-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F4UG97SV+8kG7+ui73vPE6kQNp3kYhKTJ308xZu35Y96p5hnD/i7+9dr1oVhbhsJ CF8eq567xDBiO/nkjgeUeA== 0000950130-97-005382.txt : 19971204 0000950130-97-005382.hdr.sgml : 19971204 ACCESSION NUMBER: 0000950130-97-005382 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19971203 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLEASON CORP /DE/ CENTRAL INDEX KEY: 0000743239 STANDARD INDUSTRIAL CLASSIFICATION: MACHINE TOOLS, METAL CUTTING TYPES [3541] IRS NUMBER: 161224655 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-37085 FILM NUMBER: 97731798 BUSINESS ADDRESS: STREET 1: 1000 UNIVERSITY AVE STREET 2: PO BOX 22970 CITY: ROCHESTER STATE: NY ZIP: 14692-2970 BUSINESS PHONE: 7164731000 MAIL ADDRESS: STREET 1: P O BOX 22970 STREET 2: 1000 UNIVERSITY AVE P O BOX 22970 CITY: ROCHESTER STATE: NY ZIP: 14692-2970 S-3/A 1 AMENDMENT NO. 3 TO FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 3, 1997 REGISTRATION NO. 333-37085 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- PRE-EFFECTIVE AMENDMENT NO. 3 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. JAY BERNSTEIN, ESQ. NIXON, HARGRAVE, DEVANS & DOYLE LLP ROGERS & WELLS CLINTON SQUARE 200 PARK AVENUE ROCHESTER, NEW YORK 14603-1051 NEW YORK, NEW YORK 10166 (716) 263-1000 (212) 878-8000 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALES TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. --------------- 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. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF MAXIMUM AGGREGATE SECURITIES TO BE NUMBER OF SHARES OFFERING PRICE OFFERING AMOUNT OF REGISTERED TO BE REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------- Common Stock, par value $1.00 per share....... 1,800,000(2) $27.40625 $49,331,250 $14,948(3)
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- --------------- (1) Estimated solely for the purpose of determining the registration fee pursuant to Rule 457(c) under the Securities Act of 1933. Based on the average of the high and low prices reported for the registrant's common stock on September 30, 1997. (2) Includes 1,300,000 shares which were registered under Registration Statement No. 333-37083. (3) This amount has been previously paid and includes $10,796 which was paid in connection with the filing of Registration Statement No. 333-37083. 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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +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. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED DECEMBER 3, 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 November 10, 1997, the last reported sale price of the Common Stock was $28.125 per share. Except as indicated to the contrary, all information in this Prospectus has been restated to reflect the Company's 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 8 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. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(1) COMPANY(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, Proceeds to Company and Proceeds to Selling Stockholders 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. INSIDE FRONT COVER - ARTWORK [Timeline identifying developments at the Company between 1990 and 1997 which incorporates Company photographs and artwork.] 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.'' 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(R) and G-TECH(R) are registered trademarks of the Company and POWER- CUTTING(TM) is a trademark 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 of a vehicle to its drive-axle. Cylindrical gears transmit power in parallel axes of rotation and have a wider variety of applications, including as components in the transmissions of vehicles. Based on its knowledge of the markets it serves, the Company believes it is the 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. Approximately two-thirds of the Company's aggregate net sales during the five years from 1992 through 1996 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 (which, as used herein, means earnings before interest and taxes) 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 nine-month period ended September 30, 1997, the Company's net sales increased to $212.4 million, compared to $178.1 million in the corresponding 1996 period. 3 Excluding sales of Pfauter, which was acquired on July 31, 1997, sales increased approximately 7% in the 1997 nine-month period over the corresponding 1996 period. Foreign exchange translation effects negatively impacted sales by approximately $5.0 million for the 1997 nine-month period due to the weaker German deutsche mark compared to the U.S. dollar. Operating income during the first nine months of 1997 rose 17% over the comparable period in 1996 to $24.9 million, and net income increased 20% to $15.8 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 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, which included 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 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 the next two years 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 regional 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 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. 4 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.......................... 10,364,897 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 and 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 10,424,897, respectively. (2) Based on the number of shares of Common Stock outstanding as of November 10, 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 59,099 hypothetical shares credited to directors' accounts under the Company's Plan for Deferral of Directors' Fees. 5 SUMMARY CONSOLIDATED AND PRO FORMA CONSOLIDATED FINANCIAL DATA(1) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA(2) NINE MONTHS NINE MONTHS ENDED PRO FORMA(2) ENDED SEPTEMBER 30, YEAR ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ---------------------- DECEMBER 31, ---------------------------------- 1997 1997 1996 1996 1996 1995 1994 ------------- ---------- ---------- ------------ ---------- ---------- ---------- STATEMENTS OF OPERATIONS DATA: Net sales............... $ 298,044 $ 212,432 $ 178,134 $ 426,306 $ 248,089 $ 197,046 $ 128,462 Costs and expenses Cost of products sold.. 211,962 146,783 120,581 301,332 167,958 137,461 94,935 Selling, general and administrative expenses.............. 53,234 35,781 31,546 76,379 42,614 33,789 24,539 Research and development expenses.. 7,746 5,628 5,618 11,254 7,243 5,617 4,729 Interest expense--net.. 3,253 282 660 6,113 513 527 11 Other (income)--net.... (1,555) (679) (851) (1,563) (982) (1,328) (909) ---------- ---------- ---------- ---------- ---------- ---------- ---------- 274,640 187,795 157,554 393,515 217,346 176,066 123,305 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income from continuing operations before income taxes........... 23,404 24,637 20,580 32,791 30,743 20,980 5,157 Provision (benefit) for income taxes(3)........ 8,291 8,871 7,477 11,738 11,083 (9,402) 825 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income from continuing operations(3).......... 15,113 15,766 13,103 21,053 19,660 30,382 4,332 Gain on disposal of discontinued operations............. -- -- -- -- -- 445 2,956 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income.............. $ 15,113 $ 15,766 $ 13,103 $ 21,053 $ 19,660 $ 30,827 $ 7,288 ========== ========== ========== ========== ========== ========== ========== Primary earnings per common share: Income from continuing operations(3)......... $ 1.46 $ 1.53 $ 1.22 $ 1.97 $ 1.84 $ 2.87 $ .42 Gain on disposal of discontinued operations............ -- -- -- -- -- .04 .29 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income............. $ 1.46 $ 1.53 $ 1 .22 $ 1.97 $ 1.84 $ 2.91 $ .71 ========== ========== ========== ========== ========== ========== ========== Fully diluted earnings per common share: Income from continuing operations(3)......... $ 1.45 $ 1.52 $ 1.22 $ 1.97 $ 1.84 $ 2.85 $ .42 Gain on disposal of discontinued operations............ -- -- -- -- -- .04 .29 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income............. $ 1.45 $ 1 .52 $ 1.22 $ 1.97 $ 1.84 $ 2.89 $ .71 ========== ========== ========== ========== ========== ========== ========== Weighted average number of common shares outstanding: Primary................ 10,326,069 10,326,069 10,731,260 10,681,644 10,681,644 10,600,234 10,325,754 Fully diluted.......... 10,394,860 10,394,860 10,746,766 10,681,644 10,681,644 10,679,742 10,325,754 Cash dividends declared per common share....... $ .1875 $ .1875 $ .1875 $ .25 $ .25 $ .25 $ .20
See footnotes on following page. 6
SEPTEMBER 30, 1997 DECEMBER 31, ----------------------- -------------------------- AS ADJUSTED(4) ACTUAL 1996 1995 1994 -------------- -------- -------- -------- -------- BALANCE SHEET DATA: Cash and equivalents....... $ 12,109 $ 12,109 $ 7,199 $ 9,926 $ 3,173 Net working capital........ 72,602 72,602 53,834 60,409 28,596 Total assets............... 353,567 353,567 190,674 197,198 122,016 Total debt, including current portion........... 66,540 77,142 4,841 26,810 3,283 Pension plans and other retiree benefits, including current portion................... 64,378 64,378 41,180 44,048 46,059 Total stockholders' equity.................... 105,936 95,334 84,864 73,291 42,199
PRO FORMA(2) NINE MONTHS NINE MONTHS ENDED PRO FORMA(2) ENDED SEPTEMBER 30, YEAR ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30, ------------------ DECEMBER 31, ---------------------------- 1997 1997 1996 1996 1996 1995 1994 ------------- -------- -------- ------------ -------- -------- -------- OTHER FINANCIAL DATA: Orders.................. $300,800 $209,600 $184,600 $407,400 $246,352 $226,107 $156,962 Gross margin(5)(6)...... 28.9% 30.9% 32.3% 29.3% 32.3% 30.2% 26.1% Selling, general and administrative expenses (as a % of sales)...... 17.9% 16.8% 17.7% 17.9% 17.2% 17.1% 19.1% Operating margin(6)(7).. 8.9% 11.7% 11.9% 9.1% 12.6% 10.9% 4.0% Earnings before interest and income taxes(8).... $ 26,657 $ 24,919 $ 21,240 $ 38,904 $ 31,256 $ 21,507 $ 5,168 Capital expenditures.... $ 11,144 $ 8,196 $ 5,123 $ 19,955 $ 10,281 $ 8,309 $ 3,527 Depreciation and amortization........... $ 14,500 $ 9,527 $ 8,296 $ 20,170 $ 10,707 $ 9,992 $ 9,293
- -------- (1) All share and per share data have been restated to reflect the Stock Split. (2) The pro forma data reflect 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. 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 $28.125 per share) and the application of the estimated net proceeds therefrom as set forth under "Use of Proceeds." (5) Gross margin is calculated by dividing the difference of net sales minus the cost of products sold by net sales. (6) The gross margin and operating margin data for 1994, 1995 and 1996 reflect the improved operating performance of the Company resulting from the implementation of its strategic initiatives. The pro forma gross margin and operating margin data for the nine months ended September 30, 1997 and the year ended December 31, 1996 give effect to the acquisition of Pfauter, which has historically had lower gross margins and operating margins than those of the Company. The Company intends to invest approximately $9.0 million over the next two years to rationalize Pfauter's operations and estimates that this investment will enable to the Company to achieve subsequent annual cost savings of a similar magnitude. (7) Operating margin is calculated by dividing earnings before interest and income taxes ("EBIT") by net sales. Management believes that operating margin is a meaningful indicator of the effectiveness of the Company's operations because it provides a relative measure of profitability generated directly by operations (excluding financing costs and income taxes). (8) EBIT and earnings before interest, income taxes and depreciation and amortization ("EBITDA") are presented in this Prospectus because they are commonly used by industry analysts to measure a company's operating performance and historical ability to service debt. EBIT and EBITDA are not indicative of cash (used) provided by operating activities, should not be used as a measure of operating income and cash flows from operations as determined under generally accepted accounting principles, and should not be considered in isolation or as an alternative to, or more meaningful than, measures of performance determined in accordance with generally accepted accounting principles. EBIT and EBITDA, as computed by the Company, may not be comparable to similarly titled information provided by other companies or analysts. 7 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. In particular, sales to Ford Motor Company and its subsidiaries represented approximately 14.5% of the Company's net sales for the year ended December 31, 1996. 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. 8 RISKS OF INTERNATIONAL OPERATIONS AND FOREIGN EXCHANGE FLUCTUATIONS The Company has substantial operations and sales outside of the United States. Approximately two-thirds of the Company's aggregate net sales during the five years from 1992 through 1996 were to customers in overseas markets. Foreign operations are subject 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. The Company generally enters into foreign currency forward contracts to hedge transactions involving foreign currencies primarily for firm commitments to buy or sell goods; however, there can be no assurances regarding the effectiveness or adequacy of such transactions to protect the Company from changes in exchange rates between the U.S. dollar and other currencies. 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 9 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 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. 10 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 $28.125 per share, are estimated to be approximately $10.6 million (approximately $12.2 million if the Underwriters' over-allotment option is exercised in full). The Company will use its net proceeds from the Offering to repay a portion of the outstanding indebtedness under its revolving credit and term loan facility which was incurred in connection with the Pfauter acquisition. After such payment, the Company will have approximately $70 million of available credit under the revolving credit and term loan facility which it may use for working capital and general corporate purposes. See "Management's Discussion and Analysis of Results of Operations and Financial Condition-- Liquidity and Capital Resources." The 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 Shares by the Selling Stockholders. CAPITALIZATION The following table sets forth as of September 30, 1997 (i) the actual capitalization of the Company and (ii) the capitalization as adjusted to give effect to the sale of 400,000 Shares offered hereby at an assumed offering price of $28.125 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" and the "Consolidated Financial Statements."
