<PAGE>
CONFIDENTIAL
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(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 30, 1999
------------
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:
Title of each class Name of each exchange on which registered
Common Stock - $.10 par value American Stock Exchange
- ------------------------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
None
--------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
<PAGE>
The aggregate market value of the voting stock held by non-affiliates of the
registrant is approximately $66,000,000. Such aggregate market value was
computed by reference to the closing price of the Common Stock as reported on
the American Stock Exchange on August 16, 1999. 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 16, 1999 was 12,382,807.
DOCUMENTS INCORPORATED BY REFERENCE
The information required for Part III hereof is incorporated by reference from
the registrant's Proxy Statement for its 1999 Annual Meeting of Shareholders to
be filed within 120 days after the end of the registrant's fiscal year.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I............................................................................................................1
ITEM 1. BUSINESS DESCRIPTION......................................................................................1
ELECTROMAGNETICS SEGMENT.......................................................................................1
SUPERCONDUCTING MATERIALS SEGMENT..............................................................................8
REFRIGERATION SEGMENT.........................................................................................10
RESEARCH AND DEVELOPMENT......................................................................................13
INVESTMENTS...................................................................................................15
PERSONNEL.....................................................................................................17
EXECUTIVE OFFICERS OF THE REGISTRANT..........................................................................17
ITEM 2. PROPERTIES...............................................................................................19
ITEM 3. LEGAL PROCEEDINGS........................................................................................19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................................20
PART II..........................................................................................................20
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................................20
ITEM 6. SELECTED FINANCIAL DATA..................................................................................21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK..............................................29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..............................................................29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.....................29
PART III.........................................................................................................29
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................................29
ITEM 11. EXECUTIVE COMPENSATION..................................................................................29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..........................................30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........................................................30
PART IV..........................................................................................................30
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.........................................30
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS........................................................30
(b) REPORTS ON FORM 8-K.................................................................................33
SIGNATURES.......................................................................................................34
</TABLE>
iii
<PAGE>
SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Intermagnetics General Corporation ("Intermagnetics" or "Company") 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
various important assumptions, risks, uncertainties and other factors that could
cause the Company's actual results for fiscal year 2000 and beyond to differ
materially from those expressed in such forward-looking statements. These
important factors include, without limitation, the assumptions, risks, and
uncertainties set forth in Management's Discussion and Analysis of Financial
Condition and Results of Operations, as well as other assumptions, risks,
uncertainties and factors disclosed throughout this report.
PART I
ITEM 1. BUSINESS DESCRIPTION
Intermagnetics is a leading developer of superconducting materials and
related products. Superconductivity is the phenomenon in which certain materials
lose all resistance to the flow of electrical current when cooled below a
critical temperature. Devices made with superconductive materials require
special refrigeration equipment, known as cryogenic systems, to maintain
materials at the very cold temperatures at which superconductivity occurs.
Superconductors offer advantages over conventional conductors, such as copper,
by carrying electricity with virtually no energy loss, and generating
comparatively more powerful magnetic fields.
The Company designs, develops, manufactures and sells products in three
significant segments: Electromagnetics, Superconducting Materials and
Refrigeration. Electromagnetics consists primarily of low temperature
superconducting ("LTS") magnets, and radio frequency ("RF") coils. These
products are developed and sold through a corporate division, the IGC-Magnet
Business Group ("IGC-MBG"), and through IGC-Medical Advances Inc. ("IGC-MAI"), a
wholly-owned subsidiary. The Electromagnetics segment also includes development
of high temperature superconducting ("HTS") products and industrial magnetic
resonance ("MR") systems through the Company's Technology Development division
("IGC-TD"). Superconducting Materials consist of wire and cable manufactured and
sold by the Company's IGC-Advanced Superconductors division ("IGC-AS"). Three
wholly-owned subsidiaries make up the Company's Refrigeration segment. IGC-APD
Cryogenics Inc. ("IGC-APD") and IGC-Polycold Systems Inc. ("IGC-Polycold")
design, develop, manufacture and sell low and very low temperature refrigeration
equipment, and InterCool Energy Corporation ("ICE") designs, develops and sells
refrigerants for mobile and stationary applications. Prior to its fiscal year
1999, the Company divided its business into two industry segments for reporting
purposes: Magnetic Products and Refrigeration Products. In fiscal year 1999, the
Company adopted the "management approach" to segment disclosure required by
Statement of Financial Accounting Standards No. 131 effective for fiscal years
beginning after December 15, 1997. As a result, the Company now discusses its
business using the three segments listed above.
ELECTROMAGNETICS SEGMENT
-------------------------
A. Introduction
1. About MRI and other magnets generally
1
<PAGE>
The single largest existing commercial application for
superconductivity is the magnetic resonance imaging medical diagnostic system
("MRI System"). MRI Systems are used in hospitals and clinics for non-invasive,
diagnostic imaging of organs within a patient's body. At the core of an MRI
System is a large, highly engineered magnet system. The magnet system can be
based upon a conventional resistive electro-magnet, a permanent magnet or a more
sophisticated superconductive magnet. Superconductive magnets offer far more
powerful, high-quality magnetic fields (measured in Tesla) with virtually no
power loss. Higher magnetic field strengths correlate with improved
"signal-to-noise" ratios which can in turn lead to higher quality images in
shorter acquisition times. The annual commercial market for new MRI Systems in
calendar year 1999 is estimated at approximately $2 billion worldwide. The MRI
industry is dominated by a small number of system integrators who sell MRI
Systems to end-users. The General Electric Company ("GE"), Siemens Corporation
("Siemens"), Philips Medical Systems Nederlands B.V. ("Philips"), Hitachi
Medical Corporation ("Hitachi"), Toshiba Corporation ("Toshiba") and Picker
International Ltd. are the major MRI System integrators. The Company is a
supplier of key components to a number of these integrators. (See "Principal
Products" below.)
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. (See "Principal
Products - Other Superconductive Magnet Systems" below.)
2. About MRI Radio Frequency (RF) Coils Generally
An RF coil is a necessary component of an MRI System. An RF coil is
placed inside the bore of the magnet of an MRI System, or more generally placed
onto the patient. The RF coil acts as an antenna to receive, or transmit and
receive, radio frequency signals from the human body as it lies inside the
strong magnetic field of the MRI System. These radio frequency signals are
transferred electronically to the MRI System computer where they are
reconstructed into a clinically useful diagnostic image.
Specialized RF coils -- those dedicated to imaging particular parts of
the human anatomy, such as the knee, neck, wrist, foot, etc. -- increase the
number of diagnostic applications for which an MRI System can be used. The
increased number of applications increases the potential utilization rate of a
given MRI System, which typically helps to justify economically the acquisition
of that 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 RF
coil. The Company believes each MRI System could benefit from an array of six to
nine separate specialized RF coils.
An RF coil must work very closely with the MRI system in which it is
used. Consequently, RF coils are designed for a specific manufacturer's system
configuration and its related characteristics. Hence, RF coils may not 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, the market opportunity for any particular RF coil
model usually is limited to the specific system for which it is designed and
built.
2
<PAGE>
B. Principal Products
The Company derived approximately 58% and 63% of its net sales in
fiscal years 1999 and 1998, respectively, from the sale of products in its
Electromagnetics segment. Those sales consisted primarily of MRI-related
products, including superconductive MRI magnet systems, and RF coils. Within its
Electromagnetics segment, the Company produces the following:
o Superconductive MRI Magnet Systems. Through IGC-MBG, the Company manufactures
and sells superconductive MRI magnet systems to MRI System integrators for use
in stationary and mobile applications. During fiscal years 1999, 1998 and
1997, MRI magnet systems accounted for 45%, 52% and 58%, respectively, of the
Company's net sales. The Company's latest generation of superconductive MRI
magnet systems consists of three types of systems with field strengths of 0.5,
1.0 and 1.5 Tesla ("T").
The Company's MRI magnet systems are made with wire from IGC-AS and fitted
with cryogenic refrigerators (shield coolers) supplied by IGC-APD. In fact,
the Company is the only vertically integrated manufacturer of superconductive
MRI magnet systems, which the Company believes is an important source of
competitive strength.
o Other Superconductive Magnet Systems. Through IGC-MBG, the Company also
designs and builds superconductive magnet systems for various scientific and
defense applications. These usually are one-of-a-kind, custom-built systems.
For example, in fiscal year 1999, the Company manufactured and delivered an 8T
magnet for Fourier Transform Ion Cyclotron Resonance (FTICR) mass
spectrometry, which is used by research chemists to examine the structure of
large molecules. In addition, the Company is working with the National High
Magnetic Field Laboratory at Florida State University, to design and
manufacture a technology-leading superconductive magnet for a 900 MHz NMR
system. Systems with higher operating frequencies offer better sensitivity and
discrimination in the analysis of complex molecules.
o RF Coils for MRI Systems. Through IGC-MAI, the Company manufactures and sells
RF coils for use in MRI Systems. IGC-MAI's current product line includes ten
anatomical applications with more than fifty product groups available in
magnetic field strengths from 0.2T to 3.0T, for a total of more than 150
products. Typical RF coils have a selling price between $5,000 and $30,000,
although some custom or high end coils may sell for substantially more. In
fiscal years 1999 and 1998, RF coils accounted for 13% and 11%, respectively,
of the Company's net sales. Because the Company acquired IGC-MAI in March,
1997, RF coils accounted for substantially less than 5% of net sales in fiscal
year 1997.
3
<PAGE>
C. Marketing
The Company markets its magnet systems through its own personnel. In
addition, it licenses the manufacture and marketing of superconductive MRI
magnet systems to its European joint venture. That license will expire on
December 31, 1999. (See "European Joint Venture" below.) The Company also has a
wholly-owned European marketing and service subsidiary in the U.K., as well as a
foreign sales corporation located in Barbados. IGC-MAI markets its RF coils
through a direct sales force to domestic MRI System integrators and end-users,
such as hospitals, clinics and research facilities. IGC-MAI markets its RF coils
internationally to foreign-based MRI System integrators through direct sales and
to end-users through a distributor network.
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 Refrigeration segment)
for fiscal years 1999, 1998 and 1997 totaled $61.1, $57.3 and $53.1 million,
respectively, most of which were to European customers.
Principal Customers. Sales to customers accounting for more than 10% of
the Company's net sales aggregated approximately 54% of net sales in fiscal
1999, 55% of net sales in fiscal 1998 and 50% of net sales in fiscal 1997. (See
Note K of Notes to Consolidated Financial Statements included in response to
Item 8.)
A substantial portion of the Company's sales to the MRI industry are to
four customers, two of which are significant. Philips is the principal customer
for the Company's MRI magnet systems. The Company sells Philips certain
superconductive MRI magnet systems of various field strengths for incorporation
into Philips' proprietary MRI Systems. In fiscal year 1999, Intermagnetics and
Philips executed a new sales agreement with an initial five-year term. The term
is extended 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 the new agreement, which will cover all sales
to Philips beginning on January 1, 2000, Intermagnetics will be the sole
supplier of certain MRI magnet systems to Philips. Sales prior to that date are
covered by a pre-existing supply agreement among Intermagnetics, Philips and
Intermagnetics' joint venture. (See "European Joint Venture" below.) Sales to
Philips (including sales by the Refrigeration segment) amounted to approximately
41%, 44% and 50% of the Company's net sales for fiscal 1999, 1998 and 1997,
respectively.
The Company's second principal customer for MRI products is GE. The
Company sells LTS wire to GE for use in GE's MRI magnet systems, as well as RF
coils for use with GE's MRI Systems. Under the Company's current arrangement
with GE, GE places orders for LTS wire and RF coils from time to time with the
Company. Sales to GE (including sales by the Superconducting Materials segment)
accounted for approximately 13%, 11% and 9% of the Company's net sales for
fiscal 1999, 1998 and 1997, respectively.
D. European Joint Venture
In 1987, the Company and Alstom Energy, S.A. ("Alstom"), a leading
French industrial group in the areas of electrical and electromechanical
equipment, created a joint venture named Alstom Intermagnetics ("AISA") located
in France. AISA manufactures superconductive MRI magnet systems under a license
from the Company. AISA pays a royalty to the Company for the licensed
technology, and the Company shares in AISA's profits in proportion to its
ownership interest (45%). The Company accounts for its investment in AISA using
the equity method of accounting. AISA is party to a supply agreement with
Philips, and supplies a portion of Philips' requirements for superconductive MRI
magnet systems. That supply agreement will expire on December 31, 1999, and AISA
is not a party to any subsequent supply agreements.
On May 28, 1999, Intermagnetics, Alstom and AISA signed an agreement
terminating their joint venture. Effective May 30, 1999, the Company sold its
interest in AISA to Alstom for three hundred thousand dollars ($300,000 U.S.
currency). Effective December 31, 1999, AISA's magnet production will be
consolidated in the Company's Latham, New York facility, and AISA will cease
production of superconductive MRI magnet systems. In consideration of the
obligations of AISA and Alstom under the termination agreement, Intermagnetics
agreed to pay AISA nine million dollars ($9,000,000 U.S. currency) (the
"Payment"). The Company paid four million two hundred fifty thousand dollars
($4,250,000 U.S. currency) of the Payment to AISA in fiscal year 1999; the
remainder is due on or before March 31, 2000.
4
<PAGE>
E. Competition/Market
U.S. demand for MRI Systems recovered from flat sales recorded in 1995
and 1996 and rose to new highs in 1997 and 1998. The Company believes that
worldwide sales of MRI Systems in calendar 1999 should be about the same as the
strong sales in calendar 1998. The Company's growth in this segment is dependent
on its customers' ability to grow their respective businesses, and on the
Company's ability to attract new customers. There are no assurances that such
growth will occur. In addition, while the economic slowdown in Asia and Latin
America was offset by strong MRI System sales in the U.S., there are no
assurances that the slowdown will not adversely impact overall growth in sales
of MRI Systems over the next year.
MRI Systems compete indirectly with other diagnostic imaging methods
such as conventional and digital X-ray systems, nuclear medical systems,
ultrasound and X-ray CT scanners. Most large MRI Systems suppliers perceive
higher field strength imaging systems (1.0T or greater) based upon
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. In addition,
"open" magnet configurations based on permanent and resistive magnets have
enjoyed rapid growth in market share over the past four years.
o Superconductive MRI Magnet Systems. Within the market for superconductive
MRI magnet systems, the Company's competitors fall into two categories: (1)
magnet manufacturers that make MRI magnet systems for sale to MRI System
integrators; and (2) MRI System integrators that manufacture superconductive
magnet systems for their own use.
The Company considers Oxford Magnet Technology Limited ("OMT") its 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 Siemens, a leading MRI System integrator. OMT has sold
substantially more superconductive MRI magnet systems, has greater production
capacity and greater financial resources than the Company; however, the
Company believes it can compete effectively against OMT on the basis of
technology and price.
Competitors in the second category include companies like GE and Toshiba that
manufacture MRI magnet systems for use in their own MRI Systems. Historically,
such integrators have been unavailable to the Company as customers for its MRI
magnet systems. The Company has instead treated these companies as customers
or potential customers for component products, such as superconductive wire,
cryogenic systems and RF coils.
Within the market for superconductive MRI magnet systems, the Company also has
seen increased competition from low-field "open" MRI magnet systems. These
systems are designed to reduce the feeling of claustrophobia in a patient
undergoing imaging, and may give medical personnel greater access to the
patient during imaging. While the Company does not currently manufacture an
"open" MRI magnet system, such magnet systems have represented one of the
fastest growing segments of the market. The Company does manufacture a magnet
system for another rapidly growing segment of the market: compact high field
MRI systems. Philips is the Company's primary customer for this magnet system.
5
<PAGE>
o Other Superconductive Magnet Systems. Historically, the Company has competed
against many different companies domestically and internationally (including
Oxford, which dominates the worldwide market for NMR systems) for the
opportunity to design and build non-MRI superconductive magnet systems. To
date, the Company's sales of such systems have not been significant.
o RF Coils for MRI Systems. The Company believes that the market for RF coils
will grow faster than the market for MRI Systems because: (i) the number of
MRI applications using specialized RF coils is increasing, requiring that
additional, and more technically sophisticated RF coils be purchased for each
new and existing MRI System; (ii) RF coil technology is being improved
continuously, and with an average technology obsolescence rate of
approximately three years, existing coils need to be upgraded to
later-generation products; and (iii) an increasing number of existing MRI
Systems are being upgraded by MRI System integrators at a much lower cost than
replacing an entire MRI System. An added set of RF coils typically is needed
in connection with each upgrade.
The Company's primary RF coil competitors consist of independent manufacturers
that make RF coils for sale to MRI System integrators and end-users. The
Company also experiences competition from MRI System integrators that
manufacture RF coils for sale with their MRI Systems.
Most MRI System integrators outsource RF coil development and manufacture to
companies such as IGC-MAI, although, the Company believes Siemens and Philips
have maintained the most extensive in-house coil development activities of the
major MRI System integrators. If the MRI System integrators decide to pull RF
coil development in-house, access to the market for independent RF coil
manufacturers could be limited. The Company believes this risk is remote,
however, because 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. The
Company believes that, of these companies, two compete with IGC-MAI against
its full product range. The other competitors offer limited product lines and
generally lack an organizational infrastructure and extensive product
development capabilities to compete across IGC-MAI's broad product line at
this time. Competition generally is based upon price and diagnostic image
quality. To remain competitive, the Company must continue to offer high
quality, technically advanced products while reducing costs. As competition
increases, however, price pressures grow and there are no assurances that
IGC-MAI can remain competitive in the marketplace.
6
<PAGE>
F. Patents
The Company believes at the present time that patents are not a
significant competitive factor in the conduct of its business in the
Electromagnetics segment. The Company directly or indirectly either owns, or is
a licensee under a number of patents relating to RF coils and permanent magnet
systems. There are no assurances that changing technology and/or emerging
patents will not adversely impact the Company's current patent position or its
competitiveness. In addition, the Company's patent protection for emerging
technologies will have commercial value only to the extent the associated
technologies become commercially significant, of which there can be no
assurance.
G. Backlog
The Company does not consider backlog material to an understanding of
the Electromagnetics segment for two main reasons: (1) the manufacturing cycle
for magnet products has shortened significantly and the Company believes this
trend will continue and (2) because of short manufacturing lead times, backlog
is not a factor in the Company's RF coil business.
H. 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. The Company's investment in inventories for production of MRI magnet
systems is based primarily on production schedules required to fill existing and
anticipated customer orders.
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.
I. Warranty
The expense to the Company to date for performance of its warranty
obligations in the Electromagnetics segment has not been significant.
7
<PAGE>
SUPERCONDUCTING MATERIALS SEGMENT
---------------------------------
A. Introduction
There are two broad classes of superconductive materials. 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 (LTS cable is made up of bundles of LTS wire). 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). Although currently available HTS materials are economically viable only
in a rather narrow range of existing applications, the Company is working to
develop practical applications for HTS technology. (See "Research and
Development - New Products" below.)
LTS wire is used today mainly in the manufacture of MRI magnet systems
and for large sized accelerators. Emerging areas for application of LTS
wire/cable and HTS tape/wire include fault current limiters, transformers and
other electric power equipment. (See "New Product Development: HTS Materials &
Devices" below.)
B. Principal Products
Through IGC-AS, the Company manufactures and sells the two principal
LTS materials that are commercially available for the construction of
superconductive magnets: niobium-titanium ("NbTi") wire, and niobium-tin
("Nb3Sn") wire. In contrast to the relatively large market for NbTi wire, Nb3Sn
multi-filamentary wire, which has been under development for many years, is sold
only in limited quantities. This is because NbTi wire is more cost effective for
MRI magnet systems, which is the leading market for superconductive wire. The
Company has seen a significant increase in government-sponsored work for non-MRI
applications through its participation in the Large Hadron Collider project for
the European Organization for Nuclear Research ("CERN") in Switzerland, and the
Superconducting Tokamak Advanced Research Project in Korea. These multi-year
programs offer potential for increased non-MRI wire and cable orders. During
each of fiscal years 1999, 1998 and 1997, sales of superconductive wire and
cable (excluding intercompany sales) accounted for approximately 12% of the
Company's net sales.
C. Marketing
The Company markets its wire/cable through its own personnel. (See
"Electromagnetics Segment - Marketing" for information about principal
customers.)
D. Competition/Market
The single largest commercial market for superconductive wire is MRI.
In fact, most of the superconductive wire manufactured by the Company is used
for superconductive MRI magnet systems (either internally by IGC-MBG, or
externally by other customers). The Company believes that it, Oxford
Superconducting Technology and VACUUMSCHMELZE, A.G. are the major suppliers of
NbTi wire for the MRI market. While there are several other foreign and domestic
manufacturers of NbTi superconductive wire, none of them have been a significant
factor in the worldwide MRI market.
The Company has a contract to supply nearly 100 tons of superconductive
cable to CERN for the Large Hadron Collider Project, a European
government-sponsored program. An additional 1,400 tons of cable will be supplied
to CERN by European companies (Alstom, VACUUMSCHMELZE and Europa Metalli) and
100 tons of cable will be supplied by Furukawa Electric, a Japanese company. The
Company believes that the quantity of wire required for this project exceeds
that required for the global MRI market. Even with this significant project,
industry capacity for NbTi wire is greater than current demand, and the Company
has seen substantial pressure on prices. The Company's prices for
superconductive wire/cable currently are competitive, and the Company believes
that product quality and the ability to meet delivery schedules are factors
important to its market position. There are no assurances, however, that the
Company can remain competitive without future price reductions, or that the
Company can find means to offset price reductions with further cost reductions.
8
<PAGE>
The Company is also a major U.S. supplier of Nb3Sn superconducting
wire. Oxford Superconducting Technology also participates in the domestic
market, and there are a number of manufacturers of Nb3Sn wire in Japan and
Europe. Nb3Sn wire is used in the commercial nuclear magnetic resonance and high
field magnet markets, as well as in government-sponsored programs. The Company
believes that it and one other Company in Japan, Mitsubishi Electric, are the
only companies supplying substantial quantities of Nb3Sn material needed for the
Superconducting Tokamak Advanced Research Project in Korea.
In the area of LTS wire/cable, practical and more cost-effective HTS
materials developed by the Company and others could eventually reduce the market
for the Company's current LTS products, although the Company does not, at this
time, believe this is likely to happen in the near future. (See "Research and
Development - New Product Development: HTS Materials & Devices" below.)
E. Patents
The Company believes at the present time that patents are not a
significant competitive factor in the conduct of its business in the
Superconducting Materials segment. The Company directly or indirectly either
owns, or is a licensee under a number of patents relating to superconducting
materials and the manufacture thereof. There are no assurances that changing
technology and/or emerging patents will not adversely impact the Company's
current patent position or its competitiveness. In addition, the Company's
patent protection for emerging technologies will have commercial value only to
the extent the associated technologies become commercially significant, of which
there can be no assurance.
F. Backlog
The Company does not consider backlog material to an understanding of
the Superconducting Materials segment because the manufacturing cycle for such
material has shortened significantly and the Company believes this trend will
continue.
G. Raw Materials and Inventory
The number of sources for NbTi raw material required for production of
NbTi superconductive wire is declining. While the Company has not experienced
substantial difficulty in obtaining such materials, fluctuation in demand caused
by large projects such as the Large Hadron Collider being constructed by CERN in
Switzerland, could create temporary imbalances in supply and demand and thus
adversely impact the price of such raw material. The Company has negotiated a
multi-year contract with a key supplier in order to reduce this risk and
stabilize supply and price.
H. Warranty
The expense to the Company to date for performance of its warranty
obligations in the Superconducting Materials segment has not been significant.
9
<PAGE>
REFRIGERATION SEGMENT
---------------------
A. Introduction
Three wholly-owned subsidiaries comprise the Company's Refrigeration
segment: IGC-APD and IGC-Polycold, which design, manufacture and sell low
temperature (semi-cryogenic) and very low temperature (cryogenic) refrigeration
equipment; and ICE, which designs, develops and sells refrigerants, and is
developing refrigeration equipment. (See "New Product Development: Refrigerants
and Refrigeration Equipment" below.)
The Company derived approximately 30% and 25% of its net sales in
fiscal years 1999 and 1998, respectively, from the sale of products in its
Refrigeration segment.
B. Principal Products
IGC-APD's product line includes shield coolers (refrigerators) used in
the production of MRI magnet systems, a specialized cryogenic refrigeration
system sold under the registered tradename CRYOTIGER and specialized water pump
systems and cryopumps sold under the registered tradenames AquaTrap and Marathon
that are used primarily in the manufacture of semiconductors. Shield coolers
make up IGC-APD's largest product line.
IGC-Polycold manufactures and sells a line of low temperature
refrigeration systems in the -40 to -90 Celsius range. The Company acquired
IGC-Polycold in fiscal year 1998. (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations: Liquidity and Capital
Commitments" included in response to Item 7.) IGC-Polycold's refrigeration
systems are used in several markets, including optical coating, semiconductor
manufacturing, magnetic media, decorative coating, plastic coating and roll/web
coating. Sales to the optical coating industry made up the largest single market
for IGC-Polycold's products.
ICE sells a family of environmentally acceptable refrigerants under the
registered tradename of FRIGC. These products are marketed to replace
ozone-depleting chlorofluorocarbons ("CFC's"). CFC's are being phased out of use
globally under the Montreal Protocol, an international treaty signed by the U.S.
and ninety-three other nations. ICE's core product, FRIGC FR-12 (sold under
ASHRAE designation R-416A), is an EPA-approved replacement for R-12 (the leading
CFC refrigerant) in mobile and certain stationary air conditioning systems.
IGC-APD, IGC-Polycold and ICE also license certain mixed gas
refrigerant technology to third parties for use in markets in which the Company
does not otherwise participate.
C. Marketing
IGC-APD markets its shield coolers through a direct sales force located
in its Allentown, Pennsylvania headquarters, its office in Sunnyvale, California
and its European office in the U.K. IGC-APD's other cryogenic and semi-cryogenic
products are marketed worldwide through its direct sales force and through
scientific and vacuum equipment sales representatives and distributors. In
addition, IGC-APD has a worldwide partnership with Daikin Industries, Ltd.
("Daikin"), a Japanese company, pursuant to which the parties sell common
cryopumps under the "Marathon" trademark in well-defined territories. In fiscal
year 1999, IGC-APD licensed a non-core portion of its laboratory systems
business to a third party, which now markets and sells IGC-APD's laboratory
systems on an exclusive basis.
IGC-Polycold markets its line of refrigeration systems through a direct
sales force based in its San Rafael, California headquarters, and through a
worldwide network of sales representatives and two key distributors located in
Japan and Germany. In addition, IGC-APD and IGC-Polycold share common direct
sales and marketing teams.
ICE employs a direct sales force based in the Company's corporate
headquarters, and also continues to pursue a strategy of securing distributors,
nationally and internationally. In the North American market, ICE successfully
integrated the former market coverage of Pennzoil Products Company ("Pennzoil"),
into ICE's internal operations. Pennzoil withdrew from the refrigerant
distribution market at the end of calendar year 1998. In addition, in fiscal
year 1999, ICE successfully added a number of regional and national FRIGC FR-12
distribution outlets in North America. Internationally, ICE continues to explore
distribution opportunities in the Asian-Pacific markets. While Sumitomo
Corporation of America ("SCOA") is no longer an exclusive distributor of FRIGC
FR-12 in that region, ICE has developed strong relationships with a number of
other distributors in the market. ICE's lead distributor in Australia has been
particularly successful, making FRIGC FR-12 refrigerant the number one
alternative to R-12 in mobile applications during the 1998-1999 Australian
summer.
10
<PAGE>
D. Competition/Market
IGC-APD supplies shield coolers to IGC-MBG for its superconductive MRI
magnet systems. In addition, IGC-APD sells these refrigerators to other
manufacturers of superconducting MRI magnet systems. IGC-APD licenses Daikin to
produce shield coolers and other cryogenic products for the Japanese market.
Daikin has captured a significant portion of that market for shield coolers. The
Company considers its principal competitor in the manufacture of shield coolers
to be Leybold AG ("Leybold"). Leybold has greater production capacity and
financial resources than the Company, and has successfully locked up many of
IGC-APD's potential customers in multi-year supply agreements. In addition,
Sumitomo Heavy Industries supplies shield coolers to a major MRI System
integrator.
