-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B29W8g0xZtYq55gJXeRggwL/nDw6880r68ThB6O16p5cc6Fn8w7h+v7rpN7YgjzH M/71gKX1bhGoIT7BwI+/Jg== 0000950135-98-000919.txt : 19980218 0000950135-98-000919.hdr.sgml : 19980218 ACCESSION NUMBER: 0000950135-98-000919 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980130 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980213 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GALILEO CORP CENTRAL INDEX KEY: 0000711425 STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827] IRS NUMBER: 042526583 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-11309 FILM NUMBER: 98538331 BUSINESS ADDRESS: STREET 1: PO BOX 550 STREET 2: GALILEO PARK CITY: STURBRIDGE STATE: MA ZIP: 01566 BUSINESS PHONE: 5083479191 MAIL ADDRESS: STREET 1: GALILEO PARK STREET 2: PO BOX 550 CITY: STURBRIDGE STATE: MA ZIP: 01566 FORMER COMPANY: FORMER CONFORMED NAME: GALILEO ELECTRO OPTICS CORP DATE OF NAME CHANGE: 19920703 8-K 1 GALILEO CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8 - K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) JANUARY 30, 1998 GALILEO CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 04-2526583 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 0-11309 (Commission File Number) GALILEO PARK, P.O. BOX 550, STURBRIDGE, MASSACHUSETTS 01566 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code (508) 347-9191 - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report) 2 Item 2. ACQUISITION OR DISPOSITION OF ASSETS On January 30, 1998, the Registrant acquired OFC Corporation ("OFC"), a New Hampshire corporation, pursuant to the Agreement and Plan of Merger, dated as of December 30, 1997 (the "Merger Agreement") among the Registrant, a wholly-owned subsidiary of the Registrant, OFC and the principal stockholders of OFC. Following the merger, OFC became a wholly-owned subsidiary of the Registrant. In exchange for all of the outstanding common stock of OFC, the Registrant paid approximately $6,000,000 in cash and issued 1,154,258 shares of its common stock. The terms of the transaction resulted from arms-length negotiations between the Registrant and OFC and are more fully set forth in the Merger Agreement. Neither the Registrant nor any of its affiliates had any relationship with OFC prior to the merger. The cash portion of the transaction was financed partly from the Registrant's operating funds and partly from a portion of its revolving credit facility with BankBoston, N.A. OFC, located in Natick, Massachusetts, designs, manufactures and markets a broad range of optical components and systems which incorporate the latest advances in photonic technology and optical coating. OFC's products include optical filters, optical lens coatings for medical devices, laser systems, infrared thermal imaging devices and optical analytical instruments. OFC's operations also include one of the world's largest and most technically advanced diamond point turning facilities which manufactures highly-sophisticated optical components and systems for industrial lasers and semiconductor instrumentation. Item 7. FINANCIAL STATEMENTS AND EXHIBITS a) Financial Statements of Business Acquired Financial statements of the business acquired are filed as Exhibit 99.1 hereto. b) Pro Forma Financial Information The pro forma financial information required pursuant to Article 11 of Regulation S-X currently are not available and will be filed as soon as practicable, but not later than 60 days after the date that this report is due. c) Exhibits 2.1 Agreement and Plan of Merger dated as of December 30, 1997, among Galileo Corporation, OFC Acquisition Corporation, OFC Corporation and the Principal Stockholders of OFC Corporation (filed as Exhibit 2.1 to the Registrant's Form 8-K filed on January 7, 1998 and incorporated herein by reference). 99.1 Financial Statements of OFC Corporation for fiscal year ended December 31, 1997. 99.2 Press Release dated January 5, 1998 (filed as Exhibit 99.1 to the Registrant's Form 8-K filed on January 7, 1998 and incorporated herein by reference). 99.3 Press Release dated February 2, 1998. 3 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. GALILEO CORPORATION Date: February 11, 1998 By: /s/ Josef W. Rokus ------------------------------- Josef W. Rokus Vice President, Corporate Development and Secretary 4 EXHIBIT INDEX
Exhibit No. Page No. - ----------- -------- 2.1 Agreement and Plan of Merger dated as of December 30, 1997 (filed as Exhibit 2.1 to the Registrant's Form 8-K filed on January 7, 1998 and incorporated herein by reference). 99.1 Financial Statements of OFC Corporation for year ended December 31, 1997. 99.2 Press Release dated January 5, 1998 (filed as Exhibit 99.1 to the Registrant's Form 8-K filed on January 7, 1998 and incorporated herein by reference). 99.3 Press Release dated February 2, 1998.
