-----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, SWuYtUdET1p+IHPBYwuLppoz7/2YVQDIwX44hyaFO2nzgBemhblQputafkHZbhmf asl0UtfSs7Z2ziJnwszCuA== 0000950135-99-004044.txt : 19990816 0000950135-99-004044.hdr.sgml : 19990816 ACCESSION NUMBER: 0000950135-99-004044 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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-Q SEC ACT: SEC FILE NUMBER: 000-11309 FILM NUMBER: 99689187 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-Q 1 GALILEO CORPORATION 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended: JUNE 30, 1999 Commission File Number: 0-11309 GALILEO CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 04-2526583 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) STURBRIDGE BUSINESS 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 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 the number of shares outstanding of each of the Issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 11, 1999 - ----------------------------- ------------------------------- COMMON STOCK, PAR VALUE $.01 10,210,034 SHARES PAGE 1 OF 18 Index to Exhibits appears on Page 18 2 GALILEO CORPORATION INDEX
Page No. PART I. Financial Information: Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets at June 30, 1999 and September 30, 1998 ................................................. 3 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 1999 and 1998 ........................... 4 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 1999 and 1998 ................................ 5 Notes to Condensed Consolidated Financial Statements ................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .............................................. 10 PART II. Other Information: Item 1. Legal Proceedings .................................................... 14 Item 4. Submission of Matters to a Vote of Security Holders................... 15 Item 5. Other Information .................................................... 15 Item 6. Exhibits and Reports on Form 8-K...................................... 15 Signatures ........................................................... 17
-2- 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS GALILEO CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
(Unaudited) June 30, 1999 Sept. 30, 1998 ------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 1,281 $ 710 Accounts receivable, net 6,609 7,952 Inventories, net 7,665 8,828 Other current assets 841 1,092 Assets held for sale 9,020 -- -------- -------- Total current assets 25,416 18,582 Property, plant and equipment, net 8,230 16,128 Excess of cost over the fair value of assets acquired, net 18,865 19,396 Other assets, net 1,141 1,548 -------- -------- Total assets $ 53,652 $ 55,654 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable (See Notes 2 and 6) $ 9,763 $ 11,846 Current portion of other notes payable 44 1,458 Accounts payable 2,917 4,283 Accrued liabilities 5,267 4,400 -------- -------- Total current liabilities 17,991 21,987 Other liabilities 920 1,008 Commitments and contingencies (See Note 8) -- -- Shareholders' equity: Common stock 101 81 Additional paid-in capital 58,057 52,176 Accumulated deficit (23,161) (19,545) Accumulated other comprehensive loss (256) (53) -------- -------- Total shareholders' equity 34,741 32,659 -------- -------- Total liabilities and shareholders' equity $ 53,652 $ 55,654 ======== ========
See Notes to Condensed Consolidated Financial Statements. -3- 4 GALILEO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
For the Three Months For the Nine Months Ended June 30, June 30, 1999 1998 1999 1998 ------------------------------------------------------------------ Net sales $ 9,586 $ 12,500 $ 31,189 $ 32,540 Cost of sales 5,308 8,586 18,503 21,859 ------------------------------------------------------------------ Gross profit 4,278 3,914 12,686 10,681 Engineering expense 314 1,320 1,218 3,954 Selling and administrative expense 3,440 5,718 12,460 11,815 Reduction in carrying value of certain long-lived assets -- -- 1,841 -- ------------------------------------------------------------------ 3,754 7,038 15,519 15,769 ------------------------------------------------------------------ Operating profit (loss) 524 (3,124) (2,833) (5,088) Interest expense, net (243) (208) (791) (278) Other income, net 89 29 177 37 ------------------------------------------------------------------ Profit (loss) before income taxes 370 (3,303) (3,447) (5,329) Provision (benefit) for income taxes 25 (44) 169 (64) ------------------------------------------------------------------ Net income (loss) $ 345 $ (3,259) $ (3,616) $ (5,265) ================================================================== Net income (loss) per share - basic and assuming dilution $ 0.03 $ (0.41) $ (0.39) $ (0.70) ==================================================================
See Notes to Condensed Consolidated Financial Statements. -4- 5 GALILEO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
For the Nine Months Ended June 30, 1999 1998 ------------------------------- Cash flows from operating activities: Net loss $ (3,616) $ (5,265) Adjustments to reconcile net loss to net cash provided (used) by operating activities: Depreciation and amortization 2,167 2,230 Reduction in carrying value of certain long-lived assets 1,841 -- Provision (recovery)for potential uncollectible receivables (204) 984 Non-cash compensation 204 -- Other adjustments, net (26) 8 Increase (Decrease) in cash from changes in operating assets and liabilities: Accounts receivable 1,547 35 Inventories 870 (1,659) Accounts payable and accrued liabilities (1,199) (224) Other changes, net 434 36 ------------------------------- Total adjustments 5,634 1,410 ------------------------------- Net cash provided (used) by operating activities 2,018 (3,855) Cash flows from investing activities: Acquisition of businesses, net of cash acquired -- (10,562) Capital expenditures (3,560) (2,227) Other investing activities 136 -- ------------------------------- Net cash used in investing activities (3,424) (12,789) Cash flows from financing activities: Proceeds from notes payable 2,550 10,300 Payments on notes payable (6,047) (2,219) Exercise of stock options 305 -- Proceeds from issuance of common stock, net 5,372 178 Other financing, net -- (15) ------------------------------- Net cash provided by financing activities 2,180 8,244 Effect of exchange rate changes on cash (203) -- ------------------------------- Net increase (decrease) in cash and cash equivalents 571 (8,400) Cash and cash equivalents at beginning of period 710 9,546 ------------------------------- Cash and cash equivalents at end of period $ 1,281 $ 1,146 ===============================
See Notes to Condensed Consolidated Financial Statements -5- 6 GALILEO CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments except as disclosed in Note 7) considered necessary for a fair presentation. The Company's accounting policies are described in the Notes to Consolidated Financial Statements in the Company's 1998 Form 10-K, which should be read in conjunction with these financial statements. The results of operations for the three and nine months ended June 30, 1999, are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to amounts reported in previous quarters in order to conform with the current quarter's presentation. 2. GOING CONCERN The accompanying condensed consolidated financial statements were prepared assuming the Company will continue as a going concern. As a result of a number of developments which have had a materially adverse effect on the results of operations, the Company has incurred recurring operating losses, working capital deficiencies and, as of December 31, 1998 and September 30, 1998, was in violation of certain covenants of loan agreements with a bank. These conditions raised substantial doubt about the Company's ability to continue as a going concern. As a result of the aforementioned, the Company has taken a number of steps to improve its financial condition, which are summarized as follows: Private Placement - On January 26, 1999, the Company completed the sale of 2,000,000 shares of the Company's common stock, together with warrants for an additional 2,000,000 shares, to an investment entity formed by the principals of Andlinger & Company, Inc. for an aggregate purchase price of $6.0 million. The warrants are exercisable for a period of 7 1/2 years at a price of $1.50 per share, subject to an antidilution adjustment. -6- 7 Loan Agreement - Also on January 26, 1999, the Company's bank loan agreement was amended to reduce maximum borrowings to $13.0 million through June 30, 1999 and $6.0 million thereafter and to extend the term of the loan through October 31, 2000. The financial covenants were also amended, and the bank agreed to waive specified previous events of default. As discussed in Note 9, the Company sold certain non-strategic assets on July 1, 1999, with the sales proceeds of $8.6 million being applied against its bank borrowings. The Company had received an extension from the bank with respect to reducing its maximum borrowings to $6.0 million and, therefore, was not in default at June 30, 1999. Sale of Non-Strategic Assets - In addition to the sale of non-strategic assets on July 1, 1999 (Note 9), the Company is also evaluating the possibility of the sale of its Sturbridge, Massachusetts facility. There can be no assurance as to whether or how quickly the Company will reach an agreement for the sale of that facility. Cost Reductions - During the three months ended December 31, 1998, the Company terminated its Telecommunications business and further reduced the workforce by 49 employees. These reductions, coupled with reductions-in-force of 61 employees in the fourth quarter of fiscal 1998, are expected to result in annualized cost savings of approximately $5.3 million. 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. Actual results may differ from management's expectations. 3. EARNINGS PER SHARE DATA The following table sets forth the computation of basic and diluted earnings per share (amounts in thousands, except per share data):