IGC-APD's principal competitors in its other markets include Helix
Technology Corporation ("Helix") (which markets its products under the names
"CTI Cryogenics" and "CTI") and Ebara Technologies, Inc. Helix is believed to
control 80% or more of the world market for cryopumps. Notwithstanding Helix's
market predominance, the Company believes that it can retain its position in the
market on the basis of technology and equipment performance. In addition,
IGC-APD's CRYOTIGER refrigeration system competes against machines known as
Stirling refrigerators (which the Company believes are more costly and less
reliable than CRYOTIGER), and against 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, this higher initial cost is offset by lower operating
and maintenance costs and greater ease of use. The Company believes there is a
significant opportunity for this product in the marketplace, however, there are
no assurances it will achieve widespread commercial success.
IGC-Polycold's major competitors include Sanyo and Shin Meiwa in Japan,
and Helix domestically. 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 price,
availability and product quality. In addition, with respect to both IGC-APD and
IGC-Polycold, there are no assurances that emerging technology will not
adversely impact their competitiveness.
In its mobile application, FRIGC FR-12 refrigerant is a substitute for
R-12 in automobile, truck and bus air conditioning systems. Since 1994, new
mobile air conditioning systems have been designed to use R-134a (an HFC offered
by DuPont) and FRIGC FR-12 does not compete in the new car market. Mobile air
conditioning systems manufactured before 1994 relied on R-12. ICE believes that
FRIGC FR-12 refrigerant is the most cost-effective alternative refrigerant for
these systems because its use does not require equipment changes. By contrast,
the use of R-134a refrigerant entails, in most cases, substantial equipment
changes to deliver effective and reliable cooling. There are several other
alternative refrigerants offered by competitors including some that sell at
lower prices than FRIGC FR-12. The Company believes that FRIGC FR-12's superior
technical performance and safety record give it a strategic advantage. Within
the mobile market, the Company believes that its biggest competitive challenges
come from the continuing availability of R-12, lower cost alternatives and low
cost (incomplete or "dirty") retrofit kits to adapt R-12 systems to the use of
R-134a.
ICE also markets FRIGC FR-12 as a direct substitute for R-12 in certain
stationary applications, such as building air conditioning systems,
refrigeration systems and food chillers. The stationary market employs a wide
variety of refrigerants. R-12 sales in the stationary market accounted for
approximately 12 million pounds of refrigerant sold nationally in calendar 1998.
Since 1994, vendors and end-users have been looking for alternative refrigerants
that provide effective, cost-efficient cooling. The Company believes that
end-users with R-12-based equipment who wish to end their use of ozone-depleting
R-12 face three choices: (1) make an expensive hardware purchase of either new
equipment (that uses other refrigerants) or major new components that convert
existing systems to R-134a refrigerant; (2) purchase an R-22-based alternative
blended refrigerant, such as R-401A offered by DuPont, R-409A or R-414B; or (3)
purchase FRIGC FR-12. The Company believes that FRIGC FR-12 refrigerant provides
a superior alternative to items (1) and (2) above. With respect to item (1)
above, FRIGC FR-12 requires little to no investment in hardware upgrades. This
is particularly true for medium temperature refrigeration applications such as
vending and ice machines. With respect to item (2) above, FRIGC FR-12 provides
11
<PAGE>
superior operating performance relative to R-22-based refrigerant blends,
primarily in the form of ease of installation, leak tolerance and potentially
less wear and tear on refrigeration equipment. R-409A and R-401A are marketed by
companies with significantly greater resources and access to better-established
distribution systems than those currently available to ICE, and R-414B gained
significant market acceptance in fiscal year 1999 based on price and aggressive
marketing. Nonetheless, the Company believes that the technical and operating
advantages of FRIGC FR-12 refrigerant are such that it can compete effectively
against these alternative refrigerants.
The Company believes that ICE's FRIGC refrigerants still face
significant challenges ahead, and there are no assurances they will win
wide-spread acceptance. In addition, notwithstanding the phase-out of domestic
production of R-12 refrigerant at the end of 1996, there remain substantially
greater stocks of such refrigerant today than previously anticipated. Relatively
easy access to R-12 has had an adverse impact on the near-term ability of ICE to
market FRIGC FR-12 refrigerant in both the mobile and stationary markets.
E. Patents
Patents are a significant competitive factor for the Company's
Refrigeration segment. The formula for FRIGC FR-12 is protected by a U.S. patent
and foreign patents are pending for certain countries targeted by ICE as
potentially viable markets. IGC-APD's CRYOTIGER line is based upon its patented
proprietary technology. IGC-APD's AquaTrap systems are based principally on
IGC-APD's proprietary CRYOTIGER technology. While IGC-Polycold does have some
patent protection for its products, patents currently are not a significant
competitive factor for IGC-Polycold. Patents may become more significant in the
future, however, as IGC-Polycold develops new products. The Company's success in
marketing its Refrigerant Products will depend on its continued ability to
obtain patents, maintain trade secret protection and operate without infringing
on the proprietary rights of others. No assurance can be given that any
additional patents will issue with respect to patent applications filed or to be
filed by the Company. Furthermore, even if such patents issue, there can be no
assurance that any issued patents will protect against competitive products or
otherwise be commercially valuable. No patents that the Company considers
significant expire during the next five years.
F. Backlog
Due to the relatively short production cycle for products in this
segment, the Company does not consider backlog to be material to an
understanding of the Refrigeration business.
G. Raw Materials and Inventory
IGC-APD purchases certain major components from single sources, but the
Company believes alternate sources are available. IGC-APD 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. IGC-Polycold generally maintains a
sufficient inventory of raw materials, assembled parts and partially and fully
assembled major components to meet production requirements.
With respect to its refrigerant products, ICE has an agreement with
Schenectady International, Inc. ("SII") for the purchase of FRIGC FR-12
refrigerant for the domestic market. SII's ability to supply commercial
quantities of FRIGC FR-12 refrigerant, however, will depend on the availability
of certain raw materials, which are manufactured by a small number of companies.
H. Warranty
In fiscal year 1999, IGC-APD experienced significant warranty
obligations which adversely affected its overall financial performance. IGC-APD
has addressed the warranty issue and does not believe performance of warranty
obligations will be significant in fiscal year 2000. The expense to the Company
in fiscal 1999 for IGC-APD's warranty obligations was $1,205,000.
12
<PAGE>
RESEARCH AND DEVELOPMENT
------------------------
A. General Research and Development
The Company believes its research and development activities are
important to its continued success in new and existing markets. Externally
funded development programs have directly increased sales of design services and
products and, at the same time, assisted in expanding the Company's technical
capabilities without burdening operating expenses. Under many of the Company's
government contracts, it must share any new technology resulting from such
contracts with the government, which includes the right to transfer such
technology to other government contractors; however, the Company currently does
not expect such rights to have a material adverse effect on it.
Previously, a substantial portion of the Company's research and
development expenditures had been covered by external funding, principally from
the U.S. government. In fiscal 1999, approximately 43% of total research and
development activities were paid by such external programs compared to
approximately 37% and 47% in fiscal years 1998 and 1997, respectively. During
fiscal years 1999, 1998 and 1997, product research and development expenses in
all segments were $10,886,000, $13,072,000 and $13,012,000, respectively. The
decline in fiscal year 1999 primarily resulted from the closure of the Company's
Field Effects division in December 1998, and the completion of certain
internally-funded programs.
The Company believes that, apart from continued reductions in federal
spending on research and development, three other factors will reduce external
funding from U.S. government sources. First, and especially in the context of
HTS technology, government contracts are emphasizing cost-sharing, which
requires the awardee to contribute 20% to 50% of the total cost of the
development effort. This cost-sharing requirement may limit the Company's
reliance on the government as a significant source of research and development
funds. Second, because the Company has more than 500 employees, it is not
eligible for certain government-sponsored research and development programs for
small businesses (defined as fewer than 500 employees). Third, the Company
expects in the future only to solicit government funding for programs of direct
strategic importance.
The Company can experience, in any given year, significant increases or
decreases in external funding depending on its success in obtaining funded
contracts.
B. New Product Development: HTS Materials & Devices
The Company believes that HTS materials in the form of tape (and to a
lesser extent wire) may, in the future, have a substantial impact on commercial
markets and applications for superconductors. In particular, the Company
believes HTS materials could be suitable for larger scale, specialized electric
power applications and high field magnets in five to ten years, depending upon
further advances. The Company's activities in this area have been funded in part
through government-supported research and development programs, including joint
research agreements.
The Company's activities in HTS include: (1) converting HTS materials
into usable tape/wire with acceptable electrical current densities and
competitive pricing levels; and (2) creating devices and equipment based upon
HTS tape/wire. The Company has focused primarily on bismuth-based HTS materials,
but it also is investigating tape using yttrium-based materials, which show
promise of even higher superconducting performance than their bismuth-based
counterparts. Currently, the Company does not participate in the costly and
highly competitive endeavor of identifying new HTS materials.
13
<PAGE>
The Company has continued to develop applications of HTS materials and
advanced devices in partnership with various utilities, manufacturers and
government laboratories, including a 5/10 MVA HTS transformer, a 15-kV HTS Fault
Current Limiter, HTS RF coils for low field MRI systems, and HTS current leads.
All of these products are in the development stage, and as yet remain
technologically and economically unproven. The Company has established a
dedicated facility for the manufacture of bismuth-based HTS tape for use in
sufficient quantities to develop certain of these prototype devices.
The Company does not believe its current operations depend upon
successful market acceptance of HTS-based products or devices, nor are the
Company's continued operations necessarily dependent on its success in the HTS
marketplace, even if HTS-based products or devices do become commercially
viable. However, if technical problems are solved and HTS materials become
economically feasible for commercial applications in fields in which the Company
competes, then the Company could be adversely affected unless it is able to
develop products or devices using HTS materials. Accordingly, while representing
a relatively high-risk, long-term investment of its resources, the Company
perceives HTS technology as being of important strategic interest.
Because of the perceived high commercial potential of HTS materials,
HTS research is a highly competitive field, and currently involves many
commercial and academic institutions 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 the Company will
have sufficient resources to bring HTS products to market or that emerging
patents will not adversely impact the Company's competitiveness.
C. New Product Development: Industrial Applications of Magnetic Resonance (MR)
In the area of specialty MR applications, the Company's principal
activity focuses on determining the commercial and technological feasibility of
using MR in industrial manufacturing -- specifically, for the automated sensing
and control of manufacturing processes and/or for testing the quality of
in-process or manufactured goods.
In principle, many fundamental properties of liquids and solids are
amenable to analysis by MR. In the industrial context referred to here, it has
been employed thus far primarily on a research basis and primarily by academic
research groups in the analysis of foods and beverages, plastics and rubbers,
petrochemicals, ceramics, explosives and narcotics, fuel propellants and even
timber.
Commercial sales of such products currently represent an insignificant
portion of the Company's total sales. The Company's sole commercial sales have
been two customized MR systems for the automated, on-line detection of the
presence of bacterial spoilage in aseptically packaged foods. The Company's MR
system performs a 100% non-destructive detection of spoilage in finished
packages. The method is sensitive to many types of contamination, is rapid
(throughput rates of several hundred containers per minute are typical) and is
non-contact -- indeed, multiple containers within a sealed shipping carton can
be inspected simultaneously but independently.
The Company's efforts currently are directed towards determining
applications that are technically and commercially viable, as well as further
exploiting the above-described spoilage detection application. There can be no
assurances that such efforts will be successful, or, if technically feasible,
that such applications will be cost-effective. An additional risk is that
commercialization of such products requires the Company to enter markets in
which it has little or no involvement. Finally, the Company expects to outsource
certain key technology components (e.g., MR systems electronics and software)
from third parties. Historically, the Company has obtained such services and
products from its strategic partner, SMIS Limited (See "Investments: SMIS
Limited" below.) There can be no assurance that the Company will be able to
secure such third party services and products, or that such services and
products will be available at the prices required to make the Company's proposed
products commercially attractive.
14
<PAGE>
D. New Product Development: Refrigerants and Refrigeration Equipment
ICE currently expects that in the future it will introduce other
refrigerants from its FRIGC family of refrigerants for other carefully targeted
market opportunities. ICE believes that its refrigerant technology -- which is
an outgrowth of its expertise in cryogenic technology -- may give it a superior
insight into refrigerant design and more flexibility in designing refrigerating
hardware. Nonetheless, many other companies and research facilities currently
are working to identify environmentally acceptable alternatives to the existing
CFC- and HCFC-based refrigerants. Many of these companies are larger, better
financed, better staffed and more experienced in the refrigerant business than
ICE. There can be no assurances that ICE's future refrigerants will win market
acceptance.
In fiscal year 1998, ICE obtained a patent for an advanced subcooler
device. ICE is in the process of Beta Site testing this device for the
stationary market. This hardware could dramatically increase the energy
efficiency of existing and new stationary refrigeration systems, such as display
case systems (typically found in supermarkets), refrigerated warehouses and ice
rinks. ICE will be competing in this market with other larger companies with
potentially greater resources, and there are no assurances that the Company can
create a device with sufficient technical and cost advantages to compete in the
market.
E. New Product Development: Superconducting Magnetic Energy Storage ("SMES")
A SMES system acts as an electro-magnetic storage system that can
protect critical electrical power loads from interruptions, spikes and sags. The
Company has developed an advanced prototype micro-SMES unit for the U.S. Air
Force. That system was delivered and installed in fiscal year 1998 and field
testing was carried out in fiscal year 1999. At this time, the Company has no
additional orders for SMES systems, and does not anticipate investing in
additional development.
While SMES may become commercially viable in the future, at this time
the cost of SMES is significantly higher than for other energy storage systems.
Additionally, the Company faces other competitors interested in the SMES market,
some of which may have superior resources and patent positions.
F. New Product Development: Low-cost, Permanent Magnet-Based MRI Systems
The Company ceased production of this product in November, 1998 and
closed its Field Effects division, which previously had manufactured this
system. (See Note C of the Notes to Consolidated Financial Statements included
in response to Item 8.)
INVESTMENTS
-----------
A. ULTRALIFE BATTERIES, INC.
The Company owns 975,753 shares of the common stock (approximately 9.3%
of the outstanding common stock) of Ultralife Batteries, Inc. ("Ultralife"),
acquired at a cost of $7,015,000. Headquartered in Newark, N.Y., Ultralife
focuses on markets that require increased energy density and extended shelf
life. Ultralife produces lithium batteries that are the same size and voltage as
standard batteries, but have double the operating life and a longer shelf life
(up to 10 years) than alkaline or zinc carbon batteries. These batteries
currently command a premium price in the market for long-life batteries. In
addition, Ultralife produces advanced rechargeable batteries that are being
commercialized for notebook computers, cellular telephones and other portable
electronic products.
15
<PAGE>
The Company is represented on Ultralife's Board of Directors.
Ultralife's common stock is traded on the NASDAQ National Market System under
the symbol ULBI. The market value of the Company's total investment in
Ultralife, the sale of which is restricted under U.S. securities laws, was
$4,452,000 and $11,221,000 at May 30, 1999 and May 31, 1998, respectively. The
Company believes the current decline in Ultralife's market value is temporary.
The Company sold no shares of its Ultralife holdings in its fiscal years 1999,
1998 and 1997; however, it may in the future sell Ultralife shares as market
conditions warrant.
B. SMIS LIMITED
As of May 30, 1999, the Company owned 354,223 of the outstanding
ordinary shares (approximately 23%) of SMIS, Limited, acquired at a cost of
$3,530,000, and 980,000 redeemable preference shares of SMIS purchased at a cost
of $1,511,000. The Company also has provided additional loans to SMIS which are
convertible into capital stock of SMIS. (See Note D to the Notes of Consolidated
Financial Statement included in response to Item 8.) During the year ended May
31, 1998, SMIS obtained a line of credit in the amount of 2,500,000 British
Pounds Sterling ("Pounds") (approximately $4,025,000 as of May 30, 1999). The
Company guaranteed repayment of one half of the outstanding balance up to
1,250,000 Pounds (approximately $2,000,000 as of May 30, 1999) in the event of
default by SMIS. As of May 30, 1999, SMIS had drawn approximately 2,250,000
Pounds (approximately $3,622,000) against the line.
During the Company's fiscal year 1999, SMIS experienced cash flow
problems, and in the second half of the fiscal year, also experienced declining
sales and operating losses as a result of its inability to achieve the
anticipated improvements in its business plan, including new product orders,
improved manufacturing results and cost reductions. In March, 1999, it was
determined by SMIS management that additional funds would be required to sustain
operations based on projected cash flows and the deterioration in its backlog.
Based on the Company's evaluation of SMIS' past performance and projections for
future results it was determined by Intermagnetics' management in the fourth
quarter of fiscal 1999 that it would not provide additional funding to SMIS.
Additionally, during July, 1999, SMIS management agreed in principle to sell the
majority of its operations for a price which will result in no return to the
Company. The Company, therefore, has written off its investment in, and advances
to, SMIS and provided for the estimated amount of guaranteed debt it will be
required to re-pay on SMIS' behalf. The total amount of this charge was $7.3
million, of which approximately $2 million related to guaranteed debt. (See Note
D of the Notes to Consolidated Financial Statements included in response to Item
8.)
C. KRYOTECH, INC.
On March 23, 1998, the Company acquired 1,172,840 shares (the "B
Shares") of the Series B Convertible Preferred Stock, $.01 par value per share
(the "Series B Stock"), of KryoTech, Inc. a privately-held, South Carolina
corporation, and a warrant (the "Warrant") to purchase an additional 237,416
shares (the "Warrant Shares") of Series B Stock. The Company paid $4,750,000 for
the B Shares. The Warrant may be exercised, in whole or in part, at any time
before it expires on March 23, 2008. The Warrant may be exercised at a price
equal to $1.053 per Warrant Share. On an as-converted basis, the Company's
holdings represent 20.7% of the outstanding equity of KryoTech.
KryoTech was formed on March 15, 1996 for the purpose of developing,
marketing, manufacturing and selling thermal management products which are
designed specifically for the computer industry. More specifically, KryoTech has
successfully demonstrated that active cooling of computer chips can improve chip
performance.
As partial consideration for the Warrant, Intermagnetics granted to
KryoTech an exclusive, worldwide, fully paid up, irrevocable right (the "Right")
to represent and sell products for application to, and use in, computer chip
cooling, based upon IGC-APD's and IGC-Polycold's refrigeration technology
(including mixed gas technology). Unless otherwise renewed or extended by
agreement of the parties, the Right has a term ending on the later of (1) March
28, 2005, or (2) the date on which Intermagnetics' equity ownership interest in
KryoTech falls below 15% on a fully diluted basis. KryoTech may not sublicense,
sell or transfer the Right. The scope of the Right expressly excludes the
cryo-cooling of other electronic devices, such as communications equipment of
any type. The Company's equity ownership interest may be diluted in fiscal year
2000 as a result of a direct public offering being made by KryoTech in calendar
year 1999; however, the Company does not expect that offering to cause its
ownership interest to fall below 15%.
16
<PAGE>
D. POWERCOLD CORPORATION
In September 1998, the Company acquired 1,250,000 shares of the Series
A Preferred Stock of PowerCold Corporation ("PowerCold") for approximately
$1,000,000. PowerCold is a solution provider of energy-efficient products in the
refrigeration, air-conditioning and power industries and has strong ties to the
supermarket refrigeration industry. (See "Management's Discussion and Analysis
of Financial Condition and Results of Operations: Liquidity and Capital
Commitments" included in response to Item 7 hereto.)
PERSONNEL
---------
On May 30, 1999, the Company employed 583 people.
Within the Superconducting Materials segment, the production and
maintenance employees of IGC-AS, in Waterbury, Connecticut, are represented by
the United Steelworkers of America ("United Steelworkers"). The Company and the
United Steelworkers have a five-year collective bargaining agreement effective
June 1, 1998. Within the Refrigeration segment, the production employees at
IGC-APD in Allentown, Pennsylvania, are represented by the International
Association of Machinists and Aerospace Workers ("IAMAW"). The Company and IAMAW
have a three-year collective bargaining agreement effective August 23, 1997.
There is great demand for trained scientific and technical personnel,
and the Company's growth and success will require it to attract and retain such
personnel. Many of the prospective employers of such personnel are larger and
have greater financial resources than the Company and may be in a better
position to compete with the Company for prospective employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
As of the date of this report, the executive officers of the Company
were:
<TABLE>
<CAPTION>
Name Position Age
- ---- -------- ---
<S> <C> <C>
Carl H. Rosner Chairman of the Board of Directors 70
and Chief Executive Officer (Retired as
Chief Executive Officer effective May 31, 1999)
Glenn H. Epstein President and Chief Operating Officer 41
(Appointed Chief Executive Officer
effective June 1, 1999)
Michael C. Zeigler Senior Vice President -- Finance 53
& Chief Financial Officer
Leo Blecher Vice President and General Manager -- 53
IGC-Magnet Business Group
David Dedman Vice President and General Manager -- 45
IGC-APD Cryogenics Inc.
and IGC-Polycold Systems Inc.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Name Position Age
- ---- -------- ---
<S> <C> <C>
Ian L. Pykett Vice President -- IGC-Technology 46
Development
Robert S. Sokolowski Vice President and General Manager -- 46
IGC-Advanced Superconductors
(Transferred to Vice President of
Market Development, a non-officer position,
effective June 1, 1999)
Richard J. Stevens Vice President and General Manager -- 57
IGC-Medical Advances Inc.
</TABLE>
Carl H. Rosner is a principal founder of the Company and has been
Chairman of the Board of Directors of the Company since the Company's formation
in 1971. Before that Mr. Rosner headed the Superconductive Products Operation of
the General Electric Company. Mr. Rosner retired as the Company's Chief
Executive Officer effective May 31, 1999.
Glenn H. Epstein was named President and Chief Operating Officer on May
5, 1997. Effective June 1, 1999, he was appointed Chief Executive Officer. Prior
to joining the Company, Mr. Epstein worked for Oxford Instruments Group, plc in
various capacities between 1986 and April, 1997, and most recently held the
position of President of the Nuclear Measurements Group, Inc., a wholly-owned
subsidiary of Oxford Instruments, plc. Mr. Epstein also worked for the General
Electric Company between 1981 and 1986.
Michael C. Zeigler was appointed Senior Vice President -- Finance and
Chief Financial Officer of the Company in September, 1993. He previously served
as Vice President-Finance and Chief Financial Officer of the Company from June,
1987 until his appointment as a Senior Vice President, and served as the
Company's Controller from June, 1985 through June, 1987.
Leo Blecher was appointed Vice President and General Manager of IGC-MBG
in April, 1997. He previously held the title of Deputy 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.
David Dedman was appointed Vice President and General Manager of
IGC-APD and IGC-Polycold in September, 1998. Prior to joining the Company, Mr.
Dedman served as Executive Vice President, Global Business Development for
SubMicron Systems Corporation and has held various executive management
positions in a range of technology companies including EI DuPont de Nemours,
Emerson Electric and Tylan General.
Ian L. Pykett, Ph.D., was appointed Vice President of IGC-TD in 1991.
Prior to joining the Company, Dr. Pykett had been President and Chief Executive
Officer of Advanced NMR Systems, Inc., a diagnostic imaging company he
co-founded in 1983.
Robert S. Sokolowski, Ph.D., was appointed Vice President and General
Manager of IGC-AS in February, 1996. Dr. Sokolowski served as the Company's
Manager of High Temperature Superconductor Operations between November, 1992 and
February, 1996. Effective June 1, 1999, Dr. Sokolowski was named Vice President
of Market Development, a new, non-officer position within the Company.
Richard J. Stevens became Vice President and General Manager - IGC-MAI
upon its acquisition by the Company in March, 1997. An original founder of
Medical Advances, Inc., Mr. Stevens had been its President since 1985. Prior to
that, Mr. Stevens was a marketing and advertising executive for seventeen years
with the General Electric Company. He spent twelve years of his career at the
General Electric Company in the Medical Systems Group and five years in
materials technologies businesses, and held the title of Manager of Computed
Tomography Marketing in the Medical Systems Group from 1981 to 1985.
18
<PAGE>
ITEM 2. PROPERTIES
The Company's corporate offices, IGC-MBG, IGC-TD and ICE offices are
located in approximately 146,000 square feet of space located in Latham, New
York (the "Latham Facility"). The Company owns 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.) In fiscal year 1999, the
Company entered into a lease agreement for up to 65,000 square feet of office
and manufacturing space in nearby Schenectady, New York. Approximately 32,600
square feet of that space is expected to be available for occupancy in fiscal
year 2000, and is expected to become the future home of ICE and certain R&D
activities related to HTS manufacturing. The lease has a 20 year term beginning
on the date the premises are available for occupancy.
The Company's HTS facility is located in approximately 19,000 square
feet of leased space located in Cohoes, New York. The three-year lease expires
on January 31, 2000, with two consecutive three year renewal terms. The Company
plans to move some or all of this activity to the manufacturing space it is
renting in Schenectady (see above).
IGC-AS' offices and production facilities are located in Waterbury,
Connecticut in premises of approximately 212,700 square feet (of which 57,900
square feet are presently being used) pursuant to a thirty-year prepaid lease
that expires in December, 2021. The facility's equipment includes a drawbench
with a pulling force of up to 150,000 pounds and a length of approximately 400
feet. The Company believes that this drawbench is one of the largest in the
world.
The former IGC Field Effects division operated out of premises totaling
approximately 21,900 square feet in Tyngsboro, Massachusetts. The facility is
subject to a five-year lease expiring in July of 2001.
IGC-APD operates out of a building, which it owns, in Allentown,
Pennsylvania totaling approximately 56,550 square feet.
IGC-MAI leases approximately 19,650 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, 1999, and may be renewed for a
successive one-year term. While the Company currently believes that it will be
able to renew this lease, the Research Park expects that IGC-MAI eventually will
purchase or lease property within the Park for the purpose of building a new
facility. IGC-MAI is studying the possibility of building or moving to a new
facility.
IGC-Polycold Systems Inc. leases approximately 27,900 square feet of
manufacturing and office space in three buildings located in San Rafael,
California. The lease for one building expires in 1999 and is in the process of
being renewed. Leases for the two other buildings expire in 2002.
The Company believes its facilities are adequate and suitable for its
current and near-term needs.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to any
material legal proceeding. The Company is, from time to time, a party to
litigation arising in the normal course of its business.
19
<PAGE>
To the Company's knowledge, no director, officer, affiliate of the
Company, holder of 5% or more of the Company's Common Stock, or associate of any
of the foregoing, is a party adverse to, or has a material interest adverse to,
the Company or any of its subsidiaries in any proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the American Stock Exchange
under the symbol IMG. The high and low sales prices of the Common Stock for each
quarterly period for the last two fiscal years, as reported on the American
Stock Exchange, are shown below.
Closing Prices(1)
-----------------
Fiscal Year 1998 High Low
- ---------------- ---- ---
Quarter Ended August 24, 1997 $13 7/16 $ 9 15/16
Quarter Ended November 23, 1997 11 7/8 8 7/16
Quarter Ended February 22, 1998 9 3/16 7 3/4
Quarter Ended May 31, 1998 11 1/2 9
Fiscal Year 1999
- ----------------
Quarter Ended August 30, 1998 $ 9 15/16 $ 6 3/4
Quarter Ended November 29, 1998 7 3/4 5 7/16
Quarter Ended February 28, 1999 6 1/2 5 5/16
Quarter Ended May 30, 1999 12 1/4 5 9/16
- ------
(1) The closing prices have been adjusted to reflect a two percent stock
dividend distributed on September 17, 1998, to stockholders of record
on August 27, 1998.
There were 1,941 holders of record of Common Stock as of August 16,
1999. 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. The Board of Directors of the Company has declared a policy
of granting annual stock dividends where, and to the extent that, the
performance of the Company warrants such a declaration. The Company did not
declare any stock dividend for fiscal year 1999. 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.
20
<PAGE>
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.
