-----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, F9fAAuEOtmSxO/a0V6gbtBpVb0BXugJZ4fNPsJ9KfWFYE8LDA+rxLStbaVMCy8Ll /F0akY8MbAAS0uaNXqdPoA== 0000950135-98-006434.txt : 19981230 0000950135-98-006434.hdr.sgml : 19981230 ACCESSION NUMBER: 0000950135-98-006434 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981229 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: 10-K405 SEC ACT: SEC FILE NUMBER: 000-11309 FILM NUMBER: 98777465 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 10-K405 1 GALILEO CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (x) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED: SEPTEMBER 30, 1998 Commission File Number: 0-11309 GALILEO CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 04-2526583 (State of Incorporation) (IRS Employer Identification No.) 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 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE (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 Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of September 30, 1998, 8,052,786 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant on such date was $25.6 million. DOCUMENTS INCORPORATED BY REFERENCE: Portions of Registrant's proxy statement for the 1998 Annual Meeting of Shareholders are incorporated by reference into Part III of this report. The Index to Exhibits is located on Page 40. PAGE 1 OF 41 2 PART I Item 1. BUSINESS Galileo Corporation (the "Company" or "Galileo") along with its wholly-owned subsidiary, Optical Filter Corporation ("OFC"), develops, manufactures and markets a variety of fiberoptic and electro-optic products that transmit, sense or intensify light or images. The Company's core competency in glass sciences is fundamental to developing and manufacturing its products. The Company's products include medical, scientific, optical components and systems and office product applications. Leisegang Medical, Inc. ("Leisegang Medical"), a wholly-owned subsidiary, develops, manufactures, and markets women's health-related medical products. The Company's current operations are primarily in the United States but include operating subsidiaries in Canada and Germany. PRODUCTS The Company operates in a single industry segment and designs and produces products for medical, scientific detector and spectroscopy and optical components and systems. MEDICAL PRODUCTS Currently, the Company's Medical Products consist primarily of women's health-related products and formerly Endoscopic Imaging devices. Sales of Medical Products, including Endoscopic Imaging devices, which products were discontinued during fiscal 1998 (see additional discussion below), accounted for 43%, 41% and 18% of the Company's net sales for fiscal years 1998, 1997 and 1996, respectively. Women's Health-Related Products Through Leisegang Medical, a wholly-owned subsidiary, the Company develops, manufactures and distributes women's health-related medical products including colposcopes, ultrasound devices, rigid and flexible hysteroscopes, fetal monitors, endoscopes and a variety of surgical and diagnostic instruments. In February 1998, the Company acquired Les Entreprises Galenica, Inc. ("Galenica"). Galenica was a privately held company that manufactures and markets a broad line of disposable, single-use vaginal specula, a frequently used diagnostic instrument used by OB/GYN physicians, clinics and hospitals. In February 1998, the Company entered into a medical product supply and distribution agreement with PSS World Medical, Inc. ("PSSI"). The agreement covers distribution to physicians' offices and other office-based healthcare providers throughout the United States and includes purchase requirements to retain exclusivity to certain Leisegang Medical products. In October 1997, the Company acquired Leisegang Feinmechanik-Optik GmbH & Co., KG ("Leisegang GmbH"). Leisegang GmbH was a privately held manufacturer and worldwide distributor of colposcopes and accessories and is the supplier of colposcopes to Leisegang Medical. 2 3 In March 1997, the Company acquired the Sani-Spec(R) product line from C.R. Bard, Inc. This product line includes Sani-Spec single-use vaginal specula, Sani-Scope(TM) anoscopes, Spec Light(TM) speculum lights and Pap Smear Kits used by OB/GYN physicians, clinics and hospitals. Endoscopic Imaging Devices The Company's Medical Products business designed, developed and marketed application-specific, minimally invasive endoscopic imaging products used in any medical procedure where enhanced optical imaging can provide accurate diagnosis, improve surgical performance and increase patient comfort via smaller diameter scopes. The Company exited this business during the fourth quarter of fiscal 1998. SCIENTIFIC DETECTOR AND SPECTROSCOPY PRODUCTS Sales of Scientific Detector and Spectroscopy Products accounted for 29%, 59% and 82% of the Company's net sales for fiscal years 1998, 1997 and 1996, respectively. The principal products within Scientific Detector and Spectroscopy Products include single channel detectors, microchannel plates, detector assemblies and systems, spectroscopy products and office products. See Management's Discussion and Analysis of Financial Condition and Results of Operations for factors affecting the Scientific Detector and Spectroscopy Products business. Single Channel Detectors Single Channel Detectors are small glass tubes manufactured with semi-conducting inner surfaces that emit electrons. This emission process is repeated many times along the length of the tube in a multiplying sequence, whereby one electron entering at one end of the tube generates a pulse containing millions of electrons at the other end of the tube. This pulse can be measured as it emerges from the tube. The primary application of this product is as the detecting element in a mass spectrometer. Mass spectrometers identify the atoms of unknown elements by determining atomic mass through the measurement of velocity or path of movement of subatomic particles. They are used in the biotechnology and pharmaceutical industries and in drug screening applications. The Company's Channeltron(R) and Spiraltron(TM) Single Channel Detectors have replaced the complex multi-electrode structure of older detectors and require only a single two-terminal power supply. The simplicity of the Company's Detectors, their mechanical ruggedness and their resistance to contamination in service have led to their adoption as the preferred detector in mass spectrometers, ultraviolet spectrometers and in a growing range of surface-scanning instruments. All major mass spectrometer manufacturers use the Company's detectors and, in some cases, the Company is the single source. Microchannel Plates Microchannel Plates ("MCPs") are multi-channel electron multipliers. The initial manufacturing process of MCPs consists of producing a small wafer-thin fused fiberoptic disc. These discs are then further processed by etching out the core of each fiber to produce hollow channels, the surfaces of which are semi-conducting. Each channel serves as a microscopic single channel electron multiplier, multiplying the electrons that enter the channel in order to intensify faint electron images. The Company manufactures an improved, long-life MCP with enhanced gain stability, resulting in improved brightness and a significantly longer life expectancy than other MCPs available in the marketplace. 3 4 Detector Assemblies and Systems Detector Assemblies and Systems consist of multi-channel electron multipliers combined with fiberoptic, mechanical and electronic components. These value-added devices are used as ion, X-ray or particle detectors in scientific instrumentation. The Company provides these detector assemblies primarily to the major manufacturers of analytical instrumentation and to the research community. The Company's advanced performance "Time-of-Flight" detectors provide rapid identification of electrons by measurement of their velocity through a defined area and are utilized in biotechnology and pharmaceutical applications, improving the productivity of drug screening processes. Spectroscopy Products Spectroscopy Products provide technically advanced, cost-effective solutions for industrial process monitoring through the use of on-line spectroscopy systems. Spectroscopy systems identify or monitor a material's chemical signature by analyzing the behavior of introduced light. The Company's products are used in raw material screening, moisture content analysis, octane measurements and process monitoring in industries such as chemical, pharmaceutical, semiconductor, petrochemical, environmental and food and beverage. The Company's IR Link(R) Single and Multi-Channel Systems are a family of integrated sensors and accessories used to monitor process quality and reduce costs by moving analyses from the laboratory directly to the production line. Multi-Channel Systems allow up to seven sensing points to be monitored using a single analytical instrument. The Company's fixed-mount and hand-held diffuse reflectance systems analyze samples of raw materials such as powders, slurries and textiles. These portable systems provide immediate analyses enabling customers to make timely adjustments to reduce costs, improve quality and raise productivity and yields. The Company's Lightguides supply illumination to remote areas through the use of flexible fiberoptics. Lightguides, when used in tandem or with other detectors, are also used as sensors to detect signals, position, dimensions, images and many other physical phenomena. Office Products Office Products are used in a variety of applications to improve the reliability and performance of high-volume, high-speed copiers and ion deposition printers. The Company's highest volume office product is the dicorotron. The dicorotron, which utilizes the Company's proprietary glass-coated wire technology, generates ions that a copier's photoreceptors use during the image transfer process. In February 1997, the Company received written notification from its then largest customer, Xerox Corporation ("Xerox"), that Xerox had developed internal production capabilities for dicorotron assemblies and would no longer purchase these assemblies from the Company. Sales to Xerox accounted for approximately 0%, 19% and 48% of revenues for the fiscal years ended 1998, 1997 and 1996, respectively. The Company completed final shipments to Xerox during the second quarter of fiscal 1997. See Management's Discussion and Analysis of Financial Condition and Results of Operations for additional discussion. 4 5 OPTICAL COMPONENTS AND SYSTEMS PRODUCTS OFC, acquired in January 1998, designs, manufactures and markets a broad range of optical components and systems that incorporate recent advances in photonic technology and optical coating. OFC's revenues for the period ending September 30, 1998 accounted for approximately 28% of the Company's net sales. 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. TELECOMMUNICATION PRODUCTS During fiscal 1998 and 1997, the Company developed and proved the technical feasibility of its line of optical amplification products based on fluoride fiber technology but determined that commercial success and sustained profitability would probably not be realized in the near future without significant further investments. Consequently, in October 1998, the Company decided to explore several options for this business including partnering with another company in this field, selling or exiting the business. RESEARCH AND NEW PRODUCT DEVELOPMENT The Company's scientists and engineers conduct research and development in glass, fiberoptic and electro-optic technologies to develop new products and to enhance and expand applications for existing products. The Company's expenditures for research and development were approximately $5,239,000, $4,727,000, and $3,220,000 in fiscal years 1998, 1997 and 1996, respectively. MARKETING The Company markets its products to original equipment manufacturers, through marketing partners, distributors and direct to end-users. The Company has its own sales and marketing personnel, and Leisegang Medical also uses manufacturers' representatives. CUSTOMERS Export sales to foreign customers, principally in Europe and North America, amounted to approximately $9,901,000, $5,355,000 and $8,716,000 in fiscal years 1998, 1997 and 1996, respectively. Sales to Xerox were 19% and 48% of net sales in fiscal years 1997 and 1996, respectively. Xerox no longer purchases products from the Company as discussed above. RAW MATERIALS AND SUPPLIES The principal raw materials and supplies used by the Company in the manufacture of its products include glass tubing and core bars, glass substrates, chemicals for glass manufacture, plastic resins and purchased parts for assemblies and instruments. The Company has not experienced any shortages in the past and does not anticipate any future shortages or unavailability of these items. Most raw materials are available from alternative sources. 5 6 PATENTS Although the Company possesses many patents that relate to its technology, it does not believe that the protection offered by these patents is of material importance to the success of its business. The Company believes that its success depends primarily on its development, manufacturing and marketing skills. BACKLOG At September 30, 1998 and 1997, the sales backlog was $12,930,000 and $5,495,000, respectively. Backlog is scheduled for shipment during the following fiscal year. COMPETITION The Company's competitive position depends primarily upon the technological development of its products, as well as service, quality and price. Some of the Company's competitors are major corporations or divisions of major corporations, which have greater financial resources than the Company. EMPLOYEES As of September 30, 1998, the Company had 431 full-time employees, none of whom is a party to a collective bargaining agreement with the Company. Of these employees, 131 were employed at the Company's facilities in Sturbridge, Massachusetts (reduced to 72 during the first quarter of fiscal 1999), 119 were employed at OFC in Natick, Massachusetts and in Keene, New Hampshire, 90 at Galenica near Montreal, Canada, 47 at Leisegang GmbH in Berlin, Germany and 44 at Leisegang Medical, in Boca Raton, Florida. The Company believes that it has good relations with its employees. Item 2. PROPERTIES The Company's corporate headquarters and certain manufacturing facilities are located in Sturbridge, Massachusetts, where the Company owns three buildings, with a total of 197,000 square feet on a 56-acre tract. The land and buildings, among other assets, secure the Company's revolving credit facility. OFC, a wholly-owned subsidiary, has sales, marketing, administrative and manufacturing facilities in Natick, Massachusetts and additional manufacturing facilities in Keene, New Hampshire. OFC leases approximately 55,000 square feet of space including approximately 25,000 square feet from a related party. Galenica is a wholly-owned subsidiary located near Montreal, Canada where the Company owns a facility where it manufactures a majority of the products produced by this subsidiary and it also leases approximately 6,000 square feet of space from a related party for sales, marketing and certain manufacturing. Leisegang GmbH, a wholly-owned subsidiary, is located in Berlin, Germany, and leases approximately 23,000 square feet of space for sales, marketing, administration and manufacturing. Leisegang Medical, a wholly-owned subsidiary, is located in Boca Raton, Florida, where it leases approximately 11,500 square feet of space used for sales, service and marketing and administration. 6 7 Item 3. LEGAL PROCEEDINGS There are four class action lawsuits against the Company and certain of its officers alleging violations of the federal securities laws. The Company has received an extension for an indefinite period to respond to complaints pending consolidation of the four cases and selection of a lead plaintiff. The Company will vigorously defend these lawsuits and believes they are without merit. There are no other material pending legal proceedings to which the Company is a party to or to which any of its property is subject. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the Company's security holders during the fourth quarter of the 1998 fiscal year. EXECUTIVE OFFICERS OF THE REGISTRANT The following table indicates the names and ages of all executive officers of the Company and the offices held by each:
Name Age Officer ---- --- ------- W. Kip Speyer 50 President and Chief Executive Officer and Director Stephen P. Todd 33 Interim Chief Financial Officer Josef W. Rokus 56 Vice President, Corporate Development and Corporate Secretary
Each officer, except for Mr. Todd, serves for a term extending until the meeting of directors following the next annual meeting of shareholders and until a successor is elected and qualified or until earlier resignation or removal. Mr. Todd serves the Company through a consulting agreement with Argus Management Corporation that is terminable by Argus Management Corporation or the Company at any time. Mr. Speyer joined the Company in 1996 as a result of the Company's acquisition of Leisegang Medical where he had been President since 1986. He joined the Board of Directors in November 1998 and was appointed President and CEO in December 1998. His prior experience includes 25 years in senior management and chief executive officer positions. Mr. Speyer is a graduate of Northeastern University and holds a B.S. degree in Business Administration. Mr. Todd, a consultant with Argus Management Corporation, joined the Company on an interim basis in 1998. He has served as a financial consultant since 1995. From 1994 to 1995, Mr. Todd served as controller of PerSeptive BioSystems, Inc., a manufacturer of equipment for the life sciences industry. From 1991 to 1993, Mr. Todd served as finance manager of Damon Corporation, a medical laboratory business. Mr. Todd holds a B.S. degree in Accounting from Bentley College and is a Certified Public Accountant in Massachusetts. Mr. Rokus joined the Company as Vice President, Manufacturing in 1984, was appointed Vice President, Corporate Development in 1986 and Vice President, Finance in 1988. He was named Chief Financial Officer in 1990 and Corporate Secretary in 1993. In 1996, he was named Vice President, Corporate Development. Prior experience includes management and controller positions with Corning Incorporated. Mr. Rokus holds an M.B.A. in Finance from The Tuck School, Dartmouth College and an M.S. and B.S. in Electrical Engineering from the University of Illinois. 7 8 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the Nasdaq Stock Market under the symbol GAEO. The following table sets forth, for the periods indicated, the high and low sale prices for the common stock as reported by Nasdaq.
