As filed with the Securities and Exchange Commission on October 17, 1997
Registration No. 333-37083
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
____________________
GLEASON CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 16-1224655
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 UNIVERSITY AVENUE
ROCHESTER, NEW YORK 14692-2970
(716) 473-1000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
JOHN J. PERROTTI
VICE PRESIDENT-FINANCE
AND CHIEF FINANCIAL OFFICER
GLEASON CORPORATION
1000 UNIVERSITY AVENUE
ROCHESTER, NEW YORK 14692-2970
(716) 473-1000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
____________________
COPIES TO:
JUSTIN P. DOYLE, ESQ.
NIXON, HARGRAVE, DEVANS & DOYLE LLP
CLINTON SQUARE
ROCHESTER, NEW YORK 14603-1051
(716) 263-1000
____________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALES TO THE PUBLIC:
From time to time after this Registration Statement becomes
effective as determined by market conditions.
____________________
<PAGE>
<PAGE>
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
___________________
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
Subject to Completion, Dated October 17, 1997
PROSPECTUS
[LOGO] 1,600,000 SHARES
GLEASON CORPORATION
COMMON STOCK
Of the 1,600,000 shares (the "Shares") of common stock, par value $1.00 (the
"Common Stock"), of Gleason Corporation offered hereby (the "Offering"),
400,000 Shares are being sold by Gleason Corporation (the "Company") and
1,200,000 Shares are being sold by certain stockholders (the "Selling
Stockholders"). The Company will not receive any of the proceeds from the sale
of Shares by the Selling Stockholders. See "Principal and Selling
Stockholders."
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "GLE." On October 14, 1997, the last reported sale price of the
Common Stock was $27.81 per share. Except as indicated to the contrary, all
information in this Prospectus has been restated to reflect the two-for-one
stock split in the form of a stock distribution paid on September 26, 1997 (the
"Stock Split").
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR INFORMATION
THAT PROSPECTIVE INVESTORS SHOULD CONSIDER IN CONNECTION WITH THEIR INVESTMENT
DECISION.
_______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
==============================================================================
Price to Underwriting Proceeds to Proceeds to
Public Discount to Company Selling
(1) (2) Stockholders
- ------------------------------------------------------------------------------
Per Share... $ $ $ $
- ------------------------------------------------------------------------------
Total (3)... $ $ $ $
==============================================================================
(1) The Company and the Selling Stockholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the Offering estimated at $467,500 which
will be shared proportionately by the Company and each of the Selling
Stockholders based on the number of Shares sold by each.
(3) The Company and one of the Selling Stockholders have granted the
Underwriters a 30-day option to purchase up to 124,484 additional shares
of Common Stock solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discount
and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
The Shares are offered by the several Underwriters, when, as and if
delivered to and accepted by them, and subject to various prior conditions,
including the right to reject orders in whole or in part. It is expected that
delivery of share certificates will be made against payment therefor at the
offices of Furman Selz LLC in New York, New York on or about , 1997.
FURMAN SELZ
MCDONALD & COMPANY
SECURITIES, INC.
ABN AMRO CHICAGO CORPORATION
_______________
The date of this Prospectus is , 1997.
******************************************************************************
*Information contained herein is subject to completion or amendment. A *
*registration statement relating to these securities has been filed with the *
*Securities and Exchange Commission. These securities may not be sold nor *
*may offers to buy be accepted prior to the time the registration statement *
*becomes effective. This prospectus shall not constitute an offer to sell or*
*the solicitation of an offer to buy the securities described herein, nor *
*shall there be any sale of such securities in any jurisdiction in which such*
*offer, solicitation or sale would be unlawful prior to registration or *
*qualification under the securities laws of any such jurisdiction. *
******************************************************************************
<PAGE>
INSIDE FRONT COVER - ARTWORK
[Timeline identifying developments at the Company between 1990 and 1997 which
incorporates Company photographs and artwork.]
[Four graphs depicting the Company's Earnings Before Interest and Taxes, Return
on Average Net Operating Assets, Cumulative Growth of Cylindrical Gear Product
Shipments and Regional Sales. The data for the respective periods depicted in
the graphs is as follows:
1994 1995 1996
------ ------ ------
Earnings Before Interest and Taxes:
Dollars (in millions) $5.2 $21.5 $31.3
Percentage of Sales 4.0% 10.9% 12.6%
Return on Average Net Operating Assets 3.6% 13.2% 16.8%
Cumulative Growth of Cylindrical Gear Product
Shipments (% increase over 1993 shipments) 64.2% 339.4% 520.5%
Regional Sales (in millions):
Asia-Pacific $25.3 $42.9 $68.9
Europe $36.9 $66.1 $80.5
Americas $66.3 $88.0 $98.7]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE IN
ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF
1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO (THE "CONSOLIDATED FINANCIAL STATEMENTS"), APPEARING ELSEWHERE IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL SHARE, PER SHARE AND FINANCIAL
INFORMATION SET FORTH HEREIN ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION, AND IS RESTATED TO REFLECT THE STOCK SPLIT. AS USED
HEREIN, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" AND "GLEASON"
REFER TO GLEASON CORPORATION AND ITS SUBSIDIARIES, INCLUDING THE GLEASON WORKS,
GLEASON-HURTH MASCHINEN UND WERKZEUGE GMBH ("GLEASON-HURTH"), GLEASON-PFAUTER
MASCHINENFABRIK GMBH ("GLEASON-PFAUTER"), AMERICAN PFAUTER, L.P. AND PFAUTER-
MAAG CUTTING TOOLS L.P. ("PFAUTER-MAAG"). EXCEPT AS OTHERWISE INDICATED, THE
INFORMATION PRESENTED IN THIS PROSPECTUS FOR PERIODS ENDING PRIOR TO JULY 31,
1997 IS BASED ON THE COMPANY'S ACTUAL FINANCIAL RESULTS WITHOUT GIVING EFFECT
TO THE JULY 1997 ACQUISITION OF THE HERMANN PFAUTER GROUP ("PFAUTER"),
INCLUDING HERMANN PFAUTER GMBH & CO, AMERICAN PFAUTER, L.P. AND PFAUTER-MAAG.
PHOENIX{<reg-trade-mark>} AND G-TECH{<reg-trade-mark>} ARE REGISTERED
TRADEMARKS OF THE COMPANY.
THE COMPANY
GENERAL. Founded in 1865, Gleason Corporation is a global leader in the
development and manufacture of technologically advanced gear production
machinery and associated tooling products. The gear production market is
comprised of two segments, the bevel gear market and the cylindrical gear
market. Bevel gears transmit power at a right angle, such as from the drive
shaft to the drive-axle of a vehicle. Cylindrical gears transmit power in
parallel axes of rotation and have a wider variety of applications, including
as components in the transmissions of vehicles. The Company believes it is the
market leader in the bevel gear machinery market and that it has a leading
position in the cylindrical gear equipment market. The Company's extensive
product line includes machinery for the production, finishing and testing of
gears. In addition, the Company offers a global support system providing
tooling, replacement parts, field service, application development services,
gear design and inspection software, training programs, engineering support and
machine rebuild and upgrade services. The Company is also a leader in the
theory of gear design and in the application, testing and analysis of prototype
and production gears.
Over the past five years, approximately two-thirds of the Company's net
sales were to customers outside the United States. Approximately 76% of the
Company's net sales for the year ended December 31, 1996 were to customers in
the automotive and truck industries. Other segments served include aerospace,
agriculture, construction, industrial machinery, marine, power tool and jobbers
who sell to a variety of industries. For the year ended December 31, 1996, the
Company's top ten customers (which included subsidiaries of Ford Motor Company,
Daimler-Benz AG, Chrysler Corporation, General Motors Corp. and Dana Corp.)
accounted for 44% of the Company's net sales.
FOCUS ON CORE BUSINESS. Since 1990, Gleason Corporation has enhanced
shareholder value by strategically focusing on its core business of gear
technology. As part of this strategy, the Company divested its non-core
businesses, invested in new manufacturing technologies, reengineered and
streamlined its business processes and significantly expanded its product
offerings through internal product development and its acquisition of Hurth
Maschinen und Werkzeuge GmbH ("Hurth") in July 1995 and Pfauter in July 1997.
The implementation of the Company's strategies has resulted in
significantly improved financial results. For the year ended December 31,
1996, the Company reported record net sales of $248.1 million representing a
26% increase from the year ended December 31, 1995, its operating income
increased 45% to $31.3 million and its net income increased 48% to $19.7
million (adjusted to exclude a one-time tax benefit in 1995). For the first
six months of 1997, the Company's net sales declined modestly compared to 1996
first half to $122.7 million, reflecting a $2.8 million reduction from the
foreign exchange translation effect of a weaker German deutsche mark.
Operating income during the first half of 1997 rose 10% over the comparable
period in 1996 to $16.6 million and net income increased 15% to $10.8 million.
ACQUISITIONS. On July 1, 1995, the Company acquired, for $10.6 million,
certain assets of Hurth, a leader in the design and production of cylindrical
gear machinery and tooling based in Munich, Germany. The Company acquired,
from receivership, Hurth's patents, trademarks, rights to technology, and
machinery and equipment. The acquisition of Hurth enabled the Company to
expand its presence in the cylindrical gear equipment market by providing
complementary machine
3
<PAGE>
models and entry into the cylindrical gear cutting tools segment. Primarily as
a result of the Hurth acquisition, the Company's cylindrical gear equipment
sales increased from $27.6 million in 1994 to $104.2 million in 1996.
On July 31, 1997, the Company completed its acquisition of Pfauter, a
worldwide leader in cylindrical gear production equipment based in Ludwigsburg,
Germany, including Pfauter-Maag, a leading cutting tool manufacturer based in
Rockford, Illinois. The acquisition of Pfauter positions the Company to be a
worldwide leader in gear production equipment and related technology by
combining Pfauter's extensive line of cylindrical gear production machinery
with the Company's leading position in bevel gear production equipment.
Pfauter-Maag substantially increases the Company's sales of higher-margin
cylindrical gear cutting tools and related services. In addition, the Pfauter
acquisition expands the Company's customer base to include a broad range of
non-automotive customers. The Pfauter acquisition was completed for a total
consideration of $91.8 million, including $34.8 million in cash and the
assumption of $57.0 million in bank debt. Management plans to invest
approximately $9.0 million over a two-year period to rationalize Pfauter's
operations and estimates that this investment will enable the Company to
achieve subsequent annual cost savings of a similar magnitude.
GROWTH STRATEGIES. The Company's business and growth strategies are
aimed at enhancing value for its stockholders. The Company intends to maximize
value for its stockholders by continuing to focus on the following growth
strategies:
* CAPITALIZE ON MACHINE REPLACEMENT OPPORTUNITIES--Aggressively pursue
sales of the Company's technologically advanced products, such as its
PHOENIX line, to replace the aging installed base of gear production
equipment;
* INCREASE SALES OF CONSUMABLE CUTTING TOOLS, ACCESSORIES, TOOL
MANAGEMENT AND AFTERMARKET SERVICES--Utilize the Company's installed base
of equipment, global marketing network and extensive manufacturing
capabilities to increase sales of these products and services, including
the recently-acquired line of Pfauter-Maag cutting tools;
* LEVERAGE NEW PRODUCT AND PROCESS TECHNOLOGY--Use the Company's
leadership position in gear and manufacturing technology to enhance both
new and existing product lines and to capitalize on opportunities beyond
its traditional markets;
* INCREASE SALES TO CUSTOMERS IN EMERGING MARKETS--Continue expansion
efforts in emerging markets which are expected to present significant
opportunities for sales growth; and
* PURSUE GROWTH FROM ACQUISITIONS--Complete the integration of the
Company's recent acquisitions to fully realize the synergies created by
these businesses and selectively pursue future acquisitions.
OPERATIONS. The Company has manufacturing facilities in Rochester, New
York and Rockford, Illinois; Plymouth, England; Munich and Ludwigsburg,
Germany; Bologna and Porretta Terme, Italy; Bangalore, India; and Biel,
Switzerland. The Company has sales and service offices throughout the United
States and Europe, and in the Asia-Pacific region. The Company has
approximately 2,600 employees worldwide. Gleason's principal executive offices
are located at 1000 University Avenue, Rochester, New York 14692 and its
telephone number at that address is (716) 473-1000.
THE OFFERING
Common Stock Offered by the Company... 400,000 Shares(1)
Common Stock Offered by the
Selling Stockholders................ 1,200,000 Shares(1)
Common Stock to be Outstanding
after the Offering.................. 10,364,912 shares(1)(2)
Use of Proceeds....................... The net proceeds from the sale of
Common Stock by the Company will be
used to repay indebtedness. See "Use
of Proceeds."
New York Stock Exchange Symbol........ GLE
_________________
(1) If the Underwriters' over-allotment option is exercised in full, the total
number of shares to be offered by the Company, the Selling Stockholders and
the total number of shares of Common Stock to be outstanding after the
Offering will be 460,000, 1,264,484 and 10,424,912, respectively.
(2) Based on the number of shares of Common Stock outstanding as of September
30, 1997. Does not include 685,650 shares of Common Stock which may be
issued pursuant to outstanding options under the Company's 1981 and 1992
Stock Plans or 58,889 hypothetical shares credited to directors' accounts
under the Company's Plan for Deferral of Directors' Fees.
4
<PAGE>
SUMMARY CONSOLIDATED AND PRO FORMA CONSOLIDATED FINANCIAL DATA(1)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION> PRO FORMA(2)
SIX MONTHS SIX MONTHS PRO FORMA(2)
ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31, YEAR ENDED DECEMBER 31,
-------- --------------- ------------ ------------------------------
1997 1997 1996 1996 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales.............................. $190,347 $122,719 $124,667 $426,306 $248,089 $197,046 $128,462
Costs and expenses
Cost of products sold................ 135,341 83,699 84,859 301,332 167,958 137,461 94,935
Selling, general and
administrative expenses.............. 34,205 19,622 21,576 76,379 42,614 33,789 24,539
Research and development expenses.... 5,430 3,634 3,786 11,254 7,243 5,617 4,729
Interest (income) expense--net....... 2,423 (121) 527 6,113 513 527 11
Other (income)--net.................. (1,583) (825) (617) (1,563) (982) (1,328) (909)
-------- -------- -------- -------- -------- -------- --------
175,816 106,009 110,131 393,515 217,346 176,066 123,305
-------- -------- -------- -------- -------- -------- --------
Income from continuing operations
before income taxes.................. 14,531 16,710 14,536 32,791 30,743 20,980 5,157
Provision (benefit) for income
taxes(3)............................. 4,915 5,939 5,198 11,738 11,083 (9,402) 825
-------- -------- -------- -------- -------- -------- --------
Income from continuing operations(3)... 9,616 10,771 9,338 21,053 19,660 30,382 4,332
Gain on disposal of discontinued
operations........................... -- -- -- -- -- 445 2,956
-------- -------- -------- -------- -------- -------- --------
Net income............................. $ 9,616 $ 10,771 $ 9,338 $ 21,053 $ 19,660 $ 30,827 $ 7,288
======== ======== ======== ======== ======== ======== ========
Primary earnings per common share:
Income from continuing
operations(3)...................... $ .93 $ 1.04 $ .87 $ 1.97 $ 1.84 $ 2.87 $ .42
Gain on disposal of discontinued
operations......................... -- -- -- -- -- .04 .29
-------- -------- -------- -------- -------- -------- --------
Net income......................... $ .93 $ 1.04 $ .87 $ .97 $ 1.84 $ 2.91 $ .71
======== ======== ======== ======== ======== ======== ========
Fully diluted earnings per
common share:
Income from continuing
operations(3)...................... $ .93 $ 1.04 $ .87 $ 1.97 $ 1.84 $ 2.85 $ .42
Gain on disposal of discontinued
operations......................... -- -- -- -- -- .04 .29
-------- -------- -------- -------- -------- -------- --------
Net income......................... $ .93 $ 1 .04 $ .87 $ 1.97 $ 1.84 $ 2.89 $ .71
======== ======== ======== ======== ======== ======== ========
Weighted average number of common
shares outstanding:
Primary.............................. 10,316,908 10,316,908 10,739,068 10,681,644 10,681,644 10,600,234 10,325,754
Fully diluted........................ 10,388,976 10,388,976 10,751,666 10,681,644 10,681,644 10,679,742 10,325,754
Cash dividends declared per
common share......................... $ .125 $ .125 $ .125 $.25 $.25 $.25 $.20
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31,
---------------------------------------- ----------------------------
AS ADJUSTED(4) PRO FORMA(2) ACTUAL 1996 1995 1994
-------------- ------------ --------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents.......................... $ 1,459 $ 1,459 $ 20,437 $ 7,199 $ 9,926 $ 3,173
Net working capital........................... 66,913 66,913 61,079 53,834 60,409 28,596
Total assets.................................. 342,384 342,384 197,368 190,674 197,198 122,016
Total debt, including current portion......... 63,138 73,620 4,942 4,841 26,810 3,283
Total stockholders' equity.................... 102,042 91,560 91,560 84,864 73,291 42,199
_________________
SEE FOOTNOTES ON FOLLOWING PAGE.
5
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA(2)
SIX MONTHS SIX MONTHS PRO FORMA(2)
ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31, YEAR ENDED DECEMBER 31,
----------- ----------------- ------------- ----------------------------
1997 1997 1996 1996 1996 1995 1994
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Orders................................. $207,500 $130,000 $134,500 $407,400 $246,352 $226,107 $156,962
Gross margin(5)........................ 28.9% 31.8% 31.9% 29.3% 32.3% 30.2% 26.1%
Selling, general and administrative
expenses (as a % of sales)........... 18.0% 16.0% 17.3% 17.9% 17.2% 17.2% 19.1%
Operating margin(6).................... 8.9% 13.5% 12.1% 9.1% 12.6% 10.9% 4.0%
Earnings before interest and
income taxes......................... $ 16,954 $ 16,589 $ 15,063 $ 38,904 $ 31,256 $ 21,507 $ 5,168
Capital expenditures................... $ 7,561 $ 5,424 $ 3,145 $ 19,955 $ 10,281 $ 8,309 $ 3,527
Depreciation and amortization.......... $ 9,788 $ 5,535 $ 5,545 $ 20,170 $ 10,707 $ 9,992 $ 9,293
Return on Average Net Operating
Assets(7)............................ N/A 17.4% 14.9% N/A 16.8% 13.2% 3.6%
</TABLE>
_______________
(1) All share and per share data has been restated to reflect the Stock Split.
(2) The pro forma data reflects the combined operations of the Company and
Pfauter as if the acquisition, which was completed on July 31, 1997, had
been completed as of the beginning of the periods presented, in the case
of Statements of Operations Data and Other Financial Data, and at the date
of the balance sheet presented, in the case of Balance Sheet Data. See
Note 20 of "Notes to Consolidated Financial Statements" and the "Pro Forma
Consolidated Financial Statements of Gleason Corporation and Hermann
Pfauter GmbH & Co."
(3) For the year ended December 31, 1995, income from continuing operations
included positive adjustments to record deferred tax assets not previously
recognized. Income from continuing operations for 1995 using normalized
tax rates would have been approximately $12.9 million, or $1.22 per share.
See Note 10 of "Notes to Consolidated Financial Statements."
(4) Adjusted to give effect to the sale of 400,000 Shares offered by the
Company (at an assumed offering price of $27.81 per share) and the
application of the estimated net proceeds therefrom as set forth under
"Use of Proceeds."
(5) Gross margin is calculated as net sales less cost of products sold as a
percentage of net sales.
(6) Operating margin is calculated as earnings before interest and income
taxes as a percentage of net sales.
(7) Return on average net operating assets is calculated as operating income
(excluding interest, LIFO expense and non-operating charges) minus cash
taxes paid divided by average operating assets minus operating liabilities
(excluding interest bearing assets and liabilities, most long-term
liabilities and the LIFO inventory reserve).
6
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS
DESCRIBED BELOW, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS,
BEFORE DECIDING WHETHER TO INVEST IN THE COMMON STOCK OFFERED HEREBY. CERTAIN
INFORMATION INCLUDED OR INCORPORATED HEREIN CONTAINS "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED (THE "EXCHANGE ACT"), WHICH REPRESENT THE COMPANY'S
EXPECTATIONS OR BELIEFS, INCLUDING, BUT NOT LIMITED TO, STATEMENTS CONCERNING
INDUSTRY PERFORMANCE, THE COMPANY'S OPERATIONS, PERFORMANCE, FINANCIAL
CONDITION, GROWTH AND ACQUISITION OBJECTIVES, MARGINS AND GROWTH IN SALES OF
THE COMPANY'S PRODUCTS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED IN THIS
PROSPECTUS THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE
FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING,
WORDS SUCH AS "MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTEND,"
"COULD," "ESTIMATE" OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF
OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES,
CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND ACTUAL RESULTS MAY
DIFFER MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING THOSE
DESCRIBED BELOW.
CYCLICALITY OF MARKETS
The primary markets for the Company's products include the automotive,
truck, aerospace, agriculture, construction, industrial machinery, marine and
power tool industries. The Company's sales to these industries have
historically been subject to cyclical variation extending over a number of
years, based on general economic conditions. The demand for, price of and
margins for the Company's products may be adversely impacted by decreases in
its customers' capital spending during periods of economic contraction.
DEPENDENCE ON AUTOMOTIVE AND TRUCK INDUSTRIES
Customers in the automotive and truck industries accounted for
approximately 76% of the Company's net sales for the year ended December 31,
1996. For the year ended December 31, 1996, the Company's top ten customers,
all of which were affiliated with the automotive or truck industries, accounted
for approximately 44% of the Company's net sales. A decline in automotive or
truck sales and production could result in a decline in the Company's results
of operations or a deterioration in the Company's financial position. The loss
of, or reduced demand for products from, one or more of the Company's
significant customers could have a material adverse effect on the Company's
business, financial condition or results of operations.
IMPACT AND RISKS OF ACQUISITIONS
Generally, acquisitions involve significant potential risks, including
but not limited to those associated with: (i) the ability to identify and
consummate potential acquisitions; (ii) the diversion of management's attention
to the assimilation of the businesses to be acquired; (iii) the risk that the
acquired business will fail to maintain the operating performance it achieved
historically; (iv) the need to implement financial and other systems and add
management resources; (v) the risk that key employees of the acquired business
will leave after the acquisition; (vi) potential liabilities of the acquired
business; (vii) adverse short-term effects on the Company's operating results;
(viii) lack of success in assimilating or integrating the operations of
acquired businesses with those of the Company; (ix) the incurrence of
additional debt; (x) the amortization of goodwill and other intangible assets
for acquisitions that are accounted for using the purchase method of
accounting; and (xi) unforeseen difficulties in the acquired operations.
On July 31, 1997, the Company acquired Pfauter. On a combined pro forma
basis, Pfauter would have accounted for 42% of the Company's net sales for the
year ended December 31, 1996. There can be no assurance when or the extent to
which the Company will be able to successfully integrate the operations of
Pfauter or that the Company will be able to do so with any future acquisitions.
RISKS OF INTERNATIONAL OPERATIONS AND FOREIGN EXCHANGE FLUCTUATIONS
The Company has substantial operations and sales outside of the United
States. Over the past five years, approximately two-thirds of the Company's
net sales were to customers in overseas markets. Foreign operations are
subject
7
<PAGE>
to special risks that can materially affect the sales, profits, cash flows and
financial position of the Company, including taxes on distributions or deemed
distributions from subsidiaries, currency exchange rate fluctuations,
inflation, maintenance of minimum capital requirements, import and export
controls, exchange controls, social (labor) programs and/or changes in the
regulatory or political environment. Exchange rates may affect the Company's
pricing in local currencies, possibly impairing its ability to effectively
compete with other companies in such markets. Since the Company's financial
statements are denominated in U.S. dollars, changes in exchange rates between
the U.S. dollar and other currencies have had and will have an impact on the
reported results of the Company. While the Company engages in hedge
transactions to reduce the risk of currency exchange rate fluctuations, there
can be no assurances regarding the effectiveness or adequacy of such
transactions.