<TABLE>
<CAPTION>
(Dollars in Thousands Except Per Share Amounts)
---------------- ----------------- ---------------- ----------------- ---------------
For the Fiscal Year Ended May 30, 1999 May 31, 1998 May 25, 1997 May 26, 1996 May 28, 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net sales $102,871 $95,894 $87,052 $88,467 $83,877
Gross Margin 32,739 35,685 26,200 22,279 23,703
Income (loss) before
income taxes (8,241) 4,744 4,035 6,882 6,512
Net income (loss) (7,029) 2,753 2,615 4,427 4,007
Per common share - diluted (0.57) 0.21 0.20 0.35 0.33
At End of Fiscal Year 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Working capital $34,389 $45, 493 $49,346 $53,642 $52,655
Total assets 125,458 127,776 115,889 112,397 103,706
Long-term debt
(net of current maturities) 26,631 28,833 29,105 29,364 39,807
Accumulated deficit (8,061) (1,081) (1,643) (1,727) (2,495)
Shareholders' equity 72,173 83,801 73,087 67,296 53,305
</TABLE>
- ------
(a) Income (loss) per common share - diluted 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 - diluted has been restated to give
effect to the 2% stock dividend distributed in September 1998, September,
1997 and August, 1996 and the 3% stock dividend distributed in June, 1995.
(d) Prior years have been reclassified to conform to current years presentation.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY
- -------
The following tables set forth, for the periods indicated, the
percentages which certain items reflected in the financial data bear to net
sales of the Company and the percentage change of such items from period to
period. See the Consolidated Financial Statements, located elsewhere in this
report, for financial information to which the percentages set forth below
relate.
<TABLE>
<CAPTION>
Period to Period
Relationship to Net Sales Increase (Decrease)
------------------------------------------------------ ----------------------
Fiscal Year Ended Fiscal Years
------------------------------------------------------ ----------------------
May 30, May 31, May 25, 1998- 1997-
1999 1998 1997 1999 1998
------------ ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 7.3% 10.2%
Cost of products sold 66.4 62.8 69.9 13.5 (1.1)
Inventory written off in
restructuring 1.8 -- -- ** **
------- -------- --------
Gross margin 31.8 37.2 30.1 (8.3) 36.2
Product research and
development 6.0 8.4 7.8 (23.5) 19.9
Marketing, general and
administrative 20.9 21.7 18.2 3.0 31.6
Amortization of
intangible assets 1.3 1.3 0.4 12.1 261.3
Restructuring charges 2.8 -- -- ** **
------- -------- --------
31.0 31.4 26.4 5.9 31.5
------- -------- --------
Operating income 0.8 5.8 3.7 (85.9) 69.6
Interest and other
income 1.9 2.5 3.4 (17.9) (20.2)
Interest and other
expense (2.1) (2.2) (2.3) 2.2 6.5
Write-off of investment in
unconsolidated affiliate (7.1) -- -- ** **
Equity in net loss of
unconsolidated affiliates (1.5) (1.1) (0.2) 47.8 454.4
-------- -------- --------
Income (loss) before
income taxes (8.0) 5.0 4.6 (273.7) 17.6
Provision for income
taxes (benefit) (1.2) 2.1 1.6 (160.9) 40.2
-------- ------- -------
Net income (loss) (6.8%) 2.9% 3.0% (355.3%) 5.3%
========= ======== ========
</TABLE>
- -------
** Not applicable for purposes of this table.
22
<PAGE>
The statements contained in this annual report which are not historical
fact are "forward-looking statements" that involve various important
assumptions, risks, uncertainties and other factors which could cause the
Company's actual results for fiscal 2000 and beyond to differ materially from
those expressed in such forward-looking statements. These important factors
include, without limitation, the assumptions, risks, and uncertainties set forth
herein, as well as other assumptions, risks, uncertainties and factors disclosed
elsewhere in this report and in the Company's press releases, shareholders'
reports and filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS -- FISCAL 1999 and FISCAL 1998
Consolidated
Net sales increased 7.3% in fiscal 1999 compared to an increase of
10.2% in fiscal 1998. Sales for fiscal 1999 grew mainly due to the inclusion of
full year results from the acquisition of IGC-Polycold Systems Inc.
("IGC-Polycold"), which was added to the Refrigeration segment in November,
1997. Sales for fiscal 1998 increased because of the IGC-Polycold acquisition
and the inclusion of a full years results of IGC-Medical Advances Inc.
("IGC-MAI"), which was added to the Electromagnetics segment in March, 1997.
As a percentage of net sales, gross margins declined in fiscal 1999 due
mainly to inventory write-offs, production problems, and an unfavorable sales
mix in certain business groups. Gross margins had improved in fiscal 1998 due to
cost-reduction efforts and a favorable product mix, including the acquisition of
IGC-MAI and IGC-Polycold.
Looking forward, the Company expects greater sales and earnings in
fiscal 2000. This expectation is based on the following assumptions, among
others:
-the market for MRI systems continues to grow;
-the Company can successfully contend with continued competitive
pressure on selling prices in the MRI marketplace for magnets and
materials;
-anticipated sales of refrigerants occur;
-sales of refrigeration products to Asian customers increase;
-reductions in production costs in the operating segments continue,
including resolution of production problems at IGC-APD Cryogenics Inc.
("IGC-APD");
-no adverse consequences of the "Year 2000 Problem" or any
litigation occur; and,
-unconsolidated affiliate improves operating performance.
Also, the Company expects future sales growth due to:
-the signing of a five-year agreement with Philips Medical Systems to
be the exclusive developer and supplier of advanced superconductive
magnet systems, with a total value estimated to exceed $350,000,000;
-the purchase of manufacturing rights from the Company's European joint
venture partner, as described below; and
-the signing of a $16,400,000 agreement to supply over four years
superconducting materials for the Large Haldron Collider (which will
be, when completed, the world's most powerful particle accelerator), at
the European Laboratory for Particle Physics located near Geneva,
Switzerland.
Company-funded product research and development expenses decreased in
fiscal 1999 by 23.5% compared to an increase of 19.9% in fiscal 1998, almost all
of which was due to acquisitions. The decline in 1999 resulted from the
completion of certain internal programs and the termination of the Field Effects
Division business.
Marketing, general and administrative expenses increased 3.0% in fiscal
1999 compared with an increase of 31.6% in fiscal 1998. The modest increase in
1999 was due to the inclusion of IGC-Polycold for a full year, offset by
reductions in other refrigeration products and the termination of Field Effects.
The 1998 increase was due primarily to acquisitions, increased marketing
expenses for IGC-APD, and a non-cash charge of $600,000 associated with the
issuance of a warrant to Sumitomo Corporation of America in connection with a
distribution agreement.
23
<PAGE>
In November, 1998 the Company decided to close the Field Effects
Division after the unilateral cancellation of a marketing agreement by the
exclusive distributor of the Field Effects' permanent magnet-based clinical MRI
system. As a result, the Company wrote off $1,820,000 of inventory and recorded
a charge to operations of $2,919,000 relating to the costs associated with the
expenses necessary to close out the business unit.
In fiscal 1998 the Company began to separately report the amortization
of intangible assets due to the significance of such expense resulting from
acquisitions. The excess of the purchase price over the fair market value of net
assets acquired for these acquisitions and investments is being written off over
15 years.
In fiscal 1999 the Company froze all pension benefits as of December
31, 1998 (with the exception of approximately 50 bargaining union members at
IGC-APD Inc.). Therefore, no additional benefits were accrued after that date.
Since prior Company contributions were intended to fund both benefits earned and
those expected to be earned in the future, the freezing of the benefits
generated a "curtailment gain" of $1,465,000, which has been credited to the
appropriate operating expenses containing salary and wages expense. The Company
has been advised that the pension plan has sufficient assets to permit
termination of the plan and has begun the required steps to do so in accordance
with statutory requirements. The actual termination date depends on economic
conditions and receiving regulatory approval and may require the Company to
recognize additional pension expense to provide full funding of vested benefits
upon termination.
Interest expense was slightly higher in fiscal 1999 due to utilization
of short-term borrowings, and in 1998 principally due to the issuance of a
short-term note as part of the IGC-Polycold acquisition.
During the Company's fiscal 1999, SMIS experienced cash flow problems
and continued operating losses as a result of its inability to achieve the
anticipated improvements in its business plan, including new product orders,
improved manufacturing results and cost reductions. In March, 1999, it was
determined by SMIS management that additional funds would be required to sustain
operations based on projected cash flows and the deterioration in its backlog.
Based on the Company's evaluation of SMIS' past performance and projections for
future results it was determined by Intermagnetics' management in the fourth
quarter of fiscal 1999 that it would not provide additional funding to SMIS.
Subsequent to the close of the Company's fiscal year, SMIS agreed in principle
to sell the majority of its business at a price that will not result in any
return to its shareholders. Accordingly, the Company recorded a impairment
charge of $7.3 million to write off its investment in and advances to SMIS,
consisting of ordinary and redeemable preference shares in the amount of
$2,337,000 and notes receivable in the amount of $2,924,000, and to provide for
the estimated $2 million that will be required to settle third-party debt of
SMIS guaranteed by the Company.
In fiscal 1999 the Company incurred a net loss and recognized a tax
benefit of $1,212,000 relating to the portion of the loss which can be reflected
on income tax returns. During fiscal year 1999, the Company recognized
approximately $5,583,000 of capital losses for income tax purposes, including
approximately $5,056,000 in connection with the write off of SMIS. Under current
tax law, only $1,683,000 can be carried back against previously recognized
capital gains. The Company's effective income tax rate increased in fiscal 1998
to 42%, up from 35% in fiscal 1997, due mainly to the effect of non-deductible
amortization of intangible assets associated with the acquisitions. See Note H
of Notes to Consolidated Financial Statements, located elsewhere in this report,
for detailed information regarding income taxes.
In May, 1997, the Company entered into a distributorship agreement with
Sumitomo Corporation of America to market FRIGC-FR12 refrigerant in the
Asia-Pacific market. In June, 1997, the Company entered into a Warrant Agreement
with Sumitomo under which Sumitomo could purchase up to 1,200,000 shares of
Common Stock. Sumitomo paid $120,000 for the rights to the warrants. The Company
issued an initial warrant to purchase 500,000 shares at $12.50 per share. In
connection with the initial Warrant, the Company incurred a non-cash charge of
$600,000 in fiscal 1998. The Warrant expired unexercised in November 1998.
In December, 1998, Pennzoil Products Company announced that it was
merging with Quaker State and, as a consequence, was discontinuing the
distribution of FRIGC refrigerants to concentrate on its core businesses.
Pennzoil turned over to the Company its FRIGC related mobile air-conditioning
refrigerant business and the Company repurchased Pennzoil's FRIGC refrigerant
inventory. The Company is servicing the former Pennzoil customers through direct
sales and wholesale distributors.
24
<PAGE>
Segment Discussion
- ------------------
Electromagnetics Segment. This segment consists of the design,
development, manufacture and sale of superconductive magnets, RF coils,
and other magnetic products. Sales for the segment decreased 1.6% in
fiscal 1999 compared to an increase of 14.6% in fiscal 1998. The 1999
decrease was due decreased sales by IGC-MBG and decreased sales as a
result of the closing of the Field Effects Division, offset by
increased sales from IGC-MAI. The 1998 increase was principally due to
the inclusion of IGC-MAI for the full year. Magnet system sales
decreased by 6.3% in fiscal 1999 compared to an decrease of 2.0% in
fiscal 1998, whereas RF Coil sales increased 20.3% and 442.5% in fiscal
1999 and fiscal 1998, respectively. The increase in fiscal 1998 sales
is due to the inclusion of IGC-MAI's full year results. In fiscal 1999,
gross profit margins declined for electromagnetic products, principally
because of the write-off of the Field Effects Division and an
unfavorable sales mix. In fiscal 1998, gross profit margins increased
for electromagnetic products due to continued cost improvements, higher
sales and improved product mix, including IGC-MAI's impact on the full
year. Operating profit increased in this segment during the past two
years, mainly due to the acquisition of IGC-MAI. The fiscal 1999
results were adversely affected by the termination of the Field
Effects Division.
Superconducting Materials Segment. This segment consists of the design,
development, manufacture and sale of Superconducting wire and cable.
Superconducting Material sales increased 9.2% in fiscal 1999 compared
to an increase of 4.0% in fiscal 1998; these increases were principally
due to substantially higher superconducting material sales to a major
customer who had previously decided not to renew a long-term supply
agreement. Gross margins in this segment increased in fiscal 1999 and
fiscal 1998 due mainly to increased sales. Operating profit has
increased for the past two years due to increased sales and improved
cost controls.
Refrigeration Segment. This segment, which consists of the design,
development, manufacture and sale of refrigeration equipment and
refrigerants, had increased sales of 28.7% in fiscal 1999 and 2.8% in
fiscal 1998. The increase in fiscal 1999 was due to the inclusion of
IGC-Polycold for a full year, which more than offset the decline
in sales for IGC-APD. Fiscal 1998 includes IGC-Polycold's sales
for six months, which slightly exceeded the reduction in sales of FRIGC
refrigerants and IGC-APD's refrigeration equipment due to reduced
demand for both product lines. Gross margin, as a percentage of net
sales, declined substantially in fiscal 1999 after having increased
slightly in fiscal 1998. The fiscal 1999 decline was due to production
problems, manufacturing variances, inventory write-offs, and lower
sales for cryogenic refrigeration equipment, principally in the IGC-APD
business. This segment has experienced operating losses during the past
two years, despite the acquisition of IGC-Polycold. In fiscal 1999,
this segment experienced significant inventory write-downs together
with continuing higher than normal warranty expenses. In fiscal 1998
this segment recorded a $600,000 non-cash charge to operations for the
issuance of a warrant.
See Note K of Notes to Consolidated Financial Statements, located
elsewhere in this report, for financial information by reportable
operating segment.
Year 2000 Compliance
The transition to the Year 2000 could potentially affect any computer
system or software application that uses date data. The "Year 2000 Problem"
(sometimes called the "year 2000 bug" or "millennium bug") refers to the fact
that some computer systems store the year portion of dates in two-digit form
identifying 1999 as "99," for example.
State of Readiness:
The Company recognizes the importance of providing customers with
products that will continue to function correctly during the year 2000 and
beyond. We continue to assess the potential impact of the year 2000 on our
internal business systems, products, and operations. Our year 2000 initiatives
include testing and upgrading significant information technology systems and
facilities; testing and developing upgrades; contacting key vendors to determine
their year 2000 compliance status; and developing contingency plans. The Company
has developed and is implementing a remediation plan to identify and, if
necessary, correct potential year 2000 problems in the following areas:
25
<PAGE>
1. Products. The Company has implemented a compliance program to test and
evaluate the year 2000 readiness of the material products that it
currently manufactures and sells. The Company has determined that all
material products (superconducting magnets, radio frequency imaging
coils, superconducting wire and cable, cryogenic equipment, and
refrigeration systems) are year 2000 compliant. However, as many of the
Company's products are complex, interact with or incorporate
third-party products, and operate on computer systems that are not
under the Company's control, there can be no assurance that the Company
has identified all of the year 2000 problems with its current products.
2. Computer Systems. The Company has completed the evaluation of all
desktop and server systems for the existence of year 2000 problems
using commercial evaluation software. The majority of our non-compliant
desktop and server systems have been replaced or upgraded to become
year 2000 compliant. The small number of remaining non-compliant
desktop and server systems will be corrected and tested before the end
of October, 1999.
3. Business Software. The Company's assessment and remediation plan has
identified that several of the present business systems are not year
2000 compliant. The Company has had an ongoing project to install an
enterprise-wide resource planning system designed to integrate all
business entities. This project began in 1996. The software and
hardware selected for this project is year 2000 compliant and is
expected to be implemented by the end of October, 1999. This represents
a five-month delay from the originally expected implementation date of
May, 1999. One of our business units has rendered its existing business
system year 2000 compliant and will be implementing the corporate-wide
enterprise resource planning system in fiscal 2000.
4. Non-Information Technology Systems. Non-information technology systems
include facilities and communications systems such as HVAC, telephone,
voice-mail, and security systems, as well as machine tools and controls
used in the manufacturing process. The Company has completed its
evaluation of these systems and has developed replacement or upgrade
plans to correct the problems incurred. Non-compliant phone and
voice-mail systems at two of our locations will be replaced by the end
of October 1999.
5. Business Partners. The Company is in the process of identifying and
assessing the year 2000 readiness of key vendors that are believed to
be significant to the Company's business operations. Beginning in 1998,
the Company requested year 2000 readiness information from all its
vendors. The Company is now in the process of performing year 2000 risk
assessments for all critical suppliers. For our most critical vendors,
contingency plans have been developed, and in some cases implemented,
to mitigate year 2000 risks. The Company believes that its major
customers have substantially mitigated their year 2000 risks.
Costs:
The Company estimates that the total cost of its assessment and
remediation plan will amount to approximately $2.2 million, which is being
funded through operating cash flows. Included in this amount is approximately $2
million for the replacement of the business systems described above, which is
being capitalized because its purchase and implementation was primarily related
to increases in system functionality. Approximately $1.8 million of the expected
total cost has been expended as of July 31, 1999.
Contingency Plans:
The Company is performing year 2000 risk assessments for all its
critical suppliers to ensure the uninterrupted flow of goods and services into
the year 2000. As part of risk mitigation, the Company is developing contingency
plans that will allow its primary business operations to continue despite
disruptions due to year 2000 problems. These plans include identifying and
securing alternate suppliers, increasing inventories, and modifying production
facilities and schedules. The Company expects to complete the year 2000 risk
assessment of all critical suppliers and to implement contingency plans, where
deemed appropriate, by the end of September 1999.
26
<PAGE>
Risks of the Company's Year 2000 Issues:
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. If any of the Company's significant vendors
experience business disruptions due to year 2000 issues, there may also be a
material adverse effect on the Company. There can be no assurance that the
Company will not incur material costs in defending or bringing lawsuits related
to year 2000 issues. In addition, if any year 2000 issues are identified, there
can be no assurance that the Company will be able to retain qualified personnel
to remedy such issues. Any unexpected costs or delays arising from the year 2000
issue could have a significant adverse impact on the Company's business,
operations, and financial condition in amounts that cannot be reasonably
estimated at this time.
LIQUIDITY AND CAPITAL COMMITMENTS
- ---------------------------------
In fiscal 1999 the Company generated net cash of $8,713,000 from
operating activities, which, together with available cash and short-term
borrowings, was used to purchase property, plant and equipment, to make an
advance payment for the purchase of the production rights of a joint venture as
described below, to purchase Treasury Stock, repay debt and to make additional
investments.
On November 24, 1997, the Company acquired IGC-Polycold of San Rafael,
CA., a manufacturer of low-temperature refrigeration systems including water
vapor cryopumps, cryocoolers, cold trap chillers and gas chillers, for an
aggregate consideration of approximately $16,500,000, consisting of a 90-day
promissory note for $6,821,000 (paid in March 1998), 281,568 shares of the
Company's Common Stock and 69,992 shares of Series A Preferred Stock, which is
redeemable in cash or Common Stock at the option of the Company. The $10,175,000
excess of purchase price over the fair market value of net assets acquired is
being amortized over 15 years. The Preferred Stock is redeemable in cash by the
Company at any time at $102 per share. Also, the Company may convert some or all
of the Preferred Stock into Common Stock at any time after December 11, 1998,
but before December 1, 1999. If any of the Preferred Stock is not so converted
by the Company, it shall automatically convert into Common Stock as of December
1, 1999. The conversion shall be effected by dividing the conversion price ($102
per share) by the average of the closing prices of the Common Stock on the ten
trading days preceding the date of conversion.
In fiscal 1999, the Company entered into an agreement to purchase, from
its European joint venture partner, all of the manufacturing rights and
licenses, as well as certain other assets of the joint venture, for a total
consideration of $9,000,000. The joint venture will cease operating about the
beginning of the year 2000 when increased shipments will begin from the
Company's Latham, NY factory. In fiscal 1999, the Company made an initial
payment of $4,250,000 of the purchase price with the balance scheduled for
payment in March, 2000. It is expected that this transaction will result in up
to a 50% increase in the Company's MRI magnet shipments, as well as a similar
increase in the manufacture of superconducting wire by IGC-Advanced
Superconductors beginning in mid-2001. It is not expected that these increased
production rates will require substantial investments in additional capital
equipment.
During fiscal 1999, under the Company's stock buy-back program, the
Company repurchased a total of 530,500 shares of Common Stock for $4,046,000.
Also in fiscal 1999, the Company paid $1,550,000 for the early retirement of
$1,860,000 5.75% Convertible Subordinated Debentures due September 2003 and
recorded a pre-tax gain of $275,000, which is included in interest and other
income.
During the year ended May 31, 1998, SMIS obtained line of credit
financing in the amount of 2,500,000 Pounds ($4,025,000) as of May 30, 1999. The
Company has guaranteed (by issuing a letter of credit) repayment of one half of
the outstanding balance, up to 1,250,000 Pounds, approximately $2,000,000, as of
May 30, 1999 in the event of default by SMIS. The Company has included the
expected cost of honoring this guarantee in the amount written off associated
with the impairment loss recorded on investment in and advances to SMIS.
27
<PAGE>
In September 1998, the Company acquired 1,250,000 shares of the Series
A Preferred Stock, of PowerCold Corporation, a publicly held corporation
("PowerCold") for approximately $1,000,000. PowerCold has strong ties with the
supermarket refrigeration industry and is a solution provider of
energy-efficient products for refrigeration, air-conditioning and power
industries. The Series A Preferred Stock is convertible by the Company at any
time until September 14, 2002 when it will automatically be converted into
shares of PowerCold common stock. The conversion price (subject to adjustments)
will be based on a percentage of the thirty-day average closing bid price for
the PowerCold common stock on the OTC Bulletin Board prior to conversion or, if
lower, prior to September 14, 1998.
See the Consolidated Statements of Cash Flows in the Consolidated
Financial Statements, located elsewhere in this report, for a detailed
description of the sources and uses of cash during fiscal 1999 as well as the
two preceding years.
The Company's capital resource commitments as of August 1, 1999
consisted principally of capital equipment commitments of approximately
$1,500,000, approximately $2,000,000 for the SMIS loan guarantee and the balance
due on the purchase of rights from the European joint venture.
The Company has an unsecured line of credit of $25,000,000, which
expires in November 2000, of which $4,850,000 was in use at May 30, 1999 and
none at May 31, 1998. 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, whichever is the most favorable. The weighted average
interest rate with respect to borrowings at May 30, 1999 was 5.4134%. The line
of credit agreement provides for various covenants, including requirements that
the Company maintain specified financial ratios. The Company was not in
compliance with its minimum tangible net worth and interest coverage ratios for
the fiscal year ended May 30, 1999. The Company has received a waiver dated
August 30, 1999 from the financial institutions related specifically to these
events of default as of May 30, 1999 and a commitment from the financial
institutions to amend the aforementioned financial ratios. The Company has
issued letters of credit in the amount of 1,250,000 pounds (approximately
$2,000,000 at May 30, 1999) in support of guarantees of indebtedness for SMIS
and $1,645,000 to guarantee the performance of a contract.
The Company believes that it will have sufficient working capital to
meet its needs for the short term by using internally generated funds and
existing credit facilities. However, on a longer-term basis with substantial
increases in sales volume and/or unusually large expenditure requirements to
commercialize the FRIGC family of refrigerants or high temperature
superconducting materials and devices, the Company may be required to obtain
additional lines of credit for working capital purposes and possibly make
periodic public offerings or private placements in order to meet the liquidity
needs of such growth. While the Company does not believe it will be restricted
in financing such growth, there can be no assurances that such sources of
financing will be available to the Company in sufficient amounts or on
acceptable terms. Under such circumstances, the Company would expect to manage
its growth within the financing available.
28
<PAGE>
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. For the revenue
bonds, the Company negotiated variable rates with the option to set fixed rates.
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.
The Company does not believe that its exposure to commodity and foreign
exchange risk are material.
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
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 1999 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.
29
<PAGE>
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 SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
Attached hereto and filed as part of this report are the financial statements,
schedules and the exhibits listed below.
1. Financial Statements
--------------------
Independent Auditors Report
Consolidated Balance Sheets as of May 30, 1999 and May 31, 1998
Consolidated Statements of Operations for fiscal years ended May 30,
1999, May 31, 1998 and May 25, 1997
Consolidated Statements of Changes in Shareholders' Equity and
Comprehensive Income (Loss) for fiscal years ended May 30, 1999, May
31, 1998 and May 25, 1997
Consolidated Statements of Cash Flows for the fiscal years ended May
30, 1999, May 31, 1998 and May 25, 1997
Notes to Consolidated Financial Statements
2. Schedule
--------
II Valuation and Qualifying Accounts
All other schedules are not required or are inapplicable and,
therefore, have been omitted.
3. Exhibits
--------
Articles of Incorporation and By-laws
3(i) Restated Certificate of Incorporation (11) (Exhibit
3)
3(ii) By-laws, as amended (3) (Exhibit 3.2)
30
<PAGE>
Instruments defining the rights of security holders, including indentures
4.1 Form of Common Stock certificate (5) (Exhibit 4.1)
4.2 Intermagnetics General Corporation Indenture dated as
of September 15, 1993 (11) (Exhibit 4.1)
4.3 Second Amended and Restated Loan and Agency Agreement
dated as of October 23, 1997 among Corestates Bank,
N.A. and Intermagnetics General Corporation, APD
Cryogenics Inc., Magstream Corporation, Medical
Advances, Inc. and InterCool Energy Corporation (11)
(Exhibit 4.2)
4.4 First Amendment dated as of May 18, 1998 to the
Second Amended and Restated Loan Agreement dated as
of October 23, 1997 among Corestates Bank, N.A. and
Intermagnetics General Corporation, APD Cryogenics
Inc., Magstream Corporation, Medical Advances, Inc.
and InterCool Energy Corporation (11) (Exhibit 4.3)
Material Contracts
10.1 Agreement Restating and Superseding Lease and
Granting Rights to Use Common Areas and Other Rights
dated as of December 23, 1991 between Waterbury
Industrial Commons Associates, IGC Advanced
Superconductors Inc. and Intermagnetics General
Corporation (5) (Exhibit 10.1)
+ 10.2 1990 Stock Option Plan (4) (Appendix A)
+ 10.3 1981 Stock Option Plan, as amended (2) (Exhibit 10.7)
+ 10.4 Supplemental Executive Benefit Agreement (1) (Exhibit
10.37)
10.5 Agreement dated June 2, 1992 between Philips Medical
Systems Nederlands B.V. and Intermagnetics General
Corporation for sales of magnet systems (7) (Exhibit
10.6)
10.6 Amendment No. 3 dated January 1, 1997 to the
Agreement of June 2, 1992 between Philips Medical
Systems Nederlands B.V. and Intermagnetics General
Corporation for sales of magnet systems (8) (Exhibit
10.6)
# 10.7 Agreements dated April 29, 1999 between Philips
Medical Systems Nederlands B.V. and Intermagnetics
General Corporation for sales of magnet systems
(Exhibit 10.7)
+ 10.8 Employment Agreement dated April 20, 1998 between
Intermagnetics General Corporation and Carl H. Rosner
(11) (Exhibit 10.1)
+* 10.9 Employment Agreement dated June 1, 1999 between
Intermagnetics General Corporation and Glenn H.
Epstein
+ 10.10 Employment Agreement dated March 10, 1997 between
Intermagnetics General Corporation and Richard J.
Stevens (9) (Exhibit 10.1)
+ 10.11 Employment Agreement dated November 24, 1997 between
Intermagnetics General Corporation and Ronald W.
Sykes (10) (Exhibit 10.1)
31
<PAGE>
10.12 Share Purchase Agreement, dated January 23, 1992, by
and between Ultralife Batteries, Inc. and
Intermagnetics General Corporation (6) (Exhibit 10.1)
Subsidiaries of the registrant
* 21 Subsidiaries of the Company
Consents of experts and counsel
* 23 Consent of KPMG 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 and
333-75269 on Form S-8.
- ----------------------------------------------------------
(1) Exhibit incorporated herein by reference to the
Registration Statement on Form S-2 (Registration No.
2-99408) filed by the Company on August 2, 1985.
(2) Exhibit incorporated herein by reference to the
Annual Report on Form 10-K filed by the Company for
the fiscal year ended May 31, 1987.
(3) Exhibit incorporated herein by reference to the
Annual Report on Form 10-K filed by the Company for
the fiscal year ended May 27, 1990.
(4) Exhibit incorporated herein by reference to the Proxy
Statement dated October 4, 1991 for the 1991 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 31, 1992, as amended by
Amendment No. 1 on Form 8 dated November 17, 1992.
