adjustments - foreign currency translation 1,051 1,051 Unrealized loss on available for sale securities, net (750) (750) Unrealized gain on foreign currency translation (164) (164) Transitional adjustment - on derivatives (128) (128) Loss on derivative (140) (140) --------- Total comprehensive income $ 21,730 ========= Net repayments 702 Deferred taxes Stock based compensation Issuance of 639,583 shares of Common Stock , including exercise of stock options and sale of 7,673 shares to IGC Savings Trust Receipt of treasury stock, upon exercise of stock options (231) Stock dividend adjustment of (121) shares and payments for fractional shares --------- --------- --------- Balances at May 26, 2002 $ (906) $ (6,052) $ (799) ========= ========= =========
See notes to consolidated financial statements. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTERMAGNETICS GENERAL CORPORATION NOTE A - ACCOUNTING POLICIES Basis of Presentation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant 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. The Company operates on a 52/53 week fiscal year ending the last Sunday during the month of May. Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Revenue Recognition: Sales are recognized as of the date of shipment or upon customer acceptance, which is based on product test results. Sales to the United States Government or its contractors under research and development cost reimbursement contracts are recorded as costs are incurred and include estimated earned profits. The Company recognizes revenue on long-term development contracts based upon the lesser of, milestones achieved or costs incurred plus earned profit. Some of these contracts require the Company to contribute to the development effort. The Company accrues for possible future claims arising under terms of various warranties (one to three years) made in connection with the sale of products. Inventories: Inventories are stated at the lower of cost (first-in, first-out) or market value. At May 26, 2002 and May 27, 2001 the Company had reserves for excess and obsolete inventory of $ 1,064,000 and $4,025,000 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 net income. 45 Investments: Certain investments are categorized as available for sale securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Available for sale securities are reported at fair value, with unrealized gains and losses included in shareholders' equity. Realized gains and losses and other than temporary losses for securities classified as available for sale are included in earnings and are determined using the specific identification method for determining the cost of securities sold. Income Taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Investment and other tax credits are included in net income when realized. Foreign Currency Translation: Foreign currency translation adjustments arise from conversion of the Company's foreign subsidiary's financial statements to US currency for reporting purposes, and are included in Other Comprehensive Income (Loss) in shareholders' equity on the accompanying consolidated balance sheets. Realized foreign currency transaction gains and losses are included in interest and other expense in the accompanying consolidated income statements. Goodwill and Other Intangibles: The ratable amortization of goodwill and other intangibles with indefinite lives is replaced with periodic tests of the goodwill's impairment and that identifiable intangible assets other than goodwill are amortized over their useful lives. Impairment of Long-Lived Assets: Long-lived assets, including intangible assets, used in the Company's operations are reviewed for impairment when circumstances indicate that the carrying amount of an asset may not be recoverable. The primary indicators of recoverability are the associated current and forecasted undiscounted operating cash flows. Stock-Based Compensation: The intrinsic value method of accounting is used for stock-based compensation plans. Under the intrinsic value method, compensation cost is measured as the excess, if any, of the quoted market price of the stock at the grant date over the amount an employee must pay to acquire the stock. Per Share Amounts: Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue Common Stock were exercised or converted into Common Stock or resulted in the issuance of Common Stock that then shared in the earnings of the entity. Comprehensive Income: Comprehensive income (loss) consists of net income (loss), net unrealized gains (losses) on available-for-sale securities, foreign currency translation adjustments and gain (loss) on derivative activity and is presented in the consolidated statements of changes in shareholders' equity and comprehensive income (loss). 46 Use of Estimates: Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenue and expenses and the disclosure of contingent assets and liabilities, to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates. New Accounting Pronouncements: In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligation." This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible, long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. As used in this Statement, a legal obligation is an obligation that a party is required to settle as a result of an existing or enacted law, statute, ordinance, or written or oral contract or by legal construction of a contract under the doctrine of promissory estoppel. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management does not expect the adoption of SFAS No. 143 to have a material effect on the Company's financial statements. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", ("SFAS No. 144") which supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". SFAS No. 144 establishes a single accounting method for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and extends the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 also requires that an impairment loss be recognized for assets held-for-use when the carrying amount of an asset (group) is not recoverable. The carrying amount of an asset (group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (group), excluding interest charges. Estimates of future cash flows used to test the recoverability of a long-lived asset (group) must incorporate the entity's own assumptions about its use of the asset (group) and must factor in all available evidence. SFAS No. 144 is effective for the Company for the first quarter of Fiscal 2003. Management has not yet determined the impact that the adoption of SFAS No. 144 will have on the Company's consolidated financial statements. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections as of April 2002". This Standard addresses a number of items related to leases and other matters. The Company is required to adopt this Standard beginning in the first quarter of fiscal 2003. The Company does not expect the adoption of SFAS No. 145 to have a material effect on its financial statements. In June 2002, the Financial Accounting Standards Board issued SFAS 146, "Accounting for Costs Associated with Exit or Disposal Activities". This Standard addresses the recognition, measurement and reporting costs that are associated with exit or disposal activities. SFAS No.146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a material effect on its financial statements. NOTE B - DISPOSITIONS IGC - Advanced Superconductors - ------------------------------ On October 25, 2001, the Company sold substantially all of the assets of IGC-AS, a division that manufactures low temperature superconducting wire and tape. The sale was subject to a purchase agreement, dated October 4, 2001, between the Company and Outokumpu Copper Products Oy and Outokumpu Advanced Superconductors Inc. (together, the "Purchasers"). The purchase consideration was arrived at by arms length negotiation and consisted of $29.8 million in cash paid on October 25 and the recording of a note receivable of $4 million, with a net present value of $3.8 million, due in two years from the closing date. The net pretax gain from the sale was $15.4 million. The agreement also includes a six-year strategic supply arrangement under which the Company will purchase from Outokumpu a substantial portion of the LTS wire it requires internally, primarily for manufacturing superconducting magnet systems. The Company can earn up to $4 million as a performance payment if it attains specified levels of LTS wire purchases over the next two years. In connection with the sale of IGC-AS, the Company has recorded a $1.5 million liability related to environmental investigation and potential remediation costs to be incurred by the Company under certain property transfer laws of the State of Connecticut. Management has estimated this liability based upon information provided by environmental consultants. Additionally, the Company recorded an expense of about $795,000 for stock based compensation related to the sale. 47 IGC - APD Cryogenics, Inc. - -------------------------- On February 5, 2002, the Company sold the stock of its subsidiaries IGC-APD Cryogenics, Inc. and IG-Europe, Ltd. The sale was subject to a stock purchase agreement between the Company and Sumitomo Heavy Industries (SHI) of Japan dated January 7, 2002. The sale to SHI included only the helium related business. The purchase consideration was arrived at by arms length negotiation and consisted of $9.5 million in cash paid on February 5, 2002. The Company was also able to withdraw an additional $1.2 million in cash prior to closing. The net pretax gain from the sale was $10,000. The agreement includes a six-year strategic supply agreement under which the Company will purchase from SHI shield coolers it requires internally, primarily for manufacturing superconducting magnet systems. The mixed-gas portion of the refrigeration systems business previously conducted at IGC-APD was transferred and integrated into IGC-Polycold, Inc. Additionally, the Company recorded stock based compensation expense of $528,000 related to the sale. NOTE C - RESTRUCTURING Refrigerant Business In February 2000, the Company decided to exit its refrigerant business, a part of the Instrumentation segment, over a 15 month period. As a result, the Company recorded a restructuring charge of $2,000,000 including liabilities recorded of $191,000, comprised of the following: (Dollars in Thousands) Inventory write-down $1,770 Write-down of equipment 39 Severance costs 191 ------ $2,000 ====== Under the exit plan, the Company terminated all but two of its employees in fiscal 2000. The plan involved continuing operations through a master distributor while attempting to find a buyer for the business, and contemplated sales of product through May 2001, at which time operations would cease. The Company paid a total of $92,000 and $99,000 in fiscal 2001 and 2000, respectively, in severance costs. In October 2000, the Company sold the remaining assets for approximately $1,800,000. These assets consisted primarily of inventory. As a result, the Company recorded a recovery of the restructuring charge of approximately $1,300,000. Selected financial data for this business follows: (Dollars in Thousands) FY 2001 FY 2000 ------------ ------------ Sales $ 1,253 $ 5,031 Net Income (loss) (including restructuring charges or recovery) 728 (2,938) 48 NOTE D - INVESTMENTS Available for Sale Securities: The Company owns 850,753 shares of the Common Stock of Ultralife Batteries Inc., as of May 26, 2002 and May 27, 2001, which are accounted for as "Available for Sale Securities." During fiscal 2002, the Company wrote this investment down to fair market value. The write down amounted to $2.8 million and in the opinion of management is other than temporary. Realized gains from the sale of such securities amounted to $615,000 in fiscal 2000. There were no sales in fiscal 2002 or fiscal 2001. During fiscal 2002, the Company sold its shares in Powercold Corporation for total proceeds of $1,300,000 with a gross realized gain on the sale of $230,000. The gross realized gain was based on specific identification of such securities. In connection with the sale, net unrealized holding gain of $311,000 has been reclassified from accumulated other comprehensive income. The Company owned 1,354,785 shares of Powercold Corporation, as of May 27, 2001. The cost and market value of the Company's Available for Sale Securities as of May 26, 2002 and May 27, 2001 were: (Dollars in Thousands) May 26, 2002 May 27, 2001 ------------ ------------ Cost $ 3,471 $ 7,306 Gross unrealized (loss) gain (638) (1,161) -------- -------- Market Value $ 2,833 $ 6,145 ======== ======== Other Investments: The Company owns approximately 15% of the Common Stock of KryoTech, a privately-held corporation, acquired at a cost of $4,750,000. During fiscal 2002, the Company wrote this investment down to zero due to a decline in fair value, which, in the opinion of management is other than temporary. Until December 1999, the Company accounted for its investment in KryoTech using the equity method of accounting because it owned more than 20% of the common shares. The initial acquisition cost exceeded the underlying equity in net assets by $3,645,000, which was being amortized over a period of 15 years. During fiscal 2000, when our ownership position fell below 20%, the Company began accounting for the remaining investment value of approximately $3.5 million using the cost method. NOTE E - NOTES PAYABLE AND LONG-TERM DEBT The Company increased its unsecured line of credit from $27,000,000 to $50,000,000 in September 2001, and changed the expiration date from October 2002 to October 2004. The line of credit was not in use at May 26, 2002 or May 27, 2001. The Company may elect to apply interest rates to borrowings under the line which relate to either the London Interbank Offered Rate (LIBOR) or prime plus the applicable margin. The line of credit agreement provides for various covenants, including requirements that the Company maintain specified financial ratios. Long-term debt consists of the following: (Dollars in Thousands) May 26, 2002 May 27, 2001 ------------- ------------- Revenue bonds $1,350 Notes payable 2,096 Mortgage payable $4,935 5,184 ------ ------ 4,935 8,630 Less current portion 267 2,445 ------ ------ Long-term debt $4,668 $6,185 ====== ====== 49 Revenue bonds consist of IGC-APD's obligation under an agreement with an Economic Development Authority with respect to revenue bonds issued in connection with the acquisition of certain land, building and equipment acquired at a total cost of $2,408,000. The bonds bear interest at a weekly adjustable annual rate (convertible to fixed rate at the option of the Company) which averaged 4.51% for the year ended May 27, 2001. The bonds mature serially in amounts ranging from $100,000 in December 1999 to $200,000 in December 2009. In the event of default or upon the occurrence of certain conditions, the bonds are subject to mandatory redemption at prices ranging from 100% to 103% of face value. As long as the interest rate on the bonds is adjustable weekly, the bonds are redeemable at the option of the holder at face value. Under the terms of the revenue bond agreement monthly advance payments to restricted cash accounts in amounts sufficient to meet the interest and principal payments on the bonds when due. The balance of these accounts, included in "Cash and Cash Equivalents" on the accompanying consolidated balance sheets, was $43,000 at May 27, 2001. On February 5, 2002 SHI assumed the Company's obligations with respect to the revenue bonds in connection with the sale of IGC-APD. Notes payable at May 27, 2001 consisted of $1,000,000 due for the purchase of certain patent rights and $1,096,000 representing the final installment of the purchase price of Polycold Systems, Inc. The note relating to patent rights is non-interest bearing and was paid in September 2001. The note relating to Polycold Systems Inc. bore interest at three-month LIBOR (3.99% at May 27, 2001) and was paid in June 2001. The mortgage payable bears interest at the rate of LIBOR (2.63% at May 26, 2002 and 4.259% at May 27, 2001) plus 0.9%, and is payable in monthly installments of $50,000, including principal and interest, through October 2005 with a final payment of $3,943,000 due in November 2005. The loan is collateralized by land and buildings and certain equipment acquired at a cost of approximately $10,800,000. The Company has entered into interest rate swap agreements to reduce the effect of changes in interest rates on certain of its floating rate long-term debt. At May 26, 2002, the Company had outstanding interest rate swap agreements with a commercial bank, having a total original notional principal amount of approximately $4,935,000. Those agreements effectively change the Company's interest rate exposure on its mortgages due 2005 to a fixed 6.88%. The interest rate swap agreement matures at the time the related notes mature. The Company is exposed to credit loss in the event of non-performance by the other parties to the interest rate swap agreement. However, the Company does not anticipate non-performance by the counterparties. Aggregate maturities of long-term debt for the next five fiscal years are: 2003 - - $267,000; 2004 - $284,000; 2005 - $307,000; 2006 - $4,076,000; and 2007 - $0. Interest paid for the years ended May 26, 2002, May 27, 2001, and May 28, 2000, amounted to $479,000, $1,151,000 and $1,725,000 respectively. NOTE F - SHAREHOLDERS' EQUITY In July 2001, the Company declared a 2% stock dividend to be distributed on all outstanding shares, except Treasury Stock, on August 31, 2001 to holders of record on August 14, 2001. The consolidated financial statements have been adjusted retroactively to reflect this stock dividend in all numbers of shares, prices per share and earnings per share. In June 2000, the Company declared a 3% stock dividend to be distributed on all outstanding shares, except Treasury Stock, on August 25, 2000 to holders of record on August 4, 2000. The consolidated financial statements have been adjusted retroactively to reflect this stock dividend in all numbers of shares, prices per share and earnings per share. The Company has established three stock option plans: the 1981 Stock Option Plan, the 1990 Stock Option Plan, and the 2000 Stock Option and Stock Award Plan. Shares and prices per share have been adjusted to reflect the 2% stock dividend declared in July 2001 and the 3% stock dividend declared June 2000. A total of 3,668,913 shares had been authorized for grant under the 1990 plan and 714,000 shares have been authorized under the 2000 Plan. All remaining grants under the 1981 Plan were exercised during the year ended May 28, 2000. Options granted under the 1990 and 2000 Stock Option and Stock Award Plans have lives ranging from five to ten years and vest over periods ranging from one to five years. 50 Option activity under these plans was as follows:
Fiscal Year Ended ------------------------------------------------------------------------------------------------ May 26, 2002 May 27, 2001 May 28, 2000 --------------------------------- -------------------------------- ----------------------------- Weighted Weighted Weighted Average Average Average Number Exercise Number Exercise Number Exercise of Shares Price of Shares Price of Shares Price --------------------------- ---------------------------- ----------------------------- Outstanding, beginning of year 2,022,452 $ 9.325 2,412,863 $ 8.145 2,020,967 $ 8.542 Granted 448,546 25.272 256,794 20.625 987,282 7.861 Exercised (644,318) 8.808 (563,375) 9.342 (407,317) 8.740 Forfeited (45,165) 14.055 (83,831) 10.092 (188,070) 9.621 --------- --------- --------- Outstanding, end of year 1,781,515 13.406 2,022,452 9.325 2,412,863 8.145 ========= ========= ========= Exercisable, end of year 801,366 $ 8.746 792,537 $ 7.993 1,073,626 $ 8.966 ========= ========= =========
May 26, 2002 -------------------------------------------------------------------------------------------- Options Outstanding Options Exercisable ------------------------------------------------------ ---------------------------------- Weighted Weighted Weighted Average Average Average Range of Option Number Exercise Remaining Number Exercise Exercise Prices Outstanding Price Contractual Life Exercisable Price - ---------------- ------------------------------------------------------ ------------------- --------------- $3.1403 to $6.2804 184,300 $ 5.0212 2.0 years 146,831 $ 4.8146 $6.2805 to $9.4206 859,155 7.4883 3.4 years 498,246 7.4119 $9.4207 to $12.5608 51,584 10.1242 3.1 years 49,869 10.1314 $12.5609 to $15.701 27,069 13.9427 4.0 years 24,967 13.8594 $15.7011 to $18.8412 37,584 16.8784 3.8 years 21,924 16.8173 $18.8413 to $21.9814 154,794 20.5082 8.7 years 33,828 20.6400 $21.9815 to $25.1216 203,995 23.4806 9.6 years 2,349 23.4900 $25.1217 to $28.2618 207,720 26.0053 7.3 years 18,655 26.1653 $28.2619 to $31.402 55,314 29.3611 8.7 years 4,698 31.4020 --------- --------- --------- ------- -------- 1,781,515 $ 13.4062 5.0 years 801,366 $ 8.7461 ========= =======
In connection with the license of patent rights, the Company issued warrants to purchase 105,060 shares of its Common Stock at a price of $18.98 per share. These warrants were valued at $1,097,000, which was capitalized as part of the cost of the patent rights and expire in 2007. Following are the shares of Common Stock reserved for issuance and the related exercise prices for the outstanding stock options and outstanding warrants at May 26, 2002: Number Exercise Price Of Shares Per Share --------- -------------- 2000 Stock Option and Stock Award Plan 1,170,968 $4.56 to 1990 Stock Option Plan 603,793 $31.40 Warrants 105,060 $18.98 --------- Shares reserved for issuance 1,879,821 ========= 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. The pro forma effect on net income for fiscal years 2002, 2001 and 2000 is not representative of the pro forma effect on net income in future years because, as required by SFAS No. 123, "Accounting for Stock Based Compensation," no consideration has been given to awards granted prior to fiscal 1996. 51 (Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended -------------------------- --------------------------- -------------------------- May 26, 2002 May 27, 2001 May 28, 2000 -------------------------- --------------------------- -------------------------- As As As Reported Pro Forma Reported Pro Forma Reported Pro Forma -------------------------- --------------------------- -------------------------- Net income $20,589 $18,627 $11,067 $ 9,522 $ 6,452 $ 5,022 Earnings per Common Share: Basic $ 1.26 $ 1.14 $ 0.72 $ 0.62 $ 0.48 $ 0.38 ======= ======= ======= ======== ======= ======= Diluted $ 1.19 $ 1.08 $ 0.67 $ 0.58 $ 0.45 $ 0.35 ======= ======= ======= ======== ======= =======
The weighted average fair value of each option granted under the 1990 Stock Option Plan and the 2000 Stock Option and Award Plan during fiscal years 2002, 2001 and 2000 was $15.647, $14.123 and $4.385, respectively. The fair value of each option grant was estimated on the date of the grant using the Black-Scholes Model with the following weighted average assumptions. The risk-free interest rates for fiscal years 2002, 2001 and 2000 were 3.2%, 4.8% and 6.1%, respectively. The expected volatility of the market price of the Company's Common Stock for fiscal years 2002, 2001 and 2000 grants was 73.3%, 68.8% and 55.1%, respectively. The expected average term of the granted options for fiscal 2002, 2001 and 2000 was 5.1 years, 6.5 years and 4.8 years, respectively. There was no expected dividend yield for the options granted for fiscal years 2002, 2001 and 2000. During the years ended May 26, 2002, May 27, 2001 and May 28, 2000, in connection with the grant of stock options to consultants, the Company has recognized compensation cost in the amount of $0, $293,000 and $37,000, respectively. Also, in connection with the exercise of certain stock options in fiscal 2000, the Company recognized $386,000 of compensation expense. During the year ended May 26, 2002, the Company issued 15,756 shares of Common Stock at a fair market value of $26.26 per share as compensation to the Board of Directors. During the year ended May 27, 2001, the Company issued 15,759 shares of Common Stock at a fair market value of $16.147 per share as compensation to the Board of Directors. In addition, during the year ended May 28, 2000 the Company issued 631,128 shares of Treasury Stock for partial redemption of Preferred Stock and 21,012 shares at a fair market value of $8.321 per share as compensation to the Board of Directors. NOTE G - RETIREMENT PLANS The Company had a non-contributory, defined benefit plan covering all eligible employees. Benefits under the plan were based on years of service and employees' career average compensation. The Company's funding policy was to contribute annually an amount sufficient to meet or exceed the minimum funding standard contained in the Internal Revenue Code. Contributions were intended to provide not only for benefits attributable to service to date, but also for those expected to be earned in the future. As of December 31, 1998, the Company froze all pension benefits except for approximately 50 bargaining unit employees at a subsidiary. In September 2000, the Company received approval from the Internal Revenue Service to terminate the plan. In November 2000, the Company terminated the plan and settled nearly all its obligations by purchasing annuity contracts or making lump-sum distributions in an amount determined by the plan's actuary. The remaining plan assets were distributed to the plan participants on a pro-rata basis. Such distributions were completed during August 2001. The Company recorded termination and settlement costs of approximately $588,000 during the fiscal year ended May 27, 2001, and curtailment gain of $1,465,000 in the fiscal year ended May 28, 2000. 52 The following tables set forth the Bargaining unit plan's funded status at May 26, 2002 and May 27, 2001 and the terminated plan amounts for the year ended May 27, 2001: (Dollars in Thousands)
Terminated Bargaining Unit Plan Plan Fiscal Year Ended -------------- ---------------------------------- May 27, 2001 May 26, 2002 May 27, 2001 -------------- --------------- -------------- Change in benefit obligation during year: Benefit obligation at beginning of year $ 4,093 $ 581 Service cost - - $ 25 Interest cost 145 43 38 Benefit payments - (33) (2) Administrative expenses - - - Actuarial (gain) or loss - 34 49 Acquisitions or (divestitures) (470) - 471 Settlements - - - Curtailments (3,768) - - -------------- --------------- -------------- Benefit obligation at end of year $ 0 $ 625 $581 ============== =============== ============== Change in plan assets during year: Fair value of plan assets at beginning of year $ 6,277 $ 753 $ - Employer contributions - - - Benefit payments - (33) (2) Administrative expenses - - - Actual return on plan assets 225 (42) 91 Acquisitions or (divestitures) (664) - 664 Settlements (5,838) - - -------------- --------------- -------------- Fair value of plan assets at end of year $ 0 $ 678 $ 753 ============== =============== ============== Reconciliation of funded status at end of year: Funded status $ - $ 53 $ 172 Unrecognized net transition (asset) or obligation - - - Unrecognized prior service cost - (163) (178) Unrecognized net (gain) or loss - 146 11 -------------- --------------- -------------- Net amount recognized $ 0 $ 36 $ 5 ============== =============== ============== Amounts recognized in the Consolidated Balance Sheet at end of year: -------------- --------------- -------------- Prepaid benefit cost $ 0 $ 36 $ 5 ============== =============== ============== Net periodic benefit cost recognized for year $ - $ - $ - Service cost 145 - 25 Interest cost 145 43 38 Expected return on plan assets (225) (60) (53) Amortization of net transition obligation 3 - - Amortization of prior service cost 3 (15) (15) Amortization of net gain (27) - - -------------- --------------- -------------- Net periodic benefit cost $(101) $(32) $ (5) ============== =============== ============== Additional amounts recognized for year: Settlement (gain) or loss $ 800 Weighted-average assumptions for year: Discount rate 8.00% 7.50% 8.00% Rate of compensation increases 4.50% - 4.50% Expected long-term rate of return on plan assets 8.00% 8.00% 8.00% Weighted-average assumptions at end of year: Discount rate - 7.25% 7.50% Rate of compensation increases - - 4.50%
53 The Company also maintains an employee savings plan, covering substantially all employees, under Section 401(k) of the Internal Revenue Code. Under this plan, the Company makes a contribution for all employees and matches a portion of participants' contributions. Expenses under the plan during the fiscal years ended May 26, 2002, May 27, 2001 and May 28, 2000 aggregated $633,000, $663,000 and $588,000, respectively. The Company also maintains supplemental retirement and disability plans for certain of its executive officers. These plans utilize life insurance contracts for funding purposes. Expenses under these plans were $28,000, $21,000 and $21,000 for the fiscal years ended May 26, 2002, May 27, 2001 and May 28, 2000, respectively. NOTE H - INCOME TAXES The components of the provision for income taxes (benefit) are as follows: (Dollars in Thousands)
Fiscal Year Ended --------------------------------------------------------- May 26, 2002 May 27, 2001 May 28, 2000 ---------------- ---------------- ---------------- Current Federal $9,303 $4,532 $2,573 State 870 560 611 Foreign 45 77 162 ---------------- ---------------- ---------------- Total current 10,218 5,169 3,346 Deferred Federal (486) 1,522 664 State (46) 268 44 ---------------- ---------------- ---------------- Total deferred (532) 1,790 708 ---------------- ---------------- ---------------- Provision for income taxes (benefit) $9,686 $6,959 $4,054 ================ ================ ================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows: (Dollars in Thousands)
May 26, 2002 May 27, 2001 ---------------- ---------------- Deferred tax assets: Inventory reserves $443 $1,175 Non-deductible accruals 992 1,372 Product warranty reserve 503 649 Equity in net loss of unconsolidated affiliate 469 469 Restructuring and other accruals 89 917 Unrealized loss on available for sale securities 2,359 Capital loss carry forward 1,120 ---------------- ---------------- Total gross deferred tax assets 4,855 5,702 Less valuation allowance (191) (1,311) ---------------- ---------------- Deferred tax assets 4,664 4,391 ---------------- ---------------- Deferred tax liabilities: Depreciation and amortization differences (822) (447) Intangibles (1,746) (2,342) Pension curtailment gain (549) (549) Other, net (36) (74) ---------------- ---------------- Total gross deferred tax liabilities (3,153) (3,412) ---------------- ---------------- Net deferred tax assets $1,511 $979 ================ ================