COMPETITION
The markets in which the Company participates are competitive. Many of
the programs for which the Company competes require bids or proposals from
multiple vendors. The Company's competitors include manufacturers of gear
production equipment, principally in Europe and Japan, some of which have
greater financial resources than the Company. In addition, the Company may
face competition from new entrants into these markets and increased competition
from existing competitors that may develop products which are superior to those
offered by the Company. While the Company believes its product lines compete
effectively in their markets, there can be no assurance that they will continue
to do so. Competition is also encountered from alternative manufacturing
processes for the production of gears, such as forging, forming and molding of
plastic or powder metal.
TECHNOLOGICAL CHANGE
Industrial manufacturing, in general, and the gear production machinery
sector, in particular, are subject to technological change, evolving industry
specifications and regulatory requirements, changing customer requirements and
improvements in and expansion of product offerings. The Company's ability to
meet changes in technology, industry specifications, customer requirements and
competitive product offerings, as well as to introduce new and enhanced
products on a timely basis which are accepted in the market, are significant
factors in the Company's competitive position and its prospects for growth.
Although the Company believes that it has the technological capabilities to
remain competitive, there can be no assurance that developments by competitors
will not render the Company's products or technologies noncompetitive or
obsolete. Failure by the Company to anticipate or respond rapidly to
technological advances, new products and enhancements by competitors, or
changes in customer requirements could have a material adverse effect on the
Company. In addition, technological developments may increase the productivity
or performance of gear production equipment or diminish the need for gears in
certain applications, in either case potentially reducing the level of demand
for the Company's products.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation, Bylaws and Shareholder Rights
Plan contain certain provisions that could hamper the acquisition of the
Company by means of a tender offer, a proxy contest or otherwise. These
provisions include staggered terms for members of the Company's Board of
Directors, advance notice procedures for stockholders to designate nominees for
election as directors of the Company and for stockholders to submit proposals
for consideration at stockholders' meetings and a voting requirement that 85%
of the stockholders entitled to vote must approve certain mergers or
acquisition transactions. In addition, Delaware corporate law contains certain
provisions that restrict certain business combinations. All of the foregoing
may have the effect of deterring certain potential acquisitions of the Company
or making more difficult a change in control of the Company or the removal of
incumbent management or the Board of Directors of the Company, which may
thereby inhibit a change in control of the Company under circumstances that
could give the stockholders the opportunity to realize a premium over the then-
prevailing market prices. See "Certain Anti-Takeover Provisions."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has increased
substantially over the past year. See "Price Range of Common Stock." The
market price of the Common Stock could continue to fluctuate substantially due
to a variety of factors, including illiquidity due to limited trading volume,
quarterly fluctuations in results of operations, the impact of
8
<PAGE>
acquisitions, adverse circumstances affecting the introduction or market
acceptance of new products and services offered by the Company or its
customers, changes in the general economic climate, changes in earnings
estimates by analysts, changes in accounting principles, sales of Common Stock
by existing stockholders, loss of key personnel and other events. The market
price for the Common Stock may also be affected by the Company's ability to
meet analysts' expectations, and any failure to meet such expectations, even if
minor, could have a material adverse effect on the market price of the Common
Stock. In addition, market conditions in the industrial manufacturing and
automotive industries, or forecasts related thereto, may have an impact on the
market price of the Common Stock. The stock market historically has
experienced volatility which has affected the market price of securities of
many companies and which has sometimes been unrelated to their operating
performance.
FLUCTUATIONS IN QUARTERLY RESULTS
In general, the Company recognizes net sales when products have been
shipped or services have been provided. The Company's quarterly results can be
subject to significant fluctuation based on the timing of its shipments.
Shipments are dependent upon customer delivery requirements and the Company's
ability to satisfy order specifications on a timely basis. In addition, orders
for certain of the Company's products can be large, and a relatively limited
number of orders can constitute a meaningful percentage of the Company's net
sales in any quarterly period.
DEPENDENCE ON SUPPLIERS
Certain of the components used in the Company's products are purchased
from third parties and are available from a limited number of sources. The
loss of any one supplier or an inability of suppliers to provide the Company
with the required quantity or quality of these components could have an
interruptive effect on the Company's business until such time as an alternative
source of supply is found.
DEPENDENCE ON INTELLECTUAL PROPERTY RIGHTS
The Company's ability to compete effectively will depend, in part, on its
ability to protect its intellectual property, including its patents,
trademarks, copyrights and trade secrets, and on its ability to obtain future
patents. In addition to patents, the Company relies on a combination of
trademark registrations, copyrights and confidentiality agreements to protect
its proprietary rights in intellectual property. The Company's ability to
compete effectively also depends on its ability to avoid infringing on the
proprietary rights of others. Because pending U.S. patent applications are
confidential for a period of time after they are filed, it is impossible to
anticipate all potential patent infringement issues for products under
development. There can be no assurance that the steps taken by the Company to
protect its intellectual property will be adequate to prevent misappropriation
or that others will not independently develop technologies or products that
compete with or are superior to the products of the Company. Likewise, there
can be no assurance that the Company will not inadvertently infringe on the
intellectual property rights of others.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 400,000 Shares
offered by the Company, after deducting underwriting discounts, commissions and
estimated offering expenses and assuming a public offering price of $27.81 per
share, are estimated to be approximately $10.5 million (approximately $12.1
million if the Underwriters' over-allotment option is exercised in full). The
Company will use its net proceeds from the Offering to repay outstanding
indebtedness under its revolving credit and term loan facility which, after
such payment, will have approximately $90 million of available credit which the
Company may use for working capital and general corporate purposes. The
revolving credit and term loan facility matures on July 1, 2002 and bears
interest at a floating rate which, on a weighted average basis, was 4.71% per
year as of September 30, 1997. The Company will not receive any of the
proceeds from the sale of Common Stock by the Selling Stockholders.
9
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1997 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
to give effect to the acquisition of Pfauter, and (iii) the pro forma
capitalization as adjusted to give effect to the sale of 400,000 Shares offered
hereby at an assumed offering price of $27.81 per share and the application of
the net proceeds therefrom as described under "Use of Proceeds." In addition,
the following table is restated to reflect the Stock Split. This table should
be read in conjunction with "Management's Discussion and Analysis of Results of
Operations and Financial Condition," the "Consolidated Financial Statements,"
and the "Pro Forma Consolidated Financial Statements of Gleason Corporation and
Hermann Pfauter GmbH & Co."
JUNE 30, 1997
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- -------------- -----------
(Dollars in thousands)
Debt(1):
Short-term debt:
Short-term borrowing............... $ 2,145 $ 3,571 $ 3,571
Current portion of long-term debt.. 4 4 4
-------- -------- --------
Total short-term debt............ 2,149 3,575 3,575
Long-term debt, less current portion:
Revolving credit and term
loan facility ................... 2,057 69,309 58,827
Other.............................. 736 736 736
-------- -------- --------
Total long-term debt............. 2,793 70,045 59,563
-------- -------- --------
Total debt....................... 4,942 73,620 63,138
Stockholders' equity:
Preferred Stock, par value $1.00 per
share; 500,000 shares authorized;
issued: none
Common Stock, par value $1.00 per share;
20,000,000 authorized; 11,594,140
shares issued and 9,912,570 shares
outstanding and 10,312,570 as
adjusted(2)(3) .................. 11,594 11,594 11,594
Additional paid-in capital(3)...... 5,657 5,657 12,608
Retained earnings.................. 95,716 95,716 95,716
Cumulative foreign currency
translation adjustment........... (3,648) (3,648) (3,648)
Minimum pension liability adjustment (461) (461) (461)
-------- -------- --------
108,858 108,858 115,809
Less treasury stock of 1,681,570
shares (1,281,570 as adjusted),
at cost(3)(4).................... 17,298 17,298 13,767
-------- -------- --------
Total stockholders' equity....... 91,560 91,560 102,042
-------- -------- --------
Total capitalization $ 96,502 $165,180 $165,180
======== ======== ========
_______________
(1) See Notes 9 and 20 of "Notes to the Consolidated Financial Statements."
(2) Does not include 685,650 shares of Common Stock which may be issued
pursuant to outstanding options under the Company's 1981 and 1992 Stock
Plans or 58,889 hypothetical shares credited to directors' accounts under
the Company's Plan for Deferral of Directors' Fees.
(3) Common Stock, additional paid-in capital, shares of Common Stock issued and
outstanding and shares of treasury stock have been restated to reflect the
Stock Split.
(4) Assumes that the 400,000 Shares offered by the Company are issued from
treasury stock.
10
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the New York Stock Exchange under the
symbol "GLE." The following table sets forth for the periods indicated the
high and low sale prices of the Common Stock as reported on the New York Stock
Exchange Composite Tape and the dividends declared by the Company, as adjusted
for the Stock Split.
High Low Dividend
-------- ------- --------
FISCAL YEAR ENDED DECEMBER 31, 1995
First Quarter $ 9.50 $ 7.31 $.0625
Second Quarter 12.75 8.88 .0625
Third Quarter 18.63 11.00 .0625
Fourth Quarter 17.94 13.69 .0625
FISCAL YEAR ENDED DECEMBER 31, 1996
First Quarter $21.50 $13.63 $.0625
Second Quarter 21.38 18.00 .0625
Third Quarter 20.50 15.50 .0625
Fourth Quarter 19.88 14.13 .0625
FISCAL YEAR ENDING DECEMBER 31, 1997
First Quarter $18.94 $16.13 $.0625
Second Quarter 23.25 15.56 .0625
Third Quarter 29.66 23.13 .0625
Fourth Quarter (through
October 14, 1997) 29.00 27.25 --
On October 14, 1997, the last reported sale price for the Common Stock on
the New York Stock Exchange Composite Tape was $27.81 per share and the number
of stockholders of record was approximately 3,000.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
THE INFORMATION CONTAINED IN THIS SECTION SHOULD BE READ IN CONJUNCTION
WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING IN THIS
PROSPECTUS OR INCORPORATED HEREIN. ALL SHARE AND PER SHARE FIGURES HAVE BEEN
ADJUSTED TO REFLECT THE STOCK SPLIT.
OVERVIEW
Founded in 1865, Gleason Corporation is a global leader in the
development and manufacture of technologically advanced gear production
machinery and associated tooling products. Since 1990, the Company has
enhanced shareholder value by strategically focusing on its core business of
gear technology. As part of this strategy, the Company divested its non-core
businesses, invested in new manufacturing technologies, reengineered and
streamlined its business processes and significantly expanded its product
offerings through internal product development and selective acquisitions. The
Company acquired Hurth in July 1995 and Pfauter in July 1997. See "Business--
Acquisitions."
Sales are generally recognized when products are shipped or services have
been provided. Sales are reported net of returns and allowances. Because
certain of the Company's orders can be large and since shipments are dependent
upon customer delivery requirements, a relatively limited number of orders can
constitute a meaningful percentage of the Company's net sales in any quarter.
The Company has historically had a high percentage of sales to the
automotive and truck industries. Customers in the automotive and truck
industries accounted for approximately 76% of the Company's net sales for the
year ended December 31, 1996. The Company's major customers in 1996 included
Ford Motor Company, Daimler-Benz AG, Chrysler Corporation, General Motors Corp.
and Dana Corp. Giving pro forma effect to the acquisition of Pfauter, which has
a more diversified customer base, the automotive and truck industries accounted
for approximately 65% of net sales for the year ended December 31, 1996.
Operating margins have varied from period to period, depending upon the
Company's product mix. In general, cutting tool, accessory and aftermarket
service revenues have generated higher gross margins than those of machine
sales. Historically, bevel gear machine sales have produced higher gross
margins than those of cylindrical gear machine sales. Selling, general and
administrative expenses also vary as a percentage of sales. Sales to Japan,
Korea and South America are generally conducted through independent dealers, to
whom the Company pays commissions. In periods when these regions represented a
higher percentage of net sales, selling, general and administrative expenses
have been higher as a percentage of total net sales.
Order and backlog levels have varied from quarter to quarter due to the
receipt of large orders and the production times required to fill such orders.
Orders in backlog are typically shipped within 12 months of receipt.
The Company has substantial operations and sales outside the United
States. For the years ended December 31, 1994, 1995 and 1996, the Company's
net sales to customers outside the United States represented 53%, 65% and 73%,
respectively, of total net sales. All asset and liability accounts of foreign
operations are translated at the current exchange rate, income statement items
are translated at average exchange rates and the resulting translation
adjustments are made to a separate component of stockholders' equity,
"cumulative foreign currency translation adjustment." Gains and losses from
foreign currency transactions are reported in operations and have historically
had minimal impact.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
EARNINGS. Net income for the six months ended June 30, 1997 was $10.8
million, or $1.04 per share, compared to $9.3 million, or $.87 per share, for
the 1996 first half. Operating income before interest and taxes for the 1997
six-month period was $16.6 million, or 13.5% of sales, compared to $15.1
million, or 12.1% of sales, for the comparable 1996 period.
12
<PAGE>
The improvement in operating income from the first half of 1996 was primarily
attributable to lower selling expenses in the first half of 1997.
ORDERS AND BACKLOG. Order levels for the 1997 six-month period were
$130.0 million compared to $134.5 million in the 1996 six-month period. Order
levels for the Company's foreign operations for the first half of 1997 compared
to the 1996 first half, as stated in U.S. dollars, were negatively impacted by
a foreign exchange translation effect of approximately $5.8 million, primarily
due to the stronger U.S. dollar versus the German deutsche mark. Consolidated
backlog was $130.1 million at June 30, 1997 compared to $122.8 million at
December 31, 1996 and $134.4 million at June 30, 1996.
Cylindrical gear production machine orders increased 70% in the first
half of 1997 compared to the first half of 1996, accounting for more than 50%
of total machine orders. Incoming orders for the six months were higher across
all cylindrical gear product categories, including a single order of $14
million received in the second quarter. This order has deliveries scheduled
for late 1997, 1998 and 1999. Order levels for bevel gear production machines
for the first half of 1997 declined 40% compared to last year's first half
primarily due to lower order levels from U.S. customers. In the 1996 second
quarter, the Company received large bevel gear equipment orders totaling $24
million from two U.S. vehicle and axle manufacturers. Bevel gear production
machine orders, while lower than last year's first half, were higher than in
the last six months of 1996. The Company expects that its major U.S. customers
will continue with their planned capital investment programs to modernize their
bevel gear production capabilities.
NET SALES. Net sales were $122.7 million for the six-month period ended
June 30, 1997, compared to $124.7 million in the prior year period. Sales were
down slightly in the six-month period of 1997 compared to 1996 largely due to
translation effects of the stronger U.S. dollar versus the German deutsche mark
and lower shipments of cylindrical gear products. Foreign exchange translation
effects negatively impacted sales by approximately $2.8 million for the 1997
six-month period.
Sales of machine products were slightly lower in the first half of 1997
compared to the 1996 period. Bevel gear production machine sales in the first
half increased 20% over the prior period in 1996, primarily due to higher
shipments to customers in the United States. Bevel gear production machine
sales in the 1997 first half included shipments associated with the large
orders received in the second quarter of 1996. Cylindrical gear production
machine sales decreased in the six-month period of 1997 compared to the prior
year's period, primarily due to lower shipments of Gleason-Hurth gear shaving
machines. Sales in the 1996 first half included a large gear shaving machine
program for a Brazilian customer associated with the start-up of a new
production facility for a customer in that region.
Sales of tooling products for the first half were down approximately 7%
from the comparable 1996 period, largely due to lower workholding sales and the
negative foreign exchange translation effect on Gleason-Hurth tooling sales.
Bevel gear cutting tool sales were down approximately 3% in the first six
months of 1997 due to lower shipments to customers in Europe and the Asia-
Pacific regions, partially offset by higher shipments to customers in the
United States. Other products sales, including spare parts, service and
software, were slightly higher in the 1997 first half than in the 1996 first
half.
COSTS AND EXPENSES. Cost of products sold as a percentage of sales was
68.2% for the six-month period ended June 30, 1997 compared to 68.1% for the
six-month period ended June 30, 1996. Margins can be significantly impacted by
the mix of products sold. For example, machines generally tend to carry higher
cost of sales percentages than tooling or other products. Also, bevel gear
production machines typically carry higher margins than cylindrical gear
machines. Gross margins overall for the first half of 1997 approximated those
of the comparable 1996 period. The favorable impact on margins of a higher
percentage of bevel gear production machines in the sales mix was offset by the
negative impact due to lower tooling product sales.
Selling, general and administrative expenses for the first half of 1997
totaled $19.6 million, or 16.0% of sales, compared to $21.6 million, or 17.3%
of sales, for the prior year's period. The decrease was primarily attributable
to lower commissions paid to outside dealers. The lower commission payments
were due to a decrease in sales to the Asia-Pacific and South American regions
where the Company is represented by independent dealers.
13
<PAGE>
Research and development expenses were $3.6 million in the six-month
period of 1997, compared to $3.8 million in the prior year's period.
Development spending in 1997 included new product development for both bevel
and cylindrical gear production equipment and manufacturing technology
initiatives for the Company's tooling operations.
Other income totaled $0.8 million in the first six months of 1997
compared to $0.6 million in the prior year's first half. Other income included
a $0.4 million gain on the sale of property associated with one of the
Company's former Components Group businesses. The property had been leased to
the purchaser of that operation since its sale in 1992.
Net interest income totaled $0.1 million in the 1997 first half compared
to net interest expense of $0.5 million in the 1996 six-month period. The
decrease in interest expense was due to lower average borrowings outstanding
under the Company's revolving credit facilities and higher balances in cash and
equivalents. The Company generated significantly higher operating cash flows
during the six-month period of 1997 compared to the six-month period of 1996,
with improved earnings, reductions in accounts receivable and increases in
advance payments received from customers. This resulted in an increase in cash
and a reduction in outstanding debt during the 1997 first half.
INCOME TAXES. The Company recorded a tax provision of $5.9 million, or
an effective tax rate of 35.5%, in the first six months of 1997, compared to
$5.2 million, or an effective tax rate of 35.8%, for the prior year six-month
period. The effective tax rates for both the 1997 and 1996 periods
approximated the U.S. statutory rate. The impact of the higher statutory rates
on foreign earnings (primarily in Germany) was offset by the utilization of
certain foreign tax credits and foreign operating loss carryforwards in both
the 1997 and 1996 periods.
1996 COMPARED TO 1995
EARNINGS. Operating income (earnings before interest and taxes)
increased 45% in 1996 to $31.3 million, or 12.6% of sales, compared to $21.5
million, or 10.9% of sales, in 1995. This improvement in operating income was
primarily attributable to benefits from higher operating volumes, improved
margins and incremental earnings from Gleason-Hurth.
Net income for 1996 was $19.7 million, or $1.84 per share, compared to
$30.8 million, or $2.91 per share, in 1995. Net income for 1995 was increased
by significant tax benefits related to the recognition of deferred tax assets
associated with charges recorded in prior years. Management estimates that net
income for 1995 using normalized tax rates would have been approximately $13.3
million, or $1.26 per share. Net income for 1995 also included a gain on the
disposal of discontinued operations of $0.4 million, or $.04 per share.
ORDERS AND BACKLOG. Order levels in 1996 were $246.4 million, an
increase of 9% from 1995. New orders, excluding the Company's Gleason-Hurth
subsidiary which was acquired in mid-1995, increased 5% compared to 1995.
Order volumes were higher, primarily due to a 25% increase in orders for bevel
gear production machinery, partially offset by lower incoming orders for
cylindrical gear production equipment and tooling products. Bevel gear
machinery orders increased with the continued strong demand for rear-wheel and
all-wheel drive vehicles, which use bevel gears, and the advantages for these
vehicle producers of replacing their older installed base of bevel gear
production equipment with the Company's newer PHOENIX line of products. Order
levels for cylindrical gear machinery were lower than in 1995 primarily due to
a reduction in orders from Europe. Orders in 1995 included multiple machine
orders from European vehicle producers related to transmission production
expansion programs. The order rate for cylindrical gear production machines
increased during 1996, with orders in the second half more than double the
first half level. Tooling orders, excluding orders from the Company's Gleason-
Hurth subsidiary, were down 7% in 1996 due to lower orders for bevel gear
cutting tools.
Backlog was $122.8 million at December 31, 1996 compared to $124.5
million at December 31, 1995. Bevel gear production machinery accounted for
about 60% of total machine backlog at December 31, 1996 compared to 42% at 1995
year-end.
NET SALES. Net sales were $248.1 million in 1996, a 26% increase from
1995. Sales, excluding Gleason-Hurth, increased 8% compared to the prior
year. This increase in sales was primarily a result of higher shipments of gear
production machines.
14
<PAGE>
Machine product sales, excluding Gleason-Hurth machines, increased 15%
compared to 1995. Higher shipments of bevel gear machinery more than offset
lower shipments of cylindrical gear production machines. Bevel gear production
machine sales were higher largely due to increased sales to the Asian market.
The majority of this increase was attributable to capital spending programs
associated with new or expanding capacity requirements for vehicle producers in
that region. The reduction in cylindrical gear production machine sales,
excluding Gleason-Hurth, was primarily due to lower shipments of the Company's
G-TECH gear hobbing machines. Sales of these products were negatively impacted
by the introduction, in 1996, of a new PHOENIX medium sized gear hobbing
machine, for which shipments began in early 1997. Shipments of the Company's
PHOENIX cylindrical gear cutting machines increased 13% in 1996 compared to
1995.
Sales of the Company's tooling products, excluding Gleason-Hurth, were
comparable to those in 1995. Workholding equipment sales, which increased 10%,
were offset by a decrease in shipments of bevel gear cutting tools to customers
in the United States. Sales of other products including spare parts, field
service and software were down slightly from 1995.
COSTS AND EXPENSES. Cost of goods sold as a percentage of sales was
67.7% compared to 69.8% in 1995. The lower cost of sales percentage for 1996
was primarily due to increased gross margins across all major machine product
lines and a more favorable sales mix of higher margin machine products
including bevel gear and cylindrical gear shaving machines. Margins on machine
products, in general, were positively impacted by the higher production volumes
which increased the coverage of fixed operating costs. This was partially
offset by a higher percentage of machines in the overall sales mix. Generally,
machine products have lower margins than tooling or other products.
Selling, general and administrative expenses were $42.6 million, or 17.2%
of sales, compared to $33.8 million, or 17.1% of sales, in 1995. Spending as
a percentage of sales was basically flat year over year; however, commission
expense as a percentage of sales increased compared to 1995. Commissions paid
to dealers increased due to higher shipments into the Asia-Pacific and South
American regions where the Company is represented by independent machine
dealers.
Research and development spending in 1996 was $7.2 million, or 2.9% of
sales, compared to $5.6 million, or 2.9% of sales, in 1995. Development
spending in 1996 exceeded 1995 levels because of increased spending for new
product development for both bevel and cylindrical gear production equipment
and manufacturing technology initiatives for the Company's tooling operations.
Other income decreased to $1.0 million in 1996 from $1.3 million in 1995
primarily due to lower outside commission income.
INCOME TAXES. In 1996, the Company recorded a tax provision of $11.1
million on pre-tax income of $30.7 million, or an effective rate of 36%. In
1995, the Company recorded a net tax benefit of $9.4 million for continuing
operations on pre-tax income of $21.0 million. In 1995, income taxes were
lowered by significant deferred tax benefits resulting from a reduction in the
valuation allowance recorded for deferred tax assets. This reduction in the
valuation allowance resulted in an increase in the net deferred tax asset
recorded on the Company's Consolidated Balance Sheet at December 31, 1995 to
$18.2 million from $2.8 million at December 31, 1994. The Company had
previously been limited, under the provisions of FASB Statement No. 109, in the
amount of the deferred tax asset it had been able to record.
1995 COMPARED TO 1994
EARNINGS. Operating income (earnings before interest and taxes) in 1995
improved to $21.5 million, or 10.9% of sales, from $5.2 million, or 4.0% of
sales, in 1994. The improvement in operating income from 1994 resulted from
higher sales, improved margins and incremental earnings from the Gleason-Hurth
operation acquired on July 1, 1995.