(6) Exhibit incorporated herein by reference to the
Quarterly Report on Form 10-Q filed by the Company
for the six months ended November 29, 1992.
(7) Exhibit incorporated herein by reference to the
Annual Report on Form 10-K/A2 for the fiscal year
ended May 29, 1994. Portions of this Exhibit were
omitted and filed separately with the Secretary of
the Securities and Exchange Commission pursuant to an
Application for Confidential Treatment under Rule
24b-2 of the Securities Exchange Act of 1934, as
amended.
(8) Exhibit incorporated herein by reference to the
Annual Report on Form 10-K/A filed by the Company for
the fiscal year ended May 25, 1997.
(9) Exhibit incorporated herein by reference to the
Current Report on Form 8-K filed by the Company on
March 10, 1997.
(10) Exhibit incorporated herein by reference to the
Current Report on Form 8-K filed by the Company on
November 24, 1997.
32
<PAGE>
(11) Exhibit incorporated herein by reference to the
Annual Report on Form 10-K filed by the Company on
August 28, 1998.
* Filed with the Annual Report on Form 10-K for the fiscal year ended
May 30, 1999.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this annual report on Form 10-K.
# Filed with the Annual Report on Form 10-K/A for the fiscal year ended
May 30, 1999.
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.
33
<PAGE>
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: November 9, 1999 By: /s/ Glenn H. Epstein
-------------------------------
Glenn H. Epstein
President 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 C. Zeigler,
Senior Vice President - Finance and Chief Financial Officer, and each of them,
his true and lawful attorneys-in-fact, in his name, place and stead to execute
and cause to be filed with the Securities and Exchange Commission any or all
amendments to this report.
<TABLE>
<CAPTION>
Name Capacity Date
- ---- -------- ----
<S> <C> <C>
/s/ Glenn H. Epstein President and November 16, 1999
- ---------------------------
Glenn H. Epstein Chief Executive Officer
(principal executive
officer) and Director
/s/ Michael C. Zeigler Senior Vice President- November 16, 1999
- ---------------------------
Michael C. Zeigler Finance; Chief Financial
Officer (principal financial
and accounting officer)
/s/ Carl H. Rosner Chairman of the Board November 16, 1999
- ---------------------------
Carl H. Rosner of Directors
/s/ Joseph C. Abeles Director November 16, 1999
- ---------------------------
Joseph C. Abeles
/s/ John M. Albertine Director November 16, 1999
- ---------------------------
John M. Albertine
/s/ Edward E. David, Jr. Director November 16, 1999
- ---------------------------
Edward E. David, Jr.
/s/ James S. Hyde Director November 16, 1999
- ---------------------------
James S. Hyde
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Thomas L. Kempner Director November 16, 1999
- ---------------------------
Thomas L. Kempner
/s/ Stuart A. Shikiar Director November 16, 1999
- ---------------------------
Stuart A. Shikiar
/s/ Sheldon Weinig
- --------------------------- Director November 16, 1999
Sheldon Weinig
</TABLE>
35
<PAGE>
1. Financial Statements
36
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors and Shareholders
Intermagnetics General Corporation:
We have audited the consolidated financial statements of Intermagnetics General
Corporation and subsidiaries, as listed in the accompanying index. In connection
with our audits of the consolidated financial statements, we also have audited
the financial statement schedule as listed in the accompanying index. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Intermagnetics General Corporation and subsidiaries as of May 30, 1999 and May
31, 1998, and the results of their operations and their cash flows for each of
the years in the three-year period ended May 30, 1999, in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
----------------------------------
Albany, New York
July 16, 1999, except as to Note E
which is as of August 30, 1999.
37
<PAGE>
CONSOLIDATED BALANCE SHEETS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
May 30, May 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 2,283 $ 2,993
Trade accounts receivable, less allowance
(1999 - $401; 1998 - $350) 22,275 14,802
Costs and estimated earnings in excess of
billings on uncompleted contracts 1,788 4,660
Inventories:
Finished products 1,106 1,045
Work in process 15,725 18,313
Materials and supplies 9,748 13,491
--------- ---------
26,579 32,849
Income tax refund receivable 1,717
Deferred income taxes 4,069 3,583
Prepaid expenses and other 2,020 1,423
--------- ---------
TOTAL CURRENT ASSETS 60,731 60,310
PROPERTY, PLANT AND EQUIPMENT
Land and improvements 1,479 1,479
Buildings and improvements 16,639 16,604
Machinery and equipment 38,500 39,421
Leasehold improvements 649 649
--------- ---------
57,267 58,153
Less allowances for depreciation and amortization 33,090 32,445
--------- ---------
24,177 25,708
Equipment in process of construction 1,798 2,231
--------- ---------
25,975 27,939
INTANGIBLE AND OTHER ASSETS
Available for sale securities 1,366 3,450
Other investments 5,904 5,178
Investment in affiliate 3,736 7,564
Notes receivable from affiliate 2,476
Excess of cost over net assets acquired, less
accumulated amortization (1999 - $2,514; 1998 - $1,166) 17,618 18,966
Other intangibles 8,750
Other assets 1,378 1,893
--------- ---------
TOTAL ASSETS $125,458 $127,776
========= =========
(Continued)
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
May 30, May 31,
1999 1998
-------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 317 $ 272
Borrowings under line of credit 4,850
Accounts payable 5,641 6,076
Salaries, wages and related items 3,396 3,647
Customer advances and deposits 2,065 298
Product warranty reserve 1,577 996
Accrued income taxes 2,411
Accrued termination payment 4,750
Accrual for affiliate financial guarantee 2,000
Other liabilities and accrued expenses 1,746 1,117
-------- --------
TOTAL CURRENT LIABILITIES 26,342 14,817
LONG-TERM DEBT, less current portion 26,631 28,833
DEFERRED INCOME TAXES 312 325
SHAREHOLDERS' EQUITY
Preferred Stock, par value $.10 per share:
Authorized - 2,000,000 shares
Issued and outstanding - 69,992 shares 6,999 6,999
Common Stock, par value $.10 per share:
Authorized - 40,000,000 shares
Issued and outstanding (including shares in treasury):
1999 - 13,522,900 shares
1998 - 13,334,280 shares 1,352 1,334
Additional paid-in capital 82,175 81,008
Accumulated deficit (8,061) (1,081)
Accumulated other comprehensive income (loss) (668) 496
-------- --------
81,797 88,756
Less cost of Common Stock in treasury
(1999 - 1,161,690 shares; 1998 - 562,175 shares) (9,624) (4,955)
-------- --------
72,173 83,801
-------- --------
TOTAL LIABILITIES AND SHAREH0LDERS' EQUITY $125,458 $127,776
======== ========
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
---------------------------------------------
May 30, May 31, May 25,
1999 1998 1997
-------- ------- -------
<S> <C> <C> <C>
Net sales $102,871 $95,894 $87,052
Cost of products sold 68,312 60,209 60,852
Inventory written off in restructuring 1,820 -- --
-------- ------- -------
Total cost of products sold 70,132 60,209 60,852
-------- ------- -------
Gross margin 32,739 35,685 26,200
Product research and development 6,220 8,128 6,779
Marketing, general and administrative 21,472 20,840 15,836
Amortization of intangible assets 1,348 1,203 333
Restructuring charges 2,919 -- --
-------- ------- -------
31,959 30,171 22,948
-------- ------- -------
Operating income 780 5,514 3,252
Interest and other income 1,942 2,364 2,961
Interest and other expense (2,172) (2,125) (1,996)
Write off of investment in unconsolidated affiliate (7,300) -- --
Equity in net loss of unconsolidated affiliates (1,491) (1,009) (182)
-------- ------- -------
Income (loss) before income taxes (8,241) 4,744 4,035
Provision for income taxes (benefit) (1,212) 1,991 1,420
-------- ------- -------
NET INCOME (LOSS) $ (7,029) $ 2,753 $ 2,615
======== ======= =======
Earnings (loss) per Common Share:
Basic $(0.57) $ .22 $ .21
======== ======= =======
Diluted $(0.57) $ .21 $ .20
======== ======= =======
</TABLE>
See notes to consolidated financial statemetns.
40
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (LOSS)
INTERMAGNETICS GENERAL CORPORATION
Fiscal Years Ended May 30, 1999, May 31, 1998, May 25, 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive Treasury Comprehensive
Stock Capital Deficit Income (Loss) Stock Income (Loss)
-------- ---------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at May 26, 1996 $1,208 $69,040 $(1,727) $2,250 $(3,475)
Comprehensive income:
Net income 2,615 $2,615
Unrealized loss on available for
sale securities, net (1,733) (1,733)
Unrealized gain on foreign currency
translation 80 80
=============
Total comprehensive income $962
=============
Tax benefit from exercise of stock options 412
Sale of 133,024 shares of Common Stock,
including receipt of 15,644 shares of
Treasury Stock, upon exercise of stock
options 13 669 (185)
Sale of 8,356 shares of Common Stock
to IGC Savings Trust 1 116
Stock dividends and payments for
fractional shares 23 2,495 (2,531)
Purchase of 291,100 shares of Treasury Stock (3,358)
Issuance of 678,517 shares of Common Stock,
including 474,895 Treasury Shares in
payment for acquisition 19 1,646 5,509
-------- ---------- ----------- ------------ ----------
Balances at May 25, 1997 1,264 74,378 (1,643) 597 (1,509)
Comprehensive income:
Net income 2,753 $2,753
Unrealized gain on available for
sale securities, net 237 237
Unrealized loss on foreign currency
translation (338) (338)
-------------
Total comprehensive income $2,652
=============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Tax benefit from exercise of stock options 177
Sale of 132,214 shares of Common Stock,
including receipt of 21,843 shares of
Treasury Stock, upon exercise of stock
options 13 739 (226)
Sale of 7,023 shares of Common Stock
to IGC Savings Trust 1 69
Stock dividends and payments for
fractional shares 25 2,157 (2,191)
Purchase of 465,650 shares of Treasury Stock (4,065)
Issuance of 312,650 shares of Common Stock
and 69,992 shares of Series A Preferred Stock
in payment for acquisitions 31 2,719
Issuance of 89,018 shares of Treasury Stock
for purchase of inventory 25 845
Issuance of warrant to acquire 500,000
shares of Common Stock 720
Option based compensation 24
-------- ---------- ----------- ------------ ----------
Balances at May 31, 1998 1,334 81,008 (1,081) 496 (4,955)
Comprehensive income:
Net loss (7,029) $(7,029)
Unrealized loss on available for
sale securities, net (1,358) (1,358)
Unrealized gain on foreign currency
translation 194 194
-------------
Total comprehensive loss $(8,193)
=============
Tax benefit from exercise of stock options 185
Sale of 188,556 shares of Common Stock,
including receipt of 69,015 shares of
Treasury Stock, upon exercise of stock
options 19 911 (623)
Sale of 8,741 shares of Common Stock
to IGC Savings Trust 58
Stock dividend adjustment of 8,677 shares and
payments for fractional shares (1) (48) 49
Option based compensation 61
Purchase of 530,500 shares of Treasury Stock (4,046)
-------- ---------- ----------- ------------ ----------
Balances at May 30, 1999 $1,352 $82,175 $(8,061) $(668) $(9,624)
======== ========== =========== ============ ==========
</TABLE>
See notes to consolidated financial statements.
41
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
INTERMAGNETICS GENERAL CORPORATION
(Dollars in Thousands)
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------
May 30, May 31, May 25,
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(7,029) $ 2,753 $ 2,615
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 5,636 5,424 3,964
Non-cash restructuring charges 4,739
Write off of investment in unconsolidated affiliate 7,300
Gain on debt redemption (275)
Provision for deferred taxes 227 (1,028) (589)
Equity in net loss of unconsolidated affiliates 1,491 1,009 182
Loss (gain) on sale and disposal of assets 306 60 (374)
Non-cash expense from warrants issued 600
Gain on sale of joint venture (300)
Other non-cash activity 61 (118)
Change in operating assets and liabilities, net of effects of acquisitions:
(Increase) decrease in accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts (4,858) 3,494 3,299
(Increase) decrease in inventories and prepaid expenses and other 2,583 (5,579) (1,447)
(Decrease) increase in accounts payable and accrued expenses (1,362) 27 919
Change in foreign currency translation adjustments 194 (338) 80
-------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,713 6,422 8,531
-------- ------- -------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (3,139) (3,146) (5,446)
Proceeds from sale of assets 51 92 935
Advance on purchase of production rights (4,250)
Acquisitions, net of cash acquired (3,115) (4,139)
Purchase of other investments (1,043)
Investment in and advances to unconsolidated affiliates (1,015) (6,855) (972)
Repayment of advances by unconsolidated affiliate 611 470
Decrease in other assets 41 66 83
-------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (8,744) (12,488) (9,539)
-------- ------- -------
FINANCING ACTIVITIES
Net proceeds from short term borrowings 4,850
Early debt redemption (1,550)
Proceeds from sale of warrants 120
Purchase of Treasury Stock (4,046) (4,065) (3,358)
Proceeds from sales of Common Stock 365 596 614
Principal payments on note payable and long-term debt (298) (259) (2,277)
-------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (679) (3,608) (5,021)
-------- ------- -------
DECREASE IN CASH AND SHORT-TERM INVESTMENTS (710) (9,674) (6,029)
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD 2,993 12,667 18,696
-------- ------- -------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 2,283 $ 2,993 $12,667
======== ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Exchange of Common Stock in partial payment of exercise
price on options $ 623 $ 226 $ 185
======== ======= =======
Tax benefit from exercise of stock options $ 185 $ 177 $ 412
======== ======= =======
Issuance of Common Stock, Preferred Stock, and Treasury Stock
for acquisitions $ 9,749 $ 7,174
======= =======
Accrual of termination payment $ 4,750
========
Issuance of Treasury Stock for purchase of inventory $ 870
=======
Stock dividends $ 2,191 $ 2,531
======= =======
</TABLE>
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERMAGNETICS GENERAL CORPORATION
NOTE A - ACCOUNTING POLICIES
Description of Business:
Intermagnetics General Corporation (the "Company") operates in three reportable
operating segments: Electromagnetics, Superconducting Materials and
Refrigeration. The Electromagnetics segment consists primarily of the
manufacture and sale of magnets and radio frequency coils and the
Superconducting Materials segment consists primarily of the manufacture and sale
of superconducting wire and cable, all of which are used mainly in Magnetic
Resonance Imaging ("MRI") for medical diagnostics. The majority of the Company's
sales in these two segments are to US and European customers. The Refrigeration
segment consists of refrigeration equipment produced by two subsidiaries,
IGC-APD Cryogenics, Inc. (IGC-APD) and IGC-Polycold Systems Inc., (IGC-Polycold)
and refrigerants which are sold by another subsidiary, InterCool Energy
Corporation (ICE). Refrigeration equipment is used in the vacuum deposition
industry, the semiconductor manufacturing process, MRI, and in a variety of
research applications. Refrigerants consist of a family of environmentally
friendly refrigerants designed to replace recently banned CFC refrigerants.
Sales of this segment are primarily to US, Asian and European customers. The
Company operates on a 52/53 week fiscal year ending the last Sunday during the
month of May. See Note K for further discussion regarding segment and related
information.
Basis of Presentation:
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All significant intercompany transactions have been eliminated
in consolidation. The Company's 45% investment in ALSTOM Intermagnetics, 23%
investment in SMIS Limited ("SMIS"), and 21% investment in KryoTech, Inc.
("KryoTech") are accounted for using the equity method of accounting. See notes
B and D for additional information regarding ALSTOM Intermagnetics and SMIS.
The Company is presenting its consolidated statements of operations in a
multi-step format and, accordingly, certain reclassifications of fiscal 1997
amounts have been made to conform to this presentation. In addition, it is the
Company's policy to reclassify prior year consolidated financial statements to
conform to the current year presentation.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Short-term investments ($139,000 at May 30, 1999 and $68,000 at May 31, 1998)
consist primarily of US Government and Agency obligations, commercial paper, and
other corporate obligations and are stated at market. The Company considers
these short-term investments to be cash equivalents for purposes of the
Consolidated Statements of Cash Flows.
Sales:
Sales are generally recognized as of the date of shipment or in accordance with
customer agreements.
Sales to the United States Government or its contractors under cost
reimbursement contracts are recorded as costs are incurred and include estimated
earned profits.
43
<PAGE>
Sales of products involving long-term production periods and manufactured to
customer specifications are generally recognized by the percentage-of-completion
method, by multiplying the total contract price by the percentage that incurred
costs to date bear to estimated total job costs, except when material costs are
substantially incurred at the beginning of a contract, in which case material
costs are charged to the contract as they are placed into production. At the
time a loss on a contract is indicated, the Company accrues the entire amount of
the estimated ultimate loss.
The Company accrues for possible future claims arising under terms of various
warranties made in connection with the sale of products.
Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market
value.
Property, Plant and Equipment:
Land and improvements, buildings and improvements, machinery and equipment and
leasehold improvements are recorded at cost. Provisions for depreciation are
computed using straight-line and accelerated methods in a manner that is
intended to amortize the cost of such assets over their estimated useful lives.
Leasehold improvements are amortized on a straight-line basis over the remaining
initial term of the lease. For financial reporting purposes, the Company
provides for depreciation of property, plant and equipment over the following
estimated useful lives:
Land improvements 25 years
Buildings and improvements 7 - 40 years
Machinery and equipment 3 - 15 years
Leasehold improvements 2 - 15 years
Investments:
Certain investments are categorized as available for sale securities in
accordance with Statement of Financial Accounting Standards ("SFAS") 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.
A decline in the market value of any available for sale security below cost that
is deemed other than temporary is charged to earnings, resulting in the
establishment of a new cost basis for the security.
Dividend and interest income are recognized when earned. Realized gains and
losses for securities classified as available for sale are included in earnings
and are derived using the specific identification method for determining the
cost of securities sold.
Income Taxes:
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases, and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
44
<PAGE>
Foreign Currency Translation:
Foreign currency translation adjustments arise from conversion of the Company's
foreign subsidiary's financial statements to US currency for reporting purposes,
and are reflected in shareholders' equity in the accompanying consolidated
balance sheets. Realized foreign currency transaction gains and losses are
included in interest and other expense in the accompanying consolidated
statements of operations.
Pension Plan:
On June 1, 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pension and Other Postretirement Benefits." SFAS No. 132 revises employers'
disclosures about pension and other postretirement benefit plans. SFAS No. 132
does not change the method of accounting for such plans.
Excess of Cost Over Net Assets Acquired and Other Intangibles:
Excess of cost over the fair value of net assets acquired in acquisitions is
being amortized on a straight-line basis over 15 years. Other intangibles, as
discussed further in Note B, will be amortized on a straight-line basis over 5
years. The Company periodically assesses recoverability, and impairments would
be recognized in operating results if a permanent diminution in value were to
occur.
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 (such as stock
options).
Comprehensive Income:
On June 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income (loss) and its components in a full set of financial
statements. Comprehensive income (loss) consists of net income,net unrealized
gains (losses) on available-for-sale securities and foreign currency translation
adjustments and is presented in the consolidated statements of changes in
shareholders' equity and comprehensive income (loss). SFAS No. 130 requires only
additional disclosures in the consolidated financial statements; it does not
affect the Company's financial position or results of operations. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS No. 130.
Derivative Financial Instruments:
The Company enters into interest rate hedge agreements which involve the
exchange of fixed and floating rate interest payments periodically over the life
of the agreement, without the exchange of underlying principal amounts. The
differential to be paid or received is accrued as interest rates change and is
recognized over the life of the agreements as an adjustment to interest expense.
45
<PAGE>
Use of Estimates:
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, and the disclosure of
contingent assets and liabilities, to prepare these consolidated financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
New Accounting Pronouncements:
In March, 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 also requires that costs related to the preliminary project stage and
post-implementation/operations stage of an internal-use computer software
development project be expensed as incurred. SOP 98-1 is effective for fiscal
years beginning after December 15, 1998. The Company will comply with the
reporting requirements of SOP 98-1 for the fiscal year ending May 28, 2000.
Management anticipates that the adoption of SOP 98-1 will not have a material
effect on the Company's consolidated financial statements.
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 has subsequently been amended by SFAS No. 137,
issued in June, 1999, which delays the effective date for implementation of SFAS
No. 133 until fiscal quarters of fiscal years beginning after June 15, 2000.
Management is currently evaluating the impact of SFAS No. 133 on the Company's
consolidated financial statements.
NOTE B - ACQUISITIONS
Polycold Systems International, Inc.
On November 24, 1997, the Company issued a note for, and on March 11, 1998, paid
$3,115,000 in cash, net of cash acquired, and issued 281,568 shares of Common
Stock, valued at $8.879 per share, and 69,992 shares of Series A Preferred
Stock, valued at $100 per share, for all of the outstanding shares of Polycold
Systems International, Inc. ("Polycold") Common Stock.
The acquisition has been accounted for using the purchase method of accounting,
and the results of operations of Polycold have been included in the consolidated
financial statements since November 24, 1997, the date of acquisition. The
excess of cost over the fair value of net assets acquired of approximately
$10,175,000 is being amortized on a straight-line basis over 15 years.
Medical Advances, Inc.
On March 11, 1997, the Company paid $4,139,000 in cash, net of cash acquired,
and issued 678,517 shares of Common Stock, valued at $10.573 per share,
including 474,895 shares of Treasury Stock, for all of the outstanding shares of
Medical Advances, Inc. ("MAI") Common Stock. The acquisition agreement provided
for the issuance of up to 101,777 additional shares as part of the purchase
price if the average of the Company's closing price on the American Stock
Exchange during the ninety calendar day period following the release of earnings
for fiscal 1997 was less than $11.053. During fiscal 1998 this contingency was
resolved and the Company issued 31,082 additional Common Shares.
The acquisition has been accounted for using the purchase method of accounting,
and the results of operations of MAI have been included in the consolidated
financial statements since March 11, 1997, the date of acquisition. The excess
of cost over the fair value of net assets acquired of approximately $9,700,000
is being amortized on a straight-line basis over 15 years.
46
<PAGE>
The following unaudited pro forma information presents a summary of consolidated
results of operations of the Company, Polycold and MAI as if the acquisitions
had occurred at the beginning of fiscal year 1998, with pro forma adjustments to
give effect to amortization of the excess of cost over the fair value of net
assets acquired and interest income on short-term investments, together with
related income tax effects.
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
May 31, 1998
-------------------------
Total revenue $107,518
Net income 2,900
Earnings per Common Share:
Basic .22
Diluted .21
Total amortization of excess of cost over the fair value of net assets acquired
for the fiscal years ended May 30, 1999, May 31, 1998, and May 25, 1997 amounted
to $1,348,000, $997,000, and $169,000, respectively.
ALSTOM Intermagnetics
- ---------------------
Effective May 30, 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 will be consolidated in the Company's Latham, New York
facility, and AISA will cease production of superconductive MRI magnet systems.
Under the termination agreement, the Company sold its interest in AISA to Alstom
for $300,000, payment of which was outstanding at May 30, 1999 and is included
in "Prepaid expenses and other" in the consolidated balance sheet. In
consideration of the contractual rights of AISA and Alstom under the termination
agreement, the Company agreed to pay AISA $9,000,000 ("Termination Payment") for
the purchase of certain assets with an approximate fair value of $250,000, and
other intangibles, primarily comprised of future production rights, as well as
technology and a covenant not to compete, with a total value of $8,750,000.
During fiscal 1999, the Company paid $4,250,000 of the "Termination Payment" to
AISA, while the remainder, $4,750,000, is due on or before March 31, 2000.
47
<PAGE>
NOTE C - RESTRUCTURING
In October, 1998, the Company received notice from Trex Medical Corporation
("Trex") that it was not prepared to continue operating under a distributor
agreement under which Trex was to distribute the Company's permanent
magnet-based clinical MRI systems. The Company has filed suit against Trex for
breaching and repudiating the agreement. In November 1998, the Company decided
to exit this business and restructured its operations through the closure of its
Field Effects division, which was engaged in the manufacture and sale of
clinical MRI systems. As a result, the Company recorded a total restructuring
charge, as adjusted in the fourth quarter, of $4,739,000, including liabilities
of $1,277,000, comprised of the following:
(Dollars in Thousands)
Inventory write-down included in cost of products sold $1,820
Restructuring charges:
Write-down of equipment to net realizable value $ 1,267
Write-off of accounts receivable and other assets 375 1,642
----
Liabilities for:
Severance and lease obligations 751
Other 526 1,277
---- -------
2,919
-------
Total $ 4,739
=======
The Company vacated the premises and moved existing equipment and inventory to
storage near its corporate headquarters. All usable equipment has been
transferred to other operations at its book value. Other equipment and inventory
were initially held for sale and written down to estimated realizable value,
however, these assets have been subsequently adjusted to zero based on
unsuccessful attempts by the Company to sell the associated equipment and
inventory. It is estimated that the remaining activities under the plan, with
the exception of the Company's existing lease commitment that expires in July,
2001, will be completed by November, 1999.
The Company made a total of $568,000 in payments on liabilities recorded in the
restructuring, as follows:
(Dollars in Thousands)
Initial Balances as of
Accruals Adjustments Payments May 30, 1999
-------- ----------- -------- --------------
Lease obligation $ 492 $ 33 $(120) $ 405
Severance 226 -- (226) --
Product liability -- 304 -- 304
Other 201 21 (222) --
----- ----- ----- -----
Totals $ 919 $ 358 $(568) $ 709
===== ===== ===== =====
NOTE D - INVESTMENTS AND NOTES RECEIVABLE
Available for Sale Securities:
As of May 30, 1999 and May 31, 1998, the Company owned 975,753 shares
(approximately 9%) of the common stock of Ultralife Batteries, Inc.
("Ultralife"), a manufacturer of lithium batteries, acquired at a cost of
$7,015,000. The market value of the Company's total investment in Ultralife, the
sale of which is restricted under US Securities laws, was $4,452,000 and
$11,221,000 at May 30, 1999 and May 31, 1998, respectively. The cost and market
value of "Available for Sale" securities, representing those shares saleable
under Securities laws, were as shown below:
48
<PAGE>
(Dollars in Thousands)
May 30, 1999 May 31, 1998
------------ ------------
Cost $2,154 $2,154
Gross unrealized holding gain (loss) (788) 1,296
------ ------
Market value $1,366 $3,450
====== ======
The balance of the Ultralife investment is included at cost in other
investments.
Other Investments:
Investments in other securities at May 30, 1999 and May 31, 1998 consist of:
(Dollars in Thousands)
1999 1998
---- ----
Ultralife $4,861 $4,861
PowerCold 1,043 --
Other -- 317
------ ------
$5,904 $5,178
====== ======
In September 1998, the Company acquired 1,250,000 shares of Series A Convertible
Preferred Stock of PowerCold Corporation ("PowerCold"), a publicly held
corporation, for approximately $1,000,000. PowerCold is a provider of
energy-efficient products for refrigeration, air conditioning and power
industries. The Series A Convertible Preferred Stock is entitled to a number of
votes per share equal to the number of shares of PowerCold common stock into
which each such share of Series A Convertible Preferred Stock is convertible at
the time of such vote. As of May 30, 1999, the Company's voting interest in
PowerCold was approximately 15%. The Company accounts for its investment in
PowerCold at cost.
Investments in Affiliates:
- --------------------------
Investments in affiliates at May 30, 1999 and May 31, 1998 consist of:
(Dollars in Thousands)
1999 1998
------ ------
KryoTech preferred stock $3,736 $4,710
SMIS ordinary and preferred stock - 2,854
------ ------
$3,736 $7,564
====== ======
KryoTech:
- ---------
On March 23, 1998, the Company acquired 1,172,840 shares of the Series B
Convertible Preferred Stock, $.01 par value per share, of KryoTech, a
privately-held, South Carolina corporation, and a warrant to purchase an
additional 237,416 shares, at a cost of $4,750,000. The warrant may be
exercised, in whole or in part, at any time on or before March 23, 2008 at a
price equal to $1.053 per share. On an as-converted basis, the Company's
holdings represent approximately 20.7% of the outstanding voting securities of
KryoTech.
