<PAGE> 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
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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.
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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.
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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.
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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.
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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.
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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:
<TABLE>
<CAPTION>
Name Age Officer
---- --- -------
<S> <C> <C>
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
</TABLE>
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.
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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.
<TABLE>
<CAPTION>
Fiscal 1997 Low High
----------- --- ----
<S> <C> <C>
1st Quarter $21.000 $27.750
2nd Quarter 6.000 26.500
3rd Quarter 4.500 7.750
4th Quarter 5.500 15.250
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998 Low High
----------- --- ----
<S> <C> <C>
1st Quarter $ 8.750 $14.750
2nd Quarter 9.750 17.500
3rd Quarter 11.125 16.500
4th Quarter 2.063 13.125
</TABLE>
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
<TABLE>
<CAPTION>
Years ended September 30,
(Dollars in thousands, except per share data) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
======================================================================================================================
</TABLE>
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<TABLE>
<CAPTION>
Years ended September 30,
(Dollars in thousands, except per share data) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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)
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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.
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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.
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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.
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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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 19
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
ITEM 14(a)
<TABLE>
<S> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 21
GALILEO CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
(Dollars in thousands, except per share data) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
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
======================
</TABLE>
See accompanying notes.
21
<PAGE> 22
GALILEO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended September 30,
(Dollars in thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
====================================
</TABLE>
See accompanying notes.
22
<PAGE> 23
GALILEO CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Additional Earnings Other Total
Common Paid-In (Accumulated Comprehensive Shareholders'
(Dollars in thousands) Stock Capital Deficit) Income (Loss) Equity
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
=====================================================================
</TABLE>
See accompanying notes.
23
<PAGE> 24
GALILEO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended September 30,
(Dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<S> <C> <C> <C>
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 $ -- $ --
====================================
</TABLE>
See accompanying notes.
24
<PAGE> 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:
<TABLE>
<S> <C>
Buildings and improvements 10-30 years
Machinery, equipment and furniture 3-10 years
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<TABLE>
<S> <C>
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
========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
September 30,
---------------------
1998 1997
------ ------
<S> <C> <C>
Finished goods $5,223 $2,755
Work-in-progress 1,819 660
Raw materials 1,786 3,199
------ ------
$8,828 $6,614
====== ======
</TABLE>
30
<PAGE> 31
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
----------------------
1998 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
Years ended September 30,
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
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:
<TABLE>
<CAPTION>
Years ended September 30,
1998 1997
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations $(6,410) $(5,108)
======= =======
Accumulated benefit obligations $(6,589) $(5,351)
======= =======
</TABLE>
31
<PAGE> 32
<TABLE>
<S> <C> <C>
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
======= =======
</TABLE>
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:
<TABLE>
<CAPTION>
Years ended September 30,
1998 1997
----- -----
<S> <C> <C>
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
===== =====
</TABLE>
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
<PAGE> 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:
<TABLE>
<S> <C>
1999 $ 974
2000 581
2001 490
2002 383
2003 and thereafter 1,241
------
Total minimum lease obligations $3,669
======
</TABLE>
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
<PAGE> 34
The following table summarizes stock option plan activity:
<TABLE>
<CAPTION>
Weighted Average Aggregate
Shares Price Price
------ ----- -----
<S> <C> <C> <C>
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
======= ========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Years ended September 30,
1998 1997
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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
<PAGE> 36
The components of the Company's taxable income (loss) before income taxes
are as follows:
<TABLE>
<CAPTION>
Years ended September 30,
1998 1997 1996
------- -------- --------
<S> <C> <C> <C>
Domestic $(12,895) $(11,021) $ 5,616
Foreign
556 -- --
-------- -------- --------
Total $(12,339) $(11,021) $ 5,616
======== ======== ========
</TABLE>
Significant components of the provision for income taxes from continuing
operations are as follows:
<TABLE>
<CAPTION>
Years ended September 30,
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
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
===== ===== =====
</TABLE>
The reconciliation of the statutory federal income tax rate and the
effective tax rate from continuing operations is as follows:
<TABLE>
<CAPTION>
Years ended September 30,
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
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%
===== ===== =====
</TABLE>
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
<PAGE> 37
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Years ended September 30,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
37
<PAGE> 38
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
38
<PAGE> 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
<PAGE> 40
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit # Page
- ---------- ----
<S> <C>
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.
</TABLE>
40
<PAGE> 41
<TABLE>
<S> <C> <C>
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.
</TABLE>
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
<PAGE> 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
<PAGE> 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".
<PAGE> 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
<PAGE> 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:
<PAGE> 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
<PAGE> 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.
<PAGE> 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:
<TABLE>
<CAPTION>
Month Ending Maximum Ratio
------------ -------------
<S> <C>
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
</TABLE>
d. by deleting the provisions of Section 5.9 in their entirety and substituting
the following in its stead:
<PAGE> 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:
<TABLE>
<CAPTION>
Month Ending Minimum Ratio
------------ -------------
<S> <C>
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
</TABLE>
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.
<PAGE> 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.
<PAGE> 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:
<PAGE> 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
<PAGE> 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
<PAGE> 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:
<PAGE> 13
Title:
"BANK"
BANKBOSTON, N.A.
By:__________________________________________
Name:
Title:
<PAGE> 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):
<PAGE> 2
<TABLE>
<CAPTION>
12 Months Net Sales
Ending (000's)
------ -------
<S> <C>
September 30, 1997 $7,000
September 30, 1998 $8,000
September 30, 1999 $9,200
</TABLE>
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.
<PAGE> 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
<PAGE> 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.
<PAGE> 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
<PAGE> 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)).
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 710
<SECURITIES> 0
<RECEIVABLES> 9,217
<ALLOWANCES> 1,265
<INVENTORY> 8,828
<CURRENT-ASSETS> 18,582
<PP&E> 48,290
<DEPRECIATION> 32,162
<TOTAL-ASSETS> 55,654
<CURRENT-LIABILITIES> 21,987
<BONDS> 1,008
0
0
<COMMON> 81
<OTHER-SE> 32,578
<TOTAL-LIABILITY-AND-EQUITY> 55,654
<SALES> 44,306
<TOTAL-REVENUES> 44,306
<CGS> 33,012
<TOTAL-COSTS> 33,012
<OTHER-EXPENSES> 23,271
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 524
<INCOME-PRETAX> (12,339)
<INCOME-TAX> 288
<INCOME-CONTINUING> (12,627)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,627)
<EPS-PRIMARY> (1.65)
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