The Company reported income from continuing operations of $30.4 million,
or $2.87 per share, in 1995, compared to $4.3 million, or $0.42 per share, in
1994. Income from continuing operations for 1995 was increased by positive
adjustments related to the recognition of deferred tax assets associated with
charges recorded in prior years. Management estimates that income from
continuing operations for 1995 using normalized tax rates would have been
approximately $12.9 million, or $1.22 per share. Net income for the year was
$30.8 million, or $2.91 per share, including an after-tax gain from
15
<PAGE>
discontinued operations of $0.4 million, or $.04 per share. Net income for
1994 was $7.3 million, or $0.71 per share, which included an after-tax gain
from discontinued operations of $3.0 million, or $0.29 per share.
ORDERS AND BACKLOG. Order levels in 1995 increased 44% over 1994 to
$226.1 million. Orders for the Gleason-Hurth operation totaled $41.2 million
for the six-month period from the acquisition to December 31, 1995. New
orders, excluding Gleason-Hurth, increased 18% compared to 1994. This increase
primarily resulted from higher order levels for PHOENIX bevel gear machinery
and bevel gear cutting tools. The higher order rate was attributable to
improved demand from the Company's overseas markets.
Backlog was $124.5 million at December 31, 1995, compared to $54.7
million at December 31, 1994. This increase in backlog of $69.8 million
included $49.3 million for the Gleason-Hurth operation. The remaining increase
of $20.5 million in backlog was principally for bevel gear machinery.
NET SALES. Net sales were $197.0 million in 1995, a 53% increase from
1994. Sales for the Gleason-Hurth operation totaled $32.8 million, accounting
for approximately 48% of the total increase. The remaining increase in sales
of $35.8 million, represented a 28% improvement from 1994 shipment levels.
Sales of all product lines increased compared to 1994 with higher machine sales
accounting for the largest portion of the improvement.
Machine product sales, excluding Gleason-Hurth machines, increased $26.8
million compared to 1994. This increase was divided relatively equally between
bevel and cylindrical gear machinery. Higher shipments of the Company's PHOENIX
gear hobbing machines accounted for the majority of the increase in cylindrical
gear machine sales. Shipments to customers in the United States accounted for
approximately 60% of the 1995 full year total cylindrical gear machine sales
and the largest portion of the year over year increase. Bevel gear production
machine sales were higher largely due to increased sales to the Asian market,
primarily China and India.
Sales of the Company's tooling products also showed strong improvement.
Tooling sales were $8.1 million higher, excluding the Gleason-Hurth operation,
with the greatest increase coming from overseas markets which accounted for
approximately 70% of the increase.
COSTS AND EXPENSES. Cost of goods sold as a percentage of sales was
69.8% compared to 73.9% in 1994. The lower percentage was primarily
attributable to improved gross margins on machine products. Margin improvement
on these products resulted from lower direct product costs on most machine
product lines and the effect of higher production volumes, which increased
capacity utilization and coverage of fixed operating costs. Margins on tooling
products also increased compared to 1994. The Gleason-Hurth operation
contributed favorably to the overall gross margin percentage from its
acquisition through December 31, 1995.
Selling, general and administrative expenses were $33.8 million, or 17.1%
of sales, compared to $24.5 million, or 19.1% of sales, in 1994. Spending
decreased as a percentage of sales due to the higher sales volumes. Total
spending increased in 1995 with the inclusion of the Gleason-Hurth operation in
the second half of 1995 and increased variable selling expenses, including
warranty and commissions. Variable selling expenses as a percentage of sales
were in line with 1994 levels.
Research and development spending in 1995 was $5.6 million, or 2.9% of
sales, compared to $4.7 million, or 3.7% of sales, in 1994. Major development
programs in 1995 included a new computer-numerically-controlled gear testing
machine, shipments of which began in the 1995 fourth quarter. In addition,
spending for development programs associated with new product design and
manufacturing technology initiatives for the Company's tooling operations
increased in 1995 compared to 1994.
INCOME TAXES. In 1995, the Company recorded a net tax benefit of $9.4
million for continuing operations on pre-tax income of $21.0 million. In 1994,
the Company recorded a tax provision of $0.8 million for continuing operations
on pre-tax income of $5.2 million. The 1995 tax benefit included a net
deferred benefit of $14.8 million primarily resulting from a reduction in the
valuation allowance recorded for deferred tax assets. This reduction in the
valuation allowance resulted in an increase in the net deferred tax asset
recorded on the Company's Consolidated Balance Sheet at December 31, 1995 to
$18.2 million from $2.8 million at December 31, 1994. Under the provisions of
FASB Statement No. 109, the Company
16
<PAGE>
had been limited, primarily due to its prior domestic operating losses, in the
amount of the deferred tax asset it had been able to record. Significant
improvements in domestic operating performance and available tax planning
strategies provided the necessary positive evidence that it was more likely
than not that future income would be sufficient to fully realize the deferred
tax asset recorded at December 31, 1995. A valuation allowance for deferred tax
assets of $7.0 million remained at December 31, 1995 for certain tax credits
and net foreign operating loss carryforwards for which realization could not be
anticipated at that time.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $13.2 million in the first six months
of 1997 to $20.4 million at June 30, 1997. Dividend payments to stockholders
totaled $1.2 million in the first half.
Operating activities provided cash of $19.8 million in the first half of
1997 compared to $1.6 million in the comparable 1996 period. Operating cash
flows were higher in the first six months of 1997 due to higher earnings and
lower working capital requirements, partially offset by an increase in income
tax payments. Net working capital decreased primarily due to a decrease in
accounts receivable, and increases in accounts payable and advance payments
from customers.
Investing activities used $3.8 million of cash in the 1997 first half
versus $3.1 million in the comparable prior year period. Capital expenditures
totaled $5.4 million through June for the 1997 first half versus $3.1 million
in the comparable 1996 period. Capital expenditures for the 1997 full year are
planned to increase from last year's level of $10.3 million, with the majority
of the spending planned for upgrading existing production capabilities. Cash
flows from investing activities in the 1997 first half also included $1.5
million in cash received from the sale of the property of one of the Company's
former Components Group businesses.
During the first six months of 1997, the Company used $1.4 million in
cash to repurchase shares of Common Stock under a program authorized by its
Board of Directors in July 1996 to purchase up to 10% of the Company's
outstanding shares. As of June 30, 1997, the Company had used approximately
$7.6 million in cash to repurchase 491,600 shares under this program.
Effective July 31, 1997 the Company entered into a new $170 million
revolving and term loan credit facility providing for multi-currency borrowings
and stand-by letters of credit and bank guarantees. The revolving credit
portion of the facility is $110 million and matures on July 1, 2002. The term
loan portion is $60 million and requires repayment in equal quarterly
installments beginning on October 1, 1999. Up to $40 million of the revolving
credit portion of the facility is available for the issuance of letters of
credit or bank guarantees. The credit facility is unsecured (except for
pledges of 65% of the stock of certain designated foreign subsidiaries of the
Company), and there are no prepayment penalties. The interest rate on the
credit facility is LIBOR plus 35 basis points through March 31, 1998.
Thereafter, the rate is based on a spread above LIBOR as determined by certain
financial ratios. Facility fees are calculated on the entire credit facility,
regardless of usage, and are 15 basis points through March 31, 1998 and adjust
on the same basis as interest rates for periods which follow. The credit
facility provides average borrowing costs which are approximately 25 basis
points lower than the Company's former revolving credit facility and
approximately 100 basis points lower than Pfauter's average borrowing costs on
its former secured credit facilities.
The Company's total debt outstanding was $4.9 million, and pro forma for
the Pfauter acquisition would have been $73.6 million, at June 30, 1997.
Available unused short and long-term credit lines with banks, including
revolving credit facilities, totaled $36.7 million at June 30, 1997. As of
September 30, 1997, the Company had approximately $80 million available for
borrowing under its revolving and term loan credit facility. Management
believes that the Company's cash balances, borrowing capacity under its lines
of credit, and anticipated funds from operations will be sufficient to meet its
near-term operating and investing activities or that it will be able to obtain
additional long-term financing if such financing is required.
17
<PAGE>
BUSINESS
THE COMPANY
Founded in 1865, Gleason Corporation is a global leader in the
development and manufacture of technologically advanced gear production
machinery and associated tooling products. The gear production market is
comprised of two segments, the bevel gear market and the cylindrical gear
market. Bevel gears transmit power at a right angle, such as from the drive
shaft to the drive-axle of a vehicle. Cylindrical gears transmit power in
parallel axes of rotation and have a wider variety of applications, including
as components in the transmissions of vehicles. The Company believes it is the
market leader in the bevel gear machinery market and that it has a leading
position in the cylindrical gear equipment market. The Company's extensive
product line includes machinery for the production, finishing and testing of
gears. In addition, the Company offers a global support system providing
tooling, replacement parts, field service, application development services,
gear design and inspection software, training programs, engineering support and
machine rebuild and upgrade services. The Company is also a leader in the
theory of gear design and in the application, testing and analysis of prototype
and production gears.
Over the past five years, approximately two-thirds of the Company's net
sales were to customers outside the United States. Approximately 76% of the
Company's net sales for the year ended December 31, 1996 were to customers in
the automotive and truck industries. Other segments served include aerospace,
agriculture, construction, industrial machinery, marine, power tool and jobbers
who sell to a variety of industries. For the year ended December 31, 1996, the
Company's top ten customers (which included subsidiaries of Ford Motor Company,
Daimler-Benz AG, Chrysler Corporation, General Motors Corp. and Dana Corp.)
accounted for 44% of the Company's net sales.
The Company has manufacturing facilities in Rochester, New York and
Rockford, Illinois; Plymouth, England; Munich and Ludwigsburg, Germany; Bologna
and Porretta Terme, Italy; Bangalore, India; and Biel, Switzerland. The
Company has sales and service offices throughout the United States and Europe,
and in the Asia-Pacific region. The Company has approximately 2,600 employees
worldwide.
Since 1990, Gleason Corporation has enhanced shareholder value by
strategically focusing on its core business of gear technology. As part of
this strategy, the Company divested its non-core businesses, invested in new
manufacturing technologies, reengineered and streamlined its business processes
and significantly expanded its product offerings through internal product
development and selective acquisitions.
Between 1991 and 1994, the Company divested its non-gearing businesses,
which manufactured industrial products including powder metal parts, metal
stampings and precision plastic parts, and also sold its less profitable gear
equipment operations in Belgium. During this period, the Company made
significant investments to upgrade and modernize its manufacturing technology
and processes. Most notably, the Company invested approximately $30 million to
create a state-of-the-art manufacturing facility in Rochester, New York. As a
result of its investment and reengineering initiatives, the Company reduced
overhead costs, excluding depreciation expense, by approximately $12 million
over this period and reduced the lead times for its principal machine models
from an average of 40 weeks in 1992 to as low as fourteen weeks, currently.
The Company has expanded the breadth of its product line through both
internal development and, more recently, selective acquisitions. In 1989, the
Company introduced its first PHOENIX machine, a computer-numerically-controlled
("CNC") gear production machine, which is considered to be among the most
flexible and productive gear manufacturing equipment on the market. Since
then, the Company has extended this technology across its bevel and cylindrical
gear machinery product lines. Excluding sales from acquired businesses, sales
of PHOENIX and other recently introduced CNC machines accounted for over 75% of
the Company's cumulative net sales of machines since 1993. In 1993, the
Company introduced the PHOENIX 125GH cylindrical gear hobbing machine which
provided the Company with a highly competitive product in the cylindrical gear
equipment market in which the Company historically had a modest presence.
Within the first three years of its introduction, sales of this machine had
more than tripled the Company's former sales levels in this product area. To
further expand its cylindrical gear product offerings and enhance its global
presence in this market, the Company acquired Hurth in July 1995 and Pfauter in
July 1997.
18
<PAGE>
The implementation of the Company's strategies has resulted in
significantly improved financial results. For the year ended December 31,
1996, the Company reported record net sales of $248.1 million, representing a
26% increase from the year ended December 31, 1995; its operating income
increased 45% to $31.3 million and its net income increased 48% to $19.7
million (adjusted to exclude a one-time tax benefit in 1995). For the first
six months of 1997, the Company's net sales declined modestly versus the 1996
comparable period to $122.7 million, reflecting a $2.8 million reduction from
the foreign exchange translation effect of a stronger U.S. dollar compared to
the German deutsche mark. Operating income during the first half of 1997 rose
10% over the comparable period in 1996 to $16.6 million and net income
increased 15% to $10.8 million. The quarter ended June 30, 1997 marked the
fourteenth consecutive quarter in which the Company reported increased
operating earnings on a comparative year-over-year basis.
ACQUISITIONS
HURTH. On July 1, 1995, the Company acquired, for $10.6 million, certain
assets of Hurth, a leader in the design and production of cylindrical gear
machinery and tooling based in Munich, Germany. The Company acquired, from
receivership, Hurth's patents, trademarks, rights to technology, and machinery
and equipment. The acquisition of Hurth enabled the Company to expand its
presence in the cylindrical gear equipment market by providing complementary
machine models and entry into the cylindrical gear cutting tools segment.
Primarily as a result of the Hurth acquisition, the Company's cylindrical gear
equipment sales increased from $27.6 million in 1994 to $104.2 million in 1996.
The Company streamlined Hurth's operations by discontinuing its
unprofitable product lines, eliminating operating redundancies and retaining
only 280 of its 420 employees, thereby significantly reducing its cost
structure. Gleason enhanced the distribution of Hurth's products by utilizing
the Company's established global sales network and realized savings by
eliminating most of Hurth's sales and distribution infrastructure. The Company
also realized savings by utilizing global sourcing supplier relationships for
requirements ranging from purchased components to corporate services and
consolidating certain activities such as advertising and promotion. In
addition, the Company has benefited from synergies generated by sharing product
and process technologies. The acquisition was immediately accretive to the
Company's earnings and has increased the Company's consolidated operating
margins.
PFAUTER. On July 31, 1997, the Company completed its acquisition of
Pfauter, including, among other operations, Hermann Pfauter GmbH & Co., a
worldwide leader in cylindrical gear production equipment based in Ludwigsburg,
Germany, and Pfauter-Maag, a leading cutting tool manufacturer based in
Rockford, Illinois. Pfauter was founded in 1900 and has major operations in
Germany, Italy and the United States.
The acquisition of Pfauter positions the Company to be a worldwide leader
in gear production equipment and related technology by combining Pfauter's
extensive line of cylindrical gear production machinery with the Company's
leading position in bevel gear production equipment. Pfauter-Maag
substantially increases the Company's sales of higher-margin cylindrical gear
cutting tools and related services. In addition, the Pfauter acquisition
expands the Company's customer base to include a broad range of non-automotive
customers, from small-gear machine users such as power tool and precision
instrument manufacturers to producers of large gears utilized in off-highway
equipment and heavy industrial applications. Approximately 48% of Pfauter's
consolidated sales for the year ended December 31, 1996 were to customers
outside the automotive and truck industries.
The acquisition was completed for a total consideration of $91.8 million,
including $34.8 million in cash and the assumption of $57.0 million in bank
debt. The acquisition was funded through a new $170.0 million revolving and
term loan credit facility. Management estimates that the acquisition will
result in pre-tax costs totaling $9.0 million, related to the rationalization
of Pfauter's operations, which will be accounted for as part of the purchase
price. Management believes that the Company will be able to achieve annual
cost savings of a similar magnitude after the initial two years following the
acquisition. For the year ended December 31, 1996, Pfauter generated sales of
approximately $178.2 million and earnings before special charges, interest,
taxes, depreciation and amortization (EBITDA) of approximately $16.8 million.
GROWTH STRATEGIES
The Company's business and growth strategies are aimed at enhancing value
for its stockholders. Management believes that its best internal benchmark for
measuring the long-term creation of stockholder value is Economic Value Added
19
<PAGE>
("EVA"). EVA is calculated by multiplying a company's average net operating
assets by the excess of its return on average net operating assets over its
estimated weighted average cost of capital. For the year ended December 31,
1996, the Company generated EVA in excess of $8 million as its return on
average net operating assets approximated 17%, compared to its estimated
weighted average cost of capital of 11%. The Company intends to maximize its
EVA by continuing to focus on the following growth strategies: capitalizing on
machine replacement opportunities; increasing sales of consumable cutting
tools, accessories and aftermarket services; leveraging new product and process
technology; increasing sales to customers in emerging markets and pursuing
growth from acquisitions.
CAPITALIZE ON MACHINE REPLACEMENT OPPORTUNITIES. Gleason's estimated
worldwide installed base of more than 15,000 bevel gear machines has an average
age in excess of 25 years. Technologically, these machines are at least two
or three generations behind the capabilities of the Company's current PHOENIX
bevel gear production machines. The growing market for sport utility,
light-weight trucks and all-wheel drive vehicles, most of which use bevel
gears, has motivated automotive manufacturers to accelerate the replacement of
older gear production equipment with more flexible, efficient CNC machines. In
1996, certain large producers of bevel gears began the process of modernizing
and upgrading their production facilities by installing the Company's PHOENIX
line of equipment to keep pace with the rapidly increasing requirements for
higher quality and productivity. Management believes that there continues to
be a significant growth opportunity in replacement sales since products in its
PHOENIX line represented less than five percent of Gleason's estimated
worldwide installed base of bevel gear equipment, as of September 30, 1997.
The Company also has attractive opportunities related to the replacement
of the installed base of cylindrical gear machines. While the average age of
the installed base of cylindrical gear machines is not as great as that of
bevel gear machines, the Company believes that technological advances provide
customers with potential returns on investment that should accelerate the
replacement of the installed machine base. Management believes that it is
well-positioned to capitalize on these opportunities because of its broad range
of products, leading technology and full range of customer support.
INCREASE SALES OF CONSUMABLE CUTTING TOOLS, ACCESSORIES AND AFTERMARKET
SERVICES. The Company's large base of installed equipment represents a
meaningful source of potential revenues from consumable products and
accessories such as cutting tools, workholding devices and spare parts. The
Company also offers aftermarket services including field service, application
development services, gear design and inspection software, training programs,
engineering support and machine rebuild and upgrade services. The Company's
revenues derived from consumable cutting tools, accessories and aftermarket
services, which accounted for approximately 35% of the Company's net sales for
the year ended 1996, have typically generated higher margins than those of
machine sales.
The Company believes that Pfauter-Maag is a market leader in cylindrical
gear cutting tools in the United States. The Company plans to leverage
Pfauter-Maag's product and process technology in overseas markets where the
Company presently has established bevel cutting tool manufacturing operations
and proven distribution channels. The Company also sees a significant growth
opportunity, both in the United States and abroad, for tool management and
reconditioning services, including such services as ordering and managing
customers' tool inventories and sharpening and recoating tools.
Leverage New Product and Process Technology. One of the Company's
fundamental goals is to be the technology leader in the markets which it
serves. To compete successfully, the Company must bring new technology to
market quickly. The Company has substantially reduced the lead time required
to introduce new products from approximately 30 months in 1990 to approximately
one year currently. The Company reduced its lead times as a result of
initiatives such as concurrent engineering, in which highly focused cross-
functional groups from engineering, manufacturing, outside suppliers and others
work closely together with common objectives.
Management plans to further reduce the time required to bring a new
product to market by using a "modular platform" for the design and production
of its machines. Under this approach, one design platform typically supports
multiple machine models. Additional benefits of using modular platforms
include lower development costs, more common parts, and lower production costs.
The Company's new parametric-based computer aided design and manufacturing
software, which is being used in all new product development projects, provides
leading-edge tools to further extend these benefits. The Company also sees
opportunities in designing and manufacturing many of the new products from
Pfauter across common company-wide platforms.
20
<PAGE>
Gleason believes that it is distinct from other machinery manufacturers
in that it is a world leader in the advanced design of machinery as well as in
the theory, design and optimization of the end-product, gears. Gear processing
solutions require an in-depth understanding of all the variables in the
production process, including the machine, cutting tools, workholding equipment
and characteristics of the workpiece. Gleason's recent acquisitions, coupled
with its comprehensive product and process knowledge, strengthen the Company's
position as a technological leader in its markets. In addition, the Company
believes that it will be able to leverage its expertise in the design and
manufacture of complex parts and advanced machinery to pursue a variety of
market opportunities in the future.
INCREASE SALES TO CUSTOMERS IN EMERGING MARKETS. One of the first phases
in the construction of a developing nation's infrastructure is the creation of
a transportation network. For the Company, this has meant new demand for gear-
making equipment used in the production of construction equipment, trucks,
buses and passenger vehicles. According to WARD'S 1996 WORLD VEHICLE FORECASTS
AND STRATEGIES, three-quarters of all vehicles are owned by only 16% of the
world's population. Also, according to that same publication, twice as many
new cars and trucks are expected to be sold over the next 20 years than in the
past two decades, with annual sales reaching 92 million units by the year 2015
from 51 million in 1995. WARD'S projects that developing countries will
account for approximately 71% of this increase.
The Company has long recognized the opportunity presented by emerging
markets and has established an installed base of over 800 of its machines in
each of China and India. For the years ended December 31, 1996 and 1995, over
20% of the Company's net sales were to customers in developing countries,
including China, India and Brazil. Management is committed to strengthening
its local presence in these and other selected regions. For example, the
Company began operations in Bangalore, India in 1996 to produce bevel gear
cutting tools for the Indian market and to provide its own sales and service
support to the Company's growing base of customers in that region. The Company
believes that its initiatives have positioned it to be able to capitalize on
the opportunities presented by these emerging markets.
PURSUE GROWTH FROM ACQUISITIONS. The Company considers selective
acquisitions to be an important aspect of its strategy for long-term growth.
Consistent with this strategy, the Company acquired Hurth in 1995 and Pfauter
in 1997. The Company believes that it has successfully assimilated Hurth into
its operations and that it will continue to benefit from synergies generated by
this combination. The Company believes that its experience with Hurth will
help it to successfully restructure and integrate Pfauter. In addition to
future benefits from the synergies of Hurth and Pfauter, the Company intends to
continue to pursue future acquisitions that complement its existing operations.
INDUSTRY
The gear production machinery industry serves businesses which
manufacture gears for use as components in such products as automobiles,
trucks, industrial machinery, power tools and aerospace, agricultural,
construction and marine equipment. The majority of gear production is
conducted by original equipment manufacturers which incorporate gears into
their finished products.
DEMAND. Historically, the automotive and truck industries have been the
largest consumers of gears and related production equipment. A number of
factors in the automotive industry have contributed to the increase in demand
for gears, and consequently, for the latest generation of gear production
machinery. In light vehicle applications, the most notable change in recent
years has been the increase in the number of speeds in both manual and
automatic transmissions. Driven by higher performance and fuel economy
standards, automatic transmissions have risen from three to four speeds and
manual transmissions have increased from four to five speeds. Since each
incremental speed requires additional gears, this trend has resulted in higher
demand for gears in general.
Increased demand for light-weight trucks has also fueled demand for gears
and gear production machinery. According to Automotive News Data Center and
WEFA, light-weight trucks and sport utility vehicles accounted for nearly 44%
of light vehicle sales in the United States during 1996, compared to 36% during
1992. The increase in light-weight truck production is especially important to
the bevel gear market because the majority of these vehicles are equipped with
all-wheel or rear-wheel drive, both of which utilize bevel gears. Management
believes that the growing market for sport utility, light-weight trucks and
all-wheel drive vehicles has motivated automotive manufacturers to accelerate
the replacement of older gear production equipment with more flexible,
efficient CNC machines.
21
<PAGE>
According to WARD'S 1996 WORLD VEHICLE FORECASTS AND STRATEGIES, twice as
many new cars and trucks will be sold over the next 20 years than in the past
two decades, with annual sales reaching 92 million units by the year 2015 from
51 million in 1995. Gear requirements for other industries such as aerospace,
agriculture, construction, industrial machinery, marine and power tools are
expected to vary with demand for end-use products and are dependent on general
economic conditions.