54 The foregoing assets and liabilities are classified in the accompanying consolidated balance sheets as follows: (Dollars in Thousands) May 26, 2002 May 27, 2001 ------------ ------------- Net current deferred tax assets $1,497 $3,362 Net long-term deferred tax assets/(liabilities) 14 (2,383) ------------ ------------- $ 1,511 $ 979 ============ ============= During the years reported, the Company adjusted the valuation allowance to an amount it believes is necessary to reduce deferred taxes to an amount which is more likely than not to be realized. The changes made to the valuation allowance during fiscal 2002 and 2000 were a decrease of $1,120,000 and $209,000, respectively. There were no changes in fiscal 2001. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and capital gains during the periods in which those temporary differences become deductible. Management considers projected future taxable income, the character of such income and tax planning strategies in making this assessment. The Company had Federal taxable income of approximately $18,900,000 in fiscal 2002, $13,500,000 in fiscal 2001 and $6,500,000 in fiscal 2000. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of the remaining deductible differences. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. The reasons for the differences between the provision for income taxes (benefit) and the amount of income tax (benefit) determined by applying the applicable statutory Federal tax rate to income (loss) before income taxes are as follows: (Dollars in Thousands)
Fiscal Year Ended ---------------------------------------------------------------- May 26, 2002 May 27, 2001 May 28, 2000 --------------- --------------- --------------- Pretax income (loss) at statutory tax rate (34%) $10,446 $6,184 $3,572 State taxes, net of Federal benefit 548 546 432 Benefit of Foreign Sales (759) (600) (425) Amortization of intangibles 73 539 539 Capital loss carry forward used (1,120) (209) Change in valuation allowance Other, net 498 290 145 --------------- --------------- --------------- Provision for income taxes $9,686 $6,959 $4,054 =============== =============== ===============
The Company paid income taxes, net of cash refunds received, of $6,200,000 during the year ended May 26, 2002; $3,650,000 during the year ended May 27, 2001; and received $50,000 in net tax refunds during May 28, 2000. 55 NOTE I - PER SHARE INFORMATION The following table provides calculations of basic and diluted earnings per share: (Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended ------------------------------------------------------------- May 26, 2002 May 27, 2001 May 28, 2000 ------------ ------------ ------------ Income available to Common shareholders $ 20,589 $ 11,067 $ 6,452 =========== =========== =========== Weighted average shares 16,336,181 15,363,208 13,378,100 Dilutive potential Common Shares: Warrants 31,404 7,817 Convertible Preferred Stock 544,004 Stock options 881,027 1,124,004 447,876 ----------- ----------- ----------- Adjusted weighted average Shares 17,248,612 16,495,029 14,369,980 =========== =========== =========== Net income (loss) per Common Share: Basic $ 1.26 $ 0.72 $ 0.48 =========== =========== =========== Diluted $ 1.19 $ 0.67 $ 0.45 =========== =========== ===========
For fiscal 2001 and 2000, shares issuable upon conversion of convertible debentures are considered in calculating "diluted" earnings per share, but have been excluded, as the effect would be anti-dilutive. Additionally, shares issuable upon exercise of stock options in which the market value is lower than the exercise price have also been excluded, as the effect would be anti-dilutive. In July 2001 the Company declared a 2% stock dividend to be distributed on all outstanding shares, except Treasury Stock, on August 31, 2001 to holders of record on August 14, 2001. The Company distributed a 3% stock dividend on August 25, 2000. The distribution has been made from the Company's authorized but unissued shares. All data with respect to earnings per share, weighted average shares outstanding and Common Stock equivalents have been adjusted to reflect these stock dividends. NOTE J - COMMITMENTS AND CONTINGENCIES The Company leases certain manufacturing facilities and equipment under operating lease agreements expiring at various dates through October 2019. Certain of the leases provide for renewal options. Total rent expense was $1,267,669, $907,000 and $731,000 for the years ended May 26, 2002, May 27, 2001 and May 28, 2000, respectively. Future minimum rental commitments, excluding renewal options, under the noncancellable leases covering certain manufacturing facilities and equipment through the term of the leases are as follows: Fiscal Year ----------- 2003 $ 1,268,000 2004 1,117,000 2005 1,096,000 2006 1,122,000 2007 1,208,000 ----------- Total $ 5,812,000 =========== 56 In addition to operating lease agreements, the Company also has a maintenance agreement for $113,000 per year, through January 2004, for a computer system. At May 26, 2002, the Company's capital equipment commitments were approximately $770,000. The Company is subject to certain claims and lawsuits arising in the normal course of business. Based on information currently available, it is the opinion of management, based upon advice of counsel, that the ultimate resolution of these matters would not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. However, based on future developments and as additional information becomes known, it is possible that the ultimate resolution of such matters could have a material adverse effect on the Company's financial statements in future periods. NOTE K - SEGMENT AND RELATED INFORMATION The Company operates in three reportable segments: Magnetic Resonance Imaging (MRI), Instrumentation, and Energy Technology. The MRI segment consists primarily of the manufacture and sale of magnets (by the IGC-Magnet Business Group) and radio frequency coils (by IGC-Medical Advances Inc.), which are used principally in the medical diagnostic imaging market. Until October 25, 2001 this segment also included the manufacture and sale of low-temperature superconducting wire (by IGC-Advanced Superconductors, also known as IGC-AS). The Company sold substantially all of the assets of IGC-AS on October 25, 2001. The Instrumentation segment consists of the manufacture and sale of refrigeration equipment (by IGC-Polycold Systems Inc.), used primarily in ultra-high vacuum applications, industrial coatings, analytical instrumentation, medical diagnostics and semiconductor processing and testing. This segment also included IGC-APD Cryogenics Inc., which manufactured and sold refrigeration equipment. The Company transferred the mixed-gas portion of IGC-APD to IGC-Polycold and sold the remaining IGC-APD business in a stock sale effective February 5, 2002. 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. In fiscal 2000, the Company reported its operations in four segments: Electromagnetics, Low-Temperature Superconductors, Refrigeration, and Energy Technology. The change in the current year reflects our continued focus on commercial market applications of core technology. The resulting reporting segments are intended to relate to the primary markets which each serve, rather than the technologies that give rise to individual products. Prior year segment data has been reclassified to conform with current year presentation. The accounting policies of the reportable segments are the same as those described in Note A of the Notes to Consolidated Financial Statements. Inter-segment sales and transfers are accounted for as if the sales or transfers were to third parties, that is, at current market prices. The Company evaluates the performance of its reportable segments based on operating income (loss). Summarized financial information concerning the Company's reportable segments is shown in the following table: 57 (Dollars in Thousands)
----------------------------------------------------------- May 26, 2002 ----------------------------------------------------------- Magnetic Resonance Energy Imaging Instrumentation Technology Total ------------ ------------- ----------- ----------- Net sales to external customers: Magnet systems & components $120,738 $120,738 Refrigeration equipment $ 26,891 26,891 Refrigerants Other 2,092 $ 3,573 5,665 -------- -------- -------- -------- Total 122,830 26,891 3,573 153,294 Inter-segment net sales 3,481 3,481 Segment operating profit (loss) 27,776 (3,272) (6,719) 17,785 Total assets $158,332 $ 10,128 $ 8,765 $177,225 Additions to plant, property and equipment 4,544 3,391 3,663 11,598 Depreciation and amortization expense 4,522 568 713 5,803 ----------------------------------------------------------- May 27, 2001 ----------------------------------------------------------- Magnetic Resonance Energy Imaging Instrumentation Technology Total ------------ ------------- ----------- ----------- Net sales to external customers: Magnet systems & components $ 86,428 $ 86,428 Refrigeration equipment $ 41,313 41,313 Refrigerants 1,253 1,253 Other 7,549 $ 1,614 9,163 -------- -------- -------- -------- Total 93,977 42,566 1,614 138,157 Inter-segment net sales 4,029 4,029 Segment operating profit (loss) 18,925 5,121 (4,292) 19,754 Total assets $123,559 $ 23,084 $ 5,515 $152,158 Additions to plant, property and equipment 3,111 586 1,495 5,192 Depreciation and amortization expense 6,135 608 343 7,086
58 (Dollars in Thousands)
----------------------------------------------------------- May 28, 2000 ----------------------------------------------------------- Magnetic Resonance Energy Imaging Instrumentation Technology Total ------------ ------------- ----------- ----------- Net sales to external customers: Magnet systems & components $ 67,223 $ 67,223 Refrigeration equipment $ 28,515 28,515 Refrigerants 5,030 5,030 Other 10,337 $ 1,667 12,004 -------- --------- ------- --------- Total 77,560 33,545 1,667 112,772 Inter-segment net sales 2,414 2,414 Segment operating profit (loss) 14,063 (3,329) (1,732) 9,002 Total assets $103,637 $ 21,562 $2,778 $127,977 Additions to plant, property and 4,083 472 732 5,287 equipment Depreciation and amortization expense 4,516 1,514 350 6,380
May 26, 2002 May 27, 2001 May 28, 2000 ------------ ------------ ------------ Reconciliation of income before income taxes: Total operating profit from reportable segments $ 17,785 $ 19,754 $ 9,002 Inter-company profit in ending inventory 1,860 (1,116) 295 -------- -------- -------- Net operating profit 19,645 18,638 9,297 Interest and other income 1,957 1,374 1,790 Interest and other expense (652) (1,986) (1,965) Gain on sale of division 15,385 Write down of investments (6,290) Gain on available for sale securities 230 Equity in net loss of unconsolidated affiliates (236) Recovery of investment in unconsolidated affiliates 1,620 -------- -------- -------- Income before income taxes $ 30,275 $ 18,026 $ 10,506 ======== ======== ========
59 Net sales to two customers of the Company's MRI segments were each in excess of 10% of the Company's total net sales in fiscal 2000 and 2001. During fiscal 2002, the Company's MRI segment had one customer with sales in excess of 10% of the Company's total net sales. Net sales to each of these customers during the last three fiscal years were as follows: Fiscal Year Ended ---------------------------------------------- May 26, May 27, May 28, (Dollars in Thousands) 2002 2001 2000 ---------------------------------------------- Customer A $ 110,483 $ 76,824 $ 56,098 Customer B 10,000 12,286 ---------------------------------------------- Total $ 110,483 $ 86,824 $ 68,384 ============================================== Net sales by country, based on the location of the customer, for the last three fiscal years were as follows: Fiscal Year Ended ---------------------------------------------- May 26, May 27, May 28, (Dollars in Thousands) 2002 2001 2000 ---------------------------------------------- United States $ 26,042 $ 36,114 $ 35,992 Netherlands 107,891 76,824 56,860 Other countries 19,361 25,219 19,920 ------------------------------------------------- Total $ 153,294 $ 138,157 $ 112,772 ================================================= All significant long-lived assets of the Company are located within the United States. NOTE L - FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments". Although the estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies, the estimates presented are not necessarily indicative of the amounts that the Company could realize in current market exchanges. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents, receivables, and accounts payable and accrued expenses: The carrying amounts reported in the consolidated balance sheets approximate their fair values because of the short maturities of these instruments. Available for sale securities and other investments: The fair value of available for sale securities is estimated based on quoted market prices (see Note D) at the balance sheet date. Long-term debt: The carrying value of long-term debt, including current portion, was approximately $4,935,000 at May 26, 2002, while the estimated fair value was $4,935,000, based upon interest rates available to the Company for issuance of similar debt with similar terms and discounted cash flows for remaining maturities. 60 NOTE M - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The accumulated balances for each classification of accumulated other comprehensive income (loss) are as follows:
Accumulated Foreign Other Currency Available for Derivative Comprehensive Items Sale Securities Liability Income (Loss) -------- ---------------- ------------ ------------- Balances at May 30, 1999 $(160) $ (508) $ - $ (668) Current period change - 2000 (482) 874 - 392 ----- ------- ----- ------- Balances at May 28, 2000 (624) 366 - (276) Current period change - 2001 (244) (1,527) - (1,771) ----- ------- ----- ------- Balances at May 27, 2001 (886) (1,161) - (2,047) Current period change - 2002 886 523 (268) 1,141 ----- ------- ----- ------- Balances at May 26, 2002 $ - $ (638) $(268) $ (906) ===== ======= ===== =======
The related tax effects allocated to each component of accumulated other comprehensive income (loss) are as follows: Before-Tax Tax (Expense) Net-of-Tax Amount or Benefit Amount ---------- ------------- ---------- Balance at May 30, 1999 $ (948) $ 280 $ (668) Foreign currency translation adjustments (482) - (482) Unrealized gains (losses) on available for sale securities 1,332 (458) 874 ------- ------- ------- Balance at May 28, 2000 (98) (178) (276) Foreign currency translation adjustments (244) - (244) Unrealized gains (losses) on available for sale securities (1,705) 178 (1,527) ------- ------- ------- Balance at May 27, 2001 (2,047) - (2,047) Foreign currency translation adjustments 886 - 886 Available for sale securities 523 - 523 Derivative Liability (268) - (268) ------- ------- ------- Balance at May 26, 2002 $ (906) $ - $ (906) ======= ======= ======= 61 NOTE N - QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Summarized quarterly financial data for fiscal 2002 and 2001 are as follows: (Dollars in Thousands, Except Per Share Amounts)
Earnings Per: --------------------- Net Gross Net Basic Diluted Sales Margin Income Share Share -------- ------ --------- ------ ------ 2002 Quarter Ended August 26, 2001 $40,089 $17,239 $3,640 $ .23 $ .21 November 25, 2001 38,971 16,034 10,387 .64 .60 February 24, 2002 37,201 14,619 3,118 .19 .18 May 26, 2002 37,034 14,011 3,444 .21 .20 2001 Quarter Ended August 27, 2000 $31,711 $12,843 $2,427 $ .17 $ .16 November 26, 2000 32,425 15,185 3,139 .20 .18 February 25, 2001 34,297 14,060 2,890 .18 .17 May 27, 2001 39,724 16,440 2,611 .17 .15
NOTE O - GOODWILL AND OTHER INTANGIBLE ASSETS Effective May 28, 2001, the Company adopted 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. An initial transition impairment test was required as of May 28, 2001. The Company completed this initial transition impairment test during the second quarter of 2002 which did not result in any impairment charges. For purposes of applying FAS No. 142, the Company has determined that the reporting units are consistent with the operating segments identified in Note K, Segment and Related Information. Fair values of reporting units and the related implied fair values of their respective goodwill were established using public company analysis and discounted cash flows. During fiscal 1997, the Company acquired IGC-Medical Advances Inc. and in fiscal 1998, IGC-Polycold Inc. In connection with the acquisitions, approximately $13,750,000 is recorded as goodwill. During 1999, the Company completed an agreement with Alstom, S.A. ("Alstom") to terminate the parties' joint venture, ALSTOM Intermagnetics ("AISA"). AISA, a previously 45% owned unconsolidated joint venture located in Belfort, France, was created for the manufacture and sale of superconductive MRI magnet systems under license from the Company. Effective December 31, 1999, AISA's magnet production was consolidated in the Company's Latham, New York facility, and AISA ceased production of superconductive MRI magnet systems. Under the termination agreement, the Company sold its interest in AISA to Alstom for $300,000. In consideration of the contractual rights of AISA and Alstom under the termination agreement, the Company paid AISA $9,000,000 for the purchase of certain assets with an approximate fair value of $250,000, and other intangibles, comprising future production rights, as well as technology and a covenant not to compete, with a total value of $8,750,000. On June 30, 2000, the Company entered into a non-exclusive, royalty-free agreement to license certain US and international patents and pending patents related to superconducting materials and devices. In connection with the agreement, the Company agreed to pay a lump sum fee payable in two installments. Additionally, the Company granted the licensor warrants to purchase 105,060 shares of the Company's Common Stock at a price of $18.98 per share. Total costs of $3,097,000 are included in Other Intangibles on the accompanying balance sheets. 62 The components of other intangibles are as follows: (Dollars in Thousands)
As of May 26, 2002 ------------------------------------------------------- Gross Carrying Accumulated Weighted Average Amount Amortization Life -------------- ------------ ------------------- Amortized Intangible Assets Production Rights $ 8,750 $3,845 5.5 Patents 3,832 674 17.9 Trade Name 960 264 20.0 Unpatented Technology 930 930 20.0 Other 33 33 5.0 ------- ------ ----- $14,505 $5,746 9.8 As of May 27, 2001 ------------------------------------------------------ Gross Carrying Accumulated Weighted Average Amount Amortization Life -------------- ------------ ------------------ Amortized Intangible Assets Production Rights $ 8,750 $2,253 5.5 Patents 3,944 430 17.9 Trade Name 960 216 20.0 Unpatented Technology 930 837 20.0 Other 71 29 5.0 ------- ------ ----- $14,655 $3,765 9.8
Aggregate amortization expense for the years ended May 26, 2002, May 27, 2001 and May 28, 2000 was $1,979,000 and $3,094,000 and $2,011,000, respectively. Estimated Amortization Expense: For the year ending May 2003 $1,817 For the year ending May 2004 $1,817 For the year ending May 2005 $1,817 For the year ending May 2006 $ 359 For the year ending May 2007 $ 225 All intangibles are amortized on a straight-line basis. The table below shows the effect on net income had FAS 142 been adopted in prior periods. (Dollars in Thousands, Except Per Share Amounts)
For the Years Ended ----------------------------------------- May 26, May 27, May 28, 2002 2001 2000 ----------------------------------------- Net income $ 20,589 $ 11,067 $ 6,452 Goodwill amortization 1,165 1,165 ---------- ---------- --------- Adjusted net income $ 20,589 $ 12,232 $ 7,617 ========== ========== ========= Basic earnings per share: Net income per common share $ 1.26 $ 0.72 $ 0.48 Effect of accounting change - 0.08 0.09 ---------- ---------- --------- Adjusted net income per common share $ 1.26 $ 0.80 $ 0.57 ========== ========== ========= Diluted earnings per share: Net income per common share $ 1.19 $ 0.67 $ 0.45 Effect of accounting change 0.07 0.08 ---------- ---------- --------- Adjusted net income per common share $ 1.19 $ 0.74 $ 0.53 ========== ========== =========
NOTE P - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES On May 28, 2001, the Company adopted the provisions of FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This standard requires that all derivative instruments be recognized on the balance sheet at their fair value and changes in fair value be recognized immediately in earnings, unless the derivatives qualify as hedges in accordance with the Standard. The change in fair value for those derivatives that qualify as hedges is recorded in shareholders' equity as other comprehensive income (loss). The Company has an interest rate swap which qualifies as a cash flow hedge as defined in the standard and accordingly, on the date of adoption, the Company recognized an initial transition adjustment of $128,000 which was recorded as a derivative liability and other comprehensive loss. During 2002 the fair value of the interest rate swap declined an additional $140,000. 63 INTERMAGNETICS GENERAL CORPORATION ---------------------------------- SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands) - ----------------------------------------------------------------------------------------------------------------------------------- COL. A COL. B COL. C COL. D COL. E - ----------------------------------------------------------------------------------------------------------------------------------- Additions --------------------------------- Balance at Charged to Charged to Beginning Costs and Other Accounts- Deductions- Balance at DESCRIPTION of Period Expenses Describe Describe End of Period - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended May 27, 2002 Deducted from asset accounts: Allowance for doubtful accounts $ 496 $ 230 $ 433 (3) $ 293 Reserve for inventory obsolescence 4,025 366 3,327 (5) 1,064 Included in liability accounts: Product warranty reserve 1,474 697 845 (1) 1,326 Contract adjustment reserve (4) 228 170 58 Year Ended May 27, 2001 Deducted from asset accounts: Allowance for doubtful accounts $ 478 $ 206 $ 188 (3) $ 496 Reserve for inventory obsolescence 10,470 1,725 8,170 (5) 4,025 Included in liability accounts: Product warranty reserve 2,059 458 1,043 (1) 1,474 Contract adjustment reserve (4) 221 7 228 Year Ended May 28, 2000 Deducted from asset accounts: Allowance for doubtful accounts $ 401 $ 166 $ 89 (3) $ 478 Reserve for inventory obsolescence 8,282 2,665 1,770 (7) 2,247 (5) 10,470 Included in liability accounts: Product warranty reserve 1,577 808 40 (2) 366 (1) 2,059 Contract adjustment reserve (4) 301 80 (6) 221 Upgrade Reserve (4) 40 40 (2) 0
(1) Cost of warranty performed. (2) Adjustments to accruals. (3) Write-off uncollectible accounts. (4) Classified in the Balance Sheet with other liabilities and accrued expenses. (5) Write-off or sale of obsolete inventory. (6) Cost to finalize contracts. (7) Restructuring charges 64 3. Exhibits 65 3. Exhibits Exhibit Index Exhibit - ------- 4.1 Form of Common Stock certificate 4.2 Loan and Agency Agreement among Intermagnetics General Corporation, IGC-APD Cryogenics Inc., IGC-Polycold Systems, Inc., IGC-Superpower, LLC, Medical Advances, Inc. and First Union National Bank and the other banks party hereto with First Union National Bank, as agent and JP Morgan Chase Bank, as successor to the Chase Manhattan Bank, as syndication agent and Keybank National Association, as documentation agent dated September 19, 2001 10.1 Employment Agreement dated July 23, 2002 between Intermagnetics General Corporation and Glenn H. Epstein 10.2 Employment Agreement dated October 19, 2001 between Intermagnetics General Corporation and Philip J. Pellegrino 21 Subsidiaries of the Company 23 Consent of Independent Auditors (PricewaterhouseCoopers LLP) 99.1 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. 99.2 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. EX-4.1 3 p319987_ex4-1.txt FORM OF COMMON STOCK CERTIFICATE Exhibit 4.1 NUMBER SHARES IGC IGC INTERMAGNETICS GENERAL CORPORATION CUSIP 458771 10 2 SEE REVERSE FOR CERTAIN DEFINITIONS INCORPORATED UNDER THE LAWS OF THE STATE OF NEW YORK THIS CERTIFIES that is the owner of FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK OF THE PAR VALUE OF $.10 EACH OF INTERMAGNETICS GENERAL CORPORATION transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to all the provisions of the Certificate of Incorporation, as amended, and of the By-laws of the Corporation (copies thereof being on file with the Secretary of the Corporation) and the holder hereof, accepting this certificate, expressly assents thereto. This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. WITNESS the seal of the Corporation and the facsimile signatures of its duly authorized officers Dated INTERMAGNETICS GENERAL CORPORATION Countersigned and Registered: CORPORATE AMERICAN STOCK TRANSFER COMPANY SEAL (New York, N.Y.) 1971 By Transfer Agent NEW YORK and Registrar Authorized Signature /s/ Michael Burke - ------------------------------------- Michael Burke Executive Vice President, Chief Financial Officer and Treasurer /s/ Glenn Epstein - ------------------------------------- Glenn Epstein President and Chief Executive Officer AMERICAN BANK NOTE COMPANY The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common TEN ENT - as tenants by the entireties JT TEN - as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT..........Custodian........ (Cash) (Shares) under Uniform Gifts to Minors Act........................ (State) Additional abbreviations may also be used though not in the above list. For Value received,..............hereby sell, assign and transfer unto ............................................................................ PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ............................................................................ Please print or typewrite name and address including postal zip code of assignee ............................................................................ ............................................................................ of the Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint..................................................... ............................................................................ Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated ............. ............................................. NOTICE: The signature to this assignment must correspond with the name as written upon the face of the Certificate, in every particular, without alteration or enlargement, or any change whatever. EX-4.2 4 p319987_ex4-2.txt LOAN AND AGENCY AGREEMENT Exhibit 4.2 LOAN AND AGENCY AGREEMENT among INTERMAGNETICS GENERAL CORPORATION IGC-APD CRYOGENICS INC. IGC-POLYCOLD SYSTEMS, INC. IGC-SUPERPOWER, LLC MEDICAL ADVANCES, INC. and FIRST UNION NATIONAL BANK AND THE OTHER BANKS PARTY HERETO with FIRST UNION NATIONAL BANK, as Agent and THE CHASE MANHATTAN BANK, as Syndication Agent and KEYBANK NATIONAL ASSOCIATION, as Documentation Agent September 19, 2001 LIST OF EXHIBITS: Exhibit A Form of Borrowing Notice Exhibit B Form of Covenant Compliance Certificate Exhibit 12.4 Form of Assignment LIST OF SCHEDULES: Schedule A Applicable Margin for LIBO Rate Loans and Prime Rate Loans Schedule 3.4(c) Borrowers' Investments Schedule 5.16 Financial Covenants Schedule 6.2 Existing Indebtedness LOAN AND AGENCY AGREEMENT THIS LOAN AND AGENCY AGREEMENT, dated as of September 19, 2001 (this "Agreement"), is entered into by and among INTERMAGNETICS GENERAL CORPORATION, a New York corporation ("IGC"), IGC-APD CRYOGENICS INC., a Pennsylvania corporation ("APD"), MEDICAL ADVANCES, INC., a Wisconsin corporation ("MA"), IGC-POLYCOLD SYSTEMS, INC., a Delaware corporation ("PSI") and IGC-SUPERPOWER, LLC, a New York limited liability company ("SP") (each, a "Borrower" and collectively, the "Borrowers"), the banking institutions signatories hereto and such other institutions that hereafter become a "Bank" pursuant to Section 12.4 hereof (each, a "Bank" and collectively, the "Banks"), FIRST UNION NATIONAL BANK, a national banking association ("First Union"), as agent for the Banks under this Agreement (in such capacity, the "Agent"), THE CHASE MANHATTAN BANK, a New York banking corporation ("Chase"), as syndication agent for the Banks under this Agreement (in such capacity, the "Syndication Agent") and KEYBANK NATIONAL ASSOCIATION, a national banking association ("Key"), as documentation agent for the Banks under this Agreement (in such capacity, the "Documentation Agent"). IN CONSIDERATION of the mutual covenants and undertakings herein contained and intending to be legally bound hereby, the parties hereto agree as follows: I. CERTAIN DEFINITIONS 1.1. Definitions. As used in this Agreement, the following terms shall have these meanings: "Additional Amount" shall have the meaning set forth in Section 2.1. "Affiliate" shall mean any Person: (1) which directly or indirectly controls, or is controlled by, or is under common control with any Borrower or any Subsidiary; (2) which directly or indirectly beneficially owns or holds ten percent (10%) or more of any class of voting stock of any Borrower or any Subsidiary; or (3) ten percent (10%) or more of the voting stock of which is, directly or indirectly, beneficially owned or held by any Borrower or any Subsidiary. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract, or otherwise. "Agreement" shall mean this Loan and Agency Agreement, as amended, supplemented, or modified from time to time, and all exhibits and schedules attached hereto. "Aggregate Revolving Loan Commitment" shall have the meaning set forth in Section 2.1. "Applicable Margin" shall mean the margin applicable to LIBO Rate Loans and Prime Rate Loans, determined in accordance with Schedule A hereto. "Business Day" shall mean any day other than a Saturday, Sunday, or other day on which commercial banks in New York are authorized or required to close under the laws of the State of New York and, if the applicable day relates to a LIBO Rate Loan, or notice with respect to a LIBO Rate Loan, a day on which dealings in Dollar deposits are also carried on in the London interbank market and banks are open for business in London ("London Business Day"). "Capitalized Lease" shall mean all lease obligations of any Person for any property (whether real, personal or mixed) which have been or should be capitalized on the books of the lessee in accordance with Generally Accepted Accounting Principles. "Closing Date" shall mean the date hereof. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and all rules and regulations with respect thereto in effect from time to time. "Commitment Percentage" shall mean with respect to each Bank, the percentage set forth opposite its name on the signature page hereof. "Covenant Compliance Certificate" shall mean a certificate, completed by the Chief Financial Officer of IGC on behalf of the Borrowers and submitted to the Agent, in the form of Exhibit B hereto. "Current Assets" shall mean, at any time, all assets which, in accordance with GAAP, should be classified as current assets of any Borrower. "Default Rate" on any Loan shall mean the lower of (i) 2% per annum above the Prime Rate; or (ii) the highest interest rate permitted by applicable law. "Dollars" shall mean the lawful currency of the United States of America. "EBITDA" shall mean, for any period, the sum (without duplication) of (i) Net Income, (ii) provision for taxes based on income, (iii) Interest Expenses, and (iv) to the extent Net Income has been reduced thereby, amortization expense, depreciation expense and other expenses not ultimately settled in cash, all as determined for the Borrowers on a consolidated basis in accordance with GAAP. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. "ERISA Affiliate" shall mean any corporation which is a member of the same controlled group of corporations as any Borrower within the meaning of Section 414(b) of the Code, or any trade or business which is under common control with any Borrower within the meaning of Section 414(c) of the Code. "Event of Default" shall have the meaning set forth in Section 7.1. 2 "Environmental Laws" shall mean the Federal Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.ss.ss.9601, et seq., the Federal Resource Conservation and Recovery Act, 42 U.S.C.ss.ss.6901, et seq., the Hazardous Materials Transportation Act, 49 U.S.C.ss.ss.1801, et seq., all other federal, state and local environmental or health laws applicable to any Borrower or its business, operations or assets now or hereafter enacted, and all rules, regulations, orders and publications adopted or promulgated pursuant thereto from time to time. "Federal Funds Rate" shall mean, for any day, the rate per annum (rounded, if necessary, to the nearest l/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day. "Guaranty" shall mean any guaranty or other agreement to be a surety or other contingent liability (other than any endorsement for collection or deposit in the ordinary course of business), direct or indirect, with respect to any obligation of another Person. "Generally Accepted Accounting Principles" or "GAAP" shall mean generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "Governmental Authority" shall mean the federal, state, county or municipal government or any department, agency, bureau or other similar type body obtaining authority therefrom or created pursuant to any laws, including, without limitation, Environmental Laws. "Indebtedness" shall mean any obligation for borrowed money, including, without limitation: (i) any obligation owed for all or any part of the purchase price of property or other assets or for the cost of property or other assets constructed or improvements thereto, other than accounts payable included in current liabilities and incurred in respect of property purchased in the ordinary course of business; and (ii) any Capitalized Lease obligation. "Interest Expenses" shall mean, for any period, the gross interest expense for the Borrowers on a consolidated basis for such period, as determined in accordance with GAAP. "Interest Period" shall mean, with respect to any LIBO Rate Loan, each period commencing on the date any such Loan is made or, with respect to a Loan being renewed, the last day of the next preceding Interest Period with respect to a Loan, and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day of the calendar month) in the first, second, third or sixth calendar month thereafter as selected under the procedures specified in Section 2.3, if the Banks are then offering LIBO Rate Loans for such period; provided that each LIBO Rate Loan Interest Period which would otherwise end on a day which is not a Business Day (or, for purposes of Loans to be repaid on a London Business Day, such day is not a London Business Day) shall end on the next succeeding Business Day (or London Business Day, as appropriate) unless such next succeeding Business Day (or London Business Day, as appropriate) falls in the next succeeding calendar month, in which case the Interest Period shall end on the next preceding Business Day (or London Business Day, as appropriate); provided, further, any LIBO Rate Loan of less than $2,000,000 shall have an Interest Period of one month. 3 "LIBO Rate" shall mean, for the applicable Interest Period, the rate, determined by the Agent two London Business Days prior to the date of the corresponding LIBO Rate Loan, at which the Agent is offered deposits in dollars as reported on Telerate page 3750 as of 1l:00 A.M. London time in an amount and for a period comparable to the amount and Interest Period of such Loan (or if not so reported, then as determined by Agent from another recognized source of interbank quotation). LIBO Rate shall be calculated on the basis of the number of days elapsed in a year of 360 days. "LIBO Rate Loans" shall mean Revolving Credit Loans accruing interest based on the LIBO Rate. "Lien" shall mean any lien, mortgage, security interest, chattel mortgage, pledge or other encumbrance (statutory or otherwise) of any kind securing satisfaction of an obligation, including any agreement to give any of the foregoing, any conditional sales or other title retention agreement, any lease in the nature thereof, and the filing of or the agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction or similar evidence of any encumbrance, whether within or outside the United States. "Loan" or "Loans" shall mean a Revolving Credit Loan or Revolving Credit Loans. "Loan Documents" shall mean this Agreement, the Notes, and each other agreement, document and instrument executed in connection herewith. "Multiemployer Plan" shall mean a multiemployer plan as defined in ERISA Section 4001 (a)(3), which covers employees of any Borrower or any ERISA Affiliate. "Net Income" shall mean for any period, the consolidated net income (or net loss) of the Borrowers, determined after provision for federal and state taxes based on income and in accordance with GAAP, excluding: (a) the proceeds of any insurance policy; (b) any gain or loss arising from: (1) the purchase, sale or other disposition of any assets, other than in the ordinary course of business (other than Current Assets); (2) any write-up of assets; or (3) the acquisition of outstanding securities representing Indebtedness of any Borrower, 4 (c) any earnings, prior to the date of acquisition, of any Person acquired in any manner, (d) any earnings or losses of a successor to or transferee of the assets of any Borrower prior to becoming such successor or transferee; (e) any deferred credit (or amortization of a deferred credit) arising from the acquisition of any Person; and (f) any other item constituting an extraordinary gain or loss under Opinions of the Accounting Principles Board No. 30; provided, however, the aggregate amount of any such extraordinary losses does not exceed $5,000,000 in any given fiscal year. Notwithstanding the foregoing, no charge against earnings will be excluded from Net Income if any such charge represents either (i) a disbursement of cash or (ii) a deferred disbursement of cash. "Notes" shall mean the Revolving Credit Notes. "Obligations" shall mean all now existing or hereafter arising debts, obligations, covenants, and duties of payment or performance of every kind, matured or unmatured, direct or contingent, owing, arising, due, or payable to the Banks or the Agent by or from the Borrowers or any Subsidiary arising out of this Agreement or any other Loan Document, including, without limitation, all obligations to repay principal of and interest on all the Revolving Credit Loans, and to pay interest, fees, costs, charges, expenses, professional fees, and all sums chargeable to the Borrowers or any Subsidiary or for which any Borrower or any Subsidiary is liable as indemnitor under the Loan Documents, whether or not evidenced by any note or other instrument. "Operating Lease" shall mean an operating lease as defined by Generally Accepted Accounting Principles, excluding all leases the expenses for which may be charged to a customer of any Borrower pursuant to the written terms of the contract with such customer. "Other Loan Agreements" shall mean all agreements, documents and instruments evidencing Indebtedness of any Borrower (other than this Agreement and any of the Loan Documents). "PBGC" shall mean the Pension Benefit Guaranty Corporation and any successor thereto. "Pension Plan" shall mean, at any time, any Plan (including a Multiemployer Plan), the funding requirements of which (under ERISA Section 302 or Code Section 412) are, or at any time within the six years immediately preceding the time in question were, in whole or in part, the responsibility of any Borrower or any ERISA Affiliate. "Permitted Acquisitions" shall mean acquisitions by the Borrowers, or any of them, of the assets and/or capital stock of other businesses and/or Persons for which cash consideration (net of any cash acquired directly by the Borrowers or retained by the entity that is acquired by the Borrowers as part of the acquisition transaction) is paid in an amount not to exceed $20,000,000 in the aggregate between the Closing Date and the Revolver Termination Date; provided, however, if such cash consideration is funded by the incurrence of Indebtedness by the Borrowers, or any of them, such Indebtedness must be in the form of Revolving Credit Loans or other debt instrument(s) satisfactory to the Banks; provided, further, the Loans shall only be used as cash consideration for acquisitions by the Borrowers, or any of them, of the assets and/or capital stock of another business and/or Person whose board of directors, members, managers or other governing body has approved such acquisition (i.e., "friendly" acquisitions). 5 "Person" shall mean any individual, corporation, partnership, limited liability company, joint venture, association, company, business trust or entity, or other entity of whatever nature. "Plan" shall mean an employee benefit plan as defined in Section 3(3) of ERISA, other than a Multiemployer Plan, whether formal or informal and whether legally binding or not. "Potential Default" shall mean an event, condition or circumstance that with the giving of notice or lapse of time or both would become an Event of Default. "Prime Rate" shall mean, for any day, the rate announced by First Union from time to time as its prime rate and is one of several interest rate bases used by First Union. First Union lends at rates both above and below First Union's Prime Rate, and Borrowers acknowledge that First Union's Prime Rate is not represented or intended to be the lowest or most favorable rate of interest offered by First Union. The Prime Rate shall be computed on the basis of the actual number of days elapsed in a year of 360 days. "Prime Rate Loans" shall mean Revolving Credit Loans accruing interest based on the Prime Rate. "Regulation" shall mean any statute, law, ordinance, regulation, order or rule of any United States or foreign, federal, state, local or other government or governmental body, including, without limitation, those covering or related to banking, financial transactions, securities, public utilities, environmental control, energy, safety, health, transportation, bribery, record keeping, zoning, anti-discrimination, antitrust, wages and hours, employee benefits, and price and wage control matters. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System, as it may be amended from time to time. "Regulatory Change" shall mean any change after the date of this Agreement in any Regulation (including Regulation D) or the adoption or making after such date of any interpretations, directives or requests of or under any Regulation (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof applying to a class of banks including any one of the Banks but excluding any foreign office of any Bank. "Reportable Event" shall mean, with respect to a Pension Plan: (a) Any of the events set forth in ERISA Sections 4043(b) (other than a reportable event as to which the provision of 30 days' notice to the PBGC is waived under applicable regulations) or 4063(a) or the regulations thereunder, (b) an event requiring any Borrower or any ERISA Affiliate to provide security to a Pension Plan under Code Section 401(a)(29) and (c) any failure by any Borrower or any ERISA Affiliate to make payments required by Code Section 412(m). 6 "Required Banks" at any time shall mean Banks whose Revolving Loan Commitments equal or exceed 51% of the total of such Revolving Loan Commitments if no Loans are outstanding or, if Loans are outstanding, Banks whose outstanding Loans equal or exceed 51% of the Loans; provided, however, that with respect to Sections 5.1, 5.11, 5.14, 5.16, 6.1, 6.2, 6.3, 6.4, 6.6, 6.7, 6.8, 6.10 and 8.1 of this Agreement, the term "Required Banks" shall mean Banks whose Revolving Loan Commitments equal 100% of the total of such Revolving Loan Commitments if no Loans are outstanding or, if Loans are outstanding, Banks whose outstanding Loans equal 100% of the Loans. "Revolver Termination Date" shall have the meaning set forth in Section 2.1. "Revolving Loan Commitment" shall have the meaning set forth in Section 2.1. "Revolving Credit Loan" or "Loan" shall have the meaning set forth in Section 2.1. "Revolving Credit Note" shall have the meaning set forth in Section 2.2. "Senior Indebtedness" shall mean (i) Indebtedness, excluding accounts payable and Subordinated Indebtedness; plus (ii) Capitalized Lease obligations. "Subordinated Indebtedness" shall mean, at any time, all Indebtedness of the Borrowers to "mezzanine" or similar lenders which is incurred with the consent of Required Lenders and subordinated to the Obligations on terms reasonably satisfactory to the Agent. "Subsidiary" shall mean a corporation or other entity, the shares of stock or other equity interests of which having ordinary voting power (other than stock or other equity interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors or other managers of such corporation are at the time owned, or the management of which is otherwise controlled, directly or indirectly through one or more intermediaries or both, by any Borrower. "Taxes" shall have the meaning set forth in Section 2.8. "Termination Event" shall mean, with respect to a Pension Plan: (a) a Reportable Event, (b) the termination of a Pension Plan or the filing of a notice of intent to terminate a Pension Plan, or the treatment of a Pension Plan amendment as a termination under ERISA Section 4041(c), (c) the institution of proceedings to terminate a Pension Plan under ERISA Section 4042 or (d) the appointment of a trustee to administer any Pension Plan under ERISA Section 4042. 1.2. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with Generally Accepted Accounting Principles consistent with those applied in the preparation of the Financial Statements referred to in Section 3.4, and all financial data submitted pursuant to this Agreement shall be prepared in accordance with such principles. 7 II. THE CREDIT 2.1. Revolving Credit Loans. (a) Subject to the terms and conditions hereof and in reliance upon the representations, warranties and covenants contained herein, each Bank agrees, severally and not jointly with the other Banks, to make revolving credit loans (collectively called the "Revolving Credit Loans" and each individually a "Revolving Credit Loan") to the Borrowers from time to time during the period commencing on the Closing Date and ending three (3) years following the Closing Date, or on any earlier date as provided in Section 2.6(b) or Section 8.1 hereof (the "Revolver Termination Date"), in principal amounts not to exceed at any time outstanding in the aggregate the amount set forth opposite the name of each such Bank on the signature page hereof (each such amount being hereinafter called such Bank's "Revolving Loan Commitment" and collectively, the Banks' "Aggregate Revolving Loan Commitment"). All Loans shall be made by the Banks simultaneously and pro rata in accordance with the Revolving Loan Commitments. The failure of any one or more of the Banks to make Revolving Credit Loans in accordance with its or their obligations shall not relieve the other Banks of their several obligations under this Section 2.1(a), but in no event shall the aggregate amount at any one time outstanding which any Bank shall be required to lend under this Section 2.1 (a) exceed the amount of such Bank's Revolving Loan Commitment at that time. (b) The Borrowers may request Revolving Credit Loans to bear interest at either the Prime Rate or LIBO Rate options described in Section 2.4. The Revolving Credit Loans outstanding at any one time may involve any combination of such interest rate options in such amounts as the Borrowers may determine, subject to the terms and conditions hereof, including the requirement concerning minimum Loan requests and the requirements that (i) no request may be made which would require more than one interest rate option or more than one Interest Period to apply to a single Revolving Credit Loan, and (ii) in the case of LIBO Rate Loans, no LIBO Rate Loan may have an Interest Period extending beyond the Revolver Termination Date. (c) Notwithstanding the foregoing, the Borrowers shall not be entitled to a Revolving Credit Loan if, after giving effect to such Revolving Credit Loan, the unpaid principal amount of the Revolving Credit Loans to the Borrowers exceeds the Aggregate Revolving Loan Commitment. (d) Except for Revolving Credit Loans which exhaust the full remaining amount of the Aggregate Revolving Loan Commitment and conversions which result in the conversion of all Revolving Credit Loans subject to a particular interest rate option, each of which may be in lesser amounts, each Loan when made and each conversion of Loans of one type into Loans of another type hereunder shall be in an amount at least equal to $500,000 or, if greater, then in such minimum amount plus $100,000 multiples. 8 (e) Within the limits of the Aggregate Revolving Loan Commitment, the Borrowers may borrow, prepay (in accordance with Section 2.7) and reborrow Revolving Credit Loans. All Revolving Credit Loans shall, in any event, be repaid by the Borrowers on the Revolver Termination Date. (f) If any principal of a LIBO Rate Loan shall be voluntarily repaid (whether upon prepayment, reduction of the Aggregate Revolving Loan Commitment after acceleration or for any other reason) or converted to a Prime Rate Loan pursuant to Section 2.10 prior to the last day of the Interest Period applicable to such LIBO Rate Loan or if the Borrowers fail for any reason to borrow a LIBO Rate Loan after giving irrevocable notice pursuant to Section 2.3, the Borrowers shall pay to each Bank, in addition to the principal and interest then to be paid, such additional amounts as may be necessary to compensate each Bank for all appropriate direct and indirect costs and losses (including losses resulting from redeployment of prepaid or unborrowed funds at rates lower than the cost of such funds to such Bank, and including lost profits incurred or sustained by such Bank) as a result of such repayment or failure to borrow (the "Additional Amount"). The Additional Amount (which each Bank shall take reasonable measures to minimize) shall be specified in a written notice or certificate delivered to the Borrowers by the Agent in the form provided by each Bank sustaining such costs or losses. Such notice or certificate shall contain a calculation in reasonable detail of the Additional Amount to be compensated and shall be conclusive as to the facts and the amounts stated therein, absent manifest error. 2.2. The Revolving Credit Notes. The Revolving Credit Loans made by each Bank shall all be evidenced by a single promissory note of the Borrowers (each such promissory note as it may be amended, extended, modified or renewed a "Revolving Credit Note") in principal face amount equal to such Bank's Revolving Loan Commitment, payable to the order of such Bank and otherwise in form and substance satisfactory to the Banks. The Revolving Credit Notes shall be dated the Closing Date, shall bear interest at the rate per annum and be payable as to principal and interest in accordance with the terms hereof. The Revolving Credit Notes shall mature upon the Revolver Termination Date, and upon maturity each outstanding Revolving Credit Loan evidenced thereby shall be due and payable. The Agent shall maintain records of all Loans evidenced by the Revolving Credit Notes and of all payments thereon, which records shall be conclusive absent manifest error. 2.3. Funding Procedures. (a) Each request for a Revolving Credit Loan or the conversion or renewal of an interest rate with respect to a Loan shall be made not later than 1l:00 a.m. on a Business Day by delivery to the Agent of a written request signed by IGC on behalf of the Borrowers or, in the alternative, a telephone request followed promptly by written confirmation of the request, specifying the date and amount of the Loan to be made, converted or renewed, selecting the interest rate option applicable thereto, and in the case of LIBO Rate Loans, specifying the Interest Period applicable to such Loan. The form of request attached hereto as Exhibit A ("Borrowing Notice") shall be used to request the making, conversion or renewal of Revolving Credit Loans unless otherwise agreed. Each request shall be received not less than one (1) Business Day prior to the date of the proposed borrowing, conversion or renewal in the case of Prime Rate Loans, and three (3) London Business Days prior to the date of the proposed borrowing, conversion or renewal in the case of LIBO Rate Loans. No request shall be effective until actually received in writing by the Agent. 9 (b) Upon receipt of a request for a Loan or the conversion of a Loan, and if the conditions precedent provided herein shall be satisfied at the time of such request the Agent promptly shall notify each Bank of such request and of such Bank's ratable share of such Loan. Upon receipt by the Agent the request for a Loan or the conversion of a Loan shall not be revocable by the Borrowers. (c) Not later than 11:00 A.M. on the date of each Loan, each Bank shall make available (except as provided in clause (d) below) its ratable share of such Loan, in immediately available funds, to the Agent at the address set forth in Section 12.6 hereof or at such account in London as the Agent shall specify to the Borrowers and the Banks. Unless the Agent knows that any applicable condition specified herein has not been satisfied, the Agent will make the funds so received from the Banks immediately available to the Borrowers on the date of each Loan by a credit to the account of the Borrowers at the Agent's aforesaid address. (d) Unless the Agent shall have been notified by any Bank at least one (1) Business Day prior to the date of the making, conversion or renewal of any LIBO Rate Loan, or by 3:00 P.M. on the date a Prime Rate Loan is requested, that such Bank does not intend to make available to the Agent such Bank's portion of the total amount of the Loan to be made, converted or renewed on such date, the Agent may assume that such Bank has made such amount available to the Agent on the date of the Loan and the Agent may, in reliance upon such assumption, make available to the Borrowers a corresponding amount. If and to the extent such Bank shall not have made such funds available to the Agent, such Bank agrees to repay the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrowers until the date such amount is repaid to the Agent, at the Federal Funds Rate plus 50 basis points. If such Bank shall repay to the Agent such corresponding amount such amounts so repaid shall constitute such Bank's Loan for purposes of this Agreement. If such Bank does not repay such corresponding amount forthwith upon the Agent's demand therefor, the Agent shall promptly notify the Borrowers, and the Borrowers shall within sixty (60) days of such notice pay such corresponding amount to the Agent, without any prepayment penalty or premium, but with interest on the amount repaid, for each day from the date such amount is made available to the Borrowers until the date such amount is repaid to the Agent, at the rate of interest applicable at the time to such Loan. Nothing herein shall be deemed to relieve any Bank of its obligation to fulfill its Revolving Loan Commitment hereunder or to prejudice any rights which the Borrowers may have against any Bank as a result of any default by such Bank hereunder. (e) If the Banks make a Loan on a day on which all or any part of an outstanding Loan from the Banks is to be repaid, each Bank shall apply the proceeds of its new Loan to make such repayment and only an amount equal to the difference (if any) between the amount being borrowed and the amount being repaid shall be made available by such Bank to the Agent as provided in clause (c). 10 2.4. Interest. (a) Prime Rate. Each Prime Rate Loan shall bear interest on the principal amount thereof from the date made until such Loan is paid in full or converted, at a rate per annum equal to the Prime Rate plus the Applicable Margin determined from time to time. (b) LIBO Rate. Each LIBO Rate Loan shall bear interest on the principal amount thereof from the date made until such Loan is paid in full, renewed, or converted, at a rate per annum equal to the applicable LIBO Rate plus the Applicable Margin determined from time to time. (1) After receipt of a request for a LIBO Rate Loan, the Agent shall proceed to determine the LIBO Rate to be applicable thereto. The Agent shall give prompt notice by telephone or facsimile to the Borrowers and to each Bank of the LIBO Rate thus determined in respect of each LIBO Rate Loan or any change therein. (2) In the event the Borrowers fail to, or are not permitted to, select an Interest Period for any LIBO Rate Loan within the time period and otherwise as provided herein, such Loan shall be automatically converted into a Prime Rate Loan on the last day of the Interest Period for such Loan. (c) Intentionally Omitted. (d) Renewals and Conversions of Loans. The Borrowers shall have the right to convert Prime Rate Loans into LIBO Rate Loans, and vice versa, and to renew LIBO Rate Loans from time to time, provided that: (i) IGC, on behalf of the Borrowers, shall give the Agent notice of each permitted conversion or renewal as provided in Section 2.3 hereof; (ii) upon receipt by Agent of any notice contemplated by (i) of this Section 2.4(d), Agent shall promptly give the Banks notice thereof, (iii) LIBO Rate Loans may be converted or renewed only as of the last day of the applicable Interest Period for such Loans; and (iv) no Interest Period may be renewed if on the proposed date of conversion an Event of Default, or Potential Default exists or would thereby occur. The Agent shall use its best efforts to notify the Borrowers of the effectiveness of each such conversion or renewal, and the new interest rate to-which the converted or renewed Loan is subject, as soon as practicable after the conversion; provided, however, that any failure to give such notice shall not affect the Borrowers' obligations or the Banks' rights and remedies hereunder in any way whatsoever. (e) Continuing Liability of Borrowers. The liability of the Borrowers under this Section 2.4 shall continue to be effective or be automatically reinstated, as the case may be, if at any time payment, in whole or in part, of any of the payments to the Banks is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Borrower or any other Person, or upon or as a result of the appointment of a custodian receiver, trustee or other officer with similar powers with respect to any Borrower or other Person or any substantial part of its property, or otherwise, all as though such payment had not been made. 11 2.5. Fees. The Borrowers shall pay to the Agent for the ratable benefit of the Banks, and as compensation for the Banks' Revolving Loan Commitments, a fee (the "Commitment Fee") computed at the rate per annum equal to 15 basis points (0.15%) on the average daily amount of the Aggregate Revolving Loan Commitment accrued from and after the date hereof. The Commitment Fee shall be payable in arrears on the first day of each January, April, July and October, commencing October 1, 2001 (for the three month period or portion thereof ended on the preceding day), and on the Revolver Termination Date. Payment shall be made to the Agent on behalf of the Banks and the Agent shall promptly forward to each Bank the portion of the Commitment Fee amount due such Bank. The Commitment Fee shall be calculated on the basis of a 360 day year. 2.6. Reduction or Termination of Aggregate Revolving Loan Commitment. (a) Voluntary. The Borrowers may at any time, on not less than three (3) Business Days' written notice, terminate or permanently reduce the Aggregate Revolving Loan Commitment pro rata among the Banks, provided that any reduction shall be in the amount of $1,000,000 a multiple thereof and that no such reduction shall cause the principal amount of Loans outstanding to exceed the Aggregate Revolving Credit Commitment as reduced. (b) Termination. In the event the Aggregate Revolving Loan Commitment is terminated pursuant to the terms of this Agreement, the Revolver Termination Date shall accelerate and the Borrowers shall, simultaneously with such termination, repay the Prime Rate Loans and LIBO Rate Loans in accordance with Section 2.8. 2.7. Voluntary Prepayments. (a) Prime Rate Loans: On one (1) Business Day's notice to the Banks, the Borrowers may, at their option, prepay the Prime Rate Loans in whole at any time or in part from time to time, provided that each partial prepayment shall be in the principal amount of $500,000 or, if greater, then in $100,000 multiples. (b) LIBO Rate Loans. The Borrowers may, at their option, prepay any LIBO Rate Loan, provided that if the Borrowers shall prepay a LIBO Rate Loan prior to the last day of the applicable Interest Period, or shall fail to borrow any LIBO Rate Loan on the date such Loan is to be made, the Borrowers shall pay to each Bank, in addition to the principal and interest then to be paid in the case of a prepayment, on such date of prepayment, the Additional Amount incurred or sustained by such Bank as a result of such prepayment or failure to borrow as provided in Section 2.1(f)). 2.8. Payments. (a) LIBO Rate Loans. Accrued interest on LIBO Rate Loans with Interest Periods of one, two or three months shall be due and payable on the last day of such Interest Period. Accrued interest on LIBO Rate Loans with Interest Periods of six months shall be due and payable at the end of the third month and on the last day of such Interest Period. 