SEPTEMBER 30, 1997 -------------------------- ACTUAL AS ADJUSTED ----------- ------------- (DOLLARS IN THOUSANDS) Debt: Short-term debt: Short-term borrowing.............................. $ 7,337 $ 7,337 Current portion of long-term debt................. 1,513 1,513 ----------- ----------- Total short-term debt........................... 8,850 8,850 Long-term debt, less current portion: Revolving credit and term loan facility........... 67,348 56,746 Other............................................. 944 944 ----------- ----------- Total long-term debt............................ 68,292 57,690 ----------- ----------- Total debt...................................... 77,142 66,540 Stockholders' equity: Preferred Stock, par value $1.00 per share; 500,000 shares authorized; none issued Common Stock, par value $1.00 per share; 20,000,000 shares authorized; 11,594,140 shares issued and 9,964,912 shares outstanding and 10,364,912 shares outstanding, as adjusted(1)........................ 11,594 11,594 Additional paid-in capital........................ 5,438 12,509 Retained earnings................................. 100,091 100,091 Cumulative foreign currency translation adjustment....................................... (4,555) (4,555) Minimum pension liability adjustment.............. (461) (461) ----------- ----------- 112,107 119,178 Less treasury stock of 1,629,228 shares (1,229,228 as adjusted), at cost(2)......................... 16,773 13,242 ----------- ----------- Total stockholders' equity...................... 95,334 105,936 ----------- ----------- Total capitalization............................ $ 172,476 $ 172,476 =========== ===========
- -------- (1) 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. (2) Assumes that the 400,000 Shares offered by the Company are issued from treasury stock. 11 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 November 10, 1997)............. 29.25 26.88 .0625(1)
- -------- (1) On November 4, 1997, the Company's Board of Directors declared a dividend payable on November 28, 1997 to holders of record of the Common Stock on November 18, 1997. On November 10, 1997, the last reported sale price for the Common Stock on the New York Stock Exchange Composite Tape was $28.125 per share and the number of stockholders of record was approximately 3,000. 12 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" and "Risk Factors--Impact and Risks of Acquisitions." While the Company expects to continue to maintain its leadership position in bevel gear production machinery, the Company believes that cylindrical gear production machinery, particularly as a result of the acquisition of Pfauter, will represent an increasingly important component of the Company's orders, backlog and net sales. 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. See "Risk Factors--Fluctuations in Quarterly Results." 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. See "Risk Factors--Dependence on Automotive and Truck Industries." 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 twelve 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 stockholder's 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 NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Earnings. Net income for the nine months ended September 30, 1997 was $15.8 million, or $1.53 per share, compared to $13.1 million, or $1.22 per share, for the 1996 nine-month period. Operating income (EBIT) 13 for the 1997 nine-month period was $24.9 million, an increase of 17% compared to the 1996 period. Operating results included two months of activity from the Pfauter operations, which the Company acquired on July 31, 1997. The Pfauter operating results and related effects of the acquisition slightly lowered the Company's net income for the period. Orders and Backlog. Orders for the 1997 nine-month period were $209.6 million compared to $184.6 million in 1996. Order levels for the nine-month period of 1997, excluding Pfauter, were 2% lower than the comparable 1996 period due to negative foreign exchange translation effects of approximately $8.0 million, primarily due to the stronger U.S. dollar versus the German deutsche mark. Order levels for machine products, excluding Pfauter, for the comparative nine-month periods were approximately equal. Excluding Pfauter, orders for cylindrical gear production machines increased 43% in the 1997 nine-month period versus the comparable period in 1996. Cylindrical gear production machine orders, excluding Pfauter, accounted for 56% of total machine orders in the 1997 nine-month period versus 39% in the comparable 1996 period. Incoming orders for the nine months of 1997 were higher primarily due to increased orders for PHOENIX gear hobbing machines and Gleason-Hurth gear honing machines. Order levels for bevel gear production machines were 30% lower in 1997 than for the comparative nine-month period in 1996, primarily due to lower order levels from U.S. customers. In the second quarter of 1996, the Company received large orders totaling $24 million from two U.S. vehicle and axle manufacturers. The Company expects that 1997 fourth quarter orders for bevel gear production machines will be higher than in any other quarter of the current year, although orders for bevel gear production machines are expected to be lower for the 1997 full year than the 1996 full year. Orders for tooling products, including gear cutting tools and workholding equipment, excluding Pfauter, were lower for the 1997 nine-month period versus the comparable period in 1996. Order levels for these products decreased principally due to foreign currency translation effects and lower order volumes for gear cutting tools from Europe and the Asia-Pacific region. Consolidated backlog was $194.9 million at September 30, 1997 compared to $122.8 million at December 31, 1996 and $131.0 million at September 30, 1996. The Pfauter operations accounted for $81.2 million of the September 30, 1997 backlog. Net Sales. Net sales were $212.4 million for the nine-month period ended September 30, 1997 versus $178.1 million in the comparable prior year period. Net sales for the nine-month period of 1997, when compared to the 1996 period, were negatively impacted by foreign currency translation effects of approximately $5.0 million, primarily due to the stronger U.S. dollar versus the German deutsche mark. Net sales of machine products, excluding Pfauter, increased 12% for the 1997 nine-month period compared to the 1996 nine-month period. Bevel gear production machine sales increased 35% for the 1997 nine-month period over the comparable 1996 period, primarily due to higher shipments of PHOENIX gear equipment to customers in the United States. Bevel gear production machine sales in the 1997 nine-month period included shipments associated with the large orders received in the second quarter of 1996. Cylindrical gear production machine sales, excluding Pfauter, were 8% lower for the 1997 nine- month period versus the comparable 1996 period. The decrease in sales of cylindrical gear production machines in the 1997 nine-month period was primarily due to lower shipments of Gleason-Hurth gear shaving machines and foreign currency translation effects, partially offset by higher shipments of PHOENIX gear hobbing machines and cylindrical gear grinding machines. Net sales in the 1996 nine-month period included a large program for Gleason-Hurth gear shaving machines associated with an order received in the 1995 third quarter. Net sales of tooling products, excluding Pfauter, for the 1997 nine-month period were approximately 5% lower than for the comparable 1996 period primarily due to the negative foreign currency translation effect on sales of Gleason-Hurth tooling and lower shipments of workholding equipment during the first half of 1997. Other products sales, including spare parts, service and software, excluding Pfauter, in the 1997 nine-month period were slightly higher than in the comparable 1996 period. 14 Costs and Expenses. Cost of products sold as a percentage of sales was 69.1% for the 1997 nine-month period versus 67.7% for the comparable period in 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. Margins were lower for the 1997 nine-month period because of the higher percentage of machine shipments in the overall sales mix, lower margins on tooling sales and the effect of Pfauter's lower margins. Tooling margins were lower due to a less favorable product mix and increased price discounting in certain markets. Selling, general and administrative expenses for the 1997 nine-month period were 16.8 percent of sales compared to 17.7 percent of sales for the comparable 1996 nine-month period. The lower spending as a percentage of sales for the 1997 nine-month period was primarily attributable to lower commissions paid to outside dealers, partially offset by higher selling expenses as a percentage of sales for the Pfauter operations. The reduction in commission expense was due to decreased sales to South Korea and Brazil, where the Company is represented by independent dealers. Research and development expenses for the comparative nine-month periods of 1997 and 1996 were relatively unchanged at $5.6 million. 