Fiscal 1997 Low High ----------- --- ---- 1st Quarter $21.000 $27.750 2nd Quarter 6.000 26.500 3rd Quarter 4.500 7.750 4th Quarter 5.500 15.250
Fiscal 1998 Low High ----------- --- ---- 1st Quarter $ 8.750 $14.750 2nd Quarter 9.750 17.500 3rd Quarter 11.125 16.500 4th Quarter 2.063 13.125
The Company had 479 shareholders of record as of September 30, 1998. The Company has not paid dividends since 1979 and does not anticipate paying cash dividends in the foreseeable future. In fact, the Company has a retained earnings deficit, and future earnings are expected to be retained for use in its businesses. Item 6. SELECTED FINANCIAL DATA
Years ended September 30, (Dollars in thousands, except per share data) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------- Net sales $ 44,306 $ 34,117 $ 42,634 $ 40,753 $ 35,937 Operating profit (loss) (11,977) (11,856) 5,212 1,176 (1,596) Other income (expense), net (362) 835 404 305 213 -------------------------------------------------------------- Income (loss) before income taxes and extraordinary gain (12,339) (11,021) 5,616 1,481 (1,383) Provision for income taxes 288 163 89 82 69 Extraordinary gain (net of taxes) -- -- 158 -- -- -------------------------------------------------------------- Net income (loss) $(12,627) $(11,184) $ 5,685 $ 1,399 $ (1,452) ======================================================================================================================
8 9
Years ended September 30, (Dollars in thousands, except per share data) 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- Earnings per share: Numerator - Net income (loss) $(12,627) $(11,184) $5,685 $1,399 $(1,452) --------------------------------------------------------- Denominator - Weighted average shares: Basic 7,646 6,851 6,795 6,748 6,744 Assuming dilution 7,646 6,851 6,952 6,778 6,744 ===================================================================================================================== Net income (loss) per common share - basic: Before extraordinary gain $ (1.65) $ (1.63) $ .81 $ .21 $ (.22) Extraordinary gain (net of taxes) -- -- .02 -- -- --------------------------------------------------------- Net income (loss) - basic $ (1.65) $ (1.63) $ .83 $ .21 $ (.22) ========================================================= Net income (loss) per common share - assuming dilution: Before extraordinary gain $ (1.65) $ (1.63) $ .80 $ .21 $ (.22) Extraordinary gain (net of taxes) -- -- .02 -- -- --------------------------------------------------------- Net income (loss) - assuming dilution $ (1.65) $ (1.63) $ .82 $ .21 $ (.22) =====================================================================================================================
As of September 30, 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------- Working capital (deficit) $ (3,405) $ 16,317 $ 26,462 $ 20,312 $ 16,856 Property, plant and equipment, net 16,128 15,372 19,228 19,891 21,755 Total assets 55,654 42,727 53,064 48,173 46,519 Long-term obligations 1,008 86 132 716 653 Shareholders' equity 32,659 36,102 47,028 40,934 39,486
Notes: Results for years prior to fiscal 1997 have been restated to reflect the acquisition in fiscal year 1996 of Leisegang Medical, Inc., accounted for as a pooling of interests. Earnings per share amounts prior to fiscal 1998 have been restated to comply with Statement of Financial Accountings Standards No. 128, Earnings Per Share. 9 10 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Fiscal Year 1998 Compared to Fiscal Year 1997 Revenues for fiscal 1998 of $44.3 million increased $10.2 million, or 30%, from revenues of $34.1 million in fiscal 1997. Current fiscal year revenues from acquisitions, particularly OFC, have more than offset the loss of fiscal 1997 revenues from Xerox. For the year ended September 30, 1998, revenues for Scientific Detector and Spectroscopy Products were adversely impacted by foreign shipment restrictions placed on certain microchannel plate products by the U.S. Department of Defense. For the last four years, these products were shipped to foreign customers under licenses granted by the U.S. Department of Commerce. During the third quarter ended June 30, 1998, the Department of Defense restricted foreign shipments pending a jurisdictional ruling of licenses between these two departments. The jurisdictional ruling will decide whether any future licenses will be granted. The Company has been working aggressively with these departments and with its elected officials to resolve this inter-departmental dispute with some success; however, the Company lost sales revenue in the last half of fiscal 1998 as some of its international customers started sourcing their requirements from the Company's competitors. In addition, fiscal 1998 revenues were negatively impacted by reduced shipments of the Company's detector products to semiconductor capital equipment manufacturers who had significantly reduced orders in response to the Asian economic downturn. Revenues for Medical Endoscope Products for fiscal 1998 of $2.7 million were negatively impacted by the failure to complete a marketing relationship for an application-specific endoscope and lower than expected product requirements by the Company's marketing partners. As a result, during the fourth quarter of fiscal 1998, the Company terminated its Medical Endoscope Products business. Gross profit (as a percentage of revenues) for the year ended September 30, 1998, of 26% decreased from 35% for fiscal 1997. This decline was due primarily to the impact of the reduction in the carrying costs of inventories to fair market value ($2.9 million) and the loss of higher margin Xerox-related revenues replaced by lower gross margins from acquired businesses. Engineering expenses increased to $5.8 million in fiscal 1998 from $5.3 million in fiscal 1997 due to the inclusion of expenses from acquisitions and continued funding of the Company's now terminated investments in the Medical Endoscope and Telecommunication Products businesses. Selling and administrative expenses increased from $9.2 million in fiscal 1997 to $15.4 million in fiscal 1998 due to the inclusion of operating expenses and goodwill amortization from acquisitions and an increase in selling expenses in support of certain supply and distribution agreements. In addition to selling and administrative expenses, the Company incurred one-time charges for costs during fiscal 1998 to reduce the carrying value of certain equipment to estimated fair market value ($1.5 million). Included in operating results for the year ended September 30, 1998, is a charge of $0.6 million related to the potential uncollectibility of receivables (net of recoveries) from a medical endoscope customer that has experienced severe liquidity issues. Management is currently in negotiations with this customer to resolve this issue. Although some or all of this receivable may be collectible in the future, management believes that the provision is appropriate under current circumstances. Interest expense amounted to $0.5 million during fiscal 1998 compared with interest income of $0.7 million during fiscal 1997 due to the liquidation of short-term investments held during fiscal 1997 and borrowings under the Company's revolving line of credit with a bank during fiscal 1998 as discussed below. 10 11 For both the current and comparable prior year periods, the Company's effective tax rate differs from the statutory rate primarily due to the unrecognized benefit of available tax loss carryforwards. The current year provision relates principally to foreign, state and franchise taxes. The Company realized a net loss of $12.6 million, or a loss of $1.65 per share in fiscal 1998, versus a net loss of $11.2 million, or $1.63 per share, in fiscal 1997. The benefit of increased revenues from acquisitions was offset by lower product margins and the aforementioned nonrecurring charges. Fiscal Year 1997 Compared to Fiscal Year 1996 Sales for fiscal 1997 of $34.1 million decreased $8.5 million, or 20%, from sales of $42.6 million in fiscal 1996. Reduced revenues resulted primarily from the loss of the Company's Xerox business. Sales to this customer were $20.4 million in fiscal 1996 and declined to $6.3 million in fiscal 1997. The Company completed final shipments to this customer during its second fiscal quarter of 1997. Excluding activity with this customer, sales for fiscal 1997 of $27.8 million increased 25% from fiscal 1996 revenues of $22.3 million. This increase was primarily from higher revenues in the Company's Medical Products business. Gross profit (as a percentage of revenues) of 34% in fiscal 1997 decreased from 44% in fiscal 1996 primarily due to the impact of reduced revenues on substantially fixed manufacturing-related expenses. Engineering expenses increased to $5.3 million in fiscal 1997 from $4.0 million in fiscal 1996 primarily due to increased spending to support the development of the Company's medical and telecommunications products. Selling and administrative expenses in fiscal 1997 declined from fiscal 1996 by $0.5 million due to cost reduction efforts. As a result of the loss of the Xerox business, the Company announced a reorganization plan during fiscal 1997. In connection with this plan, the Company recorded a nonrecurring charge of $6.9 million, or $1.01 per share, in the three months ended March 31, 1997. In addition, in the first quarter of fiscal 1997, the Company recorded a $2.2 million, or $0.32 per share, nonrecurring charge to reduce the value of certain robotic assembly equipment used in its Medical Products business to its estimated fair market value. During fiscal 1997 the Company realized a net loss of $11.2 million, or a loss of $1.63 per share, versus net income of $5.7 million, or $0.82 per share, in fiscal 1996 resulting primarily from lower revenues and the aforementioned one-time charges. LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION During 1997 and continuing into 1998, the Company experienced a number of developments which have had a materially adverse effect on the results of operations. The Company has incurred recurring operating losses, has a working capital deficiency and is in violation of certain covenants of loan agreements with banks. These conditions raise substantial doubt about the Company's ability to continue as a going concern. See Note 2 of the Notes to Consolidated Financial Statements for additional discussion. On December 22, 1998, the Company announced the signing of an agreement with an investment entity formed by the principals of Andlinger & Company, Inc. under which that entity has agreed to purchase for $6.0 million in a private transaction 2,000,000 shares of the Company's common stock, together with warrants for an additional 2,000,000 shares. The warrants are exercisable for a period of 7 1/2 years at a price of $1.50 per share, subject to antidilution adjustment. Consummation of the transaction is subject to a number of conditions, including obtaining waivers and amendments under the Company's bank loan agreement and the issuance of a waiver by The Nasdaq Stock Market of the requirement for shareholder approval of the transaction. 11 12 Subsequent to September 30, 1998, the Company decided to sell certain assets deemed to be non-strategic to its on-going business operations, including assets associated with the Company's Medical Endoscope and Telecommunications Products businesses. The Company is also evaluating the possibility of a sale and leaseback transaction of the Sturbridge, Massachusetts facility. There can be no assurance whether or how quickly the Company will reach an agreement for the sale of any of the non-strategic assets. In January 1998, the Company entered into a $14.0 million revolving credit facility with a bank (as amended in August 1998, the "Loan Agreement") of which $11.8 million was outstanding as of September 30, 1998. The Loan Agreement contains certain covenants and requirements concerning financial ratios and other indebtedness, as well as limitations regarding the payment of dividends. As a result of continuing losses, the Company's liquidity position has deteriorated significantly. The Company is in violation of certain of the financial covenants and the bank has the right to accelerate the loan. The Company is currently working with the bank to restructure the Loan Agreement. There can be no assurances that an accommodation will be reached. Accordingly, the outstanding balance of the Loan Agreement, which would otherwise be classified as long-term debt, has been classified as short-term in the Company's consolidated balance sheet as of September 30, 1998. The outstanding balance of the Loan Agreement as of December 22, 1998 was approximately $13.6 million. The Company anticipates continuing operating losses through the first quarter of fiscal year 1999, which losses are expected to include a charge for the reduction of carrying values of certain long-lived assets of $1.6 million and severance and other consolidation costs of $1.4 million. Giving effect to reclassifying the outstanding loan to short-term, the Company's working capital decreased from $16.3 million at September 30, 1997 to a working capital deficit of $3.4 million at September 30, 1998. The change in working capital of $19.7 million is primarily attributable to the aforementioned reclassification and the use of cash for acquisitions (approximately $11.3 million). If the bank debt had not been classified as short-term, working capital would have been $8.4 million at September 30, 1998. Capital expenditures for fiscal 1998 amounted to $2.9 million versus $3.8 million for fiscal 1997. Fiscal 1998 capital expenditures primarily relate to machinery and equipment to support OFC and operations in Sturbridge. Assuming the successful completion of the private placement, a restructuring of the Loan Agreement, and immediate savings expected to be experienced by the Company from the termination of the various businesses discussed above, management believes that working capital will be sufficient to fund the Company's operations in the near term. If the Company is unsuccessful in closing the private placement and restructuring the Loan Agreement, the Company will need to obtain alternative financing to support its current operations. There is no assurance that such alternative financing will be available. YEAR 2000 The Year 2000 issue is the result of computer programs using two digits rather than four to define the applicable year. Such software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations leading to disruptions in the Company's activities and operations. If the Company, its significant customers, or suppliers fail to make necessary modifications and conversions on a timely basis, the Year 2000 issue could have a material adverse effect on Company operations. However, the impact cannot be quantified at this time. The Company believes that its competitors face a similar risk. In December 1997, the Company established a corporate-wide strategy to address and remedy technology issues relating to the Year 2000. This strategy encompasses four areas: internal technology systems and applications used in its business operations; manufacturing control systems; external systems of vendors and service providers; and technology systems of existing customers. 12 13 The Company has completed an inventory and assessment of all critical internal business systems and applications and the majority of remedies consisting of upgrades or replacements are complete. The Company expects to have all actions and implementation complete by May 31, 1999, with ongoing testing and verification to continue through December 31, 1999. The current assessment process for the inventory, testing and remediation of manufacturing control and data control systems will continue throughout calendar 1999. Additionally, the Company is investigating the Year 2000 compliance status of vendors and service providers and an aggressive surveying has been completed. The Company will attempt to minimize risk and exposure based on responses of these critical vendors and service providers through alternative sources and contingency plans. In the event the Company is unable to fully meet Year 2000 compliance, the manufacturing operations in Germany and Canada will be adversely impacted. Any potential future business interruptions, costs, damages or losses related thereto, are dependent, to a significant degree, upon the Year 2000 compliance of third parties, both domestic and international, such as government agencies, customers, vendors and suppliers. While efforts will be made to minimize risk, no assurance can be made that companies in the entire supply chain will not be affected. In that respect, failures and disruptions of the business process remain a possibility and no assurance can be provided that Year 2000 compliance can be achieved without significant additional costs. Previous costs related to Year 2000 compliance were funded through operating cash flows and the Company's revolving debt facility. Through fiscal 1998, the Company expended approximately $0.1 million in remediation efforts paid to third party consultants and vendors. Internal expenditures are not traded separately. The Company estimates remaining costs to be between $0.2 million and $0.3 million. The Company believes it is taking appropriate steps to achieve Year 2000 compliance. As previously discussed, many of the compliance issues rely on the uninterrupted delivery of products and services of third parties. Consequently, there can be no assurance of uninterrupted business processes, or additional costs, losses, or damages occurring as a result of the Year 2000 compliance. IMPORTANT FACTORS REGARDING FUTURE RESULTS Information provided by the Company, including information contained in this annual report, or by its spokespersons from time to time, may contain forward-looking statements concerning projected financial performance, market growth, product development or other aspects of future operations. The Company cautions investors that its performance and any forward-looking statement are subject to risks and uncertainties. The following important factors, among others, may cause the Company's future results to differ materially from those projected in any forward-looking statement. 