For the Three Months Ended For the Nine Months Ended June 30, June 30, 1999 1998 1999 1998 --------------------------------------------- --------------- Numerator: Net income (loss) $ 345 $(3,259) $(3,616) $(5,265) ------------------------------------------------------------- Denominator: Weighted average shares - basic 10,109 8,042 9,232 7,509 Dilutive employee stock options and warrants 1,436 -- -- -- ------------------------------------------------------------- Weighted average shares - assuming dilution 11,545 8,042 9,232 7,509 ============================================================= Net income (loss) per common share - basic and assuming dilution $ 0.03 $ (0.41) $ (0.39) $ (0.70) =============================================================
-7- 8 Common stock equivalents were antidilutive and therefore were not included in the computation of weighted average shares used in computing the diluted loss per share for the three and nine months ended June 30, 1998 and the nine months ended June 30, 1999. 4. INVENTORIES Inventories consist of the following:
As of June 30, September 30, 1999 1998 ------------------------------------------- (Amounts in 000's) Finished Goods $4,680 $5,223 Work-in-progress 1,772 1,819 Raw Materials 1,213 1,786 ------------------------------------------- $7,665 $8,828 ===========================================
5. COMPREHENSIVE INCOME (LOSS) Total comprehensive income (loss) was $0.3 million and ($3.8) million for the three and nine months ended June 30, 1999 and ($3.3) million and ($5.3) million for the three and nine months ended June 30, 1998. 6. REVOLVING CREDIT FACILITY In January 1998, the Company entered into a revolving credit facility with a bank (as amended in August 1998 and January 1999, the "Loan Agreement"). The Loan Agreement provides for a maximum commitment of $13.0 million through June 30, 1999 and $6.0 million thereafter with interest payable on a monthly basis at the bank's base rate plus 2% per year. 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 asset 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 October 31, 2000. The outstanding balance of this facility at June 30, 1999 and September 30, 1998 was $9.8 million and $11.8 million, respectively. The carrying value of this debt as of June 30, 1999 and September 30, 1998 approximated its fair market value. In compliance with the Loan Agreement, a $0.1 million amendment fee was paid to the bank on January 2, 1999 in addition to a fee totaling $0.2 million payable quarterly in 1999. -8- 9 As discussed in Note 2, as of December 31, 1998 and September 30, 1998 the Company was in violation of certain covenants contained in the Loan Agreement. The bank waived these violations in the amendment to the Loan Agreement executed in January 1999. As a result of the mandatory reduction in the Loan Agreement to $6.0 million at June 30, 1999 and uncertainties associated with the sale of non-strategic assets, the loan balance of $9.8 million and $11.8 million is recorded as a current liability at June 30, 1999 and September 30, 1998, respectively. As discussed in Notes 2 and 9, bank borrowings were reduced by $8.6 million on July 1, 1999 to approximately $1.1 million. 7. NONRECURRING CHARGES In December 1998, the Company recorded a charge of $1.8 million to reduce the carrying value of certain long-lived assets to estimated fair market value primarily related to land and buildings, as well as maintenance and engineering equipment, at the Company's Sturbridge, Massachusetts facility. During the three months ended December 31, 1998, the Company terminated its Telecommunications business and further reduced the workforce. The Company has suspended all investments for this business and related activities. In addition, the Company incurred operating losses related to the Telecommunications business of $0.4 million for the three months ended December 31, 1998. No additional losses were incurred during the three-month period ending June 30, 1999, and none are expected in subsequent quarters. The Company reduced its workforce by 49 employees during the three months ended December 31, 1998. The Company recorded a one-time operating expense associated with the reduction-in-force and other consolidation costs of approximately $0.8 million. No additional reductions or costs were incurred during the quarter ended June 30, 1999. 8. COMMITMENTS AND CONTINGENCIES Legal Proceedings - There is one class action lawsuit pending against the Company and certain of its former officers alleging violations of federal securities laws, which was filed on June 21, 1999. This lawsuit consolidates and amends four class action lawsuits filed during the first quarter of fiscal year 1999. The Company is in the process of responding to the allegations contained in the lawsuit. As indicated previously, the Company will vigorously defend this lawsuit and believes that it is without merit. Environmental Matters - Related to the completed clean-up and continued monitoring of a previously environmentally contaminated area, the Company has completed the removal of contaminated soil from what is believed to be an isolated disposal of certain industrial wastes on its property in an area which is now part of a parking lot. Additional monitoring will be required to confirm that the remediated area was the single source of the contamination. The Company estimates that the cost to complete the work now underway is in the $0.1 million to $0.2 million range, which has been provided for in the financial statements for the period ending June 30, 1999. -9- 10 9. SUBSEQUENT EVENTS On July 1, 1999, subsequent to the end of the third quarter, the Company sold its Scientific Detector and Spectroscopy Products (SDP) Business and certain assets related to a previously discontinued business. The proceeds from those transactions, totaling approximately $8.6 million, were applied to the Company's indebtedness under its revolving credit agreement with its principal lender reducing its indebtedness to approximately $1.1 million as of July 1, 1999. The Company will recognize the gain from these transactions in its fourth quarter financial statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS - FOR THE THREE MONTHS ENDED JUNE 30, 1999 Revenues for the three months ended June 30, 1999, decreased to $9.6 million from $12.5 million for the comparable prior-year period due to lower sales to a major medical products distributor and the elimination of revenues from discontinued businesses. Gross profit (as a percentage of revenues) for the three months ended June 30, 1999, of 44.6%, increased from 31.3% from the comparable prior-year period primarily due to the impact of cost reduction programs, including the benefit of previously announced restructuring programs. Engineering expense decreased to $0.3 million for the three months ended June 30, 1999 from $1.3 million in the comparable prior-year period as a result of the discontinuance of the Company's Medical Endoscope Imaging Products and Telecommunications businesses in 1998 ($1.0 million) and the reclassification of certain engineering expenses more properly classified as selling and administrative expense ($0.3 million). Selling and administrative expense decreased to $3.4 million for the three months ended June 30, 1999 from $5.7 million in the comparable prior-year period primarily due to (1) the benefits of previously announced restructuring programs and on-going cost reduction programs ($1.0 million), (2) $1.0 million that had been recorded in the previous year for a potentially uncollectible receivable and, (3) the engineering expense reclassification mentioned above ($0.3 million). During the quarter ended June 30, 1999, approximately $0.5 million of compensation expense was incurred due to the resignation and termination of certain key executives of the Company. Also during the quarter, the Company recorded recoveries of $0.2 million from certain previously reserved accounts receivable. For both the current and comparable prior-year periods, the Company's effective tax rate differs from the statutory rate primarily due to available tax loss carry-forwards. The provision for income taxes for the current year period relates to foreign taxes. -10- 11 RESULTS OF OPERATIONS - FOR THE NINE MONTHS ENDED JUNE 30, 1999 Revenues for the nine months ended June 30, 1999, decreased to $31.2 million from $32.5 million for the comparable prior-year period. The acquisitions of Les Entreprises Galenica, Inc., ("Galenica") and OFC Corporation ("OFC") in the second quarter of fiscal 1998 contributed an additional $1.1 million and $3.8 million of revenues for the nine months ended June 30, 1999, respectively. The increased revenues from the acquisitions were offset by a reduction in revenues of $2.1 million attributable to the overall SDP business and impacted by foreign shipment restrictions on the Company's microchannel plate products by the U.S. Department of Defense and a reduction in revenues of $2.4 million related to the discontinuance of the Company's Medical Endoscope Imaging Products business. Also, sales to a major medical distributor were lower during the nine month period ending June 30, 1999 by $1.7 million. Gross profit (as a percentage of revenues) for the nine months ended June 30, 1999, of 40.7%, increased from 32.8% from the comparable prior-year period primarily due to the impact of a more favorable product mix from the acquired businesses, improved operating efficiencies and benefits from cost reduction programs. Engineering expense decreased to $1.2 million for the nine months ended June 