COMPETITION. The markets in which the Company participates are
competitive. Many of the customer programs for which the Company competes
require bids or proposals from multiple vendors. The Company's competitors
include manufacturers of gear production equipment, principally in Europe and
Japan, most of which are privately-held entities or subsidiaries of larger
companies. Management believes that a relatively small number of companies
account for a large percentage of sales to the global gear production market.
Due to the geographic dispersion of the customer base and the demand for
aftermarket services, most of these companies possess worldwide production and
distribution capabilities. Management believes that the Company is well-
positioned to compete effectively within this market.
SUBSTITUTE TECHNOLOGY. Gears can be manufactured using a number of
materials, although metal gears are generally preferred for their durability,
price and performance advantages. Metal gears can be produced through a
variety of methods including: machining, powder metal processing, cold forming
and forging. Although a number of these processes can be used to produce
simple or light-weight gears, metal machining is preferred for applications
which require precision, durability, strength and complex geometry. Higher
fuel economy standards have led to gear boxes with thinner walls which require
gear sets to operate with less vibration and noise. In addition, engineering
improvements require gears to handle higher revolutions per minute with greater
durability, higher load-bearing capacity and efficiency. Metal machining
techniques produce gear sets which are able to meet these stringent
requirements.
PRODUCTS
The Company offers a complete array of machines, tools and accessories
for producing bevel and cylindrical gears of all types and sizes. In general,
three basic steps are involved in the production of gears: soft manufacturing,
heat treatment and hard manufacturing. The first step in gear processing, soft
manufacturing, cuts gear teeth into a metal blank. The gear is then prepared
for and subjected to heat treatment, where it is hardened. The final process,
hard manufacturing, refines the gear to remove the distortions caused by heat
treatment and finishes the gear to meet design specifications. The following
is a brief discussion of the basic gear production process and the products
offered by the Company to serve each function for the bevel and cylindrical
gear markets:
BEVEL GEARS
Soft Manufacturing. Bevel gears are cut via one of two methods, face
milling or face hobbing. Face milling is an indexed process in which gears are
formed by cutting each tooth, one at a time, to its full depth. Face hobbing
involves the synchronous rotation of both the cutting tool and the workpiece,
with all gear teeth being gradually cut at the same time. Earlier generations
of machines were dedicated to one process or the other. The Company's PHOENIX
bevel gear cutting machines, however, have the flexibility to be programmed for
either face hobbing or face milling. Management believes that the recent
increase in demand for all-wheel drive vehicles has induced many manufacturers
to replace outdated bevel gear machines with the Company's latest PHOENIX
models. This technology upgrade has also provided manufacturers with the
option to convert from face milling to face hobbing, which has become
increasingly preferred due to its flexibility and cost efficiency.
Hard Manufacturing. Following soft manufacturing procedures, the gears
are hardened through a heat treatment process. Hard manufacturing processes
correct the distortions caused by heat treatment and finish gears to meet final
specifications. For bevel gears, hard manufacturing is typically accomplished
through two basic processes, lapping or grinding. Lapping is used primarily in
the automotive industry to refine the contact between mating gears. In this
process, the gears are mounted in a machine in their approximate operating
positions, and are run together in a mesh with a mildly abrasive lapping
compound that refines the area of contact between the gears, leading to
improved noise characteristics and longer life.
22
<PAGE>
Gear grinding is used as a hard finishing operation for face-milled gears
where greater accuracy is required in the application than can be provided by
cutting alone. Instead of a cutting tool, a wheel which is coated with
abrasives is used to remove stock from between gear teeth. Gear grinding has
long been a prerequisite for aircraft-quality applications and has more
recently been applied to rear-wheel drive automotive applications, particularly
in European luxury vehicles. The Company manufactures bevel gear lapping and
grinding machines under both the Gleason and PHOENIX brand names.
Other. In addition to the gear production machines outlined above, the
Company also manufactures PHOENIX inspection and testing equipment for bevel
gears. The Company provides aftermarket products and services such as cutting
tools, workholding devices, spare parts, software development, engineering
support, machine rebuilds and upgrades, tool management, and other repair and
maintenance services.
CYLINDRICAL GEARS
Soft Manufacturing. Soft manufacturing for cylindrical gears can be
accomplished through hobbing or shaping. Gear hobbing is the most common
method of producing cylindrical gears. Gear teeth are formed when a rotating
tool (hob) is gradually fed into a rotating gear blank. The Company
manufactures cylindrical gear hobbing machines under the PHOENIX and Pfauter
brand names. With the acquisition of Pfauter, the Company now offers hobbing
machines capable of producing gears as small as 25 millimeters and larger than
two meters in outside diameter. Gear shaping, which forms a tooth in an axial
direction, is used when a part's geometry creates interferences that preclude
the use of gear hobbing. The acquisition of Pfauter also provided the Company
with the ability to serve this market segment.
Prior to heat treatment, cylindrical gears which have been hobbed are
often subjected to a shaving procedure, whereby a serrated cutting tool removes
a modest amount of stock from the gear in anticipation of the distortion which
will be caused by heat treatment. Gears completed by this process may not
require any corrective finishing after heat treatment. The Company markets
cylindrical gear shaving machines under the Gleason-Hurth brand name.
Hard Manufacturing. After heat treatment, cylindrical gears are
typically finished by grinding or honing or in some combination thereof.
Profile or form grinding is an indexed process in which the teeth are refined
one at a time and the tooth takes the shape of the tool. Since the tool or
grinding wheel is dedicated to a specific gear design, this process tends to be
more efficient for high-volume applications where relatively few teeth are
involved. The Company acquired the ability to manufacture large profile
grinders with Pfauter, which has recently introduced a smaller gear profile
grinder. The Company also manufactures a threaded wheel grinding machine under
the Gleason brand name. Threaded wheel grinders are preferred by manufacturers
who need to finish gears with a high number of teeth or who require greater
flexibility. Honing is another finishing procedure for cylindrical gears in
which an abrasive tool is run in mesh with a cylindrical gear to remove a
modest amount of stock to improve surface finish and noise characteristics.
The Company entered the gear honing market with its acquisition of Hurth.
OTHER. In addition to the machines outlined above, the Company also
markets an array of cutting tools, accessories (such as workholding devices)
and aftermarket services under the Gleason, Gleason-Hurth, Gleason-Pfauter and
Pfauter-Maag brands. The acquisition of Pfauter-Maag significantly expanded
the Company's offerings in consumable cutting tools and related services for
the cylindrical gear tool market.
23
<PAGE>
PRODUCT LINES
The following chart demonstrates the manufacturing processes involved in
the production of bevel and cylindrical gears and the respective product lines
manufactured by the Company to service each of these functions:
Gear Production Company Offerings by Brand
- ------------------------------------- -------------------------------------
Gear Type Process Product Gleason PHOENIX Gleason- Gleason-
Hurth Pfauter/
Pfauter-
Maag
- ------------------------------------------------------------------------------
Soft Face Hobbing X
---------------------------------------------------
Manufacturing Face Milling X X
------------------------------------------------------------------
Heat -- -- -- -- --
Treatment
------------------------------------------------------------------
Hard Lapping X X
--------------------------------------------------
Manufacturing Grinding X
------------------------------------------------------------------
Bevel Cutting Tools X
Gears --------------------------------------------------
Inspecting & X X
Testing
Other --------------------------------------------------
Workholding X
Equipment
--------------------------------------------------
Tool Sharpening X
--------------------------------------------------
Spare Parts and X X
Services
- ------------------------------------------------------------------------------
Soft Hobbing X X
--------------------------------------------------
Manufacturing Shaping X
--------------------------------------------------
Shaving X
------------------------------------------------------------------
Heat -- -- -- -- --
Treatment
------------------------------------------------------------------
Cylindrical Hard Grinding X X
Gears Manufacturing -------------------------------------------------
Honing X
------------------------------------------------------------------
Cutting Tools X X
-------------------------------------------------
Workholding X X X
Other Equipment
-------------------------------------------------
Tool Sharpening X X
-------------------------------------------------
Spare Parts and X X X X
Services
- ------------------------------------------------------------------------------
X - Indicates that the Company provides the applicable product or service
under the indicated brand name.
NEW TECHNOLOGY
At the EMO international machine tool show in Hannover, Germany in September
1997, the Company introduced important new products and technologies for gear
processing. For bevel gear production, the new PHOENIX 450HC bevel gear
cutting machine with POWER CUTTING<trademark> was demonstrated for the first
time. This process, through the use of carbide steel cutting tools and higher
spindle speeds, may eliminate the need for coolants in the cutting process and
can increase the metal-removal rate on a typical ring gear by up to five times
the rate of existing machine models and conventional cutting tools. While the
initial cutting tool costs are higher, the savings in machining time and
extended tool lives should provide a strong economic incentive for many bevel
gear producers to convert to this new technology. Gleason, with its strong
leadership in this market both for machines and cutting tools, is favorably
positioned to capitalize on opportunities created by this technology.
24
<PAGE>
For cylindrical gear production, the Company presented a variety of new
machines at this international trade show, including its new P200G CNC gear
profile grinding machine and its ZH125 CNC gear honing machine. The profile
grinding machine, developed by Gleason-Pfauter, represents a completely new
product offering for the Company. Pfauter, which for many years has been
recognized as a leader in profile grinding machines for large cylindrical
gears, has now transferred this technology to smaller sized gearing
applications. This fast growing market represents an incremental sales
opportunity for the Company, as gear producers, including automotive companies,
are aggressively seeking more cost-effective ways to manufacture higher quality
gearing. This new machine model offers impressive productivity and quality
results compared to competitive product offerings and is designed and
manufactured in a manner which permits it to be sold below existing market
prices for similar machines.
The ZH125 CNC gear honing machine represents one of the most versatile,
compact honing machines on the market today. The honing process, the principal
purposes of which are to improve the gear surface finish and reduce noise in a
gear set, has experienced increased demand resulting from more stringent
quality requirements for gears. The ZH125 CNC machine was developed by the
Company's Gleason-Hurth subsidiary and represents the Company's second product
offering in this field. This machine, for which the Company has already
received multiple orders, should extend the Company's leadership in this
emerging area of gear processing.
SALES & MARKETING
The Company's machines and tooling are currently in worldwide use in
approximately 50 countries by a variety of gear manufacturers. Sales and
service functions in North America and Europe are performed directly by
employees of the Company, while such functions in Japan, South America and
Korea are performed primarily by independent dealers. The Company services
North American customers from offices throughout the United States and services
European customers from offices in England, France, Germany, Italy, Spain and
Sweden. In the Asia-Pacific region, the Company maintains offices in
Australia, India and the People's Republic of China. The Company owns a 20%
interest in the dealer which serves Japan and Taiwan. In other countries, the
sales and service function is performed by a combination of independent dealers
and employees of the Company.
Overseas markets are important to the Company. Sales outside the United
States, during the five years from 1992 through 1996, comprised approximately
71%, 57%, 53%, 65% and 73%, respectively, of consolidated net sales. In 1996,
significant overseas sales were made, in order of magnitude, to Germany, Korea,
Brazil and Japan. Foreign sales are made both directly by the Company and its
subsidiaries and through independent foreign dealers. Generally, foreign sales
are not significantly more or less profitable than domestic sales, except that
the cost of commissions paid to independent dealers in certain regions tend to
exceed the expense that the Company incurs through direct sales transactions.
The regional diversity of the Company's sales base minimizes the effect of
economic cycles in any one particular market.
Machine sales have accounted for an average of approximately 60% of the
Company's annual net sales from 1994 through 1996. Other sales are generated
principally from consumable cutting tools, accessories and aftermarket
services.
The Company's sales are not dependent on any one customer, although they
are dependent upon the domestic and foreign automotive and truck industries in
general. Those industries are the largest user of the Company products,
accounting for approximately 76% of net sales (65% of net sales pro forma with
Pfauter) for the year ended December 31, 1996. During this period,
consolidated net sales included $36.0 million, or 14% of total net sales, to
various divisions of Ford Motor Company and its subsidiaries in this country
and abroad. Direct sales to U.S. governmental agencies are insignificant. The
Company's sales are not seasonal in nature, but have historically been subject
to quarterly fluctuations.
Because of the varying and complex requirements of its customers and the
technical nature of gear design, a close working relationship exists between
the Company and its customers. The Company's engineers and service
technicians, as well as its foreign dealer personnel, travel extensively to
customers' plants to assist in the design and application of gears, in the
selection of equipment to meet customers' production and testing requirements
and to provide services. The Company has a worldwide reputation as an
authority on gear engineering and provides customer access to its proprietary
computer-aided gear design and analysis system. To assure the competence of
its technical personnel, the Company mandates training programs in gear design,
machine operation and maintenance. The Company's customers from around the
world also avail themselves of these training programs to upgrade their gear
engineering and manufacturing expertise.
25
<PAGE>
BACKLOG
Backlog (unshipped orders) is a measure of short-term business activity.
Because of the nature of the industry, backlog is subject to fluctuation. As
of June 30, 1997, backlog totaled $130.1 million compared to $134.4 million as
of June 30, 1996 and $122.8 million as of December 31, 1996. The Company
expects substantially all of the June 30, 1997 backlog to be shipped within
twelve months of such date.
RESEARCH AND DEVELOPMENT
The Company considers product development to be an important factor in
maintaining and improving its market position and strives to provide its
customers with equipment which incorporates new technology and results in
manufacturing costs savings. Many advancements in the gear design field have
been first described in technical papers published by the Company and have
subsequently been adopted by the American Gear Manufacturers Association in
their standards of gear design and specifications.
The Company works closely with its customers to develop new gear designs
for their applications and to determine the feasibility of manufacturing
particular gears. The Company assists its customers in determining the best
machinery, cutting tools and configuration for their application,customizing
machines and tools, as necessary. As a result of frequent contact with its
customers, the Company is able to assess the need and market demand for new
products to meet its customers' requirements. These efforts have been the
primary stimulus for the introduction and expansion of the Company's PHOENIX
product line.
The Company has been a leader in the development of gearing technology by
maintaining an active research and development program. During the year ended
December 31, 1996, the Company expended approximately $7.2 million on research
and development activities, compared to $5.6 million during the year ended
December 31, 1995. These activities were conducted exclusively by the Company.
The Company owns over 375 U.S. and foreign patents and presently has over
125 patent applications pending. While the Company expects to continue its
policy of obtaining patents as appropriate, it does not consider patents to be
a major factor in the successful conduct of its business.
EMPLOYEES
At September 30, 1997, the Company had approximately 2,600 employees.
Many of the Company's employees possess a high degree of engineering, technical
and mechanical skills. Management believes its relationships with its
employees are good. With the exception of government-mandated employee
representation in Germany and Italy, the Company's employees are not
represented by any collective bargaining agent.
PROPERTIES
The Company's corporate office is located in Rochester, New York and its
manufacturing operations are conducted at plants in Rochester, New York;
Rockford, Illinois; Munich and Ludwigsburg, Germany; Plymouth, England; Bologna
and Porretta Terme, Italy; Bangalore, India and Biel, Switzerland.
26
<PAGE>
The following table sets forth certain information regarding the
Company's major facilities:
SQUARE
LOCATION FOOTAGE PRINCIPAL PRODUCTS
- --------- --------- -------------------
Owned Facilities:
Rochester, New York 721,000 Bevel and cylindrical gear production
machines and workholding equipment
Ludwigsburg, Germany 285,000 Cylindrical gear production machines
Rockford, Illinois 250,000 Cylindrical gear cutting tools, gear
production machine assembly
Plymouth, England 106,000 Bevel gear cutting tools
Leased Facilities:
Munich, Germany 248,000 Cylindrical gear production machines and
cutting tools
Bologna, Italy 202,000 Cylindrical gear production machines
Porretta Terme, Italy 46,000 Cylindrical gear production machines
Bologna, Italy 15,000 Cylindrical gear cutting tools
Biel, Switzerland 11,000 Cylindrical gear production machine
assembly
Bangalore, India 9,000 Bevel gear cutting tools
The Munich, Germany facility is being leased for a term ending in 2001.
The lease for the 202,000-square foot facility in Bologna, Italy expires in
September, 1998. The Company owns approximately 250 acres of undeveloped land
in Monroe County, New York and leases office space for its sales and service
offices in various locations around the world. The Company owns the land and
building of a former subsidiary, which it sold in 1992, which it leases to the
new owners of the business.
ENVIRONMENTAL AND RELATED MATTERS
The Company generates hazardous and nonhazardous wastes in the normal
course of its manufacturing operations. As a result, the Company is subject to
a wide range of federal, state, local and foreign environmental laws and
regulations, including the Comprehensive Environmental Response, Compensation
and Liability Act, that (i) govern activities or operations that may have
adverse environmental effects, such as discharges to air and water, as well as
handling and disposal practices for hazardous and nonhazardous wastes, and
(ii) impose liability for the costs of cleaning up, and certain damages
resulting from, sites of past spills, disposals or other releases of hazardous
substances. Compliance with such laws and regulations requires expenditures
by the Company on a continuing basis. The Company does not expect that these
expenditures will have a material adverse effect on its financial condition or
results of operations.
LEGAL
The Company experiences routine litigation in the normal course of its
business. The Company does not believe that any pending or threatened
litigation or claims will have a material effect on the Company's financial
condition or results of operations.
27
<PAGE>
OTHER INFORMATION
Certain of the components used in the Company's products are purchased
from third parties and are available from a limited number of sources.
Although the Company is not significantly dependent on any one supplier, the
inability of suppliers to provide the Company with the required quantity or
quality of these components could have an interruptive effect on the Company's
business until such time as an alternative source of supply is found.
MANAGEMENT
The following table sets forth certain information concerning the
executive management and directors of the Company:
NAME AGE POSITION
- ---- ---- --------
James S. Gleason 63 Chairman of the Board, Chief Executive
Officer, President and Director
David J. Burns 43 Executive Vice President and Director
David W. Goodfellow 51 Senior Vice President - Worldwide Sales
(The Gleason Works) and President of
Pfauter-Maag Cutting Tools L.P.
John J. Perrotti 37 Vice President - Finance and Chief
Financial Officer
Ralph E. Harper 63 Vice President, Secretary and Treasurer
John B. Kodweis 55 Vice President - Administration and
Human Resources
John W. Pysnack 35 Controller
Martin L. Anderson 48 Director
Julian W. Atwater 66 Director
Robert W. Bjork 71 Director
J. David Cartwright 58 Director
John W. Guffey, Jr. 59 Director
Donald D. Lennox 78 Director
William P. Montague 50 Director
Robert A. Sherman 78 Director
Robert L. Smialek 53 Director
James S. Gleason has been President and Chief Executive Officer of the
Company since 1985. He received his AB degree from Princeton University and
his MBA degree from the William E. Simon Graduate School of Business
Administration of the University of Rochester. He is the 1997 Chairman of the
Association for Manufacturing Technology and is a Trustee of the Rochester
Institute of Technology. He is also a director of the Company and is the
President and a director of the Gleason Foundation.
28
<PAGE>
David J. Burns has been Executive Vice President of the Company since
1995 and from 1992 to 1995 was Vice President of the Machine Products Group of
the Company. He received his BA degree from St. John Fisher College and his
MBA degree from the William E. Simon Graduate School of Business Administration
of the University of Rochester.
David W. Goodfellow has been Senior Vice President - Worldwide Sales (The
Gleason Works) since 1997. He has also been President and Chairman of Pfauter-
Maag since 1987 and President of American Pfauter, L.P. since 1976. He has
been a director of the American Gear Manufacturers Association since 1992.
John J. Perrotti has been Vice President of Finance and Chief Financial
Officer of the Company since 1995 and from 1993 to 1995 was Vice President -
Controller of the Company. He received his BS degree from Rochester Institute
of Technology and his MBA degree from the William E. Simon Graduate School of
Business Administration of the University of Rochester and is a Certified
Public Accountant.
Ralph E. Harper has been Vice President, Secretary and Treasurer of the
Company since 1993. Prior thereto, he was Corporate Counsel of the Company.
He received his BA degree from the University of Rochester and his LLB degree
from George Washington University.
John B. Kodweis has been Vice President - Administration and Human
Resources of the Company since 1992. He received his BS degree from John
Carroll University and his MBA degree from Rochester Institute of Technology.
John W. Pysnack has been Controller of the Company since 1995. Prior
thereto, he was Director of Accounting of the Company. He received his BS
degree from St. John Fisher College and is a Certified Public Accountant.
Martin L. Anderson has been Director of Supply Chain Programs, Babson
College, since 1996. He has been Affiliate Director of the International Motor
Vehicle Program, Massachusetts Institute of Technology, since 1996. Prior
thereto he was Associate Director of that Program and prior thereto was Vice
President of Gemini Consulting.
Julian W. Atwater, P.C. is a partner in Nixon, Hargrave, Devans & Doyle
LLP, one of the Company's principal outside counsel. See "Legal Matters."
Robert W. Bjork has been a personal investment and private consultant
with Jefferson Financial Corp. since 1995, and prior thereto was a Vice
President of Schaenen Wood & Associates, Inc., an investment management firm.
J. David Cartwright has been President of Cooper Hand Tools, a division
of Cooper Industries, Inc., since 1994 and prior thereto was President of
Champion Spark Plug Company, a division of Cooper Industries, Inc.
John W. Guffey Jr. has been Chairman, President and Chief Executive
Officer of Coltec Industries since 1995 and prior thereto was President and
Chief Operating Officer of Coltec Industries.
Donald D. Lennox has been Chairman of the Board of International Imaging
Materials, Inc., a manufacturer of thermal transfer ribbons for office
equipment, since 1990. Prior thereto he was Chairman and Chief Executive
Officer of Schlegel Corporation and prior thereto was Chairman, President and
Chief Executive Officer of Navistar International Corporation. He is a
director of Prudential Mutual Fund Management Corporation.
William P. Montague has been President of Mark IV Industries, Inc. since
1996. Prior thereto he was Executive Vice President and Chief Financial
Officer of Mark IV, whose core technologies include power transmission, fluid
transfer and filtration systems, and components for global industrial and
automotive markets. He is a director of Mark IV Industries, Inc. and of
Gibraltar Steel Corporation.
Robert A. Sherman is retired; prior thereto he was Senior Vice President-
Finance and Administration of Eastman Kodak Company.
Robert L. Smialek has been President, Chief Executive Officer and
Chairman of Insilco Corp., a diversified manufacturer of industrial and
specialty consumer products, since 1993. Prior thereto he was President and
Chief Operating Officer of Siebe plc Controls Group. He is also a director of
Thermalex, Inc.
29
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The Retirement Plan of The Gleason Works is selling its Shares in order
to liquify its assets in anticipation of settling the Plan's liabilities.
Gleason Foundation is selling a portion of its shares of Common Stock to
increase the diversification of its holdings. The following table sets forth
certain information concerning the beneficial ownership of the Common Stock as
of October 14, 1997 and as adjusted to reflect the sale of 400,000 Shares by
the Company and the sale of 1,200,000 Shares by the Selling Stockholders, by
(i) each person known by the Company to be the beneficial owner of more than 5%
of the outstanding Common Stock, (ii) each of the Selling Stockholders,
(iii) each director of the Company, (iv) each of the Company's five most highly
compensated executive officers in 1996 and (v) all executive officers and
directors of the Company as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY
OWNED PRIOR TO BE OWNED AFTER
TO OFFERING(1) Sold in OFFERING(1)
------------------- -------- -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERING NUMBER PERCENT
- ------------------------ --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Gleason Foundation(2) 1,359,126 13.6% 429,896 929,230 9.0%
The Retirement Plan of The
Gleason Works 770,104 7.7% 770,104 0 0.0%
Dimensional Fund
Advisors, Inc.(3) 668,000 6.7% -- 668,000 6.4%
James S. Gleason(4)-(8) 462,518 4.5% -- 462,518 4.3%
David J. Burns(5)(6)(7) 72,238 * -- 72,238 *
John B. Kodweis(5)(6)(7) 70,064 * -- 70,064 *
Robert A. Sherman(5)(6)(8) 59,560 * -- 59,560 *
Ralph E. Harper(5)(6)(7) 51,256 * -- 51,256 *
John J. Perrotti(5)(6)(7) 50,732 * -- 50,732 *
Donald D. Lennox(5)(6)(8) 41,089 * -- 41,089 *
Julian W. Atwater(5)(6)(8) 31,278 * -- 31,278 *
Robert W. Bjork(5)(6)(8) 30,243 * -- 30,243 *
J. David Cartwright(5)(6)(8) 20,146 * -- 20,146 *
John W. Guffey, Jr.(5)(6)(8) 18,257 * -- 18,257 *
Martin L. Anderson(5)(6)(8) 14,268 * -- 14,268 *
William P. Montague(5)(6)(8) 4,566 * -- 4,566 *
Robert L. Smialek(5)(6)(8) 566 * -- 566 *
All directors and executive
officers as a group
(16 persons)(2)(4)-(9) 3,071,605 28.7% 1,200,000 1,871,605 16.9%
</TABLE>
______________________
* Less than 1% of the outstanding shares of Common Stock.