13 14 Possible Equity Offering On December 22, 1998, the Company announced the signing of an agreement with an investment entity formed by the principals of Andlinger & Company, Inc. under which that entity has agreed to purchase for $6.0 million in a private transaction 2,000,000 shares of the Company's common stock, together with warrants for an additional 2,000,000 shares. The warrants are exercisable for a period of 7 1/2 years at a price of $1.50 per share, subject to antidilution adjustment. Consummation of the transaction is subject to a number of conditions, including obtaining waivers and amendments under the Company's bank loan agreement and the issuance of a waiver by The Nasdaq Stock Market of the requirement for shareholder approval of the transaction. Following completion of the sale, the Company's board of directors would be enlarged to seven members, of which three would be designated by the purchaser including the Chairman. In addition, certain specified transactions, such as mergers, acquisitions, divestitures and financing would require the consent of five directors. Prior to entering into this transaction, the Company's board of directors received an opinion from its financial advisor, Needham & Company, Inc., as to the fairness from a financial point of view of the consideration to be received by the Company in the investment. There can be no assurance that the bank loan will be restructured on terms acceptable to the investor, that a waiver will be granted by The Nasdaq Stock Market or that this transaction will be consummated. Sale of Non-strategic Assets Subsequent to September 30, 1998, the Company decided to sell certain assets deemed to be non-strategic to its on-going business operations, including assets associated with the Company's Medical Endoscopes and Telecommunications businesses. The Company is also evaluating the possibility of a sale and leaseback transaction of the Sturbridge, Massachusetts facility. There can be no assurance whether or how quickly the Company will reach an agreement for the sale of any of the non-strategic assets. Significant Customers In February 1998, the Company entered into a medical product supply and distribution agreement with PSS World Medical, Inc. ("PSSI"). The agreement covers distribution to physicians' offices and other office-based healthcare providers throughout the United States and includes purchase requirements to retain exclusivity to certain Leisegang products. During the fiscal year ended September 30, 1998, sales to PSSI approximated $3.1 million, and related accounts receivable were $1.1 million at fiscal year end. The PSSI accounts receivable is subject to normal credit risk and exposure. There can be no assurance that if the sales to PSSI ceased or declined, whether or how quickly the Company will be able to replace this business. Technological Change and New Product Development The market for the Company's products is characterized by rapidly changing technology. The Company's future success will continue to depend upon its ability to enhance its current products and to develop and introduce new products that keep pace with technological developments and evolving industry standards, respond to changes in customer requirements and achieve market acceptance. Any failure by the Company to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction, could have a material adverse effect on the Company's business, financial condition and results of operations. In order to develop new products successfully, the Company is dependent upon close relationships with its customers and their willingness to share proprietary information with the Company. There can be no assurance that the Company's customers will continue to provide it with timely access to such information or that the Company will be successful in developing and marketing new or enhanced products and services in a timely manner and respond effectively to technological changes or new product announcements by others. In addition, there can be no assurance that the new products and services or product and service enhancements, if any, developed by the Company will achieve market acceptance. 14 15 Potential Acquisitions The Company regularly reviews various acquisition prospects of businesses, technologies or products complementary to the Company's business and periodically engages in discussions regarding such possible acquisitions. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations and products of the acquired companies, the ability to effectively manage geographically remote units, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has limited or no direct experience and the potential loss of key employees of the acquired companies. In addition, acquisitions may result in the issuance of debt and dilutive equity securities, reduction in existing cash balances, amortization expenses related to goodwill and other intangible assets and other charges to operations that may materially adversely affect the Company's business, financial condition and results of operations. Although management expects to carefully analyze any such opportunity before committing the Company's resources, there can be no assurance that the Company will be successful in making acquisitions, that the prices and terms of any acquisitions will be favorable to the Company, that any completed acquisition will result in long-term benefits to the Company or that the Company's management will be able to manage effectively the resulting businesses. Competition The Company's competitive position depends primarily on the technological development of its products, as well as on service, quality and price. Some of the Company's competitors are major corporations, or divisions of major corporations, which have greater financial, technological and personnel resources than the Company and may represent significant competition for the Company. Such companies may succeed in developing technologies and products that are more effective or less costly than those that may be developed by the Company, and such companies may be more successful than the Company in developing, manufacturing and marketing products. There can be no assurance that the Company will be able to compete successfully in the future or that developments by others will not render the Company's products obsolete or non-competitive or that the Company's customers will not choose to use competing technologies or products. Further, the entry of new competitors into the markets for the Company's products could cause downward pressure on the prices of such products and a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Proprietary Technology Although the Company does not believe that its success is dependent upon the protection offered by patents, the Company possesses many patents that relate to its technology. There can be no assurance that the steps taken by the Company to protect its proprietary technology will be adequate to prevent misappropriation of its technology by third parties or will be adequate under the laws of some foreign countries, which may not protect the Company's proprietary rights to the same extent as do laws of the United States. In addition, there remains the possibility that others will "reverse engineer" the Company's products in order to determine their method of operation and introduce competing products or that others will develop competing technology independently. Any such adverse circumstances could have a material adverse effect on the Company's business, financial condition and results of operations. Further, some of the markets in which the Company competes are characterized by the existence of a large number of patents and frequent litigation for financial gain that is based on patents with broad, and often questionable, application. As the number of its products increases, the markets in which its products are sold expands, and the functionality of those products grows and overlaps with products offered by competitors, the Company believes that it may become increasingly subject to infringement claims. Although the Company does not believe any of its products or proprietary rights infringe the rights of third parties, there can be no assurance that infringement claims will not be asserted against the Company in the future or that any such claims will not require the Company to enter into royalty arrangements or result in costly litigation. 15 16 The Company also relies upon trade secrets, technical know-how and continuing technological innovation to develop and maintain its competitive position. The Company typically requires its employees, consultants and advisors to execute confidentiality and assignment of invention agreements in connection with their employment, consulting or advisory relationships with the Company. There can be no assurance, however, that these agreements will not be breached or that the Company will have adequate remedies for any breach. Furthermore, there can be no assurance that competitors will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to the Company's proprietary technology, or that the Company can meaningfully protect its rights in unpatented proprietary technology. Several of the Company's management and scientific personnel were formerly associated with competitive companies. In some cases, these individuals are conducting research in similar areas with which they were involved prior to joining the Company. As a result, the Company, as well as these individuals, could be subject to claims of violation of trade secrets and similar claims. The Company intends to vigorously protect and defend its intellectual property. Costly and time-consuming litigation brought by the Company may be necessary to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, or to determine the enforceability, scope and validity of the proprietary rights of others. Potential Product Liability Exposure and Insurance The Company's products, particularly its Medical Products, may expose the Company to product liability claims, and there can be no assurance that the Company will not experience material product liability losses in the future. The Company currently has product liability insurance coverage for the commercial sale of its products. However, a successful claim brought against the Company in excess of available insurance coverage, or a claim or product recall that results in significant adverse publicity against the Company, may have a material adverse effect on the Company's business, financial condition and results of operations. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk related to its revolving credit facility as discussed in the Notes to the Consolidated Financial Statements. The interest on the revolving credit facility is subject to fluctuations in the market. The Company does not believe such market risk is material to the Company's consolidated financial statements. The Company operates in foreign countries which exposes it to market risk associated with foreign currency exchange rate fluctuations; however, such risk is immaterial at this time to the Company's consolidated financial statements. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Financial Statements and Financial Statement Schedule filed as a part of this Form 10-K are listed on the Index to Consolidated Financial Statements and Consolidated Financial Statement Schedule on page 19. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 16 17 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See the information at the end of Part I of this report and the information contained in the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders (the "Proxy Statement") under the captions "Election of Directors" and "Share Ownership," which information is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION See the information contained in the Proxy Statement under the captions "Election of Directors - Director Compensation" and "Executive Compensation" which information is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the information contained in the Proxy Statement under the heading "Share Ownership," which information is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OFC, a wholly-owned subsidiary, has sales, marketing, administrative and manufacturing facilities in Natick, Massachusetts and additional manufacturing facilities in Keene, New Hampshire. OFC leases approximately 25,000 square feet of office space from a realty trust of which the sole beneficiary is John F. Blais, Jr., the former majority stockholder of OFC and currently its president and a director of the Company. The lease, which expires in December 2006, provides for monthly payments of $19,500 subject to annual adjustment to reflect changes in the fair market value of the real estate. The Company is responsible for certain insurance, utilities and other operating costs. Rents paid to the realty trust during fiscal 1998 were approximately $179,000. 17 18 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) Documents filed as a part of this Form 10-K 1. Financial Statements. The Financial Statements filed as a part of this Form 10-K are listed on the Index to Consolidated Financial Statements and Consolidated Financial Statement Schedule on page 19. 2. Financial Statement Schedule. The Financial Statement Schedule filed as a part of this Form 10-K is listed on the Index to Consolidated Financial Statements and Consolidated Financial Statement Schedule on page 19. 3. Exhibits. The Exhibits filed as a part of this Form 10-K are listed on the Index to Exhibits on page 40. (b) The Registrant filed a Form 8-K, dated August 5, 1998, reporting the financial results for the third quarter of fiscal year 1998 and announced a reorganization plan, as reported in its press release dated July 23, 1998. 18 19 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE ITEM 14(a) Consolidated Financial Statements: Report of Independent Auditors 20 Consolidated Balance Sheets at September 30, 1998 and 1997 21 Consolidated Statements of Operations for the fiscal years ended September 30, 1998, 1997 and 1996 22 Consolidated Statements of Changes in Shareholders' Equity for the fiscal years ended September 30, 1998, 1997 and 1996 23 Consolidated Statements of Cash Flows for the fiscal years ended September 30, 1998, 1997 and 1996 24 Notes to Consolidated Financial Statements 25 Schedule: II. Valuation and qualifying accounts for the fiscal years ended September 30, 1998, 1997 and 1996 38
Schedules Omitted: All other schedules are omitted as they are not applicable or the information is shown in the financial statements or notes thereto. 19 20 REPORT OF INDEPENDENT AUDITORS The Board of Directors Galileo Corporation We have audited the accompanying consolidated balance sheets of Galileo Corporation as of September 30, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended September 30, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Galileo Corporation at September 30, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. The accompanying consolidated financial statements have been prepared assuming Galileo Corporation will continue as a going concern. As more fully described in Note 2, the Company has incurred recurring operating losses and has a working capital deficiency. In addition, the Company has not complied with certain covenants of loan agreements with a bank. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. As discussed in Note 4 to the consolidated financial statements, during the first quarter of fiscal 1997 the Company adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." Providence, Rhode Island December 22, 1998 ERNST & YOUNG LLP 20 21 GALILEO CORPORATION CONSOLIDATED BALANCE SHEETS
September 30, (Dollars in thousands, except per share data) 1998 1997 - ------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 710 $ 9,546 Accounts receivable, less allowance of $1,265 and $244, respectively 7,952 5,639 Inventories 8,828 6,614 Other current assets 1,092 187 ---------------------- Total current assets 18,582 21,986 Property, plant and equipment, net 16,128 15,372 Excess of cost over the fair value of assets acquired, net 19,396 3,873 Other assets, net 1,548 1,496 ---------------------- Total assets $ 55,654 $ 42,727 ====================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable in default $ 11,846 $ -- Current portions of other notes payable 1,458 -- Accounts payable 4,283 3,004 Accrued liabilities 4,400 2,665 ---------------------- Total current liabilities 21,987 5,669 Other liabilities 1,008 956 Commitments & contingencies (Note 9) Shareholders' equity: Common stock, $0.01 par value, 36,000,000 shares authorized, 8,052,786 and 6,872,205 issued and outstanding, respectively 81 69 Additional paid-in capital 52,176 42,951 Accumulated deficit (19,545) (6,918) Accumulated other comprehensive income (loss) (53) -- ---------------------- Total shareholders' equity 32,659 36,102 ---------------------- Total liabilities and shareholders' equity $ 55,654 $ 42,727 ======================
See accompanying notes. 21 22 GALILEO CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, (Dollars in thousands, except per share data) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------ Net sales $ 44,306 $ 34,117 $ 42,634 Cost of sales 33,012 22,363 23,706 ------------------------------------ Gross profit 11,294 11,754 18,928 Engineering expenses 5,790 5,282 4,018 Selling and administrative expenses 15,387 9,230 9,698 Provision for uncollectible customer account 569 -- -- Reduction in the carrying value of certain long-lived assets 1,525 2,226 -- Reorganization costs -- 6,872 -- ------------------------------------ 23,271 23,610 13,716 ------------------------------------ Operating profit (loss) (11,977) (11,856) 5,212 Interest income (expense), net (524) 745 685 Other income (expense), net 162 90 (281) ------------------------------------ Income (loss) before income taxes and extraordinary gain (12,339) (11,021) 5,616 Provision for income taxes 288 163 89 ------------------------------------ Income (loss) before extraordinary gain (12,627) (11,184) 5,527 Extraordinary gain on receipt and sale of stock, net of taxes -- -- 158 ------------------------------------ Net income (loss) $(12,627) $(11,184) $ 5,685 ==================================== Net income (loss) per common share - basic: Before extraordinary gain $ (1.65) $ (1.63) $ .81 Effect of extraordinary gain -- -- .02 ------------------------------------ Net income (loss) per common share - basic $ (1.65) $ (1.63) $ .83 ==================================== Net income (loss) per common share - assuming dilution: Before extraordinary gain $ (1.65) $ (1.63) $ .80 Effect of extraordinary gain -- -- .02 ------------------------------------ Net income (loss) per common share - assuming dilution $ (1.65) $ (1.63) $ .82 ====================================
See accompanying notes. 22 23 GALILEO CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Retained Additional Earnings Other Total Common Paid-In (Accumulated Comprehensive Shareholders' (Dollars in thousands) Stock Capital Deficit) Income (Loss) Equity - ------------------------------------------------------------------------------------------------------------------------- Balance, September 30, 1995 $ 68 $ 42,285 $ (1,419) $ -- $ 40,934 Net income -- -- 5,685 -- 5,685 Exercise of stock options and related tax benefit -- 409 -- -- 409 --------------------------------------------------------------------- Balance, September 30, 1996 68 42,694 4,266 -- 47,028 Net loss -- -- (11,184) -- (11,184) Exercise of stock options and related tax benefit 1 257 -- -- 258 --------------------------------------------------------------------- Balance, September 30, 1997 69 42,951 (6,918) -- 36,102 -------- Net loss -- -- (12,627) -- (12,627) Currency translation adjustment -- -- -- (53) (53) -------- Comprehensive income (loss) (12,680) -------- Exercise of stock options and grants and -- 243 -- -- 243 related tax benefit Issuance of 1,154,258 shares of common stock in connection with acquisition 12 8,982 -- -- 8,994 --------------------------------------------------------------------- Balance, September 30, 1998 $ 81 $ 52,176 $(19,545) $ (53) $ 32,659 =====================================================================
See accompanying notes. 23 24 GALILEO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, (Dollars in thousands) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $(12,627) $(11,184) $ 5,685 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 3,388 2,942 3,311 Provision for uncollectible customer account 569 -- -- Provision for other uncollectible accounts receivable 764 100 198 Write down of inventory to fair market value 2,921 -- -- Reorganization costs -- 6,451 -- Reduction in carrying value of long-lived assets 1,525 2,226 -- Extraordinary gain on receipt and sale of stock -- -- (319) Other adjustments, net -- 100 538 Increase (decrease) in cash from changes in operating assets and liabilities: Accounts receivable (290) (129) 1,479 Inventories (1,935) (1,083) 356 Accounts payable (1,206) 1,579 (1,618) Accrued liabilities 1,527 (114) 545 Other changes, net (88) (267) (157) ------------------------------------ Total adjustments 7,175 11,805 4,333 ------------------------------------ Net cash provided (used) by operating activities (5,452) 621 10,018 Cash flows from investing activities: Acquisitions, net of cash acquired (10,290) (5,500) -- Capital expenditures (2,870) (3,828) (3,069) Proceeds from sale of assets -- -- 2,418 Other investing activities, net -- (115) 403 ------------------------------------ Net cash used in investing activities (13,160) (9,443) (248) Cash flows from financing activities: Borrowings on note payable in default 11,846 -- -- Payment of other notes payable (2,260) (542) -- Proceeds from issuance of common stock 243 258 409 Other financing activity, net -- -- (107) ------------------------------------ Net cash provided (used) by financing activities 9,829 (284) 302 ------------------------------------ Effect of exchange rate changes on cash (53) -- -- ------------------------------------ Net increase (decrease) in cash and cash equivalents (8,836) (9,106) 10,072 Cash and cash equivalents at beginning of year 9,546 18,652 8,580 ------------------------------------ Cash and cash equivalents at end of year $ 710 $ 9,546 $ 18,652 ==================================== Supplemental cash flow information: Interest payments $ 521 $ -- $ 60 Income tax payments 86 227 132