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(net) totaled $0.7 million in the first nine months of 1997 compared to $0.9 million in the comparable 1996 nine-month period. Other income(net) for the 1997 nine-month period included $0.4 million of costs related to the relocation of the Company's sales office in Stuttgart, Germany to the Pfauter offices in Ludwigsburg, Germany. The 1997 nine-month period also included a $0.4 million gain on the sale of property associated with one of the Company's former Components Group businesses which had been leased to the purchaser since the sale of that business in 1992. Net interest expense totaled $0.3 million for the 1997 nine-month period versus $0.7 million in the comparable 1996 period. The decrease in interest expense for the 1997 nine-month period was due to lower average borrowings outstanding under the Company's revolving credit facilities and higher balances in cash and equivalents during the first half of 1997. Income Taxes. The Company's provision for income taxes as a percentage of income before taxes for the 1997 nine-month period was 36.0%, and 36.3% for the comparable 1996 period. These percentages for both the 1997 and 1996 nine- month 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 1997 and 1996. 1996 COMPARED TO 1995 Earnings. Operating income 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 15 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 of 1996 more than double those of the first half. 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. 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 in 1996 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 in 1996 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(net) decreased to $1.0 million in 1996 from $1.3 million in 1995 primarily due to lower outside commission income. 16 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 36.1%. 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 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 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 in 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 in 1995 was 69.8% compared to 73.9% in 1994. The lower percentage was primarily attributable to improved gross margins on machine products. 17 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 in 1995 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 costs 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 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 equivalents increased $4.9 million in the nine months of 1997 to $12.1 million at September 30, 1997. Borrowings under the Company's revolving credit facilities increased to $67.3 million at September 30, 1997 from $3.9 million at December 31, 1996. Borrowings under these facilities increased due to the cash paid for the acquisition of Pfauter and the repayment of most of Pfauter's outstanding bank debt. Dividend payments to stockholders totaled $1.9 million in the nine months ended September 30, 1997. Effective July 31, 1997 the Company entered into a new $170 million revolving and term loan credit facility providing for multi-currency borrowings and standby 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 was $60 million and requires repayment in equal quarterly installments beginning October 1, 1999. Effective October 31, 1997, the Company reduced the total amount of the facility from $170 million to $160 million, with the term loan portion decreasing from $60 million to $50 million. All other terms and conditions remain the same. Up to $40 million of the revolving credit portion of the facility is available for 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 over 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 for 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 18 borrowing costs on its former secured credit facilities. The Credit Agreement relating to the facility contains customary financial ratio covenants and provisions which restrict the Company's ability to pay dividends in the event of a default. The Company intends to use the proceeds from the Offering to pay down a portion of the outstanding balance of this facility, which will further reduce the commitment under this facility to $150 million. After such payment, the Company will have approximately $70 million of available credit under the revolving credit and term loan facility which it may use for working capital and general corporate purposes. See "Use of Proceeds." Operating activities provided cash of $32.6 million in the first nine months of 1997 compared to $30.6 million in the comparable 1996 period. Operating cash flows were higher in the 1997 period due to higher earnings before depreciation and amortization expense. Cash provided from reductions in working capital during the first nine months of 1997 was slightly lower than during the comparable 1996 period as decreases in trade accounts receivable were less because of substantially higher 1997 third quarter sales. Future uses of cash for operating activities are expected to include approximately $9.0 million which management plans to spend over the next two years to rationalize Pfauter's operations. Management estimates that this investment will enable the Company to achieve subsequent annual cost savings of a similar magnitude. Investing activities used $36.3 million of cash in the 1997 nine-month period versus $5.0 million in the comparable prior year period. Investing activities for 1997 included cash used of $29.8 million, net of cash acquired of $6.4 million, for the acquisition of Pfauter. Capital expenditures during the first nine months of 1997 totaled $8.2 million, compared to $5.1 million in the comparable 1996 period. The Company expects that 1997 and 1998 full year capital expenditures will be greater than the 1996 level of $10.3 million, with the majority of the spending planned for further investments to upgrade existing production capabilities. Cash flows from investing activities in 1997 also included $1.5 million in cash received from the sale of the property of one of the Company's former businesses. During the first nine months of 1997, the Company used $1.4 million in cash to repurchase shares of its Common Stock under a program authorized by its Board of Directors in July 1996. As of September 30, 1997, the Company had used approximately $7.6 million in cash to repurchase 491,600 shares under this program. 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. 19 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 of a vehicle to its drive-axle. Cylindrical gears transmit power in parallel axes of rotation and have a wider variety of applications, including as components in the transmissions of vehicles. Based on its knowledge of the markets it serves, the Company believes it is the 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. Approximately two-thirds of the Company's aggregate net sales during the five years from 1992 through 1996 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 of 20 cylindrical gear hobbing machines. 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. 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 nine-month period ended September 30, 1997, the Company's net sales increased to $212.4 million, compared to $178.1 million in the 1996 period. Excluding sales of Pfauter, which was acquired on July 31, 1997, sales increased approximately 7% in the 1997 nine-month period over 1996. Foreign exchange translation effects negatively impacted sales by approximately $5.0 million for the 1997 nine-month period due to the weaker German deutsche mark compared to the U.S. dollar. Operating income during the first nine months of 1997 rose 17% over the comparable period in 1996 to $24.9 million, and net income increased 20% to $15.8 million. The quarter ended September 30, 1997 marked the fifteenth consecutive quarter in which the Company reported increased operating earnings on a comparative year-over-year basis. See footnote 8 to "Prospectus Summary-- Summary Consolidated and Pro Forma Consolidated Financial Data" for a discussion of EBIT and certain factors that should be considered when analyzing EBIT. 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 Hurth's 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 positively affected 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. 21 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 the Company's $160 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, had EBITDA of approximately $16.8 million and had net cash provided by (used in) operating activities, investing activities and financing activities of approximately $18.7 million, $(9.5) million and $(8.7) million, respectively. See footnote 8 to "Prospectus Summary-- Summary Consolidated and Pro Forma Consolidated Financial Data" for a discussion of EBITDA and certain factors that should be considered when analyzing EBITDA. 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 ("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 production 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. 22 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. 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 other 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 23 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 realizing future benefits from the synergies of Hurth and Pfauter, the Company intends 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. 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. 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, 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. Demand for gears by 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 equipment 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 24 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. 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 25 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 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. 