EX-99.1 2 FINANCIAL STATEMENTS AS OF 12/31/1998 1 EXHIBIT 99.1 OFC CORPORATION FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 TOGETHER WITH INDEPENDENT AUDITOR'S REPORT 2 OFC CORPORATION CONTENTS DECEMBER 31, 1997 AND 1996 PAGES ----- INDEPENDENT AUDITOR'S REPORT ........................................... 1 FINANCIAL STATEMENTS: Balance Sheets ....................................................... 2 Statements of Operations ............................................. 3 Statements of Changes in Stockholders' Equity ........................ 4 Statements of Cash Flows ............................................. 5 Notes to Financial Statements ........................................ 6-13 3 INDEPENDENT AUDITOR'S REPORT To the Board of Directors of OFC Corporation: We have audited the accompanying balance sheets of OFC Corporation (a New Hampshire corporation) as of December 31, 1997 and 1996, and the related statements of operations, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in all material respects, the financial position of OFC Corporation as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Alexander Aronson Finning - ------------------------------------- Alexander Aronson Finning Certified Public Accountants 21 East Main Street Westborough, Massachusetts 01581 January 20, 1998 4 OFC CORPORATION STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 1997 1996 ---- ---- REVENUES $13,902,400 $12,601,700 COST OF REVENUES 8,574,300 7,570,200 ----------- ----------- Gross profit 5,328,100 5,031,500 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,496,500 2,729,400 ----------- ----------- Income from operations 831,600 2,302,100 ----------- ----------- OTHER INCOME (EXPENSES): Interest income 40,500 45,300 Interest expense (217,400) (250,200) Other income 18,200 103,300 Loss on investments (79,500) (313,200) ----------- ----------- Total other income (expenses) (238,200) (414,800) ----------- ----------- Income from operations before state income tax expense 593,400 1,887,300 STATE INCOME TAX EXPENSE 33,600 67,100 ----------- ----------- Net income $ 559,800 $ 1,820,200 =========== =========== The accompanying notes are an integral part of these statements. 5 OFC CORPORATION BALANCE SHEETS DECEMBER 31, 1997 AND 1996 ASSETS 1997 1996 ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 417,100 $ 925,300 Marketable securities 12,400 173,200 Accounts receivable - trade, net of allowance for doubtful accounts of $43,200 and $28,600 in 1997 and 1996, Respectively 2,290,100 1,288,600 Accounts receivable - related parties 151,400 159,800 Accounts receivable - other, net of reserve of $79,500 in 1997 58,300 - Inventory 1,220,600 773,900 Prepaid expenses and other 418,700 48,200 Deferred state income tax asset 42,000 39,300 ---------- ---------- Total current assets 4,610,600 3,408,300 ---------- ---------- FIXED ASSETS, at cost: Machinery and equipment 7,606,400 7,508,400 Leasehold improvements 1,459,900 1,247,200 Furniture and fixtures 409,200 379,400 Motor vehicles 25,000 25,000 ---------- ---------- 9,500,500 9,160,000 Less - accumulated depreciation 7,681,600 7,323,000 ---------- ---------- Net fixed assets 1,818,900 1,837,000 ---------- ---------- OTHER ASSETS: Investment, net of valuation allowance of $163,200 in 1996 - - Construction-in-progress - 126,200 Cash surrender value of officer's life insurance, net 278,300 265,500 Deposits and other 45,100 21,300 Purchase price in excess of fair value of assets acquired, net of accumulated amortization 158,800 164,100 ---------- ---------- Total other assets 482,200 577,100 ---------- ---------- $6,911,700 $5,822,400 ========== ========== The accompanying notes are an integral part of these statements. 6 LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 ---- ---- CURRENT LIABILITIES: Current portion of long-term debt $ 379,600 $ 371,700 Accounts payable 967,500 426,800 Accrued payroll and other 818,000 638,200 Dividends payable - 612,000 ---------- ---------- Total current liabilities 2,165,100 2,048,700 ---------- ---------- LONG-TERM DEBT, less current portion 1,681,600 2,061,700 ---------- ---------- STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 10,000,000 shares authorized, 4,874,920 and 4,152,800 shares issued at December 31, 1997 and 1996, respectively, and 4,002,916 and 3,280,796 shares outstanding at December 31, 1997 and 1996, respectively 48,700 41,500 Capital in excess of par value 1,492,800 118,900 Retained earnings 1,633,000 1,661,100 ---------- ---------- 3,174,500 1,821,500 Less - treasury stock, at cost (109,500) (109,500) ---------- ---------- Total stockholders' equity 3,065,000 1,712,000 ---------- ---------- $6,911,700 $5,822,400 ========== ========== The accompanying notes are an integral part of these statements. 