12 (b) Prime Rate Loans. Accrued interest on all Prime Rate Loans shall be due and payable on the first Business Day of each month and upon the Revolver Termination Date. (c) Form of Payments; Application of Payments; Payment Administration, Etc. Provided that no Event of Default or Potential Default then exists, all payments and prepayments shall be applied to the Loans in such order and to such extent as shall be specified by the Borrowers, by written notice to the Agent at the time of such payment or prepayment. Except as otherwise provided herein, all payments of principal, interest, fees, or other amounts payable by the Borrowers hereunder shall be remitted to the Agent on behalf of the Banks at the address set forth opposite its name on the signature page hereof or at such office or account as the Agent shall specify to the Borrowers and the Banks, in immediately available funds not later than 12:00 p.m. on the day when due. If any payment is made by the Borrowers pursuant to the previous sentence and is received by the Agent (i) at or prior to 12:00 p.m. on any Business Day, then on that same Business Day the Agent shall distribute to each Bank by wire transfer in immediately available funds each Bank's pro rata share of such payment based upon such Bank's Commitment Percentage or (ii) later than 12:00 p.m. on any Business Day, then on the immediately following Business Day the Agent shall distribute to each Bank by wire transfer in immediately available funds each Bank's pro rata share of such payment based upon such Bank's Commitment Percentage. Whenever any payment is stated as due on a day which is not a Business Day, the maturity of such payment shall, except as otherwise provided in the definition of "Interest Period" in Section 1.1, be extended to the next succeeding Business Day and interest and commitment fees shall continue to accrue during such extension. Each Borrower authorizes the Agent to deduct from any account of any Borrower maintained at the Agent or over which the Agent has control any amount payable under this Agreement, the Notes or any other Loan Document which is not paid in a timely manner. The Agent's failure to deliver any bill, statement or invoice with respect to amounts due under this Section or under any Loan Document shall not affect the Borrowers' obligations to pay any installment of principal, interest or any other amount under this Agreement when due and payable. (d) Net Payments. All payments made to the Banks and the Agent by the Borrowers hereunder, under any Note or under any other Loan Document will be made without set-off, counterclaim or other defense. All such payments will be made free and clear of, and without deduction or withholding for, any taxes, assessments or other charges lawfully levied or assessed upon any Borrower, including, without limitation, real and personal property taxes, assessments and charges and all franchise, income, employment, social security benefits, withholding and sales taxes, each of which shall be paid, when due and as applicable, by each Borrower. If any tax by any governmental authority is or may be imposed on or as a result of any transaction between any Borrower and Agent or any Bank which Agent or any Bank may be required to withhold or pay or if any taxes, assessments, or other charges remain unpaid after the date fixed for their payment, Agent may without notice to Borrowers pay the taxes, assessments or other charges and each Borrower hereby indemnifies and holds Agent and each Bank harmless in respect thereof. Agent will not pay any taxes, assessments or charges to the extent that any Borrower has contested or disputed those taxes, assessments or charges in good faith, by expeditious protest, administrative or judicial appeal or similar proceeding provided that any related tax lien is stayed. The amount of any payment by Agent under this Section 2.8(d) shall be charged to Borrowers as a Revolving Credit Loan and added to the Obligations and, until Borrowers shall furnish Agent with an indemnity therefor (or supply Agent with evidence satisfactory to Agent that due provision for the payment thereof has been made), Agent may hold without interest any balance standing to Borrowers' credit. 13 2.9. Changes in Circumstances: Yield Protection. (a) If any Regulatory Change or compliance by the Banks with any request made after the date of this Agreement by the Board of Governors of the Federal Reserve System or by any Federal Reserve Bank or other central bank or fiscal, monetary or similar authority (in each case whether or not having the force of law) shall: (i) impose, modify or make applicable any reserve, special deposit, Federal Deposit Insurance Corporation premium or similar requirement or imposition against assets held by, or deposits in or for the account of, or loans made by, or any other acquisition of funds for loans or advances by, the Banks; (ii) impose on the Banks any other condition regarding the Notes; (iii) subject the Banks to, or cause the withdrawal or termination of any previously granted exemption with respect to, any tax (including any withholding tax but not including any income tax not currently causing the Banks to be subject to withholding) or any other levy, impost, duty, charge, fee or deduction on or from any payments due from the Borrowers; or (iv) change the basis of taxation of payments from the Borrowers to the Banks (other than by reason of a change in the method of taxation of a Bank's net income); and the result of any of the foregoing events is to increase the cost to a Bank of making or maintaining any Loan or to reduce the amount of principal, interest or fees to be received by the Bank hereunder in respect of any Loan, the Agent will immediately so notify the Borrowers. If a Bank determines in good faith that the effects of the change resulting in such increased cost or reduced amount cannot reasonably be avoided or the cost thereof mitigated, then upon notice by the Agent to the Borrowers, the Borrowers shall pay to such Bank on each interest payment date of the Loan, such additional amount as shall be necessary to compensate the Bank for such increased cost or reduced amount. (b) If any Bank shall reasonably determine that any Regulation regarding capital adequacy or the adoption of any Regulation regarding capital adequacy, which Regulation is applicable to banks (or their holding companies) generally and not such Bank (or its holding company) specifically, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Bank (or its holding company) with any such request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has the effect of reducing the rate of return on such Bank's capital as a consequence of its obligations hereunder to a level below that which such Bank could have achieved but for such adoption, change or compliance (taking into consideration such Bank's policies with respect to capital adequacy) by an amount reasonably deemed by such Bank to be material, the Borrowers shall promptly pay to the Agent for the account of such Bank upon the demand of such Bank, such additional amount or amounts as will compensate such Bank for such reduction. 14 (c) If the Agent shall reasonably determine (which determination will be made after consultation with any Bank requesting same and shall be, in the absence of fraud or manifest error, conclusive and binding upon all parties hereto) that by reason of abnormal circumstances affecting the interbank eurodollar or applicable eurocurrency market, adequate and reasonable means do not exist for ascertaining the LIBO Rate to be applicable to the requested LIBO Rate Loan or that eurodollar or eurocurrency funds in amounts sufficient to fund all the LIBO Rate Loans are not obtainable on reasonable terms, the Agent shall give notice of such inability or determination by telephone to the Borrowers and to each Bank at least two (2) Business Days prior to the date of the proposed Loan and thereupon the obligations of the Banks to make, convert other Loans to, or renew such LIBO Rate Loan shall be excused, subject, however, to the right of the Borrowers at any time thereafter to submit another request. (d) Determination by a Bank for purposes of this Section 2.9 of the effect of any Regulatory Change or other change or circumstance referred to above on its costs of making or maintaining Loans or, on amounts receivable by it in respect of the Loans and of the additional amounts required to compensate such Bank in respect of any additional costs, shall be made in good faith and shall be evidenced by a certificate, signed by an officer of such Bank and delivered to the Borrowers, as to the fact and amount of the increased cost incurred by or the reduced amount accruing to the Bank owing to such event or events. Such certificate shall be prepared in reasonable detail and shall be conclusive as to the facts and amounts stated therein, absent manifest error. (e) The affected Bank will notify the Borrowers of any event occurring after the date of this Agreement that will entitle the Bank to compensation pursuant to this Section as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Said notice shall be in writing, shall specify the applicable Section or Sections of this Agreement to which it relates and shall set forth the amount of amounts then payable pursuant to this Section. The Borrowers shall pay such Bank the amount shown as due on such notice within 10 days after their receipt of the same. 2.10. Illegality. Notwithstanding any other provision in this Agreement, if the adoption of any applicable Regulation, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by the Banks with any request or directive (whether or not having the force of law) of any such authority, central bank, or comparable agency shall make it unlawful or impossible for the Banks to (1) maintain their Revolving Loan Commitments, then upon notice to the Borrowers by the Agent, the Revolving Loan Commitments shall terminate; or (2) maintain or fund their LIBO Rate Loans, then upon notice to the Borrowers of such event, the Borrowers' outstanding LIBO Rate Loans shall be converted into Prime Rate Loans. 15 2.11. Joint and Several Liability. Each Borrower, on a joint and several basis, unconditionally and irrevocably guarantees to each Bank the due, prompt and complete payment by each other Borrower of its payment of principal of and interest on each Revolving Credit Loan, when and as the same shall become due and payable, and any and all other amounts with respect to which any other Borrower is obligated under any Loan Document. The obligation of each Borrower under this Section 2.11 is a guaranty of payment and not of collectability and is no way conditioned or contingent upon any attempt to collect from or enforce compliance by any other Borrower or upon any other event, contingency or circumstance whatsoever. The obligation of each Borrower under this Section shall be primary, absolute and unconditional, shall not be subject to any counterclaim, set-off, deduction, diminution, abatement, recoupment, suspension, deferment, reduction, or defense based upon any claim any Borrower or any other Person may have against any other Borrower or any other Person, and shall remain in full force and effect without regard to, and shall not be released, discharged or in any way affected by, any circumstance or condition whatsoever (whether or not any Borrower shall have any knowledge or notice thereof). No Borrower shall be subrogated to the rights of the Banks in respect of any payment or other obligation with respect to which an amount has been payable by such Borrower under this Section 2.11 and no Borrower shall seek to exercise any rights of subrogation, reimbursement or indemnity arising from payments made by it pursuant to the provisions of this Section 2.11 until all Obligations have been paid in full and the Revolving Loan Commitments have been terminated. 2.12. Optional Cash Management Facility. Should the Borrowers, or any of them, utilize the cash management services of First Union, the Banks agree to allow $500,000 of the Revolving Loan Commitment of First Union to be dedicated to fund, on a daily basis, the cash management requirements of such Borrower(s), without allocating such borrowings among the Banks on a pro rata basis; provided, however, the minimum amount to be utilized by such Borrower(s) for cash management under this Section 2.12 shall be $100,000 and the interest rate applicable to such amounts shall be the interest rate applicable to Prime Rate Loans. III. REPRESENTATIONS AND WARRANTIES In order to induce the Banks to execute and deliver this Agreement and to make the Loans available to the Borrowers, the Borrowers, jointly and severally, represent and warrant to the Banks that: 3.1. Good Standing of the Borrowers: Authorization. Each of the Borrowers is duly incorporated, validly existing and in good standing in its jurisdiction of incorporation or formation. Each Borrower is duly qualified as a foreign corporation or limited liability company and authorized to do business in all other jurisdictions wherein the nature of its business or property makes such qualification necessary except where the failure to so qualify would not have a material adverse effect on the financial condition of such Borrower, and has the corporate or limited liability company power to own its properties and to carry on its business as now conducted. The execution, delivery and performance of this Agreement and the Loan Documents have been duly authorized by all necessary corporate or limited liability company proceedings on the part of each of the Borrowers. 16 3.2. Compliance with Laws and Other Agreements. Each Borrower is in compliance in all material respects with all Other Loan Agreements and Regulations applicable to such Borrower and has not received, and has no knowledge of, any order or notice of any governmental investigation or of any violation or claim of violation of any Other Loan Agreement or Regulation that might have a materially adverse effect on any Borrower. 3.3. No Conflict: Governmental Approvals. The execution, delivery, and performance of this Agreement and each of the Loan Documents will not (i) conflict with, violate, constitute a default under, or result in a breach of any provision of any applicable law, rule, regulation, judgment decree, order, instrument or other agreement, or (ii) conflict with or result in a breach of any provision of the certificate or articles of incorporation or by-laws or certificate of formation or operating agreement of any Borrower. No authorization, permit, consent or approval of or other action by, and no filing, registration or declaration with, any governmental authority or regulatory body is required to be obtained or made by any Borrower for the due execution and performance of this Agreement or any of the Loan Documents, except such as have been duly obtained or made prior to the Closing Date and are in full force and effect as of the Closing Date (copies of which have been delivered to the Banks on or before the Closing Date). 3.4. Financial and Other Information Regarding Borrowers. (a) The Borrowers have delivered to the Banks true, correct and complete copies of the consolidated balance sheets of IGC and its consolidated Subsidiaries as of May 27, 2001, and related statements of income for the period then ended, together with notes thereto and the unqualified opinion thereon, dated July 17, 2001, of Pricewaterhouse Coopers LLP. The Borrowers shall, upon request by the Agent, supply the Banks with true and correct copies of consolidating balance sheets of IGC and its consolidated subsidiaries for the aforementioned periods. Those financial statements and the notes thereto (together, the "Financial Statements") present fairly the financial position of IGC and its consolidated Subsidiaries as at such dates and the results of their operations for the periods then ended in conformity with GAAP. (b) As of the date of this Agreement, no Borrower has any Indebtedness other than as shown in the Financial Statements. (c) Except as set forth on Schedule 3.4(c) as of the date of this Agreement no Borrower has any "investment" (as such term is defined under GAAP), whether by stock purchase, capital contribution, loan, advance, purchase of property or otherwise, in any Person. 3.5. Taxes. No Borrower is delinquent in the payment of any material income, property or other tax, except for any delinquency in the payment of a tax which is contested in good faith by a Borrower and for which appropriate reserves have been established in accordance with GAAP. 3.6. Liens and Guaranties. (a) All properties and assets of each Borrower are owned by that Borrower free and clear of all Liens except (i) those for taxes or other government charges either not yet delinquent or the nonpayment of which is permitted by Section 3.5 of this Agreement; (ii) those not arising in connection with Indebtedness that do not materially impair the use or value of the properties or assets of that Borrower in the conduct of its businesses; (iii) Liens whose release and termination is evidenced by the Borrowers' delivery to the Banks of appropriate documents on the Closing Date; and (iv) Liens permitted under the Loan Documents. 17 (b) Except as permitted hereby, no Borrower is obligated under any Guaranty. 3.7. Material Adverse Changes. Since May 27, 2001, there has not been any material adverse change in the business, operations, properties or financial position of any of the Borrowers. No Borrower knows of any fact (other than matters of a general economic or political nature) which materially adversely affects, or, so far as that Borrower can now reasonably foresee, will materially adversely affect, the business, operations, properties or financial position of any Borrower or the performance by any Borrower of its obligations under this Agreement and the other Loan Documents. 3.8. Compliance with Federal Reserve Board Regulations. No part of the proceeds of the Loans will be used, directly or indirectly, for the purpose of purchasing or carrying any "margin security" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 C.F.R. 221), or for the purpose of purchasing or carrying or trading in any securities under such circumstances as to involve any Borrower in a violation of Regulation X of the said Board (12 C.F.R. 224). The assets of the Borrowers do not include any margin securities, and no Borrower has any present intention of acquiring any margin security. 3.9. ERISA. The provisions of each Plan maintained by any Borrower complies in all material respects with all applicable requirements of ERISA and of the Code, and with all applicable rulings and regulations issued under the provisions of ERISA and the Code setting forth those requirements. No Reportable Event has occurred with respect to any Plan; no Plan to which Section 4021 of ERISA applies has been terminated and no Plan has incurred any liability to PBGC as provided in Section 4062,4063 and 4064 of ERISA; no Plan has been involved in any prohibited transaction within the meaning of Section 406 of ERISA or Section 4975 of the Code; and no Termination Event has occurred. 3.10. Pending Litigation. There are no actions, suits, proceedings or investigations pending, or, to the knowledge of any of the Borrowers, threatened against or affecting any Borrower, before any court, arbitrator or administrative or governmental body which, in the aggregate, might adversely affect any action taken or to be taken by any Borrower under this Agreement and the other Loan Documents or which, in the aggregate, might materially adversely affect the business, operations, properties or financial position of any Borrower, or the ability of any Borrower to perform its obligations under this Loan Agreement and the other Loan Documents. 3.11. Valid, Binding and Enforceable. This Agreement and the Loan Documents have been duly and validly executed and delivered by the parties thereto (other than the Banks) and constitute the valid and legally binding obligations of such parties enforceable in accordance with their respective terms, except as enforcement of this Agreement, and the Loan Documents may be limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors' rights and except as enforcement is subject to general equitable principles. 18 3.12. No Untrue Statements. To the Borrowers' knowledge, neither this Agreement, the Loan Documents nor any other document, certificate or statement furnished or to be furnished by the Borrowers or by any other party to the Banks in connection herewith contains, or at the time of delivery will contain, any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements contained herein and therein not misleading. IV. CONDITIONS PRECEDENT 4.1. Conditions Precedent to All Loans. The obligation of each Bank to make any Loan is conditioned upon the following: (a) Documents. The Borrowers shall have delivered and the Agent shall have received a Borrowing Notice and all such other documents as may be reasonably requested by the Banks; provided, that if the Banks should request any such additional documents, the Borrowers shall have thirty (30) days following such request in which to deliver such additional documents to the Agent. (b) Covenants; Representations. Each Borrower shall be in compliance with all covenants, agreements and conditions in each Loan Document and each representation and warranty contained in each Loan Document shall be true with the same effect as if such representation or warranty had been made on the date such Loan is made or issued. (c) Defaults. Immediately prior to and after giving effect to such transaction, no Event of Default or Potential Default shall exist. 4.2. Conditions Precedent to First Loan. The obligation of each Bank to make the first Loan hereunder is conditioned upon the following: (a) Articles, Bylaws. The Agent shall have received copies of the Articles or Certificates of Incorporation and Bylaws or, if applicable, certificate of formation and operating agreement of each of the Borrowers, certified by the Corporate Secretary or Assistant Secretary of each such entity; together with a Certificate of Good Standing for each Borrower from any jurisdiction where the nature of its business or the ownership of its properties requires such qualification except where the failure to be so qualified would not have a material adverse effect on the business, operations, assets or condition (financial or otherwise) of the Borrowers and their Subsidiaries taken as a whole. (b) Evidence of Authorization. The Agent shall have received copies, certified by the Corporate Secretary or Assistant Corporate Secretary of each Borrower, of documentation that authorizes all corporate or other action taken by each Borrower to execute, deliver and perform the Loan Documents and that authorizes the Revolving Credit Loans, together with such other related papers as the Banks shall reasonably require. (c) Incumbency. The Agent shall have received a certificate signed by the Secretary or Assistant Secretary of each signatory to the Loan Documents other than a Bank, together with the true signature of the officer or officers authorized to execute and deliver the Loan Documents and certificates thereunder, upon which the Banks shall be entitled to rely conclusively until the Agent shall have received a further certificate of the appropriate secretary or assistant secretary amending the prior certificate and submitting the signature of the officer or officers named in the new certificate as being authorized to execute and deliver Loan Documents and certificates thereunder, 19 (d) Notes. Each Bank shall have received an executed Note payable to the order of such Bank. (e) Documents. The Agent shall have received all certificates, instruments and other documents then required to be delivered pursuant to any Loan Documents, in each instance in form and substance reasonably satisfactory to the Agent and the Banks. (f) Consents. The Borrowers shall have provided to the Agent evidence satisfactory to the Agent that all governmental, shareholder, member and third party consents and approvals necessary in connection with the transactions contemplated hereby have been obtained and remain in effect. (g) Other Agreements. The Borrowers shall have executed and delivered each other Loan Document required hereunder. (h) Borrowing Notice. The Borrowers shall have delivered and the Agent shall have received a Borrowing Notice, which shall, at a minimum, set forth the information regarding the conversion of the Existing Indebtedness into a Prime Rate Loan or a LIBO Rate Loan. (i) Fees. The Borrowers shall have paid all fees required as of the Closing Date by Section 2.5 hereof. (j) Legal Opinion. The Agent shall have received a favorable written opinion of general counsel to the Borrowers, which shall be addressed to the Banks and be dated the date of the first Loan, in form and substance satisfactory to the Banks. V. AFFIRMATIVE COVENANTS The Borrowers, jointly and severally, hereby covenant and agree that, from and after the date hereof and so long as the Revolving Loan Commitments are in effect or any Obligations remain unpaid or outstanding, unless the Required Banks have otherwise consented in writing, the Borrowers shall do the following: 5.1. Use of Proceeds. Use the proceeds of the Loans only for working capital and Permitted Acquisitions. 5.2. Accounting Records, Reports and Financial Statements. Furnish to the Agent: (a) Within one hundred and five (105) days after the end of each fiscal year, IGC's Form 10-K filed with the Securities and Exchange Commission for that year, including consolidated financial statements of IGC and the other Borrowers. Such financial statements shall present fairly the consolidated financial position of IGC and the other Borrowers as of the close of such year and the results of its operations and changes in its financial position during such year, in accordance with GAAP, and shall be audited and accompanied by the unqualified opinion of an independent public accountant acceptable to the Banks. With each Form 10-K delivered to the Banks, the Borrowers shall, upon request by the Agent, supply, as supplemental information, unaudited consolidating financial statements of the Borrowers used in the preparation of such Form 10-K; 20 (b) Within sixty (60) days after the end of each fiscal quarter, IGC's Form 10-Q filed with the Securities and Exchange Commission for that quarter, including unaudited consolidated financial statements of IGC and the other Borrowers. Such financial statements shall present fairly the financial position of the Borrowers as of the end of such quarter and the results of their operations and changes in their financial position during each quarter in accordance with GAAP. With each Form 10-Q delivered to the Banks, IGC, on behalf of all Borrowers, shall, upon request by the Agent, supply, as supplemental information, consolidating financial statements of the Borrowers used in the preparation of such Form 10-Q; (c) With reasonable promptness, and when reasonably requested by the Banks unless any Borrower's compliance with such request would conflict with any law, regulation or contractual obligation applicable to such Borrower, copies of all financial reports, statements and returns which each Borrower shall file with any federal or state department, commission, board, bureau, agency or instrumentality and any report, statement or return delivered by any Borrower to any supplier or other creditor which is material to that Borrower's operations or financial condition; (d) Within sixty (60) days after the end of each fiscal quarter, a complete and fully-executed Covenant Compliance Certificate; (e) With reasonable promptness but in any event within ten (10) days after the filing by any Borrower of a Form 8-K with the Securities and Exchange Commission, a copy of any such filing; and (f) All such other documents and information as may be reasonably requested by the Banks, within thirty (30) days following any such request by the Banks. 5.3. Ordinary Course of Business: Records. Conduct its business only in the ordinary course and keep accurate and complete books and records of its assets, liabilities and operations consistent with sound business practices and in accordance with GAAP. 5.4. Information for the Agent. Make available during normal business hours for inspection by the Agent and any Bank, or their designated representatives, any of their books and records when reasonably requested by the Agent or any Bank to do so, and furnish the Agent and any Bank with any information reasonably requested regarding their operations, business affairs and financial condition within a reasonable time after the Agent or any Bank gives notice of its request therefor. In particular, and without limiting the foregoing, each Borrower shall permit, during normal business hours, representatives of the Agent's Audit Department or any Bank to make such periodic inspections of its books, records and assets as such representatives deem necessary and proper. The first two sentences of this Section 5.4 notwithstanding, no Borrower shall be required to disclose any information which such Borrower is required by law, regulation or contractual obligation to maintain confidential, and the Agent and each Bank shall use its best efforts to coordinate the timing of any inspections made pursuant to this Section in order to minimize any resultant disruption of the Borrowers' businesses. 21 5.5. Insurance. Carry and maintain, in full force and effect at all times with financially sound and reputable insurers: (i) all workers' compensation or similar insurance as may be required under the laws of any jurisdiction applicable to such Borrower; (ii) public liability insurance against claims for personal injury, death or property damage suffered upon, in or about any premises occupied by them or occurring as a result of the ownership, maintenance or operation by them of any automobile, truck or other vehicle or as a result of the use of products manufactured, constructed or sold by them, or services rendered by them; (iii) business interruption insurance covering risk of loss as a result of the cessation for all or any part of one year of any substantial part of the business conducted by them; (iv) insurance against such other risks as are usually insured against by business entities of established reputation engaged in the same or similar businesses and similarly situated. The insurance specified in clauses (ii), (iii), and (iv) shall be maintained in such amounts (and with co-insurance and deductibles) as such insurance is usually carried by business entities of established reputation engaged in the same or similar business and similarly situated. 5.6. Maintenance. Maintain their equipment, real property and other properties in good condition and repair (normal wear and tear excepted) and pay and discharge the cost of repairs thereto or maintenance thereof other than idle equipment no longer used or useful, in connection with the Borrowers' operations. 5.7. Taxes. Pay all taxes, assessments, charges and levies imposed upon them or on any of their property, or which they are required to withhold and pay over, and provide evidence of payment thereto to the Banks if the Banks so request, except where contested in good faith by lawful and appropriate proceedings and where adequate reserves therefor have been set aside on their books; provided, however, that each Borrower shall pay all such taxes, assessments, charges and levies forthwith whenever foreclosure on any lien which attaches or security therefor appears imminent. 5.8. Leases. Pay all rent or other sums required by every lease to which any Borrower is a party as the same become due and payable; perform all their obligations as tenant or lessee thereunder except where contested in good faith by lawful and appropriate proceedings and where adequate reserves therefor have been set aside; and keep all such leases at all times in full force and effect during the terms thereof. 5.9. Existence; Certain Rights; Laws. Do all things necessary to preserve and keep in full force and effect the existence, licenses, rights, patents, trademarks, trade names and franchises of each Borrower (except that any Borrower may merge into or consolidate with another Borrower as long as the Agent receives written notice prior thereto) and comply with all present and future laws, ordinances, rules and regulations applicable to them in the operation of their businesses; provided, however, that a Borrower may terminate any patent, trademark or license and other rights conferred by jurisdictions outside the United States as long as such Borrower's business judgment requires such termination. 