26 PRODUCT LINES The following chart demonstrates the manufacturing processes involved in the production of bevel and cylindrical gears and the respective products and services provided by the Company to support each of these processes: GEAR PRODUCTION COMPANY OFFERINGS BY BRAND GLEASON- PFAUTER/ GLEASON PFAUTER/ GEAR TYPE PROCESS PRODUCT/SERVICE GLEASON PHOENIX HURTH MAAG - -------------------------------------------------------------------------------- Soft Face Hobbing . Manufacturing Face Milling . . Heat Treatment Hard Lapping . . Manufacturing Grinding . BEVEL Cutting Tools . GEARS Inspecting & Testing . . Workholding Other Equipment . Tool Sharpening . Spare Parts and Services . . Hobbing . . Soft Shaping . Manufacturing Shaving . Heat Treatment Hard Grinding . . CYLINDRICAL Manufacturing Honing . GEARS Cutting Tools . . Workholding Other Equipment . . . Tool Sharpening . . Spare Parts and Services . . . . . 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 was demonstrated for the first time. This 27 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 using 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. 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 28 the year ended December 31, 1996. During this period, consolidated net sales included $36.0 million, or 14.5% 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. 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 September 30, 1997, backlog totaled $194.9 million compared to $131.0 million as of September 30, 1996 and $122.8 million as of December 31, 1996. The Pfauter operations accounted for $81.2 million of the September 30, 1997 backlog. The Company expects substantially all of the September 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 any single patent to be a significant factor in the successful conduct of its business. See "Risk Factors--Dependence on Intellectual Property Rights." 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. 29 The following table sets forth certain information regarding the Company's major facilities:
LOCATION SQUARE 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 leases the land and building of a former subsidiary to the new owners of that 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 is involved in 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. 30 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 the President and a director of Gleason Foundation. 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. 31 John W. Pysnack has been Controller of the Company since 1995. Previously, 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. Previously, 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 previously 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 previously 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 previously was President and Chief Operating Officer of Coltec Industries. Donald D. Lennox was Chairman of the Board of International Imaging Materials, Inc., a manufacturer of thermal transfer ribbons for office equipment, from 1990 through 1997. Previously, 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. Previously, 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, now retired, 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. Previously, he was President and Chief Operating Officer of Siebe plc Controls Group. He is also a director of Thermalex, Inc. 32 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 November 10, 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.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR OWNED AFTER TO OFFERING(1) SHARES TO OFFERING(1) ----------------------- BE SOLD ----------------------- NAME OF BENEFICIAL OWNER NUMBER PERCENT IN OFFERING NUMBER PERCENT - ------------------------ ------------ ---------- ----------- ------------ ---------- 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 -- -- Dimensional Fund Advisors, Inc.(3)...... 668,000 6.7% -- 668,000 6.4% James S. Gleason(4)- (7).................... 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)....... 59,595 * -- 59,595 * 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)........ 41,124 * -- 41,124 * Julian W. Atwater(5)(6)(8)....... 31,295 * -- 31,295 * Robert W. Bjork(5)(6)(8)......... 30,261 * -- 30,261 * J. David Cartwright(5)(6)(8).... 20,181 * -- 20,181 * John W. Guffey, Jr.(5)(6)(8)........... 18,222 * -- 18,222 * Martin L. Anderson(5)(6)(8)...... 14,303 * -- 14,303 * William P. Montague(5)(6)(8)...... 4,601 * -- 4,601 * Robert L. Smialek(5)(6)(8)....... 601 * -- 601 * All directors and executive officers as a group (16 persons)(2)(4)- (9).................... 3,071,815 28.9% 1,200,000 1,871,815 17.0%
- -------- * Less than 1% of the outstanding shares of Common Stock. (1) Sole dispositive and voting powers unless otherwise indicated by footnote. (2) If the over-allotment option is exercised, the number of shares that Gleason Foundation will sell in the Offering, the number of shares beneficially owned by Gleason Foundation and the percentage of outstanding shares beneficially owned by 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 dispositive 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. (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 4,303, 2,295, 2,261, 8,181, 4,222, 15,114, 21,521, 601 and 601 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, 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. 33 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 November 10, 1997, 11,594,140 shares of Common Stock were issued, of which 9,964,897 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 $10.99 per share, and there were 59,099 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. 34 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 Bylaws, and the Rights Agreement dated as of June 8, 1989 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, 35 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. 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 36 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. 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. 37 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. 38 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. The Company and 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, Gleason Foundation and James S. Gleason 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 that (i) the Company may grant options under its 1981 and 1992 Stock Plans and hypothetical shares under its Plan for the Deferral of Directors' Fees and may issue shares pursuant to the exercise of outstanding options or under the Company's Plan for the Deferral of Directors' Fees, and (ii) Mr. Gleason may sell certain shares of Common Stock in order to satisfy tax obligations resulting from his exercise of Company stock options. 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. 39 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 and owns 5,000 shares of Common Stock, options to purchase 24,000 shares of Common Stock and 2,295 hypothetical shares granted under the Company's Plan for the Deferral of Directors' Fees. 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. 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. 40 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 Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 filed on November 12, 1997. (5) 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, October 2, 1997 and November 28, 1997; and (6) 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). 41 GLEASON CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NUMBER 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 September 30, 1997 and December 31, 1996................................................................ F-22 Consolidated Statements of Operations for the three months ended September 30, 1997 and 1996......................................... F-23 Consolidated Statements of Operations for the nine months ended September 30, 1997 and 1996......................................... F-24 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996......................................... F-25 Notes to Consolidated Financial Statements........................... F-26 PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF GLEASON CORPORATION AND HERMANN PFAUTER GMBH & CO. (UNAUDITED) Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1996............................................. F-29 Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 1997..................................... F-30 Notes to the Pro forma Financial Information......................... F-31
F-1 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 GLEASON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31, ------------------ 1996 1995 -------- -------- 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 ======== ========
See Notes to Consolidated Financial Statements. F-3 GLEASON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- 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 ========== ========== ==========
See Notes to Consolidated Financial Statements. F-4 GLEASON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (DOLLARS IN THOUSANDS)
CUMULATIVE FOREIGN MINIMUM TOTAL ADDITIONAL CURRENCY PENSION STOCK- COMMON PAID-IN RETAINED TRANSLATION LIABILITY TREASURY HOLDERS' STOCK CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT STOCK EQUITY ------- ---------- -------- ----------- ---------- -------- -------- 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 ======= ======= ======= ======= ======= ======== =======
See Notes to Consolidated Financial Statements. F-5 GLEASON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------- 1996 1995 1994 -------- ------- -------- 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 activi- ties............................................. (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 ======== ======= ========
See Notes to Consolidated Financial Statements. F-6 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. 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 F-7 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 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.