Supplemental schedule of noncash investing and financing activities: The Company made certain acquisitions during fiscal 1998 and 1997 as described more fully in Note 3 to the Notes to the Consolidated Financial Statements. In conjunction with the acquisitions, liabilities were assumed as follows: Fair value of assets acquired $ 26,515 $ 5,500 $ -- Gross cash paid 11,003 5,500 -- Fair value of Company Common Stock issued 8,994 -- -- ------------------------------------ Liabilities assumed $ 6,518 $ -- $ -- ====================================
See accompanying notes. 24 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Thousands, Except Per Share Data) 1. ACCOUNTING POLICIES ORGANIZATION - Galileo Corporation (the "Company" or "Galileo") along with its wholly-owned subsidiary, Optical Filter Corporation ("OFC"), develops, manufactures and markets a variety of fiberoptic and electro-optic products that transmit, sense or intensify light or images. The Company's core competency in glass sciences is fundamental to developing and manufacturing its products. The Company's products include medical, scientific, optical components and systems and office product applications. Leisegang Medical, Inc. ("Leisegang Medical"), a wholly-owned subsidiary, develops, manufactures, and markets women's health-related medical products. The Company's current operations are primarily in the United States but include operating subsidiaries in Canada and Germany. CONSOLIDATION - The consolidated financial statements include the accounts of Galileo Corporation and its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated. REVENUE RECOGNITION AND CREDIT RISK - The Company records a sale and recognizes revenue when title passes to the customer or when services are performed in accordance with contracts. The Company extends credit to customers based on evaluating financial condition, and collateral is generally not required. Credit losses are provided for in the financial statements and include, in fiscal year 1998, a provision of $569, net of recoveries, for an uncollectible customer account. Export sales to various foreign customers amounted to approximately $9,901, $5,355 and $8,716 in fiscal years 1998, 1997 and 1996, respectively. One customer represented 13% of the accounts receivable balance at September 30, 1998. CASH EQUIVALENTS - The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. INVENTORIES - Inventories are valued at the lower of cost (first in, first out) or market. Inventory costs include all direct manufacturing costs and applied overhead. PROPERTY, PLANT AND EQUIPMENT - Depreciation is computed using either the straight-line or accelerated methods. Estimated useful lives are as follows: Buildings and improvements 10-30 years Machinery, equipment and furniture 3-10 years
ENGINEERING EXPENSE - Engineering expense includes research and development, engineering support of manufacturing operations relating to problem solving and process improvement, the preparation of bids and proposals and sales support of customers. The amounts charged for research and development were approximately $5,239, $4,727, and $3,220 for fiscal years 1998, 1997 and 1996, respectively. NET INCOME PER COMMON SHARE - In 1997, the Financial Accounting Standards Board issued Statement ("SFAS") No. 128, "Earnings per Share." SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate restated, to conform to SFAS No. 128. STOCK-BASED COMPENSATION - The Company grants stock options for a fixed number of shares of Common Stock to employees and directors with an exercise price equal to the fair value of the shares at the date of the grant. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and, accordingly, recognizes no compensation expense relating to stock options. 25 26 GOODWILL - The excess of cost over the fair value of assets acquired is being amortized on a straight-line basis over a period of 30 years. Accumulated amortization amounted to $537 and $77 as of September 30, 1998 and 1997, respectively. COMPREHENSIVE INCOME - On October 1, 1997, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes new rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires items such as foreign currency translation adjustments to be included in comprehensive income. However, the adoption of this Statement had no impact on the Company's net loss or shareholders' equity. SEGMENT REPORTING - In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographical areas, and major customers. The Company will adopt the new requirements retroactively in fiscal year 1999. Management has not completed its review of SFAS No. 131, but does not anticipate that the adoption of this statement will have a significant effect on the Company's reported segments. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. RECLASSIFICATION - Certain reclassifications have been made to amounts reported in previous years in order to conform to the current year presentation. 2. GOING CONCERN The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. During 1997 and continuing into 1998, the Company experienced a number of developments which have had a materially adverse effect on the results of operations. As is discussed more fully below, the Company has incurred recurring operating losses, has a working capital deficiency and is in violation of certain covenants of loan agreements with a bank. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with respect to these matters are described below. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. ADVERSE DEVELOPMENTS The more significant developments that have adversely affected the economic performance of the Company are as follows: LOSS OF SIGNIFICANT CUSTOMER - In February 1997, the Company received written notification from its then largest customer, Xerox Corporation ("Xerox"), that Xerox had developed internal production capabilities for dicorotron assemblies and would no longer purchase these assemblies from the Company. As a result, sales to Xerox decreased from $20,350 for the fiscal year ended September 30, 1996 to $6,345 and $0 in the fiscal years ended September 30, 1997 and 1998, respectively. Reduced revenues from this product adversely affected the Company's financial performance in 1997. See Note 4 below for additional discussion. 26 27 FOREIGN SHIPMENT RESTRICTIONS - The Company experienced reduced revenues from its Scientific Detector and Spectroscopy Products during fiscal year 1998 due to foreign shipment restrictions placed on the Company's microchannel plate products by the U.S. Government. Prior to 1998, these products were shipped to foreign customers under licenses granted by the U.S. Department of Commerce. During the third quarter of fiscal 1998, the U.S. Department of Defense restricted foreign shipments pending a jurisdictional ruling of licenses between these two departments. This ruling will decide whether any future licenses will be granted. ASIAN ECONOMIC CRISIS - Revenues during the last two quarters of 1998 were negatively impacted by the economic crisis in Far East Asia. Shipments of the Company's detector products to semiconductor capital equipment manufacturers were significantly reduced as a result of this economic downturn. MEDICAL ENDOSCOPE PRODUCTS - Revenues for Medical Endoscope Products during the last two quarters of 1998 were adversely affected by the failure to complete a marketing relationship for an application-specific endoscope developed by the Company. Also, orders of existing products were reduced as a result of lower-than-expected product requirements by the Company's marketing partners. These conditions resulted in the Company's decision to terminate its Medical Endoscope Products business. LOAN AGREEMENT - As a result of continuing losses experienced by the Company, the Company's liquidity position deteriorated significantly. To provide the Company with working capital and to fund acquisition opportunities, the Company entered into a $14,000 revolving credit facility with a bank. See further discussion in Note 5. Currently, the Company is in violation of certain financial and other covenants in connection with this loan and the bank has the right to accelerate collection. Accordingly, the outstanding balance of approximately $11,846 has been classified as short-term in the consolidated balance sheet as of September 30, 1998. MANAGEMENT'S PLANS AND MITIGATING FACTORS As a result of the aforementioned, the Company has taken a number of steps to alleviate this financial condition, which are summarized as follows: PRIVATE PLACEMENT - On December 22, 1998, the Company announced the signing of an agreement with an investment entity formed by the principals of Andlinger & Company, Inc. under which that entity has agreed to purchase for $6,000 in a private transaction 2,000,000 shares of the Company's common stock, together with warrants for an additional 2,000,000 shares. The warrants are exercisable for a period of 7 1/2 years at a price of $1.50 per share, subject to antidilution adjustment. Consummation of the transaction is subject to a number of conditions, including obtaining waivers and amendments under the Company's bank loan agreement and the issuance of a waiver by The Nasdaq Stock Market of the requirement for shareholder approval of the transaction. SALE OF NON-STRATEGIC ASSETS - Subsequent to September 30, 1998, the Company decided to sell certain assets deemed to be non-strategic to the on-going business operations, including assets associated with the Company's Medical Endoscopes and Telecommunications business. The Company is also evaluating the possibility of a sale and leaseback transaction of the Sturbridge, Massachusetts facility. There can be no assurance whether or how quickly the Company will reach an agreement for the sale of any of the non-strategic assets. COST REDUCTIONS - During the fourth quarter of fiscal 1998, the Company terminated its Medical Endoscope Products business. As a result, the Company instituted a reduction in force of 61 employees during fiscal year 1998. Subsequent to September 30, 1998, the Company terminated its Telecommunications business, and further reduced the work force by 57 employees. These reductions are expected to result in annualized savings of approximately $4,446. The Company has suspended all investments for these businesses and related activities. In connection with these actions, the Company incurred one-time charges of approximately $4,446 for the year ended September 30, 1998 for costs to reduce the carrying value of certain equipment ($1,525) and inventories ($2,921) to estimated fair market value. 27 28 While the Company's management believes that it has taken the appropriate steps to alleviate the liquidity issue, certain of these steps are contingent upon future events, some of which are not within the Company's control. These include the satisfaction of conditions to the closing of the private placement and the restructuring or refinancing of the Company's bank loans. Actual results may differ from management's expectations. 3. ACQUISITIONS (a) Les Entreprises Galenica, Inc. In February 1998, the Company acquired all of the outstanding shares of Les Entreprises Galenica, Inc., ("Galenica") for approximately $3,458 in cash. Galenica manufactures and markets a broad range of disposable, single-use vaginal specula, a frequently used diagnostic instrument by OB/GYN physicians, clinics and hospitals. The acquisition was accounted for using the purchase method of accounting. The purchase price allocations are preliminary, and the resulting excess of the cost over the fair value of net assets acquired of $2,799 is being amortized over 30 years. (b) OFC Corporation In January 1998, the Company acquired all of the outstanding shares of OFC Corporation ("OFC") for approximately $6,518 in cash and 1,154,258 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 coatings. The acquisition was accounted for using the purchase method of accounting. The purchase price allocations are preliminary, and the resulting excess of the cost over the fair value of net assets acquired of $12,536 is being amortized over 30 years. (c) Leisegang Feinmechanik-Optik GmbH & Co., KG ("Leisegang GmbH") In October 1997, the Company acquired all of the outstanding shares of Leisegang GmbH for approximately $2,250 in cash. Leisegang GmbH was a privately held manufacturer and distributor of colposcopes and accessories. These diagnostic products are sold to OB/GYN physicians' offices and hospitals primarily through a worldwide network of sales representatives and distributors. The acquisition was accounted for using the purchase method of accounting. The purchase price allocations are preliminary, and the resulting excess of the cost over the fair value of the net assets acquired of $725 is being amortized over 30 years. Included in the current portion of notes payable in the accompanying consolidated balance sheet as of September 30, 1998 is $1,223 associated with the final acquisition payment made in October 1998. Assuming that these acquisitions had been made as of the beginning of fiscal 1998 and 1997, results for the Company on a pro forma basis would have been net sales of $49,236 and $49,704 and a net loss of $12,526 and $10,510, or a loss of $1.56 and $1.31 per share for the year ended September 30, 1998 and 1997, respectively. (d) Sani-Spec(R) Product Line In March 1997, the Company acquired the Sani-Spec(R) product line for $5,500 in cash. The Sani-Spec(TM) product line includes a comprehensive suite of women's health-related products used by OB/GYN physicians, clinics and hospitals including Sani-Spec single-use vaginal specula, Sani-Scope(TM) anoscopes, Spec-Light(TM) speculum lights and Pap Smear Kits. The acquisition was accounted for using the purchase method of accounting. The excess of the cost of the net assets acquired amounted to $3,950 and is being amortized over 30 years. Assuming that the acquisition had been made as of the beginning of fiscal 1996, pro forma sales, net loss and net loss per share would have been $35,659, a loss of $10,971 and a loss of $1.60, for fiscal 1997 and sales, net income and net income per share would have been $46,334, $6,197 and $0.89, respectively for fiscal 1996. 28 29 (e) Leisegang Medical, Inc. ("Leisegang Medical") In August 1996, the Company acquired Leisegang Medical by issuing 269,913 shares of its common stock in exchange for all of the outstanding common stock of Leisegang Medical. The acquisition was accounted for as a pooling of interests with Leisegang Medical becoming a wholly-owned subsidiary of the Company. Accordingly, the Company's consolidated financial statements have been restated to include the accounts and operations of Leisegang Medical for all periods prior to the merger. Separate results of the merged entities for fiscal year 1996 are as follows: Net sales: Galileo $ 36,438 Leisegang 6,196 -------- Total $ 42,634 ======== Extraordinary gain (net of taxes): Galileo $ 158 Leisegang -- -------- Total $ 158 ======== Net income: Galileo $ 6,124 Leisegang 250 Merger and acquisition expenses (689) -------- Total $ 5,685 ========
In connection with the acquisition, $689 of acquisition costs and expenses, consisting primarily of legal, accounting and broker fees, were incurred and charged to expenses in the fourth quarter of fiscal 1996. 4. NONRECURRING CHARGES (a) Impairment of Long-Lived Assets The consolidated statement of operations for the year ended September 30, 1998, includes nonrecurring, pretax, non-cash charges of approximately $1,525, or $.20 per share, in connection with the Company's termination of its Medical Endoscope Products business and certain portions of its Scientific Detector and Remote Spectroscopy Products business. For the year ended September 30, 1997, the Company incurred nonrecurring, pretax, non-cash charges of $2,226, or $.32 per share, which reduced certain robotic assembly equipment for the Company's Medical Products business to its estimated fair market value. In the first quarter of fiscal 1997, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement requires impairment losses to be recognized for long-lived assets when indicators of impairment are present and the fair market values of assets are estimated to be less than carrying amounts. 29 30 (b) Loss of a Major Customer and Related Reorganization As discussed in Note 2 above, in February 1997, the Company received written notification from its then largest customer, Xerox, that it would no longer purchase certain assemblies from the Company. On March 12, 1997, the Company announced a reorganization plan in response to this lost business. In connection with this plan, the Company recorded a nonrecurring charge of $6,872, or $1.01 per share, in the three months ended March 31, 1997. The charge included a $6,451 non-cash provision for the impairment of related long-lived assets ($3,946), other assets ($1,238) and inventory ($1,267), and a $421 provision for related severance and other obligations. Sales to Xerox amounted to $6,345 and $20,350 for the fiscal years ended September 30, 1997 and 1996, respectively. The Company completed final shipments to Xerox during the second quarter of fiscal 1997. 5. REVOLVING CREDIT FACILITY In January 1998, the Company entered into a revolving credit facility with a bank (as amended in August 1998, the "Loan Agreement"). The Loan Agreement provides for a maximum commitment during a certain revolving credit period of $14,000 with interest payable on a monthly basis at the bank's base rate plus 1% per year (9.25% as of September 30, 1998). The loan, which is secured by substantially all assets of the Company, also includes provisions which require the Company to remit all of the net cash proceeds of assets sales (as defined) to the bank. The maximum commitment will be reduced by an amount equal to the net cash proceeds of asset sales and may not be reinstated. The then outstanding balance of the loan is due and payable in full on December 31, 1999. The outstanding balance of this facility as of September 30, 1998 was $11,846. The carrying value of this debt as of September 30, 1998 approximated its fair market value. The Loan Agreement requires a $100 amendment fee payable to the bank on January 2, 1999 that is included in accrued liabilities as of September 30, 1998 in the accompanying consolidated financial statements. The Loan Agreement contains certain covenants and requirements concerning financial ratios and other indebtedness, as well as limitations regarding the payment of dividends. As is discussed more fully in Note 2, the Company is in violation of certain of these covenants as of September 30, 1998. As a result, the loan balance of $11,846 is recorded as note payable in default and classified as a short-term liability in the accompanying consolidated financial statements as of September 30, 1998. 6. INVENTORIES Inventories consist of the following:
September 30, --------------------- 1998 1997 ------ ------ Finished goods $5,223 $2,755 Work-in-progress 1,819 660 Raw materials 1,786 3,199 ------ ------ $8,828 $6,614 ====== ======
30 31 7. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consist of the following:
September 30, ---------------------- 1998 1997 -------- -------- Land, buildings and improvements $ 19,587 $ 18,616 Machinery, equipment and furniture 28,197 24,235 Capital projects in process 506 324 -------- -------- 48,290 43,175 Less: accumulated depreciation (32,162) (27,803) -------- -------- Property, plant and equipment, net $ 16,128 $ 15,372 ======== ========
8. RETIREMENT PLANS PENSION PLAN - The Company has a noncontributory pension plan covering substantially all employees who joined the Company prior to January 1, 1995. None of the employees of companies acquired subsequent to this date are eligible to participate in the Pension Plan. The Plan provides pension benefits based upon years of service and average compensation during the five years preceding retirement. The Company's policy is to fund the maximum amount that can be deducted for federal income tax purposes. Plan assets are invested primarily in U.S. Government Agency obligations, equity securities of U.S. based companies, corporate bonds and mutual funds. Net pension cost consists of:
Years ended September 30, 1998 1997 1996 ----- ----- ----- Service cost - benefits earned during the period $ 196 $ 235 $ 254 Interest cost on projected benefit obligations 537 517 490 Actual return on assets (769) (674) (317) Net amortization and deferral (52) (51) (404) ----- ----- ----- $ (88) $ 27 $ 23 ===== ===== =====
The assumptions used in calculating pension expense include discount rates of 8% and expected long-term rates of return on Plan assets of 9%. In addition, the rate of increase in compensation levels was assumed to be 5% for 1998, 1997 and 1996. As a result of reductions in force at its Sturbridge, Massachusetts facility during fiscal year 1998, the Company recognized a curtailment gain of approximately $179. In addition, during fiscal 1998, the Company incurred a charge of approximately $72 for special termination benefits above and beyond what was required by the Plan. The following table sets forth the Plan's funded status and the amounts recognized in the Company's Consolidated Balance Sheets at September 30, 1998 and 1997, for the Plan:
Years ended September 30, 1998 1997 ------- ------- Actuarial present value of benefit obligations: Vested benefit obligations $(6,410) $(5,108) ======= ======= Accumulated benefit obligations $(6,589) $(5,351) ======= =======
31 32 Projected benefit obligations for services rendered to date $(8,066) $(6,831) Plan assets at fair value 8,950 8,707 ------- ------- Plan assets in excess of projected benefit obligations 884 1,876 Effect of plan curtailment 179 -- Effect of special termination benefits (72) -- Unrecognized prior service cost (60) (66) Unrecognized net gain/(loss) 363 (665) Unrecognized net asset (341) (388) ------- ------- Prepaid pension costs included in other assets $ 953 $ 757 ======= =======
TAX DEFERRED SAVINGS PLAN - The Company has a tax deferred savings plan under Section 401(k) of the Internal Revenue Code under which, subject to certain limitations, each eligible employee may contribute up to 15% of gross wages per year. The Company matches 50% of the first 6% of employee contributions. Company contributions to the Plan were approximately $131, $185 and $146 in fiscal years 1998, 1997 and 1996, respectively. OTHER RETIREMENT PLANS - In addition to the Company's defined benefit pension plan, the Company sponsors a defined benefit postretirement medical and life insurance plan. Employees who retire from the Company and who have attained age 65 with 15 years of service (10 years of service for employees hired before October 1, 1989) and who were hired prior to October 1, 1993, are eligible. Employees who retired prior to October 1, 1989, are not required to contribute; employees who retired after October 1, 1989, contribute a portion of the cost beyond a Company subsidy. The Plan is not funded. The actuarial and recorded liabilities for the Plan were as follows:
Years ended September 30, 1998 1997 ----- ----- Accumulated postretirement benefit obligation: Retirees $ 434 $ 402 Active plan participants 146 150 ----- ----- Accumulated postretirement benefit obligation 580 552 Plan assets at fair value -- -- ----- ----- Unfunded accumulated benefit obligation in excess of plan assets 580 552 Unrecognized net gain 85 113 ----- ----- Accrued postretirement benefit cost included in other liabilities $ 665 $ 665 ===== ===== Net periodic postretirement benefit cost in 1998 and 1997 includes the following components: Service cost $ 5 $ 6 Interest cost 41 39 Net amortization of unrecognized net gain (7) -- ----- ----- Net periodic postretirement benefit cost $ 39 $ 45 ===== =====
For measurement purposes, an 8.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for fiscal year 1998. The rate was assumed to decrease gradually down to 6.0% for fiscal year 2003 and remain at that level thereafter. Increasing the assumed health care cost trend rate one percentage point in each year would increase the accumulated postretirement benefit obligation as of September 30, 1998, by $29 (or by 5%) and the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for fiscal year 1998 by $3 (or by 8%). 32 33 The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 6.75%. As the plan is unfunded, no assumption was needed as to the long-term rate of return on assets. 9. COMMITMENTS AND CONTINGENCIES LEGAL PROCEEDINGS - The Company is a defendant in four class action law suits filed in Federal District Court in the Commonwealth of Massachusetts by stockholders of the Company alleging violations of the federal securities laws based on alleged misleading statements regarding the Company's financial performance and other matters. The Company believes these lawsuits are without merit and intends to defend them vigorously. EQUIPMENT ACQUISITION AND LEASE AGREEMENT - In May 1998, the Company entered into Equipment Acquisition and Master Lease Agreements (collectively the "Expansion Lease") with a leasing company for the expansion of certain manufacturing capabilities at the Company's wholly-owned subsidiary OFC. Under the terms of the Expansion Lease, the leasing company has agreed to fund, and the Company has agreed to lease back, certain manufacturing equipment. The leasing company will advance not more than $2,600 on or before December 31, 1998. The Company will commence lease payments in January 1999 at a rate equal to $12.70 per $1,000 of equipment cost financed. Such payments shall be made over a period of 96 months with an early buy-out clause after 84 months at the Company's option. Such lease will be accounted for as an operating lease. The Company has also entered into a number of operating leases, including two from related parties, for office and manufacturing facilities located primarily in the United States as well as in Canada and Germany. Rent expense paid to related parties amounted to $192 during fiscal year 1998. Future minimum lease payments under operating leases as of September 30, 1998 are as follows: 1999 $ 974 2000 581 2001 490 2002 383 2003 and thereafter 1,241 ------ Total minimum lease obligations $3,669 ======
Total rental expense for all operating leases was approximately $788, $222 and $246 in fiscal years 1998, 1997 and 1996, respectively. 10. COMMON STOCK EMPLOYEE STOCK OPTION PLAN - Under the Company's 1991 Stock Option Plan, which succeeded the 1981 Stock Option Plan, the Plan Administrative Committee of the Board of Directors may grant options to purchase common stock to officers and key employees of the Company and its subsidiaries. The stock options are exercisable at a price not less than the fair market value of the common stock on the date of grant. The Plan also provides that the Committee may issue stock appreciation rights. The exercise price of the stock appreciation rights may not be less than the fair market value of the common stock on the date of grant or if issued with a stock option, the exercise price of the related option. Stock appreciation rights provide for the issuance of common stock, or the payment of cash, or a combination of both equal to the difference between the exercise price of the stock appreciation right and the fair market value of the common stock on the date of exercise. 33 34 The following table summarizes stock option plan activity:
Weighted Average Aggregate Shares Price Price ------ ----- ----- Balance, September 30, 1995 252,000 $ 6.02 $ 1,518 Granted 102,000 14.91 1,521 Exercised (69,000) 5.52 (381) Forfeited (6,000) 16.17 (97) ------- -------- Balance, September 30, 1996 279,000 9.18 2,561 Granted 267,000 8.17 2,182 Exercised (33,000) 4.76 (157) Forfeited (45,000) 9.38 (422) ------- -------- Balance, September 30, 1997 468,000 8.90 4,164 Granted 211,000 10.68 2,253 Exercised (5,000) 5.20 (26) Forfeited (42,000) 9.98 (419) ------- -------- Balance, September 30, 1998 632,000 $ 9.45 $ 5,972 ======= ========
As of September 30, 1998, 127,100 option shares were available for grant under the 1991 Plan. As of September 30, 1998, 197,125 options, with a weighted average fair value of $8.36 per share, were exercisable at prices ranging from $3.63 to $30.38, aggregating approximately $1,648 under the 1981 and 1991 Plans. The remaining outstanding options are exercisable on various dates through 2001 at exercise prices ranging from $3.63 to $30.38. The weighted-average remaining contractual life of outstanding options is 8.0 years. DIRECTOR STOCK OPTION PLAN - The Company may grant up to an aggregate of 200,000 shares of common stock under the 1996 Director Stock Option Plan (formerly the 1989 Director Stock Option Plan). Under the plan, the Company grants each non-employee director options to purchase 2,500 shares of common stock on the director's election at each Annual Meeting of Shareholders of the Company. Options become exercisable one year after grant or earlier upon the death or disability of the director and upon a change in control of the Company, as defined. No option may be exercised more than one year after the director's termination as a director for any reason. The option is exercisable at the fair market value of the common stock on the date of grant. Under the Director Stock Option Plan, options to purchase 12,000 shares of common stock, at a price of $10.75 per share, were granted in fiscal year 1998, and as of September 30, 1998, 43,750 shares were exercisable at a weighted average fair value of $12.87 per share, aggregating approximately $563. Options covering 140,000 shares remain available for grant under the Plan. The Company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for the 1991 Plan and the Director Stock Option Plan. Accordingly, no compensation expense has been recognized in the consolidated financial statements. Assuming compensation expense for options granted under these Plans after September 30, 1995 had been determined based on the estimated fair value at the grant dates for awards under the Plan, the Company's pro forma net loss and loss per share would have been $13,107 and $1.71, respectively for fiscal 1998 and $11,439 and $1.67, respectively, for fiscal 1997. The Company's pro forma net income and earnings per share would have been $5,602 and $.81, respectively for fiscal 1996. The effects of expensing the estimated fair value of stock options on pro forma net income and earnings per share are not necessarily representative of the effects on reported net income for future years because of the potential for issuance of additional stock options in future years. 34 35 The fair value of options granted after September 30, 1995, under these Plans, was estimated at the date of grant using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for fiscal 1998, 1997 and 1996, respectively: risk-free interest rates of 4.9%, 6.0% and 6.45%; volatility factors of the expected market price of the Company's common stock of 89%, 79% and 52%; and a weighted-average expected life of the option of 5.0 years for all three years. The Company did not assume a dividend yield for fiscal 1998, 1997 or 1996. As of September 30, 1998, 267,100 shares of Company common stock were reserved for issuance under all stock option plans. EMPLOYEE STOCK PURCHASE PLAN - On January 1, 1997, the Company amended the Employee Stock Purchase Plan (the "Plan"). Under the revised Plan, 100,000 shares of Company Common Stock were made available for purchase by eligible employees. The purchase price per share of Common Stock under the Plan may not be less than 85% of the lower of its fair market value at the beginning of an offering period or the applicable exercise date, payable though payroll deductions. Since January 1, 1997, 26,836 shares have been purchased at prices ranging from $4.57 to $10.09 per share. At September 30, 1998, there were 73,164 shares available for issuance under the Plan. Prior to being amended, the Company had a Common Stock purchase plan under which it contributed up to 37.5% of amounts contributed by participating employees to a combined maximum of $1,375 per calendar year. All contributions were made to a trust that purchased shares in the open market. The Plan held 21,349 shares, prior to being rolled forward into the amended Plan. 11. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. Significant components of the Company's deferred tax liabilities and assets as of September 30, 1998 and 1997, respectively, are as follows:
Years ended September 30, 1998 1997 -------- -------- Deferred tax liabilities: Tax over book depreciation $ -- $ 166 Pension cost 380 302 -------- -------- Total deferred tax liabilities 380 468 -------- -------- Deferred tax assets: Inventory adjustments 1,738 741 Restructuring accruals 180 47 Other accruals 1,313 765 Net operating loss carryforwards 7,865 4,850 Federal and state tax credits 1,392 1,366 -------- -------- Total deferred tax assets 12,488 7,769 Valuation allowance for deferred tax assets (12,208) (7,506) -------- -------- Net deferred tax assets 280 263 -------- -------- Net deferred tax liabilities $ 100 $ 205 ======== ========
The net change in the total valuation allowance for the fiscal years ended September 30, 1998 and 1997, amounted to increases of $4,702 and $4,651, respectively. 35 36 The components of the Company's taxable income (loss) before income taxes are as follows:
Years ended September 30, 1998 1997 1996 ------- -------- -------- Domestic $(12,895) $(11,021) $ 5,616 Foreign 556 -- -- -------- -------- -------- Total $(12,339) $(11,021) $ 5,616 ======== ======== ========
Significant components of the provision for income taxes from continuing operations are as follows:
Years ended September 30, 1998 1997 1996 ----- ----- ----- Current: Federal $ 86 $ 48 $ 170 State 59 71 72 Foreign 248 -- -- ----- ----- ----- 393 119 242 ----- ----- ----- Deferred: Federal (105) 44 (116) State -- -- (37) ----- ----- ----- (105) 44 (153) ----- ----- ----- Total $ 288 $ 163 $ 89 ===== ===== =====
The reconciliation of the statutory federal income tax rate and the effective tax rate from continuing operations is as follows:
Years ended September 30, 1998 1997 1996 ----- ----- ----- Income tax per statutory rate 34.0% 34.0% 34.0% Utilization of net operating loss carryforwards -- -- (33.0) Loss on which no income tax benefits were recognized (35.7) (34.0) -- State income taxes, net of federal income tax benefit (0.5) (0.7) 0.8 Other (0.1) (0.8) (0.2) ----- ----- ----- (2.3)% (1.5)% 1.6% ===== ===== =====
At September 30, 1998, the Company had net operating loss carryforwards of $20,970 for federal income tax purposes that expire in years 2007 through 2018. The Company's federal income tax return for the 1996 fiscal year is under examination by the Internal Revenue Service. The Company believes it has made adequate provisions for assessment (if any) which may arise as a result of this audit. 36 37 12. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Years ended September 30, 1998 1997 1996 ---------- ---------- ---------- Numerator: Net income (loss) $ (12,627) $ (11,184) $ 5,685 ---------- ---------- ---------- Denominator: Weighted average shares - basic 7,646 6,851 6,795 Dilutive employee stock options -- -- 157 ---------- ---------- ---------- Weighted average shares - assuming dilution 7,646 6,851 6,952 ========== ========== ========== Net income (loss) per common share - basic Before extraordinary gain $ (1.65) $ (1.63) $ .81 Effect of extraordinary gain -- -- .02 ---------- ---------- ---------- $ (1.65) $ (1.63) $ .83 ========== ========== ========== Net income (loss) per common share - assuming dilution: Before extraordinary gain $ (1.65) $ (1.63) $ .80 Effect of extraordinary gain -- -- .02 ---------- ---------- ---------- $ (1.65) $ (1.63) $ .82 ========== ========== ==========
37 38 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Column F - ----------------------------------------------------------------------------------------------- Additions Additions Deductions Balance at charged to charged to written off Balance at beginning cost and other against end of Description of period expenses accounts reserve period - ----------------------------------------------------------------------------------------------- SEPTEMBER 30, 1996: Allowance for doubtful accounts 126 198 -- 140 184 SEPTEMBER 30, 1997: Allowance for doubtful accounts 184 100 -- 40 244 SEPTEMBER 30, 1998: Allowance for doubtful accounts 244 1,333 -- 312 1,265
38 39 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. Dated: December 22, 1998 GALILEO CORPORATION /s/ W. Kip Speyer ------------------------------- W. Kip Speyer, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities indicated on December 28, 1998. /s/ W. Kip Speyer ---------------------------------------------------- W. Kip Speyer, President and Chief Executive Officer and Director (Principal Executive Officer) /s/ Stephen P. Todd ---------------------------------------------------- Stephen P. Todd, Interim Chief Financial Officer (Principal Financial and Accounting Officer) /s/ John F. Blais, Jr. ---------------------------------------------------- John F. Blais, Jr. Director ---------------------------------------------------- Allen E. Busching Director /s/ Todd F. Davenport ---------------------------------------------------- Todd F. Davenport Director ---------------------------------------------------- Robert D. Happ Director 39 40 INDEX TO EXHIBITS
Exhibit # Page - ---------- ---- 3.1 Registrant's Restated Certificate of Incorporation and amendment thereto (filed as Exhibit 4.1 to the Registrant's registration statement on Form S-2, File No. 33-13752, and incorporated herein by reference). 3.2 Registrant's amended and restated By-Laws (filed as Exhibit 4.2 to the Registrant's registration statement on Form S-2, File No. 33-13752, and incorporated herein by reference). 4.1 Specimen Certificate of the Registrant's Common Stock (filed as Exhibit 4.1 to the Registrant's registration statement on Form S-2, File No. 33-13752, and incorporated herein by reference). 4.2 Loan Agreement dated January 27, 1998 between the Registrant and BankBoston, N.A. under which the Registrant entered into a $12.0 million revolving credit facility (filed as Exhibit 4 to the Registrant's Form 10-Q dated May 15, 1998, and incorporated herein by reference). 4.3 First Amendment to the Loan Agreement dated August 21, 1998 between the Registrant and BankBoston, N.A. under which the amount of the revolving credit facility was increased to $14.0 million. 10.1 Stock Option Plan adopted October 23, 1991 (filed as an exhibit to the Registrant's Proxy Statement dated December 17, 1991, and incorporated herein by reference). 10.2 Director Stock Option Plan adopted November 10, 1995 (filed as an exhibit to the Registrant's Proxy Statement dated December 11, 1995, and incorporated herein by reference). 10.3 Agreement and Plan of Merger dated July 17, 1996, among the Registrant, a wholly-owned subsidiary of the Registrant, Leisegang Medical, Inc., and the principal shareholders of Leisegang, under which the Registrant acquired Leisegang, effective August 6, 1996 (Filed as Exhibit 2.1 to the Registrant's Form 8-K dated August 6, 1996, File No. 33-13752, and incorporated herein by reference). 10.4 Agreement and Plan of Merger dated December 30, 1997, among the Registrant, a wholly-owned subsidiary of the Registrant, OFC Corporation, and the Principal Stockholders of OFC Corporation, under which the Registrant acquired OFC Corporation, effective January 30, 1998 (filed as Exhibit 2.1 to the Registrant's Form 8-K dated December 30, 1997, and incorporated herein by reference). 10.5 Employment Agreement dated August 6, 1996 among the Registrant, Leisegang Medical, Inc. and W. Kip Speyer under which Mr. Speyer agreed to serve as President of Leisegang Medical, Inc., a wholly-owned subsidiary of the Registrant. 10.6 Employment Agreement dated January 30, 1998 between the Registrant and John F. Blais, Jr. under which Mr. Blais agreed to serve as President of Optical Filter Corporation, a wholly-owned subsidiary of the Registrant.