22 5.10. Notice of Litigation. Give immediate notice to the Agent of the institution of any litigation or any administrative proceeding involving any Borrower which might materially and adversely affect the operation, financial condition, property or business of any Borrower, individually, or the Borrowers as a whole. 5.11. Indebtedness. Jointly and severally, pay or cause to be paid when due (or within applicable grace periods) all Indebtedness of the Borrowers. 5.12. Notice of Events of Default. Give immediate notice to the Agent if any Borrower becomes aware of the occurrence of any Event of Default or Potential Default, or of the failure of any Borrower to observe or perform any of the conditions or covenants to be observed or performed by it under this Agreement. 5.13. ERISA. Maintain each Plan in compliance with all applicable requirements of ERISA and of the Code and with all applicable rulings and regulations issued under the provisions of ERISA and of the Code. As promptly as practicable (but in any event not later than ten days) after any Borrower receives from the PBGC a notice of intent to terminate any Plan or to appoint a trustee to administer any Plan, after a Borrower has notified the PBGC that any Reportable Event has occurred, or after a Borrower has filed a notice of intent to terminate with the PBGC with respect to any Plan, a certificate of the chief executive officer of that Borrower shall be furnished to the Agent setting forth the details with respect to the events resulting in such Reportable Event, as the case may be, and the action which such Borrower proposes to take with respect thereto, together with a copy of the notice of intent to terminate or to appoint a trustee from the PBGC, of the notice of such Reportable Event or of a Borrower's notice of intent to terminate, as the case may be. 5.14. Deposit Accounts. Use the Banks as their primary depository institutions to the extent reasonably feasible. 5.15. Management. Furnish to the Agent within thirty (30) days of any election or appointment of officers or directors, written notice of any change in the persons who from time to time become officers and directors of each Borrower. 5.16. Financial Covenants. Observe the financial covenants set forth on Schedule 5.16 hereto; provided, however, that the financial covenants set forth in Schedule 5.16 shall supersede any financial covenants set forth in any other agreement between First Union and any of the Borrowers. VI. NEGATIVE COVENANTS The Borrowers, jointly and severally, hereby covenant and agree that, from and after the date hereof, and so long as the Revolving Loan Commitments are in effect or any Obligations remain unpaid or outstanding, they will not do any one or more of the following without first obtaining the written consent of the Required Banks: 23 6.1. Fundamental Corporate Changes. (a) Enter into any merger, consolidation, reorganization or recapitalization, or dissolve, provided that any Borrower may merge into or consolidate with another Borrower; (b) Sell, transfer, lease or otherwise dispose of all or (except in the ordinary course of business) any material part of any Borrower's assets or any significant product line or process of any Borrower; or (c) Have any Subsidiary; provided, however, that IGC may have the other Borrowers as its Subsidiaries and any Borrower may have a Subsidiary as long as such Subsidiary becomes a party to this Agreement, and subject to its terms. 6.2. Indebtedness. Incur, create, assume or have any Indebtedness except (i) existing Indebtedness set forth on Schedule 6.2 attached hereto, (ii) Indebtedness incurred pursuant to this Agreement, and (iii) purchase money Indebtedness for the acquisition of non-current assets following the date of this Agreement; provided, however, that the aggregate of any Indebtedness incurred from time to time pursuant to clauses (i) and (iii) of this Section shall not exceed $20,000,000. 6.3. Liens. Create or allow any Lien to be on or otherwise affect any Borrower's property or assets except: (a) Liens in favor of the Agent on behalf of the Banks; (b) Liens for taxes, assessments and other governmental charges incurred in the ordinary course of business which are not yet due and payable or which are being properly contested in good faith by lawful and appropriate proceedings; (c) Pledges or deposits made in the ordinary course of business to secure payment of worker's compensation or to participate in any fund in connection with worker's compensation, unemployment insurance or other social security obligations; (d) Good faith pledges or deposits made in the ordinary course of business to secure performance of tenders, contracts (other than for the repayment of Indebtedness) or leases or to secure statutory or surety, appeal, indemnity, performance or other similar bonds required in the ordinary course of business; (e) Liens of mechanics, materialmen, warehousemen, carriers or other similar liens, securing obligations incurred in the ordinary course of business that are not yet due and payable or are being contested in good faith by appropriate and lawful proceedings; (f) Liens, if any, otherwise expressly permitted by this Agreement. 24 (g) Liens in connection with or resulting from judgments permitted pursuant to Section 7.16 of this Agreement. 6.4. Guaranties. Except for a guaranty of Indebtedness of another Borrower or other guaranties of indebtedness not to exceed $l,000,000 in the aggregate, directly or indirectly make any Guaranty. 6.5. Sales and Lease-Backs. Sell, transfer or otherwise dispose of any property, real or personal, now owned or hereafter acquired, with the intention of directly or indirectly taking back a lease on such property which cumulatively in the aggregate has a fair market value in excess of $10,000,000. 6.6. Loans; Investments. Purchase, invest in, or make any loan in the nature of an investment in the stocks, bonds, notes or other securities or evidence of Indebtedness of any Person (other than another Borrower) or make any loan or advance to or for the benefit of any Person (other than to another Borrower), except for (i) short term (less than one year) loans and advances to employees in the ordinary course of business, provided that at no time after the Closing Date and prior to the Revolver Termination Date shall the aggregate amount of such loans and advances together with any loans or advances made pursuant to Section 6.6(ii) of this Agreement exceed $10,000,000, (ii) loans and advances to executives of any Borrower for purposes of buying shares of stock in such Borrower, provided that no Event of Default has occurred and is continuing and that at no time after the Closing Date and prior to the Revolver Termination Date shall the aggregate amount of such loans and advances together with any loans or advances made pursuant to Section 6.6(i) of this Agreement exceed $10,000,000, (iii) short term obligations of the Treasury of the United States of America; (iv) certificates of deposit issued by banks with shareholders' equity of at least $100,000,000; (v) repurchase agreements not exceeding 29 days in duration by banks with shareholders' equity of at least $100,000,000; (vi) notes and other instruments generally known as "commercial paper" which arise out of current transactions, which have maturities at the time of issuance thereof not exceeding nine months and which have, at the time of such purchase, investment or other acquisition, either of the two highest credit ratings of Standard & Poor's Corporation or Moody's Investors Service, Inc.; (vii) other investments in an aggregate amount not to exceed $5,000,000 at any one time except those investments made prior to closing and set forth on Schedule 3.4(c); and (viii) Permitted Acquisitions. 6.7. Change in Business. Discontinue any substantial part, or change the nature of, the business of IGC and its Subsidiaries taken as a whole or enter into any new business unrelated to the present business conducted by IGC and its Subsidiaries, taken as a whole. 6.8. Sale or Discount of Receivables. Sell any notes receivable or account receivable, with or without recourse. 6.9. ERISA. (a) Terminate any Plan maintained by any Borrower to which Section 4021 of ERISA applies without the Required Banks' prior written consent, such consent not to be unreasonably withheld; 25 (b) Allow the value of the benefits guaranteed under Title IV of ERISA to exceed the value of assets allocable to such benefits; or (c) Incur a withdrawal liability within the meaning of Section 4201 of ERISA. 6.10. Restricted Payments. Declare or pay any dividend (except stock dividends), or make any distributions of cash or property, to holders of any shares of its capital stock, or, directly or indirectly, redeem or otherwise acquire any such shares of any Borrower, provided, however, that: (i) payments of one Borrower to another Borrower shall be permitted (as long as the recipient Borrower holds shares of the payee Borrower's stock); (ii) IGC may pay cash dividends in any fiscal year in an amount not exceeding its Net Income for the preceding fiscal year, and (iii) IGC may make payments pursuant to its existing stock buy-back program. VII. DEFAULT The Borrowers shall be in default if any one or more of the following events (each an "Event of Default") occurs and is continuing, whatever the reason therefor: 7.1. Borrowers' Failure to Pay. The Borrowers jointly or severally fail to pay (a) any amount of principal as and when due under this Agreement or any of the Loan Documents, whether upon stated maturity, acceleration, or otherwise and (b) interest, fees or other sums as and when due under this Agreement or any of the Loan Documents, whether upon stated maturity, acceleration, or otherwise and have not remedied and fully cured such failure to pay within ten (10) Business Days after the date such payment is so due. 7.2. Breach of Covenants or Conditions. The Borrowers, individually or collectively, fail to perform or observe any term, any affirmative covenant, any agreement or any condition in this Agreement or any of the other Loan Documents or are in violation of or non-compliance with any provision of this Agreement or any of the Loan Documents, and have not remedied and fully cured such non-performance, non-observance, violation of or non-compliance within thirty (30) days after the Agent has given written notice thereof to the Borrowers; provided, however, that during such thirty (30) day period the Banks' obligations to make further Loans to the Borrowers shall be suspended; provided, further, that a failure to observe Section 5.16 of this Agreement or any negative covenant in this Agreement or any of the other Loan Documents shall constitute an immediate Event of Default. 7.3. Defaults in Other Agreements. The Borrowers, individually or collectively, fail to perform or observe any material term, covenant, agreement or condition contained in any other agreement applicable to the Borrowers (except for financial covenants contained in any other agreement between First Union and any of the Borrowers that are superseded by the financial covenants set forth on Schedule 5.16) or by which they are individually or collectively bound involving a material liability of any Borrower which shall not be remedied within the period of time (if any) within which such other agreement permits such default to be remedied, unless such default is waived by the other party thereto or excused as a matter of law. 26 7.4. Agreements Invalid. The validity, binding nature of, or enforceability of any material term or provision of any of the Loan Documents is disputed by, on behalf of, or in the right or name of any Borrower or any material term or provision of any such Loan Document is found or declared to be invalid, avoidable, or non-enforceable by any court of competent jurisdiction. 7.5. False Warranties; Breach of Representations. Any warranty or representation made by the Borrowers, individually or collectively, in this Agreement or any other Loan Document or in any certificate or other writing delivered under or pursuant to this Agreement or any other Loan Document, or in connection with any provision of this Agreement or related to the transactions contemplated hereby shall prove to have been false or incorrect or breached in any material aspect on the date as of which made. 7.6. Judgments. A final judgment or judgments (except those covered by insurance) is entered, or an order or orders of any judicial authority or governmental entity is issued against the Borrowers, individually or collectively, (such judgment(s) and order(s) hereinafter collectively referred to as "Judgment") (i) for payment of money, which Judgment, in the aggregate, exceeds One Million Dollars ($1,000,000.00) outstanding at any one time; or (ii) for injunctive or declaratory relief which would have a material adverse effect on the ability of any Borrower individually or the Borrowers as a whole to conduct their business, and such Judgment is not discharged or execution thereon or enforcement thereof stayed pending appeal, within thirty (30) days after entry or issuance thereof or, in the event of such a stay, such Judgment is not discharged within thirty (30) days after such stay expires. 7.7. Bankruptcy or Insolvency of a Borrower. (a) A Borrower becomes insolvent, or generally fails to pay, or is generally unable to pay, or admits in writing its inability to pay, its debts as they become due or applies for, consents to, or acquiesces in, the appointment of a trustee, receiver or other custodian for it or a substantial part of its property, or makes a general assignment for the benefit of creditors. (b) A Borrower commences any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any state or federal bankruptcy or insolvency law, or any dissolution or liquidation proceeding. (c) Any bankruptcy, reorganization, debt arrangement, or other case or proceeding under any state or federal bankruptcy or insolvency law, or any dissolution or liquidation proceeding, is involuntarily commenced against or in respect of a Borrower, which is not dismissed within forty-five (45) days, or an order for relief is entered in any such proceeding. (d) A trustee, receiver, or other custodian is appointed for a Borrower or a substantial part of its property. VIII. REMEDIES 8.1. Further Advances; Acceleration; Setoff. 27 (a) Upon the occurrence of any one or more Events of Default, the Agent shall, upon the written request of the Required Banks, terminate the Revolving Loan Commitments and refuse to make any further advances or Loans to the Borrowers. (b) Automatically upon the occurrence of any Event of Default described in Section 7.7 of this Agreement, and in the sole discretion of the Required Banks upon the occurrence of any other Event of Default, the unpaid principal balance of all Loans, all interest and fees accrued and unpaid thereon, and all other amounts and Obligations payable by the Borrowers under this Agreement and the other Loan Documents shall immediately become due and payable in full, all without protest, presentment, demand, or further notice of any kind to the Borrowers, all of which are expressly waived by the Borrowers. (c) If any one or more Events of Default shall have occurred, the Banks, any affiliate of any Bank and any other participant in the Loans shall have the right, in addition to all other rights and remedies available to them, without notice to the Borrowers, to apply toward and set-off against and apply to the then unpaid balance of the Notes and the other Obligations any items or funds held by any Bank or any such affiliate or participant, any and all deposits (whether general or special, time or demand, matured or unmatured, fixed or contingent, liquidated or unliquidated) now or hereafter maintained by any Borrower for its own account with any Bank or any such affiliate or participant, and any other indebtedness at any time held or owing by any Bank or any such affiliate or participant, to or for the credit or the account of such Borrowers. For such purpose, the Banks and any such affiliate or participant shall have, and each Borrower hereby grants to the Banks and any such affiliate or participant, a first lien on all such deposits. The Banks and any such affiliate or participant are hereby authorized to charge any such account or indebtedness for any amounts due to the Banks and any such affiliate or participant. Such right of set-off shall exist whether or not the Banks shall have made any demand under this Agreement, the Notes or any other Loan Document and whether or not the Notes and the other Obligations are matured or unmatured. Each Borrower hereby confirms the Banks' and any such affiliate's or participant's lien on such accounts and right of set-off, and nothing in this Agreement shall be deemed any waiver or prohibition of such lien and right of set-off. (d) Any date on which the Loans and such other obligations are declared due and payable pursuant to this Section shall be the Revolver Termination Date for purposes of this Agreement. Prior to the Revolver Termination Date, so long as an Event of Default shall have occurred and be continuing, and at all times after the Revolver Termination Date the Loans shall bear interest at the Default Rate. 8.2. Further Remedies. Upon the occurrence of any one or more Events of Default, the Agent and the Banks may proceed to protect and enforce their rights under this Agreement and the other Loan Documents by exercising such remedies as are available to the Agent and the Banks in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any provision contained in this Agreement or any of the other Loan Documents or in aid of the exercise of any power granted in this Agreement or any of the other Loan Documents. 28 IX. AGENT 9.1. Appointment and Authorization. Each Bank hereby irrevocably appoints and authorizes the Agent to take such action on its behalf and to exercise such powers under this Agreement and the Loan Documents as are specifically delegated to the Agent by the terms hereof or thereof, together with such other powers as are reasonably incidental thereto. The relationship between the Agent and each Bank has no fiduciary aspects, and the Agent's duties (as Agent) hereunder are acknowledged to be only ministerial and not involving the exercise of discretion on its part. Nothing in this Agreement or any Loan Document shall be construed to impose on the Agent any duties or responsibilities other than those for which express provision is made herein or therein. In performing its duties and functions hereunder, the Agent does not assume and shall not be deemed to have assumed, and hereby expressly disclaims, any obligation with or for the Borrowers. As to matters not expressly provided for in this Agreement or any Loan Document, the Agent shall not be required to exercise any discretion or to take any action or communicate any notice, but shall be fully protected in so acting or refraining from acting upon the instructions of the Required Banks and their respective successors and assigns; provided, however, that in no event shall the Agent be required to take any action which exposes it to personal liability or which is contrary to this Agreement, any Loan Document or applicable law, and the Agent shall be fully justified in failing or refusing to take any action hereunder unless it shall first be specifically indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or omitting to take any such action. If an indemnity furnished to the Agent for any purpose shall, in the reasonable opinion of the Agent, be insufficient or become impaired, the Agent may call for additional indemnity from the Banks and not commence or cease to do the acts for which such indemnity is requested until such additional indemnity is furnished. 9.2. Duties and Obligations. In performing its functions and duties hereunder on behalf of the Banks, the Agent shall exercise the same care and skill as it would exercise in dealing with loans for its own account. Neither the Agent nor any of its directors, officers, employees or other agents shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement or any Loan Document except for its or their own gross negligence or willful misconduct. Without limiting the generality of the foregoing, the Agent (a) may consult with legal counsel and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith and in accordance with the advice of such experts; (b) makes no representation or warranty to any Bank as to, and shall not be responsible to any Bank for, any recital, statement, representation or warranty made in or in connection with this Agreement, any Loan Document or in any written or oral statement (including a financial or other such statement), instrument or other document delivered in connection herewith or therewith or furnished to any Bank by or on behalf of any Borrower, (c) shall have no duty to ascertain or inquire into any Borrower's performance or observance of any of the covenants or conditions contained herein or to inspect any of the property (including the books and records) of any Borrower or inquire into the use of the proceeds of the Revolving Credit Loans or (unless the officers of the Agent active in their capacity as officers of the Agent on the Borrowers' account have actual knowledge thereof or have been notified in writing thereof) to inquire into the existence or possible existence of any Event of Default or Potential Default; (d) shall not be responsible to any Bank for the due execution, legality, validity, enforceability, effectiveness, genuineness, sufficiency, collectability or value of this Agreement or any other Loan Document or any instrument or document executed or issued pursuant hereto or in connection herewith, except to the extent that such may be dependent on the due authorization and execution by the Agent itself; (e) except as expressly provided herein in respect of information and data furnished to the Agent for distribution to the Banks, shall have no duty or responsibility, either initially or on a continuing basis, to provide to any Bank any credit or other information with respect to any Borrower, whether coming into its possession before the making of the Loans or at any time or times thereafter; and (f) shall incur no liability under or in respect of this Agreement or any other Loan Document for, and shall be entitled to rely and act upon, any notice, consent, certificate or other instrument or writing (which may be by facsimile (telecopier), telegram, cable, or other electronic means) believed by it to be genuine and correct and to have been signed or sent by the proper party or parties. 29 9.3. The Agent as a Bank. With respect to its Revolving Loan Commitment and the Loans made and to be made by it, the Agent shall have the same rights and powers under this Agreement and all other Loan Documents as the other Banks and may exercise the same as if it were not the Agent. The terms "Bank" and "Banks" as used herein shall, unless otherwise expressly indicated, include the Agent in its individual capacity. The Agent and any successor Agent which is a commercial bank, and their respective affiliates, may accept deposits from, lend money to, act as trustee under indentures of and generally engage in any kind of business with, the Borrowers and their affiliates from time to time, all as if such entity were not the Agent hereunder and without any duty to account therefor to any Bank. 9.4. Independent Credit Decisions. Each Bank acknowledges to the Agent that it has, independently and without reliance upon the Agent or any other Bank, and based upon such documents and information as it has deemed appropriate, made its own independent credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently or through other advisers and representatives but without reliance upon the Agent or any other Bank, and based upon such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or refraining from taking any action under this Agreement or any Loan Document. 9.5. Indemnification. The Banks agree to indemnify the Agent (to the extent not reimbursed by the Borrowers), ratably in proportion to each Bank's Commitment Percentage, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against the Agent in such capacity in any way relating to or arising out of this Agreement or any Loan Document or any action taken or omitted to be taken by the Agent in such capacity hereunder or under any Loan Document; provided that none of the Banks shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. Without limiting the generality of the foregoing, each Bank agrees to reimburse the Agent, promptly on demand, for such Bank's ratable share (based upon the aforesaid apportionment) of any out-of-pocket expenses (including counsel fees and disbursements) incurred by the Agent in connection with the preparation, execution, administration or enforcement of, or the preservation of any rights under, this Agreement and the Loan Documents to the extent that the Agent is not reimbursed for such expenses by the Borrowers. 30 9.6. Successor Agent. The Agent may resign at any time by giving written notice of such resignation to the Banks and the Borrowers, such resignation to be effective only upon the appointment of a successor Agent as hereinafter provided. Additionally, the Agent may be removed by the Required Banks if: (i) the aggregate Commitment Percentages of the Agent and its affiliates do not equal at least fifteen percent (15%); or (ii) a conservator, receiver or trustee in bankruptcy is appointed for the Agent and such appointment is not vacated within ninety (90) days of such appointment. Upon any such resignation or removal of the Agent, the Banks shall jointly appoint a successor Agent upon written notice to the Borrowers and the retiring or removed Agent. If no successor Agent shall have been jointly appointed by such Banks and shall have accepted such appointment within thirty (30) days after a retiring Agent shall have given notice of resignation, the retiring Agent may, upon notice to the Borrowers and the Banks, appoint a financial institution as successor Agent. Upon its acceptance of any appointment as Agent hereunder, the successor Agent shall succeed to and become vested with all the rights, powers, privileges and duties of the previous Agent, and the previous Agent shall be discharged from its duties and obligations as Agent under this Agreement and the Loan Documents. After any Agent's resignation or removal hereunder, the provisions hereof shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent under this Agreement and the Loan Documents. 9.7. Allocations Made By Agent. As between the Agent and the Banks, unless a Bank objecting to a determination or allocation made by the Agent pursuant to this Agreement delivers to the Agent written notice of such objection within one hundred twenty (120) days after the date any distribution was made by the Agent, such determination or allocation shall be conclusive on such one hundred twentieth day and only those items expressly objected to in such notice shall be deemed disputed by such Bank. The Agent shall not have any duty to inquire as to the application by the Banks of any amounts distributed to them. 9.8. Benefits of Article IX. The parties hereto agree that the provisions of this Article IX are intended solely for the benefit of the Agent and the Banks, and the Borrowers shall not be entitled to rely on any provisions or assert any such provisions of this Article in any claim or as a defense against the Agent or the Banks. 9.9. Reports and Notices. The Borrowers hereby agree that whenever herein or in any other Loan Document any report notice, statement or other information is to be given to any Bank or the Agent, such report, notice, statement or other information shall be given to all Banks contemporaneously and within the period of time required for giving such report, notice, statement or information. X. SYNDICATION AGENT The Syndication Agent shall have no duties or responsibilities (other than its duties and responsibilities as a Bank) under this Agreement or any of the other Loan Documents. XI. DOCUMENTATION AGENT The Documentation Agent shall have no duties or responsibilities (other than its duties and responsibilities as a Bank) under this Agreement or any of the other Loan Documents. 31 XII. MISCELLANEOUS 12.1. Waiver. No failure or delay on the part of the Agent or any Bank or any holder of any Note in exercising any right, power or remedy under any Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under any Loan Document. The remedies provided under the Loan Documents are cumulative and not exclusive of any remedies provided by law. 12.2. Amendments. No amendment, modification, termination or waiver of any Loan Document or any provision thereof nor any consent to any departure by any Borrower therefrom shall be effective unless the same shall have been approved in writing by Required Banks, be in writing and be signed by the Agent and the applicable Borrower or Borrowers, and then any such waiver or consent shall be effective only in the instance and for the specific purpose for which given. No notice to or demand on the Borrowers shall entitle the Borrowers to any other or further notice or demand in similar or other circumstances. Notwithstanding any other provision contained in any Loan Document, no amendment, modification, termination or waiver shall affect the payment of principal (including without limitation the date when due), reduce any interest rate margin or any fee provided herein, increase any Revolving Loan Commitment, extend the Revolver Termination Date, modify the definition of "Required Banks" or any voting rights of the Banks or amend or modify this Section 12.2 without the written consent of all of the Banks. The rights and responsibilities of the Agent hereunder cannot be changed without the Agent's prior written consent. 