49
<PAGE>
KryoTech was formed on March 15, 1996 for the purpose of developing, marketing,
manufacturing and selling thermal management products, which are designed
specifically for the computer industry. The preferred shares have the same
voting rights as common stock. Accordingly, the Company is accounting for its
investment in KryoTech using the equity method of accounting. The acquisition
cost exceeded the underlying equity in net assets by $3,645,000, which is being
amortized over a period of 15 years. Accumulated amortization at May 30, 1999
and May 31, 1998 was $283,000 and $40,000, respectively. During the year ended
May 30, 1999, the Company recorded $974,000 as its share of KryoTech's losses.
As KryoTech is privately held, the market value of this investment is not
readily determinable.
SMIS:
- -----
As of May 30, 1999 and May 31, 1998, the Company owned 354,223 ordinary shares
(approximately 23%) of SMIS acquired at a cost of $3,530,000, and 980,000
redeemable preference shares acquired at a cost of $1,511,000. The preference
shares are convertible into ordinary equity of SMIS. The Company has recorded
its investment using the equity method of accounting, and, accordingly, has
reduced its investment by amortizing the excess of the cost of its investment in
the ordinary shares over the underlying equity over a period of 40 years and by
recording its proportionate share of SMIS' losses. The total amount written off
amounted to $2,674,000 at May 30, 1999, and $2,156,000 at May 31, 1998. Also, as
of May 31, 1998, the Company had made advances to SMIS of approximately
$2,476,000 in the form of loans which are convertible into ordinary equity of
SMIS. In May, 1998, the Company guaranteed repayment of one half of the
outstanding balance of borrowings under a line of credit obtained by SMIS at
that time. The maximum amount guaranteed is 1,250,000 pounds (approximately
$2,000,000 at May 30, 1999). During the year ended May 30, 1999, the Company
advanced a total of $1,015,000 to SMIS, of which $611,000 was repaid.
As a result of SMIS' inability to achieve the anticipated improvements in its
business plan, including new product orders, improved manufacturing results and
cost reductions, SMIS continued operating at a loss in 1999. In March, 1999, it
was determined by SMIS management that additional funds would be required to
sustain operations based on projected cash flows and the deterioration in its
backlog. Based on the Company's evaluation of SMIS' past performance and
projections for future results it was determined by Intermagnetics' management
in the fourth quarter of fiscal 1999 that it would not provide additional
funding to SMIS. Additionally, during July 1999, SMIS management agreed in
principle to sell the majority of its operations at a price that will not result
in any return to its shareholders. Accordingly, the Company has written off its
remaining investment in and advances to SMIS and has provided for the estimated
amount which it will be required to pay as a result of the financial guarantee
discussed above. The total amount written off was $7,300,000, consisting of the
write off of the ordinary and redeemable preference shares in the amount of
$2,337,000, notes receivable in the amount of $2,924,000 and the accrual of
approximately $2,000,000 related to the financial guarantee. The write off is
shown as "Write off of investment in unconsolidated affiliate" in the
accompanying consolidated statement of operations.
NOTE E - NOTES PAYABLE AND LONG-TERM DEBT
The Company has an unsecured line of credit of $25,000,000, which expires in
November 2000, of which $4,850,000 was in use at May 30, 1999 and none at May
31, 1998. 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,
whichever is the most favorable. The weighted average interest rate with respect
to borrowings at May 30, 1999 was 5.4134%. The line of credit agreement provides
for various covenants, including requirements that the Company maintain
specified financial ratios. The Company was not in compliance with its minimum
tangible net worth and interest coverage ratios for the fiscal year ended May
30, 1999. The Company has received a waiver dated August 30, 1999 from the
financial institutions related specifically to these events of default as of May
30, 1999 and a commitment from the financial institutions to amend the
aforementioned financial ratios. The Company has issued letters of credit in the
amount of 1,250,000 pounds (approximately $2,000,000 at May 30, 1999) in support
of guarantees of indebtedness for SMIS and $1,645,000 to guarantee the
performance of a contract.
50
<PAGE>
Long-term debt consists of the following:
(Dollars in Thousands) May 30, May 31,
1999 1998
-------- --------
Revenue bonds $1,550 $ 1,650
Mortgage payable 5,633 5,830
Convertible debentures 19,765 21,625
------- -------
26,948 29,105
Less current portion 317 272
------- -------
Long-term debt $26,631 $28,833
======= =======
Revenue bonds consist of a subsidiary's obligation under an agreement with an
Economic Development Authority with respect to revenue bonds issued in
connection with the acquisition of certain land, building and equipment acquired
at a total cost of $2,408,000. The bonds bear interest at a weekly adjustable
annual rate (convertible to fixed rate at the option of the Company) which
averaged 3.68% for the year ended May 30, 1999 (4.04% for the year ended May 31,
1998). 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
Company at face value. The Company makes monthly advance payments to restricted
cash accounts in amounts sufficient to meet the interest and principal payments
on the bonds when due. The balances of these accounts, included in "Cash and
Short-Term Investments" on the accompanying consolidated balance sheets, were
$52,000 at May 30, 1999 and $51,000 at May 31, 1998.
The mortgage payable bears interest at the rate of LIBOR 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 secured by land and buildings and certain equipment acquired at a
cost of approximately $10,800,000. The Company has entered into an interest rate
swap agreement, the effect of which is to fix the rate on this loan at 6.88%.
Convertible debentures at May 30, 1999 consist of $19,765,000 of 5.75%
convertible subordinated debentures due September, 2003, issued in a private
placement. The debentures are convertible into Common Stock at approximately
$14.272 per share. Interest on the debentures is payable semi-annually. The
debentures are redeemable, in whole or in part, at the option of the Company at
any time at prices ranging from 103.450% to 100.575%. The debentures also
provide for redemption at the option of the holder upon a change in control of
the Company, as defined, and are subordinated to senior indebtedness, as
defined.
In February 1999, the Company paid $1,550,000 for the early retirement of
Convertible Subordinated Debentures with a carrying value of $1,860,000. As a
result of the early retirement of debt, the Company recognized a gain of
approximately $275,000 in fiscal 1999.
Aggregate maturities of long-term debt for the next five fiscal years are: 2000
- - $317,000; 2001 - $332,000; 2002 - $349,000; 2003 - $392,000; and 2004 -
$20,174,000.
Interest paid for the years ended May 30, 1999, May 31, 1998, and May 25, 1997
amounted to $1,961,000, $1,910,000, and $1,800,000, respectively.
51
<PAGE>
NOTE F - SHAREHOLDERS' EQUITY
In July, 1998, the Company declared a 2% stock dividend to be distributed on all
outstanding shares, except Treasury Stock, on September 17, 1998. The
consolidated financial statements have been adjusted retroactively to reflect
this stock dividend in all numbers of shares, prices per share and earnings per
share.
The Company has established two stock option plans: the 1981 Stock Option Plan
and the 1990 Stock Option Plan. Shares and prices per share have been adjusted
to reflect the 2% stock dividends declared in July, 1998 and July, 1997,
respectively. The total shares authorized for grant under the 1981 and 1990
plans are 1,492,996 and 3,042,208, respectively.
Option activity under these plans was as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------------------------------------------
May 30, 1999 May 31, 1998 May 25, 1997
------------------------------------------------------------------ -----------------------------
Weighted Weighted Weighted
Average Average Average
Number Exercise Number Exercise Number Exercise
of Shares Price of Shares Price of Shares Price
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year 1,802,704 $ 9.477 1,687,977 $ 9.319 1,552,307 $ 8.656
Granted 480,897 6.766 353,485 9.567 365,221 10.785
Exercised (188,556) 5.000 (132,214) 5.684 (133,024) 5.124
Forfeited (171,414) 12.445 (106,544) 11.953 (96,527) 9.993
--------- --------- ---------
Outstanding,
end of year 1,923,631 8.975 1,802,704 9.477 1,687,977 9.319
========= ========= =========
Exercisable,
end of year 1,042,355 $ 9.543 1,060,485 $ 8.648 870,331 $ 7.842
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
May 30, 1999
--------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Option Exercise Number Exercise Contractual Number Exercise
Prices Outstanding Price Life Exercisable Price
----------------- ---------------- ----------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
$3.265 to $5.875 325,289 $ 4.767 3.1 years 309,637 $ 4.711
$6.125 to $7.000 461,322 6.511 8.0 years 32,949 6.277
$7.782 to $10.813 541,465 9.237 5.9 years 227,348 9.574
$11.253 to $12.900 400,979 11.670 3.5 years 321,924 11.673
$13.096 to $20.142 194,576 15.563 4.1 years 150,497 15.594
--------- ---------
1,923,631 $ 8.975 5.2 years 1,042,355 $ 9.543
========= =========
</TABLE>
The Company uses the intrinsic value based method of accounting for stock-based
compensation, under which compensation cost is measured as the excess, if any,
of the quoted market price of the stock at the grant date over the amount an
employee must pay to acquire the stock. Since the exercise price of stock
options granted under the 1981 and 1990 Stock Option Plans is not less than the
market price of the underlying stock on the date of grant, no compensation cost
has been recognized for such grants.
52
<PAGE>
The following pro forma net income (loss) and earnings (loss) per share
information has been determined as if the Company had accounted for stock-based
compensation awarded under the 1990 Stock Option Plan using the fair value-based
method. Under the fair value-based method, the estimated fair value of awards
would be charged against income ratably by installments over the vesting period.
The pro forma effect on net income for fiscal years 1999, 1998 and 1997 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.
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Fiscal Year Ended
----------------------------------------------------------------------------------------
May 30, 1999 May 31, 1998 May 25, 1997
-------------------------- --------------------------- --------------------------
As As As
Reported Pro Forma Reported Pro Forma Reported Pro Forma
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(7,029) $(8,359) $2,753 $1,816 $2,615 $1,886
Earnings (loss) per Common
Share:
Basic $ (0.57) $ (0.67) $ 0.22 $ 0.14 $ 0.21 $ 0.15
========= ========= ======= ======= ======= =======
Diluted $ (0.57) $ (0.67) $ 0.21 $ 0.14 $ 0.20 $ 0.15
========= ========= ======= ======= ======= =======
</TABLE>
The weighted average fair value of each option granted under the 1990 Stock
Option Plan during fiscal 1999, 1998 and 1997 was $3.808, $5.446 and $6.550,
respectively. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes Model with the following weighted average
assumptions. The risk-free interest rates for fiscal 1999, 1998 and 1997 were
5.1%, 5.9% and 6.3%, respectively. The expected volatility of the market price
of the Company's Common Stock for fiscal 1999, 1998 and 1997 grants was 51.3%,
55.3% and 58.4%, respectively. The expected average term of the granted options
for fiscal 1999, 1998 and 1997 was 6.6 years, 5.9 years and 6.4 years,
respectively. There was no expected dividend yield for the options granted for
fiscal 1999, 1998 and 1997.
Following are the shares of Common Stock reserved for issuance and the related
exercise prices for the outstanding stock options, convertible subordinated
debentures, Preferred Stock, and Warrants at May 30, 1999:
Number Exercise Price
of Shares Per Share
--------- -----------------
1981 Stock Option Plan 28,565 $3.265
1990 Stock Option Plan 1,895,066 $4.103 to $20.142
Convertible subordinated debentures 1,384,879 $14.272
Preferred Stock 883,431
Warrants 700,000
---------
Shares reserved for issuance 4,891,941
=========
In June, 1997, the Company, as part of a long-term strategic alliance, entered
into a Warrant Agreement with a distributor under which the distributor could
purchase up to 1,200,000 shares of Common Stock. The distributor paid $120,000
for the rights to the warrants and an initial warrant (which expired on November
16, 1998) to purchase 500,000 shares at $12.50 per share was issued. Future
warrants are conditioned on the distributor meeting specified performance levels
and would be issued at market prices at that time. No additional warrants have
been issued. In connection with the initial warrant, the Company incurred a
non-cash charge of $600,000 in fiscal 1998 which was included as marketing,
general and administrative expense in the accompanying consolidated statement of
operations.
53
<PAGE>
During the year ended May 31, 1998, the Company issued 69,992 shares of Series A
Preferred Stock, valued at $100 per share, in connection with its acquisition of
Polycold. These shares are redeemable, at the option of the Company, at any
time, for cash of $102 per share, or after the first anniversary of their
issuance, for Common Stock valued at $102 per share. In the event the shares
have not been redeemed by November 30, 1999, or upon the occurrence of certain
change of control events, they will automatically convert to Common Stock. The
price of Common Stock used for redemption or conversion is based on the average
trading price for a specified ten-day period preceding the redemption or
conversion.
The Series A Preferred Stock issued by the Company is non-voting, and has no
dividend or liquidation preference, but is entitled to participate in any cash
dividend or liquidation distribution, on an "as converted" basis, with the
Company's Common Stock.
During the year ended May 30, 1999 and May 31, 1998, in connection with the
grant of stock options to consultants, the Company has recognized compensation
cost in the amount of $61,000 and $24,000, respectively. In addition, during the
year ended May 31, 1998, the Company issued 89,018 shares of Treasury Stock at
fair market value in connection with the purchase of inventory from a supplier.
NOTE G - RETIREMENT PLANS
The Company has a non-contributory, defined benefit plan covering all eligible
employees. Benefits under the plan are based on years of service and employees'
career average compensation. The Company's funding policy is to contribute
annually an amount sufficient to meet or exceed the minimum funding standard
contained in the Internal Revenue Code. Contributions are intended to provide
not only for benefits attributable to service to date, but also for those
expected to be earned in the future. As of December 31, 1998 the Company froze
all pension benefits except for approximately 50 bargaining unit employees at a
subsidiary. Since prior Company contributions were intended to fund both
benefits earned and those expected to be earned in the future, the freezing of
the benefits generated a "curtailment gain" of $1,465,000, which has been
credited to the appropriate operating expenses containing salary and wages
expense. The Company has been advised that the pension plan has sufficient
assets to permit termination of the plan and has begun the required steps to do
so in accordance with statutory requirements.
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated balance sheets at May 30, 1999 and May 31, 1998:
54
<PAGE>
<TABLE>
<CAPTION>
Fiscal year ended
-----------------
May 30, 1999 May 31, 1998
---------------- --------------
<S> <C> <C>
Change in benefit obligation during year:
Benefit obligation at beginning of year $9,399 $7,065
Service cost 393 590
Interest cost 645 571
Benefit payments (221) (221)
Administrative expenses (98) (78)
Actuarial (gain) or loss (507) 845
Plan amendments 627
Curtailments (1,465)
------- -------
Benefit obligation at end of year $8,146 $9,399
======= =======
Change in plan assets during year:
Fair value of plan assets at beginning of year $9,583 $7,114
Employer contributions 398
Benefit payments (221) (221)
Administrative expenses (98) (78)
Actual return on plan assets 1,692 2,370
------- -------
Fair value of plan assets at end of year $10,956 $9,583
======= =======
Reconciliation of funded status at end of year:
Funded status $2,810 $ 184
Unrecognized net transition obligation 22 28
Unrecognized prior service cost 598 649
Unrecognized net gain (2,895) (1,454)
------- -------
Net amount recognized $ 535 $ (593)
======= =======
Amounts recognized in the consolidated balance sheet at end of year:
Prepaid benefit cost $ 535
Accrued benefit liability $ (593)
------- -------
Net amount recognized $ 535 $ (593)
======= =======
Net periodic benefit cost recognized for year
Service cost $ 392 $ 590
Interest cost 645 571
Expected return on plan assets (752) (577)
Amortization of net transition obligation 6 6
Amortization of prior service cost 51 51
Amortization of net gain (6)
------- -------
Net periodic benefit cost $ 336 $ 641
======= =======
Additional amounts recognized for year
Curtailment gain $(1,465)
Weighted-average assumptions for year
Discount rate 7.00% 7.50%
Rate of compensation increases 4.50% 4.50%
Expected long-term rate of return on plan assets 8.00% 8.00%
Weighted-average assumptions at end of year
Discount rate 7.50% 7.00%
Rate of compensation increases 4.50% 4.50%
</TABLE>
The Company also maintains an employee savings plan, covering substantially all
employees, under Section 401(k) of the Internal Revenue Code. Under this plan,
the Company matches a portion of employees' contributions. Expenses under the
plan during the fiscal years ended May 30, 1999, May 31, 1998 and May 25, 1997
aggregated $348,000, $252,000 and $277,000, 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 $56,000, $67,000 and
$22,000 for the fiscal years ended May 30, 1999, May 31, 1998 and May 25, 1997,
respectively.
55
<PAGE>
NOTE H - INCOME TAXES
The components of the provision for income taxes (benefit) are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) Fiscal Year Ended
------------------------------------------------------------------------
May 30, 1999 May 31, 1998 May 25, 1997
--------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Current
Federal $(1,727) $2,487 $1,513
State 176 352 280
Foreign 112 180 216
------- ------- ------
Total current (1,439) 3,019 2,009
Deferred
Federal (57) (920) (527)
State 284 (108) (62)
------- ------- ------
Total deferred 227 (1,028) (589)
------- ------- ------
Provision for income taxes (benefit) $(1,212) $1,991 $1,420
======= ======= ======
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands)
May 30, 1999 May 31, 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Inventory reserves $2,766 $2,264
Non-deductible accruals 863 1,161
Product warranty reserve 560 431
Foreign subsidiaries - 317
Equity in net loss of unconsolidated
affiliate 368 736
Restructuring and other accruals 1,600 -
Capital loss carryforward 1,329 -
Unrealized loss on available for sale securities 280 -
------ ------
Total gross deferred tax assets 7,766 4,909
Less valuation allowance (1,520) (604)
------ ------
Deferred tax assets 6,246 4,305
Deferred tax liabilities:
Unrealized gain on available for sale securities - (446)
Depreciation and amortization differences (452) (446)
Intangibles (1,475) -
Pension curtailment gain (538) -
Other, net (24) (155)
------ ------
Total gross deferred tax liabilities (2,489) (1,047)
------ ------
Net deferred tax assets $3,757 $3,258
====== ======
</TABLE>
56
<PAGE>
The foregoing assets and liabilities are classified in the accompanying
consolidated balance sheets as follows:
(Dollars in Thousands)
May 30, 1999 May 31, 1998
------------ ------------
Net current deferred tax assets $4,069 $3,583
Net long-term deferred tax liabilities 312 325
------ ------
$3,757 $3,258
====== ======
During fiscal 1998, in connection with the acquisition of Polycold, the Company
recorded $123,000 of deferred tax assets.
During fiscal 1999 the Company increased the valuation allowance to an amount it
believes is necessary to reduce deferred taxes to an amount which is more than
likely not to be realized.
Changes made to the valuation allowance during fiscal 1999 and 1998 were an
increase of $916,000 and a decrease of $230,000, respectively.
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 (loss) of approximately ($3,250,000) in fiscal 1999, $7,000,000 in fiscal
1998, and $3,700,000 in fiscal 1997. 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 asset considered realizable,
however, could be reduced in the near term if estimates of future taxable income
are reduced.
The reasons for the differences between the provision for income taxes (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:
<TABLE>
<CAPTION>
(Dollars in Thousands) Fiscal Year Ended
-------------------------------------------------------------------
May 30, 1999 May 31, 1998 May 25, 1997
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Pre-tax income (loss) at statutory tax rate (34%) $(2,802) $1,613 $1,372
State taxes, net of Federal benefit 304 161 200
Benefit of Foreign Sales Corporation (210) (288) (186)
Non-deductible distribution expense 204
Amortization of intangibles 539 392 110
Non-deductible loss on IMiG LLC 36 151
Benefit of tax credits (45) (257)
Change in valuation allowance 916 (230)
Other, net 86 103 30
------- ------ ------
Provision for income taxes $(1,212) $1,991 $1,420
======= ====== ======
</TABLE>
57
<PAGE>
The Company paid income taxes, net of cash refunds received, of $2,504,000,
$1,815,000, and $1,347,000 during the years ended May 30, 1999, May 31, 1998,
and May 25, 1997, respectively.
NOTE I - PER SHARE INFORMATION
The following table provides calculations of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Amounts)
Fiscal Year Ended
--------------------------------------------------------------
May 30, 1999 May 31, 1998 May 25, 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income (loss) available to
common stockholders $ (7,029) $ 2,753 $ 2,615
========== =========== ===========
Weighted average shares 12,429,039 12,755,733 12,325,001
Dilutive potential Common
Shares:
Convertible Preferred Stock 325,925
Stock options 327,302 468,935
---------- ---------- ----------
Adjusted weighted average
shares 12,429,039 13,408,960 12,793,936
========== =========== ===========
Earnings (loss) per Common Share:
Basic $ (0.57) $ 0.22 $ 0.21
========== =========== ===========
Diluted $ (0.57) $ 0.21 $ 0.20
========== =========== ===========
</TABLE>
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. Shares issuable upon conversion of convertible preferred
stock and exercise of stock options have been excluded for the year ended May
30, 1999 as their effect would be anti-dilutive.
The Company distributed 2% stock dividends on September 17, 1998 and September
16, 1997. The distributions have been made from the Company's authorized but
unissued shares. All data with respect to earnings per share, weighted average
shares outstanding and common stock equivalents have been adjusted to reflect
these stock dividends.
NOTE J - COMMITMENTS AND CONTINGENCIES
The Company leases certain manufacturing facilities and equipment under
operating lease agreements expiring at various dates through December, 2021.
Certain of the leases provide for renewal options. Total rent expense was
$519,000, $400,000 and $331,000 for the years ended May 30, 1999, May 31, 1998,
and May 25, 1997, 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:
58
<PAGE>
Fiscal Year
-----------
2000 $ 836,000
2001 825,000
2002 667,000
2003 509,000
2004 369,000
----------
Total $3,206,000
==========
In addition to operating lease agreements, the Company also has a five-year
maintenance agreement for $113,000 per year beginning January 1, 1999 for a
newly implemented computer system.
At May 30, 1999, the Company's capital equipment commitments were approximately
$2,000,000.
The Company has negotiated a multi-year contract with a key supplier in order
to stabilize supply and price on materials for a long term production contract.
In connection with AISA the Company has agreed to purchase approximately
$3,000,000 of superconducting wire for use in producing MRI magnets.
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 or results of operations. 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 results of operations in future periods.
59
<PAGE>
NOTE K - SEGMENT AND RELATED INFORMATION
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information", in fiscal year 1999. SFAS No. 131 changes the way the
Company reports information about its operating segments. The information for
1998 and 1997 has been restated from the prior year's presentation in order to
conform to the 1999 presentation.
The Company's individual business units have been aggregated into three
reportable segments: (1) Electromagnetics; (2) Superconducting Materials; and
(3) Refrigeration, on the basis of similar products, processes and economic
circumstances, among other things. The Electromagnetics segment designs,
manufactures and sells magnet systems and radio frequency ("RF") coils used in
MRI for medical diagnostics. The Superconducting Materials segment manufactures
and sells superconducting wire principally for the construction of
superconducting MRI magnet systems. The Refrigeration segment designs, develops,
manufactures and sells refrigeration equipment and refrigerants.
The accounting policies of the reportable segments are the same as those
described in Note A of the Notes to Consolidated Financial Statements.
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).
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
<TABLE>
<CAPTION>
(Dollars in Thousands) Fiscal Year Ended
-----------------------------------------------------------------------------------------
May 30, 1999
--------------------------------------------------------------------------------------
Superconducting
Electromagnetics Materials Refrigeration Total
-------------------------------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales from external customers:
Magnet systems $ 46,723 $ 46,723
RF Coils 12,926 12,926
Superconductive wire $ 12,160 12,160
Refrigeration equipment $ 28,268 28,268
Refrigerants 2,794 2,794
------------------- -------------------- ------------------ ------------------
Total 59,649 12,160 31,062 102,871
Intersegment net sales - 6,806 2,223 9,029
Segment operating profit(loss) 4,090 2,585 (5,895) 780
Total assets 66,894 10,857 47,707 125,458
Investment in unconsolidated
affiliates: 3,736 3,736
Additions to property,
plant and equipment,
exclusive of acquisitions 1,721 798 620 3,139
Additions to long lived assets: 8,750 8,750
Depreciation and
amortization expense 3,294 871 1,471 5,636
Other significant non-cash items:
Restructuring charges 4,739 4,739
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
May 31, 1998
--------------------------------------------------------------------------------------
Superconducting
Electromagnetics Materials Refrigeration Total
-------------------------------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales from external customers:
Magnet systems $ 49,874 $ 49,874
RF Coils 10,746 10,746
Superconductive wire $ 11,131 11,131
Refrigeration equipment $ 21,947 21,947
Refrigerants 2,196 2,196
------------------- -------------------- ------------------ ------------------
Total 60,620 11,131 24,143 95,894
Intersegment net sales 7,775 4,141 11,916
Segment operating profit(loss) 3,707 2,324 (517) 5,514
Total assets 69,607 13,872 44,297 127,776
Investment in unconsolidated
affiliates: 5,330 4,710 10,040
Additions to property,
plant and equipment,
exclusive of acquisitions 2,411 310 425 3,146
Additions to long lived assets 10,175 10,175
Depreciation and
amortization expense 3,950 912 562 5,424
Other significant non-cash items:
Expense associated with
warrants issued 600 600
May 25, 1997
--------------------------------------------------------------------------------------
Superconducting
Electromagnetics Materials Refrigeration Total
-------------------------------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Net sales from external customers:
Magnet systems $ 50,894 $ 50,894
RF Coils 1,981 1,981
Superconductive wire $ 10,698 10,698
Refrigeration equipment $ 16,010 16,010
Refrigerants 7,469 7,469
------------------- -------------------- ------------------ ------------------
Total 52,875 10,698 23,479 87,052
Intersegment net sales 8,838 3,652 12,490
Segment operating profit(loss) 514 2,260 478 3,252
Total assets 67,939 13,440 34,510 115,889
Investment in unconsolidated
affiliates: 4,918 4,918
Additions to property,
plant and equipment,
exclusive of acquisitions 3,789 775 882 5,446
Additions to long lived assets: 9,957 9,957
Depreciation and
amortization expense 2,585 856 523 3,964
</TABLE>
<PAGE>
The following are reconciliations of the information used by the chief operating
decision maker to the Company's consolidated totals:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------
May 30, May 31, May 25,
(Dollars in Thousands) 1999 1998 1997
------- ------- -------
Reconciliation of income (loss) before income taxes:
<S> <C> <C> <C>
Total profit from reportable segments $ 780 $ 5,514 $ 3,252
Unallocated amounts:
Interest and other income 1,942 2,364 2,961
Interest and other expense (2,172) (2,125) (1,996)
Write off of investment in unconsolidated affiliate (7,300) -- --
Equity in net loss of unconsolidated affiliates (1,491) (1,009) (182)
======= ======= =======
Income (loss) before income taxes $(8,241) $ 4,744 $ 4,035
======= ======= =======
</TABLE>
<PAGE>
Net sales to two customers of the Company's Electromagnetics and Superconducting
Materials segments were each in excess of 10% of the Company's total net sales.
Net sales to each of these customers during the last three years were as
follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------
May 30, May 31, May 25,
(Dollars in Thousands) 1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Customer A $ 41,652 $ 42,751 $ 43,548
Customer B 13,747 10,408 7,378
----------------- ----------------- -----------------
Total $ 55,399 $ 53,159 $ 50,926
================= ================= =================
</TABLE>
Net sales by country, based on the location of the customer, for the last three
fiscal years were as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------------------
May 30, May 31, May 25,
(Dollars in Thousands) 1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
United States $ 41,771 $ 38,594 $ 34,952
Netherlands 41,652 42,751 43,548
Other countries 19,448 14,549 8,552
----------------- ----------------- -----------------
Total $102,871 $ 95,894 $ 87,052
================= ================= =================
</TABLE>
All significant long-lived assets of the Company are located within the United
States.
60
<PAGE>
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 short-term investments, 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, investment in affiliates and other investments:
The fair value of the Ultralife investment is estimated based on quoted market
prices (see Note D) at the balance sheet date. The fair value of the KryoTech
investment is not readily determinable as the company is privately held. The
estimated fair value of the PowerCold investment was approximately $1,900,000 at
May 30, 1999 based on the number of PowerCold common shares that the Series A
Convertible Preferred Stock may be converted to at the option of the Company and
the quoted market price at the balance sheet date (see Note D).