30, 1999 from $3.9 million in the comparable prior-year period as a result of the discontinuance of the Company's Medical Endoscope Imaging Products and Telecommunications businesses in 1998 ($2.0 million) and the reclassification of certain engineering expenses ($0.7 million) to selling and administrative expense. Selling and administrative expense increased to $12.5 million for the nine months ended June 30, 1999 from $11.8 million in the comparable prior-year period due to, among other things, the inclusion of $1.4 million of operating expenses and goodwill amortization from the acquisitions, severance and other consolidation costs of $0.8 million, and the reclassification of engineering expenses ($0.7 million). Offsetting those increases were the elimination of the $1.0 million charge in 1998 for a potentially uncollectible receivable and an approximate $1.0 million benefit realized in 1999 from cost reduction and restructuring programs. Interest expense, net amounted to $0.8 million during the nine months ended June 30, 1999 compared with $0.3 million during the comparable prior-year period. The increase in interest expense is primarily related to increased borrowings under the Company's revolving line of credit. For both the current and comparable prior-year periods, the Company's effective tax rate differs from the statutory rate primarily due to available tax loss carry-forwards. The provision for income taxes for the current year period principally relates to foreign taxes. -11- 12 FINANCIAL CONDITION Beginning in 1997 and continuing through the first quarter of fiscal 1999, 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 through the first quarter of fiscal year 1999, and as of December 31, 1998 and September 30, 1998 was in violation of certain financial covenants of loan agreements. These conditions have raised substantial doubt about the Company's ability to continue as a going concern. See Note 2 of the Notes to Condensed Consolidated Financial Statements for additional discussion. On January 26, 1999, the Company completed the sale of 2,000,000 shares of the Company's common stock, together with warrants for an additional 2,000,000 shares, to an investment entity formed by the principals of Andlinger & Company, Inc. for an aggregate purchase price of $6.0 million. The warrants are exercisable for a period of 7 1/2 years at a price of $1.50 per share, subject to antidilution adjustment. In January 1998, the Company entered into a revolving credit facility with a bank (as amended in August 1998 and January 1999, the "Loan Agreement"). The Loan Agreement provides for a maximum commitment of $13.0 million through June 30, 1999 and $6.0 million thereafter with interest payable on a monthly basis at the bank's base rate plus 2% per year. 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 asset 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 October 31, 2000. The outstanding balances of this facility at June 30, 1999 and September 30, 1998 were $9.8 million and $11.8 million, respectively. The carrying values of this debt as of June 30, 1999 and September 30, 1998 approximated their fair market values. In compliance with the Loan Agreement, a $0.1 million amendment fee was paid to the bank on January 2, 1999, in addition to a fee totaling $0.2 million payable quarterly in 1999. As discussed in Note 2, the Company was in violation of certain covenants contained in the Loan Agreement. The bank waived these violations in the amendment to the Loan Agreement executed in January 1999. As a result of the mandatory reduction in the Loan Agreement to $6.0 million at June 30, 1999 and uncertainties associated with the sale of non-strategic assets, the loan balance of $9.8 million and $11.8 million is recorded as a current liability at June 30, 1999 and September 30, 1998, respectively. As further discussed in Notes 2 and 9 of the Company's Condensed Consolidated Financial Statements, the Company sold certain non-strategic assets as of July 1, 1999 with the cash sales proceeds of $8.6 million being applied against its bank borrowings. Those payments reduced its borrowings to approximately $1.1 million on July 1, 1999. The Company had received an extension until July 14, 1999 for the debt reduction and, therefore, was not in default at June 30, 1999. The Company is evaluating the sale of the Sturbridge, Massachusetts facility. There can be no assurance whether or how quickly the Company could complete that sale. -12- 13 Giving effect to reclassifying the loan outstanding to current liabilities and assets held for sale to current assets, the Company's working capital at June 30, 1999 increased to $7.4 million from a working capital deficit of $3.4 million at September 30, 1998. Capital spending for the nine months ended June 30, 1999, amounted to $3.6 million. This compares with $2.2 million of capital expenditures for the comparable prior-year period. Capital spending during the current nine-month period primarily relates to machinery and equipment to support the development of new products at OFC Corporation. Cash flows provided by operating activities amounted to $2.0 million for the nine months ended June 30, 1999, as compared with cash flows used in operating activities of $3.9 million in the comparable prior-year period. 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. The Company has completed an inventory and assessment of all critical internal business systems and applications. With the exception of a system upgrade at Leisegang GmbH, the majority of remedies consisting of upgrades or replacements is complete. The Company expects to have all actions and implementations complete by October 1, 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 year 1999. Additionally, the Company is investigating the Year 2000 compliance status of vendors and service providers, and an aggressive survey has been completed. The Company will attempt to minimize risk and exposure based on responses from 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 at its Leisegang GmbH subsidiary in Germany 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 -13- 14 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 June 30, 1999, the Company expended approximately $0.2 million paid to third party consultants and vendors in remediation efforts. Internal expenditures are not tracked separately. The Company estimates remaining costs should not exceed $0.1 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. FORWARD-LOOKING STATEMENTS This Form 10-Q includes forward-looking statements concerning the sale of certain non-strategic assets, costs of testing and verification relating to Year 2000 compliance, costs relating to environmental clean-up, pending legal proceedings and other aspects of future operations. These forward-looking statements are based on certain underlying assumptions and expectations of management. Certain factors could cause actual results to differ materially from the forward-looking statements included in this Form 10-Q. For additional information on those factors which could affect actual results, please refer to the Company's Form 10-K for the fiscal year ended September 30, 1998. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There is one class action lawsuit pending against the Company and certain of its former officers alleging violations of federal securities laws which was filed on June 21, 1999. This lawsuit consolidates and amends four class action lawsuits filed during the first quarter of fiscal year 1999. The Company is in the process of responding to the allegations contained in the lawsuit. As indicated previously, the Company will vigorously defend this lawsuit and believes that it is without merit. -14- 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders was held on April 6, 1999. Information regarding the matters voted on at the Annual Meeting of Shareholders and the voting results for each matter are set forth in the Company's Form 10-Q for the quarterly period ended March 31, 1999, previously filed with the Commission and incorporated herein by reference. ITEM 5. OTHER INFORMATION ENVIRONMENTAL MATTERS Related to the completed clean-up and continued monitoring of a previously environmentally contaminated area, the Company has completed the removal of contaminated soil from what is believed to be an isolated disposal of certain industrial wastes on its property in an area which is now part of a parking lot. Additional monitoring will be required to confirm that the remediated area was the single source of the contamination. The Company estimates that the cost to complete the work now underway is in the $0.1 million to $0.2 million range, which has been provided for in the financial statements for the period ending June 30, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: 2.1 Consulting and Settlement Agreement and Full and Final Release dated as of July 6, 1999 between Galileo Corporation and W. Kip Speyer. 2.2 Employee Agreement dated as of July 6, 1999 between John D. Barlow, Jr. and Leisegang Medical, Inc. 27 Financial Data Schedule (EDGAR filing only). b. Reports on Form 8-K 1. Current Report on Form 8-K dated June 30, 1999 and filed on July 12, 1999, with press releases dated July 1, 1999 and July 6, 1999, attached as exhibits thereto, regarding (i) the sale of the Company's Scientific Detector and Spectroscopy Products Business to Burle Industries, Inc. for a cash sale price of approximately $7.1 million; (ii) the Company's sale of certain manufacturing assets relating to a previously discontinued business to IPG Photonics Corporation for a sales price of approximately $1.5 million; (iii) the amendment to the Company's revolving credit agreement to extend until July 14, 1999 the applicable dates of certain covenants in the revolving credit agreement, including the Company's obligation to reduce the maximum borrowings thereunder to below $6.0 million, and (iv) the -15- 16 assumption by Gerhard R. Andlinger of the additional titles of President and Chief Executive Officer and the appointment of John D. Barlow as President and Chief Executive Officer of the Company's Leisegang Medical, Inc. subsidiary, both succeeding W. Kip Speyer, who resigned from each of these positions. -16- 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GALILEO CORPORATION Dated: August 11, 1999 /s/ Gerhard R. Andlinger -------------------------------------------- Gerhard R. Andlinger, Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) /s/ Thomas J. Mathews --------------------------------------------- Thomas J. Mathews, Chief Financial Officer (Principal Financial and Accounting Officer) -17- 18 GALILEO CORPORATION INDEX TO EXHIBITS