7 OFC CORPORATION STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 1997 1996 ---- ---- REVENUES $13,902,400 $12,601,700 COST OF REVENUES 8,574,300 7,570,200 ----------- ----------- Gross profit 5,328,100 5,031,500 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 4,496,500 2,729,400 ----------- ----------- Income from operations 831,600 2,302,100 ----------- ----------- OTHER INCOME (EXPENSES): Interest income 40,500 45,300 Interest expense (217,400) (250,200) Other income 18,200 103,300 Loss on investments (79,500) (313,200) ----------- ----------- Total other income (expenses) (238,200) (414,800) ----------- ----------- Income from operations before state income tax expense 593,400 1,887,300 STATE INCOME TAX EXPENSE 33,600 67,100 ----------- ----------- Net income $ 559,800 $ 1,820,200 =========== =========== The accompanying notes are an integral part of these statements. 8 OFC CORPORATION STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
COMMON STOCK CAPITAL TREASURY STOCK NUMBER IN EXCESS RETAINED NOTES NUMBER OF $.01 PAR OF PAR EARNINGS RECEIVABLE - OF SHARES VALUE VALUE (DEFICIT) STOCKHOLDERS SHARES COST TOTAL ------ -------- --------- --------- ------------ ------ ---- ----- BALANCE, December 31, 1995 4,091,920 $40,900 $ 111,700 $ 452,900 $(58,400) 872,004 $(109,500) $ 437,600 Issuance of common stock - stock option plan 60,900 600 7,200 - - - - 7,800 Dividends declared - - - (612,000) - - - (612,000) Repayment of notes receivable - stockholders - - - - 58,400 - - 58,400 Net income - - - 1,820,200 - - - 1,820,200 --------- ------- ---------- ---------- -------- ------- --------- ---------- BALANCE, December 31, 1996 4,152,820 41,500 118,900 1,661,100 - 872,004 (109,500) 1,712,000 Issuance of common stock - stock option plan 429,100 4,300 50,400 - - - - 54,700 Issuance of common stock - stock grants 293,000 2,900 1,323,500 - - - - 1,326,400 Dividends declared - - - (587,900) - - - (587,900) Net income - - - 559,800 - - - 559,800 --------- ------- ---------- ---------- -------- ------- --------- ---------- BALANCE, December 31, 1997 4,874,920 $48,700 $1,492,800 $1,633,000 $ - 872,004 $(109,500) $3,065,000 ========= ======= ========== ========== ======== ======= ========= ==========
The accompanying notes are an integral part of these statements. 9 OFC CORPORATION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 559,800 $ 1,820,200 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 363,900 313,800 Reserve for loss on investment 79,500 163,200 Common stock issued as compensation 1,326,400 - (Increase) decrease in accounts receivable (1,001,500) 217,700 (Increase) decrease in accounts receivable - related parties 8,400 (101,000) Increase in accounts receivable - other (58,300) - Increase in inventory (446,700) (99,500) (Increase) decrease in prepaid expenses and other (15,400) 6,700 Increase in deferred state income tax asset (2,700) (29,600) Increase in cash surrender value of officer's life insurance, net (12,800) (12,500) Increase (decrease) in accounts payable 540,700 (525,500) Increase in accrued payroll and other 179,800 11,800 ----------- ----------- Net cash provided by operating activities 1,521,100 1,765,300 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Construction in progress - (126,200) Acquisition of fixed assets (214,300) (1,319,100) Loan to Summit Analyzers, Inc. (159,000) - Proceeds from loan to Summit Analyzers, Inc. 79,500 - Purchase of marketable securities - (173,200) Sale proceeds of marketable securities 160,800 - Increase in prepaid expenses and other (355,100) - Increase (decrease) in deposits and other (23,800) 240,900 ----------- ----------- Net cash used in investing activities (511,900) (1,377,600) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of notes receivable - stockholder - 58,400 Proceeds of long-term debt - 677,400 Proceeds from exercise of stock options 54,700 7,800 Dividends paid (1,199,900) - Payments on long-term debt (372,200) (291,100) ----------- ----------- Net cash provided by (used in) financing activities (1,517,400) 452,500 ----------- ----------- NET INCREASE (DECREASE) IN CASH (508,200) 840,200 CASH, beginning of year 925,300 85,100 ----------- ----------- CASH, end of year $ 417,100 $ 925,300 =========== =========== SUPPLEMENTAL DISCLOSURES: Cash paid for interest $ 216,000 $ 242,000 =========== =========== Cash paid for state income taxes $ 52,541 $ 54,243 =========== =========== NON-CASH FINANCING TRANSACTIONS - Common stock issued as compensation $ 1,326,400 $ - =========== =========== The accompanying notes are an integral part of these statements. 