(1) Sole dispositive and voting powers. See also Note 9.
(2) If the over-allotment option is exercised the number of shares that the
Gleason Foundation will sell in the Offering, the number of shares
beneficially owned by the Gleason Foundation and the percentage of
outstanding shares beneficially owned by the Gleason Foundation will be
494,380, 864,746 and 8.3%, respectively.
(3) Based on information contained in the Schedule 13G filed by Dimensional
Fund Advisors, Inc. with the Securities and Exchange Commission on February
12, 1997. Dimensional Fund Advisors, Inc. has sole dispositive power with
respect to all of the listed shares and has sole voting power with respect
to 385,200 of such shares. Officers of Dimensional Fund Advisors Inc. vote
an additional 49,400 shares as officers of the DFA Investment Trust Company
and an additional 233,400 shares as officers of DFA Investment Dimensions
Group Inc.
(4) Amounts include 65,710 shares held in a trust of which Mr. Gleason is an
income beneficiary, the trustee of which has agreed to vote and dispose of
the shares only as specified by him.
(5) Except as indicated in Notes 6 and 8, for all shares listed the person
possesses sole voting power and, except as indicated in Notes 4, 7 and 8,
sole investment power.
(6) Amounts include stock options which are exercisable prior to December 31,
1997: Messrs. Atwater, Bjork and Sherman - 24,000 shares each; Messrs.
Anderson, Cartwright, Guffey, Lennox, Gleason, Burns, Harper, Kodweis, and
Perrotti - 10,000, 12,000, 10,000, 20,000, 296,600, 56,778, 41,000, 50,000
and 39,000 shares respectively; and all directors and executive officers as
a group - 615,378 shares.
30
<PAGE>
(7) Amounts include the following number of shares which at September 30, 1997
were subject to restrictions on disposition: Messrs. Gleason, Burns,
Harper, Kodweis and Perrotti - 14,824, 8,104, 1,918, 5,230, and 8,878
shares respectively; and all directors and executive officers as a group -
46,382 shares.
(8) Amounts include 4,268, 2,278, 2,243, 8,146, 4,257, 15,079, 21,486, 566 and
566 hypothetical shares (without voting power) credited to the accounts of
Messrs. Anderson, Atwater, Bjork, Cartwright, Guffey, Lennox, Sherman,
Montague and Smialek, respectively, pursuant to the Company's Plan for the
Deferral of Directors' Fees.
(9) Amounts include 770,104 shares owned by The Retirement Plan of The Gleason
Works, the powers to vote and dispose of which are vested in a committee
comprised of Messrs. Gleason, Harper and Kodweis, and 1,359,126 shares
owned by Gleason Foundation, a not-for-profit corporation, of which Messrs.
Gleason, Harper and Kodweis are directors and/or officers. The
stockholdings of these entities are not included above in those
individuals' stockholdings.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, par value $1.00 per share, and 500,000 shares of preferred
stock, par value $1.00 per share (the "Preferred Stock"). As of September 30,
1997, 11,594,140 shares of Common Stock were issued, of which 9,964,912 were
outstanding and held by approximately 3,000 stockholders of record. As of such
date, there were options outstanding under the Company's 1981 and 1992 Stock
Plans to purchase an aggregate of up to approximately 685,650 shares of Common
Stock, which options had a weighted average exercise price of approximately
$9.98 per share, and there were 58,889 hypothetical shares outstanding under
the Company's Plan for the Deferral of Directors' Fees (which hypothetical
shares are held by certain directors of the Company and have no voting rights).
No shares of Preferred Stock have been issued by the Company. The Board of
Directors has, however, established the Series A Junior Participating Preferred
Stock, consisting of 87,500 shares, and fixed by resolution the designation and
other terms thereof, for use in connection with the Company's Shareholder
Rights Plan. No such shares have been issued and the related rights (the
"Rights") are not currently exercisable.
COMMON STOCK
Subject to the right of holders of Preferred Stock issued in the future
to elect one or more directors if dividends on such shares are in default, the
holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders. The holders of shares of Common Stock
are not entitled to cumulate their votes in the election of directors and, as a
consequence, minority stockholders will not be able to elect directors on the
basis of their votes alone. Subject to any dividend preferences that may be
applicable to any shares of Preferred Stock issued in the future, holders of
shares of Common Stock are entitled to receive ratably such dividends as may be
declared from time to time by the Board of Directors, in its discretion, from
any assets legally available therefor. In the event of a liquidation,
dissolution or winding up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and any liquidation preferences that may be applicable to any shares of
Preferred Stock issued in the future. The holders of Common Stock are not
entitled to preemptive, subscription or conversion rights, and there are no
redemption or sinking fund provisions applicable to the Common Stock. The
holders of Common Stock are not subject to further calls or assessments by the
Company. All outstanding shares of Common Stock are validly issued, fully paid
and nonassessable. See "Certain Anti-Takeover Provisions--Series A Junior
Participating Stock" below.
The Common Stock is quoted on the New York Stock Exchange under the
symbol "GLE." The Company's transfer agent and registrar for the Common Stock
is American Stock Transfer & Trust Company, New York, New York 10005.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that could make more difficult the acquisition of the Company, or
control of the Company, by means of a tender offer, a proxy contest, or
otherwise. These provisions are intended to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of the Company to negotiate first with the
Board of Directors. The Company believes that the benefits of these provisions
outweigh the potential disadvantages of discouraging such proposals because,
among other things, negotiation of such proposals might result in an
improvement of their terms. The description set forth below is intended as a
summary only and is qualified in its entirety by reference to the Certificate
of Incorporation, the
31
<PAGE>
Bylaws, and the Rights Agreement dated as of June 8, 1987 between the Company
and Chase Lincoln First Bank, N.A. (now The Chase Manhattan Bank), as Rights
Agent, all as amended, which are incorporated by reference into the
Registration Statement of which this Prospectus is a part.
SHAREHOLDER RIGHTS PLAN
Pursuant to the Company's Shareholder Rights Plan (the "Plan"), which was
adopted by the Board of Directors in June 1989, each outstanding share of
Common Stock carries one Preferred Stock purchase Right. Each Right, when
exercisable, entitles the holder to purchase from the Company for $22.50, one
two-hundredth of a share of Series A Junior Participating Preferred Stock, par
value $1.00 per share, of the Company. The Rights become exercisable, subject
to certain exceptions, upon announcement that a person or group has acquired
15% or more of the Company's outstanding Common Stock, or 10 days, or such
other period as the Board may determine, following commencement of, or
announcement of an intention to commence, a tender or exchange offer the
consummation of which would result in a person or group owning 15% or more of
the Company's outstanding Common Stock, whichever occurs first. Until the
Rights become exercisable, they will be evidenced by the certificates for the
shares of Common Stock. If and when they become exercisable, Rights
Certificates will be issued which will trade separately from the shares of
Common Stock.
If any person or group becomes the beneficial owner of 15% of the
outstanding Common Stock, other than pursuant to a Permitted Offer, as defined
in the Plan, each holder of a Right, other than an Acquiring Person as defined
in the Plan, will have the right to receive, upon exercise, Common Stock (or,
in certain circumstances, cash, property or other securities of the Company or
to a reduction in the purchase price) having a value equal to two times the
exercise price of $22.50, or the Board may elect to issue without any payment
Common Stock and/or equivalents of the Company with a value equal to the
exercise price. If a person or group becomes the beneficial owner of 15% or
more of the outstanding Common Stock and the Company is thereafter acquired by
another entity, by merger, consolidation, or transfer of 50% or more of the
Company's assets, in one or more transactions, each holder of a Right, other
than an Acquiring Person, will have the right to receive, upon exercise, common
shares of the acquiring company (including the Company if it is the surviving
company) having a value equal to two times the exercise price ($22.50) of the
Right. The Rights will expire on June 15, 1999, unless exercised by the holder
or redeemed by the Company prior to that date. The Company may, subject to
certain conditions, redeem the Rights at a price of $.005 per Right.
The Plan is designed to protect stockholders against unsolicited attempts
to acquire control of the Company, whether through accumulation of shares in
the open market or tender offers that do not offer what the Board believes to
be an adequate price to all stockholders.
STAGGERED BOARD OF DIRECTORS
The Certificate of Incorporation and the Bylaws provide that the Board of
Directors will be divided into three classes of directors, each class
constituting approximately one-third of the total number of directors and with
the classes serving staggered three-year terms. The classification of
directors will have the effect of making it more difficult for stockholders to
change the composition of the Board of Directors. The Company believes,
however, that the longer time required to elect a majority of a classified
Board of Directors will help to ensure continuity and stability of the
Company's management and policies.
The classification provisions could also have the effect of discouraging
a third party from accumulating large blocks of the Company's stock or
attempting to obtain control of the Company, even though such an attempt might
be beneficial to the Company and its stockholders. Accordingly, stockholders
could be deprived of certain opportunities to sell their shares of Common Stock
at a higher market price than might otherwise be the case.
NUMBER OF DIRECTORS; REMOVALS; FILLING VACANCIES
The Bylaws of the Company provide that the number of directors will be
fixed by the Board of Directors, but shall consist of not less than five nor
more than fifteen directors. In addition, the Bylaws provide that any
vacancies may be filled by the affirmative vote of a majority of the remaining
directors, though less than a quorum. Accordingly, the Board of Directors
could temporarily prevent any stockholder from enlarging the Board of Directors
and filling the new directorships with such stockholder's own nominees.
32
<PAGE>
Under the Delaware General Corporation Law ("DGCL"), directors serving on
a classified board may only be removed by the stockholders for cause.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The Company's Certificate of Incorporation provides that stockholder
action can be taken only at a meeting of stockholders. The DGCL provides that
special meetings of stockholders may be called by the Board of Directors or by
such person or persons authorized by the certificate of incorporation or the
bylaws. The Company's Bylaws provide only for the calling of such meetings by
the Board of Directors. These provisions could have the effect of delaying
consideration of a stockholder proposal until the next annual meeting.
ADVANCE NOTICE PROVISIONS FOR STOCKHOLDER NOMINATIONS AND STOCKHOLDER PROPOSALS
The Bylaws establish an advance notice procedure for stockholders to make
nominations of candidates for election as directors or bring other business
before an annual meeting of stockholders of the Company (the "Stockholder
Notice Procedure").
The Stockholder Notice Procedure provides that (i) only persons who are
nominated by, or at the direction of, the Board of Directors, or by a
stockholder who has given timely written notice containing specified
information to the Secretary of the Company prior to the meeting at which
Directors are to be elected, will be eligible for election as directors of the
Company and (ii) at an annual meeting only such business may be conducted as
has been brought before the meeting by, or at the direction of, the Board of
Directors, or by a stockholder who has given timely written notice to the
Secretary of the Company of such stockholder's intention to bring such business
before such meeting. For notice of stockholder nominations or business to be
made at an annual meeting to be timely, such notice must be received by the
Company not less than 60 days nor more than 90 days prior to the scheduled date
of the meeting, except that, if less than 70 days notice or prior public
disclosure of the date of such meeting is given, then within 10 days following
the earlier of mailing such notice or making such public disclosure.
The purpose of requiring stockholders to give the Company advance notice
of nominations and other business is to afford the Board of Directors a
meaningful opportunity to consider the qualifications of the proposed nominees
or the advisability of the other proposed business and, to the extent deemed
necessary or desirable by the Board of Directors, to inform stockholders and
make recommendations about such qualifications or business, as well as to
provide a more orderly procedure for conducting meetings of stockholders.
Although the Bylaws do not give the Board of Directors any power to disapprove
stockholder nominations for the election of directors or proposals for action,
they could have the effect of precluding a contest for the election of
directors or the consideration of stockholder proposals if the proper
procedures are not followed, and of discouraging or deterring a third party
from conducting a solicitation of proxies to elect its own slate of directors
or to approve its own proposal, without regard to whether consideration of such
nominees or proposals might be harmful or beneficial to the Company and its
stockholders.
PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors to
establish one or more series of Preferred Stock and to determine, with respect
to any series of Preferred Stock, the preferences, rights and other terms of
such series. The Company believes that the ability of the Board of Directors
to issue one or more series of Preferred Stock will provide the Company with
increased flexibility in structuring possible future financing and acquisitions
and in meeting other corporate needs which might arise. The authorized shares
of Preferred Stock will be available for issuance without further action by the
Company's stockholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which the
Company's securities are listed or traded. Although the Board of Directors has
no intention at the present time of doing so, it could issue a series of
Preferred Stock that could, depending on the terms of such series, impede a
merger, tender offer or other transaction that some, or a majority, of the
Company's stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then current
market price of such stock.
33
<PAGE>
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
As indicated above, the Board of Directors has established the Series A
Junior Participating Preferred Stock ("Series A Preferred Shares"), consisting
of 87,500 shares. Each Right under the Plan will become exercisable for one
two-hundredth of such a share if the Distribution Date under the Plan occurs.
The holders of Series A Preferred Shares will be entitled with respect to
each such share to: (i) subject to the rights of holders of any senior
preferred shares, receive quarterly dividends in an amount per share equal to
the greater of $1 or 100 times the dividend paid on a share of Common Stock;
(ii) 100 votes on all matters on which holders of Common Stock vote, voting
together with holders of Common Stock as a single class, except that, if
dividends on the Series A Preferred Shares are in default for six consecutive
quarters, holders of the Series A Preferred Shares will be entitled to elect
two directors until such default is cured; and (iii) subject to the rights of
holders of any senior preferred shares, receive on liquidation $100 per share,
plus any accrued unpaid dividends, and then, following payment to the holders
of Common Stock of $.50 per share, holders of Preferred Shares and holders of
Common Stock will share in the remaining assets in the ratio of 200 per
Preferred Share to 1 per share of Common Stock. The Preferred Shares are not
redeemable.
FAIR PRICE PROVISION
The Company's Certificate of Incorporation contains a Fair Price
Provision which was adopted prior to the adoption of Section 203 of the DGCL
(see "--Anti-takeover Legislation" below) and which, while generally similar in
effect to that Section, has a number of differences from it. The Company
provision provides that any Business Combination with or involving a
stockholder ("Interested Stockholder") which, with its affiliates, beneficially
owns 10% or more of the outstanding Common Stock ("Major Stockholder") shall
require the affirmative vote of at least the holders of 85% of the outstanding
shares of Common Stock and the holders of 2/3rds of the outstanding shares of
Common Stock not owned by such stockholder, unless: (i) the Business
Combination shall have been approved by a majority of the Disinterested
Directors, as defined in the provision; or (ii) the consideration paid in the
Business Combination shall be in an amount and form specified in the provision;
a proxy or information statement for the Business Combination complying with
the requirements of the Exchange Act shall be provided; the Interested
Stockholder shall have received no benefits specified in the provision since
becoming a Major Stockholder; and, except as approved by a majority of
Disinterested Directors, dividends shall have continued to be paid at least at
the highest rate paid since one year before the Interested Stockholder became a
Major Stockholder, and it shall not have acquired additional shares since
becoming a Major Stockholder.
The provision is designed to prevent two-step acquisitions in which an
acquiring person or company obtains a sufficient number of shares to enable it
to vote for a merger in which the remaining stockholders are forced out,
receiving less than the acquirer offered in the first step and perhaps also
receiving unmarketable securities rather than cash, and perhaps being oppressed
in the interim, and may accordingly make it more difficult for an Interested
Stockholder to effect a Business Combination with the Company.
ANTI-TAKEOVER LEGISLATION
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any business combination
with any interested stockholder (generally a 15% stockholder) for a three-year
period following the date that such stockholder becomes an interested
stockholder unless (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, or (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock at the time the transaction commenced (excluding certain shares),
or (iii) on or subsequent to such date, the business combination is approved by
the board of directors of the corporation and by the affirmative vote of at
least 66 2/3 % of the voting stock which is not owned by the interested
stockholder. Section 203 of the DGCL may accordingly make it more difficult
for an interested stockholder to effect various business combinations with a
corporation for a three-year period.
34
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement dated as of , 1997 (the "Underwriting Agreement"), Furman
Selz LLC, McDonald & Company Securities, Inc. and ABN AMRO Chicago Corporation
(the "Underwriters") have severally agreed to purchase, and the Company and the
Selling Stockholders have severally agreed to sell to them, the aggregate
number of Shares set forth opposite their respective names:
Number of
Name Shares
---- ---------
Furman Selz LLC
McDonald & Company Securities, Inc.
ABN AMRO Chicago Corporation
Total 1,600,000
=========
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by counsel
and various other conditions. The nature of the Underwriters' obligations is
such that they are committed to purchase all of the above Shares if any are
purchased. The Underwriters propose to offer the Shares directly to the public
at the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of per
share. The Underwriters may allow, and such dealers may re-allow, a concession
not in excess of $ per share to certain other dealers. After the
Offering, the offering price and other selling terms may be changed by the
Underwriters.
Certain persons participating in the Offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids or effecting syndicate
covering transactions. A stabilizing bid means the placing of any bid or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining
the price of the Common Stock. A syndicate covering transaction means the
placing of any bid on behalf of the underwriting syndicate or the effecting of
any purchase to reduce a short position created in connection with the
Offering. Such transactions may be effected on the New York Stock Exchange, in
the over-the-counter market, or otherwise. Such stabilizing, if commenced, may
be discontinued at any time.
In general, the rules of the Securities and Exchange Commission (the
"Commission) will prohibit the Underwriters from making a market in the Common
Stock during a "restricted period" commencing one business day prior to the
pricing of the Offering and extending until completion of the Offering. The
Commission has, however, adopted exceptions to these rules that permit passive
market making under certain conditions. These rules permit an underwriter to
continue to make a market subject to the conditions, among others, that its bid
not exceed the highest bid by a market maker not connected with the Offering
and that its net purchases on any one trading day not exceed prescribed limits.
Pursuant to these exemptions, the Underwriters, selling group members (if any)
or their respective affiliates may engage in passive market making in the
Common Stock during the restricted period.
The Company and the Gleason Foundation have granted to the Underwriters
an option, expiring 30 days from the date of this Prospectus, to purchase up to
124,484 additional shares of Common Stock on the same terms as set forth on the
cover page of this Prospectus, solely to cover over-allotments, if any,
incurred in the sale of the Shares offered hereby. If the Underwriters
exercise the option, each Underwriter will have a firm commitment, subject to
certain conditions, to purchase such number of additional shares of Common
Stock as is proportionate to such Underwriter's initial commitment to purchase
shares from the Company and the Selling Stockholders.
The Company and all of the Company's officers and directors have agreed
that for a period of 90 days (180 days in the case of the Company) following
the date of this Prospectus, they will not, without the prior written consent
of Furman Selz LLC, directly or indirectly, offer for sale, sell, contract to
sell, or grant any option to purchase or otherwise dispose of any shares of the
Common Stock, except in the case of the Company, options granted under the 1981
and 1992 Stock
35
<PAGE>
Plans, hypothetical shares granted under the Company's Plan for the Deferral of
Directors' Fees, or shares issued pursuant to the exercise of outstanding
options or the Company's Plan for the Deferral of Directors' Fees.
The Company and the Selling Stockholders have severally agreed to
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments that the Underwriters
may be required to make in respect thereof.
The Underwriters have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The Common Stock is quoted on the New York Stock Exchange under the
symbol "GLE."
The principal address of Furman Selz LLC is 230 Park Avenue, New York,
New York 10169, the principal address of McDonald & Company Securities, Inc. is
800 Superior Avenue, Cleveland, Ohio 44114, and the principal address of ABN
AMRO Chicago Corporation is 208 South LaSalle Street, Suite 1000, Chicago,
Illinois 60604.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Company by Nixon, Hargrave, Devans & Doyle LLP,
Rochester, New York. Julian W. Atwater, whose professional corporation is a
partner of Nixon, Hargrave, Devans & Doyle LLP, is a director of the Company.
Certain legal matters in connection with the Common Stock offered hereby will
be passed upon for the underwriters by Rogers & Wells, New York, New York.
EXPERTS
The consolidated financial statements of the Company at December 31,
1996 and 1995, and for each of the three years in the period ended December 31,
1996, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon authority of such firm as experts in accounting and auditing.
The consolidated balance sheets of Hermann Pfauter GmbH & Co. and its
consolidated subsidiaries at December 31, 1996 and 1995, the related
consolidated financial statements of cash flows for the years then ended and
the related consolidated statements of income for the years ended December 31,
1996, 1995 and 1994 appearing in the Company's Current Report on Form 8-K dated
August 14, 1997, as amended, have been audited by Schitag Ernst & Young
Deutsche Allgemeine Treuhand AG Wirtschaftspruefungsgesellschaft (formerly
Ernst & Young GmbH), independent auditors, as set forth in their report thereon
included therein and incorporated herein by reference which, as to the years
1995 and 1994, are based in part on the reports of Dugan & Lopatka, CPAs, PC,
independent auditors. The financial statements referred to above are
incorporated herein by reference in reliance upon such reports given upon
authority of such firms as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at its offices at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional
offices located at Northwest Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material can also be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Such material may also be accessed
electronically by means of the Commission's Web site on the Internet at
http://www.sec.gov.
36
<PAGE>
In addition, the Common Stock is listed on the New York Stock Exchange
under the symbol "GLE," and reports, proxy statements and other information
concerning the Company may also be inspected at the offices of the New York
Stock Exchange, 20 Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement on
Form S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the contents of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by reference to
such contract or document. For further information regarding the Company and
the Common Stock offered hereby, reference is hereby made to the Registration
Statement and the exhibits and schedules thereto which can be obtained from the
Public Reference Section of the Commission, Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission pursuant to the
Exchange Act are incorporated by reference in this Prospectus:
(1) The Company's Annual Report on Form 10-K for the year ended
December 31, 1996, as amended by the Company's Form 10-K/A relating thereto
filed on October 2, 1997;
(2) The Company's Proxy Statement relating to its 1997 Annual Meeting
of Stockholders filed on March 27, 1997;
(3) The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997, as amended by the Company's Form 10-Q/As
relating thereto filed on October 2, 1997;
(4) The Company's Current Report on Form 8-K filed on August 14, 1997,
as amended by the Company's Form 8-K/As relating thereto filed on
September 25, 1997 and October 2, 1997; and
(5) The Company's Current Report on Form 8-K dated October 2, 1997 and
filed on October 3, 1997.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this
Prospectus and prior to the termination of the Offering shall be deemed to be
incorporated by reference herein and to be a part hereof from the respective
dates of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon written or oral request of any such person,
a copy of any and all of such documents (other than exhibits to such documents
which are not specifically incorporated by reference into such documents).
Requests for such copies should be directed to Controller, Gleason Corporation,
1000 University Avenue, Rochester, New York 14692-2970 (telephone number
(716) 473-1000).