EXHIBIT NO. PAGE NO. ----------- -------- 2.1 Consulting and Settlement Agreement and Full and Final EDGAR Filing Only Release dated as of July 6, 1999 between Galileo Corporation and W. Kip Speyer. 2.2 Employee Agreement dated as of July 6, 1999 between John EDGAR Filing Only D. Barlow, Jr. and Leisegang Medical, Inc. 27 Financial Data Schedule EDGAR Filing Only
-18- EX-2.1 2 CONSULTING AND SETTLEMENT AGREEMENT 1 EXHIBIT 2.1 CONSULTING AND SETTLEMENT AGREEMENT AND FULL AND FINAL RELEASE This Consulting and Settlement Agreement and Full and Final Release (the "Agreement") is entered into as of the 6th day of July, 1999, by and between W. KIP SPEYER (hereinafter referred to as "Employee") and GALILEO CORPORATION (hereinafter referred to as "Employer"). In consideration of the mutual promises and covenants contained herein, the parties agree as follows: 1. The parties agree and acknowledge that Employee shall resign and Employee's employment with Employer shall terminate as of September 30, 2001 (the "Resignation Date"). Further, as of July 6, 1999 (the "Change Date"), Employee shall resign as Director, President, Chief Executive Officer and all other offices or positions with Employer and its subsidiaries and cease to serve as an executive officer of Employer and its subsidiaries. From the Change Date through the Resignation Date, Employee shall continue as an employee of Employer and serve as an internal consultant to Employer, without being a corporate officer, and shall assist in various matters as directed by Employer's Chairman and President from time to time. During such period, Employee shall report to Gerhard R. Andlinger, the Chairman and President of Employer, or his successor as either Chairman or President, as to his activities hereunder and shall pursue only those activities and projects as assigned by said Chairman and President from time to time. The parties acknowledge that the nature of this employment relationship shall not require the presence of Employee at Employer's place of business, except on a limited basis, and that Employee is not expected to devote any particular portion of his time to the performance of his duties hereunder. The parties agree that Employee shall be free to pursue other consulting and business opportunities subject to the limitations contained in Section 6 and that Employee's duties hereunder shall not require Employee to spend any particular time in the performance of services hereunder, all of which, except for (i) certain transitional consulting to be performed prior to July 15, 1999, and (ii) Employee's assistance in litigation matters, as described below, shall be subject to Employee's availability and own schedule, in his sole discretion. Employee shall assist Employer with respect to any litigation involving Employer arising out of actions prior to the Resignation Date (including the pending shareholder litigation) and shall make himself reasonably available for interviews and testimony when reasonably requested by Employer or its counsel and Employer shall reimburse Employee for all expenses incurred in connection with such assistance. 2. In lieu of compensation otherwise due to Employee under that certain Employment Agreement dated as of November 16, 1998 between Employer and Employee (the "1998 Agreement") and under agreements relating to the Options, as hereinafter defined, Employer will provide Employee an employment separation and consulting package as follows: (a) Severance compensation as follows; (i) base compensation at the rate of $250,000 per annum, continuing from the Change Date until September 30, 2000; (ii) continuing base compensation at the rate of $120,000 per annum, from October 1, 2000 through September 30, 2001; and -19- 2 (iii) bonus compensation of $50,000, payable on October 29, 1999, provided that Leisegang Medical, Inc. achieves net sales of $9.2 million for the fiscal year ending September 30, 1999. All such base compensation shall be payable in substantially equal weekly installments (or on such other schedule as Employer shall establish for paying compensation to its senior executives) beginning on the Change Date, but effective as of July 1, 1999, and continuing on each subsequent Employer pay date until the entire amount due has been paid to Employee (the period of time beginning on the Change Date and ending on the date of payment of the last installment of the severance compensation payable pursuant to this subparagraph 2(a) shall be hereinafter referred to as the "Severance Period"), subject to the termination provisions hereof. (b) Payment on or before July 12, 1999 for all vacation days accrued through June 30, 1999. No vacation days will be accrued from and after July 1, 1999; and (c) Employer reimbursement for all ordinary and necessary business expenses incurred by Employee prior to the Change Date in performing duties under the 1998 Agreement as well as the automobile expenses for which reimbursement is provided under this Agreement in accordance with the Employer's terms and conditions regarding accountability as in effect on the Change Date. All such payments shall be made consistent with Employer's current payroll schedule and subject to federal income tax, Employee's contributions to FICA, and other required withholdings for medical coverage, etc. Employer shall continue to make the payments referred to in Sections 2(a) through 2(c) above to Employee (or in the event of his incapacity or disability to his written designee on file with Employer or if there is no such designee, to his legal representative) notwithstanding the death, incapacity or disability of Employee. (e) The following benefits currently available to Employee shall continue from the date hereof through the expiration of the Severance Period or the date on which Employee secures other employment or the Employee's death, whichever occurs first: (i) Entitlement to all Employer medical and dental insurance benefits in accordance with the same terms and conditions as in effect on the Change Date; (ii) Entitlement to a leased car for personal and business use with an annual rental not exceeding $7,500 and reimbursement of all reasonable expenses in operating said leased car; (iii) continued participation in Employer's 401(k) retirement plan for the balance of the current plan year (but not thereafter). Except for the benefits provided in this subparagraph 2(e), Employee shall not participate in any other benefit programs of Employer during the Severance Period. (f) Employee is currently the holder of the stock options to purchase shares of Common Stock of Employer which are listed on Schedule A attached hereto (the "Options"). As consideration for the benefits provided to Employee hereunder, and at the time of execution of this -20- 3 Agreement, Employee will forfeit and surrender to Employer all of the Options with the exception of the 50,000 Options granted to Employee on December 31, 1998 and the 10,000 Options granted to Employee on August 20, 1998 (the 60,000 Options which Employee will retain following the execution of this Agreement shall hereinafter be referred to as the "Retained Options"), as indicated on Schedule A attached hereto. The parties agree that the Retained Options shall be fully vested as of the date hereof, provided, however, that the exercise provisions relating to the Retained Options shall be, and hereby are, modified to provide that such Options must be exercised by Employee (or in the event of Employee's disability, by his legal representative) on or prior to December 31, 2000 (or in the event of Employee's death, by his personal or legal representative within six months after the date of death). Employer and Employee shall promptly take such additional actions, if any, on its part as are necessary to modify the exercise provisions of the Retained Options in accordance with the terms of this subparagraph 2(f). Employee shall promptly take such further actions, if any, on his part as are reasonably requested by Employer to confirm the surrender, forfeiture and cancellation of all of the Options other than the Retained Options. For purposes of provisions of the Employer's 1991 Stock Option Plan which require that modification of the terms of a particular Option be agreed to in a writing between Employer and Employee, the parties agree that this subparagraph 2(f) shall constitute such a writing between the parties. 