40 41 21 List of Subsidiaries of the Registrant (filed as Exhibit 21.0 to the Registrant's Form S-3,File No. 333-46471, and incorporated herein by reference). 23 Consent of Independent Auditors for incorporation by reference in previously filed Registration Statements. 27.1 Financial Data Schedule. 27.2 Restated Financial Data Schedules.
Executive Compensation Plans and Arrangements Exhibits 10.1, 10.2, 10.5 and 10.6 are management contracts or compensatory plans or arrangements in which the executive officers or directors of the Company participate. 41 42 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-3, Nos. 333-19391 and 33-46471) of Galileo Corporation and in the Registration Statements (Form S-8, 2-92671, 33-5142, 33-47589, 33-47588, 333-02435, 333-23345 and 333-48375) pertaining to the Stock Option and Stock Purchase Plans of Galileo Corporation, of our report dated December 22, 1998, with respect to the consolidated financial statements and schedule of Galileo Corporation included in the Annual Report (Form 10-K) for the year ended September 30, 1998. Providence, Rhode Island ERNST & YOUNG LLP December 22, 1998 EX-4.3 2 1ST AMENDMENT TO LOAN AGREEMENT DATED 8/21/98 1 EXHIBIT 4.3 FIRST AMENDMENT TO LOAN AGREEMENT This First Amendment to Loan Agreement is made as of the 21st day of August, 1998 by and among Galileo Corporation, a Delaware corporation, with its principal place of business at Galileo Park, Sturbridge, Worcester County, Massachusetts (the "Borrower"); and BankBoston, N.A., a national banking association having its principal offices at 100 Federal Street, Boston, Massachusetts (the "Bank") In consideration of the mutual covenants herein contained and benefits to be derived herefrom. WITNESSETH WHEREAS, the Borrower and the Bank have entered into a Loan Agreement dated as of January 27, 1998 (the "Loan Agreement"); and WHEREAS, certain Events of Default have arisen under the Loan Agreement and the Borrower has requested the Bank to amend the Loan Agreement and to forbear from exercising its rights and remedies as a result of the existence of such Events of Default; and WHEREAS, the Bank is willing to forbear from exercising its rights and remedies as a result of the existence of the Events of Default and to amend the Loan Agreement on the terms set forth herein. NOW THEREFORE, it is hereby agreed as follows: 1. Definitions: All capitalized terms used herein and not otherwise defined shall have the same meaning herein as the Loan Agreement. 2. Amendment to Section 1. The provisions of section 1.1 of the Loan Agreement are hereby amended (a) By deleting the definitions of "Adjusted LIBOR Rate", "Conversion Date", "LIBOR Loan", "Interest Period" and "Notice of Borrowing and/or Selection of Interest", in their entirety. (b) By amending the definition of "Guarantor" by adding the words "and Optical Filter Corporation" at the end thereof. (c) By amending the definition of "Guaranty" by adding the words "and the Guaranty of Optical Filter Corporation dated January 30, 1998" at the end thereof. (d) By amending the definition of "landlord's Waiver" by deleting the words "at any location in which the value of the Borrower's assets or any of its Subsidiaries exceed ONE MILLION and 00/100 ($1,000,000.00) DOLLARS" and substituting in its stead the words "at any location at which assets of the Borrower or any of its Subsidiaries are maintained". 2 (e) By amending the definition of "Maximum Commitment" to read "FOURTEEN MILLION and 00/100 DOLLARS ($14,000,000.00), subject to reduction as provided in Section 2.1(b) hereof. (f) By amending the definition of "Revolving Credit Period" by deleting the words "or the Conversion Date" and substituting in its stead the words "or the Maturity Date". (g) By deleting the definition of "Security Agreements" in its entirety and substituting the following in its stead: Security Agreements. A certain Security Agreement of even date herewith by and between the BORROWER and the BANK encumbering the assets of the BORROWER, the Security Agreements now or hereafter executed and delivered by the BORROWER'S Subsidiaries to the BANK, and all other instruments, documents and agreements heretofore or hereafter executed and delivered by the BORROWER or any of its Subsidiaries to the BANK granting a Lien on any of their assets as security for the Obligations. (h) By adding the following new definitions: Adjusted Interest Coverage Ratio. At any time of determination, the ratio of (x) Consolidated Operating Cash Flow plus or minus Consolidated Working Capital Changes, as applicable, to (y) Consolidated Interest Expense. Asset Sale. Any one or series of related transactions in which the Borrower or any of its Subsidiaries conveys, sells, transfers or otherwise disposes of, directly or indirectly, any of its properties, business or assets (including the sale or issuance of any capital stock of its respective Subsidiaries) or merges or consolidates with or into, or enters into any joint venture or other business combination with, any other person or entity. Consolidated Current Assets. All assets of the BORROWER and its Subsidiaries on a consolidated basis that, in accordance with generally accepted accounting principles, are properly classified as current assets. Consolidated Current Liabilities. All liabilities and other Indebtedness of the BORROWER and its Subsidiaries on a consolidated basis maturing on demand or within one (1) year from the date Consolidated Current Liabilities are to be determined, and such other liabilities that, in accordance with generally accepted accounting principles, are properly classified as current liabilities. Consolidated EBITDA. For any period, an amount equal to Consolidated Net Income for such period, plus, to the extent deducted in the calculation of Consolidated Net Income for such period (a) depreciation, amortization 3 and other noncash expenses, (b) income tax expense, and (c) Consolidated Interest Expense, all as determined in accordance with generally accepted accounting principles. Consolidated Interest Expense. For any period, the aggregate amount of interest required to be paid or accrued by the BORROWER and its Subsidiaries during such period on all Indebtedness, including all facility and other fees incurred in connection therewith. Consolidated Operating Cash Flow. For any period, an amount equal to (a) Consolidated EBITDA for such period, less (b) the sum of (I) cash payments for all taxes made during such period, and (ii) to the extent not already deducted in the determination of Consolidated EBITDA, capital expenditures made during such period to the extent permitted under Section 5.11 hereof. Consolidated Working Capital Changes. For any period, the net change from the immediately preceding period to (a) accounts receivable of the BORROWER and its Subsidiaries, (b) accounts payable of the BORROWER and its Subsidiaries, (c) current accruals of the BORROWER and its Subsidiaries, and (d) inventory of the BORROWER and its Subsidiaries, all as determined in accordance in generally accepted accounting principles. Current Ratio. At any time of determination, the ratio of Consolidated Current assets to Consolidated Current Liabilities. Interest Coverage Ratio. At any time of determination, the ratio of (x) Consolidated Operating Cash Flow to (y) Consolidated Interest Expense. Maturity Date. December 31, 1999. Net Cash Proceeds. The net cash proceeds received by the Borrower or any of its Subsidiaries in respect of any Asset Sale, less the sum of (a) all reasonable out-of-pocket fees, commissions and other expenses incurred in connection with such Asset Sale (but excluding any applicable taxes required to be paid as a result of any such Asset sale), and (b) the aggregate amount of cash which is used to retire (in whole or in part) any Indebtedness secured by a Lien permitted hereunder having priority over the Liens of the Bank with respect to the assets which are the subject of the Asset sale and which is required to be repaid in whole or in part in connection with such Asset Sale. 3. Amendments to Section 2. The provisions of section 2 of the Loan Agreement are hereby amended (a) By deleting the provisions of section 2.1 in its entirety and substituting the following in its stead: 4 2.1 The Loan. (a) Subject to the terms and conditions hereof, the BANK will make available to the BORROWER Loans in the aggregate amount outstanding of up to the Maximum Commitment evidenced by a FOURTEEN MILLION and 00/100 DOLLAR note ("Note") with interest payable monthly at the aggregate of the Base Rate plus one percent (1%) per annum. During the revolving Credit Period, the BORROWER may borrow, prepay, and reborrow pursuant to this Agreement. The entire outstanding balance of the Loan shall be paid in full on the Maturity date. (b) The Borrower shall make a prepayment of the Obligations in an amount equal to 100% of the Net Cash Proceeds received by the Borrower or any of its Subsidiaries from any Asset Sale. Upon any such Asset Sale, the Maximum Commitment will be reduced by a n amount equal to such Net Cash Proceeds. Any reduction of the Maximum Commitment may not be reinstated. b. by deleting the provisions of Section 2.2(a) and substituting the following in its stead: a) Whenever the BORROWER desires to obtain a Loan hereunder, the BORROWER shall notify the BANK (which notice shall be irrevocable) by telex, telegraph or telephone received no later than 10:00 a.m. (Boston, MA time) on the date one (1) business day before the day on which the requested Loan is to be made. Such notice shall specify the effective date and amount of each Loan. Each such notification shall be immediately followed by a written confirmation thereof by the BORROWER in substantially the form of Exhibit "B" hereto, provided that if such written confirmation differs in any material respect from the action taken by the BANK, the records of the BANK shall control, absent manifest error. c. by deleting the provisions of Section 2.4 in their entirety. d. by deleting the words "one-quarter (.25%)" in Section 2.5(d) and substituting in its stead the words "one-half percent (.50%)". e. by adding the following new subsection at the end of Section 2.5: e) An amendment fee in connection with the First Amendment to this Agreement in the sum of $150,000.00. Such amendment fee shall be paid in two installments, the first of which shall be in the sum of $50,000.00 and shall be paid upon execution of the First Amendment to this Agreement and the second of which shall be in the sum of $100,000.00 and shall be paid on January 2, 1999. The full amount of the amendment fee shall be fully earned upon the execution of the First Amendment to this Agreement and, except as set forth in the following sentence, shall not be subject to refund or rebate under any circumstances. Notwithstanding the foregoing, if (x) all Obligations have been irrevocably paid in full on 5 or before December 31, 1998, and (y) all obligations of the BANK to make Loans terminated on or before December 31, 1998, and (z) no Event of Default has arisen after the date of the First Amendment to this Agreement as a result of which the BANK has accelerated the time for payment of the Obligations and commenced the exercise of its remedies upon default, the BANK shall waive payment of the second installment of the amendment fee due on January 2, 1999. f. by deleting the provisions of Section 2.6 in their entirety and substituting the following in its stead: 2.6 Interest Rate and Payments of Interest: Each Base Rate Loan shall bear interest on the outstanding principal amount thereof at a rate per annum equal to the aggregate of the Base Rate plus one percent (1%), which rate shall change contemporaneously with any change in the Base Rate. Interest shall be payable monthly in arrears on the first day of each month. g. by deleting the provisions of Section 2.7(a) in their entirety. h. by deleting the words "(other than such requirements as are already included in the determination of Adjusted LIBOR Rate)" in clause (2) of Section 2.7(b). i. by deleting the provisions of Section 2.8 in their entirely and substituting the following in its stead: 2.8 Payments and Prepayments of the Loan. All Base Rate Loans may be prepaid in increments of a minimum of $100,000.00 at any time without premium or penalty on one (1) business day's notice and the interest accrued on the amount so paid to the date of such payment must be paid at the time of any such payment. j. by deleting the provisions of Section 2.1(a) and substituting the following in its stead: a) Upon the occurrence of any Event of Default, interest shall accrue on the outstanding principal of the Obligations and, to the extent permitted by applicable law, overdue interest and fees or other amounts payable hereunder or under the other Loan Documents at a rate per annum equal to the aggregate of the Base Rate plus four percent (4%). k. by deleting the provisions of Section 2.11 in their entirety. l. by deleting the words "Except as provided in Paragraph (a ) of the definition of Interest Period" from the second sentence of Section 2.12. 6 4. Amendments to Section 5. The provisions of Section 5 of the Loan Agreement are hereby amended a. by deleting the words "five (5) days" appearing in Section 5.1(g) and substituting the words "two (2) days" in their stead. b. by adding the following new subsection to Section 5.1: j) promptly, and in any event no less frequently than weekly, written notice of the status of any negotiations, offers and/or agreements for any Asset Sales, together with copies of all offers, agreements and other documents in connection therewith. c. by deleting the provisions of Section 5.8 in their entirety and substituting the following in its stead: 5.8 Current Ratio. The BORROWER and its Subsidiaries will maintain a Current Ratio of no less than the following as of the end of each of the months indicated:
Month Ending Maximum Ratio ------------ ------------- September 30, 1998 1.20:1.00 October 31, 1998 1.20:1.00 November 30, 1998 1.00:1.00 December 31, 1998 1.20:1.00 December 31, 1998 and each 1.10:1.00 month end thereafter
d. by deleting the provisions of Section 5.9 in their entirety and substituting the following in its stead: 7 5.9 Ratio of Indebtedness to Consolidated Tangible Net Worth. The BORROWER and its Subsidiaries will maintain a ratio of Indebtedness to Consolidated Tangible Net Worth of no more than the following as of the end of each of the months indicated:
Month Ending Minimum Ratio ------------ ------------- September 30, 1998 1.00:1.00 October 31, 1998 1.00:1.00 November 30, 1998 1.00:1.00 December 31, 1998 1.00:1.00 January 31, 1999 and each 1.20:1.00 month end thereafter