10 OFC CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES OPERATIONS OFC Corporation (the Company) is primarily engaged in the custom manufacturing of optical components and assemblies. SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS For the purpose of the statements of cash flows, cash and cash equivalents consist of checking accounts and overnight short-term money market investments. MARKETABLE SECURITIES At December 31, 1997 and 1996, these include various investments in common stocks and mutual funds stated at cost, which approximates the market value. INVENTORY Inventory consists primarily of work-in-process ($928,600) and raw materials ($292,000), which is stated at the lower of cost (first-in, first-out) or market. Work in process includes material, labor, and applicable overhead. FIXED ASSETS AND DEPRECIATION AND AMORTIZATION The Company provides for depreciation of fixed assets using the straight-line method over the following estimated useful lives: Machinery and equipment 5 - 10 years Leasehold improvements 10 years Furniture and fixtures 5 - 7 years Motor vehicles 3 years The Company has in use approximately $6,112,000 of fixed assets, which have been fully depreciated as of December 31, 1997 and 1996. Depreciation expense included in cost of revenues and selling, general and administrative expenses was $358,600 and $308,500 for the years ended December 31, 1997 and 1996, respectively. The original amount of the purchase price in excess of fair value of assets acquired of $215,300 is a result of an acquisition by the Company of a business in 1987. Amortization is recorded on a straight-line basis over an estimated life of 40 years. As of December 31, 1997 and 1996, the accumulated amortization was $56,500 and $51,200, respectively. 11 OFC CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (Continued) (1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued) SIGNIFICANT ACCOUNTING POLICIES (Continued) INCOME TAXES The Company, with the consent of its stockholders, has elected to be taxed as an S Corporation under the provisions of the Internal Revenue Code (IRC). Under these provisions, the Company does not pay Federal corporate income taxes on its taxable income. The Company's items of income, loss, deductions and credits, are passed through to, and taken into account by, its stockholders in computing their individual income taxes. The states in which the Company does business either do not recognize the S Corporation provisions of the IRC or subject the Company to various statutory income and excise taxes. State income taxes are provided for at the applicable state statutory rates. The significant temporary differences that give rise to deferred state income tax assets and liabilities consist primarily of the differences in the book and tax basis of fixed assets and certain accrued expenses, and differences in the recognition of bad debts and reserves for book and state income tax purposes. REVENUES AND CONCENTRATION OF CREDIT Sales to prime contractors under U.S. Government military contracts and to U.S. Government agencies aggregated approximately 37% and 41% of total sales for the years ended December 31, 1997 and 1996, respectively. These contracts are subject to audit by the appropriate government agencies. In the opinion of management, the results of such audits, if any, will not have a material effect on the financial position of the Company as of December 31, 1997 and 1996, or on its results of operations for the years then ended. Approximately $1,038,800 and $395,000 of aggregate outstanding accounts receivable were due from three customers as of December 31, 1997 and 1996, respectively. The Company maintains its cash balances at one institution. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000. At various times during the year, the cash balance exceeded the insured amount. As of December 31, 1997 and 1996, the uninsured portion was approximately $134,000 and $985,000, respectively. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 12 OFC CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (Continued) (2) NOTE PAYABLE TO A BANK AND LINE OF CREDIT The Company has a line of credit agreement with a bank, under which the Company can borrow up to $600,000, subject to borrowing base requirements as defined in the agreement. There were no borrowings on this line of credit at December 31, 1997 or 1996. The agreement expires in June, 1998. Borrowings are due on demand, are secured by all assets of the Company and bear interest at the bank's base lending rate plus 1/2% (8.5% and 8.25% at December 31, 1997 and 1996, respectively). The agreement contains certain covenants and requirements concerning financial ratios and other indebtedness. The Company is in compliance with all such covenants and requirements as of the date of this report. (3) LONG-TERM DEBT Long-term debt consists of the following: 1997 1996 ---- ---- Note payable to a bank, due in eighty- four monthly principal installments of $14,500, plus interest at 3/4% above the bank's base lending rate (8.5% and 8.25% at December 31, 1997 and 1996, respectively). All outstanding principal (approximately $782,000) is due February, 2003. The note is secured by all assets of the Company $1,679,900 $1,854,500 Note payable to a bank, due in sixty monthly principal installments of $3,050 through April, 2001, plus