12.3. Governing Law. The Loan Documents and all rights and obligations of the parties thereunder shall be governed by and be construed and enforced in accordance with the laws of the State of New York without regard to New York or federal principles of conflict of laws. 12.4. Participations and Assignments. Each Borrower hereby acknowledges and agrees that a Bank may at any time: (a) grant participations in all or any portion of its Revolving Loan Commitment, any Note, or of its right, title and interest therein or in or to this Agreement (collectively, "Participations") to any other lending office or to any other bank, lending institution or other entity which has the requisite sophistication to evaluate the merits and risks of investments in Participations ("Participants") (but only with the consent of the Agent and Borrowers, which consent shall not be unreasonably withheld); provided, however, that: (i) all amounts payable by the Borrowers hereunder shall be determined as if such Bank had not granted such Participation; (ii) any agreement pursuant to which any Bank may grant a Participation: (x) shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrowers hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provisions of this Agreement; (y) such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement without the consent of the Participant if such modification, amendment or waiver would reduce the principal of or rate of interest on the Loan or postpone the date fixed for any payment of principal of or interest on the Loan; and (z) shall not relieve such Bank from its obligations, which shall remain absolute, to make Loans hereunder; and (iii) notwithstanding the foregoing, if any Event of Default with respect to Sections 5.16 or 7.1 of this Agreement has occurred within the six (6) months immediately preceding the date of the proposed participation (whether or not such Event of Default is ongoing or has been cured), the consent of the Borrowers and the Agent shall not be necessary to such participation; and 32 (b) assign any of its Loans and its Revolving Credit Commitment (but only with the consent of the Borrowers and the Agent, which consent shall not be unreasonably withheld), provided that: (i) each such assignment shall be in an amount of at least $5,000,000 (unless, after giving effect to such assignment and all other such assignments by such assigning Bank occurring simultaneously or substantially simultaneously therewith, such assigning Bank shall hold no Revolving Credit Commitment or Loan hereunder); (ii) each such assignment by a Bank of its Loans or Revolving Credit Commitment shall be made in such manner so that the same portion of its Loans, Note and Revolving Credit Commitment is assigned to the respective assignee; and (iii) notwithstanding the foregoing, if any Event of Default with respect to Sections 5.16 or 7.1 of this Agreement has occurred within the six (6) months immediately preceding the date of the proposed assignment (whether or not such Event of Default is ongoing or has been cured), the consent of the Borrowers and the Agent shall not be necessary to such assignment. Upon execution and delivery by the assignee to the Borrowers and the Agent of an instrument in writing in substantially the same form as Exhibit 12.4 hereto pursuant to which such assignee agrees to become a "Bank" hereunder (if not already a Bank) having the Revolving Credit Commitment(s) and Loans specified in such instrument, and upon consent thereto by the Borrowers and the Agent, to the extent required above, the assignee shall have, to the extent of such assignment (unless otherwise provided in such assignment with the consent of the Borrowers and the Agent), the obligations, rights and benefits of a Bank hereunder holding the Revolving Credit Commitment(s) and Loans (or portions thereof) assigned to it (in addition to the Revolving Credit Commitment(s) and Loans, if any, theretofore held by such assignee) and the assigning Bank shall, to the extent of such assignment, be released from the Commitment(s) (or portion(s) thereof) so assigned. Upon each such assignment the assigning Bank shall pay the Agent an assignment fee of $3,500. 12.5. Captions. Captions in the Loan Documents are included for convenience of reference only and shall not constitute a part of any Loan Document for any other purpose. 12.6. Notices. All notices, requests, demands, directions, declarations and other communications between the Banks and the Borrowers provided for in any Loan Document shall, except as otherwise expressly provided, be mailed by registered or certified mail, return receipt requested, or telecopied, or telexed, or delivered in hand to the applicable party at the following addresses: If to the Borrowers: Intermagnetics General Corporation 450 Old Niskayuna Road Latham, New York 12210 Attention: Michael Zeigler, Senior Vice President - Finance Telephone: (518) 782-1122 Telecopy: (518) 782-1105 33 with a copy to: Intermagnetics General Corporation 450 Old Niskayuna Road Latham, New York 12210 Attention: Katherine M. Sheehan, Esquire, Corporate Counsel Telephone: (518) 782-1122 Telecopy: (518) 782-7105 If to the Agent or the Banks: First Union National Bank 300 Main Street Stamford, Connecticut 06901 Attention: Philip Galioto, CT 2018 Telephone: (203) 406-6155 Telecopy: (203) 406-6521 with a copy to: Hahn & Hessen LLP 350 Fifth Avenue New York, New York 10118-0075 Attention: Steven J. Seif, Esquire Telephone: (212) 946-0294 Telecopy: (212) 594-7167 Notices shall be effective and deemed received three (3) Business Days after being deposited in the mail, postage prepaid, addressed as aforesaid and shall whenever sent by telecopier or telex or delivered in hand be effective when received. Any party may change its address by a communication in accordance herewith. 12.7. Sharing of Collections, Proceeds and Set-Offs; Application of Payments. (a) If any Bank, by exercising any right of set-off, counterclaim or foreclosure against trade collateral or otherwise, receives payment of principal or interest or other amount due on any Loan which is greater than the percentage share of such Bank (determined as set forth below), the Bank receiving such proportionately greater payment shall purchase such participations in the Loans held by the other Banks, and such other adjustments shall be made as may be required, so that all such payments shall be shared by the Banks on the basis of their percentage shares; provided that if all or any portion of such proportionately greater payment of such indebtedness is thereafter recovered from, or must otherwise be restored by, such purchasing Bank, the purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest being paid by such purchasing Bank. The percentage share of each Bank shall be based on the portion of the outstanding Loans of such Bank (prior to receiving any payment for which an adjustment must be made under this Section in relation to the aggregate outstanding Loans of all the Banks. Each Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Loan or reimbursement obligation, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of such Borrower in the amount of such participation. If under any applicable bankruptcy, insolvency or other similar law, any Bank receives a secured claim in lieu of a set-off to which this Section would apply, such Bank shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Banks entitled under this Section to share in the benefits of any recovery on such secured claim. 34 (b) If an Event of Default or Potential Default shall have occurred and be continuing the Agent and each Bank and the Borrowers agree that all payments on account of the Loans shall be applied by the Agent and the Banks as follows: (1) First, to the Agent for any Agent fees then due and payable under this Agreement until such fees are paid in full; (2) Second, to the Agent for any fees, costs or expenses (including expenses described in Section 12.8) incurred by the Agent under any of the Loan Documents or this Agreement, then due and payable and not reimbursed by the Borrowers or the Banks until such fees, costs and expenses are paid in full; (3) Third, to the Banks for their respective shares of all costs, expenses and fees then due and payable from the Borrowers until such costs, expenses and fees are paid in full; (4) Fourth, to the Banks for their percentage shares of the Commitment Fee then due and payable under this Agreement until such fee is paid in full; (5) Fifth, to the Banks for their percentage shares of all interest then due and payable from the Borrowers until such interest is paid in full, which percentage shares shall be calculated by determining each Bank's percentage share (determined as set forth in Section 12.7(a)) of the amounts allocated in (a) above; and (6) Sixth, to the Banks for their percentage shares of the principal amount of the Loans then due and payable from the Borrowers until such principal is paid in full, which percentage shares shall be calculated by determining each Bank's percentage share (determined as set forth in Section 12.7(a)) of the amount allocated in (a) above. 35 12.8. Expenses of the Agent; Indemnification of the Agent and the Banks. (a) The Borrowers will from time to time reimburse the Agent promptly following demand for all reasonable out-of-pocket expenses (including the reasonable fees and expenses of legal counsel) in connection with (i) the preparation of the Loan Documents, (ii) the making of any Loans, (iii) the administration of the Loan Documents and (iv) the enforcement of the Loan Documents; and will reimburse the Banks for all out-of-pocket expenses (including reasonable fees and expenses of legal counsel) in connection with the foregoing, including, without limitation, the enforcement of the Loan Documents, which expenses shall not be unreasonable. Notwithstanding the foregoing, the Banks shall use their good faith best efforts to engage common legal counsel with respect to any attempts by the Banks to enforce any of the Loan Documents. (b) In addition to the payment of the foregoing expenses, the Borrowers hereby agree, jointly and severally, to indemnify, protect and hold the Agent, each Bank and any holder of the Notes and the officers, directors, employees, agents, affiliates and attorneys of the Agent, each Bank and such holder (collectively, the "Indemnitees") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses and disbursements of any kind or nature, including reasonable fees and expenses of legal counsel, which may be imposed on, incurred by, or asserted against such Indemnitee by any Borrower or other third parties and arise out of or relate to this Agreement or the other Loan Documents or any other matter whatsoever related to the transactions contemplated by or referred to in this Agreement or the other Loan Documents; provided, however, that the Borrowers shall have no obligation to an Indemnitee hereunder to the extent that the liability incurred by such Indemnitee has been determined by a court of competent jurisdiction to be the result of gross negligence or willful misconduct of such Indemnitee. 12.9. Survival of Warranties and Certain Agreements. All agreements, representations and warranties made or deemed made herein shall survive the execution and delivery of this Agreement, the making of the Loans hereunder and the execution and delivery of the Notes. Notwithstanding anything in this Agreement or implied by law to the contrary, the agreements of the Borrowers set forth in Sections 2.1(f), 2.5, 2.10, and 12.8, and the agreements of the Banks set forth in Sections 9.1, 9.5 and 12.7 shall survive the payment of the Loans and the termination of this Agreement. This Agreement shall remain in full force and effect until the latest to occur of the termination of the Aggregate Revolving Loan Commitment or the repayment in full of all amounts owed by the Borrowers under any Loan Document. 12.10. Severability. The invalidity, illegality or unenforceability in any jurisdiction of any provision in or obligation under this Agreement, the Notes or other Loan Documents shall not affect or impair the validity, legality or enforceability of the remaining provisions or obligations under this Agreement, the Notes or other Loan Documents or of such provision or obligation in any other jurisdiction. 12.11. Banks' Obligations Several; Independent Nature of Banks' Rights. The obligation of each Bank hereunder is several and not joint and no Bank shall be the agent of any other (except to the extent the Agent is authorized to act as such hereunder). No Bank shall be responsible for the obligation or commitment of any other Bank hereunder. In the event that any Bank at any time should fail to make a Loan as herein provided, the other Banks, or any of them as may then be agreed upon, at their sole option, may make the Loan that was to have been made by the Bank so failing to make such Loan. Nothing contained in any Loan Document and no action taken by Agent or any Bank pursuant hereto or thereto shall be deemed to constitute Banks to be a partnership, an association, a joint venture or any other kind of entity. The amounts payable at any time hereunder to each Bank shall be a separate and independent debt, and, subject to the terms of this Agreement, upon giving notice to all other Banks each Bank shall be entitled to protect and enforce its rights arising out of this Agreement and it shall not be necessary for any other Bank to be joined as an additional party in any proceeding for such purpose. 36 12.12. No Fiduciary Relationship. No provision in this Agreement or in any of the other Loan Documents and no course of dealing between the parties shall be deemed to create any fiduciary duty by Agent or any Bank to the Borrowers. 12.13. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. EACH OF THE BORROWERS, THE AGENT AND EACH BANK HEREBY CONSENTS TO THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE SOUTHERN DISTRICT OF NEW YORK AND IRREVOCABLY AGREES THAT, ANY ACTIONS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THE NOTES, THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS MAYBE LITIGATED IN SUCH COURTS. EACH PARTY TO THIS AGREEMENT ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENT, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT, SUCH NOTE, OR SUCH OTHER LOAN DOCUMENT. 12.14. WAIVER OF JURY TRIAL. EACH OF THE BORROWERS, THE AGENT AND EACH BANK HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT, ANY OF THE LOAN DOCUMENTS, OR ANY DEALINGS BETWEEN THEM RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND THE LENDER/BORROWER RELATIONSHIP ESTABLISHED HEREBY. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS TRANSACTION, INCLUDING WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH OF THE BORROWERS, THE AGENT AND EACH BANK ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO THE TRANSACTION, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH OF THE BORROWERS, THE AGENT AND EACH BANK FURTHER WARRANTS AND REPRESENTS THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, THE LOAN DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE LOANS. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. 37 12.15. Further Assurances. Each of the parties to this Agreement agrees that at any time and from time to time upon the written request of any other party, it will execute and deliver such further documents and do such further acts and things as such other party may reasonably request in order to effect the purposes of this Agreement. 12.16. Counterparts; Effectiveness. This Agreement and any amendment hereto or waiver hereof may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement and any amendments hereto or waivers hereof shall become effective when the Agent shall have received signed counterparts or notice by telecopy of the signature page that the counterpart has been signed and is being delivered to the Agent or facsimile that such counterparts have been signed by all the parties hereto or thereto. 12.17. Use of Defined Terms. All words used herein in the singular or plural shall be deemed to have been used in the plural or singular where the context or construction so requires. Any defined term used in the singular preceded by "any" shall be taken to indicate any number of the members of the relevant class. 38 IN WITNESS WHEREOF, and intending to be legally bound hereby, the Borrowers and the Banks have caused this Agreement to be executed by their proper corporate officers thereunto duly authorized as of the day and year first above written. INTERMAGNETICS GENERAL CORPORATION By: /s/ Michael C. Zeigler Michael C. Zeigler Chief Financial Officer IGC-APD CRYOGENICS INC. By: /s/ Michael C. Zeigler Michael C. Zeigler Treasurer IGC-POLYCOLD SYSTEMS, INC. By: /s/ Michael C. Zeigler Michael C. Zeigler Treasurer IGC-SUPERPOWER, LLC By: /s/ Michael C. Zeigler Michael C. Zeigler Treasurer MEDICAL ADVANCES, INC. By: /s/ Michael C. Zeigler Michael C. Zeigler Treasurer 39 Commitment Percentage: 40% FIRST UNION NATIONAL BANK, individually Revolving Loan Commitment: $20,000,000 and as Agent By: /s/ Richard J. Klouda Name: Richard J. Klouda Title: Senior Vice President Commitment Percentage: 30% THE CHASE MANHATTAN BANK, individually Revolving Loan Commitment: $15,000,000 and as Syndication Agent By: /s/ David C. Horan, Jr. Name: David C. Horan, Jr. Title: Vice President Commitment Percentage: 30% KEYBANK NATIONAL ASSOCIATION, individually Revolving Loan Commitment: $15,000,000 and as Documentation Agent By: /s/ Bryant J. Cassella Name: Bryant J. Cassella Title: Vice President
40 STATE OF NEW YORK ) ) ss. COUNTY OF ALBANY ) On this 19 day of September, 2001, before me personally came Michael C. Zeigler, to me known, who, being by me duly sworn, did depose and say that he is the Chief Financial Officer of Intermagnetics General Corporation, the corporation described in and which executed the foregoing instrument and that he signed his name thereto by order of the board of directors of said corporation. /s/ Katherine M. Sheehan NOTARY PUBLIC STATE OF NEW YORK ) ) ss. COUNTY OF ALBANY ) On this 19 day of September, 2001, before me personally came Michael C. Zeigler, to me known, who, being by me duly sworn, did depose and say that he is the Treasurer of IGC-APD Cryogenics, Inc., the corporation described in and which executed the foregoing instrument and that he signed his name thereto by order of the board of directors of said corporation. /s/ Katherine M. Sheehan NOTARY PUBLIC STATE OF NEW YORK ) ) ss. COUNTY OF ALBANY ) On this 19 day of September, 2001, before me personally came Michael C. Zeigler, to me known, who, being by me duly sworn, did depose and say that he is the Treasurer of IGC-Polycold Systems, Inc., the corporation described in and which executed the foregoing instrument and that he signed his name thereto by order of the board of directors of said corporation. /s/ Katherine M. Sheehan NOTARY PUBLIC 41 STATE OF NEW YORK ) ) ss. COUNTY OF ALBANY ) On this 19 day of September, 2001, before me personally came Michael C. Zeigler, to me known, who, being by me duly sworn, did depose and say that he is the Treasurer of IGC-Superpower, LLC, the limited liability company described in and which executed the foregoing instrument and that he signed his name thereto by order of the managers of said limited liability company. /s/ Katherine M. Sheehan NOTARY PUBLIC STATE OF NEW YORK ) ) ss. COUNTY OF ALBANY ) On this 19 day of September, 2001, before me personally came Michael C. Zeigler, to me known, who, being by me duly sworn, did depose and say that he is the Treasurer of Medical Advances, Inc., the corporation described in and which executed the foregoing instrument and that he signed his name thereto by order of the board of directors of said corporation. /s/ Katherine M. Sheehan NOTARY PUBLIC 42 STATE OF NEW YORK ) ) ss. COUNTY OF WESTCHESTER ) On this 19TH day of September, 2001, before me personally came Richard J. Klouda, to me known, who, being by me duly sworn, did depose and say that he is the Senior Vice President of First Union National Bank, the corporation described in and which executed the foregoing instrument and that he signed his name thereto by order of the board of directors of said corporation. /s/ Michele A. Kasowski NOTARY PUBLIC STATE OF NEW YORK ) ) ss. COUNTY OF ) On this 4th day of September October, 2001, before me personally came David C. Horan, Jr., to me known, who, being by me duly sworn, did depose and say that he is the Vice President of The Chase Manhattan Bank, the national association described in and which executed the foregoing instrument and that he signed his name thereto by order of the board of directors of said national association. /s/ Katherine M. Vermilyea NOTARY PUBLIC STATE OF NEW YORK ) ) ss. COUNTY OF ) On this 19th day of September, 2001, before me personally came Bryant J. Cassella, to me known, who, being by me duly sworn, did depose and say that he is the Vice President of KeyBank National Association, the corporation described in and which executed the foregoing instrument and that he signed his name thereto by order of the board of directors of said corporation. /s/ Anna M. Gallucci NOTARY PUBLIC 43 Exhibit A Form of Borrowing Notice First Union National Bank - -------------------------- - -------------------------- Attention: --------------- Ladies and Gentlemen: The undersigned, INTERMAGNETICS GENERAL CORPORATION, on behalf of itself and IGC-APD CRYOGENICS INC., IGC-POLYCOLD SYSTEMS, INC., IGC-SUPERPOWER LLC and MEDICAL ADVANCES, INC. (collectively, the "Borrowers"), refers to the Loan and Agency Agreement, dated as of September __, 2001, among the Borrowers, First Union National Bank, as agent (the "Agent"), The Chase Manhattan Bank, as syndication agent (the "Syndication Agent"), KeyBank National Association, as documentation agent (the "Documentation Agent"), and the Banks (as defined therein) (as amended, modified and/or extended to date, the "Loan Agreement"), capitalized terms used herein having the definitions given such terms in the Loan Agreement, and hereby: 1. Gives you notice, irrevocably, pursuant to Section 2.3 of the Loan Agreement, that IGC on behalf of the Borrowers hereby requests a Loan under the Loan Agreement and, in that regard, sets forth below the information relating to that Loan (the "Proposed Advance") as required by Section 2.3 of the Loan Agreement: (a) the requested Business Day of the Proposed Advance is ____________, (b) the aggregate amount of the Proposed Advance is $____________;and (c) the Proposed Advance is intended to be a LIBO Rate Loan and the Interest Period for the Proposed Advance is __________months; or the Proposed Advance is intended to be a Prime Rate Loan. 44 2. Certifies to you as follows: (i) each Borrower is on the date hereof, and will be on the date of the Proposed Advance, in compliance with all covenants, agreements and conditions in each Loan Document (ii) each representation and warranty contained in each Loan Document is true on the date hereof and will be true on the date of the Proposed Advance, with the same effect as if such representation or warranty had been made on each such respective date; and (iii) immediately prior to and after giving effect to the Proposed Advance, no Event of Default or Potential Default shall exist. Very truly yours, INTERMAGNETICS GENERAL CORPORATION Dated: ______________ __, ____ By:__________________________ Name: Title: 45 Exhibit B Form of Covenant Compliance Certificate First Union National Bank - ------------------------- - ------------------------- Attention: --------------- Ladies and Gentlemen: This Covenant Compliance Certificate (this "Certificate") is executed and delivered pursuant to Section 5.2(d) of the Loan and Agency Agreement, dated September __, 2001 (the "Loan Agreement"), by and among INTERMAGNETICS GENERAL CORPORATION, on behalf of itself and IGC-APD CRYOGENICS INC., IGC-POLYCOLD SYSTEMS, INC., IGC-SUPERPOWER LLC and MEDICAL ADVANCES, INC. (collectively, the "Borrowers"), the Banks (as such term is defined in the Loan Agreement), First Union National Bank, as agent for the Banks (the "Agent"), The Chase Manhattan Bank, as syndication agent for the Banks (the "Syndication Agent"), and KeyBank National Association, as documentation agent for the Banks (the "Documentation Agent"). All capitalized terms used herein without definition shall have the meanings given to them in the Loan Agreement and Schedule 5.16 thereto. The undersigned has reviewed the terms of the Loan Agreement and has made, or caused to be made under his or her supervision, a review in reasonable detail of the transactions and financial condition of the Borrowers during the fiscal period covered by this Certificate. As of _____________ the following financial covenants have the following values:
COVENANT ACTUAL 1. Minimum Tangible Net Worth $70,000,000 $_____________ 2. Maximum Ratio of Senior Debt to EBITDA 3.0:1.0 _____________ 3. Minimum Ratio of EBIT to Interest Expenses 2.0:1.0 _____________
Attached hereto are the calculations and information necessary to determine the foregoing covenant values. As of the date hereof: (a) no Event of Default or Potential Default has occurred and is continuing; (b) the representations and warranties of the Borrowers contained in Article III of the Loan Agreement are true and correct in all material respects as of the date hereof, except that the representations and warranties in Section 3.4 of the Loan Agreement shall refer to the most recent financial statements delivered to the Banks. 46 Exhibit 12.4 ASSIGNMENT ASSIGNMENT, dated as of ___________, 200_ among ____________________ (the "Transferor Bank"), ____________________ ("Purchasing Bank"), and FIRST UNION NATIONAL BANK, as Agent for the Banks under the Loan Agreement (as those terms are hereafter defined). W I T N E S S E T H: WHEREAS, this Assignment is being executed and delivered in accordance with Section 12.4 of the Loan and Agency Agreement dated as of September 19, 2001 among Intermagnetics General Corporation, IGC-APD Cryogenics Inc., Medical Advances, Inc., IGC-Polycold Systems, Inc. and IGC-Superpower, LLC (each a "Borrower" and collectively, the "Borrowers"), the financial institutions named therein or which hereafter become a party thereto (each a "Bank" and collectively, the "Banks"), First Union National Bank ("First Union"), as agent for Banks (First Union in such capacity, "Agent"), The Chase Manhattan Bank ("Chase"), as syndication agent for Banks (Chase in such capacity, "Syndication Agent"), and KeyBank National Association ("Key"), as documentation agent for Banks (Key in such capacity, "Documentation Agent") (as same may be amended, restated, modified or supplemented from time to time, the "Loan Agreement"); WHEREAS, Purchasing Bank wishes to become a Bank party to the Loan Agreement; and WHEREAS, the Transferor Bank is selling and assigning to Purchasing Bank rights, obligations and commitments under the Loan Agreement; NOW, THEREFORE, the parties hereto hereby agree as follows: 1. All capitalized terms used herein which are not defined shall have the meanings given to them in the Loan Agreement. 2. Upon receipt by the Agent of four counterparts of this Assignment, to each of which is attached a fully completed Schedule I, and each of which has been executed by Transferor Bank and Agent, Agent will transmit to Transferor Bank and Purchasing Bank a transfer effective notice, substantially in the form of Schedule II to this Assignment (a "Transfer Effective Notice"). Such Transfer Effective Notice shall set forth, inter alia, the date on which the transfer effected by this Assignment shall become effective (the "Transfer Effective Date"), which date shall not be earlier than the first Business Day following the date such Transfer Effective Notice is received. From and after the Transfer Effective Date, Purchasing Bank shall be a Bank party to the Loan Agreement for all purposes thereof. 3. At or before 12:00 Noon (New York City time) on the Transfer Effective Date, Purchasing Bank shall pay to Transferor Bank, in immediately available funds, an amount equal to the purchase price, as agreed between Transferor Bank and such Purchasing Bank (the "Purchase Price"), of the portion of the Advances being purchased by such Purchasing Bank (such Purchasing Bank's "Purchased Percentage") of the outstanding Loan amounts and other amounts owing to the Transferor Bank under the Loan Agreement and the Notes. Effective upon receipt by Transferor Bank of the Purchase Price from a Purchasing Bank, Transferor Bank hereby irrevocably sells, assigns and transfers to such Purchasing Bank, without recourse, representation or warranty, and Purchasing Bank hereby irrevocably purchases, takes and assumes from Transferor Bank, such Purchasing Bank's Purchased Percentage of the Loans and other amounts owing to the Transferor Bank under the Loan Agreement and the Notes together with all instruments, documents and collateral security pertaining thereto. 47 4. Transferor Bank has made arrangements with Purchasing Bank with respect to (i) the portion, if any, to be paid, and the date or dates for payment, by Transferor Bank to such Purchasing Bank of any fees heretofore received by Transferor Bank pursuant to the Loan Agreement prior to the Transfer Effective Date and (ii) the portion, if any, to be paid, and the date or dates for payment, by such Purchasing Bank to Transferor Bank of fees or interest received by such Purchasing Bank pursuant to the Loan Agreement from and after the Transfer Effective Date. 5. (a) All principal payments that would otherwise be payable from and after the Transfer Effective Date to or for the account of Transferor Bank pursuant to the Loan Agreement and the Notes shall, instead, be payable to or for the account of Transferor Bank and Purchasing Bank, as the case may be, in accordance with their respective interests as reflected in this Assignment. (b) All interest, fees and other amounts that would otherwise accrue for the account of Transferor Bank from and after the Transfer Effective Date pursuant to the Loan Agreement and the Notes shall, instead, accrue for the account of, and be payable to, Transferor Bank and Purchasing Bank, as the case may be, in accordance with their respective interests as reflected in this Assignment. In the event that any amount of interest, fees or other amounts accruing prior to the Transfer Effective Date was included in the Purchase Price paid by any Purchasing Bank, Transferor Bank and Purchasing Bank will make appropriate arrangements for payment by Transferor Bank to such Purchasing Bank of such amount upon receipt thereof from Borrowers. 6. (a) Concurrently with the execution and delivery hereof, Transferor Bank will provide to Purchasing Bank conformed copies of the Loan Agreement and all related documents delivered to Transferor Bank. (b) Two (2) Business Days after the Transfer Effective Date, (i) Transferor Bank shall deliver to the Agent its Notes and (ii) Borrowers shall deliver to Agent new Notes for Purchasing Bank in the principal amount reflecting, in accordance with the Loan Agreement, its Commitment Percentage. The new Notes shall be dated the Transfer Effective Date and shall state that they are delivered in substitution for the Notes executed for Transferor Bank. Promptly after the Transfer Effective Date, Agent will send to the Purchasing Bank its new Notes and the Agent will surrender the superseded Notes in exchange therefor to Borrowers, marked "Cancelled by Substitution". 7. Each of the parties to this Assignment agrees that at any time and from time to time upon the written request of any other party, it will execute and deliver such further documents and do such further acts and things as such other party may reasonably request in order to effect the purposes of this Assignment. 48 8. By executing and delivering this Assignment, Transferor Bank and Purchasing Bank confirm to and agree with each other and Agent and Banks as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned hereby free and clear of any adverse claim, Transferor Bank makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Loan Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Agreement, the Notes or any other instrument or document furnished pursuant thereto; (ii) Transferor Bank makes no representation or warranty and assumes no responsibility with respect to the financial condition of Borrowers or the performance or observance by Borrowers of any of their Obligations under the Loan Agreement, the Notes or any other instrument or document furnished pursuant hereto; (iii) Purchasing Bank confirms that it has received a copy of the Loan Agreement, together with copies of such financial statements and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment; (iv) Purchasing Bank will, independently and without reliance upon Agent, Transferor Bank or any other Banks and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Agreement; (v) Purchasing Bank appoints and authorizes Agent to take such action as agent on its behalf and to exercise such powers under the Loan Agreement as are delegated to the Agent by the terms thereof; (vi) Purchasing Bank agrees that it will perform all of its respective obligations and exercise all of its rights as set forth in the Loan Agreement to be performed or exercised by each as a Bank; and (vii) Purchasing Bank represents and warrants to Transferor Bank, all other Banks, Agent and Borrowers that it is either (x) entitled to the benefits of an income tax treaty with the United States of America that provides for an exemption from the United States withholding tax on interest and other payments made by Borrowers under the Loan Agreement and the Loan Documents or (y) is engaged in trade or business within the United States of America. 