37
<PAGE>
GLEASON CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
GLEASON CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS:
Report of Independent Auditors.................................... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995......... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994................................ F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994.................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994................................ F-6
Notes to Consolidated Financial Statements........................ F-7
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Balance Sheets at June 30, 1997 and
December 31, 1996............................................... F-21
Consolidated Statements of Operations for the three months
ended June 30, 1997 and 1996.................................... F-22
Consolidated Statements of Operations for the six months
ended June 30, 1997 and 1996.................................... F-23
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996.................................... F-24
Notes to Consolidated Financial Statements........................ F-25
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF
GLEASON CORPORATION AND HERMANN PFAUTER GMBH & CO. (UNAUDITED)
Pro Forma Condensed Consolidated Balance Sheet at
June 30, 1997................................................... F-26
Pro Forma Condensed Consolidated Statement of Operations
for the year ended December 31, 1996............................ F-28
Pro Forma Condensed Consolidated Statement of Operations
for the six months ended June 30, 1997.......................... F-29
Notes to the Pro forma Financial Information...................... F-30
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
STOCKHOLDERS AND BOARD OF DIRECTORS
OF GLEASON CORPORATION
We have audited the accompanying consolidated balance sheets of Gleason
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gleason
Corporation and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Syracuse, New York
January 30, 1997, except for Note 19,
as to which the date is October 1, 1997
F-2
<PAGE>
GLEASON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
-------- --------
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 7,199 $ 9,926
Trade accounts receivable 65,583 65,288
Inventories 27,986 29,565
Deferred tax asset 6,894 4,113
Other current assets 4,038 5,468
-------- --------
Total current assets 111,700 114,360
Property, plant and equipment - net 61,391 60,948
Deferred tax asset 10,013 14,755
Other assets 7,570 7,135
-------- --------
Total assets $190,674 $197,198
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings $ 329 $ 1,489
Current portion of long-term debt 6 6
Trade accounts payable 16,972 16,153
Income taxes 10,224 2,335
Other current liabilities 30,335 33,968
-------- --------
Total current liabilities 57,866 53,951
Long-term debt 4,506 25,315
Pension plans and other retiree benefits 38,220 38,876
Other liabilities 5,218 5,765
-------- --------
Total liabilities 105,810 123,907
Stockholders' equity
Preferred Stock, par value $1
per share; authorized 500,000
shares; issued: none
Common Stock, par value $1 per
share; authorized 20,000,000
shares; issued: 11,594,140
shares in 1996 and 11,592,892
shares in 1995 11,594 11,593
Additional paid-in capital 5,731 5,952
Retained earnings 86,187 69,112
Cumulative foreign currency
translation adjustment (2,149) (2,156)
Minimum pension liability adjustment (461) (1,093)
-------- --------
100,902 83,408
Less treasury stock of 1,603,594
shares in 1996 and 1,229,182
shares in 1995, at cost 16,038 10,117
-------- --------
Total stockholders' equity 84,864 73,291
-------- --------
Total liabilities and stockholders' equity $190,674 $197,198
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
GLEASON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales $248,089 $197,046 $128,462
Costs and expenses
Cost of products sold 167,958 137,461 94,935
Selling, general and
administrative expenses 42,614 33,789 24,539
Research and development expenses 7,243 5,617 4,729
Interest expense-net 513 527 11
Other (income)-net (982) (1,328) (909)
-------- -------- --------
217,346 176,066 123,305
-------- -------- --------
Income from continuing operations
before income taxes 30,743 20,980 5,157
Provision (benefit) for
income taxes 11,083 (9,402) 825
-------- -------- --------
Income from continuing operations 19,660 30,382 4,332
Gain on disposal of
discontinued operations - 445 2,956
-------- -------- --------
Net income $ 19,660 $ 30,827 $ 7,288
======== ======== ========
Primary earnings per common share:
Income from continuing operations $ 1.84 $ 2.87 $ .42
Gain on disposal of
discontinued operations - .04 .29
-------- -------- --------
Net income $ 1.84 $ 2.91 $ .71
======== ======== ========
Fully diluted earnings per
common share:
Income from continuing operations $ 1.84 $ 2.85 $ .42
Gain on disposal of
discontinued operations - .04 .29
-------- -------- --------
Net income $ 1.84 $ 2.89 $ .71
======== ======== ========
Weighted average number of common
shares outstanding:
Primary 10,681,644 10,600,234 10,325,754
Fully diluted 10,681,644 10,679,742 10,325,754
Cash dividends declared per
common share $ .25 $ .25 $ .20
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
GLEASON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
Cumulative
Foreign Minimum Total
Additional Currency Pension Stock-
Common Paid-in Retained Translation Liability Treasury holders'
Stock Capital Earnings Adjustment Adjustment Stock Equity
----- ------- -------- ---------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993,
as previously reported $5,796 $11,909 $35,647 $(1,315) $(6,585) $(10,443) $35,009
Effect of stock split 5,797 (5,797) --
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1993,
as restated 11,593 6,112 35,647 1,315 (6,585) (10,443) 35,009
Net income 7,288 7,288
Dividends declared (2,065) (2,065)
Foreign currency translation
adjustments 398 398
Change in minimum pension
liability adjustment 1,576 1,576
Purchase of treasury stock (7) (7)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1994 11,593 6,112 40,870 (917) (5,009) (10,450) 42,199
Net income 30,827 30,827
Dividends declared (2,585) (2,585)
Shares issued under Stock Plans (147) 320 173
Foreign currency translation
adjustments (1,239) (1,239)
Change in minimum pension
liability adjustment 3,916 3,916
Purchase of treasury stock (59) (59)
Other shares issued to
employees (13) 72 59
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1995 11,593 5,952 69,112 (2,156) (1,093) (10,117) 73,291
Net income 19,660 19,660
Dividends declared (2,585) (2,585)
Shares issued under Stock Plans 1 (221) 298 78
Foreign currency translation
adjustments 7 7
Change in minimum pension
liability adjustment 632 632
Purchase of treasury stock (6,219) (6,219)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1996 $ 11,594 $ 5,731 $ 86,187 $ (2,149) $ (461) $(16,038) $84,864
======== ======== ======== ======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
GLEASON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 19,660 $ 30,827 $ 7,288
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 10,707 9,992 9,293
(Gain) loss on disposals of property,
plant and equipment 113 (23) (36)
Provision (benefit) for deferred
income taxes 2,286 (14,836) (1,426)
Changes in operating assets and
liabilities:
(Increase) in accounts receivable (954) (23,134) (13,774)
(Increase) decrease in inventories 374 (10,170) 3,288
(Increase) decrease in other
current assets 1,321 (2,979) 901
Increase in accounts payable 786 5,821 3,355
Increase in all other current
operating liabilities 4,318 8,114 3,261
Other, net (1,037) 1,102 (1,366)
-------- -------- --------
Net cash provided by operating activities 37,574 4,714 10,784
Cash flows from investing activities:
Capital expenditures (10,281) (8,309) (3,527)
Investment in unconsolidated affiliate - - (1,489)
Investment in subsidiary - (10,582) -
Proceeds from sales of businesses and
asset disposals 206 100 3,787
Proceeds from collection of notes
receivable 54 199 3,281
-------- -------- --------
Net cash provided by (used in)
investing activities (10,021) (18,592) 2,052
Cash flows from financing activities:
Net proceeds from (repayments of)
short-term borrowings (1,185) 876 183
Net proceeds (repayments) under
revolving credit agreements (20,646) 22,490 (12,148)
Proceeds from long-term debt 130 145 83
Repayment of long-term debt (131) (68) (139)
Dividends paid (2,585) (2,585) (2,065)
Purchase of treasury stock (6,219) (59) (7)
Net stock issued 78 232 -
-------- -------- --------
Net cash provided by (used in)
financing activities (30,558) 21,031 (14,093)
Effect of exchange rate changes on cash
and equivalents 278 (400) 275
-------- -------- --------
Increase (decrease) in cash and equivalents (2,727) 6,753 (982)
Cash and equivalents, beginning of year 9,926 3,173 4,155
-------- -------- --------
Cash and equivalents, end of year $ 7,199 $ 9,926 $ 3,173
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
GLEASON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION: The consolidated financial statements include the accounts
of the Company and its subsidiaries, all of which are wholly-owned. All
significant intercompany transactions are eliminated in consolidation.
REVENUE RECOGNITION: Sales generally are recognized by the Company when
products are shipped or services have been provided. Sales are reported net of
returns and allowances.
FOREIGN CURRENCY TRANSLATION: All asset and liability accounts of foreign
operations are translated at the current exchange rate, income statement items
are translated at average exchange rates, and the resulting translation
adjustments are made directly to a separate component of stockholders' equity
designated as "cumulative foreign currency translation adjustment." Gains and
losses from foreign currency transactions are reported in operations and had a
minimal impact on the Company in 1996, 1995 and 1994.
CASH AND EQUIVALENTS: The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
INVENTORIES: Inventories are valued at the lower of cost or market.
Inventories valued using the last-in, first-out (LIFO) method comprised 59% and
61% of consolidated inventories at December 31, 1996 and 1995, respectively.
Inventories not valued using the LIFO method are determined on the first-in,
first-out (FIFO) method.
PROPERTY AND DEPRECIATION: Property, plant and equipment are recorded at
cost. Depreciation is computed on the straight-line method over estimated
useful lives of 10 to 32 years for buildings and improvements and 4 to 12 years
for machinery and equipment. Upon retirement or disposal of an asset, the
asset and related accumulated depreciation are eliminated with any gain or loss
reported in earnings.
EARNINGS PER SHARE: The computation of primary earnings per common share
is determined by dividing the weighted average number of common shares and (in
periods in which they have a dilutive effect) common share equivalents
outstanding during the year into net earnings. Common share equivalents
include stock options and hypothetical shares associated with the Company Plan
for Deferral of Directors' Fees. Fully diluted earnings per share in 1995
reflected the additional dilution related to stock options due to the use of
the market price of the Company's Common Stock at the end of the period, which
was higher than the average price for the period, in the calculation of the
number of common share equivalents.
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. Estimates are based on currently available
information. Actual results could differ from the estimates.
RECLASSIFICATION: Certain reclassifications have been made to prior
years' financial statements to conform to the 1996 presentation.
Additional accounting policies are described in the applicable notes.
F-7
<PAGE>
NOTE 2-HURTH ACQUISITION
Effective July 1, 1995, the Company acquired, for $10,582,000 in cash,
certain assets of Hurth Maschinen und Werkzeuge GmbH ("Hurth"), a Munich,
Germany-based leader in the design and production of cylindrical gear machinery
and tooling. The Company purchased the assets from the receiver in bankruptcy
proceedings. Hurth, which entered bankruptcy on May 31, 1995, had experienced
financial losses during 1994 and 1993 due to the economic recession in Europe.
The Company acquired patents, trademarks, rights to technology and know-how,
machinery and equipment, and inventories, and retained approximately 280
employees at the Munich location. Under the agreement, the Company assumed
existing obligations for installation and warranty of machines previously sold
and completion of customer orders in backlog.
The Company accounted for the acquisition under the purchase accounting
method. The purchase included, stated at fair value, inventories ($8,350,000),
machinery and equipment ($9,310,000), technology ($1,450,000), current
liabilities ($6,428,000), long-term pension and other employee benefits
($2,100,000). The acquisition was funded from the Company's revolving credit
facility.
Results of operations after the acquisition date are included in the
Consolidated Statements of Operations. The following unaudited pro forma
information has been prepared assuming that this acquisition had taken place at
the beginning of 1995 and 1994. The pro forma information includes adjustments
for lower personnel costs associated with the reduction in headcount and lower
fixed costs associated with rental of the Munich facility, additional
depreciation and amortization based on the fair market value of machinery,
equipment and technology acquired, elimination of a Hurth investment in
subsidiary loss for 1994, lower outside dealer commission expense due to
contract terminations and higher interest expense that would have been incurred
to finance the acquisition. The pro forma financial information is not
necessarily indicative of the results of operations as they would have been had
the transaction been effected on the assumed dates.
<TABLE>
<CAPTION>
(Unaudited)
(In thousands, except per share amounts)
Year ended December 31,
-----------------------
1995 1994
-------- --------
<S> <C> <C>
Net sales $212,823 $166,724
Income from continuing operations 28,535 1,989
Net income 28,980 4,945
Income from continuing operations per
common share $ 2.69 $ .20
Net income per common share 2.73 .48
</TABLE>
NOTE 3-DISCONTINUED OPERATIONS
In the fourth quarter of 1995, the Company sold the land and building of
its former Alliance Metal Stamping and Fabricating division and recognized a
gain on this disposal of $445,000 (net of applicable income taxes of $229,000).
Proceeds from the sale included an interest bearing note receivable of
$2,100,000 due five years from the date of sale.
During 1994, the Company ceased operations at the Alliance Metal Stamping
and Fabricating division and sold the machinery and equipment located at this
division's facility for $3,550,000. The Company recognized a gain from
discontinued operations of $2,956,000 (net of applicable income taxes of
$400,000), as the loss for the disposition of this division was lower than the
amount previously estimated. Net sales for this discontinued operation were
$7,508,000 for the year ended December 31, 1994.
Accrued costs related to discontinued operations at December 31, 1996 are
presented in the Consolidated Balance Sheets as follows: $200,000 ($1,179,000
in 1995) in other current liabilities, and $2,077,000 ($1,500,000 in 1995) in
other liabilities. These liabilities principally consisted of estimated
expenses for environmental matters related to the properties of the Company's
former Components Group businesses. Refer to Note 15-Environmental Matters for
further discussion.
F-8
<PAGE>
NOTE 4-INVENTORIES
The components of inventories were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
-------- --------
<S> <C> <C>
Raw materials and purchased parts $ 5,269 $ 5,373
Work in process 18,063 18,889
Finished products 4,654 5,303
-------- --------
$ 27,986 $ 29,565
======== ========
</TABLE>
If the valuation of all inventories had been determined on the FIFO
accounting method, inventories would have been $24,929,000 and $24,209,000
higher at December 31, 1996 and 1995, respectively.
NOTE 5-PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Land $ 848 $ 838
Buildings and improvements 49,620 48,821
Machinery and equipment 119,616 112,040
-------- --------
170,084 161,699
Less accumulated depreciation 108,693 100,751
-------- --------
$ 61,391 $ 60,948
======== ========
</TABLE>
NOTE 6-OTHER CURRENT LIABILITIES
The components of other current liabilities were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
-------- --------
<S> <C> <S> <C> <C>
Salaries, wages and related costs $ 1,095 $ 8,109
Advance payments from customers 6,177 8,286
Pension and other retiree
benefit plan contributions 4,614 6,673
Warranty, installation and related costs 4,603 5,184
Other current liabilities 3,846 5,716
-------- --------
$ 30,335 $ 33,968
======== ========
</TABLE>
NOTE 7-EMPLOYEE RETIREMENT PLANS
The Company has a defined contribution retirement plan and a defined
benefit retirement plan which cover most domestic employees. The employees of
certain foreign operations participate in various postemployment benefit
arrangements, some of which are considered to be defined benefit plans for
financial reporting purposes.
F-9
<PAGE>
Effective December 31, 1990, the Company amended its domestic defined
benefit plan to provide for the freezing of all active employee accrued defined
benefits and full vesting of all active employees in the plan. In addition,
the plan amendment provides that upon settlement of the plan, if the fair value
of plan assets exceeds the accrued defined benefit obligation, any surplus will
be distributed on a pro rata basis as additional benefits to active employees.
If the plan assets are not sufficient to fund the accrued defined benefit
obligation, the Company will make any required additional contributions. All
active employees in the defined benefit plan were enrolled in the defined
contribution plan effective January 1, 1991.
The Company's funding policy is to contribute amounts to the plan
sufficient to meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, plus such additional amounts as the
Company may determine to be appropriate from time to time.
A summary of the components of net periodic pension costs relating to the
domestic defined benefit plan is presented below (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest cost on projected
benefit obligation $ 6,292 $ 6,625 $ 6,387
(Positive) negative return on plan assets (9,288) (25,171) 2,012
Net amortization and deferral 2,517 19,117 (8,249)
-------- -------- --------
Net periodic pension (income) expense $ (479) $ 571 $ 150
======== ======== ========
</TABLE>
The expected long-term rate of return on plan assets used in determining
net periodic pension costs was 9.0% for 1996 and 1995, and 8.25% for 1994.
The following table sets forth the domestic defined benefit plan's funded
status and amounts recognized in the Company's consolidated financial
statements at December 31, 1996 and 1995 (in thousands):
1996 1995
-------- --------
Actuarial present value of benefit
obligations:
Accumulated benefit obligation including
vested benefits of $88,279 in 1996
and $88,690 in 1995 $ 92,707 $ 92,900
======== ========
Projected benefit obligation $ 92,707 $ 92,900
Plan assets at market value 94,680 90,430
-------- --------
Projected benefit obligation
(lower than) in excess of plan assets (1,973) 2,470
Unrecognized prior service cost (760) (868)
Unrecognized net gain (loss) 702 (1,163)
Adjustment to recognize minimum
pension liability - 2,031
-------- --------
(Prepaid pension asset) pension liability
recognized in the consolidated
balance sheets $ (2,031) $ 2,470
======== ========
The discount rate used in determining the projected benefit obligation was
7.0% for December 31, 1996 and 1995. The nonvested portion of the accumulated
benefit obligation primarily represents certain early retirement benefits for
individuals not currently eligible. The accumulated benefit obligation is
calculated using the 1983 Group Annuity Mortality Table.
F-10
<PAGE>
In accordance with FASB Statement No. 87, "Employers' Accounting for
Pensions," the Company must recognize a pension liability at least equal to the
minimum pension liability. The minimum pension liability is the excess of the
accumulated benefit obligation over plan assets. A corresponding amount is
recognized as either an intangible asset or a reduction of equity. At December
31, 1996 the Company recognized a prepaid pension asset of $2,031,000. In
1995 the Company recorded an additional liability of $2,031,000, an intangible
asset of $868,000 and an equity reduction of $768,000. The current portion of
the pension liability recognized in the Consolidated Balance Sheets was
$1,972,000 at December 31, 1995. The decrease in the minimum pension liability
adjustment and resulting prepaid pension asset in 1996 was primarily due to an
increase in the market value of plan assets.
The plan's assets at December 31, 1996 were primarily invested in a
tactical asset allocation fund, cash equivalents and 770,104 shares of the
Company's Common Stock which had a market value of $12,707,000 and $12,514,000
at December 31, 1996 and 1995, respectively. Dividends paid on the Company's
Common Stock were $192,500 in 1996 and 1995.
All domestic employees participate in the defined contribution retirement
plan. Amounts contributed under this plan are based upon 4% of compensation
for eligible employees. The amounts expensed under this plan for continuing
operations were $1,616,000, $1,490,000 and $1,267,000 in 1996, 1995 and 1994,
respectively.
The Company also has an unfunded supplemental defined benefit retirement
plan to provide certain executives a minimum level of retirement pay, up to a
maximum of 55% of final average earnings. In accordance with the provisions of
FASB Statement No. 87, the Company recognized pension expense of $297,000,
$272,000 and $210,000 in 1996, 1995 and 1994, respectively. At December 31,
1996, the Company recorded a minimum pension liability of $2,119,000
($1,779,000 in 1995), an intangible asset of $409,000 ($490,000 in 1995) and an
equity reduction of $461,000 ($325,000 in 1995).
The Company has a funded defined benefit pension plan which covers
employees at its U.K. subsidiary. The accumulated benefit obligation for this
plan calculated under the provisions of FASB Statement No. 87 at December 31,
1996 was $9,608,000 ($8,615,000 in 1995). The discount rate used in
determining the accumulated benefit obligation was 8.25% in 1996 and 1995. The
fair market value of plan assets at December 31, 1996 totaled $10,782,000
($8,522,000 in 1995). The Company had a liability for this plan on its
Consolidated Balance Sheets at December 31, 1996 of $455,000 ($326,000 in
1995). The expense associated with this plan totaled $430,000, $463,000 and
$457,000 in 1996, 1995 and 1994, respectively.
The Company also has unfunded retirement benefit plans for employees at
certain other foreign operations, including its Gleason-Hurth subsidiary. The
costs of these foreign benefit plans were $218,000, $231,000 and $177,000 for
1996, 1995 and 1994, respectively. The liabilities included in the
Consolidated Balance Sheets for these plans were $3,175,000 and $3,200,000 at
December 31, 1996 and 1995, respectively.
NOTE 8-POSTRETIREMENT HEALTH AND LIFE INSURANCE BENEFITS
The Company provides certain health and life insurance benefits for
retired domestic employees. Employees hired prior to January 1, 1993 generally
become eligible for these benefits if they retire while working for the Company
at age 62 with a minimum of 15 years of service with the Company. Employees
hired after this date are not eligible to receive benefits. Health benefits
are provided through supplemental insurance policies whose premiums are based
on group rates. Life insurance benefits are paid directly by the Company.
The components of periodic expense for postretirement benefits were as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Service cost for benefits earned during
the year $ 111 $ 87 $ 141
Interest cost on the accumulated
postretirement benefit obligation 2,105 2,563 2,599
Net amortization of prior (gains) (141) (289) -
-------- -------- --------
Total expense $ 2,075 $ 2,361 $ 2,740
======== ======== ========
</TABLE>
F-11
<PAGE>
The recorded liabilities for this unfunded postretirement benefit plan
were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 25,264 $ 26,714
Fully eligible active plan participants 2,587 2,440
Other active plan participants 2,803 2,542
-------- --------
Total accumulated postretirement benefit obligation 30,654 31,696
Unrecognized net gain 4,777 4,578
-------- --------
Total liability for postretirement health
and life insurance benefits 35,431 36,274
Less current portion 2,960 3,200
-------- --------
Noncurrent liability for postretirement
health and life insurance benefits $ 32,471 $ 33,074
======== ========
</TABLE>
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.0% at December 31, 1996 and 1995. The decrease in the
total accumulated postretirement benefit obligation was primarily attributable
to a decrease in the number of retiree participants.
The cost of health insurance premiums of this plan are shared between the
Company and the retiree. There are no future increases in the Company's share
of health insurance premiums.
NOTE 9-DEBT
Long-term debt at December 31, 1996 and 1995 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Notes payable to banks under revolving
loan agreements $ 3,900 $ 24,709
Other obligations 612 612
-------- --------
4,512 25,321
Less current maturities 6 6
-------- --------
$ 4,506 $ 25,315
======== ========
</TABLE>
At December 31, 1996, the Company had unsecured borrowing facilities that
provided for borrowings up to a combined $40 million on a revolving loan basis
through September 29, 1998. Approximately $11 million of the total was
allocated for borrowings outside the U.S. Available borrowings under these
facilities were reduced by approximately $8.8 million at December 31, 1996 for
bank guarantees and standby letters of credit issued in the normal course of
business. These revolving credit facilities provide the Company the option to
borrow at rates no higher than the prevailing prime rate (weighted average
borrowing rate was 6.53% at December 31, 1996 and 5.77% at December 31, 1995).
The agreements contain covenants with respect to maintenance of working
capital, interest coverage, the level of indebtedness, tangible net worth and
cash flow as a percentage of indebtedness.
Lines of credit of the consolidated subsidiaries are generally in
connection with bank overdraft and note facilities for which there are neither
material commitment fees nor compensating balance requirements. Unused short
and long-term credit lines with banks, including the revolving credit
facilities, totaled approximately $34,981,000 at December 31, 1996. The
weighted average borrowing rates under short-term credit facilities were 10.70%
and 6.50% at December 31, 1996 and 1995, respectively.
F-12
<PAGE>
Scheduled maturities of long-term debt in each of the next five years are
$6,000, $3,930,000, $4,000, $4,000 and $4,000 in 1997 through 2001,
respectively.
Interest expense for each of the three years in the period ended
December 31, 1996 was $877,000, $950,000 and $415,000, respectively.