e, by deleting the provisions of Section 5.10 in their entirety and substituting the following in its stead: 5.10 Interest Coverage Ratio. (a) The BORROWER and its Subsidiaries shall achieve an Interest coverage Ratio of no less than (I) 1.30:1.00 at December 31, 1998 (calculated for the three months beginning October 1, 1998 and ending December 31, 1998), and (ii) 1.50:1.00 for each month thereafter commencing with the month ending January 31, 1999. (b) The BORROWER and its Subsidiaries shall achieve an Adjusted interest Coverage Ratio of no less than (I) 1.30:1.00 at December 31, 1998 (calculated for the three months beginning October 1, 1998 and ending December 31, 1998), and (ii) 1.50:1.00 for each month thereafter commencing with the month ending January 31, 1999. f. by deleting the provisions of Section 5.11 in their entirety and substituting the following in their stead: 5.11 Limitation on Capital Expenditures. The BORROWER and its Subsidiaries shall not make or incur capital expenditures in excess of $400,000.00 in the aggregate in any fiscal quarter. 8 g. by deleting the provisions of Section 5.13 in their entirety and substituting the following in its stead: 5.13 Consolidated Net Income. (a) the BORROWER and its Subsidiaries will not permit its consolidated net loss (before taxes and excluding non-cash deductions associated with the closure of the medical endoscope business), determined in accordance with generally accepted accounting principals, to be greater than $2,000,000.00 for the quarter ending September 30, 1998. (b) The BORROWER and its Subsidiaries shall achieve Consolidated Net Income (before taxes and excluding any extraordinary gains and extraordinary losses which would otherwise be included in the calculation of Consolidated Net Income), for the fiscal quarter ending December 31, 1998 of at least $200,000.00 (c) The BORROWER and its Subsidiaries shall achieve Consolidated Net Income (before taxes and excluding any extraordinary gains which would otherwise be included in the calculation of Consolidated Net Income), for each fiscal quarter of at least $200,000.00, commencing with the fiscal quarter ending march 31, 1999. h. by adding the following new sections to the Loan Agreement. 5.14 Disposition of Channeltron and Related Product Lines. On or before October 1, 1998, the BORROWER shall enter into an agreement, on terms and conditions reasonably satisfactory to the BANK, for the sale of Scientific Detector's channeltron detector and assemblies product lines for a purchase price of at least $4,500,000 (the assets of which have a book value of less than $2,500,000); and the BORROWER shall cause such sale to be consummated and the net Cash Proceeds therefrom to have been paid to the BANK on or before November 1, 1998. 5.15. Retention of Consultant. The BORROWER shall engage The Recovery Group or another consultant reasonably acceptable to the BANK to undertake such activities and duties as the BANK may reasonably require. The BORROWER and its Subsidiaries shall cooperate with such consultant in the performance of his duties and hereby agrees that the consultant may, without any notice to, or further consent from, the BORROWER or its Subsidiaries, disclose any and all information regarding the BORROWER and its Subsidiaries obtained by the consultant in the performance of his duties to the BANK. All reasonable fees, costs and expenses of the consultant shall be borne by the BORROWER and its Subsidiaries. 9 5.16 Loan to Value. The BORROWER shall not permit the ratio of the outstanding Obligations to the orderly liquidation value (as reasonably determined by the BANK) of the Collateral to be greater than 0.70:1.00. 5.17 Proceeds of Collateral. The BORROWER and its Subsidiaries have previously established a lock box with the BANK. All proceeds of the Collateral shall continue to be directed to the lockbox, and shall be deposited into the BORROWER'S operating account maintained with the BANK until the earlier of December 1, 1998 or the occurrence of an Event of Default, at which time the BANK may apply the proceeds in the lockbox to the Obligations. 5.18 Additional Information. The BORROWER and its Subsidiaries shall cooperate with the BANK, the consultant and their respective representatives in order that the BANK shall receive a commercial finance examination, a real estate appraisal, an inventory valuation, and a final report of The Recovery Group, each in form and substance satisfactory to the BANK by September 13, 1998. 5. Amendments to Section 6. The provisions of Section 6 of the Loan Agreement are hereby amended a. by adding the words "and its Subsidiaries" in Sections 6.2, 6.2, 6.4, and 6.5 after the words "the BORROWER" in the first line of each of such sections. b. by deleting the provisions of Section 6.1(e) and 6.1(f) in their entirety. c. by deleting the provisions of Section 6.2(f) in its entirety. d. by deleting the words "FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($500,000.00)" in clause (ii) of Section 6.4 and substituting the words "TWO HUNDRED THOUSAND AND 00/100 DOLLARS ($200,000.00) in its stead. e. by deleting the provisions of Section 6.4(iii) in their entirety. f. by adding the following new clauses at the end of Section 6.4: and (vi) the sale or other disposition of Scientific Detector's channeltron detector and assemblies product lines in accordance with the provisions of Section 5.14 hereof. 6. Amendments to Section 7. The provisions of Section 7 of the Loan Agreement are hereby amended a. by deleting clause m) in its entirety. b. by adding the following new clause thereto: 10 n) the occurrence of any default or event of default under any other instrument, document, or agreement between the BORROWER or any of its Subsidiaries and the BANK or any affiliate of the BANK. c. by adding the following at the end thereof: In addition, and without limiting any other remedies of the BANK, upon the occurrence of any Event of Default, the BANK may institute the lock box, clocked account or other procedures described in Section 5.17 hereof. 7. Amendments to Section 8. The provision of Section 8.1 of the Loan Agreement are hereby amended by changing the notice address for the BANK as follows: BankBoston, N.A. 100 Federal Street Boston, Massachusetts 02110 Attention: Ms. Corinne M. Barrett Mail Stop 01-06-01 Telephone: (617) 434-0946 Telecopier: (617) 434-4775 with a copy to: Riemer & Braunstein Three Center Plaza Boston, Massachusetts 02108 Attention: David S. Berman, Esquire Telephone: (617) 523-9000 Telecopier: (617) 723-6831 8. Amendments. Exhibits B and C to the Loan Agreement are hereby deleted in their entirety and Exhibits B and C annexed hereto are substituted in their stead. 9. Conditions to Effectiveness. This First Amendment to Loan Agreement shall not be effective until each of the following conditions precedent have been fulfilled to the satisfaction of the BANK: a. This First Amendment to the Loan Agreement shall have been duly executed and delivered by the BORROWER, the Guarantors and the BANK, and shall be in full force and effect. The BANK shall have received a fully executed copy hereof and of each other document required hereunder. b. All action on the part of the BORROWER and the Guarantors necessary for the valid execution, delivery and performance by the BORROWER of this First Amendment to Loan Agreement shall have been duly and effectively taken. The BANK shall have received from each of the BORROWER and Guarantors, true copies of their respective certificates of the 11 resolutions adopted by their respective boards of directors authorizing the transactions described herein, each certified by their respective secretaries as of a recent date to be true and complete. c. The BANK shall have received a list of all customers of the BORROWER and its Subsidiaries (including, without limitation, all names, addresses, contact persons and telephone numbers). d. The BANK shall have received (i) a duly executed Mortgage, Security Agreement and Assignment of Leases and Rents (the "Mortgage) with respect to the BORROWER'S real estate in Sturbridge, Massachusetts, evidence that such Mortgage has been duly recorded and perfected and is subject to no Liens other than Permitted Liens, and title insurance with respect to such Mortgage, (ii) duly executed Collateral Assignments of Trademarks and Patents which shall have been forwarded for filing with the United States Patent and Trademark Office, (iii) a stock pledge with respect to the capital stock of each of the BORROWER'S Subsidiaries (other than foreign Subsidiaries as to which the pledge will be limited to 66% of such stock), (iv) duly executed guarantees of the Obligations and Security Agreements from each of the BORROWER'S Subsidiaries (other than foreign Subsidiaries) and (v) all Landlord's Waivers, all of the foregoing to be in form and substance reasonably satisfactory to the BANK. e. The BORROWER and its Subsidiaries shall have executed security agreements, collateral assignments, mortgages and such other documentation as the BANK may require in order that all other obligations of the BORROWER and its Subsidiaries to the BANK and to any affiliate of the BANK are secured by the same Collateral as the Obligations under the Loan Agreement. f. The BANK shall have received opinions of counsel to each of the BORROWER and Guarantors satisfactory to the BANK and the BANK's counsel. g. The BANK shall have been paid the initial installment of the amendment fee in the sum of $50,000.00. h. The BORROWER shall have paid to the BANK all other fees and expenses then due and owing pursuant to the Loan Agreement, as modified hereby, including without limitation, reasonable attorneys' fees incurred by the BANK. i. No Default or Event of Default shall have occurred and be continuing. j. The Borrowers and Guarantors shall have provided such additional instruments and documents to the BANK as the BANK and its counsel may have reasonably requested. 10. Miscellaneous. a. Except as provided herein, all terms and conditions of the Loan Agreement and the other Loan Documents remain in full force and effect. The BORROWER and the Guarantors hereby ratify, confirm, and reaffirm all of the representations, warranties and covenants therein contained (except to the extent that such representations and warranties expressly relate to an earlier date). The BORROWER and the Guarantors further acknowledge and agree that none of them have any offsets, defenses, or counterclaims against the BANK under the Loan agreement 12 or the other Loan Documents and, to the extent that the BORROWER or the Guarantors have, or ever had, any such offsets, defenses, or counterclaims, the BORROWER and the Guarantors each hereby waive and release the same. b. The BANK hereby agrees to forbear from exercising its rights and remedies as a result of the existence of any Defaults or Events of Default existing prior to the date hereof under Sections 5.8, 5.9, 5.10 and 5.13 of the Loan Agreement until the earlier of the Maturity Date or the occurrence of any additional Event of Default under the Loan Agreement. This agreement to forebear is not a waiver of any Defaults or Events of Default which hereafter arise under such Sections of the Loan Agreement, as amended hereby. c. The BORROWER shall pay all costs and expenses incurred by the BANK in connection with this First Amendment, including without limitation, all reasonable attorneys' fees and expenses, commercial finance examination fees, appraisal fees, consultant's fees, and all reasonable travel expenses incurred by the BANK. d. This First Amendment may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered, each shall be original, and all of which together shall constitute one instrument. e. This First Amendment expresses the entire understanding of the parties with respect to the matters set forth herein and supersedes all prior discussions or negotiations hereon. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be executed and their seals to be hereto affixed as the date first above written. "BORROWER" GALILEO CORPORATION By:__________________________________________ Name: Title: "GUARANTORS" LEISEGANG MEDICAL, INC. By:__________________________________________ Name: Title: "OPTICAL FILTER CORPORATION" By:__________________________________________ Name: 13 Title: "BANK" BANKBOSTON, N.A. By:__________________________________________ Name: Title: EX-10.5 3 EMPLOYMENT AGREEMENT - W.K. SPEYER DATED 8/6/96 1 EXHIBIT 10.5 EMPLOYMENT AGREEMENT This Agreement dated as of August 6, 1996 is among Leisegang Medical, Inc. ("LMI"), a Florida corporation with its principal offices at 6401 Congress Avenue, Boca Raton, Florida 33487, W. Kip Speyer (the "Employee") residing at 10361 Parkstone Way, Boca Raton, Florida 33498, and Galileo Electro-Optics Corporation ("Galileo"), a Delaware corporation with its principal offices at Galileo Park, P.O. Box 550, Sturbridge, MA 01566. This Agreement is entered into in connection with Galileo's acquisition of LMI pursuant to the Agreement and Plan of Merger dated as of July 17, 1996. Employee was a principal stockholder of LMI prior to the acquisition. In order to preserve the value of LMI's goodwill, Galileo desires to continue the employment of Employee by LMI and to protect LMI's and Galileo's confidential information after the acquisition. Accordingly, the parties hereto agree as follows: SECTION 1. EMPLOYMENT OF EMPLOYEE. 1.1 Employment. Subject to the terms and conditions of this Agreement, LMI agrees to employ Employee in a full time capacity as president and general manager of LMI with such specific duties as may reasonably be assigned to the Employee from time to time by the Board of Directors or Chief Executive Officer of LMI for the period commencing on the date hereof and terminating three years hereafter, unless earlier terminated as herein provided. During Employee's employment hereunder, Employee will continue to serve as a director of LMI and Employee's principal place of work will remain within 20 miles of the Boca Raton municipal limits unless otherwise agreed by him. Employee hereby accepts such employment for the term hereof. Neither LMI nor Employee shall have any obligation to continue employment after the term hereof. If Employee remains employed after the term hereof, Employee's employment and compensation may be terminated at will, with or without cause and with or without notice, at any time at the option of LMI or Employee. SECTION 2. COMPENSATION. For all services to be rendered by Employee to LMI pursuant to this Agreement, LMI shall pay to and provide the Employee with the following compensation and benefits: 2.1 Base Salary and Bonus. LMI shall pay to Employee a base salary at the rate of $225,000 per year, payable in substantially equal monthly installments, subject to annual review by the Board of Directors of LMI, provided that base salary shall not be decreased during the term hereof. Employee will have the opportunity to earn an annual incentive cash bonus of 40% of base salary based upon net sales of LMI as follows (with equitable adjustments for periods of employment hereunder prior to and following the annual periods set forth below): 2
12 Months Net Sales Ending (000's) ------ ------- September 30, 1997 $7,000 September 30, 1998 $8,000 September 30, 1999 $9,200
Galileo will provide LMI with sufficient working capital to support the foregoing net sales and will undertake such product development efforts as it determines will be commercially reasonable and make all of its new products in the OB/GYN field available for sale by LMI. The Board of Directors of LMI may set additional personal and corporate goals and increase or decrease the bonus opportunity percentage, subject to the consent of Employee, which shall not be unreasonably withheld. 2.2 Stock Options. Galileo has granted to Employee non-qualified options to purchase 20,000 shares of its common stock under its 1991 Stock Option Plan, exercisable on the terms and under the conditions set forth in the option agreement delivered to Employee on this date. The exercise price is the closing price of Galileo's common stock on The Nasdaq National Market on the day preceding the date employment commences hereunder. 2.3 Participation in Benefit Plans. Employee shall be entitled to participate in all employee benefit plans or programs of Galileo to the extent that Employee's position, title, tenure, salary, age, health and other qualifications make Employee eligible to participate. Neither LMI nor Galileo guarantees the adoption or continuance of any particular employee benefit plan or program during the term of this Agreement, and Employee's participation in any such plan or program shall be subject to the provisions, rules and regulations applicable thereto. Employee shall be entitled to vacation each year for a period of four weeks during which compensation shall be paid in full, with any additional vacation time to be allowed only in accordance with applicable Galileo policy. 2.4 Expenses. LMI shall reimburse Employee for all ordinary and necessary business expenses incurred in the performance of Employee's duties under this Agreement, provided that Employee accounts properly for such expenses to LMI in accordance with the general corporate policy of LMI as determined by LMI's Board of Directors or Chief Executive Officer and in accordance with the requirements of the Internal Revenue Service regulations relating to substantiation of expenses. SECTION 3. CONFIDENTIAL INFORMATION. Employee agrees to be bound by the terms of the attached Galileo agreement as if set forth herein, including without limitation the terms relating to confidential information, inventions and Galileo employees. For purposes of such agreement, the term "Galileo" shall include LMI and Galileo. The obligations of Employee under such agreement shall survive termination of this Agreement for any reason. 3 SECTION 4. TERMINATION AND SEVERANCE PAYMENT. 4.1 Early Termination. Employee's employment hereunder shall terminate prior to the expiration of the term specified in Section 1.1: (a) Upon Employee's death or inability by reason of physical or mental impairment to perform substantially all of Employee's services as contemplated herein for 90 days or more within any six-month period; (b) By LMI or Employee without cause upon not less than 30 days' prior written notice to the other; or (c) By LMI in the event of Employee's breach of any material duty or obligation hereunder, or intentional or grossly negligent conduct that is materially injurious to LMI as reasonably determined by LMI's Board of Directors, or willful failure to follow the reasonable directions of LMI's Board of Directors. 