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, ----------------------- 1995 1994 ----------- ----------- 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
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 F-8 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 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. NOTE 4--INVENTORIES The components of inventories were as follows (in thousands):
DECEMBER 31, --------------- 1996 1995 ------- ------- 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 ======= =======
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):
DECEMBER 31, ----------------- 1996 1995 -------- -------- 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 ======== ========
NOTE 6--OTHER CURRENT LIABILITIES The components of other current liabilities were as follows (in thousands):
DECEMBER 31, --------------- 1996 1995 ------- ------- Salaries, wages and related costs......................... $11,095 $ 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 ======= =======
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 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 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):
1996 1995 1994 ------- -------- ------- 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 ======= ======== =======
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 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 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. F-11 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 The components of periodic expense for postretirement benefits were as follows (in thousands) :
1996 1995 1994 ------ ------ ------ 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 ====== ====== ======
The recorded liabilities for this unfunded postretirement benefit plan were as follows (in thousands):
1996 1995 ------- ------- 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 ======= =======
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):
1996 1995 ------ ------- 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 ====== =======
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 F-12 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 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. 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):
1996 1995 1994 ------- ------- ------ United States......................................... $14,619 $12,144 $ 815 Foreign............................................... 16,124 8,836 4,342 ------- ------- ------ Total................................................. $30,743 $20,980 $5,157 ======= ======= ======
Provisions (benefits) for income taxes included the following (in thousands):
1996 1995 1994 ------ -------- ------- 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) ====== ======== =======
F-13 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 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):
1996 1995 1994 ------- -------- ------ 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 ======= ======== ======
Deferred tax assets and liabilities were comprised of the following (in thousands):
1996 1995 ------- ------- 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 ======= =======
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. F-14 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 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. 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. F-15 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 The following is a summary of option transactions under both Plans:
SHARES PRICE RANGE ------- ------------- 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
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. F-16 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the option's vesting period. The Company's pro forma information follows (in thousands, except per share amounts):
1996 1995 ------- ------- Pro forma net income...................................... $19,079 $30,765 Pro forma earnings per share: Primary................................................. $ 1.79 $ 2.90 Fully diluted........................................... $ 1.79 $ 2.88
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, 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. F-17 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 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. 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):
1996 1995 1994 -------- -------- -------- 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 $103,871 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 ======== ======== ========
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. F-18 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 United States continuing operations for 1996, 1995 and 1994 included export sales (exclusive of intercompany sales) to the following geographic areas (in thousands):
1996 1995 1994 ------- ------- ------- 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 $52,712 ======= ======= =======
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. F-19 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 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 partnership 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 Partnership ("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. F-20 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) DECEMBER 31, 1996 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. Effective October 31, 1997, the Company reduced the total amount of the facility from $170 million to $160 million, with the term loan portion decreasing from $60 million to $50 million. All other terms and conditions remain the same. The Company accounted for the acquisition under the purchase accounting method. F-21 GLEASON CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------- ------------ (UNAUDITED) ASSETS Current assets Cash and equivalents.............................. $ 12,109 $ 7,199 Trade accounts receivable......................... 90,888 65,583 Inventories....................................... 75,350 27,986 Deferred tax assets............................... 6,894 6,894 Other current assets.............................. 6,690 4,038 -------- -------- Total current assets............................ 191,931 111,700 Property, plant and equipment, at cost.............. 235,667 170,084 Less accumulated depreciation....................... 113,822 108,693 -------- -------- 121,845 61,391 Deferred tax assets................................. 11,713 10,013 Goodwill............................................ 17,804 -- Other assets........................................ 10,274 7,570 -------- -------- Total assets........................................ $353,567 $190,674 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Short-term borrowings............................. $ 7,337 $ 329 Current portion of long-term debt................. 1,513 6 Trade accounts payable............................ 29,392 16,972 Income taxes...................................... 11,242 10,224 Other current liabilities......................... 69,845 30,335 -------- -------- Total current liabilities....................... 119,329 57,866 Long-term debt...................................... 68,292 4,506 Pension plans and other retiree benefits............ 59,998 38,220 Other liabilities................................... 10,614 5,218 -------- -------- Total liabilities............................... 258,233 105,810 Stockholders' equity Common stock...................................... 11,594 11,594 Additional paid-in capital........................ 5,438 5,731 Retained earnings................................. 100,091 86,187 Cumulative foreign currency translation adjustment....................................... (4,555) (2,149) Minimum pension liability adjustment.............. (461) (461) -------- -------- 112,107 100,902 Less treasury stock, at cost...................... 16,773 16,038 -------- -------- Total stockholders' equity...................... 95,334 84,864 -------- -------- Total liabilities and stockholders' equity.......... $353,567 $190,674 ======== ========