3. Employer agrees that except for a Material Breach (as defined below) no action will be taken through the Resignation Date to terminate this Agreement, or Employee's employment hereunder or which would interfere with or defeat or terminate the benefits derived and to be derived by Employee hereunder, including but not limited to the vesting or exercisability of the Options. Employee and Employer each acknowledge and agree that upon the occurrence of any Material Breach (as defined below) by the Employee, the Employee will not be entitled to any further salary continuation, or any other monies, benefits or entitlements as described herein, and specifically in Sections 2(a), (c), (d) and (e) above (in addition to any actions which may be taken in connection with matters in Section 2(f)). For purposes of this Agreement, the term "Material Breach" shall mean that there has been a breach by Employee (and the Employer's Board of Directors has made a good faith determination that such a breach has occurred) of the non-compete provisions of Section 6 or Employee shall have sought to rescind or deny the acknowledgment set forth in Section 4 or the release of Employer set forth in Section 5 hereof; provided, however, in the event of any such alleged breach, the Employer will provide the Employee with written notice of such alleged breach and provide Employee reasonable opportunity (consisting of at least fifteen (15) business days) to cure such alleged breach or explain or satisfactorily demonstrate to Employer in its reasonable judgment that no such breach has occurred and if so timely cured, explained or demonstrated as set forth above then no such Material Breach shall be deemed to have occurred. The parties agree and acknowledge that Employee would not be entitled to all or part of this separation and consulting package but for this Agreement and that Employee would not waive certain claims or release Employer as provided herein but for this Agreement, 4. Employee specifically acknowledges the following: (a) The Employee has waived his right to at least twenty-one (21) full days within which to consider this Agreement prior to the execution of this Agreement. (b) Employee is advised that Employee has the right and may consult with an attorney prior to executing this Agreement and acknowledges the opportunity to consult an attorney. -21- 4 (c) The Employee has seven (7) days following the execution of this Agreement to revoke the Agreement and the Agreement will not become effective or enforceable until after this seven-day period has expired. To revoke the Agreement, the Employee must advise the Employer in writing of his election to revoke it within the seven-day period. Such written notice must be addressed and delivered to Gerhard R. Andlinger, the Chairman and President, by facsimile at (914) 332-4977. In the event of revocation, the terms of the 1998 Agreement will control as to the benefits and compensation to which the Employee is entitled. The parties acknowledge that this Agreement shall serve as Employer's notice of termination of the 1998 Agreement as of the date of this Agreement. (d) Employee recognizes that he is specifically releasing, among other claims, any claims under the Age Discrimination in Employment Act of 1967 and all amendments thereto. (e) Employee acknowledges that by executing this Agreement, and in consideration of the severance compensation provided for in subparagraph 2(a) hereof and the other consideration and benefits provided to Employee hereunder, Employee is waiving any and all rights and claims to any annual incentive cash bonus or any other type or form of bonus or incentive compensation for the fiscal year ended September 30, 1999 (except as specifically provided herein), or any prior or future fiscal year. (f) Employee is not waiving rights or claims that may arise after the date of this Agreement except for the waiver of severance and other compensation, including without limitation that due under the 1998 Agreement and rights to the Options other than the Retained Options. Specifically, Employee shall be entitled to indemnification by Employer for any and all liabilities, suits, claims and demands arising from or in any manner relating to actions taken by Employee prior to the Change Date in his capacity as an executive officer or director of Employer to the same extent and in accordance with the same terms, conditions and limitations as apply to the Employer's indemnification of its directors and officers from time to time. 5. Except for the rights, duties, and obligations of the parties under this Agreement, each of the parties (and, in the case of the Employer, all past and present subsidiaries and affiliates and their divisions and departments, and their directors, officers, employees and agents, and their predecessors, successors and assigns, or any of them) hereby unconditionally and irrevocably releases and forever discharges the other party of and from and each of the parties agrees not to sue and not to assert against the other party any causes of action, claims and demands whatsoever, known or unknown at law, in equity, or before any agency or commission of local, state or federal governments, arising, alleged to have arisen or which might have been alleged to have arisen or which may arise (i) in connection with Employee's employment with Employer and the events and circumstances leading to this Agreement that occurred prior to the date hereof, (ii) Employee's performance of the duties of his employment with Employer that occurred prior to the date hereof or (iii) under any law including, but not limited to, federal, state, or municipal anti-discrimination laws such as The Americans With Disabilities Act, Title VII of the Civil Rights Act of 1964, as amended in 1972 and 1991, and the Age Discrimination In Employment Act of 1967, that such party on its own behalf and on behalf of his heirs, executors, administrators or assigns, in the case of the Employee, and its subsidiaries, affiliates, directors, officers, employees, agents, successors or assigns, in the case of the Employer, ever had, now has or hereafter can, shall or may have for or by reason or any cause whatsoever, to the effective date of this Agreement. -22- 5 6. For a period of two years following the Change Date, Employee agrees he will not, without the prior written consent of the Chairman and President of the Employer, directly or indirectly compete either as a principal, owner, partner, shareholder, director, employee or consultant, with any of Employer's lines of business existing as of the date hereof namely, (i) the development, manufacture and marketing of women's health-related medical products, and (ii) the optical filter and diamond point turning business. 7. Each of the parties agrees not to comment upon, discuss, or disclose to any person any information concerning the terms, conditions and provisions of this Agreement (except as may be required by legal process) except that each party may make the statements regarding the other as provided in the attached Exhibits 1 and 2. Notwithstanding the above, Employer or Employee may disclose the terms, conditions and provisions of this Agreement to its bankers pursuant to the terms of any of its loan or credit agreements, to its investment bankers, counsel and accountants or as may be required to comply with the requirements of its financing arrangements or federal securities laws. Employee shall not make disparaging comments about the Employer which could reasonably be anticipated to cause material harm to the Employer, and Employee agrees to not comment or discuss, except in a positive manner, with any person or entity any matters that arose in connection with Employee's employment or resignation from employment with Employer. Employer shall use reasonable efforts to assure that any public comments made by Employer concerning Employee are limited to the substance of the attached letter plus the basic information concerning Employee's date of employment, position and compensation. 8. In the event that either party breaches any of the covenants contained in this Agreement the non-breaching party may institute legal proceedings against the breaching party. The prevailing party in any such litigation shall be entitled to injunctive relief and any other remedies available at law. In addition, the prevailing party shall be entitled to receive repayment of all its expenses, including reasonable attorney's fees, incurred in the prosecution of such actions, Both the Employer and the Employee acknowledge and agree that the proper place of venue of any litigation which may arise due to any breach hereto or any attempt to enforce this Agreement shall be in Palm Beach County, Florida. In the event of a final order by any court that Employee has breached the non-disparagement prohibitions of this Agreement, the Employer is entitled to recover from the Employee any payments paid to Employee by Employer after the first date on which such disparaging comments are determined by the Court to have been made. 9. Employee agrees to return all of Employer's property in Employee's possession on the Change Date. Employee may retain the personal computer and related peripherals which Employee has been using, but such equipment shall only be delivered after Employer has removed from such equipment all data and information related to Employer or constituting the proprietary or confidential information of Employer. Employee may retain and remove all office furniture and furnishings which were purchased by Employee, and Employer shall make arrangements for Employee's access to the premises outside of regular business hours to effect such removal. 10. Employer and Employee shall use their best efforts to amend the terms of the existing Stockholders' Agreement, dated as of December 22, 1998, among Andlinger Capital XIII, LLC, John F. Blais Jr. and Employee so that Employee shall be permitted to "Transfer" (as defined in such Agreement) up to 50,000 shares of Employer's Common Stock in any fiscal quarter of Employer. -23- 6 11. This Agreement constitutes the complete understanding between the parties. Employee especially acknowledges and declares that no other contract, promise or inducement has been made to Employee. In this regard, the parties agree that this Agreement terminates and supersedes the 1998 Agreement and, accordingly, each party's rights and obligations under the 1998 Agreement are terminated upon the execution of, and replaced by the terms of, this Agreement. This Agreement may not be amended except in a writing signed by each of the parties. 12. The parties acknowledge that they have entered into this Agreement voluntarily and on their own free will and that they understand fully all the terms of the Agreement. 13. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 14. This Agreement has been executed and delivered in, and shall be governed in all respects, whether as to validity, construction, capacity, performance, or otherwise, by the laws of the Commonwealth of Massachusetts, without regard to its conflict of law provisions. -24- 7 In testimony whereof, the parties hereto set their hands and seals the day and year first written above. EMPLOYEE /s/ Charles T. Ball /s/ W. Kip Speyer - -------------------------------- ----------------------------------- Witness W. Kip Speyer GALILEO CORPORATION /s/ Stephen A. Magida By: /s/ Gerhard R. Andlinger - -------------------------------- ----------------------------------- Witness Gerhard R. Andlinger Chairman and President -25- 8 Schedule A Stock Options Held by W. Kip Speyer at July 6, 1999