interest at 10.25% for the first year, and at 1.5% above the bank's base lending rate (8.5% and 8.25% at December 31, 1997 and 1996, respectively) thereafter. The note is secured by all assets of the Company and is guaranteed by the majority stockholder 122,000 158,600 Note payable to a bank, due in thirty- six monthly principal installments of $8,334 through April, 1999, plus interest at 10.25% for the first year and at 1.5% above the bank's base lending rate (8.5% and 8.25% at December 31, 1997 and 1996, respectively) thereafter. The note is secured by all assets of the Company and is guaranteed by the majority stockholder 133,400 233,300 13 OFC CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (Continued) (3) LONG-TERM DEBT (Continued) Note payable to former landlord, due in quarterly payments of $20,000 from March, 1995, through December, 1998, and quarterly payments of $30,000 in March and June, 1999. Payments are non-interest bearing and have been discounted at the rate of 12% (see Note 4 on page 10) 125,900 187,000 ---------- ---------- 2,061,200 2,433,400 Less - current portion 379,600 371,700 ---------- ---------- $1,681,600 $2,061,700 ========== ========== Remaining maturities of long-term debt as of December 31, 1997, are as follows: 1998 $379,600 1999 $302,000 2000 $211,200 2001 $186,800 2002 $174,600 2003 $807,000 The Company and a realty trust (the Trust) are related through common ownership interests (see Note 4). The President and majority stockholder of the Company is the sole beneficiary of the Trust. The Trust is the sole obligor for two loans in the principal amount aggregating $1,018,000 and $1,031,000, at December 31, 1997 and 1996, respectively. These notes are guaranteed by the Company's President. (4) LEASE AGREEMENTS RELATED PARTY LEASE AGREEMENTS The Company leases a Massachusetts facility from the Trust described in Note 3, under an operating lease which expires September, 2006. During 1996, the Trust purchased another building in Massachusetts for lease to the Company. This lease is effective January, 1997, and expires December, 2006. During 1996, the Company started renovations to this building which is included in construction in process at December 31, 1996. The combined annual rent of $234,000, is payable in equal monthly installments, and is subject to an annual adjustment to reflect changes in the fair rental value of the facilities. The Company is responsible for certain insurance, utilities and other operating costs. As of December 31, 1997 and 1996, the Trust owed the Company $86,900 and $103,400, respectively, for costs paid on behalf of the Trust, which are included in accounts receivable - related parties in the accompanying balance sheets. 14 OFC CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (Continued) (4) LEASE AGREEMENTS (Continued) OTHER LEASE AGREEMENTS FACILITIES The Company leased a facility in New Hampshire under an operating lease expiring in July, 1997. During 1996, the Company leased additional space under the same operating lease. During 1997, the lease was extended through March, 2003. Annual base rent was approximately $124,400. Each of the remaining lease years ending through July, 2000, are subject to a 3% increase. The remaining three years through March, 2003, are fixed at the then current amount. The Company is responsible for all operating costs and real estate taxes. Rent expense for the years ended December 31, 1997 and 1996, was $136,400 and $126,400, respectively. The Company leased a facility in California. In 1993, the California division was liquidated and the Company abandoned the California facility. In 1994, the Company entered into an agreement with the California landlord for the remaining obligation of the lease under the terms of the note payable described in Note 3 on page 9. Because the agreement is non-interest bearing, the obligation has been discounted at the rate of 12%. The discounted value of the note payable at the time of the agreement was $309,900. When all of the payments are made, the Company will have no further obligation to the California landlord. If the Company defaults on any payment, $600,000 will immediately become due, less any payments previously made under the agreement. The remaining balance will bear interest at the rate of 10% annually from the date of default until payment. EQUIPMENT In 1992, the Company entered into a seven-year operating lease with a finance corporation for certain equipment with a value of approximately $755,000. The monthly lease payments under this agreement are approximately $10,800, through July, 1996, then decrease to $10,100 through September, 1999. The Company has the option to purchase the equipment at fair market value at the end of the fifth year of the lease term. In 1997, the Company received a lease commitment from a finance company for an eight-year operating lease for certain equipment with