Long-term debt: The fair value of the borrowings under the unsecured line of
credit reported in the consolidated balance sheets approximate the carrying
value of $4,850,000 and $0 at May 30, 1999 and May 31, 1998, respectively,
because the interest rates are based on floating rates identified by reference
to market rates and because of the short maturity of this instrument. The
carrying value of long-term debt, including current portion, was approximately
$26,900,000 and $29,100,000 at May 30, 1999 and May 31, 1998, respectively,
while the estimated fair value was $24,000,000 and $27,900,000, respectively,
based upon interest rates available to the Company for issuance of similar debt
with similar terms and discounted cash flows for remaining maturities.
Financial guarantees: The fair value of the Company's guarantee on one half of
the outstanding balance of borrowings under a line of credit obtained by SMIS
approximates the carrying value at May 30, 1999 because of the short maturity of
this instrument (see Note D).
61
<PAGE>
Letters of credit: The letters of credit reflect fair value as a condition of
their underlying purposes and are subject to fees competitively determined in
the market place. The contract value and fair value of the letters of credit at
May 30, 1999 was $1,645,000.
Note M - Accumulated Other Comprehensive Income (Loss)
The accumulated balances for each classification of accumulated other
comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
Unrealized Accumulated
Foreign Gains (Losses) Other
Currency on Available for Sale Comprehensive
Items Securities, Net of Tax Income (Loss)
--------- ----------------------- -------------
<S> <C> <C> <C>
Balances at May 26, 1996 $ (96) $ 2,346 $ 2,250
Current period change - 1997 80 (1,733) (1,653)
------- ------- -------
Balances at May 25, 1997 (16) 613 597
Current period change - 1998 (338) 237 (101)
------- ------- -------
Balances at May 31, 1998 (354) 850 496
Current period change - 1999 194 (1,358) (1,164)
------- ------- -------
Balances at May 31, 1999 $ (160) $ (508) $ (668)
======= ======= ========
</TABLE>
The related tax effects allocated to each component of accumulated other
comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
Before-Tax Tax (Expense) Net-of-Tax
Amount or Benefit Amount
----------- ------------ ----------
<S> <C> <C> <C>
Balance at May 26, 1996 $ 3,814 $(1,564) $ 2,250
Foreign currency translation
adjustments 80 -- 80
Unrealized losses on
available for sale securities (2,952) 1,219 (1,733)
-------- -------- --------
Balance at May 25, 1997 942 (345) 597
Foreign currency translation
adjustments (338) -- (338)
Unrealized gains on
available for sale securities 338 (101) 237
-------- -------- --------
Balance at May 31, 1998 942 (446) 496
Foreign currency translation
adjustments 194 -- 194
Unrealized losses on
available for sale securities (2,084) 726 (1,358)
-------- -------- --------
Balance at May 30, 1999 $ (948) $ 280 $ (668)
======== ======== ========
</TABLE>
<PAGE>
NOTE N - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for fiscal 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Amounts)
Earnings Per:
Net ---------------------
Net Gross Income Basic Diluted
Sales Margin (Loss) Share Share
----- ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
1999 Quarter Ended
August 30, 1998 $26,494 $9,781 $ 1,005 $ .08 $ .07
November 29, 1998 25,963 7,779 (1,449) (.12) (.12)
February 28, 1999 23,004 7,759 452 .04 .03
May 30, 1999 (1) 27,410 7,420 (7,037) (.57) (.57)
1998 Quarter Ended
August 24, 1997 $21,020 $8,048 $ 461 $ .04 $ .04
November 23, 1997 22,215 7,770 592 .05 .05
February 22, 1998 25,235 9,058 815 .06 .06
May 31, 1998 27,424 10,809 885 .07 .06
</TABLE>
(1) During the quarterly period ended May 30, 1999, the Company recorded a
$7,300,000 write-off of its investment in and advances to SMIS (See Note
D), and recognized a $1,465,000 curtailment gain upon amendment to and
planned termination of the Company's defined benefit pension plan (See Note
G). In addition, due to declining sales, warranty issues and management's
review of operations during fiscal 1999 at the Company's IGC-APD a
$1,750,000 adjustment for inventory impairment was recorded during the
quarter. Other adjustments and significant transactions which occurred
during the quarterly period ended May 30, 1999 included a $300,000 gain
upon sale of the Company's interest in AISA (See Note D) and $787,000 of
additional restructuring charges (See Note C), incurred in the closure of
the Company's Field Effects division. The aggregate effect of these
adjustments resulted in a pretax loss of $8,072,000 during the quarterly
period ended May 30, 1999.
62
<PAGE>
2. Schedule
63
<PAGE>
INTERMAGNETICS GENERAL CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
(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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ended May 30, 1999
Deducted from asset accounts:
Allowance for doubtful accounts $ 350 $ 206 119 (11) $ 412 (3) $ 401
138 (10)
Reserve for inventory obsolescence 6,843 3,732 1,820 (10) 4,113 (5) 8,282
Included in liability accounts:
Product warranty reserve 996 2,152 1,571 (1) 1,577
265 (2)
Contract adjustment reserve (4) 458 70 227 (9) 301
Upgrade Reserve (4) 60 40 60 (2) 40
Year Ended May 31, 1998
Deducted from asset accounts:
Allowance for doubtful accounts $ 302 $ 60 $ 88 (2) $ 130 (3) $ 350
30 (7)
Reserve for inventory obsolescence 6,653 1,266 (9) (6) 1,087 (5) 6,843
20 (7)
Included in liability accounts:
Product warranty reserve 911 664 70 (7) 649 (1) 996
Contract adjustment reserve (4) 274 184 458
Upgrade Reserve (4) 60 60 60 (8) 60
Year Ended May 25, 1997
Deducted from asset accounts:
Allowance for doubtful accounts $ 169 $ 92 $ 2 (6) $ 1 (3) $ 302
40 (7)
Reserve for inventory obsolescence 5,225 1,465 1 (6) 58 (5) 6,653
20 (7)
Included in liability accounts:
Product warranty reserve 1,100 724 29 (7) 942 (1) 911
Contract adjustment reserve (4) 234 81 41 (2) 274
Upgrade Reserve (4) 0 8 60 (7) 8 (8) 60
</TABLE>
(1) Cost of warranty performed.
(2) Adjustments from 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) Foreign currency translation.
(7) Balance at date of acquisition of subsidiary.
(8) Cost of upgrade work performed.
(9) Cost to finalize contracts.
(10) Restructuring charges.
(11) SMIS write-off.
64
<PAGE>
Exhibit Index
Page Exhibit
- ---- -------
10.1 Employment Agreement dated June 1, 1999 between
Intermagnetics General Corporation and Glenn H. Epstein
10.7 Agreements dated 29 April, 1999 between Philips Medical
Systems Nederlands, B.V. and Intermagnetics General
Corporation for sales of magnet systems
21 Subsidiaries of the Company
23 Consent of Independent Auditors
<PAGE>
THIS EMPLOYMENT AGREEMENT (the "1999 Agreement") is made as of the 1st
day of June, 1999, by and between Intermagnetics General Corporation, a New York
corporation (the "Company"), and Glenn H. Epstein ("Executive").
WHEREAS, Executive has served as the President and Chief Operating
Officer of the Company under an Employment Letter dated March 20, 1997 between
the Company and Executive (the "Letter");
WHEREAS, the parties amended the Letter by an agreement dated April 1,
1997 (the "First Amendment") and an agreement dated October 15, 1998 (the
"Second Amendment")(the Letter, the First Amendment and the Second Amendment to
be referred to collectively as the "1998 Agreement"); and
WHEREAS, the parties now wish to extend the term of the employment
provisions of the 1998 Agreement and make certain other changes in the
employment relationship between the Company and Executive on such terms and
conditions as will 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 1998 Agreement be
superseded in all respects by this 1999 Agreement, except as to the vesting
provisions for the options previously granted to Executive under the fifth
paragraph on page one of the Letter and except as to the non competition,
confidentiality and no solicitation provisions of the 1998 Agreement.
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.
1.1 Term.
Subject to the provisions of Sections 8 and 9 below, Executive shall
be employed as a full-time employee of the Company for the term running three
years beginning June 1, 1999 and ending on May 31, 2002 (the "Initial Employment
Term"). As used in this 1999 Agreement, the term "year" shall refer to a three
hundred and sixty five (365) day period. The "Initial Employment Term" shall be
automatically renewed from year to year for one (1) year periods, beginning on
June 1, 2002 (the Initial Employment Period and such renewal periods to be
referred to as the "1999 Agreement Term"), unless either party provides written
notice to the other at least sixty (60) days prior to the anniversary or renewal
date thereof of its or his desire to terminate the employment of Executive. The
terms of said Agreement after June 1, 2002 shall remain the same except for any
increase in salary, bonus or benefits provided by the Company to Executive.
<PAGE>
1.2 Duties and Responsibilities.
(a) During the 1999 Agreement Term, Executive shall serve 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, to whom he shall
directly report, and he shall cooperate fully with the Board of Directors and
other executive officers of the Company. During the 1999 Agreement Term
Executive shall also be available to perform similar duties on behalf of
subsidiaries or divisions of the Company. During the 1999 Agreement Term
Executive shall at all times comply with policies and procedures adopted by the
Company and ratified by the Board of Directors for executive employees of the
Company and its subsidiaries, including without limitation the procedures and
policies adopted by the Company regarding conflicts of interest.
(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 1999 Agreement or
from adhering to the terms and provisions of the 1998 Agreement, and performing
his duties and responsibilities hereunder during the 1999 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,
(vi) permanent magnet applications as part of the U.S. strategic defense
initiative program, (vii) CFC replacement products, or (viii) 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.
1.3 Extent of Service.
(a) During the 1999 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 1999 Agreement Term without the
prior written consent of the Board of Directors of the Company.
<PAGE>
(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, 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.
1.4 Base Compensation During 1999 Agreement Term.
For all the services rendered by Executive during the 1999 Agreement
Term, the Company shall pay Executive an annual salary at the rate of $250,000
for each full year of the 1999 Agreement Term, plus additional amounts, if any,
as may be approved, from time to time, 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 salary 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. Executive's
annual salary shall not be reduced unless mutually agreed to by Executive and
the Compensation Committee. During the 1999 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 1999 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 three
times Executive's annual base salary as of June 1, 1999 (i.e. a face amount of
$750,000); 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 1999 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.
<PAGE>
1.5 Bonus.
In addition to the compensation set forth above, during the 1999
Agreement Term Executive shall be entitled to participate in the following bonus
plan. Executive shall be eligible to receive in respect to each of the three
years during the 1999 Agreement Term, and subsequent years if this 1999
Agreement is renewed, a bonus up to a maximum twenty-five percent (25%) of
annual base salary which shall be made up of the following two (2) components:
(1) one half of the bonus, or a potential of twelve and one half percent (12
1/2%) of current annual base salary, shall be determined by the Company's Board
of Directors taking into account the pre-tax profitability of the Company,
subject to the audited financials of the Company (the bonus amounts and
financial objectives to be agreed upon by the Compensation Committee of the
Board and the Executive Committee); and (2) the second half of the bonus, or an
additional potential twelve and a half percent (12 1/2%) of current annual base
salary, shall be determined solely at the discretion of the Compensation
Committee, taking into account subjective criteria including Executive's and the
Company's performance (other than financial performance of the Company). Subject
to the cap set forth in this paragraph, the amount of annual bonus may change
depending upon the financial and other performance of the Company and Executive.
The bonus shall be paid to Executive as soon as possible after the audited
financial statements for such fiscal year are available, but in no event later
than 90 days after the end of the fiscal year.
1.6 Stock Options.
In consideration for Executive's continued employment under this 1999
Agreement, the Company on June 1, 1999 will grant to Executive a non-qualified
option to purchase 500,000 shares (subject to adjustment for future stock
dividends or splits) of Common Stock of the Company, with the option vesting at
a rate of 33.33% on each of June 1, 2000, June 1, 2001 and June 1, 2002
respectively. The grant will be made pursuant to the 1990 Stock Option Plan of
the Company, or any successor plan qualified under the rules and regulations
pursuant to Section 16 of the 1934 Act, and adopted by the Company's
shareholders as required by Rule 16b-3 of the 1934 Act, and a stock option
agreement for non-qualified options in the form used generally by the Company,
and the term of the stock option will be five years. The exercise price of the
option shall be determined as of the closing price of the stock of the Company
on the American Stock Exchange on June 1, 1999.
<PAGE>
1.7 Supplemental Benefits.
In addition to the compensation and equity participation set forth
above, during the first year of the 1999 Agreement Term the Company shall create
for Executive a lump-sum amount of Forty-Five Thousand Dollars ($45,000) and for
each subsequent year of the 1999 Agreement Term the Company shall establish a
lump-sum amount for Executive of Thirty-Five Thousand Dollars ($35,000) from
which he 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 establish annually an available lump sum as
set forth in the first sentence of this paragraph from which Executive shall
choose said supplemental benefits. Executive shall not be eligible to
participate in any such 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 1999 Agreement Term upon presentation of an itemized
account in accordance with Company policies.
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 the 1998 Agreement Term or 1999 Agreement Term,
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 and any income lost by him in compliance with the provisions of this
Section.
<PAGE>
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 1999 Agreement Term, disclose any such Confidential
Information to any person for any reason whatsoever (except as his duties during
the 1999 Agreement Term 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.
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, (vi) permanent magnet applications as part of the
U.S. strategic defense initiative program, (vii) CFC replacement products, or
(viii) 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 noncompetition covenant (and the non-solicitation covenant
set forth in Section 6 hereof) are therefore not appropriate.
<PAGE>
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 1999 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.
(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.
<PAGE>
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 1999
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.
7.2 Dissemination of Restrictions.
Executive agrees that until the expiration of the covenants contained
in Sections 3, 4, 5 and 6 of this 1999 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.
<PAGE>
8. Termination.
Unless otherwise modified by the terms of Section 1.1, hereof, this
1999 Agreement shall terminate prior to the expiration of the 1999 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 1999 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 1999 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), and (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. 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.
8.2 Death.
In the event that Executive dies during the 1999 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
1999 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), and (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.
<PAGE>
8.3 Voluntary Termination.
In the event that subsequent to June 1, 1999 Executive voluntarily
terminates the 1999 Agreement Term at any time upon 30 days prior written notice
to the Company.
8.4 Termination Without Cause, Nonrenewal of Agreement.
The Company shall have the right, exercisable at any time during the
term of this 1999 Agreement or any renewal term thereof, to terminate
Executive's employment without cause upon thirty (30) days prior written notice
or by the Company's nonrenewal of this 1999 Agreement or any extension thereof.
If Executive's employment is terminated without cause, or the Company provides
Executive with written notice of nonrenewal of this 1999 Agreement in accordance
with Section 1.1 hereof, he shall be entitled to the greater of an amount equal
to (i) Executive's then-base annual salary for the balance of Executive's
Initial Employment Term (only if Executive is terminated by the Company without
cause), or (ii) twelve (12) months salary plus one (1) additional month's salary
for each full year of Executive's service as President and Chief Executive
Officer, up to a maximum of eighteen (18) months' salary (such payments to be
referred to as the "Severance Payments"). In such event Executive's obligations
under the provisions of Section 5.1 and Section 6 of this 1999 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.
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 (except for a decision by
the Company not to continue the appointment of Executive as Chief Executive
Officer as of the termination of this 1999 Agreement); (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 1999 Agreement, as contemplated in Section 12
hereof.
<PAGE>
(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 1999 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.
8.6 Cause.
Nothing in this 1999 Agreement shall be construed to prevent its
termination by the Company at any time for "cause." For purposes of this 1999
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 1999 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.
<PAGE>
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 1999
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 1999 Agreement.
9. Extraordinary Termination.
In the event of an Extraordinary Termination during the 1999 Agreement
Term, as defined in Section 9.1(b), the following provisions shall apply.
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 1999 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.
<PAGE>
(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;
(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 1999 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 1999 Agreement by any successor as
and to the extent required by Section 12 of this 1999 Agreement.
<PAGE>
9.2 Termination Payments.
(a) In the event of an Extraordinary Termination during the 1999
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 an amount equal to the sum
of:
(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 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
outstanding and unexercised, whether vested or unvested, over the aggregate
exercise price of all such stock options; plus
(iv) payment in lieu of all unused paid personal leave and accrued
sick time.
(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.
<PAGE>
(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 1999 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 1999 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 1999 Agreement shall prevent the
Company after a Control Transaction from agreeing to pay Executive compensation
or benefits in excess of those provided in this 1999 Agreement.
<PAGE>
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
(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 1999 Agreement, or any offset
provided for in Section 8.7 of this 1999 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 1999 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.
<PAGE>
10. Withholding of Taxes.
The Company may withhold from any payments under this 1999 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 1999 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 1999
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 1999 Agreement. As used in this 1999
Agreement, the "Company" shall mean the Company as herein before defined and any
such successors to its business and/or assets.
13. Survival.
Notwithstanding the termination of this 1999 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 1999 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.
<PAGE>
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 1999 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.
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 1999 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.
<PAGE>
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
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 1999 Agreement; Amendment and Assignment.
(a) This 1999 Agreement supersedes all prior agreements (including the
1998 Agreement) and sets forth the entire understanding among the parties hereto
with respect to the subject matter hereof (except as for the vesting of stock
option granted to Executive under the terms of the 1998 Agreement) 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 1999 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 1999 Agreement Term.
<PAGE>
(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 1999 Agreement.
(c) All of the terms and provisions of this 1999 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 1999 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 1999 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.
21. Remedies Cumulative; No Waiver.
No remedy conferred upon the Company or Executive by this 1999
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 1999 Agreement
as of the date first above written.
ATTEST INTERMAGNETICS GENERAL CORPORATION
/s/ Carl H. Rosner /s/ Sheldon Weinig
- ------------------------------- ------------------------------------
Sheldon Weinig
Chairman, Compensation Committee of
the Board of Directors
Witness GLENN H. EPSTEIN
/s/ Catherine E. Arduini /s/ Glenn H. Epstein
- ------------------------------- ------------------------------------
<PAGE>
C O N F I D E N T I A L
SUPPLY AGREEMENT BETWEEN
PHILIPS MEDICAL SYSTEMS NEDERLAND B.V.
(PHILIPS)
AND
INTERMAGNETICS GENERAL CORPORATION
(INTERMAGNETICS)
REGARDING
A FAMILY OF ACTIVE SHIELDED
SUPERCONDUCTING MRI MAGNETS
<PAGE>
Content: Page:
----------------------------------------------------------------------------
1 Scope 2
2 Definitions 2
3 Products 2
4 Change Control 3
5 Prices 3
6 Purchase Orders 3
7 Forecast and Ordering Procedures 4
8 Production 4
9 Delivery 5
10 Warranty 6
11 Service 9
12 Branding, Trademarks and Tradenames 9
13 Term and Termination 10
14 Purchase Orders placed prior to termination effectivity 10
15 Prevailing Agreement 10
16 Surviving Terms 10
17 List of Schedules 11
18 Effectiveness 11
Schedules
---------
A [CONFIDENTIAL TREATMENT REQUESTED]
B Branding instructions
C [CONFIDENTIAL TREATMENT REQUESTED]
D [CONFIDENTIAL TREATMENT REQUESTED]
E Change request form
F Configuration management
G [CONFIDENTIAL TREATMENT REQUESTED]
H Accounting data and procedures
I Forwarding instructions
J Customs instructions
K [CONFIDENTIAL TREATMENT REQUESTED]
i
<PAGE>
This SUPPLY AGREEMENT is
between
PHILIPS MEDICAL SYSTEMS NEDERLAND B.V., of Best, The Netherlands (hereinafter
referred to as "PHILIPS") on the one part
and
INTERMAGNETICS GENERAL CORPORATION acting through its Magnet Business Group of
Latham, New York, the United States of America (hereinafter referred to as
"INTERMAGNETICS") on the other part.
WHEREAS:
o PHILIPS and INTERMAGNETICS entered into an Umbrella Agreement dated 29
April, 1999 setting forth the terms and conditions applicable to their
relationship; and
o under the Umbrella Agreement, the parties may enter into a Supply Agreement
for the supply of certain magnet systems from INTERMAGNETICS to PHILIPS; and
o the Parties now desire to enter into a Supply Agreement to cover the supply
of existing and future products from INTERMAGNETICS to PHILIPS;
NOW IT IS HEREBY AGREED AS FOLLOWS:
<PAGE>
1. Scope
This Supply Agreement is an integral part of the Parties' UMBRELLA AGREEMENT
dated 29 April, 1999. Except as expressly stated otherwise herein, all terms and
conditions of the Umbrella Agreement, including definitions, are incorporated as
if fully set forth in this Supply Agreement. This Supply Agreement will
encompass the supply of Products that meet Specifications contained in Schedule
A and shall take effect on 1 January 2000 (the Effective Date).
2. Definitions
Product(s) In addition to the definition of Product in the
Umbrella Agreement, Product shall mean, in this
Supply Agreement, the products which are specified
in Schedule A. Products may be added or deleted to
Schedule A by mutual agreement of the Parties in
writing.
Spare Parts shall mean replaceable Parts of the Products
classified by INTERMAGNETICS as spare parts
Specification shall mean the requirements for the Products as set
forth in Schedule A.
Supply Agreement: shall mean this document and all the Schedules that
are presently attached thereto and all Appendixes
and amendments that will be attached thereto
provided they are signed and/or initialed by the
individuals authorized to bind the Parties.
Tools shall mean components supplied by INTERMAGNETICS
specifically for the purpose of installation or
service of the Product(s)
3. Product(s)
3.1. INTERMAGNETICS shall only supply Product(s) which have successfully
passed the agreed upon tests to ensure meeting the Specification and
which have been subject to the issuance by PHILIPS of a NORD.
Page: 2
<PAGE>
3.2. INTERMAGNETICS shall be under no obligation to accept orders for any
Product until a NORD has been issued for that type of Product. PHILIPS
shall be under no obligation to accept deliveries until a NORD has been
issued.
4. Change Control
4.1. INTERMAGNETICS shall inform PHILIPS in writing by means of the standard
form for change request as laid out in Schedule E to this Supply
Agreement of any and all changes affecting form, fit or function to the
Product(s) and/or Spare Parts that result from its continuing
engineering activities as they occur. Any changes proposed by
INTERMAGNETICS such as change in design, material, manufacturing
process and other aspects which affect form, fit or function and/or the
Specification(s) will be subject to the prior written consent of
PHILIPS. The objective of Parties is to conclude the authorization,
cancellation or rejection of any change request within sixty (60) days
from its initiation.
4.2. In the event PHILIPS desires a change in the Product(s) and/or Spare
Parts, the provision of Article 4.1 hereof shall apply mutatis
mutandis.
5. Prices
5.1. INTERMAGNETICS shall supply the Product(s) and Spare Parts to PHILIPS
at prices which are set forth in Schedule C to this Supply Agreement.
5.2. [CONFIDENTIAL TREATMENT REQUESTED]
5.3. [CONFIDENTIAL TREATMENT REQUESTED]
6. Purchase Orders
6.1. Product(s) and/or Spare Part(s) shall be ordered by PHILIPS through the
written or electronic release of a Purchase Order which shall be
subject to and governed by this Supply Agreement.
6.2. Each Purchase Order shall at least specify the type of Product(s)
and/or Spare Part(s), the quantity(ies), the price(s) and the requested
delivery date(s).
6.3. Purchase Order(s) may include additional terms relating to the
purchase, shipment and other conditions if previously agreed upon
between PHILIPS and INTERMAGNETICS.
Page: 3
<PAGE>
6.4. Purchase Order(s) so placed by PHILIPS shall be acknowledged by
INTERMAGNETICS within five (5) working days after receipt provided that
such Purchase Order(s) comply with the requirements of Schedule D.
7. Forecast and Ordering Procedures
7.1 Parties have agreed to the forecast and order lead time provisions as
specified in Schedule D to this Supply Agreement.
8. Production
8.1. Subject to the confidentiality provisions of the Umbrella Agreement
between Parties, PHILIPS' technical, purchasing, quality, logistic and
service experts are entitled to visit INTERMAGNETICS' factory in order
to assess all relevant aspects of the progress of the manufacture of
the Products, such as without limitation with respect to
Specifications, quality, serviceability and delivery times, provided
that in accordance with INTERMAGNETICS' confidentiality needs, PHILIPS'
experts will not have access to certain, to be agreed upon in advance,
aspects of the manufacturing process. PHILIPS' experts are entitled to
make suggestions and proposals, but same shall be binding and valid on
INTERMAGNETICS and PHILIPS only if confirmed in a document signed by
authorized representatives of all relevant parties.
8.2. Each Product shall be tested by INTERMAGNETICS prior to delivery. The
tests shall enable INTERMAGNETICS to verify that the Products comply
with the Specifications. Test requirements and procedures have been
defined in the Specifications. No later than seven (7) working days
prior to the start of the test, INTERMAGNETICS shall inform PHILIPS
thereof in writing and PHILIPS is entitled to be represented at these
tests. Notwithstanding PHILIPS being so represented, Article 9.7 will
remain applicable. Upon satisfactory completion of the tests a copy of
the test results per Product authorized by INTERMAGNETICS' responsible
quality officer shall be transmitted to PHILIPS with a request to
authorize delivery thereof. PHILIPS will react to this request within
five (5) working days following receipt of the information. If PHILIPS
does not respond within said five working days the Product shall be
deemed to be accepted by PHILIPS and INTERMAGNETICS shall be entitled
to deliver the Product and forward the relevant invoice to PHILIPS. In
case the Product appears not to comply with the Specifications PHILIPS
shall be entitled to reject the Product in which case INTERMAGNETICS
shall repair or replace the Product.
9. Delivery
Page: 4
<PAGE>
9.1. Unless specifically otherwise agreed in writing the Product(s) and
Spare Part(s) shall be delivered in accordance with the terms of the
pertaining Purchase Order and this Article 9.
9.2. [CONFIDENTIAL TREATMENT REQUESTED]
9.3. [CONFIDENTIAL TREATMENT REQUESTED]
9.4. [CONFIDENTIAL TREATMENT REQUESTED]
9.5. [CONFIDENTIAL TREATMENT REQUESTED]
9.6 [CONFIDENTIAL TREATMENT REQUESTED]
9.7. Upon receipt, PHILIPS is entitled to retest (incoming inspection) at
PHILIPS location the Product(s) and Spare Part(s) in accordance with
the agreed upon tests, set forth in Schedule A to this Supply
Agreement. In the event a Product does not comply with the agreed
Specifications and acceptance test requirements, or subsequent
change(s) agreed upon in accordance with Article 4 PHILIPS is entitled
to reject the pertaining Product(s) and it shall inform INTERMAGNETICS
thereof in writing with an indication of the deficiencies as they
appear to PHILIPS. Subject to the provisions of Article 10,
INTERMAGNETICS shall, at its option, either repair or replace the
Product(s) and Spare Part(s) rejected by PHILIPS within a reasonable
time taking into account PHILIPS' interests but at the latest within 90
(ninety) days after PHILIPS' notice of rejection. All costs related to
such repair or replacement shall be borne by INTERMAGNETICS unless
caused by damage incurred under PHILIPS ownership.
10. Warranty
10.1. [CONFIDENTIAL TREATMENT REQUESTED]
10.2. [CONFIDENTIAL TREATMENT REQUESTED]
10.3. [CONFIDENTIAL TREATMENT REQUESTED]
10.4. [CONFIDENTIAL TREATMENT REQUESTED]
10.5. [CONFIDENTIAL TREATMENT REQUESTED]
10.6. [CONFIDENTIAL TREATMENT REQUESTED]
10.7. [CONFIDENTIAL TREATMENT REQUESTED]
Page: 5
<PAGE>
10.8. [CONFIDENTIAL TREATMENT REQUESTED]
10.9. [CONFIDENTIAL TREATMENT REQUESTED]
11. Service
11.1. INTERMAGNETICS undertakes that it will have available Spare Part(s),
make the same available to PHILIPS at PHILIPS' request at prices as set
forth in Schedule C to this Supply Agreement and will continue to
enhance software, if applicable, for the Products during a period of
seven (7) years after the last dispatch of Products by INTERMAGNETICS.