Date of Grant Number of Type of Option Exercise Price Plan or Agreement under Share Granted which Option was Granted 8/6/96 20,000* ISO $ 21.50 1991 SOP 3/10/97 20,000* ISO $ 7.25 1991 SOP 8/20/98 10,000 ISO $ 4.875 1991 SOP 12/31/98 50,000 NQSO $ 3.875 1991 SOP 2/23/99 50,000* NQSO $ 5.25 1991 SOP 2/23/99 100,000* NQSO $ 5.25 Outside 1991 SOP - -------------------------------------------------------------------------------------------------------------- TOTAL 250,000
* To be Surrendered and Forfeited Pursuant to this Agreement -26- EX-2.2 3 EMPLOYEE AGREEMENT 1 EXHIBIT 2.2 EMPLOYEE AGREEMENT AGREEMENT made as of the 6th day of July, 1999, by and between JOHN D. BARLOW, JR. (the "Employee") having an address at 68 Rolling Meadow, E. Amherst, New York 14051 and LEISEGANG MEDICAL, INC. (the "Company"), a Florida corporation having an address at 6401 Congress Avenue, Boca Raton, Florida 33487. WHEREAS, the Company is a wholly-owned subsidiary of Galileo Corporation ("Galileo"); and WHEREAS, the parties desire to set forth the terms of the Employee's employment with the Company. NOW, THEREFORE, for good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, and in consideration of the mutual covenants and obligations herein contained, the parties hereto agree as follows: 1. POSITION, RESPONSIBILITIES AND TITLE. During the Employee's employment by the Company, the Employee agrees to serve as Chief Executive Officer of the Company and, at the pleasure of the Board of Directors of Galileo (the "Board"), shall serve as President and a Director of the Company, and as a director and/or officer of other subsidiaries of Galileo (the "Affiliates") as designated by the Chief Executive Officer of Galileo from time to time, presently consisting of those positions listed on Exhibit A attached hereto. The Employee shall comply with and perform such directions and duties in relation to the business and affairs of the Company and the Affiliates as may from time to time be requested by the Board or the Chief Executive Officer of Galileo and shall use the Employee's best efforts to improve and extend the business of the Company and the Affiliates. The Employee shall at all times report to, and the Employee's activities shall at all times be subject to the direction and control of, the Board and the Chief Executive Officer of Galileo. The Employee agrees to devote the Employee's full business time, attention and services to the competent discharge of such duties for the successful operation of the business of the Company and the Affiliates. 2. COMPENSATION: SALARY, BONUSES, STOCK OPTIONS AND OTHER BENEFITS. During the Employee's employment by the Company, the Company shall pay the Employee the following compensation: 2.1. SALARY. The Company will pay to the Employee a salary at the annual rate of $181,500 commencing as of the date hereof payable in conformity with the Company's customary practices for executive compensation for officers of the Company as such practices shall be established or modified from time to time. Salary payments shall be subject to all applicable withholdings. 2.2. FRINGE BENEFITS. The Employee will be entitled to participate on the same basis with all other officers and employees of the Company in the Company's standard benefits package generally available for other officers and employees of the Company, including group health, disability and life insurance coverage consistent with that received by Employee in connection with Employee's previous employment position with Ethox Corp. and an automobile allowance in the amount of $550 per month. The Employee shall receive four (4) weeks of paid vacation per year, which shall accrue in accordance with the Company's normal vacation policies applicable to senior executives. 2.3 STOCK OPTIONS. The Board has approved the grant to Employee of non-qualified stock options under Galileo's 1991 Stock Option Plan to purchase 35,000 shares of Galileo's Common -27- 2 Stock at an exercise price equal to the fair market value of Galileo's Common Stock on the date of grant and subject to the terms and conditions as set forth on the Nonstatutory Stock Option Certificate which is attached hereto as Exhibit B. 2.4 SIGNING BONUS. On or before August 5, 1999, the Company shall pay Employee a signing bonus in the amount of fifty thousand dollars ($50,000). 2.5 ANNUAL INCENTIVE CASH BONUS. During the term of this Agreement, Employee shall have the opportunity to earn an annual incentive cash bonus to be paid annually following the close of the Company's fiscal year. The amount of the annual incentive cash bonus shall be determined by the Board, or the Compensation Committee thereof, in the sole discretion of the Board or the Compensation Committee, as the case may be. Notwithstanding the terms of this Section 2.5, the Company does not anticipate an annual incentive cash bonus being awarded to Employee for the Company's fiscal year ending September 30, 1999. 2.6 TRANSACTION BONUS. Employee shall be entitled to a transaction bonus ("Transaction Bonus") in the event of the sale of the women's health-related medical products business of the Company and the Affiliates (hereinafter referred to as the "Leisegang Companies") during Employee's employment with the Company and under certain conditions, as outlined below. The Transaction Bonus shall be paid pursuant to the following terms: (a) In the event of the consummation of a sale of the Leisegang Companies during Employee's employment with the Company as to which the Company has entered into a letter of intent or binding agreement on or before November 6, 1999, the Company shall pay Employee a Transaction Bonus in the amount of $200,000, irrespective of the total amount of consideration paid by the buyer in connection with such sale. (b) In the event of the consummation of a sale of the Leisegang Companies during Employee's employment with the Company as to which the Company has not entered into a letter of intent or binding agreement on or before November 6, 1999, the Company shall pay Employee a Transaction Bonus in an amount equal to the greater of (i) ten percent (10%) of the amount by which the Net Proceeds (as defined below) of such sale exceed $14.5 million or (ii) $200,000. For purposes of calculating the Transaction Bonus to be paid pursuant to this Section 2.6, "Net Proceeds" means the total cash consideration received by the Company in connection with the sale of the Leisegang Companies, less the amount of liabilities, debt or other obligations of the Leisegang Companies which the Company is obligated to pay following the sale ("Leisegang Liabilities"). For example, if the buyer pays $16,000,000 for the Leisegang Companies and assumes all liabilities of the Leisegang Companies as part of the transaction, the Net Proceeds for purposes of the Transaction Bonus will be $16,000,000. On the other hand, if the buyer in such transaction buys only assets, assumes no liabilities, pays $19,000,000 for the assets and the Leisegang Liabilities are $6,000,000, the Net Proceeds for purposes of the Transaction Bonus will be $13,000,000. In addition, the Company's legal and accounting fees incurred in connection with such a sale shall not be deducted from the consideration paid by the buyer in calculating the Net Proceeds under this Section 2.6. In the event Employee's employment with the Company is terminated by the Company without Cause pursuant to Section 4.3 hereof prior to the consummation of a sale of the Leisegang Companies -28- 3 for which Employee would otherwise be entitled to a Transaction Bonus, Employee shall be paid a Transaction Bonus with respect to such sale in accordance with the terms of this Section 2.6, provided (i) there is a letter of intent in effect for such sale at the time of the Company's without-Cause termination of Employee's employment with the Company and (ii) such sale is consummated within three (3) months following the termination of Employee's employment with the Company without Cause. The Company and Employee acknowledge and agree that any Transaction Bonus payable under this Section 2.6 shall be payable only from the proceeds of a sale of the Leisegang Companies which are actually received in cash by the Company, whether in the form of progress payments, partial payment or otherwise, and that the Company's Transaction Bonus payment obligation to Employee hereunder shall apply only to the extent that the Company receives payment in cash of the Net Proceeds from the buyer. Notwithstanding anything to the contrary contained elsewhere in this Agreement, in the event the proceeds received by the Company in connection with a sale of the Leisegang Companies consist of property or other non-cash consideration, the Board or the Compensation Committee thereof shall make a good faith determination as to the fair market value of such non-cash consideration and the extent to which such valuation amount exceeds $14.5 million. In the event of such a transaction involving the receipt of non-cash consideration, the Employee shall be entitled to a Transaction Bonus based on the fair market value of the non-cash consideration received by the Company, as determined by the Board in good faith, whose determination as to the fair market value of the non-cash consideration and the amount of the Transaction Bonus will be final and binding. In addition, in the event the Company receives sales proceeds in the form of progress payments, partial payments or some other type of installment payments, the Transaction Bonus owed to Employee with respect to such transaction shall also be paid in installments, the timing and amount of which to be determined by the Board in its sole discretion, whose determination will be final and binding. 