a value of approximately $2,600,600. A May 1998, closing date is anticipated. The Company will purchase, construct and install the equipment. As stages are completed, the finance company purchases the equipment from and leases it to, the Company. The total equipment purchases through December 31, 1997, was approximately $1,500,000, of which $339,600 was not purchased by the finance company as of December 31, 1997. This amount is included in prepaid expenses and other in the accompanying balance sheet. Until the final closing, the Company pays the finance company interim rent based on Fleet Bank's prime interest rate. The Company paid $28,000 during the year ended December 31, 1997. The expected lease payments upon completion of the equipment acquisition, are approximately $35,000 per month, including executory costs of $2,600, through May, 2006. The Company may terminate the lease and acquire the equipment at month 84 for 20.70% of the original cost. Otherwise, the Company has the option to acquire the equipment at the end of the lease term at the then fair market value. 15 OFC CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (Continued) (4) LEASE AGREEMENTS (Continued) OTHER LEASE AGREEMENTS (continued) OTHER In 1995, the Company entered into two operating leases for computer hardware and software which expire April, 2000. The leases require aggregate monthly payments of $1,525. Lease expense related to these leases was $18,300 per year for the years ended December 31, 1997 and 1996, respectively. Future minimum lease payments under all operating lease agreements, including the lease commitment with a finance corporation described on page 10, over the next five years are as follows: 1998 $778,300 1999 $888,700 2000 $786,000 2001 $780,000 2002 $780,000 SUMMIT ANALYZERS, INC. The Company had additional operating leases in 1995 for equipment. A portion of these leases relating to equipment with a value of $168,000 was sublet to Summit Analyzers, Inc. (Summit), a company related through common shareholders. In 1996, the Company terminated the operating leases and purchased the equipment and continued to lease the equipment to Summit. On October 25, 1996, the Company transferred the equipment and canceled the outstanding amounts due from Summit in exchange for an approximate ten percent ownership interest in Summit. This investment was recorded at the book value of the equipment transferred and the outstanding balance of the amounts due aggregating $163,200. A valuation allowance was recorded for the entire amount and recorded as loss on investments at December 31, 1996, due to the uncertainty of realization. In 1997, the Company advanced Summit $159,000 in the form of promissory notes. The Company exchanged its ownership interest in Summit and its notes receivable with an unrelated party in consideration of new note agreements aggregating $159,000 with the unrelated party. During 1997, the unrelated party paid the Company $79,500 against these notes. The remaining notes accrue interest at 5% and are due July, 1998. The Company has fully reserved the notes at December 31, 1997, due to the uncertainty of realization. The notes are included in accounts receivable-other in the accompanying balance sheet. (5) PROFIT SHARING PLAN The Company has a profit sharing plan in accordance with Internal Revenue Code Section 401(k). Each eligible participant, as defined, may contribute up to 15% of salary per year. Until January, 1996, the Company contributed an amount equal to 15% of the employee's contribution up to six percent of their salary. The Company's contribution was raised to 20% as of January 1, 1996. The Company contributed approximately $20,900 and $15,800 for the years ended December 31, 1997 and 1996, respectively. 16 OFC CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (Continued) (6) LIFE INSURANCE The Company is the owner and beneficiary of life insurance policies, having a total face value of $500,000, on the life of the President of the Company who is also the majority stockholder. The Company also participates in a split dollar life insurance policy, with a face value of $500,000, under which the Company owns the cash surrender value and the President designates the beneficiary. As of December 31, 1997 and 1996, total net cash surrender value of these policies was $278,300 and $265,500, respectively, net of policy loans of $145,800 and $108,500, respectively. The Company has assigned the beneficial interest of $500,000 of life insurance proceeds and net cash surrender value of $147,900 to the first bank described in Note 3. (7) STOCK PURCHASE AGREEMENTS During 1991, the Company entered into stock purchase agreements whereby two officers of the Company purchased 120,000 and 40,000 shares of the Company's common stock for $62,600 and $20,850, payable in three and five equal annual installments with interest at 6.81% and 