9. Schedule I hereto sets forth the revised Commitment Percentages of Transferor Bank and the Commitment Percentage of Purchasing Bank as well as administrative information with respect to Purchasing Bank. 10. This Assignment shall be governed by, and construed in accordance with, the laws of the State of New York without giving effect to conflict of laws or choice of law principles. 49 IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be executed by their respective duly authorized officers on the date set forth above. ------------------------, as Transferor Bank By: ---------------------------- Name: Title: ------------------------, as Purchasing Bank By: ---------------------------- Name: Title: FIRST UNION NATIONAL BANK, as Agent for Banks By: ---------------------------- Name: Title: ACCEPTED AND AGREED TO BY: INTERMAGNETICS GENERAL CORPORATION IGC-APD CRYOGENICS INC. MEDICAL ADVANCES, INC. IGC-POLYCOLD SYSTEMS, INC. IGC-SUPERPOWER, LLC By: ---------------------------- Name: Title: 50 EX-10.1 5 p319987_ex10-1.txt EMPLOYMENT AGREEMENT Exhibit 10.1 -1- THIS EMPLOYMENT AGREEMENT (the "2002 Agreement") is made as of the 1st day of June 2002, by and between Intermagnetics General Corporation, a New York corporation (the "Company"), and Glenn H. Epstein ("Executive"). WHEREAS, the parties entered into agreements related to Executives employment dated April 1, 1997, October 15, 1998, June 1, 1999 and June 1, 2000 ("the Prior Agreements"); and WHEREAS, the parties now wish to make certain changes in the employment relationship between the Company and Executive on such terms and conditions as will continue to secure the benefit of Executive's services to the Company as President and Chief Executive Officer; and WHEREAS, Executive and the Company desire that the Prior Agreements be superseded in all respects by this 2002 Agreement, except as to the terms of certain options previously granted to Executive under the Prior Agreements. NOW, THEREFORE, the parties hereto, intending to be legally bound, agree as follows: 1. Employment. The Company hereby employs or retains Executive, and Executive hereby accepts such employment and agrees to perform his duties and responsibilities hereunder, in accordance with the terms and conditions hereinafter set forth. -2- 1.1 Term. Subject to the provisions of Sections 8 and 9 below, the initial term of this 2002 Agreement shall be five years beginning June 1, 2002 and ending on May 31, 2007 (the "Employment Term"). As used in this 2002 Agreement, the term "year" shall refer to a three hundred and sixty five (365) day period. If neither party provides written notice to the other party prior to June 1, 2003 of its or his desire to terminate the employment of Executive, the Employment Term shall be extended for one additional year, until May 31, 2008. On each successive June 1st following June 1, 2003 (the "Anniversary Date"), the Employment Term shall be automatically extended from year to year for an additional one (1) year period (for example, on June 1, 2004, the term shall extend to May 31, 2009), unless either party provides written notice to the other prior to the Anniversary Date of its or his desire to terminate the employment of Executive. 1.2 Duties and Responsibilities. (a) During the 2002 Agreement Term, Executive shall be employed full time as Chief Executive Officer and President of the Company and shall perform all duties and accept all responsibilities incidental to such position or as may be assigned to him from time to time by the Company's Board of Directors, and he shall cooperate fully with the Board of Directors and other executive officers of the Company. During the 2002 Agreement Term Executive shall also be available to perform similar duties on behalf of subsidiaries or divisions of the Company. During the 2002 Agreement Term Executive shall at all times comply with policies and procedures adopted by the Company and ratified by the Board of Directors for employees of the Company and its subsidiaries, including without limitation the procedures and policies adopted by the Company regarding conflicts of interest. In the event the Company and Executive determine that it is in the best interest of the Company to appoint a separate individual as President of the Company, such appointment shall not be considered a diminution in duties for purposes of Section 8 below. -3- (b) Executive represents and covenants to the Company that he is not subject, or a party, to any employment agreement, non-competition covenant, non-disclosure agreement or any similar agreement, covenant, understanding or restriction which would prohibit Executive from executing this 2002 Agreement or from performing his duties and responsibilities hereunder during the 2002 Agreement Term or which would in any manner, directly or indirectly, limit or affect the duties and responsibilities which may now or in the future be assigned to Executive by the Company or the scope of assistance to which he may now or in the future provide to subsidiaries or divisions of the Company, including without limitation any duties and responsibilities relating to the development, production and/or sale of (i) superconductive wire and materials, (ii) permanent and superconductive magnet systems, or RF coils, used in MRI diagnostic imaging systems, (iii) NMR spectroscopy systems, (iv) devices for separation of materials by magnetic means, (v) cryogenic equipment and refrigeration systems, or (vi) products related to any other business in which the Company or any of its affiliates is engaged as of the date of Executive's separation of employment with the Company for any reason whatsoever. -4- 1.3 Extent of Service. (a) During the 2002 Agreement Term, Executive agrees to use his best efforts to carry out his duties and responsibilities under Section 1.2(a) hereof and to devote his full time, attention and energy thereto. Executive further agrees not to work either on a part time or independent contracting basis for any other business or enterprise during the 2002 Agreement Term without the prior written consent of the Board of Directors of the Company. (b) Except as provided in Section 5 hereof, subsection (a) hereof shall not be construed as preventing Executive from making investments in other businesses or enterprises, volunteering for community service or from serving as a director of any other business or enterprise, provided that such directorship is approved by the Company's Board of Directors and that Executive agrees not to become engaged in any other business activity which may interfere with his ability to discharge his duties and responsibilities to the Company as an executive. -5- 1.4 Base Compensation During 2002 Agreement Term. For all the services rendered by Executive during the 2002 Agreement Term, the Company shall pay Executive an annual salary at the rate of $420,000 for the first year of the 2002 Agreement Term, plus additional amounts, if any, as may be approved by the Company's Board of Directors, less withholdings required by law or agreed to by Executive, payable in installments at such times as the Company customarily pays its other senior officers (but in any event no less often than monthly). The Compensation Committee of the Board of Directors of the Company shall annually review Executive's base compensation based on Executive's job performance, the Company's financial condition, and the profitability and performance of the Company, and in its sole discretion shall provide Executive with an adjustment in Executive's annual salary. During the 2002 Agreement Term, Executive shall also be (i) entitled to participate in such vacation pay, life insurance, pension benefits and other fringe benefit plans as may exist from time to time for the senior officers of the Company (subject to payment of such portion of the costs thereof as the Company requires from its senior officers) (referred to herein as "the Common Benefit Plans"), excluding any supplemental pension, savings, retirement of other such plan that may subsequently be adopted by the Company for its senior officers provided, however, that nothing herein shall be deemed to require the Company to maintain in force any of the Common Benefit Plans during the term of this 2002 Agreement or to limit its right to amend the same for executives and other senior officers of the Company in any manner during the employment term; (ii) provided with full access and personal use of a suitable Company owned and assigned vehicle including all related expenses and insurance; (iii) provided with one social club membership as chosen by Executive; (iv) provided with a term life insurance policy for the duration of Executive's employment as President and Chief Executive Officer with the Company payable to Executive's designated beneficiary or beneficiaries in the face amount of four times Executive's annual base salary as of June 1, 2002 , and adjusted each contract year thereafter; and (v) entitled to be reimbursed for the reasonable expenses incurred by him in obtaining advice and services related to financial and retirement planning, not to exceed Ten Thousand Dollars ($10,000) annually. Notwithstanding the foregoing, during the 2002 Agreement Term, the Company shall provide Executive, annually, with a lump sum payment of an amount sufficient to enable him to purchase a disability insurance policy for Executive with coverage equal to sixty percent (60%) of his then current base salary, with a waiting period of 26 weeks, subject to reductions for Social Security disability and worker's compensation payments, if any, received by Executive. The disability policy shall define "disability" to be Executive's inability because of physical or mental impairment of Executive to perform his material duties on a full-time basis, as described in Sections 1.2 and 1.3, and shall provide for partial disability coverage in the event Executive is unable to perform those duties on a full-time basis and his income is reduced because of such disability. -6- 1.5 Bonus. In addition to the compensation set forth above, during the 2002 Agreement Term Executive shall be entitled to participate in the Company's incentive bonus program ("IBP") maintained for the Company's executives, as the IBP may be modified from time to time. For the initial year of the 2002 Agreement, Executive's annual incentive target level bonus will be set at 100% of base salary with actual bonus earned pursuant to the overall terms of the "IBP" of the company. 1.6 Stock Options and Stock Grants. In consideration for Executive's continued employment under the 2002 Agreement the Company will provide, by separate agreement, a long-term equity incentive grant via the terms of the Company's 2000 Stock Option and Stock Award Plan. -7- 1.7 Supplemental Benefits. In addition to the compensation and equity participation set forth above, during the first year of the 2002 Agreement Term the Company shall pay Executive the sum of Fifty-Six Thousand and Seven Hundred Dollars ($56,700). For each subsequent year of the 2002 Agreement Term the Company shall pay Executive an amount calculated by increasing the previous year's payment by the percentage by which Executive's Base Compensation has increased in accordance with the provision of Section 1.4 of the 2002 Agreement. Executive shall select either a non-qualified Supplemental Executive Benefit Agreement or other similar program for which the intent is to remove caps imposed by US Government tax regulations on the Company's qualified retirement and savings programs. The Company's sole obligation with respect to such supplemental benefits shall be to pay a lump sum as set forth in the first sentence of this paragraph from which Executive shall choose a company provided or self-directed supplemental benefit. Executive shall not be eligible to participate in any additional supplemental benefit program as may be established in the future by the Company for its other senior officers. 2. Expenses. Executive shall be reimbursed for the reasonable and necessary business expenses incurred by him in connection with his performance of services hereunder during the 2002 Agreement Term upon presentation of an itemized account in accordance with Company policies. -8- 3. Developments. All developments (including inventions, whether patentable or otherwise, trade secrets, discoveries, improvements, ideas and writings) which either directly or indirectly relate to or may be useful in the business of the Company or any of its affiliates (the "Developments") including business plans, programs, financial or operating reports, projections or budgets, which Executive, either by himself or in conjunction with any other person or persons, has conceived, made, developed, acquired or acquired knowledge of while an employee of the Company or which Executive, either by himself or in conjunction with any other person or persons, shall conceive, make, develop, acquire or acquire knowledge of during his employment with the Company, shall become and remain the sole and exclusive property of the Company. Executive hereby assigns, transfers and conveys, and agrees to so assign, transfer and convey, all of his right, title and interest in and to any and all such Developments and to disclose fully as soon as practicable, in writing, all such Developments to the Board of Directors of the Company. At any time and from time to time, upon the request and at the expense of the Company, Executive will execute and deliver any and all instruments, documents and papers, give evidence and do any and all other acts which, in the opinion of counsel for the Company, are or may be necessary or desirable to document such transfer or to enable the Company to file and prosecute applications for and to acquire, maintain and enforce any and all patents, trademark registrations or copyrights under United States or foreign law with respect to any such Developments or to obtain any extension, validation, reissue, continuance or renewal of any such patent, trademark or copyright. The Company will be responsible for the preparation of any such instruments, documents and papers and for the prosecution of any such proceedings and will reimburse Executive for all reasonable expenses incurred by him in compliance with the provisions of this Section. -9- 4. Confidential Information. Executive recognizes and acknowledges that by reason of his employment by the Company he has had and, by reason of his continued employment with the Company, will continue to have access to confidential information of the Company and its affiliates, including, without limitation, information and knowledge pertaining to products, inventions, innovations, designs, ideas, plans, trade secrets, proprietary information, manufacturing, packaging, advertising, distribution and sales methods and systems, sales and profit figures, customer and client lists, business policies, programs, operating reports, procedures or booklets, and relationships between the Company and its affiliates and dealers, distributors, wholesalers, customers, clients, suppliers and others who have had or will have business dealings with the Company and its affiliates ("Confidential Information"). Executive acknowledges that such Confidential Information is a valuable and unique asset and covenants that he will not, either during or after the his employment with the Company, disclose any such Confidential Information to any person for any reason whatsoever (except as his duties during his employment may require) without the prior written authorization of the Company's Board of Directors, unless such information is in the public domain through no fault of Executive or except as may be required by law. -10- 5. Non-Competition. 5.1 Limitation. During such time as Executive is employed by the Company, and for two (2) years following the separation of the employment of Executive for any reason whatsoever with the Company (or such longer period as may be provided for in Sections 8.4 and 8.5 hereof) (the "Restricted Period") he will not, unless acting pursuant hereto or with the prior express written consent of the Board of Directors of the Company, directly or indirectly, own, manage, operate, join, control, finance or participate in the ownership, management, operation, control or financing of, or be connected as a director, officer, employee, partner, principal, agent, representative, consultant or otherwise with or use or permit his name to be used in connection with, any business or enterprise engaged in the development, production, sale, rental or repair of (i) superconductive wire and materials, (ii) permanent and superconductive magnet systems, or RF coils, used in MRI diagnostic imaging systems, (iii) NMR spectroscopy systems, (iv) devices for separation of materials by magnetic means, (v) cryogenic equipment and refrigeration systems or (vi) products related to any other business in which the Company or any of its affiliates is engaged as of the date of Executive's separation of employment with the Company for any reason whatsoever. It is recognized by Executive that the business of the Company and the other subsidiaries or divisions of the Company which provide similar products or services and Employee's connection therewith is or will be international in scope, and that geographical limitations on this non-competition covenant (and the non-solicitation covenant set forth in Section 6 hereof) are therefore not appropriate. -11- 5.2 Exception. The foregoing restriction shall not be construed to prohibit the ownership by Executive of not more than five percent (5%) of any class of securities of any corporation which is engaged in any of the foregoing businesses having a class of securities registered pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"), provided that such ownership represents a passive investment and that neither Executive nor any group of persons including Executive in any way, either directly or indirectly, manages or exercises control of any such corporation, guarantees any of its financial obligations, otherwise takes any part in its business (other than exercising his rights as a shareholder), or seeks to do any of the foregoing. 6. No Solicitation of Customers or Employees. (a) Executive agrees that during the 2002 Agreement Term and for a period of two (2) years after termination of Executive's employment relationship with the Company for any reason whatsoever (or such longer period as may be provided for in Sections 8.4 and 8.5 hereof) (the "Restricted Period"), he will not, directly or indirectly, on his behalf or in the service or on behalf of others, call on or solicit, either directly or indirectly, any person, firm, corporation or other entity who or which at the time of such termination was, or within two years prior to the termination of Executive's employment with the Company had been, a customer of the Company or any of its affiliates with respect to the activities prohibited by Section 5 hereof. -12- (b) Executive agrees that during the Restricted Period he will not undertake, either directly or indirectly, on his behalf, or in the service or behalf of others, to solicit, divert or hire in any way, or attempt to solicit, divert or hire, for any other business or enterprise, company, partnership or proprietorship, a full-time, part-time or temporary employee of the Company. 7. Equitable Relief. 7.1 Right to Equitable Relief. Executive acknowledges that the restrictions contained in Sections 4, 5 and 6 hereof are the essence of the contract from the Company's standpoint and are reasonable and necessary to protect the legitimate interests of the Company and its affiliates, that the Company would not have entered into this 2002 Agreement in the absence of such restrictions, and that any violation of any provision of those Sections will result in irreparable injury to the Company and its shareholders for which there is no adequate remedy at law. Executive also acknowledges that the Company shall be entitled to preliminary and permanent injunctive relief, without the necessity of proving actual damages, as well as an equitable accounting of all earnings, profits and other benefits arising from any such violation, which rights shall be cumulative and in addition to any other rights or remedies to which the Company may be entitled. Executive agrees that in the event of any such violation, an action may be commenced by the Company for any such preliminary and permanent injunctive relief and other equitable relief in any court of competent jurisdiction within the State of New York or in a court of competent jurisdiction in any other state. Executive hereby waives any objections on the grounds of improper jurisdiction or venue to the commencement of an action in the State of New York and agrees that effective service of process may be made upon him by mail under the notice provisions contained in Section 16 hereof. In the event that any of the provisions of Sections 4, 5 or 6 hereof should ever be adjudicated to exceed the time, geographic, product or other limitations permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction to the maximum time, geographic, product or other limitations permitted by applicable law. The seeking or granting of such equitable relief shall be in addition to any other forms of relief or damages available to the Company in the event of a breach of this Agreement by Executive. -13- 7.2 Dissemination of Restrictions. Executive agrees that until the expiration of the covenants contained in Sections 3, 4, 5 and 6 of this 2002 Agreement, he shall provide, and that the Company may similarly provide, a copy of the covenants contained in such Sections to any business or enterprise, company, partnership or proprietorship (i) which he may directly or indirectly own, manage, operate, finance, join, control or participate in the ownership, management, operation, financing or control of, or (ii) with which he may be connected with as a director, employee, officer, executive, partner, principal, agent, representative, consultant or otherwise, or (iii) in connection with which he may use or permit his name to be used. -14- 8. Termination. Unless otherwise modified by the terms of Section 1.1, hereof, this 2002 Agreement shall terminate prior to the expiration of the 2002 Agreement Term upon the occurrence of any one of the following events: 8.1. Disability. In the event that Executive is unable to perform his material duties and responsibilities hereunder to the full extent required by the Board of Directors of the Company by reason of physical or mental illness, impairment or incapacity for 26 weeks in any fifty-two (52) week period, during which time he shall continue to be compensated as provided in Section 1.4 hereof (less any payments due Executive under disability benefit programs, including Social Security disability, worker's compensation and disability retirement benefits), this 2002 Agreement and any renewal thereto may be terminated by the Company, by providing thirty (30) days written notice to Executive. In such event, the Company shall have no further liability or obligation to Executive for compensation hereunder; provided, however, that Executive will be entitled to receive, in addition to amounts due him in such circumstances under any pension or benefit plans of the Company (including, without limitation, the Company's Retirement Plan, Supplemental Retirement Plan (if any), Supplemental Income Plan and Savings Plan (if any), (i) during the 2002 Agreement Term, the payments prescribed under any disability benefit plan which may be in effect for employees of the Company and in which he participated (subject, however, to the minimum disability benefit provisions set forth in Section 1.4 hereof), (ii) a pro rata portion of the bonus, if any, referred to in Section 1.5 hereof in respect of the period prior to the date on which Executive first became disabled, (iii) payment of all accrued vacation, sick and banked bonuses, and (iv) accelerated vesting of all outstanding options and stock grants. Executive agrees, in the event of any dispute under this Section 8.1, to submit to a physical examination by a licensed physician selected by the Board of Directors of the Company. -15- 8.2 Death. In the event that Executive dies during the 2002 Agreement Term or any renewal term thereof, the Company shall pay to his executors, legal representatives or administrators an amount equal to the installment of his salary or compensation referred to in Section 1.4 hereof for the month in which he dies plus a further amount equal to six months' salary or compensation referred to in Section 1.4 hereof and thereafter, the Company shall have no further liability or obligation hereunder to his executors, legal representatives, administrators, heirs or assigns or any other person claiming under or through him; provided, however, that Executive's estate or designated beneficiaries shall be entitled to receive, in addition to amounts due him in such circumstances under any pension or benefit plans of the Company (including, without limitation, the Company's Retirement Plan, Supplemental Retirement Plan (if any), Supplemental Income Plan and Savings Plan (if any)), (i) during the 2002 Agreement Term, the payments prescribed for such recipients under any death benefit plan which may be in effect for employees of the Company and in which Executive participated (subject, however, to the minimum life insurance provisions set forth in Section 1.4 hereof), (ii) a pro rata portion of the bonus, if any, referred to in Section 1.5 hereof in respect of the year during which Executive died, (iii) payment of all accrued vacation, sick and banked bonuses, and (iv) accelerated vesting of all outstanding options and stock grants. -16- 8.3 Voluntary Termination. In the event that subsequent to June 1, 2002 Executive voluntarily terminates the 2002 Agreement Term at any time upon 30 days prior written notice to the Company. 8.4 Termination Without Cause. The Company shall have the right, exercisable at any time during the term of this 2002 Agreement or any renewal term thereof, to terminate Executive's employment without cause upon thirty (30) days prior written notice. If Executive's employment is terminated without cause, Executive shall be entitled to his then-base annual salary for the balance of Executive's Employment Term (such payments to be referred to as the "Severance Payments"), payment of the prior year annual incentive bonus (if earned but not yet paid) or pro-rata portion of the current year target bonus, payment of all accrued vacation, sick and banked bonuses, and accelerated vesting of all outstanding options and stock grants. In such event Executive's obligations under the provisions of Section 5.1 and Section 6 of this 2002 Agreement shall remain binding on Executive as long as he is eligible to receive Severance Payments from the Company pursuant to this paragraph, or two (2) years, whichever is longer. -17- 8.5 Resignation for Good Reason. (a) During the term hereof, Executive may regard Executive's employment as being constructively terminated and may, therefore, resign within 30 days of the occurrence of one or more of the following events, any of which will constitute "good reason" for such resignation: (i) failing to continue the appointment of Executive as Chief Executive Officer or providing written notice of non-renewal of the Employment Term in accordance with Section 1.1 hereof; (ii) materially diminishing the duties and responsibilities of Executive as Chief Executive Officer, as the same are set forth hereinabove; (iii) assigning to Executive duties and responsibilities inconsistent with his position as Chief Executive Officer; (iv) requiring Executive to relocate his place of employment to a location outside of the 48 contiguous states of the United States; or (v) the failure of the Company to obtain an agreement from any Successors and Assigns to assume and agree to perform this 2002 Agreement, as contemplated in Section 12 hereof. (b) In the event of the occurrence of any of the events or conditions described in Section 8.5(a) and in the event Executive wishes to resign on the basis of occurrence of such event, Executive shall give the Board of Directors notice of his proposed resignation within 30 calendar days of the occurrence of such event, and the Board of Directors shall have 30 calendar days following its receipt of such notice to remedy the occurrence giving rise to such proposed resignation, following which, if the Board of Directors fails to so remedy said occurrence, Executive shall be deemed to have resigned from his employment with the Company for good reason pursuant to this Section 8.5, effective as of the date of such notice, and will be entitled to severance in accordance with Section 8.4. In such event, Executive's obligations under the provisions of Section 5.1 and Section 6 of this 2002 Agreement shall remain binding on Executive as long as he is eligible to receive Severance Payments from the Company pursuant to this paragraph, or two (2) years, whichever is longer. -18- 8.6 Cause. Nothing in this 2002 Agreement shall be construed to prevent its termination by the Company at any time for "cause." For purposes of this 2002 Agreement, "cause" shall mean (i) Executive's willful or gross neglect (other than as a result of his disability) of his material duties and responsibilities as an employee and officer of the Company; provided that Executive has received written notice of such neglect from the Board of Directors, has had an opportunity to respond to the notice in a meeting with the Board or a duly appointed committee thereof, and has failed to substantially cure such neglect within 30 calendar days of such notice; (ii) conviction of (or his plea of guilty or nolo contendere to) any felony or any crime involving moral turpitude; (iii) fraud, gross misconduct, breach of trust or other act of dishonesty materially and negatively affecting the Company's business; provided that Executive has received written notice of such event from the Board of Directors and has had an opportunity to respond to the notice in a meeting with the Board of Directors or a duly appointed committee thereof; or (iv) any violation of Sections 3, 4, 5 and/or 6 of this 2002 Agreement. The Company may, in its discretion, suspend Executive with pay during its investigation or inquiry into such matters as may constitute "cause", and if Executive's employment is terminated for "cause" following such suspension, Executive will be responsible for repayment to the Company of all compensation and the value of all benefits provided to him during the period of such suspension. -19- Section 8.7 Payments to Executive. Payment to Executive under this Section 8 shall be made by the Company on a weekly basis. The Company's liability, if any, for payments to Executive by virtue of the operation of any subsection or clause in Section 8 of this 2002 Agreement shall be reduced by and to the extent of any compensation received by or accrued for the benefit of Executive, from any source, as an employee, owner, consultant or otherwise, during any period that such payments are made pursuant to this 2002 Agreement. 