See Notes to Consolidated Financial Statements. F-22 GLEASON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30, ----------------------- 1997 1996 ----------- ----------- (UNAUDITED) Net sales............................................. $ 89,713 $ 53,467 Costs and expenses Cost of products sold............................... 63,084 35,722 Selling, general and administrative expenses........ 16,159 9,970 Research and development expenses................... 1,994 1,832 Interest expense--net............................... 403 133 Other (income) expense--net......................... 146 (234) ----------- ----------- Income before income taxes............................ 7,927 6,044 Provision for income taxes............................ 2,932 2,279 ----------- ----------- Net income............................................ $ 4,995 $ 3,765 =========== =========== Primary earnings per common share..................... $ .48 $ .35 =========== =========== Fully diluted earnings per common share............... $ .48 $ .35 =========== =========== Weighted average number of common shares outstanding: Primary............................................. 10,388,997 10,723,136 Fully diluted....................................... 10,398,481 10,745,104 Cash dividends declared per common share.............. $ .0625 $ .0625 =========== ===========
See Notes to Consolidated Financial Statements. F-23 GLEASON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1997 1996 ----------- ----------- (UNAUDITED) Net sales............................................ $ 212,432 $ 178,134 Costs and expenses Cost of products sold.............................. 146,783 120,581 Selling, general and administrative expenses....... 35,781 31,546 Research and development expenses.................. 5,628 5,618 Interest expense--net.............................. 282 660 Other (income)--net................................ (679) (851) ----------- ----------- Income before income taxes........................... 24,637 20,580 Provision for income taxes........................... 8,871 7,477 ----------- ----------- Net income........................................... $ 15,766 $ 13,103 =========== =========== Primary earnings per common share.................... $ 1.53 $ 1.22 =========== =========== Fully diluted earnings per common share.............. $ 1.52 $ 1.22 =========== =========== Weighted average number of common shares outstanding: Primary............................................ 10,326,069 10,731,260 Fully diluted...................................... 10,394,860 10,746,766 Cash dividends declared per common share............. $ .1875 $ .1875 =========== ===========
See Notes to Consolidated Financial Statements. F-24 GLEASON CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, ------------------ 1997 1996 -------- -------- (UNAUDITED) Cash flows from operating activities: Net income............................................... $ 15,766 $ 13,103 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 9,527 8,296 (Gain) on disposals of property, plant and equipment... (432) (2) Provision for deferred income taxes.................... 312 1,150 Changes in operating assets and liabilities: Decrease in accounts receivable...................... 5,417 13,346 (Increase) in inventories............................ (4,164) (5,459) (Increase) decrease in other current assets.......... (247) 533 Increase (decrease) in trade accounts payable........ 1,400 (1,883) Increase in all other current operating liabilities.. 5,746 2,323 Other, net........................................... (679) (824) -------- -------- Net cash provided by operating activities.................. 32,646 30,583 Cash flows from investing activities: Capital expenditures..................................... (8,196) (5,123) Investment in subsidiary, net of cash acquired........... (29,757) -- Proceeds from asset disposals............................ 1,572 41 Proceeds from collection of notes receivable............. 54 54 -------- -------- Net cash (used in) investing activities.................... (36,327) (5,028) Cash flows from financing activities: Net proceeds of short-term borrowings.................... 695 489 Net borrowings (repayments) under revolving and term loan credit agreements....................................... 62,513 (23,746) Proceeds from long-term debt............................. 217 106 Repayment of long-term debt.............................. (51,503) (130) Purchase of treasury stock............................... (1,360) (450) Net stock issues......................................... 332 -- Dividends paid........................................... (1,862) (1,945) -------- -------- Net cash provided by (used in) financing activities........ 9,032 (25,676) Effect of exchange rate changes on cash and equivalents.... (441) (75) -------- -------- Increase (decrease) in cash and equivalents................ 4,910 (196) Cash and equivalents, beginning............................ 7,199 9,926 -------- -------- Cash and equivalents, ending............................... $ 12,109 $ 9,730 ======== ========
See Notes to Consolidated Financial Statements. F-25 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 nine-month periods ended September 30, 1997 and 1996, (b) the financial position at September 30, 1997 and December 31, 1996, and (c) the cash flows for the nine-month periods ended September 30, 1997 and 1996, of Gleason Corporation and subsidiaries. 2. The results of operations for the three and nine-month periods ended September 30, 1997 are not necessarily indicative of the results that may be achieved for the full year. 3. All significant intercompany transactions have been eliminated in the consolidation. 4. On July 31, 1997, the Company purchased all of the general and limited partnership interests of Hermann Pfauter GmbH & Co., a manufacturer of cylindrical gear production equipment, and Pfauter-Maag Cutting Tools L.P., a cutting tool manufacturer (collectively referred to as "Pfauter"). The acquisition of Pfauter positions the Company to be a world leader in gear production equipment and related technology by combining Pfauter's extensive line of cylindrical gear production machinery and cutting tools with the Company's leading position in bevel gear production equipment. 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. Pfauter has major operations in Germany, Italy and the United States. 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 financed through a new multi-currency credit agreement dated July 31, 1997 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 method. The aggregate cost of the acquisition, including professional fees and other related costs totaling $2.5 million, was allocated to assets purchased and liabilities assumed based upon the fair values at the date of acquisition. The excess of the purchase price over the fair values of the net assets acquired was $17.6 million, which has been recorded as goodwill, and is being amortized on a straight-line basis over 30 years. The aggregate cost of the acquisition was allocated as follows (in thousands): Current assets, excluding cash................................... $ 77,966 Property, plant and equipment.................................... 63,595 Other assets..................................................... 3,100 Goodwill......................................................... 17,630 Current liabilities, including short-term borrowings............. (75,776) Long-term debt................................................... (29,384) Pension and other retiree benefits............................... (21,218) Other liabilities................................................ (5,034) -------- Total acquisition cost, net of cash acquired..................... $ 30,879 ========