2.7 MOVING EXPENSES. In the event the Employee relocates to the Boca Raton, Florida area in connection with his employment with the Company, the Company shall reimburse the Employee for the Employee's reasonable costs and expenses of movement of the Employee's household goods and effects from E. Amherst, New York to the Boca Raton, Florida area, provided that the Employee shall submit to the Company satisfactory documentation or support of such reasonable moving expenses. 3. ERM. The term of the Employee's employment with the Company shall commence July 6, 1999 and shall continue until July 6, 2000, unless earlier terminated as hereinafter provided. Thereafter, the term of the Employee's employment with the Company shall be renewed for successive additional twelve-month periods, subject to earlier termination as provided herein. 4. EMPLOYMENT TERMINATION. The Employee's employment under this Agreement may be earlier terminated as follows: 4.1. TERMINATION FOR CAUSE. At the election of the Company, the Employee's employment with the Company may be terminated for "Cause" immediately upon written notice by the Company to the Employee. For the purposes of this Agreement, "Cause" for termination shall be deemed to exist upon (i) the continuing failure of Employee to render services to the Company in accordance with the Employee's assigned duties consistent with this Agreement, and such failure of -29- 4 performance continues for a period of more than 30 days after notice thereof has been provided to the Employee by the Board of Directors or the Company; (ii) willful misconduct or gross negligence of the Employee in the performance of his duties and services to the Company or any of its subsidiaries; (iii) the conviction of the Employee of a felony, whether or not committed in the course of performing services for the Company or any of its subsidiaries; (iv) disloyalty, deliberate dishonesty, breach of fiduciary duty or breach of the terms of this Agreement; (v) the commission by the Employee in the course of performing any services for the Company or any of its subsidiaries of embezzlement, theft or any other fraudulent act; (vi) the commission by the Employee of an act in deliberate disregard of the rules or policies of the Company which results in loss, damage or injury to the Company or any of its subsidiaries or adversely affects the business activities, reputation, goodwill or image of the Company or any of its subsidiaries; (vii) the unauthorized disclosure by Employee of any trade secret or confidential information of the Company or any of its subsidiaries; (viii) the commission by Employee of an act which constitutes unfair competition with the Company or any of its subsidiaries or which induces any employee or customer of the Company to breach a contract with the Company or any of its subsidiaries or (ix) the material breach by the Employee of any agreement to which the Company and the Employee are parties. 4.2. DEATH OR DISABILITY. The Employee's employment with the Company shall terminate upon the Employee's death or, at the election of the Company by written notice to the Employee, upon the Disability of the Employee. As used in this Agreement, the term "Disability" shall mean the inability or failure of the Employee to perform the essential functions of the position with or without reasonable accommodation as a result of a mental or physical disability for a period of ninety (90) or more days (whether or not consecutive) during any twelve (12) months, all as determined in good faith by a majority of the disinterested members of the Board of Directors of the Company. 4.3. TERMINATION WITHOUT CAUSE. The Company may terminate the Employee's employment with the Company at any time for any reason by written notice to the Employee. 5. EFFECT OF TERMINATION. 5.1. TERMINATION FOR CAUSE. In the event of a termination for "Cause" under Section 4.1, the Employee shall be entitled to no severance or other termination benefits, or any other benefits (except for any health insurance benefits as required by applicable law). 5.2. TERMINATION FOR DEATH OR DISABILITY. If the Employee's employment is terminated by death or Disability pursuant to Section 4.2, the Company shall pay to the Employee or the Employee's estate the compensation which would otherwise be payable to the Employee up to the day as of which the Employee's employment is terminated. 5.3. TERMINATION WITHOUT CAUSE. In the event Employee's employment is terminated by the Company without Cause pursuant to Section 4.3, the Company shall continue to pay to the Employee the base salary then payable to the Employee for a period of one year after the last day of the Employee's employment by the Company. All payments are expressly conditioned upon the Employee's compliance with the terms of any other agreement to which the Company and the Employee are parties on the last day of the Employee's employment by the Company. 6. NOTICES. All notices required or permitted under this Agreement shall be in writing and shall be deemed effective upon personal delivery or upon deposit with any reliable overnight courier -30- 5 service, transfer by electronic facsimile transmission, or upon deposit by first class mail, postage prepaid addressed as follows: IF TO EMPLOYEE, ADDRESSED TO: ---------------------------- John D. Barlow, Jr. c/o Leisegang Medical, Inc. 6401 Congress Avenue Boca Raton, FL 33487 IF TO THE COMPANY, ADDRESSED TO: ------------------------------- Leisegang Medical, Inc. c/o Galileo Corporation Galileo Park P.O. Box 550 Sturbridge, MA 01566 Attention: President WITH A COPY TO: -------------- Edwards & Angell, LLP 250 Royal Palm Way, Suite 300 Palm Beach, FL 33480 Attention: Jonathan E. Cole, Esq. Facsimile: (561) 655-8719 7. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, whether written or oral, relating to the subject matter of this Agreement. 8. WAIVER AND MODIFICATION. This Agreement may be amended or modified only by a written instrument executed by both the Company and the Employee. No waiver by either party of any breach by the other or any provision hereof shall be deemed to be a waiver of any later or other breach thereof or as a waiver of any other provision of this Agreement. 9. GOVERNING LAW. This Agreement shall be construed, interpreted and enforced in accordance with the laws of the State of Florida. 10. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of both parties and their respective successors and assigns, including any corporation with which or into which the Company may be merged or which may succeed to its assets or business; provided, however, that the obligations of the Employee are personal and shall not be assigned or delegated by the Employee. 11. Miscellaneous. 11.1. WAIVERS. No delay or omission by the Company in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion shall be effective only in that instance and shall not be construed as a bar or waiver of any right on any other occasion. -31- 6 11.2. CAPTIONS. The captions of the sections of this Agreement are for convenience of reference only and in no way define, limit or affect the scope or substance of any section of this Agreement. 11.3. SEVERABILITY. In the case any provision of this Agreement shall be invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions shall in no way be affected or impaired thereby. 11.4. GENDER AND NUMBER. The gender and number used in this Agreement are used as reference terms only and shall apply with the same effect whether the parties are of the masculine, neuter or feminine gender, corporate or other form, and the singular shall likewise include the plural. 11.5 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY EXPRESSLY AND KNOWINGLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER MATTER PERTAINING TO OR ARISING DURING THE EMPLOYMENT OF THE EMPLOYEE BY THE COMPANY. 11.6 NO CONFLICT. The Employee hereby represents and warrants that the Employee is not a party to or bound by any agreement or understanding of any type with any other person or entity that in any way restricts the Employee's involvement with the Company and its subsidiaries as an employee, stockholder or otherwise. 11.7 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, and each of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written as an instrument under seal. LEISEGANG MEDICAL, INC. EMPLOYEE: By: /s/ Thomas J. Mathews /s/ John D. Barlow -------------------------------- ----------------------------- Title: TREASURER Name: JOHN D. BARLOW, JR. -32- 7 EXHIBIT A ENTITY POSITIONS - ------ --------- Leisegang Medical, Inc. Chairman of Board President & CEO Leisegang GmbH Advisory Board Member Galenica Inc. (Canada) Chairman of Board Galenica, Inc. (U.S.) Chairman of Board President -33- 8 EXHIBIT B --------- 35,000 Shares GALILEO CORPORATION 1991 Stock Option Plan NONSTATUTORY STOCK OPTION CERTIFICATE ------------------------------------- Galileo Corporation, Inc. (the "Company"), a Delaware corporation, hereby grants to the person named below an option (the "Option") to purchase shares of Common Stock, $.01 par value of the Company (the "Common Stock") subject to the following terms and conditions and those attached to this certificate: Name of Optionholder: John D. Barlow, Jr. Address: 68 Rolling Meadow E. Amherst, New York 14051 Social Security No. ###-##-#### Number of Shares: 35,000 Option Price: $7.438 Date of Grant: July 1, 1999 Exercisability Schedule: On or after July 1, 2000 as to 8,750 shares On or after July 1, 2001 as to 8,750 additional shares. On or after July 1, 2002 as to 8,750 additional shares On or after July 1, 2003 as to 8,750 additional shares Expiration Date: July 1, 2009