11.2. INTERMAGNETICS may, at its discretion, substitute functionally
equivalent Spare Parts, subject to informing PHILIPS previously in
writing and making available free of charge a number of such equivalent
Spare Parts for PHILIPS to test and provided PHILIPS approves these
Spare Parts in writing. After completion of such tests, PHILIPS will
either purchase or return such Spare Parts to INTERMAGNETICS.
11.3. Together with each Product, INTERMAGNETICS will supply to PHILIPS one
copy of the necessary updated operating and technical/maintenance
manual, both for hardware and software in the English language and will
forward same separately to PHILIPS' attention to the address PHILIPS
will specify per case.
11.4. Other Service aspects are as set forth in Schedule G to this Supply
Agreement.
12. Branding Trademarks and Trade Names
12.1. The Products and packing supplied under this Supply Agreement will be
branded with PHILIPS' and INTERMAGNETICS' trademarks and trade names in
accordance with each Party's instructions as set forth in Schedule B to
this Supply Agreement. INTERMAGNETICS recognizes PHILIPS' rights in and
to PHILIPS' trademarks and trade names. In this respect it is
understood that PHILIPS may require a separate letter of acknowledgment
from INTERMAGNETICS of PHILIPS' rights in and to the said trademarks
and trade names.
12.2. The arrangements of Article 12.1 are not to be understood as a
restriction of INTERMAGNETICS' rights and title in the design and
programming applied in the Products.
Page: 6
<PAGE>
13. Term and Termination
13.1 Term of Supply Agreement
The Term as defined in the Umbrella Agreement applies to this Supply
Agreement.
13.2 Termination by mutual agreement
The Parties may, by mutual agreement, decide to discontinue the supply
of certain Products supplied under this Supply Agreement with a minimum
of twenty four (24) months advance written notice.
13.3 Termination for breach
The provision for termination for breach from the Umbrella Agreement
shall apply as if fully set forth herein, provided, however, that as an
additional remedy for breach, the non-breaching Party may terminate the
supply of a particular Product or Product(s) under this Supply
Agreement (rather than the entire Supply Agreement) by notice in
writing.
14. Purchase Orders placed prior to termination effectivity
In the event of termination of a particular Product pursuant to Article
13.2 of this Supply Agreement, PHILIPS shall be entitled until the
actual date the supply of the affected Product(s) terminates, to place
Purchase Orders for the affected Product(s) in accordance with the
terms and conditions of this Supply Agreement and INTERMAGNETICS agrees
to honor such Purchase Orders, provided always that the delivery times
for such Purchase Orders do not exceed the prevailing lead time and
comply with Article 6 and Schedule D.
After the notice of termination coming into effect, PHILIPS shall not
be entitled to change, modify or cancel any Purchase order placed by it
for any reason other than INTERMAGNETICS' inability to honor such
Purchase Order nor to place any additional Purchase Orders.
15. Prevailing Agreement
If there is any conflict between any provision of this Supply Agreement
with any provision of a Schedule to this Supply Agreement or a Purchase
Order the provisions of this Agreement shall prevail.
16. Surviving Terms
In the event of termination of this Supply Agreement, the provisions of
Articles 10, 11 and 15 shall survive.
Page: 7
<PAGE>
17. List of Schedules to this Supply Agreement
A [CONFIDENTIAL TREATMENT REQUESTED]
B Branding instructions
C [CONFIDENTIAL TREATMENT REQUESTED]
D [CONFIDENTIAL TREATMENT REQUESTED]
E Change request form
F Configuration management
G [CONFIDENTIAL TREATMENT REQUESTED]
H Accounting data and procedures
I Forwarding instructions
J Customs instructions
K [CONFIDENTIAL TREATMENT REQUESTED]
18. Effectiveness
This Supply Agreement becomes binding when signed by duly authorized
officers of each party and will come into effect on 1 January 2000.
Page: 8
<PAGE>
IN WITNESS WHEREOF the parties have caused this Agreement to be signed by their
authorized representatives:
<TABLE>
<CAPTION>
<S> <C>
INTERMAGNETICS GENERAL PHILIPS MEDICAL SYSTEMS
CORPORATION NEDERLAND B.V.
Signature /s/ Glenn H. Epstein Signature /s/ Ir. C.F. Knoet
Glenn H. Epstein Ir. C.F. Knoet
President and Director PMC MR/CT/EVM
Chief Operating Officer
Date: 30 April 1999 Date: 28 April 1999
INTERMAGNETICS GENERAL PHILIPS MEDICAL SYSTEMS
CORPORATION NEDERLAND B.V.
Signature: /s/ Leo Blecher Signature: /s/ Dr A.H. van Ommen
Leo Blecher Dr A.H. van Ommen
VP and General Manager Director
Magnet Business Group PMG Magnetic Resonance
Date: 30 April 1999 Date: 29 April 1999
INTERMAGNETICS GENERAL PHILIPS MEDICAL SYSTEMS
CORPORATION NEDERLAND B.V.
Signature: /s/ Garry Morrow Signature: /s/ Boyd van der Plas
Garry Morrow Boyd van der Plas,
Marketing Manager Purchasing Manager
Magnet Business Group PMG Magnetic Resonance
Date: 30 April 1999 Date: 29 April 1999
</TABLE>
Page: 9
<PAGE>
UMBRELLA AGREEMENT BETWEEN
PHILIPS MEDICAL SYSTEMS NEDERLAND B.V.
AND
INTERMAGNETICS GENERAL CORPORATION
REGARDING
A FAMILY OF ACTIVE SHIELDED
SUPERCONDUCTING MAGNET SYSTEMS FOR MRI SYSTEMS
<PAGE>
Content: Page:
- ------------------------------------------------------------------
1 Scope 2
2 Definitions 2
3 Quality System 5
4 Environmental 5
5 [CONFIDENTIAL TREATMENT REQUESTED] Consultation 8
6 [CONFIDENTIAL TREATMENT REQUESTED] 10
7 (reserved) 12
8 [CONFIDENTIAL TREATMENT REQUESTED] 12
9 Continuity of Supply 13
10 Intellectual Property Rights 14
11 IPR Licenses 17
12 Ownership of Information and licenses 18
13 Confidentiality 19
14 Product Liability 20
15 Patent Indemnity 22
16 Duration and Termination 23
17 Surviving Terms 24
18 Force Majeure 25
19 Miscellaneous 25
Schedules
- ---------
A Environmental
B [CONFIDENTIAL TREATMENT REQUESTED]
C Contingency Plans
D [CONFIDENTIAL TREATMENT REQUESTED]
E Applicable regulatory codes
i
<PAGE>
Underlying Agreements
- ---------------------
[CONFIDENTIAL TREATMENT REQUESTED]
Supply Agreement
ii
<PAGE>
This Agreement is made this 29 April, 1999, (hereinafter the Effective Date) by
and between:
PHILIPS MEDICAL SYSTEMS NEDERLAND B.V., of Best, The Netherlands ("PHILIPS") on
the one part
and
INTERMAGNETICS GENERAL CORPORATION of Latham, New York, the United States of
America ("INTERMAGNETICS") on the other part
WHEREAS:
o PHILIPS is engaged amongst others, in the development, design, engineering,
manufacture and marketing of magnetic resonance imaging systems (MRI
systems); and
o INTERMAGNETICS is engaged, amongst others, in the development, design,
engineering, manufacture and marketing of magnet systems (Magnet systems)
and certain components for use in MRI systems; and
o INTERMAGNETICS manufactures and supplies certain actively shielded
superconducting Magnet systems and associated components to PHILIPS under
the terms and conditions of an Amended and Restated Supply Agreement dated
November 6, 1998; and
o Parties intend to enter into a termination of the Amended and Restated
Supply Agreement effective December 31, 1999; and
o [CONFIDENTIAL TREATMENT REQUESTED];
NOW, THEREFORE THE PARTIES HERETO AGREE AS FOLLOWS:
Page: 1
<PAGE>
Article 1
Scope
This Agreement sets forth the principles for a mutually beneficial relationship
governing all agreements between Parties as of the Effective Date except the
Amended and Restated Supply Agreement dated November 6, 1998 and the Termination
Agreement dated April 29, 1999. This Agreement applies only to the business
relationship between PHILIPS and INTERMAGNETICS' Magnet Business Group.
Article 2
Definitions
The below mentioned terms shall have the following meaning in this Agreement:
Agreement shall mean this document and all underlying
agreements, the Schedules and amendments
thereto.
Associated Companies shall mean any and all companies, firms and
persons with respect to which now or hereafter
Koninklijke PHILIPS Electronics N.V. or
INTERMAGNETICS respectively directly or
indirectly holds 50 % or more of the nominal
value of the issued share capital or has 50 % or
more of the voting power at general meetings or
has the power to appoint a majority of the
directors or otherwise directs the activities of
such company, firm or person but any such
company, firm or person shall be deemed an
Associated Company only as long as such control
exists.
Background Information such Information (other than Foreground
Information) which at the date hereof is or
during the continuance of the activities set out
in this Agreement comes into the ownership or
control of a Party and which such Party is free
to disclose without the consent of or need to
account to any third party.
Background Intellectual such Intellectual Property (not being Foreground
Property Rights (Background Intellectual Property Rights) which at the date
IPRs) hereof are or during the continuance of the
activities set out in this Agreement come into
the ownership or control of a Party and which
such Party is free to disclose without the
consent of or need to account to any third
party.
Contract Manager shall have the meaning set forth in Article 5.7.
Page: 2
<PAGE>
[CONFIDENTIAL
TREATMENT REQUESTED]
[CONFIDENTIAL
TREATMENT REQUESTED]
First Articles Shall mean an initial delivery of a Product
intended to be used for type approval tests for
compliance with the Specifications, leading to
NORD of the Product.
Foreground Information such Information (other than Background
Information) as is generated solely by either
Party or both Parties hereto from the activities
set out in this Agreement.
Foreground Intellectual such Intellectual Property as is generated
Property Rights (Foreground solely by either Party or both Parties hereto
IPRs) from the activities set out in this Agreement.
Information shall mean valuable technical information,
software, industrial secrets, trade secrets,
descriptions of manufacturing processes,
technical information inherent in Prototypes or
First Articles, know-how, product
specifications, or other proprietary information
used by either Party in carrying on its
business, which are not considered IPRs as
defined above.
Intellectual Property (IPR) shall mean inventions, whether patented or not
including the conception or reduction to
practice of an invention, patents, petty
patents, utility models, design patents, (both
registered and unregistered), copyrights,
industrial designs, trade secrets and any other
form of intellectual property right protection
afforded by law to inventions, designs or
technical information, and applications
therefor.
INTERMAGNETICS Shall mean Intermagnetics General Corporation.
Magnet system Shall mean magnet windings, cryostat, cryogenic
refrigerator and electronic monitor for MRI
systems.
[CONFIDENTIAL TREATMENT REQUESTED]
MRI system Shall mean a magnetic resonance imaging system
for medical imaging including components such as
gradient, radio frequency, spectrometer;
processing, physiology, patient handling and
user interface sub-systems, but for purposes of
this Agreement, shall not include Magnet
systems.
Page: 3
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED]
Party(ies) Shall mean PHILIPS and/or INTERMAGNETICS and,
for purposes of Articles 10, 11 and 12 their/its
Associated Companies.
PHILIPS Shall mean Philips Medical Systems Nederland
B.V.
Product(s) Shall mean those products PHILIPS shall
[CONFIDENTIAL TREATMENT REQUESTED] purchase from
time to time from INTERMAGNETICS pursuant to the
terms of, and as more fully described in
[CONFIDENTIAL TREATMENT REQUESTED] Supply
Agreement(s).
[CONFIDENTIAL TREATMENT REQUESTED]
[CONFIDENTIAL TREATMENT REQUESTED]
[CONFIDENTIAL TREATMENT REQUESTED]
Purchase Order Shall mean a written or electronic purchase
order issued to INTERMAGNETICS by PHILIPS.
[CONFIDENTIAL TREATMENT REQUESTED]
Spare Part(s) Shall mean replaceable part(s) of the Products
classified by the Parties in [CONFIDENTIAL
TREATMENT REQUESTED] Supply Agreements as field
replaceable units (FRU).
Specifications shall mean the requirements for a Product in
[CONFIDENTIAL TREATMENT REQUESTED]Supply
Agreement(s).
Substantially Similar shall be defined in a Schedule to [CONFIDENTIAL
Product(s) TREATMENT REQUESTED] Supply Agreement, for
defining the scope of any exclusivity.
Page: 4
<PAGE>
Supply Agreement shall mean an agreement to govern supply and
service of Products and Spare Parts.
Term Duration of this Agreement as set forth in
Article 16.1.
Article 3
Quality System
3.1 INTERMAGNETICS shall establish, document and maintain an effective
quality system to ensure and demonstrate that all processes, in
particular the development, design, engineering and manufacture of
Products, are in conformance with the specified requirements and
standards contained in the Specifications.
3.2 INTERMAGNETICS will use its best efforts to ensure that its quality
system will continue to meet the requirements of ISO 9001.
3.3 INTERMAGNETICS shall verify by means of planned and periodic audits,
conformance to the requirements and standards of the quality system.
The results of these audits will be documented and will be available
for review by PHILIPS upon request.
3.4 INTERMAGNETICS agrees that audits with respect to the quality system
may be performed at INTERMAGNETICS' facilities by certain qualified
employees of PHILIPS, governmental bodies and official test houses to
the extent necessary for compliance to the requirements and standards.
Article 4
Environmental
4.1 INTERMAGNETICS represents and warrants that on the Effective Date, the
Products, Service Parts and packaging, do not contain banned substances
as specified in the PHILIPS list of banned substances set forth in
Schedule A, except for substances for which dispensation has been
requested by INTERMAGNETICS on the form of Part C of Schedule A to this
Agreement, and are in compliance with additional legislation, as
mentioned in Part B of Schedule A to this Agreement. For future
deliveries, INTERMAGNETICS is responsible for the implementation of
effective controls to assure continuous compliance with the above
requirements. In case INTERMAGNETICS cannot meet above requirements,
PHILIPS' approval is required prior to delivery, using the "Request for
Dispensation", Part C of Schedule A to this Agreement.
Page: 5
<PAGE>
4.2 INTERMAGNETICS represents that on the Effective Date the Products,
Service Parts and packaging, are not manufactured with the ozone
depleting substances as specified in 40 CFR Part 82. If INTERMAGNETICS
cannot meet above requirements, PHILIPS' approval is required prior to
delivery, using the "Request for Dispensation", Part C of Schedule A to
this Agreement. INTERMAGNETICS must label such Products in compliance
with PHILIPS' written instructions.
4.3 INTERMAGNETICS will inform PHILIPS, from the Effective Date onwards, of
the presence of relevant substances in the Products, Service Parts and
packaging, as specified in PHILIPS list of relevant substances (Part D
of Schedule A to this Agreement).INTERMAGNETICS is responsible for the
implementation of effective controls on the use of these substances.
INTERMAGNETICS will inform PHILIPS on the use of these relevant
substances, using the "Declaration of Relevant Substances", Part D of
Schedule A to this Agreement.
4.4 INTERMAGNETICS will actively search for possibilities to replace banned
and relevant substances, including those for which a waiver has been
granted, which substances are specified in the PHILIPS list of banned
and relevant substances, Part B and Part D of Schedule A to this
Agreement.
4.5 INTERMAGNETICS shall comply with all applicable environmental E.U.,
U.S. Federal or International environmental laws, rules, regulations,
ordinances, covenants, standards and the like, and PHILIPS'
implementation thereof (collectively "Environmental Regulations")
concerning the Products, Service Parts and packaging as well as all
applicable US Federal and State environmental laws for plant
operations, enabling PHILIPS to distribute on a world-wide basis
Products, Service Parts and packaging as of the Effective Date.
Environmental Regulations can also include issues such as labeling
(e.g. in connection with the US Clean Air Act or US Department of
Transportation regulations), information requirements, and take-back
regulations relating to Products, Service Parts and packaging.
4.6 INTERMAGNETICS' obligation to take back Products, Spare Parts and
packaging as a result of one or more Environmental Regulations shall be
limited to those cases in which the reason for such return is based
solely on the failure of INTERMAGNETICS' Products, Spare Parts and
packaging to meet the requirements of such Environmental Regulation(s)
in effect at the time they were delivered, unless agreed otherwise.
4.7 In the event any new Environmental Regulation will be promulgated after
the Effective Date of this Agreement, the Parties will negotiate to
establish within a reasonable period of time equitable terms to prevent
or remedy any non-compliance by INTERMAGNETICS of this Article 4 as a
consequence of such promulgation to include such new Environmental
Regulation in the obligations of INTERMAGNETICS under this Article 4.
Page: 6
<PAGE>
4.8 INTERMAGNETICS will use its best efforts to ensure that Products,
Service Parts and packaging are designed and manufactured in such a way
that these can be recycled or recovered at the end of their life cycle
without special precautions and that no hazardous residues will remain.
4.9 INTERMAGNETICS shall provide PHILIPS with the following information:
(a) prior to acceptance of the Products, Service Parts and
packaging, all Material Safety Data Sheets, in accordance with
the ISO 11014-1 Standard or 91/155/EC Directive for
components, materials and substances which during all phases
of the Product life-cycle, except relating to the
manufacturing as such, may be hazardous for human health;
(b) upon request, and at PHILIPS' expense, all necessary
information for disassembling and recycling of the Products,
Service Parts and packaging;
(c) an "Environmental Declaration for Products", Part A of
Schedule A to this Agreement, to confirm that the delivered
Products comply with all Environmental Requirements set forth
in this Agreement;
(d) prior to first delivery of a Product, a "Request for
Dispensation", Part C of Schedule A to this Agreement, if the
Product is not in compliance with the in Part B of Schedule A
to this Agreement;
(e) prior to first delivery of a Product a "Declaration of
Relevant Substances", Part D of Schedule A to this Agreement,
if one of the substances as specified in Part D is present in
the Product;
(f) prior to acceptance of the Product, all labeling information
as required by the Environmental Regulations.
4.10 INTERMAGNETICS shall control the environmental aspects of the design
and manufacturing through an adequate and effective environmental
management system complying with ISO 14001, including certification by
an accredited certification body. In case said system has not yet been
implemented or said certification has not yet been awarded prior to the
Effective Date of this Agreement, then INTERMAGNETICS shall use its
best efforts to achieve the requirements of this Article 4.10 by
September 1999.
4.11 INTERMAGNETICS undertakes on a best efforts basis to participate in
PHILIPS' environmental programs, such as:
(a) Reduction and elimination of Environmental banned and relevant
substances in Products.
(b) Reduction of Packaging weight.
(c) ECO-design.
(d) Re-usability of Products. (Design for recycling, less waste
by End of Life.)
INTERMAGNETICS will apply (within reasonable limits) the results of
such environmental programs in its implementation of this Agreement.
Page: 7
<PAGE>
4.12 PHILIPS shall have the right to audit the implementation and adherence
to this Article 4, to assure continuous compliance with Environmental
Regulations.
Article 5
[CONFIDENTIAL TREATMENT REQUESTED] Consultation
5.1 Meetings
During the Term, senior representatives of the Parties shall meet
(either in person, video conference or by telephone) on a regular basis
as their relationship requires, but in any case not less than once
every calendar quarter, to confer on and review [CONFIDENTIAL TREATMENT
REQUESTED] issues including, but not limited to:
5.1.1 [CONFIDENTIAL TREATMENT REQUESTED]
5.1.2 [CONFIDENTIAL TREATMENT REQUESTED]
5.1.3 Continuity of supply
The Parties shall review the items covered in Article 9
(contingency plans, impending strike, regulatory compliance)
of this Agreement when deemed appropriate by either one of the
Parties.
5.1.4 Information/Data
The Parties will also discuss any other information, data,
etc. required to be provided from time to time under the terms
of this Agreement.
5.2 [CONFIDENTIAL TREATMENT REQUESTED]
5.3 [CONFIDENTIAL TREATMENT REQUESTED]
5.4 [CONFIDENTIAL TREATMENT REQUESTED]
5.5 Other Products
From time to time the Parties may explore the expansion of their
business relationship to include products other than Magnet systems.
5.6 Changes in Management
As they are foreseen and/or occur, the Parties shall discuss major
changes to their management and staffing critical to the mutual success
of their business relationship with the objective of preventing
disruptions to Product supply and/or the relationship of the Parties.
Page: 8
<PAGE>
5.7 Contract Managers
PHILIPS and INTERMAGNETICS shall appoint a Contract Manager in their
respective organizations who shall be responsible for the organization
and implementation of strategic consultation and review meetings and
who shall be responsible for the implementation of all business and
supply related issues, including delegation of work within each
organization. The respective Contract Managers also shall meet (either
in person or by telephone) at least every 2 weeks to discuss day-to-day
business operations and keep minutes of the subject(s) discussed. The
Parties respective Contract Managers will be appointed by the
management of the Parties.
Article 6
[CONFIDENTIAL TREATMENT REQUESTED]
Article 7
(Reserved)
Article 8
[CONFIDENTIAL TREATMENT REQUESTED]
Article 9
Continuity of Supply
9.1 Contingency plans
To ensure continuity of purchase and supply, each Party shall prepare
contingency plans for the following events:
(a) A catastrophe, e.g., fire or explosion, which interferes with
the Party continuing its manufacturing operation;
(b) Major disruption of a critical process in a Party's
manufacturing operation;
(c) Major disruption in the Party's supply chain;
(d) Major disruption of transportation.
9.2 [CONFIDENTIAL TREATMENT REQUESTED]
Page: 9
<PAGE>
9.3 Regulatory Compliance
Each Party will inform the other, through the Parties' strategic
consultations, of the status of its compliance with all significant
applicable governmental regulations that could interfere with
continuity of supply (e.g., Food and Drug Administration, Occupational
Safety and Health Administration, Environmental Protection Agency,
etc.).
Article 10
Intellectual Property Rights
10.1 Each Party shall retain exclusive ownership of its Background IPRs.
10.2 Foreground IPRs based on work performed solely by one or more
employee(s) of a Party under this Agreement shall be solely owned by
that Party.
10.3 In the event that during the term of this Agreement an invention is
made jointly (as defined under U.S. or E.U. patent law) by one or more
employees of INTERMAGNETICS and/or its Associated Companies and one or
more employees of Philips and/or its Associated Companies, the
invention shall be jointly owned by the Parties and each joint owner
shall have an equal, undivided interest in and to such joint invention,
as well as in and to Foreground IPRs thereon in all countries, subject
to the terms and conditions set forth below.
10.3.1 In case of joint inventions, each Party concerned shall
promptly inform in writing the other Party whose employee is
or employees are involved in such joint invention.
10.3.2 For non-patented joint Foreground IPRs, control and use of
such joint Foreground IPRs shall be as follows:
(a) Control over the potential filing of a patent application
is construed as follows:
o all joint Foreground IPRs regarding MRI systems will be
controlled solely by Philips;
o all joint Foreground IPRs regarding the interface
between the Magnet system and the MRI System will be
subject to Article 10.5 below;
o all joint Foreground IPRs regarding Magnet systems will
be controlled solely by INTERMAGNETICS.
(b) Subject to Articles 11.2, 11.3, 11.4 and 11.5:
o PHILIPS will retain control over the use of non-patented
joint Foreground IPRs regarding MRI systems.
o INTERMAGNETICS will retain control over the use of
non-patented joint Foreground IPRs regarding Magnet
systems.
Page: 10
<PAGE>
10.4 The Party controlling the patent application process as described above
in Article 10.3.2 may decide at its sole discretion if it will prepare,
file and prosecute a patent application for joint Foreground IPRs under
its control, upon prior written approval of the other Party, which
approval will not be unreasonably withheld. The Parties will confer in
a timely manner regarding the patent application and countries in which
to file such application. All out of pocket costs related to
applications for joint Foreground IPRs shall be shared equally between
the Parties. The same applies for the maintenance fees and other costs
- but not including litigation - for such joint Foreground IPRs on
patents granted. If, however, the non-controlling Party is not
interested in filing an application for the joint Foreground IPRs, the
controlling Party may file or have filed such application at its own
expense and shall be the sole owner of any resulting Foreground IPRs
subject to a free, fully paid-up, non-exclusive, unrestricted license
for the lifetime of the Foreground IPRs concerned for the own use of
the non-controlling Party but the rights of third parties under already
existing licenses and agreements shall not be prejudiced. The
non-filing Party shall assign all other rights in such joint invention
to the filing Party at no charge.
10.4.1 The controlling Party shall be designated to maintain
applications for joint Foreground IPRs. The other Party shall
at its own cost furnish the filing Party with all documents,
or other assistance, that may be necessary for the filing and
prosecution of each such application.
10.4.2 If a patent is allowed for any joint Foreground IPRs, each
Party shall have the right to exercise its ownership of such
joint Foreground IPRs, including the non-assignable right to
grant non-exclusive licenses, under the Foreground IPRs on
such a joint invention without the consent of and without
accounting to the other owner, so long as the owner granting
such license fulfills its obligation, if any, to pay its
proportionate share of the costs related to such Foreground
IPRs on a joint invention.
10.5 Foreground IPRs on a joint invention regarding the interface between
the Magnet system and the MRI system will be treated as follows
("Interface Foreground IPRs"):
10.5.1 The filing of applications for Interface Foreground IPRs shall
be subject to mutual agreement between the Parties. The
Parties will agree within a reasonable period of time after
notification provided under Article 10.3.1, on an appropriate
course of action for filing such applications, including which
Party is to be designated with the preparation, filing and
prosecution of such applications and in which countries of the
world to file such applications for Interface Foreground IPRs.
All out of pocket costs related to applications for Interface
Foreground IPRs or IPRs resulting from such applications shall
be shared equally between the Parties. One of the Parties
shall be designated to file or have filed, prosecute and
maintain applications for Interface Foreground IPRs and any
IPRs resulting therefrom on joint inventions. The other Party
shall at its own cost furnish the filing Party with all
documents, or other assistance, that may be necessary for the
filing and prosecution of each such application.
Page: 11
<PAGE>
10.5.2 If, however, one Party is not interested in filing an
application for Interface Foreground IPRs on a joint
invention, the other Party may file or have filed such
application at its own expense and shall be the sole owner of
any resulting Interface Foreground IPRs subject to a free,
fully paid-up, non-exclusive, unrestricted license for the
lifetime of the Interface Foreground IPRs concerned for the
own use of the Party who was not interested in filing such
application. The non-filing Party shall assign its rights in
such joint invention to the filing Party.
10.6 In the event that one of the joint owners of Foreground IPRs or a Party
filing an application for Foreground IPRs on a joint invention wants to
stop the payment of its share of the maintenance fees or other costs in
any particular country, the other owner may take over the payment of
such share. The Party discontinuing to pay its proportionate share for
one or more countries shall forthwith relinquish to the other Party
which continues such payments, its title to and interest in such
jointly owned Foreground IPRs for the countries concerned, subject,
however, to the retention of a free, fully paid-up, non-exclusive,
non-assignable and unrestricted license under the Foreground IPRs in
the countries concerned in favor of the relinquishing Party for the own
use of the relinquishing Party. However, the relinquishing owner shall
no longer have the right to grant licenses thereunder to third parties,
but the rights of third parties under already existing licenses and
agreements shall not be prejudiced. The rights of the relinquishing
Party in other (i.e., continued) countries shall not be affected.
10.7 A joint owner shall have the right to bring an action for infringement
of a jointly-owned Foreground IPR only with the consent of the other
owner. This consent may only be withheld if such action would be
prejudicial to the other owner's commercial interests as can be
demonstrated to the reasonable satisfaction of the joint owner
interested to bring such infringement action.
Article 11
IPR Licenses
11.1 Each Party hereby grants the other Party, subject to prior commitments,
a free, non-exclusive license, without the right to grant sublicenses,
under its Background IPRs and/or Foreground IPRs to the extent such IPR
is required by the other Party solely for performing the [CONFIDENTIAL
TREATMENT REQUESTED] Agreement.
11.2 Philips shall cause Koninklijke Philips Electronics N.V. to grant
hereby to INTERMAGNETICS a world-wide, irrevocable, fully paid up,
non-exclusive license, without the right to grant sublicenses, under
Philips' Foreground IPRs to make, have made - according to
INTERMAGNETICS' design -, use, sell, service, and practice any method
of Products and Substantially Similar Products taking into account the
exclusivity arrangement in Article 6 above.