NOTE 10-INCOME TAXES
For financial reporting purposes, income from continuing operations before
income taxes included the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
United States $ 14,619 $ 12,144 $ 815
Foreign 16,124 8,836 4,342
-------- -------- --------
Total $ 30,743 $ 20,980 $ 5,157
======== ======== ========
</TABLE>
Provisions (benefits) for income taxes included the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current:
Continuing operations:
Federal $ 1,703 $ 1,781 $ 1,000
State 556 600 148
Foreign 6,538 3,053 1,103
-------- -------- --------
8,797 5,434 2,251
Discontinued operations - 229 400
-------- -------- --------
Total current $ 8,797 $ 5,663 $ 2,651
======== ======== ========
Deferred:
Continuing operations:
Federal $ 3,045 $(13,038) $ (1,447)
State - (2,311) -
Foreign (759) 513 21
-------- -------- --------
Total deferred $ 2,286 $(14,836) $ (1,426)
======== ======== ========
</TABLE>
The differences between the provision (benefit) for income taxes
attributable to continuing operations at the United States federal statutory
income tax rate and the tax provision (benefit) were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
U.S. federal statutory rate 34% 34% 34%
Taxes at statutory rate $ 10,453 $ 7,133 $ 1,753
Provision (benefit) resulting from:
Change in valuation allowance (1,000) (15,400) (880)
Effect of consolidating foreign subsidiaries 1,297 (695) (352)
Foreign Sales Corporation (396) (304) -
Other 729 (136) 304
-------- -------- --------
Tax provision (benefit) $ 11,083 $ 9,402) $ 825
======== ======== ========
</TABLE>
F-13
<PAGE>
Deferred tax assets and liabilities were comprised of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued retiree and other employee benefits $15,737 $15,497
Foreign tax loss carryforwards 1,000 2,000
Federal and state tax credits 7,365 10,701
Discontinued operations 819 1,000
Other 5,287 4,441
-------- --------
Total deferred tax assets 30,208 33,639
Less valuation allowance 6,000 7,000
-------- --------
Deferred tax asset 24,208 26,639
Deferred tax liabilities:
Depreciation 7,940 7,526
Other 757 912
-------- --------
Total deferred tax liabilities 8,697 8,438
-------- --------
Net deferred tax asset $ 15,511 $ 18,201
======== ========
</TABLE>
The 1995 provision for income taxes was lowered by significant deferred
tax benefits resulting from a reduction in the valuation allowance recorded
against deferred tax assets. The Company determined that it was more likely
than not that there would be sufficient future domestic taxable income to
recognize deferred temporary differences which had previously been offset by a
valuation allowance. Accordingly, the Company reduced the valuation allowance
and increased the net deferred tax asset to $18,201,000 at December 31, 1995.
A valuation allowance of $7,000,000 was still required at December 31, 1995 for
domestic tax credits which could expire before they are utilized and a German
loss carryforward that could not be recognized due to a history of recent
losses and certain limitations on its usage. The valuation allowance of
$6,000,000 at December 31, 1996 is still required for these same issues. The
decrease in the allowance during 1996 was a result of the utilization of
certain German tax loss carryforwards in the current period. The net deferred
tax asset was $15,511,000 at December 31, 1996. Management believes that
sufficient income will be earned in the future to fully realize the net
deferred tax asset.
The net deferred tax asset of $15,511,000 at December 31, 1996
($18,201,000 in 1995) is presented in the Consolidated Balance Sheets as
follows: $6,894,000 ($4,113,000 in 1995) in current assets; $10,013,000
($14,755,000 in 1995) in non-current assets and $1,396,000 ($667,000 in 1995)
in other liabilities.
Foreign loss carryforwards totaling $2.2 million, which may be carried
forward indefinitely, are available to reduce future taxable income. Domestic
tax credits of $7.4 million are also available to reduce future federal and
state income taxes and expire at various dates through 2004, with the exception
of the federal alternative minimum tax credits which can be carried forward
indefinitely.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $13.1 million at December 31, 1996. Those earnings are
considered to be indefinitely reinvested and accordingly no provisions for U.S.
federal or state income taxes have been provided thereon. Upon distribution of
these earnings, the Company would be subject to both U.S. income tax
(potentially offset by foreign tax credits) and withholding taxes payable to
the foreign country. It is not practicable to estimate the amount of
additional tax that might be payable on the foreign earnings.
F-14
<PAGE>
NOTE 11-STOCK PLAN
The Company's 1992 Stock Plan, which became effective May 5, 1992, is a
successor to the Company's 1981 Stock Plan. No additional grants of options
could be made under the 1981 Stock Plan after December 16, 1991.
Under the Company's 1992 Stock Plan, 1,000,000 common shares have been
reserved for granting of options, stock appreciation rights (SARs) and
restricted stock to key employees. Options are granted at prices equal to 100%
of the market value of the common stock at the date of grant and may be
exercisable beginning six months and ending ten years from the date of grant.
The Executive Compensation Committee of the Company's Board of Directors at its
discretion may at the time of grant of an option provide further limitations on
periods during which options may be exercised. SARs allow the optionee to
surrender the option and receive a number of shares of common stock, cash, or
cash and shares of common stock, as the Executive Compensation Committee
determines, with an aggregate value equal to the amount by which the fair
market value of the shares covered by the surrendered option exceeds the option
price. Increases in the value of SARs resulting from changes in the market
value of common stock will be charged to expense as they occur. Options
automatically carry with them conditional SARs which are exercisable in the
event of a tender offer meeting certain specified conditions. No SARs have
been granted under the Plan.
Under the Plan an option, which is exercisable beginning six months
from the date of grant, to purchase 2,000 shares at the market value per share
on the date of grant, is granted each year to each director of the Company who
is not, and has not been an employee of the Company since the beginning of the
preceding year.
Grants of restricted stock entitle the grantee to vote and receive cash
dividends on the shares, but not to transfer or otherwise dispose of such
shares while they are subject to restrictions. The restriction period cannot
be less than one year or more than ten years from the date of grant. As
restrictions lapse, the difference between the market value on the date of
grant and the grant price, if any, is charged to expense. Any dividends paid
to the grantee during the restriction period are also charged to expense.
Grants of 800 shares of restricted stock were made during 1995 and restrictions
lapsed on 4,000 shares during 1995. At December 31, 1996 and 1995, 800
restricted shares were outstanding.
The following is a summary of option transactions under both Plans:
<TABLE>
<CAPTION>
Shares Price Range
-------- -----------------
<S> <C> <C>
Outstanding December 31, 1993 520,406 $6.25 - $9.69
Granted 140,000 $5.66 - $7.56
Forfeited (32,000) $6.56 - $9.31
--------
Outstanding December 31, 1994 628,406 $5.66 - $9.69
Granted 81,000 $10.59 - $17.41
Forfeited (20,000) $6.81
Exercised (54,908) $6.25 - $7.94
--------
Outstanding December 31, 1995 634,498 $5.66 - $17.41
Granted 103,000 $14.85 - $20.38
Exercised (53,822) $7.00 - $9.38
--------
Outstanding December 31, 1996 683,676 $5.66 - $20.38
========
Exercisable at December 31:
1996 594,676 $5.66 - $20.38
1995 567,498 $5.66 - $10.59
1994 498,406 $5.66 - $9.69
Available for additional grants at December 31:
1996 464,200
1995 567,200
1994 649,000
1993 785,000
</TABLE>
F-15
<PAGE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" requires use of
option valuation models. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, which also requires that the information be
determined as if the Company had accounted for its stock options granted
subsequent to December 31,1994 under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions: risk free interest rates of 6.80% and 6.34% for 1996 and 6.12%
and 5.65% for 1995; a dividend yield of 1.38%; volatility factors of the
expected market price of the Company's Common Stock of .313 and .358 in 1996
and .345 and .335 in 1995; and a weighted average expected life of the options
of 7 years. The weighted average exercise price and remaining contractual life
of these options were $9.73 and 7 years, respectively as of December 31, 1996.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Pro forma net income $ 19,079 $ 30,765
Pro forma earnings per share:
Primary $ 1.79 $ 2.90
Fully diluted $ 1.79 $ 2.88
</TABLE>
NOTE 12-PREFERRED STOCK PURCHASE RIGHTS
Pursuant to the Company's Shareholder Rights Plan, each outstanding share
of the Company's common stock carries one Preferred Stock purchase right. Each
right, when exercisable, entitles the holder to purchase from the Company for
$22.50, one two-hundredth of a share of Series A Junior Participating Preferred
Stock, par value $1 per share, of the Company. The Rights become exercisable,
subject to certain exceptions, upon announcement that a person or group has
acquired 15% or more of the Company's outstanding common stock, or 10 days, or
such other period as the Board may determine, following commencement of, or
announcement of an intention to commence, a tender or exchange offer
consummation of which would result in a person or group owning 15% or more of
the Company's outstanding common stock, whichever occurs first. If any person
or group becomes the beneficial owner of 15% of the outstanding common stock,
other than pursuant to a Permitted Offer, as defined in the Plan, holders,
other than an Acquiring Person as defined in the Plan, will have the right to
purchase from the Company common stock (or, in certain circumstances, cash,
property or other securities of the Company or to a reduction in the purchase
price) having a value equal to two times the exercise price of $22.50, or the
Board may elect to issue without any payment common stock and/or equivalents of
the Company with a value equal to the exercise price. If a person or group
becomes beneficial owner of 15% or more of the Company's outstanding common
stock and the Company is thereafter acquired by another entity, by merger,
consolidation, or transfer of 50% or more of the Company's assets, in one or
more transactions, holders of Rights, other than an Acquiring Person,
F-16
<PAGE>
will have the right to receive, upon exercise common shares of the acquiring
company (including the Company if it is the surviving company) having a value
two times the exercise price ($22.50) of the Right. The Rights will expire on
June 15, 1999, unless exercised by the holder or redeemed by the Company prior
to that date. The Company may, subject to certain conditions, redeem the
Rights at a price of $.005 per Right.
NOTE 13-SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments (net refunds) for income taxes were $3,188,000, $4,378,000
and ($1,188,000) for 1996, 1995 and 1994, respectively. Interest payments were
$963,000, $837,000 and $444,000 in 1996, 1995 and 1994, respectively.
Non-cash investing activities in 1995 included notes receivable of
$2,100,000 from the sale of the land and building of Alliance Metal Stamping
and Fabricating. Refer to Note 3 - Discontinued Operations.
NOTE 14-BUSINESS SEGMENT AND FOREIGN OPERATIONS
The Company's operations are conducted within one business segment. The
principal activity is the design, manufacture and sale of machinery and
equipment for the production of gears.
The Company's sales in North America and Europe are in general made
directly by employees of the Company. Sales in other territories are handled
by independent foreign machine dealers.
F-17
<PAGE>
The Company's major foreign operations are located in Western Europe.
Information about the Company's operations in the United States and Western
Europe for 1996, 1995 and 1994 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales to unaffiliated customers
United States $162,305 $146,344 $113,304
Western Europe 85,784 50,702 15,158
-------- -------- --------
248,089 197,046 128,462
Interarea sales and transfers
United States 399 468 431
Western Europe 8,777 7,774 6,844
-------- -------- --------
9,176 8,242 7,275
Total sales
United States 162,704 146,812 113,735
Western Europe 94,561 58,476 22,002
-------- -------- --------
257,265 205,288 135,737
Less interarea sales 9,176 8,242 7,275
-------- -------- --------
$248,089 $197,046 $128,462
======== ======== ========
- -------------------------------------------------------------------------------
Operating income
United States $ 17,642 $ 14,296 $ 3,250
Western Europe 16,749 9,622 4,011
-------- -------- --------
34,391 23,918 7,261
Less:
Interest expense-net 513 527 11
Corporate and other non-allocable
expenses 3,135 2,411 2,093
-------- -------- --------
Income from continuing
operations before income taxes $ 30,743 $ 20,980 $ 5,157
======== ======== ========
- -------------------------------------------------------------------------------
Identifiable assets
United States $136,349 $137,683 $03,871
Western Europe 47,115 49,578 13,416
-------- -------- --------
183,464 187,261 117,287
Corporate assets 7,210 9,937 3,199
Assets of discontinued operations - - 1,530
-------- -------- --------
Total assets $190,674 $197,198 $122,016
======== ======== ========
</TABLE>
Interarea sales and transfers are generally accounted for at prices to
yield normal returns to the selling company in relation to the costs of
production. Identifiable assets represent assets directly identified with each
geographic region. Corporate assets consist primarily of cash and equivalents.
United States continuing operations for 1996, 1995 and 1994 included
export sales (exclusive of intercompany sales) to the following geographic
areas (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Europe / Africa $ 33,892 $ 37,536 $ 27,938
Asia / Pacific 49,105 29,197 19,114
Americas 14,025 10,829 5,660
-------- -------- --------
$ 97,022 $ 77,562 $ 57,512
======== ======== ========
</TABLE>
F-18
<PAGE>
During 1996, one single customer accounted for 14% of consolidated sales.
NOTE 15-ENVIRONMENTAL MATTERS
Environmental expenditures that relate to continuing operations are
expensed or capitalized in accordance with generally accepted accounting
principles. Liabilities are recorded when environmental assessments and/or
remedial efforts are probable, and the costs can be reasonably estimated.
The Company has made provisions for environmental matters at certain
discontinued operations for which the Company retains responsibility. These
provisions were recorded in discontinued operations in 1991 and are believed to
be adequate based upon information known at this time.
The Company is subject to federal, state and local laws and regulations
concerning the environment, and is currently participating in administrative
proceedings involving different sites under these laws, as a participant in a
group of potentially responsible parties. These proceedings are at various
stages, and it is impossible to estimate with any certainty the ultimate cost,
timing and extent of remedial actions which may be required by governmental
authorities, or the amount of the liability, if any, of the Company alone or in
relation to that of the other responsible parties. Based on the facts
presently known, the Company does not believe that the outcome of any of these
proceedings will have a material adverse effect on its results of operations or
financial position.
NOTE 16-CONCENTRATIONS OF RISK
The Company's major customers are predominately in the automotive and
truck industries. Other markets utilizing the Company's products include
aerospace, manufacturers of power tools, marine, farm and construction
equipment. The Company's markets are worldwide. Approximately 73% and 65% of
total sales in 1996 and 1995, respectively, were to customers outside of the
U.S. This geographical sales distribution offsets, to a degree, the cyclical
fluctuations of regional economies. As such, the Company is not significantly
at risk to the economic cycle of a single region.
NOTE 17-COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, the ultimate liability, if any,
resulting from such actions will not have a material impact on the Company's
future results of operations or financial position.
The Company was contingently liable under standby letters of credit
issued in the normal course of business for $8.9 million at December 31, 1996.
NOTE 18-FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Long and short-term debt: The carrying amounts of the Company's short-
term borrowings and variable rate long-term debt approximate their fair value.
Foreign currency exchange contracts: The Company enters into foreign
currency forward contracts to hedge transactions involving foreign currencies
primarily for firm commitments to buy or sell goods. The aggregate contract
value of agreements to sell foreign currencies in exchange for U.S. dollars was
$2.7 million and $12.5
F-19
<PAGE>
million at December 31, 1996 and 1995, respectively. The aggregate value of
contracts for the sale of U.S. dollars in exchange for foreign currencies was
$7.1 million and $1.3 million at December 31, 1996 and 1995, respectively.
The aggregate value of contracts for the exchange of other foreign currencies
was $1.4 million at December 31, 1996. The fair values of these contracts,
representing the difference between the contract values and the estimated
settlement values based on the quoted market prices of comparable contracts at
December 31, 1996 and 1995, were not material.
NOTE 19-SUBSEQUENT EVENT
On August 28, 1997, the Board of Directors declared a two-for-one (2-for-1)
stock split on the Company's common stock, including shares held in its
treasury, effected in the form of a 100% common stock distribution payable on
September 26, 1997 to holders of record on September 12, 1997. The
distribution on September 26, 1997 increased the number of shares issued from
5,797,070 to 11,594,140 which includes an increase in treasury stock from
820,614 to 1,641,228. Common stock and additional paid-in capital as of
December 31, 1996, 1995 and 1994 have been restated to reflect this split. In
addition, all share and per share data, including stock option and stock plan
information have been stated to reflect the split.
NOTE 20-SUBSEQUENT EVENT (UNAUDITED)
On July 31, 1997 the Company purchased all of the general and limited
partnerhsip interests of Hermann Pfauter GmbH & Co. ("Pfauter") from its 21
limited partners (its general partner was owned by the limited partnership)
pursuant to an agreement between the Sellers and Purchasers dated July 23,
1997.
Pfauter, headquartered in Ludwigsburg, Germany, is a leading designer and
manufacturer of machinery for the manufacture of cylindrical gears, with
subsidiary companies for the assembly of such machines in the U.S. and Italy.
Tooling used in the production of cylindrical gears is produced by Pfauter-Maag
Cutting Tools Limited Partnerhsip ("PMCT"), located in Loves Park, Illinois,
76.12% of which (including 100% of its managing general partner) was owned by
Pfauter, and was acquired in the purchase of Pfauter.
The remaining 23.88% of partnership interests of PMCT was also purchased on
July 31, 1997, simultaneously with the purchase of Pfauter, by a wholly owned
subsidiary of the Company from PMCT management personnel, who held limited
partnership interest, and a limited liability company owned by such personnel,
which held the other general partnership interest.
The purchase price pursuant to both agreements was paid in cash, with
$25,074,575 being paid pursuant to the Pfauter agreement, and $9,700,000 being
paid pursuant to the PMCT agreement.
As a result of the purchases, the Company acquired all of the assets and
liabilities of Pfauter, its machinery assembly subsidiary companies, and PMCT,
including the assumption of approximately $57 million of bank debt.
The purchases were financed through a new multi-currency credit agreement dated
as of July 31, 1997 between the Company and its significant subsidiaries,
including Pfauter, its machinery assembly subsidiary companies, and PMCT, and
The Chase Manhattan Bank and nine other banks, providing for term loans,
revolving credit and standby letters of credit totaling up to $170 million.
The Company accounted for the acquisition under the purchase accounting method.
F-20
<PAGE>
GLEASON CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
Assets
Current assets
Cash and equivalents $ 20,437 $ 7,199
Trade accounts receivable 57,937 65,583
Inventories 31,037 27,986
Deferred income taxes 6,894 6,894
Other current assets 4,414 4,038
-------- --------
Total current assets 120,719 111,700
Property, plant and equipment, at cost 169,451 170,084
Less accumulated depreciation 110,613 108,693
-------- --------
58,838 61,391
Deferred income taxes 10,013 10,013
Other assets 7,798 7,570
-------- --------
Total assets $197,368 $190,674
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings $ 2,145 $ 329
Current portion of long-term debt 4 6
Trade accounts payable 17,461 16,972
Income taxes 10,385 10,224
Other current liabilities 29,645 30,335
-------- --------
Total current liabilities 59,640 57,866
Long-term debt 2,793 4,506
Pension plans and other retiree benefits 37,705 38,220
Other liabilities 5,670 5,218
-------- --------
Total liabilities 105,808 105,810
Stockholders' equity
Common stock 11,594 11,594
Additional paid-in capital 5,657 5,731
Retained earnings 95,716 86,187
Cumulative foreign currency
translation adjustment (3,648) (2,149)
Minimum pension liability adjustment (461) (461)
-------- --------
108,858 100,902
Less treasury stock, at cost 17,298 16,038
-------- --------
Total stockholders' equity 91,560 84,864
-------- --------
Total liabilities and stockholders' equity $197,368 $190,674
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-21
<PAGE>
GLEASON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended
June 30,
-----------------------
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
Net sales $ 62,384 $ 65,157
Costs and expenses
Cost of products sold 42,683 44,488
Selling, general and administrative expenses 9,759 11,376
Research and development expenses 1,660 1,998
Interest (income) expense --net (120) 186
Other (income)--net (285) (289)
-------- --------
Income before income taxes 8,687 7,398
Provision for income taxes 3,110 2,660
-------- --------
Net income $ 5,577 $ 4,738
======== ========
Primary earnings per common share $ .54 $ .44
======== ========
Fully diluted earnings per common share $ .54 $ .44
======== ========
Weighted average number of common
shares outstanding:
Primary 10,306,354 10,766,060
Fully diluted 10,368,326 10,766,060
Cash dividends declared per common share $ .0625 $ .0625
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-22
<PAGE>
GLEASON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
Net sales $ 122,719 $ 124,667
Costs and expenses
Cost of products sold 83,699 84,859
Selling, general and administrative expenses 19,622 21,576
Research and development expenses 3,634 3,786
Interest (income) expense --net (121) 527
Other (income)--net (825) (617)
-------- --------
Income before income taxes 16,710 14,536
Provision for income taxes 5,939 5,198
-------- --------
Net income $ 10,771 $ 9,338
======== ========
Primary earnings per common share $ 1.04 $ .87
======== ========
Fully diluted earnings per common share $ 1.04 $ .87
======== ========
Weighted average number of common
shares outstanding:
Primary 10,316,908 10,739,068
Fully diluted 10,388,976 10,751,566
Cash dividends declared per common share $ .125 $ .125
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-23
<PAGE>
GLEASON CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
-----------------------
1997 1996
-------- --------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,771 $ 9,338
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 5,535 5,545
(Gain) on disposals of property,
plant and equipment (462) (10)
Provision for deferred income taxes 278 908
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 6,068 (9,728)
(Increase) in inventories (4,201) (2,528)
(Increase) in other current assets (617) (579)
Increase (decrease) in trade accounts payable 797 (1,698)
Increase (decrease) in all other current
operating liabilities 1,644 (2,026)
Other, net (59) 2,415
-------- --------
Net cash provided by operating activities 19,754 1,637
Cash flows from investing activities:
Capital expenditures (5,424) (3,145)
Proceeds from asset disposals 1,554 26
Proceeds from collection of notes receivable 36 54
-------- --------
Net cash (used in) investing activities (3,834) (3,065)
Cash flows from financing activities:
Proceeds from short-term borrowings 1,820 486
Net (repayments) under revolving
credit agreements (1,795) (5,413)
Proceeds from long-term debt 134 85
(Repayment) of long-term debt (6) (3)
Purchase of treasury stock (1,360) --
Net stock issues 26 30
Dividends paid (1,242) (1,297)
-------- --------
Net cash (used in) financing activities (2,423) (6,112)
Effect of exchange rate changes on cash
and equivalents (259) (35)
-------- --------
Increase (decrease) in cash and equivalents 13,238 (7,575)
Cash and equivalents, beginning 7,199 9,926
-------- --------
Cash and equivalents, ending $ 20,437 $ 2,351
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-24
<PAGE>
GLEASON CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(Unaudited)
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly
(a) the results of operations for the three and six-month periods ended
June 30, 1997 and 1996 (b) the financial position at June 30, 1997 and
December 31, 1996, and (c) the cash flows for the six-month periods ended
June 30, 1997 and 1996, of Gleason Corporation and subsidiaries.
2. The results of operations for the three and six-month periods ended
June 30, 1997 are not necessarily indicative of the results to be expected
for the full year.
3. All significant intercompany transactions are eliminated in consolidation.
4. The components of inventories were as follows (in thousands):
<TABLE>
<CAPTION>
6/30/97 12/31/96
-------- --------
<S> <C> <C>
Raw materials and purchased parts $ 5,114 $ 5,269
Work in process 20,730 18,063
Finished goods 5,193 4,654
-------- --------
$ 31,037 $ 27,986
======== ========
5. Net cash payments for income taxes were $4,158,000 and $1,231,000 for the
six months ended June 30, 1997 and 1996, respectively. Interest payments
were $79,000 and $694,000 for the six months ended June 30, 1997 and 1996,
respectively.
6. In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is effective for both interim
and annual financial statements for periods ending after December 15,
1997. At that time, the Company will be required to change the method
currently being used to compute earnings per share and to restate all
prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options will be excluded.
The impact of this accounting pronouncement would have resulted in an
increase in primary earnings per share of $.02 and $.02 for the three-
month periods ended June 30, 1997 and June 30, 1996, respectively, and an
increase in primary earnings per share of $.04 and $.03 for the six-month
periods ended June 30, 1997 and June 30, 1996, respectively. There would
have been no impact on fully diluted earnings per share for the periods
presented due to Statement 128.