Notwithstanding the foregoing, in the event of a Change in Control of the Company (as defined in Section 3 of the attached terms and conditions), this Option shall become exercisable as to all shares without regard to any deferred exercise period. This Option shall not be treated as an Incentive Stock Option under section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). By acceptance of this Option, the Optionholder agrees to the terms and conditions hereof. GALILEO CORPORATION By: /s/ Josef W. Rokus -------------------------------- Vice President -34- 9 NONSTATUTORY STOCK OPTION TERMS AND CONDITIONS 1. PLAN INCORPORATED BY REFERENCE. This Option is issued under and subject to the terms of the Plan and may be amended as provided in the Plan. Capitalized terms used and not otherwise defined in this certificate have the meanings given to them in the Plan. This certificate does not set forth all of the terms and conditions of the Plan, which are incorporated herein by reference. The Committee administers the Plan and its determinations regarding the operation of the Plan are final and binding. Copies of the Plan may be obtained upon written request without charge from the Company. 2. OPTION PRICE. The price to be paid for each share of Common Stock issued upon exercise of the whole or any part of this Option is the Option Price set forth on the first page of this certificate. 3. EXERCISABILITY SCHEDULE. This Option may be exercised at any time and from time to time for the number of shares and in accordance with the exercisability schedule set forth on the first page of this certificate; provided, however, that in the event of a Change in Control of the Company, this Option shall become exercisable as to all shares without regard to any deferred exercise period. For this purpose, "Change in Control" means a change in control of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not the Company is in fact required to comply therewith; provided that without limitation, a Change in Control shall be deemed to have occurred if: (a) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) directly or indirectly of securities of the Company representing 40% or more of the combined voting power of the Company's then outstanding securities; (b) during any period of 24 consecutive months (not including any period prior to the date of this Option), individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in subsections (a), (c) or (d) of this Section 3) whose election by the Board of Directors of the Company or nomination for election by the shareholders of the Company was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved cease for any reason to constitute a majority thereof; -35- 10 (c) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation other than (i) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the combined voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (ii) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as defined above) acquires 40% or more of the combined voting power of the Company's then outstanding securities; or (d) the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. (e) the Company sells its women's health-related medical products business. This Option may be exercised only for the purchase of whole shares and may not be exercised as to any shares after the Expiration Date. 4. METHOD OF EXERCISE. To exercise this Option, the Optionholder must deliver written notice of exercise to the Company specifying the number of shares with respect to which the Option is being exercised accompanied by payment of the Option Price for such shares in cash, by certified check or in such other form, including shares of Common Stock valued at their Fair Market Value on the date of delivery, as the Committee may approve. Promptly following such notice, the Company will deliver to the Optionholder a certificate representing the number of shares for which the Option is being exercised. 5. RIGHTS AS A STOCKHOLDER OR EMPLOYEE. The Optionholder has no rights in shares as to which the Option has not been exercised and payment made as provided above. The Optionholder has no rights to continued employment by the Company or its Affiliates by virtue of the grant of this Option. 6. RECAPITALIZATION, MERGERS, ETC. As provided in the Plan, in the event of corporate transactions affecting the Company's outstanding Common Stock, the Committee will equitably adjust the number and kind of shares subject to this Option and the exercise price hereunder or make provision for a cash payment. If such transaction involves a consolidation or merger of the Company with another entity, the sale or exchange of all or substantially all of the assets of the Company or a reorganization or liquidation of the Company, then in lieu of the foregoing, the Committee may upon written notice to the Optionholder provide that this Option shall terminate on a date not less than 20 days after the date of such notice unless theretofore exercised. In connection with such notice, the Committee may in its discretion accelerate or waive any deferred exercise period. -36- 11 7. OPTION NOT TRANSFERABLE. Except as otherwise permitted by the Committee, this Option is not transferable by the Optionholder otherwise than by will or the laws of descent and distribution, and is exercisable during the Optionholder's lifetime only by the Optionholder. The naming of a Designated Beneficiary does not constitute a transfer. 8. EXERCISE OF OPTION AFTER TERMINATION OF EMPLOYMENT. If the Optionholder's status as an employee or consultant of the Company or an Affiliate (as defined in Rule 144 under the Securities Act of 1933, as amended) is terminated for any reason other than by disability, death, or a Change of Control due to the sale of the Company's women's health-related medical products business as described in subsection 3(e) above (hereinafter referred to as a "Leisegang Companies Sale") the Optionholder may exercise the rights which were available to the Optionholder at the time of such termination only within three months from the date of termination. If such status is terminated as a result of disability or a Leisegang Companies Sale, such rights may be exercised only within twelve months from the date of termination. Upon the death of the Optionholder, his or her Designated Beneficiary shall in lieu of any other rights hereunder have the right, at any time within twelve months after the date of death, to exercise in whole or in part any rights that were available to the Optionholder at the time of death. Notwithstanding the foregoing, no rights under this Option may be exercised after the Expiration Date. 9. COMPLIANCE WITH SECURITIES LAWS. As a condition to the Optionholder's right to purchase shares of Common Stock hereunder, the Company may, in its discretion, require that (a) the shares of Common Stock reserved for issue upon the exercise of this Option shall have been duly listed, upon official notice of issuance, upon any national securities exchange or automated quotation system on which the Company's Common Stock may then be listed or quoted, (b) either (i) a registration statement under the Securities Act of 1933 with respect to the shares shall be in effect, or (ii) in the opinion of counsel for the Company, the proposed purchase shall be exempt from registration under that Act and the Optionholder shall have made such undertakings and agreements with the Company as the Company may reasonably require, and (c) such other actions, if any, as counsel for the Company shall consider necessary to comply with any law applicable to the issue of such shares by the Company shall have been taken by the Company or the Optionholder, or both. The certificates representing the shares purchased under this Option may contain such legends as counsel for the Company considers necessary to comply with any applicable law. 10. PAYMENT OF TAXES. The Optionholder must pay to the Company, or make provision satisfactory to the Company for payment of, any taxes required by law to be withheld with respect to the exercise of this Option. The Committee may, in its discretion, require any other Federal or state taxes imposed on the sale of the shares to be paid by the Optionholder. In the Committee's discretion, such tax obligations may be paid in whole or in part in shares of Common Stock, including shares retained from the exercise of this Option, valued at their Fair Market Value on the date of delivery. The Company and its Affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Optionholder. -37- EX-27.1 4 FINANCIAL DATA SCHEDULE FOR JUNE 30, 1999
5 1,000 9-MOS SEP-30-1999 OCT-01-1998 JUN-30-1999 1,281 0 7,459 850 7,665 25,416 28,302 20,072 53,652 17,991 0 0 0 101 34,640 53,652 31,189 31,189 18,503 19,721 (177) 0 791 (3,447) 169 (3,616) 0 0 0 (3,616) (0.39) (0.39)
EX-27.2 5 RESTATED FINANCIAL DATA SCHEDULE FOR MAR 31, 1999
5 1,000 6-MOS SEP-30-1999 OCT-01-1998 MAR-31-1999 1,230 0 7,509 1,130 7,699 23,689 36,685 28,239 52,367 17,331 0 0 0 101 33,978 52,367 21,603 21,603 13,195 14,099 (88) 0 548 (3,817) 144 (3,961) 0 0 0 (3,961) (0.45) (0.45)
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