4.2 Severance Payment. In the event of termination of the Employee's employment by LMI under Section 4.1(b), LMI shall pay to Employee as severance an amount equal to base salary at the rate specified in Section 2.1 and the full amount of his bonus (assuming all applicable goals are achieved) for the balance of the term, and a non-accountable expense allowance at the annual rate of $7,500, in each case payable in equal monthly installments. In addition, LMI will continue the health insurance benefits of Employee in effect at such termination for the balance of the term but not after Employee secures other employment. SECTION 5. NONCOMPETITION. Employee agrees that so long as he is employed by LMI and until the later of (i) two years after termination of his employment with LMI for any reason and (ii) four years after the date hereof, Employee will not, directly or indirectly, except as a passive investor in publicly held companies, engage in competition with LMI, or own or control any interest in, or act as a director, officer or employee of, or consultant to, any firm, corporation or institution directly or indirectly engaged in competition with LMI. SECTION 6. MISCELLANEOUS. 6.1 Assignment. This Agreement may not be assigned, in whole or in part, by any party without the written consent of the other parties, except that LMI and Galileo may, without the consent of Employee, assign their respective rights and obligations under this Agreement to any corporation, firm or other business entity with or into which LMI or Galileo, as the case may be, may merge or consolidate, or to which LMI or Galileo may sell or transfer all or substantially all of their respective assets, or of which 50% or more of the equity investment and of the voting control is owned, directly or indirectly, by, or is under common ownership with, either LMI or Galileo. After any such assignment by LMI or Galileo as the case may be, such assignor shall be discharged from all further liability hereunder and such assignee shall have all the rights and obligations of the assignor under this Agreement. 6.2 Notices. All notices, requests, demands and other communications to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given if delivered by hand, transmitted by telecopy or sent by recognized overnight delivery service for 4 next day delivery to the addresses set forth below or such other address as a party shall have designated by notice in writing to the other parties: If to LMI or Galileo: P.O. Box 555 Galileo Park Sturbridge, MA 01566 Telecopy No: (508) 347-2270 Attention: President with a copy to: David R. Pokross, Jr., Esq. Palmer & Dodge LLP One Beacon Street Boston, MA 02108 Telecopy No: (617) 227-4420 If to Employee: 10361 Parkstone Way Boca Raton, FL 33498 Telecopy No: (407) 998-0846 6.3 Integration. This Agreement is the entire agreement of the parties with respect to the subject matter hereof and supersedes any prior agreement or understanding relating to Employee's employment with or compensation by LMI and Galileo, including without limitation, the Employment Agreement between LMI and the Employee dated December 31, 1993, which shall be deemed terminated as of the date hereof. This Agreement may not be amended, supplemented or otherwise modified except in writing signed by the parties hereto. 6.4 Binding Effect. Subject to Section 6.1, this Agreement shall inure to the benefit of and be binding upon the parties hereto and their successors, assigns, heirs and personal representatives. 6.5 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 6.6 Severability. If any provision hereof shall for any reason be held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid or unenforceable provision had not been included herein. If any provision hereof shall for any reason be held by a court to be excessively broad as to duration, geographical scope, activity or subject matter, it shall be construed by limiting and reducing it to make it enforceable to the extent compatible with applicable law as then in effect. 5 6.7 Enforcement Costs; Consent to Representation. If any action is brought to enforce any right under this Agreement, the party prevailing in such action shall be entitled to reimbursement from the other party of its reasonable legal fees and expenses in such action as determined by the court. Galileo and LMI hereby consent to the legal representation by Charles H. Lichtman, Esq. of Executive in connection with his entering into, and any legal proceedings arising out of, this agreement and of LMI in unrelated matters. 6.8 Governing Law. This Agreement shall be governed by the laws of Florida without regard to its conflict of law provisions. IN WITNESS WHEREOF, the undersigned have duly executed and delivered this Agreement as of the date first stated above. LEISEGANG MEDICAL, INC. By:__________________________________________ Title: GALILEO ELECTRO-OPTICS CORPORATION By:__________________________________________ Title: EMPLOYEE _____________________________________________ W. Kip Speyer EX-10.6 4 EMPLOYMENT AGREEMENT - J.F. BLAIS, JR. 1/30/98 1 EXHIBIT 10.6 EMPLOYMENT AGREEMENT This Agreement dated as of January 30, 1998 is among Galileo Corporation (the "Company"), a Delaware corporation, and John F. Blais, Jr. (the "Executive"). This Agreement is made in connection with the Company's acquisition of OFC Corporation ("OFC") pursuant to the Agreement and Plan of Merger dated as of December 30, 1997 (the "Merger Agreement"). The Executive was the principal stockholder and a key executive of OFC prior to the acquisition. In order to preserve the value of OFC's goodwill, the Company desires to continue the employment of Executive and to protect the confidential information of OFC and the Company after the acquisition. Accordingly, the parties hereto agree as follows: 1. Employment of Executive. Subject to the terms and conditions of this Agreement, the Company agrees to employ Executive, and Executive agrees to serve the Company, as an executive officer of OFC reporting to the Board of Directors of OFC (the "Board") with such specific duties appropriate for an executive officer as may be assigned to the Executive from time to time by the Board for a period of three years commencing on the date hereof, unless earlier terminated as herein provided. Executive's employment hereunder will be on a full business time basis, as President of OFC with duties comparable to those heretofore performed, for the first year and on a one-half time basis, as President Emeritus of OFC, thereafter. Neither the Company nor Executive shall have any obligation to continue employment after the term hereof. If Executive remains employed after the term hereof, Executive's employment and compensation shall be at will and may be terminated, with or without cause and with or without notice, at any time at the option of the Company or Executive. 2. Compensation. For all services to be rendered by Executive to the Company pursuant to this Agreement, the Company shall pay to and provide the Executive with the following compensation and benefits: (a) Salary. The Company shall pay to Executive salary at the rate of $100,000 per year for the first year of employment and $50,000 per year thereafter, payable in substantially equal installments no less often than biweekly. (b) Participation in Benefit Plans. Executive shall be entitled to participate in all employee benefit plans or programs of the Company to the extent eligible. The Company does not guarantee the adoption or continuance of any particular employee benefit plan or program during the term of this Agreement, and Executive's participation in any such plan or program shall be subject to the provisions, rules and regulations applicable thereto, provided that Executive shall receive benefits at least comparable to the benefits currently provided by the Company to all full-time executives. The Company shall provide health insurance with coverage comparable to the coverage currently provided by the Company to executives until Executive is age 65 regardless of the termination of his employment, unless such termination is by the Company for cause (as defined in Section 3(a)(ii)). 2 (c) Expenses. The Company shall reimburse Executive for ordinary and necessary business expenses in accordance with the general corporate policy of the Company from time to time in effect. 3. Termination. (a) Early Termination. Executive's employment hereunder shall terminate prior to the expiration of the term specified in Section 1: (i) upon Executive's death or inability by reason of physical or mental impairment to perform substantially all of Executive's services as contemplated herein for 60 days or more within any six-month period; (ii) by the Company for cause in the event of (i) Executive's willful failure to follow the reasonable directions of the Board or otherwise perform Executive's duties hereunder (other than as a result of physical or mental impairment) after written notice of such failure in reasonable detail is given to Executive by the Company or (ii) intentional or grossly negligent conduct by Executive that is materially injurious to OFC or the Company as reasonably determined by the Board, which conduct continues after written notice thereof in reasonable detail is given to Executive; or (iii) by the Company without cause, subject to payment of the amounts specified in Section 3(b). (b) Severance. If Executive's employment is terminated by the Company without cause (as defined in Section 3(a)(ii)), the Company will pay Executive as severance an amount equal to salary at the rates specified in Section 2(a) for the balance of the term, payable as provided therein. If Executive's employment is terminated for any other reason, the Company will pay Executive an amount equal to Executive's then current salary through the date of termination. 4. Confidential Information, Inventions and Noncompetition. (a) Confidential Information. During the course of Executive's employment, Executive may have become or will become aware of information relating to the operations or business affairs of OFC or the Company that is treated by them as confidential or proprietary ("Confidential Information"). Executive acknowledges that the Company is and shall at all times remain the sole owner of the Confidential Information and of all intellectual property rights relating thereto and Executive agrees not to publish or otherwise disclose or make available to any third party any Confidential Information and not to use any Confidential Information for Executive's own benefit or for the benefit of any third party. Upon termination of this Agreement, or at any time upon the Company's request, Executive will return to the Company all copies of Confidential Information in Executive's possession or under Executive's control. Confidential Information does not include information which (a) is at the time of disclosure or later becomes publicly known under circumstances involving no breach of this agreement by Executive, (b) is generally disclosed to third parties by the Company without restriction on such third parties, or (c) is required to be disclosed by a governmental authority or by order of a court of competent jurisdiction, provided that such disclosure is subject to all available protection and reasonable advance notice is given to the Company. 3 (b) Ownership of Inventions. Any invention, discovery, new product or business opportunity made, discovered or reduced to practice by Executive (whether alone or with others) in the course of performing services for OFC or the Company or arising directly from Confidential Information acquired by Executive ("Invention") will be the exclusive property of the Company, and the Company may use or pursue any of them without restriction or additional compensation to Executive. To the extent any Invention results in a patentable, copyrightable or other proprietary invention, Executive hereby assigns and agrees to assign to the Company all of Executive's right, title and interest in and to any such invention. Executive agrees to cooperate fully in obtaining patent, copyright or other proprietary protection for any such invention, all in the name of the Company and at the Company's cost and expense, and to execute and deliver all requested applications, assignments and other documents and take such other measures as the Company may reasonably request in order to perfect and enforce the Company's rights therein (including transfer of possession to the Company of all inventions embodied in tangible materials). (c) Noncompetition. Executive shall comply with his noncompetition covenant contained in Section 5.15 of the Merger Agreement notwithstanding any provision of this Agreement for the period specified therein or for a period of two years following termination of his employment hereunder for any reason, whichever period expires later. 5. Miscellaneous. (a) Remedies. Executive agrees that the restrictions contained in this Agreement are necessary for the protection of the business and goodwill of OFC and the Company and are reasonable for such purpose. Executive agrees that any breach of this Agreement will cause the Company substantial and irreparable damage and, therefore, in the event of any such breach, in addition to such other remedies as may be available, the Company shall have the right to seek specific performance and injunctive relief without bond. (b) Notices. Any notice or other communication hereunder shall be in writing and shall be deemed given when so delivered in person, by overnight courier (with receipt confirmed) or by facsimile transmission (with receipt confirmed by telephone or by automatic transmission report) or on the third business day after being sent by registered or certified mail (postage prepaid, return receipt requested), addressed, if to the Company, to the attention of the President, Galileo Corporation, Galileo Park, P.O. Box 550, Sturbridge, Massachusetts 01566 (fax number (508) 347-2270), or to such other address as the Company may designate in writing at any time or from time to time to the Executive, and if to the Executive, to the most recent address on file with the Company. (c) Integration. This Agreement is the entire agreement of the parties with respect to the subject matter hereof and supersedes any prior agreement or understanding relating to Executive's employment with or compensation by OFC or the Company. This Agreement may not be amended, supplemented or otherwise modified except in writing signed by the parties hereto. (d) Binding Effect. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their successors, assigns, heirs and personal representatives. 4 (e) Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. (f) Severability. If any provision hereof shall for any reason be held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid or unenforceable provision had not been included herein. If any provision hereof shall for any reason be held by a court to be excessively broad as to duration, geographical scope, activity or subject matter, it shall be construed by limiting and reducing it to make it enforceable to the extent compatible with applicable law as then in effect. (g) Governing Law. This Agreement shall be governed by the laws of Massachusetts without regard to its conflict of laws principles. IN WITNESS WHEREOF, the undersigned have duly executed and delivered this Agreement as of the date first stated above. GALILEO CORPORATION By:______________________________ Title: _________________________________ JOHN F. BLAIS, JR. EX-27.1 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR SEP-30-1998 OCT-01-1997 SEP-30-1998 710 0 9,217 1,265 8,828 18,582 48,290 32,162 55,654 21,987 1,008 0 0 81 32,578 55,654 44,306 44,306 33,012 33,012 23,271 0 524 (12,339) 288 (12,627) 0 0 0 (12,627) (1.65) (1.65)
EX-27.2 6 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR SEP-30-1997 SEP-30-1996 OCT-01-1996 OCT-01-1996 SEP-30-1997 SEP-30-1996 9,546 18,652 0 0 5,639 5,710 244 184 6,614 6,218 21,986 31,178 15,372 19,228 27,803 23,457 42,727 53,064 5,669 4,248 0 0 0 68 0 0 69 0 36,033 46,960 42,727 53,064 34,117 42,634 34,117 42,634 22,363 23,724 22,363 23,724 0 0 0 0 0 0 (11,021) 5,616 163 89 (11,184) 5,527 0 0 0 158 0 0 (11,184) 5,685 (1.63) .83 (1.63) .82
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