7. Subsequent Event: On August 28, 1997, the Board of Directors declared a
two-for-one (2-for-1) stock split on the Company's common stock, including
shares held in its treasury, effected in the form of a 100% common stock
distribution payable on September 26, 1997 to holders of record on
September 12, 1997. The distribution on September 26, 1997 increased the
number of shares issued from 5,797,070 to 11,594,140, which includes an
increase in treasury stock from 820,614 to 1,641,228. Common stock and
additional paid-in capital as of June 30, 1997 and December 31, 1996 have
been restated to reflect this split. In addition, all share and per share
data have been restated to reflect the split.
F-25
<PAGE>
GLEASON CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(Unaudited)
(Dollars in thousands)
</TABLE>
<TABLE>
<CAPTION>
Gleason Pro forma Pro forma
Corporation Pfauter Combined Adjustments Results
----------- ------- -------- ----------- -------
(C)
<S> <C> <C> <C> <C> <C>
Assets
Current assets
Cash and equivalents $ 20,437 $ 2,022 $ 22,459 $(21,000) $ 1,459
Trade accounts receivable 57,937 30,593 88,530 (212) 88,318
Inventories 31,037 41,741 72,778 3,279 76,057
Deferred income taxes 6,894 -- 6,894 -- 6,894
Other current assets 4,414 5,407 9,821 (3,376) 6,445
-------- -------- -------- -------- --------
Total current assets 120,719 79,763 200,482 (21,309) 179,173
Property, plant and
equipment, net 58,838 30,188 89,026 34,821 123,847
Other assets 7,798 5,891 13,689 13,962 27,651
Deferred income taxes 10,013 -- 10,013 1,700 11,713
-------- -------- -------- -------- --------
Total assets $197,368 $115,842 $313,210 $ 29,174 $342,384
======== ======== ======== ======== ========
</TABLE>
See Notes to Pro Forma Financial Information.
F-26
<PAGE>
GLEASON CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1997
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Gleason Pro forma Pro forma
Corporation Pfauter Combined Adjustments Results
----------- ------- -------- ----------- -------
(C)
<S> <C> <C> <C> <C> <C>
Liabilities and Stockholders'
Equity
Current liabilities
Short-term borrowings $ 2,145 $ 26,926 $ 29,071 $ (25,500) $ 3,571
Current portion of
long-term debt 4 6,431 6,435 (6,431) 4
Trade accounts payable 17,461 12,235 29,696 -- 29,696
Income taxes 10,385 343 10,728 -- 10,728
Other current liabilities 29,645 27,737 57,382 10,879 68,261
-------- -------- -------- -------- --------
Total current liabilities 59,640 73,672 133,312 (21,052) 112,260
Long-term debt 2,793 23,600 26,393 43,652 70,045
Pension plans and other
retiree benefits 37,705 21,867 59,572 -- 59,572
Other liabilities 5,670 4,517 10,187 (1,240) 8,947
-------- -------- -------- -------- --------
Total liabilities 105,808 123,656 229,464 21,360 250,824
Stockholders' equity
Common stock 11,594 -- 11,594 -- 11,594
Additional paid-in capital 5,657 -- 5,657 -- 5,657
Retained earnings 95,716 -- 95,716 -- 95,716
Partners' equity -- (7,814) (7,814) 7,814 --
Cumulative foreign currency
translation adjustment (3,648) -- (3,648) -- (3,648)
Minimum pension liability
adjustment (461) -- (461) -- (461)
-------- -------- -------- -------- --------
108,858 (7,814) 101,044 7,814 108,858
Less treasury stock,
at cost 17,298 -- 17,298 -- 17,298
-------- -------- -------- -------- --------
Total stockholders' equity 91,560 (7,814) 83,746 7,814 91,560
-------- -------- -------- -------- --------
Total liabilities and
stockholders' equity $197,368 $115,842 $313,210 $ 29,174 $342,384
======== ======== ======== ======== ========
See Notes to Pro Forma Financial Information.
</TABLE>
F-27
<PAGE>
GLEASON CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Gleason Pro forma Pro forma
Corporation Pfauter Combined Adjustments Results
----------- ------- -------- ----------- -------
(D)
<S> <C> <C> <C> <C> <C>
Net sales $248,089 $178,217 $426,306 -- $426,306
Costs and expenses
Cost of products sold 167,958 133,246 301,204 $ 128 301,332
Selling, general and
administrative expenses 42,614 33,412 76,026 353 76,379
Research and development
expenses 7,243 4,011 11,254 -- 11,254
Interest expense 513 4,055 4,568 1,545 6,113
Other (income) (982) (427) (1,409) (154) (1,563)
-------- -------- -------- -------- --------
Income (loss) before
income taxes and
minority interest 30,743 3,920 34,663 (1,872) 32,791
Provision for income taxes 11,083 281 11,364 374 11,738
-------- -------- -------- -------- --------
Income (loss) before
minority interest 19,660 3,639 23,299 (2,246) 21,053
Minority interest -- (1,444) (1,444) 1,444 --
-------- -------- -------- -------- --------
Net income (loss) $ 19,660 $ 2,195 $ 21,855 $ (802) $ 21,053
======== ======== ======== ======== ========
Weighted average number
of common shares
outstanding 10,681,644 10,681,644 10,681,644 10,681,644 10,681,644
Income (loss) before
minority interest $ 1.84 $ 0.34 $ 2.18 $ (0.21) $ 1.97
Minority interest -- $ (0.14) $ (0.14) $ 0.14 --
Net income (loss) $ 1.84 $ 0.20 $ 2.04 $ (0.07) $ 1.97
</TABLE>
See Notes to Pro Forma Financial Information.
F-28
<PAGE>
GLEASON CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Gleason Pro forma Pro forma
Corporation Pfauter Combined Adjustments Results
----------- ------- -------- ----------- -------
(D)
<S> <C> <C> <C> <C> <C>
Net sales $ 122,719 $ 67,628 $ 190,347 $ -- $ 190,347
Costs and expenses
Cost of products sold 83,699 51,575 135,274 67 135,341
Selling, general and
administrative expenses 19,622 14,386 34,008 197 34,205
Research and development
expenses 3,634 1,796 5,430 -- 5,430
Interest (income) expense (121) 1,762 1,641 782 2,423
Other (income) (825) (648) (1,473) (110) (1,583)
-------- -------- -------- -------- --------
Income (loss) before income
taxes and minority interest 16,710 (1,243) 15,467 (936) 14,531
Provision for income taxes 5,939 206 6,145 (1,230) 4,915
-------- -------- -------- -------- --------
Income (loss) before
minority interest 10,771 (1,449) 9,322 294 9,616
Minority interest -- (799) (799) 799 --
-------- -------- -------- -------- --------
Net income (loss) $ 10,771 $ (2,248) $ 8,523 $ 1,093 $ 9,616
======== ======== ======== ======== ========
Weighted average number
of common shares
outstanding 10,316,908 10,316,908 10,316,908 10,316,908 10,316,908
Income (loss) before
minority interest $1.04 $(0.14) $0.90 $0.03 $0.93
Minority interest $ -- $(0.08) $(0.08) $0.08 $ --
Net income (loss) $1.04 $(0.22) $0.82 $0.11 $0.93
</TABLE>
See Notes to Pro Forma Financial Information.
F-29
<PAGE>
NOTES TO PRO FORMA FINANCIAL INFORMATION
(Unaudited)
(A) The pro forma consolidated balance sheet (unaudited) at June 30, 1997 and
pro forma consolidated statements of operations (unaudited) for the year
ended December 31, 1996 and the six months ended June 30, 1997 give pro
forma effect to the acquisition by Gleason Corporation ("Gleason") of
Hermann Pfauter GmbH & Co. ("Pfauter") and Pfauter-MaaG Cutting Tools
Limited Partnership ("PMCT"). The pro forma consolidated statements of
operations for the year ended December 31, 1996 and the six months ended
June 30, 1997 present the results of operations of Gleason as if the
acquisition had been consummated as of January 1, 1996. The pro forma
consolidated balance sheet as of June 30, 1997 has been prepared as if the
transaction had occurred on that date.
The pro forma financial information is based on the historical financial
statements of Gleason and Pfauter, giving effect to the acquisition under
the purchase method of accounting and the assumptions and adjustments set
forth in these notes. The pro forma information and accompanying notes
should be read in conjunction with the historical financial statements on
which they are based. This pro forma financial information may not be
indicative of either future results of operations or the results that
actually would have occurred if the acquisition had been consummated on
the dates indicated.
(B) Amounts for Pfauter have been translated from deutsche marks to U.S.
dollars as follows:
Balance Sheet - at the exchange rate in effect as of June 30, 1997
($1 = DM 1.75)
Statements of Operations - at the approximate average exchange rates
in effect during the year ended December 31, 1996 ($1 = DM 1.51) and
the six months ended June 30, 1997 ($1 = DM 1.69)
(C) Under purchase accounting, the assets and liabilities of the acquired
business are required to be adjusted from historical amounts to their
estimated fair values. Purchase accounting adjustments have been
preliminarily estimated by Gleason's management based upon available
information and are believed by management to be reasonable. There can be
no assurance, however, that the final purchase accounting adjustments that
will ultimately be determined by Gleason's management will not differ from
these estimates. The following pro forma adjustments have been made to
reflect the estimated fair values of the assets and liabilities of Pfauter
assumed in the acquisition:
Adjustments (in thousands):
<TABLE>
<CAPTION>
Increase
(DECREASE)
-------------
<S> <C> <C>
Cash and equivalents $(21,000) (1)
Trade accounts receivable (212) (2)
Inventories 3,279 (2)
Other current assets (3,376) (3)
Property, plant and equipment 34,821 (2)
Other assets 13,962 (4)
Deferred income taxes 1,700 (5)
Short-term borrowings (25,500) (1)
Current portion of long-term debt (6,431) (1)
Other current liabilities 10,879 (6)
Long-term debt 43,652 (1)
Other liabilities (1,240) (7)
Partners equity 7,814 (8)
________________
<FN>
(1) The reduction in cash and equivalents represents the use of
available cash on hand as of June 30, 1997 to reduce the debt
associated with the acquisition. The reductions in short-term
borrowings and current
F-30
<PAGE>
portion of long-term debt represent the repayment of certain Pfauter
debt as part of the acquisition and the refinancing of other
outstanding Pfauter debt under Gleason's new revolving and term
credit facility. The increase in long-term debt includes Gleason's
financing of the $34.8 million purchase price (partially offset by
the use of the cash on hand at June 30) and the refinancing of
Pfauter's short-term borrowings and current portion of long-term
debt under Gleason's revolving and term credit facility.
(2) The reduction in trade accounts receivable and increases in
inventories and property, plant and equipment represent the
adjustments required to record the assets of Pfauter at estimated
fair market values. The increase in property, plant and equipment
includes an increase to the carrying value of land of $9.4 million
based on independent market appraisals.
(3) The reduction in other current assets includes the reclassification
of $1.2 million of acquisition costs incurred by Gleason through
June 30, 1997 which, under purchase accounting, are considered to be
part of the purchase price. The reduction in other current assets
also includes the elimination of a note receivable due from the
minority interest partners of PMCT which was included in Pfauter's
June 30 balance sheet. This note was repaid by the partners to the
partnership as part of the acquisition.
(4) The increase in other assets represents the net adjustment required
to reduce certain license rights and goodwill recorded in Pfauter's
balance sheet at June 30, 1997 to estimated fair market values under
Gleason's ownership (a reduction of approximately $4.7 million) and
the recognition of goodwill associated with the acquisition
(approximately $18.7 million). The goodwill will be amortized on a
straight-line basis over a period of 30 years.
(5) The increase in deferred income taxes (a non-current asset)
represents the estimated tax effect associated with the recording of
the acquired assets and liabilities.
(6) The increase in other current liabilities includes $9.0 million for
the rationalization of the Pfauter business into Gleason's existing
operations. These costs have been included as a component of the
purchase price based on Gleason's intention to consolidate certain
Pfauter operating activities into Gleason operations. This amount
represents a preliminary estimate based on currently available
information and may be adjusted as more specific plans become
finalized. The increase in other current liabilities also includes
accruals for estimated additional costs (including legal and
accounting fees) associated with the acquisition.
(7) The reduction in other liabilities represents the elimination of the
minority interest liability of PMCT (Pfauter owned 76 percent of the
equity of PMCT). Gleason acquired 100 percent ownership interest in
PMCT in the acquisition.
(8) The increase in partners equity represents the removal of the net
deficit in Pfauter Partners' equity as of June 30, 1997.
<FN>
</TABLE>
F-31
<PAGE>
(D) For purposes of determining the estimated pro forma effect of the
acquisition of Pfauter on the Gleason Consolidated Statement of
Operations, the following pro forma adjustments have been made:
<TABLE>
<CAPTION>
Increase (Decrease) Net Income
Year ended Six Months Ended
12/31/96 6/30/97
-------- -------
(Dollars in thousands)
<S> <C> <C>
Lower dealer commission expense due
to termination of dealer contracts(1) $ 323 $ 142
Higher depreciation resulting from
adjustments to fair value of
property, plant and equipment(2) (151) (79)
Higher amortization expense resulting
from the recognition of goodwill
associated with the acquisition(2) (499) (217)
Higher net interest expense associated
with higher debt due to the acquisition
financing, partially offset by a
reduction of the interest expense due
to lower rates under refinanced debt(3) (1,545) (782)
Income tax (provision) benefit on Pfauter
operations and pro forma adjustments(4) (374) 1,230
Minority interest removal(5) 1,444 799
------- -------
Total adjustment to net income $ (802) $ 1,093
======= =======
__________________
<FN>
(1) With the acquisition, certain of Pfauter's outside dealer
representative relationships have been terminated. The reduction in
commission expense represents the estimated savings for 1996 and six
months of 1997 due to the replacement of these outside dealers with
existing Gleason direct sales representation.
(2) The higher expenses for depreciation and amortization are the result
of the increase in bases of both tangible assets (plant and
equipment) and intangible assets (goodwill). The higher
depreciation expense due to the increase in basis of plant and
equipment was partially offset by a reduction to expense due to the
change from accelerated to straight-line depreciation methods for
the Pfauter operations. The higher amortization expense associated
with goodwill recorded in the acquisition was partially offset by
the removal of amortization of intangibles which were included in
Pfauter operating results but which were removed from the opening
balance sheet.
(3) The increase in interest expense consists of two components.
Interest expense increased with the additional outstanding debt (and
lower cash balances) due to the acquisition financing. This
increase was partially offset with a reduction in Pfauter's interest
expense due to the refinancing, at lower average borrowing rates, of
Pfauter's debt under the Company's revolving and term credit
facilities. Interest rate assumptions used in the calculation of
this pro forma adjustment were based on current average borrowing
rates. Management estimated interest expense on the additional debt
using an average borrowing cost of 5.25%. The reduction of interest
expense on Pfauter historical borrowings was based on an estimated
1.0% reduction in average borrowing rates due to the refinancing of
the Pfauter debt.
(4) The provision for income taxes represents the adjustment to record
income taxes for the inclusion of Pfauter operations within the
consolidated operations of Gleason Corporation and subsidiaries.
Management has estimated the tax provision considering the Pfauter
operational results and pro forma adjustments for the relevant
taxing jurisdictions.
F-32
<PAGE>
(5) The minority interest reduction to net income was eliminated due to
the fact that, as part of the acquisition, Gleason acquired 100
percent ownership interest in PMCT. As such, there is no minority
interest in PMCT operating results under Gleason ownership.
</FN>
</TABLE>
The pro forma adjustments to the Statement of Operations do not include
any positive adjustments for increased sales or additional cost reductions
associated with the synergies of the combined business. In addition,
there are no positive adjustments included for benefits expected from the
rationalization of the Pfauter operations. These effects are considered to
be of a forecasted nature and as such, are not permissible as pro forma
adjustments.
(E) Subsequent Event: On August 28, 1997, the Board of Directors declared a
two-for-one (2-for-1) stock split on the Company's common stock, including
shares held in its treasury, effected in the form of a 100% common stock
distribution payable on September 26, 1997 to holders of record on
September 12, 1997. The distribution on September 26, 1997 increased the
number of shares issued from 5,797,070 to 11,594,140, which includes an
increase in treasury stock from 820,614 to 1,641,228. Common stock and
additional paid-in capital as of June 30, 1997 have been restated to
reflect this split. In addition, all share and per share data have been
restated to reflect the split.
F-33
<PAGE>
INSIDE BACK COVER - ARTWORK
[Photographs of various Company products.]
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON 1,600,000 SHARES
HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH
THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE [LOGO]
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION GLEASON CORPORATION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR TO ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. COMMON STOCK
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER AT ANY TIME IMPLIES THAT THE (PAR VALUE $1.00 PER SHARE)
INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
____________
PROSPECTUS
_________________ ____________
TABLE OF CONTENTS
PAGE FURMAN SELZ
Prospectus Summary...............3
Risk Factors.....................7 MCDONALD & COMPANY
Use of Proceeds..................9 SECURITIES, INC.
Capitalization..................10
Price Range of Common Stock.....11 ABN AMRO CHICAGO
Management's Discussion and
Analysis of Results of CORPORATION
and Financial Conditions.....12
Business........................18 , 1997
Management......................28
Principal and Selling
Stockholders................ 30
Description of Capital Stock....31
Certain Anti-Takeover
Provisions.................. 31
Underwriting....................35
Legal Matters...................36
Experts.........................36
Available Information...........36
Incorporation of Certain
Documents by Reference.......37
Index to Financial Statements..F-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table is an itemized listing of expenses to be incurred in
connection with the issuance and distribution of the shares of Common Stock
being registered hereby, other than underwriting discounts and commissions.
These expenses will be borne by the Selling Stockholders. All amounts shown
are estimates, except the SEC Registration fee:
SEC Registration Fees $ 10,796
Printing and Engraving Expenses 55,000
Legal Fees and Expenses 110,000
Accounting Fees and Expenses 125,000
Miscellaneous 36,704
--------
Total $ 337,500
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") permits the
Company to indemnify any director or officer of the Company against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement,
or incurred in defense of any action (other than an action by or in the right
of the Company) arising by reason of the fact that he is or was an officer or
director of the Company, if in any civil action or proceeding it is determined
that he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Company and, with respect to any
criminal action or proceeding, it is determined that he had no reasonable cause
to believe his conduct was unlawful. Section 145 also permits the Company to
indemnify any such officer or director against expenses incurred in an action
by or in the right of the Company if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, except in respect of any matter as to which such person is adjudged to
be liable to the Company, unless allowed by the court in which such action is
brought. This statute requires indemnification of such officers and directors
against expenses to the extent they may be successful in defending any such
action. The statute also permits purchase of liability insurance by the
Company on behalf of its officers and directors.
Article VII of the Company's By-laws provide for the mandatory
indemnification of and advancement of litigation expenses to any person to the
full extent permitted by the DGCL against expenses, judgments, fines and
amounts paid in settlement reasonably incurred in connection with any action,
suit or proceeding in which he is made, or threatened to be made, a party by
reason of the fact he is or was a director or officer of the Company or, at its
request, of another entity. These provisions are not exclusive of any other
indemnification rights to which a person may otherwise be entitled. The
Company may also purchase liability insurance on behalf of its directors and
officers and has done so.
Reference is made to any Underwriting Agreement to be incorporated by
reference herein for provisions relating to the indemnification of the
Underwriters named in such agreement and persons who control such Underwriters
within the meaning of Section 15 of the Securities Act of 1933, and to
indemnification of the Company by any such Underwriters.
See also the undertaking made with respect to indemnification matters
involving the Company's directors, officers and controlling persons, found in
Item 17 below.
II-1
<PAGE>
ITEM 16. EXHIBITS.
The following exhibits are filed herewith:
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
1 Form of Underwriting Agreement(1)
3(a) Restated Certificate of Incorporation of the Company(2)
3(b) Certificate of Amendment to Restated Certificate of Incorporation
as filed with the Delaware Secretary of State on May 8, 1996 is
incorporated herein by reference to Exhibit 3 to the
registrant's Form 10-Q for the period ending March 31, 1996.
3(c) By-laws of the Company, as amended(2)
4(a) Specimen of Common Stock Certificate(1)
4(b) Gleason Corporation Preferred Stock Purchase Rights Agreement, as
amended(2)
5 Opinion of Nixon, Hargrave, Devans & Doyle LLP(1)
23(a) Consent of Nixon, Hargrave, Devans & Doyle LLP (1)
23(b) Consent of Ernst & Young LLP
23(c) Consent of Ernst & Young GmbH
23(d) Consent of Dugan & Lopatka, CPAs, PC
24 Powers of Attorney (contained in the signature page)
_______________
(1) To be filed by amendment or as an exhibit to a document to be incorporated
by reference herein in connection with an offering of the Common Stock.
(2) Incorporated herein by reference to the registrant's Form 8-K dated
October 2, 1997 and filed with the Commission on October 3, 1997.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended
("Securities Act"), each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934
("Exchange Act") (and, where applicable, each filing of an employee benefit
plan's Annual Report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in this Registration Statement shall be deemed to be
a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 15 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in that Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any such action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-2
<PAGE>
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this Registration Statement as of the time
it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
Prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Rochester, State of New York, on this
October 17, 1997.
GLEASON CORPORATION
By: /s/ John J. Perrotti
----------------------------
John J. Perrotti
Vice President-Finance and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
* Chairman, President and Chief October 17, 1997
- ---------------------- Executive Officer and Director
James S. Gleason
/s/ John J. Perrotti Vice President-Finance and Chief October 17, 1997
- ---------------------- Financial Officer
John J. Perrotti (PRINCIPAL FINANCIAL OFFICER)
* Controller October 17, 1997
- ---------------------- (PRINCIPAL ACCOUNTING OFFICER)
John W. Pysnack
* Director October 17, 1997
- ----------------------
Martin L. Anderson
* Director October 17, 1997
- -----------------------
Julian W. Atwater
* Director October 17, 1997
- -----------------------
Robert W. Bjork
* Director October 17, 1997
- -----------------------
David J. Burns
* Director October 17, 1997
- -----------------------
J. David Cartwright
II-4
<PAGE>
* Director October 17, 1997
- -------------------------
John W. Guffy, Jr.
* Director October 17, 1997
- -------------------------
Donald D. Lennox
* Director October 17, 1997
- -------------------------
William P. Montague
* Director October 17, 1997
- -------------------------
Robert A. Sherman
* Director October 17, 1997
- -------------------------
Robert L. Smialek
* By: /s/ John J. Perrotti
---------------------
John J. Perrotti,
Attorney-in-fact
II-5
<PAGE>
EXHIBIT 23(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Gleason Corporation
for the registration of 1,300,000 shares of its common stock and to the
incorporation by reference therein of our report dated January 30, 1997 (except
for Note 19, as to which the date is October 1, 1997), with respect to the
consolidated financial statements of Gleason Corporation incorporated by
reference in its Annual Report (Form 10-K, as amended) for the year ended
December 31, 1996, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
Syracuse, New York
October 17, 1997
<PAGE>
EXHIBIT 23(c)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Gleason Corporation
for the registration of 1,300,000 shares of its common stock and to the
incorporation by reference therein of our report dated March 27, 1997 (except
for Note 14g., as to which the date is June 4, 1997), with respect to the
consolidated financial statements of Hermann Pfauter GmbH & Co. and its
consolidated subsidiaries included in its Current Report on Form 8-K dated
August 14, 1997, as amended, filed with the Securities and Exchange Commission.
/s/ Ernst & Young GmbH
Stuttgart, Germany
October 17, 1997
EXHIBIT 23(d)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of Gleason Corporation
for the registration of 1,300,000 shares of its common stock and to the
incorporation by reference therein of our reports dated February 22, 1996
with respect to the financial statements of American Pfauter Management, Inc.
with respect to the consolidated financial statements of Hermann Pfauter
GmbH & Co. and its consolidated subsidiaries included in its Current Report
on Form 8-K dated August 14, 1997, as amended, filed with the Securities
and Exchange Commission.
/s/ Dugan & Lopatka
Wheaton, Illinois
October 17, 1997