9. Extraordinary Termination. In the event of an Extraordinary Termination during the 2002 Agreement Term, as defined in Section 9.1(b), the following provisions shall apply. -20- 9.1. Definitions. The following terms shall have the meanings indicated for purposes of this Section 9: (a) "Control Transaction" means a change in control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, as in effect on the date of this 2002 Agreement, in a Form 8-K filed under the Exchange Act or in any other filing by the Company with the Securities and Exchange Commission; provided that, without limitation, such a Control Transaction shall be deemed to have occurred if: (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing thirty percent (30%) or more of the voting power of the then outstanding securities of the Company; (ii) during any period of two consecutive calendar years there is a change of twenty-five percent (25%) or more in the composition of the Board of Directors of the Company in office at the beginning of the period except for changes approved by at least two-thirds of the directors then in office who were directors at the beginning of the period. (b) "Extraordinary Termination" means (i) termination by the Company of the employment of Executive with the Company for any reason other than as set forth in Section 8 hereof, within three years after a Control Transaction, or (ii) resignation of Executive upon the occurrence of any of the following events within two years after a Control Transaction: (1) an assignment to Executive of any duties inconsistent with, or a significant change in the nature or scope of Executive's authority or duties from, those held by Executive immediately prior to the Control Transaction; -21- (2) a reduction in Executive's annual salary or bonus program in effect immediately prior to the Control Transaction; (3) the relocation of Executive's place of employment to a location outside of the 48 contiguous states of the United States; (4) during the 2002 Agreement Term, the failure by the Company to provide Executive with a reasonable number of paid vacation days at least equal to the number of paid vacation days to which he was entitled in the last full calendar year prior to the Control Transaction; (5) the failure of the Company to provide Executive with substantially the same fringe benefits that were provided to him immediately prior to the Control Transaction, or with a package of fringe benefits that, though one or more of such benefits may vary from those in effect immediately prior to the Control Transaction, is substantially at least as beneficial to Executive in all material respects to such fringe benefits taken as a whole; or (6) the failure of the Company to obtain the express written assumption of and agreement to perform this 2002 Agreement by any successor as and to the extent required by Section 12 of this 2002 Agreement. 9.2 Termination Payments. (a) In the event of an Extraordinary Termination during the 2002 Agreement Term, the Company shall, in addition to any amounts due for periods prior to the Extraordinary Termination, if any, pay to Executive in cash within sixty (60) days after the Extraordinary Termination, in consideration of all the provisions of this Agreement, an amount equal to the sum of: -22- (i) three times the greater of (1) Executive's annual salary at the time of the Control Transaction, or (2) Executive's annual salary immediately prior to the Extraordinary Termination; plus (ii) three times Executive's average annual bonus for the three prior years prior to the Extraordinary Termination; plus (iii) at the option of Executive and in lieu of his exercising any stock options and/or restricted stock grants that he might hold at the time, an amount equal to the excess of the aggregate market price at the close of business on the date of the Extraordinary Termination of the Company's shares subject to all stock options and/or restricted stock grants outstanding and unexercised, whether vested or unvested, over the aggregate exercise price of all such stock options and/or restricted stock grants; plus (iv) payment in lieu of all unused paid personal leave, accrued sick time and prior year bonuses held in "banked" accounts by the company. (b) Executive may elect to defer the payment of all or part of the amount to be paid to him under subsection (a) for up to twelve months after the Extraordinary Termination, or to have all or part of such amount paid to him in installments over a period not to exceed twelve months after the Extraordinary Termination. -23- (c) In addition to payment of the amounts specified in subsection (a); (i) for a period of twelve months following an Extraordinary Termination during the 2002 Agreement Term the Company will continue or cause to be continued, at no cost to Executive, medical care and life insurance benefits substantially comparable to those furnished to Executive by the Company immediately prior to the Extraordinary Termination and (ii) the Company shall provide Executive immediate vesting of all Company contributions to any established qualified or non-qualified retirement or savings programs. (d) It is the intention of the parties that the payments under this Section 9 shall not constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended, and any regulations promulgated by the Internal Revenue Service thereunder. In the event that the independent accountants acting as auditors for the Company on the date of a Control Transaction (or another accounting firm designated by them) determine that the payments under this Section constitute "excess parachute payments," the amounts payable under this Section shall be reduced to the maximum amount which may be paid without constituting the payments "excess parachute payments." Such determination shall take into account (i) whether the payments under this 2002 Agreement are "parachute payments" within the meaning of Section 280G and, if so, (ii) the amount of payments under this Section that constitutes reasonable compensation within the meaning of Section 280G. The fees and expenses of the accountants performing this calculation shall be paid in full by the Company. Nothing contained in this 2002 Agreement shall prevent the Company after a Control Transaction from agreeing to pay Executive compensation or benefits in excess of those provided in this 2002 Agreement. -24- (e) Notwithstanding and without regard to the provisions of Section 9.2(d) of this 2002 Agreement, in the event of an Extraordinary Termination within twenty-four (24) months after a Control Transaction, the Company agrees that the amount payable to Executive will not be reduced from that to which Executive would be entitled to receive in accordance with Sections 9.2(a), 9.2(b) and/or 9.2(c) hereof, irrespective of whether any or all of such payments would constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code. In addition, in the event of an Extraordinary Termination within twenty-four (24) months after a Control Transaction, the Company agrees to reimburse Executive, through a "gross-up" payment, for any excise tax imposed on Executive by to the Internal Revenue Code based on a determination that any portion of the payments provided by the Company to Executive pursuant to Sections 9.2(a), 9.2(b) and/or 9.2(c) constitute "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code. The calculation of payments provided by the Company to Executive pursuant to Sections 9.2(a), 9.2(b), 9.2(c) and/or 9.2(e) shall be made by the independent accountants acting as auditors for the Company on the date of a Control Transaction or by another accounting firm designated by the Company, which accounting services shall be paid for by the Company. 9.3 Interest and Expenses. If the Company shall fail or refuse to pay any amount due under this Section 9 within the time required, the Company shall pay to Executive, in addition to the payment of any other sums required under this Section: (a) interest, compounded daily, on any amount remaining unpaid from the date payment is required under this Section until payment to Executive, at the rate from time to time announced by Corestates Bank as its prime rate plus 1.5%, each change in the rate of interest hereunder to take effect on the effective date of the change in such prime rate; and -25- (b) on demand, the amount necessary to reimburse Executive for all expenses (including reasonable attorneys' fees and disbursements) incurred by Executive in enforcing any of the obligations of the Company under this Section. 9.4 Payment Obligations Absolute. The obligation of the Company to pay Executive the compensation and to make the arrangements provided herein shall be absolute and unconditional and shall not be affected by any circumstances, including, without limitation, any setoff, counterclaim, recoupment, defense or other right that the Company may have against him or anyone else except any offset due to the Company from Executive by virtue of Executive's engaging in conduct violative of any of the provisions of Sections 4, 5, 6(a) or 6(b) of this 2002 Agreement, or any offset provided for in Section 8.7 of this 2002 Agreement. Except as modified above, all amounts payable by the Company hereunder shall be paid without notice or demand. The Company waives all rights which it may now have or may hereafter have conferred upon it, by statute or otherwise, to terminate, cancel or rescind this Section, or any other section of this 2002 Agreement, in whole or in part. Except as modified above, each and every payment made hereunder by the Company shall be final and the Company will not seek to recover all or any part of such payment from Executive or from whomsoever may be entitled thereto, for any reason whatsoever, except as provided in Section 9.2(d) hereof Executive shall not be required to mitigate the amount of any payment provided for in this Section by seeking other employment or otherwise. -26- 10. Withholding of Taxes. The Company may withhold from any payments under this 2002 Agreement all federal, state or local taxes and FICA taxes as shall be required pursuant to any law, regulation or ruling. 11. Non-Alienation. Executive shall not have any right to pledge, hypothecate, anticipate or in any way create a lien upon any amounts provided under this 2002 Agreement, and no benefit payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law. 12. Successor Company. The Company shall require any successor or successors (whether direct or indirect, by purchase, merger, consolidation or otherwise, and whether in one transaction or a series of transactions) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to Executive, to expressly assume and agree to perform this 2002 Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this 2002 Agreement. As used in this 2002 Agreement, the "Company" shall mean the Company as herein before defined and any such successors to its business and/or assets. -27- 13. Survival. Notwithstanding the termination of this 2002 Agreement by reason of Executive's disability under Section 8.1, voluntary termination under Section 8.3, termination without cause or non-renewal of agreement under Section 8.4, resignation for good reason under Section 8.5, termination for cause under Section 8.6 or upon an Extraordinary Termination under Section 9, his obligations under Sections 3, 4, 5 and 6 hereof shall survive and remain in full force and effect indefinitely or for such period therein provided, and the provisions for equitable relief against Executive in Section 7 hereof shall likewise continue in force. 14. Governing Law. This 2002 Agreement shall be governed by and interpreted under the laws of the State of New York without giving effect to any conflict of laws provisions. -28- 15. Resolution of Disputes. In the event a dispute exists between the parties concerning any controversy or claim arising out of or relating to this 2002 Agreement, or the breach thereof, other than a dispute concerning or related to Sections 3, 4, 5, 6 and/or 7 hereof, the parties shall first attempt to resolve such dispute through mediation under the auspices of JAMS/Endispute in the City and State of New York in accordance with the rules of JAMS/Endispute. The mediation shall be before one (1) mediator from the existing panel of employment law mediators maintained by JAMS/Endispute. If mediation is unsuccessful in resolving the dispute the matter shall be referred to arbitration by an agreed-upon arbitrator selected from the panel of JAMS/Endispute's arbitrators specializing in employment law which shall not include the mediator who had attempted to mediate the dispute. In the event the parties are unable to agree upon either a mediator or an arbitrator from the respective JAMS/Endispute panel, either party may petition the Supreme Court, County of New York of the State of New York, for appointment of the mediator or arbitrator from the JAMS/Endispute panel. The arbitrator shall not have the authority to add to, subtract from or in any way modify the express written terms of the Agreement, and in rendering an award, the arbitrator shall be required to adhere to the express written provisions of this Agreement and the intention of the parties appearing therefrom. The mediation agreement or the decision of the arbitrator, as the case may be, shall be final and binding on the parties hereto and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The costs for the mediation and/or arbitration shall be borne equally by both parties. -29- 16. Compliance with Securities Laws. Executive shall comply with all federal and state securities laws and Company policies and guidelines relating thereto concerning insider trading, reporting requirements, and confidentiality of undisclosed internal material information about the Company. 17. Litigation, Mediation and Arbitration Expenses. In the event a judicial action or proceeding, mediation or arbitration is initiated by either party to enforce the provisions of this 2002 Agreement, the prevailing party, if any, as determined by the court, mediator or arbitrator, shall be entitled to recover reasonable costs, expenses and attorneys' fees from the other party. 18. Notices. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be deemed to have been given when hand delivered or mailed by registered or certified mail, as follows (provided that notice of change of address shall be deemed given only when received): If to the Company, to: Intermagnetics General Corporation 450 Old Niskayuna Road POB 461 Latham, NY 12110 Attention: Board of Directors -30- If to Executive, to: Glenn H. Epstein POB 261 540 County Route 17 North Chatham, NY 12132 or to such other names or addresses as the Company or Executive, as the case may be, shall designate by notice to each other person entitled to receive notices in the manner specified in this Section. 19. Contents of 2002 Agreement; Amendment and Assignment. (a) This 2002 Agreement supersedes all Prior Agreements and sets forth the entire understanding among the parties hereto with respect to the subject matter hereof and cannot be changed, modified, extended or terminated except upon written amendment approved by the Board of Directors of the Company and executed on its behalf by a duly authorized officer; provided, however, that (i) the provisions of Sections 3, 4 and 7 shall be in addition to, and not in limitation of, any other invention assignment, confidentiality or similar agreement between the Company and Executive. Without limitation, nothing in this 2002 Agreement shall be construed as giving Executive any right to be retained in the employ of the Company, except as specifically provided herein, during the 2002 Agreement Term. -31- (b) Executive acknowledges that from time to time, the Company may establish, maintain and distribute employee manuals or handbooks or personnel policy manuals, and officers or other representatives of the Company may make written or oral statements relating to personnel policies and procedures. Such manuals, handbooks and statements are intended only for general guidance and shall not be binding on Executive to the extent that they conflict with the provisions of this 2002 Agreement. (c) All of the terms and provisions of this 2002 Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, executors, administrators, legal representatives, successors and assigns of the parties hereto, wherever applicable, except that the duties and responsibilities of Executive hereunder are of a personal nature and shall not be assignable or delegable in whole or in part by Executive. 20. Severability. If any provision of this 2002 Agreement or application thereof to anyone or under any circumstances is adjudicated to be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect any other provision or application of this 2002 Agreement which can be given effect without the invalid or unenforceable provision or application and shall not invalidate or render unenforceable such provision or application in any other jurisdiction. -32- 21. Remedies Cumulative; No Waiver. No remedy conferred upon the Company or Executive by this 2002 Agreement is intended to be exclusive of any other remedy, and each and every such remedy shall be cumulative and shall be in addition to any other remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by the Company or Executive in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, and any such right, remedy or power may be exercised by the Company or Executive from time to time and as often as may be deemed expedient or necessary by the Company or Executive in their sole discretion. IN WITNESS WHEREOF, the undersigned have executed this 2002 Agreement as of the date first above written. ATTEST INTERMAGNETICS GENERAL CORPORATION /s/ K. Hyde /s/ James S. Hyde - --------------------------- ------------------------------------ James S. Hyde PhD Chairman, Compensation Committee of the Board of Directors Witness GLENN H. EPSTEIN /s/ Katherine M. Sheehan /s/ Glenn H. Epstein - ------------------------ ------------------------------------ EX-10.2 6 p319987_ex10-2.txt EMPLOYMENT AGREEMENT Exhibit 10.2 CONFIDENTIAL EMPLOYMENT AGREEMENT This Agreement effective the 19th day of October 2001 (the "Effective Date"), is by and between Intermagnetics General Corporation, a corporation having a principal place of business at 450 Old Niskayuna Road, Latham, New York 12110 ("Intermagnetics", or the "Company") and Philip J. Pellegrino, an individual residing at 58 Heron Drive, Marlboro, New Jersey 07746 ("Executive"). WHEREAS, the Company and Executive entered into an Offer of Employment Letter dated September 28, 2001 (the "Letter"); and WHEREAS, the parties now wish to enter into a formal agreement that supersedes the Letter; NOW, THEREFORE, in consideration of the matters recited, the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged by the parties, the Company and the Executive agree as follows: 1. Employment. Intermagnetics shall employ Executive as Sector President - Energy Technology and President of IGC-SuperPower, LLC ("SuperPower"). Executive shall commence his employment on October 19, 2001 and report directly to Intermagnetics' President and Chief Executive Officer. Executive shall perform the duties generally associated with the job description set forth on Schedule "A" of this Agreement. Notwithstanding the foregoing, Intermagnetics, through its Chief Executive Officer, retains the discretion to vary the title and duties of Executive from time to time; provided that Executives' title and duties shall not be less than at a senior executive level during the term of this Agreement, and provided further that any change shall not constitute a "diminution of authority" as defined in Section 2(g)(ii) of Intermagnetics' Enhanced Benefit Plan attached as Schedule "B" to this Agreement. 2. Compensation. A. Base Salary. Executive's annual salary will be $200,000, with the opportunity for increase on an annual basis. Intermagnetics currently reviews salaries for senior executives in July of each calendar year, but reserves the right to modify this review date. B. Management Incentive Bonus Program. Executive will participate in Intermagnetics' Management Incentive Bonus Program (the "Program") with a target bonus equal to 35% of Executive's Base Salary beginning in Intermagnetics' fiscal year 2002 (prorated for FY '02). Executive's qualitative goals under the Program will be determined within the first three months of his employment. Executive's target bonus after fiscal year 2002 will be reviewed annually based on the terms of the then current Program. CONFIDENTIAL C. Restricted Stock Grant. Executive will receive a restricted stock grant of 1,000 shares of Intermagnetics' Common Stock under the terms of the Company's 2000 Stock Option and Stock Award Plan. The grant shall vest in two equal installments: 500 shares on October 18, 2003 and 500 shares on October 18, 2004, subject to the terms of the Plan. D. Stock Options. Executive will receive a non-qualified stock option grant of 25,000 shares of Intermagnetics' Common Stock under the terms of the Company's 2000 Stock Option and Stock Award Plan. The exercise price will be the market closing price on October 19, 2001. This option will be exercisable in installments of 20% of the total at completion of each year, over 5 years following the grant. Executive will have a total of ten years to exercise all options. E. SuperPower Equity. Executive will be eligible to receive 5% of the equity in SuperPower. The Company will develop a plan for providing this equity ("Equity Plan") not later than April 12, 2002, with a vesting period not to extend past five (5) years. The vesting schedule will be consistent for all of the Company's executives eligible to participate in the plan. 3. Benefits. A. Enhanced Benefit Plan. Executive will be a participant in Intermagnetics' Enhanced Benefit Plan. The current fixed annual contribution to the Company's Deferred Compensation Plan on behalf of each participant is $8,000. Except as expressly modified by this Agreement, the terms (including the definitions) of the Plan shall apply to Executive, including the dispute resolution and non-compete/non-solicitation provisions of that Plan. B. Relocation Expenses. If Executive purchases a home in the Capital District within 24 months of the Effective Date of this Agreement, he will be eligible for full reimbursement (plus tax gross up) of incurred moving expenses and customary real estate costs related to the purchase of a new home and the sale (if any) of an existing home. In addition to one-time closing costs, Intermagnetics will reimburse for the cost of up to two (2) points or the equivalent amount paid to reduce Executive's mortgage interest rate to the rate he pays on the mortgage for his existing home. -2- CONFIDENTIAL C. Monthly Living Expenses. The Company will provide Executive with $2,000 per month for living expenses during the initial three (3) year term of this Agreement, provided that such payments shall cease if Executive exercises his rights as provided in 4(B) above. D. Medical, Dental, 401(k), etc. Executive shall be entitled to receive group medical insurance and other employee benefits, including, but not limited to, life insurance, disability insurance and 401(k) participation, subject to the same terms afforded other senior executive employees of Intermagnetics. Executive acknowledges that these employee benefit plans may be amended, enlarged, diminished or eliminated on a non-discriminatory basis by Intermagnetics from time to time at its discretion. E. Reimbursement for Legal/Financial Review. Intermagnetics will reimburse Executive, upon presentation of an invoice, up to $5,000 for professional financial advice in connection with the Equity Plan or legal review of the Letter and this Agreement. F. Paid Personal Leave. In addition to Intermagnetics' standard ten paid holidays, Executive will be entitled to four (4) weeks of paid personal leave per calendar year, which will be pro-rated for calendar year 2001 based on the Effective Date of this Agreement. 4. Executive Stock Purchase Plan. Executive will be expected to meet the guidelines for stock ownership set forth in the Company's Executive Stock Purchase Plan (i.e., not less than one times base salary) within his first six months of employment. A copy of the Executive Stock Purchase Plan has been provided to Executive and a stock acquisition loan will be made available to Executive pursuant to the terms of that Plan. 5. Term. The initial term of this Agreement shall be three (3) years beginning on October 19, 2001 and ending on October 18, 2004. Unless either party provides written notice of termination to the other six months prior to the end of the initial term, this Agreement shall extend for an additional two year term and shall be extended automatically for additional one year terms thereafter, unless either party provides twelve months written notice to the other of its intent to terminate at the end of the then applicable term. 6. Termination. A. For Cause. Intermagnetics may terminate this Agreement for "Cause" as defined in the Enhanced Benefit Plan. B. Disability. Intermagnetics may terminate Executive's employment if Executive is unable, as a result of physical or mental disability, to perform his duties as provided in this Agreement for a period in excess of twenty (20) weeks, consecutively or non-consecutively, in any twelve (12) month period. Termination under this provision shall be executed by written notice from Intermagnetics to Executive and shall be effective thirty (30) days following the written notice. For purposes of determining whether Executive has a "physical or mental disability" under this paragraph 7(B) he shall be evaluated by a physician retained by Intermagnetics at Intermagnetics' expense. Such physician must be Board Certified in the specialty for which Executive is being evaluated. Executive shall make all relevant medical records available to the physician retained by Intermagnetics and shall otherwise cooperate in such evaluation. -3- CONFIDENTIAL C. Death. This Agreement shall terminate in the event of Executive's death, effective on the date of his death. D. By Executive. Executive may terminate this Agreement at any time upon thirty days prior written notice, or sooner, as mutually agreed to by the parties to this Agreement. E. Severance Benefits. Except as specifically modified hereinbelow as to the number of months of Base Salary to be included in Severance Payments, and the provisions for accelerated vesting, all other provisions included in paragraph 5. of the Enhanced Benefit Plan will be applicable to Executive. In the event of an Extraordinary Termination, as defined in the Enhanced Benefit Plan, other than in connection with a "Control Transaction" (as that term is defined in the Enhanced Benefit Plan), Intermagnetics will provide Executive with twelve (12) months of his then current Base Salary in a Severance Payment, and will cover the expense associated with paying for benefits under COBRA during the salary continuation period. In addition, the stock rights provided under paragraphs 2(C) and 2(D) above would become fully vested and exercisable. In the event of an Extraordinary Termination in connection with a "Control Transaction" (as that term is defined in the Enhanced Benefit Plan) involving SuperPower, Executive will receive a Severance Payment equal to two years of his then current Base Salary, plus two times his previous year's incentive bonus. Stock rights will be the same as provided hereinabove, but, in addition, will provide that Executive's equity in SuperPower would become fully vested. 7. Confidentiality. The terms of the confidentiality and proprietary information agreement executed by Executive shall remain in full force and effect and shall not be altered or amended by this Agreement. 8. Miscellaneous. A. Governing Law. This Agreement is made under, and shall be interpreted, construed, and enforced in accordance with the laws of the State of New York, without regard to the conflicts of law provisions thereof. -4- CONFIDENTIAL B. Disputes. All disputes arising out of this Agreement or Executive's employment shall be subject to the dispute resolution provisions of the Enhanced Benefit Plan. C. Severability. If any provision or provisions of this Agreement, or any schedule hereto, are held to be invalid or unenforceable, such invalidity or unenforceability shall not affect or impair the validity or enforceability of the remaining provisions of this Agreement, which shall remain in full force and effect. D. Successors and Assigns. This Agreement shall benefit and bind the parties and the successors and assigns of Intermagnetics. E. Entire Agreement. This Agreement contains the entire agreement of the parties relating to its subject matter, and supersedes all prior agreements, negotiations and representations not specifically set forth in this Agreement or the schedules hereto. IN WITNESS HEREOF, the parties have caused this Employment Agreement to be executed as of the date first written above INTERMAGNETICS GENERAL CORPORATION By: /s/ Glenn H. Epstein /s/ Philip J. Pellegrino -------------------- ------------------------ Glenn H. Epstein Philip J. Pellegrino President and Sector President-Energy Technology Chief Executive Officer President-IGC SuperPower, LLC -5- EX-21 7 p319987_ex21.txt SUBSIDIARIES OF THE COMPANY Exhibit 21 Subsidiaries of the Company IGC-Medical Advances Inc. IGC-Polycold Systems Inc. Intermagnetics General Corporation Foreign Sales Corporation Superpower, Inc. EX-23 8 p319987_ex23.txt CONSENT OF INDEPENDENT AUDITORS Exhibit 23 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 2-80041, 2-94701, 33-2517, 33-12762, 33-12763, 33-38145, 33-44693, 33-50598, 33-55092, 33-72160, 333-10553, 333-42163, 333-75269, 33-51776 and 333-64822) of Intermagnetics General Corporation of our report dated July 12, 2002 relating to the financial statements and financial statement schedule, which appear in this Form 10-K. /s/ PricewaterhouseCoopers LLP Albany, New York August 22, 2002 EX-99.1 9 p319987_ex99-1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 99.1 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 Annual Report of Intermagnetics General Corporation (the "Company") on Form 10-K for the year ending May 26, 2002 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 Chief Executive Officer August 23, 2002 EX-99.2 10 p319987_ex99-2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 99.2 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 Annual Report of Intermagnetics General Corporation (the "Company") on Form 10-K for the year ending May 26, 2002 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 Chief Financial Officer August 23, 2002 -----END PRIVACY-ENHANCED MESSAGE-----