Page: 12
<PAGE>
11.3 INTERMAGNETICS hereby grants to Philips and to Philips' Associated
Companies a world-wide, irrevocable, fully paid up, non-exclusive
license, without the right to grant sublicenses, under INTERMAGNETICS'
Foreground IPRs to use, sell, lease, service, practice any method or
otherwise dispose of Products taking into account the exclusivity
arrangement in Article 6 above.
11.4 If INTERMAGNETICS willfully and with the intent to force termination of
this Agreement, fails to perform a material obligation hereunder
resulting in termination by PHILIPS pursuant Article 15.2(a), then the
license provided in Article 11.3 above, shall include the right, under
INTERMAGNETICS' Foreground IPRs to make, or have made by a third party,
the Products or natural commercial successors of the Products resulting
from the normal evolution of the design (but not to include material
reconfiguration that would result in the development of new products).
11.5 The licenses granted under Articles 11.2, 11.3 and 11.4 shall be for
the lifetime of the Foreground IPRs concerned.
11.6 Philips is prepared to cause Koninklijke Philips Electronics N.V. to
grant to INTERMAGNETICS at its request, subject to prior commitments, a
non-exclusive license under its Background IPRs against reasonable
terms and conditions to be agreed upon, provided that such license,
which shall be limited to the field of Products and Substantially
Similar Products, is demonstrated to the reasonable satisfaction of
Philips to be technically indispensable for INTERMAGNETICS in order to
operate under the licenses granted by Philips under Article 11.2
hereof.
11.7 INTERMAGNETICS is prepared to grant to Philips at its request, subject
to prior commitments, a non-exclusive license under its Background IPRs
against reasonable terms and conditions to be agreed upon, provided
that such license, which shall be limited to the field of Products, is
demonstrated to the reasonable satisfaction of INTERMAGNETICS to be
technically indispensable for Philips in order to operate under the
licenses granted by INTERMAGNETICS under Article 11.3, and Article 11.4
hereof but only if such Article becomes applicable.
11.8 The licenses granted by PHILIPS to INTERMAGNETICS under the Parties'
Amended and Restated Supply Agreement (dated November 13, 1998) shall
remain in full force and effect and are not intended in any way to be
limited by the terms and conditions of this Agreement.
11.9 Except for the licenses granted under this Agreement, PHILIPS shall
have no rights to, or ownership of, the specific design of the
Prototype and/or First Articles or the Product(s) or INTERMAGNETICS'
engineering or production technologies, to the extent such design
and/or technologies are proprietary to INTERMAGNETICS.
Page: 13
<PAGE>
Article 12
Ownership of Information and Licenses
12.1 Each Party shall retain exclusive ownership of its Background
Information and the Foreground Information solely developed by one or
more employee(s) of that Party.
12.2 In the event that during the term of this Agreement and as a result of
and in the course of [CONFIDENTIAL TREATMENT REQUESTED] any Foreground
Information is jointly developed by one or more employees of Philips
and/or its Associated Companies and one or more employees of
Intermagnetics and/or its Associated Companies and the contributions of
both Parties are undividable, then both Parties will jointly own such
jointly developed Foreground Information and each joint owner shall
have an equal, undivided interest in and to such jointly developed
Foreground Information.
12.3 Each joint owner in accordance with Article 12.2, shall have the
non-assignable, non-exclusive and unrestricted right, including the
right to grant sublicenses to third parties, to use jointly developed
Foreground Information without the consent of and without accounting to
the other owner for the duration and within the scope of this Agreement
only. In case only one of the Parties upon termination of this
Agreement wishes to use such jointly owned Foreground Information the
Parties shall treat as Confidential Information the other Party's
interest or lack thereof in such jointly owned Foreground Information
until such other Party's interest or lack thereof , in such jointly
owned Foreground Information is, or otherwise becomes, generally known
or available through no act or disclosure of the other Party or its
personnel.
12.4 Each Party hereby grants the other Party, subject to prior commitments,
a free, non-exclusive license, without the right to grant sublicenses,
under its Background Information and/or Foreground Information to the
extent such Information is required by the other Party solely for
performing the work allocated to it under [CONFIDENTIAL TREATMENT
REQUESTED Agreement.
12.5 Philips shall cause Koninklijke Philips Electronics N.V. hereby to
grant to INTERMAGNETICS and its Associated Companies a world-wide,
fully paid up, perpetual and non-exclusive license, without the right
to grant sublicenses, to use its Foreground Information to make, have
made, use, sell or otherwise dispose of Products or Substantially
Similar Products.
12.6 INTERMAGNETICS and its Associated Companies hereby grant Philips and
its Associated Companies a world-wide, fully paid up, perpetual and
non-exclusive license, without the right to grant sublicenses, to use
its Foreground Information to use, sell, lease, service or otherwise
dispose of Products.
Page: 14
<PAGE>
12.7 Philips and its Associated Companies are prepared to grant and to cause
Koninklijke Philips Electronics N.V. to grant to INTERMAGNETICS and its
Associated Companies at their request, subject to prior commitments, a
non-exclusive license under its Background Information against
reasonable terms and conditions to be agreed upon, provided that such
license, which shall be limited to the field of Products and
Substantially Similar Products, is demonstrated to the reasonable
satisfaction of Philips to be technically indispensable for
INTERMAGNETICS in order to exercise the licenses granted by Philips to
INTERMAGNETICS under Article 12.5.
12.8 INTERMAGNETICS and its Associated Companies are prepared to grant to
Philips and its Associated Companies at their request, subject to prior
commitments, a non-exclusive license under its Background Information
against reasonable terms and conditions to be agreed upon, provided
that such license, which shall be limited to the field of Products, is
demonstrated to the reasonable satisfaction of INTERMAGNETICS to be
technically indispensable for Philips in order to exercise the licenses
granted by INTERMAGNETICS to Philips under Article 12.6.
Article 13
Confidentiality
13.1 Confidential Information
All specifications, including the Specifications, drawings, industrial
designs, samples, marketing plans, software and all other information
disclosed in writing by either Party to the other and being marked as
"Confidential", "Proprietary" or similar indications or disclosed
visually or orally and confirmed in writing within 14 days after such
oral or visual disclosure, as well as the contents of this Agreement,
[CONFIDENTIAL TREATMENT REQUESTED] and any Supply Agreement, including
Purchase Orders placed pursuant to those agreements ("Confidential
Information"), shall be kept in strictest confidence by the receiving
Party, shall remain the disclosing Party's property, may be divulged
only to such of the receiving Party's personnel as has need to know and
as has undertaken to keep Confidential Information secret, and shall be
returned to the disclosing Party upon its request. Confidential
Information shall not be reproduced, disclosed or used by the receiving
Party except to the extent required for due performance of this
Agreement and the receiving Party shall protect Confidential
Information from further disclosure by itself and by its personnel in
the same manner as it would do with regard to its own Confidential
Information. Exceptions are allowed only after prior mutual agreement
or where required by law.
Page: 15
<PAGE>
13.2 Duration
The Parties' obligations under this Article 13 shall continue for a
period of five (5) years after termination of this Agreement.
13.3 Exceptions
This Article 13 shall not apply to Confidential Information that the
receiving Party can demonstrate:
(a) is or becomes generally known or available through no act or
disclosure of the receiving Party or its personnel; or
(b) was available to the receiving Party prior to disclosure or
has been furnished to it by a third party entitled to disclose
same without restrictions as to disclosure or use or by the
other Party; or
(c) was, subsequent to disclosure, independently developed by the
receiving Party without use of Confidential Information; or
(d) is required to be disclosed under applicable law.
13.4 Confidential disclosure agreements with third parties
Neither Party shall enter into a confidential disclosure agreement with
a third party which would prohibit strategic consultation between
Parties as provided for in Article 5.2 and 5.3.
Article 14
Product Liability
14.1 In no event will INTERMAGNETICS' Product liability be greater for any
Prototype and/or First Article than for any Product purchased by
PHILIPS.
14.2 INTERMAGNETICS shall indemnify PHILIPS and all PHILIPS' Associated
Companies and assume the defense of, any and all claims for bodily
injury and/or death arising solely as a direct result of (i) design or
manufacturing defects in the Products, (ii) failure by INTERMAGNETICS
to provide PHILIPS with reasonable warnings with respect to known risks
(or risks which should have been known to INTERMAGNETICS) of bodily
injury or harm caused by the Product, except risks relating to magnetic
fields in general, or (iii) installation performed by INTERMAGNETICS of
Products sold to PHILIPS. If PHILIPS has actual notice that such a
claim shall be or has been made against it involving INTERMAGNETICS,
PHILIPS shall immediately inform INTERMAGNETICS in writing and allow
INTERMAGNETICS and its insurers the opportunity to conduct the defense
of such claim including possible negotiations for settlement. PHILIPS
shall cooperate fully with INTERMAGNETICS and its insurers in the
disposition of any such matters whenever reasonably requested to do so.
The obligations of INTERMAGNETICS to indemnify and defend shall not
extend to claims solely attributable to the negligence or intentional
malfeasance of PHILIPS or PHILIPS' Associated Companies, their agents,
distributors and/or their customers or other users of the MRI systems
nor to any claims attributable solely to or arising out of actions
solely by them which are outside the scope of or inconsistent with
INTERMAGNETICS' operating instructions and/or technical/maintenance
manuals.
Page: 16
<PAGE>
14.3 PHILIPS shall indemnify INTERMAGNETICS against, and assume the defense
of, any and all product liability and other third party claims for
bodily injury and/or death arising or attributable (i) solely to the
use of those parts of the Products sold or provided free of charge by
PHILIPS to INTERMAGNETICS for incorporation in the Products, (ii) to
the effect of magnetic fields (iii) solely to the negligence or
intentional malfeasance of PHILIPS or PHILIPS' Associated Companies,
their agents or distributors or (iv) solely to parts of the MRI system
other than the Products supplied by INTERMAGNETICS. If INTERMAGNETICS
has actual notice that such a claim shall be or has been made against
INTERMAGNETICS involving PHILIPS, INTERMAGNETICS shall immediately
inform PHILIPS in writing and allow PHILIPS and its insurers the
opportunity to conduct the defense of such claim, including possible
negotiations for settlement. INTERMAGNETICS shall cooperate fully with
PHILIPS and its insurers in the disposition of any such matters,
whenever reasonably requested to do so. To this end, INTERMAGNETICS
shall keep records of all relevant design and test documentation which
INTERMAGNETICS normally keeps in order to defend product liability
claims at least thirteen years after delivery of each Product and on
request provide PHILIPS' insurers with copies thereof under relevant
confidentiality obligations, solely for the purpose of defending such
third party claims. The obligation of PHILIPS to indemnify and defend
shall not extend to claims attributable solely to the negligence or
intentional malfeasance of INTERMAGNETICS or INTERMAGNETICS' vendors or
agents.
14.4 Each Party shall maintain such insurance as it may deem necessary to
cover its Product liability, and upon the other Parties' request shall
produce for inspection these insurance policies and premium payment
receipts.
Article 15
Patent Indemnity
15.1 INTERMAGNETICS shall fully indemnify to the limit of the total invoice
value of any allegedly infringing Products, PHILIPS, PHILIPS'
Associated Companies, their distributors, agents and/or customers,
against all reasonable fines, losses, damages, costs and expenses
including attorney fees, arising from any valid claim brought by a
third party claiming that a Product (or any part thereof) infringes on
the third party's patent rights or other industrial or intellectual
property right; provided PHILIPS gives INTERMAGNETICS full authority,
at the option of INTERMAGNETICS, either to settle or to defend such
claim, suit or proceeding and - at INTERMAGNETICS' request and expense
- full cooperation, assistance and information as needed by
INTERMAGNETICS to address the claim. PHILIPS shall promptly notify
INTERMAGNETICS in writing of any allegation of infringement and shall
not make any admission without INTERMAGNETICS' prior consent. If the
use of any Product or Spare Part is enjoined, INTERMAGNETICS shall, at
its own expense and at its option, either procure for PHILIPS, the
PHILIPS' Associated Companies and their customers the right to continue
using Product and/or Spare Part, or replace same with a non-infringing
Product or Spare Part or modify it so that it becomes non-infringing,
always without substantially affecting the Product or Spare Part's
compatibility with PHILIPS' MRI system device in conjunction with which
it is to be used and without substantially affecting conformance to the
Specifications. INTERMAGNETICS' indemnification does not cover any
claim in respect of any patent or patent application of PHILIPS or
others of which PHILIPS or PHILIPS' Associated Companies is presently
aware that is to be used in Products to be supplied by INTERMAGNETICS
to PHILIPS under this Agreement and which it does not bring to
INTERMAGNETICS' attention before execution of this Agreement.
Page: 17
<PAGE>
15.2 If and to the extent that the infringement is the result of (a) parts
supplied by PHILIPS, or (b) modifications or enhancements of Products
or Parts as specifically designed by PHILIPS or specifically requested
by PHILIPS to be implemented in the Products or Parts, INTERMAGNETICS
shall not be liable under this Article 15. INTERMAGNETICS shall not be
required to meet any design requests by PHILIPS if INTERMAGNETICS
advises PHILIPS that it would infringe patents of a third party in
order to meet such requests. INTERMAGNETICS' indemnification does not
extend to any suit based upon any infringement or alleged infringement
of any industrial or intellectual property rights on the basis of
combining, incorporating and/or inserting Products furnished by
INTERMAGNETICS into MRI systems if the infringement would be avoided by
the use of the Products alone. PHILIPS shall similarly indemnify
INTERMAGNETICS to the limit of the total invoice value of the allegedly
infringing Products for suits and proceedings and all reasonable
damages and costs awarded, including attorneys fees, with respect to
all these occurrences covered by this paragraph.
15.3 PHILIPS shall indemnify INTERMAGNETICS, to the limit of the total
invoice value of the Products, for alleged infringement of:
(a) OMT active shielded magnet patent US4587504 and its
corresponding patents/applications in any country;
(b) Siemens B-zero field compensation patent EP0299325 and its
corresponding patents/applications in any country; and
(c) any patent of any third party which cannot be avoided if
PHILIPS' active shielded magnet patent EP0138270 and/or its
corresponding patents/applications in any country are used.
PHILIPS' indemnification to INTERMAGNETICS for suits and proceedings
shall cover all reasonable damages, expenses and costs, including
attorney fees as provided above with respect to such Products using
such patents and supplied to PHILIPS.
Page: 18
<PAGE>
15.4 The foregoing states the entire liability of INTERMAGNETICS and PHILIPS
respectively for infringement of the said rights by Products or any
Spare Parts.
Article 16
Duration and Termination
16.1 Term
The initial term of this Agreement shall commence on the Effective Date
through and up to 31 December 2005. Starting Calendar year 2001, at the
end of each calendar year of this Agreement, the term shall be extended
automatically for an additional twelve (12) month period, unless either
Party provides a written notice to the other of its intent to terminate
at the end of the then applicable term.
16.2 Termination
In addition to termination in accordance with Article 18, this
Agreement may be terminated as follows:
(a) If a Party is in material breach of this Agreement, the
non-breaching Party is entitled to give written notice to the
breaching Party. The notice must specify the breach and
provide a reasonable opportunity to remedy the breach to the
reasonable satisfaction of the non-breaching Party as quickly
as commercially reasonable but in any event no longer than six
(6) months.
If the breaching Party fails to remedy the breach, the
non-breaching Party is entitled to take any action open to it
under this Agreement and in law, including immediate
termination of this Agreement by notice in writing; provided,
however, that (i) neither Party shall be liable to the other
for any special or consequential damages at any time, and (ii)
any action is subject to the arbitration procedure set forth
in Article 19.8. In addition, if INTERMAGNETICS' breach is the
result of its repeated failure to supply Products on a
prolonged basis, the Parties will negotiate for a second
source of supply.
(b) Either Party may terminate this Agreement immediately by
written notice to the other Party in the event the latter
Party becomes insolvent, files or is the subject of a
bankruptcy action which is not dismissed within sixty (60)
days, has a receiver appointed, or makes an assignment for the
benefit of creditors.
Page: 19
<PAGE>
(c) PHILIPS may terminate this Agreement upon two (2) years
written notice to INTERMAGNETICS if more than 50% of the
voting shares of INTERMAGNETICS are acquired by, or more than
a majority of INTERMAGNETICS' directors have been nominated
by, a principal competitor of PHILIPS in MR imaging.
(d) INTERMAGNETICS may terminate this Agreement upon two (2) years
written notice to PHILIPS if PHILIPS or its Associated
Companies acquire control over, or become controlled by, an
entity engaged in the manufacture of superconductive magnets
for MR imaging systems.
16.3 Effect of Termination
Any notice of termination given under this Agreement shall be deemed to
be a notice of termination under any [CONFIDENTIAL TREATMENT REQUESTED]
Supply Agreement. Termination of an individual [CONFIDENTIAL TREATMENT
REQUESTED] and/or Supply Agreement will not affect the Term of this
Agreement, any (other) Supply Agreement or any (other) [CONFIDENTIAL
TREATMENT REQUESTED] entered into by the Parties, unless such
termination constitutes a material breach under the terms of this
Agreement.
Article 17
Surviving Terms
17.1 In the event of termination of this Agreement, the provisions of
Articles 2, 4.6 , 10, 11, 12, 13, 14, 15, 17, 19.1, 19.5, 19.7, 19.8,
19.9, 19.10, 19.11, 19.12 of this Agreement shall survive.
17.2 Upon termination of this Agreement neither Party shall be liable to the
other Party except if otherwise stated in this Agreement.
Article 18
Force Majeure
18.1 Effect of Force Majeure
If either Party is prevented from or delayed in the performance of this
Agreement due to the occurrence of force majeure either Party shall be
entitled to suspend performance of its obligation for the duration of
the prevention or delay caused by such force majeure, without being
responsible for any damages resulting therefrom to the other Party.
18.2 Force Majeure Exceeding Three Months
If the period of prevention or delay caused by force majeure exceeds
three consecutive months, then either Party shall be entitled to
terminate this Agreement upon thirty (30) days written notice without
being liable for any damages whatsoever towards the other Party. This
does not affect however commitments which remain applicable upon
termination of this Agreement as stated elsewhere in this Agreement.
Page: 20
<PAGE>
18.3 Information and Action by Affected Party
The Party affected by force majeure shall inform the other Party
promptly in writing specifying the force majeure as well as its
expected duration. The Party so affected shall take all reasonable
steps to limit the period of prevention or delay as much as possible.
18.4 Definition
The expression "force majeure" shall mean and include a happening or
event beyond a Party's reasonable control in consequence of which it
cannot execute or cannot reasonably be required to execute its
obligations. Such circumstances include but are not restricted to: acts
of God, war, civil war, insurrection, flood, strikes, epidemics,
governmental regulations, freight embargoes, non-availability of any
permits, licenses and/or authorizations required unless such
non-availability is attributable to the Party claiming the force
majeure. [CONFIDENTIAL TREATMENT REQUESTED]
Article 19
Miscellaneous
19.1 Entire Agreement
It is understood and agreed that this Agreement and the attached
Schedules contain the entire understanding between the Parties relating
to the subject matter and that any representation, promise, or
condition not contained in this Agreement shall not be binding on
either Party, unless otherwise agreed and confirmed in writing;
provided, however, that this Agreement shall not in any way affect or
supersede the Parties' obligations under the Amended and Restated
Supply Agreement dated November 6, 1998 and the Termination Agreement
dated April 29, 1999.
19.2 Non-applicability of Standard Terms and Conditions
The terms and conditions contained in this Agreement and the attached
Schedules shall take precedence over any standard terms and conditions
which appear on any documents previously or subsequently issued by
PHILIPS or INTERMAGNETICS under or with reference to this Agreement
inclusive of any Purchase Order or any documents incorporated by
reference, unless such document is signed by both Parties and
explicitly states that it is a modification of this Agreement.
19.3 Assignment
This Agreement shall be binding on the Parties hereto and their
successors and assigns, provided, however, that this Agreement may not
be assigned, transferred or hypothecated by either Party, in whole or
in part, directly or indirectly, without the prior written consent of
the other Party and provided further that either Party is entitled to
assign its rights (but not its obligations) under this Agreement in
part or in whole to any of its Associated Companies without the other
Party's consent.
Page: 21
<PAGE>
19.4 Waiver
No failure by either Party to insist upon strict compliance by the
other Party with any of the terms, provisions or conditions of this
Agreement in any instance shall be construed as a waiver or
relinquishment by either Party of the other Party's rights to insist
upon strict compliance in the future.
19.5 Notices
Notices, consents, approvals and other communications from one Party to
the other pursuant to this Agreement shall be deemed to have been
sufficiently given if sent by registered airmail, or, by telefax or
telex confirmed the same day by registered airmail, and addressed as
specified below, or, addressed in such other manner as previously
notified in writing by the addressee. All communications shall be
deemed to have arrived, in the case of a communication by registered
airmail only as of the 6th (sixth) day following posting, and, in the
case of a communication by telefax or telex confirmed by registered
airmail, as of the business day following the day the telefax or telex
is dispatched.
Communications to PHILIPS shall be addressed as follows:
(by mail) : PHILIPS Medical Systems Nederland B.V.
f.a.o. General Counsel PMS
Veenpluis 6
P.O. Box 10000
5680 DA Best
The Netherlands
(by telefax) : +31-40-2762561
with a copy to Purchasing Department MR
Communications to INTERMAGNETICS shall be addressed as follows to:
(by mail) : V.P. and General Manager, Magnet Business Group
Intermagnetics General Corporation
450 Old Niskayuna Road
P.O. Box 461
Latham, New York 12110-0461
U.S.A.
(by telefax) : + 1-518-783-2623
with a copy to Intermagnetics' Finance Department
Page: 22
<PAGE>
19.6 Modification of Agreement
This Agreement may not be modified or amended except by a writing
signed by the authorized representatives of the Parties which shall be
attached to this Agreement.
19.7 Consent
Whenever under this Agreement a Party's consent, permission, agreement,
acceptance, satisfaction or approval is required, it shall not be
unreasonably or arbitrarily withheld or delayed.
19.8 Applicable Law and Settlement of Disputes
This Agreement shall be governed by, and the rights of the Parties
shall be determined under, the laws of the State of New York, not
including New York rules of conflicts of laws or private international
law that may refer to the law of another jurisdiction as the applicable
governing law.
The Parties agree to endeavor to identify in advance issues that could
generate controversies or disputes, in order to permit their early
resolution by friendly negotiations, and to use their best efforts to
negotiate in good faith, for a period of sixty (60) days or such other
period as shall be mutually agreed upon by them, to resolve all such
controversies or disputes in an amicable manner. All disputes arising
out of or in connection with the interpretation or execution of this
Agreement during its life or thereafter shall be finally settled by
arbitration in New York City, New York, USA, accordingly to the Rules
of Conciliation and Arbitration of the International Chamber of
Commerce by three (3) arbitrators in accordance with the Rules. The
language of the arbitration shall be English. The award of the Court of
Arbitration shall be final and binding and may be enforced in any court
of competent jurisdiction.
19.9 Headings
Headings in this Agreement are included for convenience of reference
only and shall not constitute a part of this Agreement for any other
purpose.
19.10 Publicity
Neither INTERMAGNETICS nor PHILIPS shall, without the prior written
consent of the other Party, (a) make any news release or public
announcement, relating to this Agreement or its subject matter, nor (b)
in any manner advertise or publish the fact that Parties entered into
this Agreement except as required by law.
19.11 Trademarks
PHILIPS herewith grants INTERMAGNETICS the right to use the following
trademarks: (a) the word mark "Philips" and Philips' Shield Emblem and
(b) such other trademark(s) as may be designated at any time by Philips
on the Products during the Term, if INTERMAGNETICS strictly adheres to
the instructions of PHILIPS laid down in a Schedule to a Supply
Agreement. INTERMAGNETICS acknowledges all rights of PHILIPS in and to
the said trademarks and further agrees that the design, development,
manufacture and supply of Product(s), Spare Part(s), and packing, if
any, bearing such trademarks shall not be construed as a grant of any
rights in such trademarks or as the use of such trademarks, either on
or relating to INTERMAGNETICS' products, in INTERMAGNETICS' sales
literature or other publications, or otherwise, by or for the benefit
of INTERMAGNETICS without PHILIPS' prior written consent.
Page: 23
<PAGE>
19.12 Severability
If any of the provisions of this Agreement are held to be void or
unenforceable by or as a result of a determination of an arbitrator or
judicial authority having competent jurisdiction, the decision of which
is binding upon the Parties with respect to one or more of the
countries to which this Agreement applies, the Parties agree that such
determination shall not result in the nullity or unenforceability of
the remaining portions of this Agreement in such country(ies). The
Parties further agree to replace such void or unenforceable provisions
of this Agreement with respect such country(ies) by valid and
enforceable provisions which will achieve, to the extent possible, the
economic, business and other purposes of the void or unenforceable
provisions. The provisions so determined to be void or unenforceable
shall, however, remain in full force and effect with respect to all
other countries to which this Agreement applies.
IN WITNESS WHEREOF the parties have caused this Agreement to be signed by their
authorized representatives:
<TABLE>
<CAPTION>
<S> <C>
INTERMAGNETICS GENERAL PHILIPS MEDICAL SYSTEMS
CORPORATION NEDERLAND B.V.
Signature /s/ Glenn H. Epstein Signature /s/ Ir. C.F. Knoet
Glenn H. Epstein Ir. C.F. Knoet
President and Director PMC MR/CT/EVM
Chief Operating Officer
Date: 30 April 1999 Date: 28 April 1999
INTERMAGNETICS GENERAL PHILIPS MEDICAL SYSTEMS
CORPORATION NEDERLAND B.V.
Signature: /s/ Leo Blecher Signature: /s/ Dr A.H. van Ommen
Leo Blecher Dr A.H. van Ommen
VP and General Manager Director
Magnet Business Group PMG Magnetic Resonance
</TABLE>
Page: 24
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Date: 30 April 1999 Date: 29 April 1999
INTERMAGNETICS GENERAL PHILIPS MEDICAL SYSTEMS
CORPORATION NEDERLAND B.V.
Signature: /s/ Garry Morrow Signature: /s/ Boyd van der Plas
Garry Morrow Boyd van der Plas,
Marketing Manager Purchasing Manager
Magnet Business Group PMG Magnetic Resonance
Date: 30 April 1999 Date: 29 April 1999
</TABLE>
Page: 25
<PAGE>
Exhibit 21
Subsidiaries of the Company
- ---------------------------
IGC-APD Cryogenics Inc.
IGC-Medical Advances Inc.
IGC-Polycold Systems Inc.
InterCool Energy Corporation
Intermagnetics General (Europe) Ltd.
Magstream Corporation (inactive)
Intermagnetics General Corporation Foreign Sales Corporation
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the registration statements of
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 and 333-75269) of
Intermagnetics General Corporation of our report dated July 16, 1999, except
as to Note E which is as of August 30, 1999 relating to the consolidated balance
sheets of Intermagnetics General Corporation and subsidiaries as of May 30, 1999
and May 31, 1998, and the related consolidated statements of operations,
shareholders' equity and comprehensive income (loss) and statements of cash
flows for each of the years in the three-year period ended May 30, 1999, and the
related schedule, which report appears in the May 30, 1999 annual report on Form
10-K of Intermagnetics General Corporation.
/s/ KPMG LLP
------------------------------------------
Albany, New York
August 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-30-1999
<PERIOD-END> MAY-30-1999
<CASH> 2,283
<SECURITIES> 0
<RECEIVABLES> 22,583
<ALLOWANCES> 432
<INVENTORY> 26,579
<CURRENT-ASSETS> 60,731
<PP&E> 59,065
<DEPRECIATION> 33,090
<TOTAL-ASSETS> 125,458
<CURRENT-LIABILITIES> 26,342
<BONDS> 26,631
0
6,999
<COMMON> 1,352
<OTHER-SE> 63,822
<TOTAL-LIABILITY-AND-EQUITY> 125,458
<SALES> 102,871
<TOTAL-REVENUES> 104,813
<CGS> 70,132
<TOTAL-COSTS> 70,132
<OTHER-EXPENSES> 40,750
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,172
<INCOME-PRETAX> (8,241)
<INCOME-TAX> (1,212)
<INCOME-CONTINUING> (7,029)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,029)
<EPS-BASIC> (.57)
<EPS-DILUTED> (.57)
</TABLE>