8.74%, respectively. As of December 31, 1997, both officers made the required payments under the above agreements. Upon the death, disability, or termination of any of the above stockholders, the Company must buy back the stock at a price in accordance with the provisions of the agreement. (8) STOCK OPTION PLAN AND GRANTS During 1995, the Company granted certain key employees 500,000 options pursuant to its 1995 Stock Option Plan. Options that have been granted and are outstanding expire ten years from the date of grant and become exercisable at rates tied to the profitability of the Company and/or its divisions (with the exception of 98,000 options in 1996 which became exercisable one year from the date of grant). The following is a summary of the activity in the Company's stock option plan: Option Plan Shares ------ Outstanding, December 31, 1995 480,000 Granted 10,000 Exercised (60,900) -------- Outstanding, December 31, 1996 429,100 Granted - Exercised (429,100) -------- Outstanding, December 31, 1997 - -------- 17 OFC CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (Continued) (8) STOCK OPTION PLAN AND GRANTS (Continued) All options granted under the plan have an exercise price of $.1275 per share. No compensation expense was recorded in the accompanying financial statements as the exercise price equals the estimated fair value of the Company's stock on the grant date. Options issued under the plan are not transferrable except through the estate of a deceased optionee. Such options expire six months following the death of the optionee. If the optionee terminates employment with the Company because of disability, the issued options will expire six months from the date of the termination. Should the optionee terminate employment for any other reason, the options issued expire sixty days following the date of the termination. The Company maintains the right of first refusal to purchase shares issued under the plan in the event that an optionee, who has purchased shares under the plan, entertains an offer for sale from a third party. The Company also maintains the right of repurchase with respect to all shares issued under the plan if the optionee terminates employment with the Company for any reason. Such shares would be repurchased at fair market value. On December 31, 1997, the Company granted 293,000 shares of common stock to certain employees and directors. The shares had an aggregate estimated fair value of $1,326,400 at the time of grant. These grants are reported as compensation, common stock and capital in excess of par value in the accompanying financial statements. (9) NOTES RECEIVABLE In 1996, the Company loaned $150,000 to an unrelated corporation in the form of forty-five day notes that bear interest at 10% per annum. Principal and interest are convertible at the Company's option into stock ownership. As of December 31, 1996, the Company has written off the entire note balance of $150,000 as loss on investments. (10) SUBSEQUENT EVENTS On December 30, 1997, the shareholders of the Company signed an agreement to sell for cash and common stock of the acquirer, all of the Company's outstanding common stock and any options to purchase any such stock. A January, 1998, closing date is anticipated. In January, 1998, the Company signed a lease agreement for additional facility space for the Keene, NH facility. The lease is for a five year term with an option to extend for another five years. The approximate annual lease payment will be as follows: Year 1 $30,000 Year 2 $32,400 Years 3 - 5 $42,000 EX-99.3 3 PRESS RELEASE 02/02/1998 1 EXHIBIT 99.3 Investor Relations - Gregory Riedel (508) 347-4222 GALILEO COMPLETES ACQUISITION OF OFC CORPORATION - -------------------------------------------------------------------------------- STURBRIDGE, MA, FEBRUARY 2, 1998 - Galileo Corporation (NASDAQ National Market: GAEO) announced today that it has completed the previously announced acquisition of OFC Corporation, a privately held company based in Natick, Massachusetts, by acquiring all of the outstanding shares of OFC for approximately $6 million in cash and 1.15 million shares of Galileo common stock. OFC designs, manufactures and markets a broad range of optical components and systems which incorporate the latest advances in photonic technology and optical coating. OFC's products include optical filters, optical lens coatings for medical devices, laser systems, infrared thermal imaging devices and optical analytical instruments. OFC's operations also include one of the world's largest and most technically advanced diamond point turning facilities, which manufactures highly sophisticated optical components and systems for industrial lasers and semiconductor instrumentation. Detailed information about Galileo and OFC can be found on the Internet at the web sites www.galileocorp.com and www.ofccorp.com. -----END PRIVACY-ENHANCED MESSAGE-----