In the allocation of the acquisition costs, current liabilities and other liabilities include $7.0 million and $2.0 million, respectively, of costs associated with the restructuring of Pfauter's operations. These costs F-26 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1997 (UNAUDITED) represent the Company's estimate of the expenses associated with the consolidation of certain sales and manufacturing operations and elimination of redundant activities. The Company expects these restructuring activities will take approximately two years to complete. Any adjustments to these estimated costs will adjust the goodwill recorded in the acquisition. Results of operations of Pfauter for the two month period following the acquisition date are included in the Consolidated Statements of Operations for the three and nine-month periods ending September 30, 1997. The following unaudited pro forma information has been prepared assuming that the Pfauter acquisition had taken place at the beginning of 1996 (in thousands, except per share amounts):
PRO FORMA NINE MONTHS ENDED SEPTEMBER 30 ----------------- 1997 1996 -------- -------- (UNAUDITED) Net sales............................................. $298,044 $295,594 Net income............................................ 15,113 11,180 Per common share.................................... 1.46 1.04
The pro forma financial information is not necessarily indicative of the results that would have been obtained if the transaction had been effected on the assumed date or the results that may be achieved by the Company in the future. The pro forma net income for the periods shown does not include any adjustments for cost savings expected to be realized from the restructuring plans or synergies of the combined business. 5.The components of inventories were as follows (in thousands):
9/30/97 12/31/96 ------- -------- Raw materials and purchased parts...................... $13,342 $ 5,269 Work in process........................................ 49,639 18,063 Finished goods......................................... 12,369 4,654 ------- ------- $75,350 $27,986 ======= =======
6. Net cash payments for income taxes were $6,664,000 and $2,687,000 for the nine months ended September 30, 1997 and 1996, respectively. Interest payments were $444,000 and $994,000 for the nine months ended September 30, 1997 and 1996, respectively. 7. On August 28, 1997 the Company's Board of Directors declared a two-for-one (2-for-1) stock split on the Company's common stock, including shares held in 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 increased the number of shares issued from 5,797,070 to 11,594,140, which included an increase in treasury stock from 814,614 to 1,629,228. As a result of the stock split, $5,797,070 was transferred from additional paid-in capital to common stock, representing the par value of the additional shares issued. Common stock and additional paid-in capital as of December 31, 1996 have been restated to reflect the stock split. In addition, all share and per share data have been restated to reflect the stock split. 8. 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 F-27 GLEASON CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) SEPTEMBER 30, 1997 (UNAUDITED) 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 $.01 for the three-month periods ended September 30, 1997 and September 30, 1996, respectively, and an increase in primary earnings per share of $.06 and $.04 for the nine-month periods ended September 30, 1997 and September 30, 1996, respectively. Fully diluted earnings per share would have increased by $.01 per share for the nine months ended September 30, 1997. There would have been no impact on fully diluted earnings per share for the other periods presented. 9. Certain reclassifications have been made to the prior period's financial statements to conform such financial statements to the presentation of the 1997 financial statements. 10. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS No. 131). This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. FAS No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997. The adoption of FAS No. 131 will have no impact on the Company's consolidated results of operations, financial position or cash flows, but may impact the disclosure of segment information. 11. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting on Comprehensive Income" (FAS No. 130). This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The purpose of reporting comprehensive income is to report a measure of all changes in equity of an enterprise that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. FAS No. 130 is effective for financial statements for fiscal years beginning after December 15, 1997. The adoption of FAS No. 130 will have no impact on the Company's consolidated results of operations, financial position or cash flows, but may impact the financial statement presentation. F-28 GLEASON CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA GLEASON ADJUSTMENTS PRO FORMA CORPORATION PFAUTER COMBINED (C) RESULTS ----------- ----------- ----------- ----------- ----------- 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
See Notes to Pro Forma Financial Information. F-29 GLEASON CORPORATION PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA GLEASON PRO FORMA ADJUSTMENTS CORPORATION PFAUTER COMBINED (C) RESULTS ----------- ----------- ----------- ----------- ----------- Net sales............... $ 212,432 $ 85,612 $ 298,044 $ -- $ 298,044 Costs and expenses Cost of products sold................. 146,783 65,101 211,884 78 211,962 Selling, general and administrative expenses............. 35,781 17,199 52,980 254 53,234 Research and development expenses............. 5,628 2,118 7,746 -- 7,746 Interest expense...... 282 2,058 2,340 913 3,253 Other (income)........ (679) (744) (1,423) (132) (1,555) ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes and minority interest...... 24,637 (120) 24,517 (1,113) 23,404 Provision for income taxes.................. 8,871 368 9,239 (948) 8,291 ----------- ----------- ----------- ----------- ----------- Income (loss) before minority interest...... 15,766 (488) 15,278 (165) 15,113 Minority interest....... -- (1,032) (1,032) 1,032 -- ----------- ----------- ----------- ----------- ----------- Net income (loss)....... $ 15,766 $ (1,520) $ 14,246 $ 867 $ 15,113 =========== =========== =========== =========== =========== Weighted average number of common shares outstanding............ 10,326,069 10,326,069 10,326,069 10,326,069 10,326,069 Income (loss) before minority interest...... $ 1.53 $ (.05) $ 1.48 $ (.02) $ 1.46 Minority interest....... $ -- $ (.10) $ (.10) $ .10 $ -- Net income (loss)....... $ 1.53 $ (.15) $ 1.38 $ .08 $ 1.46
See Notes to Pro Forma Financial Information. F-30 GLEASON CORPORATION NOTES TO PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (A) The pro forma consolidated statements of operations (unaudited) for the year ended December 31, 1996 and the nine months ended September 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 nine months ended September 30, 1997 present the results of operations of Gleason as if the acquisition had been consummated as of January 1, 1996. 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: Statements of Operations--at the approximate average exchange rates in effect during the year ended December 31, 1996 ($1 = DM 1.51) and the nine months ended September 30, 1997 ($1 = DM 1.71) (C) 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:
INCREASE (DECREASE) NET INCOME ------------------------------------- YEAR ENDED NINE MONTHS ENDED 12/31/96 9/30/97 --------------- ------------------ (DOLLARS IN THOUSANDS) 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) (92) Higher amortization expense resulting from the recognition of goodwill associated with the acquisition(2).................... (499) (250) 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) (913) Income tax (provision) benefit on Pfauter operations and pro forma adjustments(4).................... (374) 948 Minority interest removal(5)....... 1,444 1,032 --------------- -------------- Total adjustment to net income..... $ (802) $ 867 =============== ==============
-------- (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 nine 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. F-31 GLEASON CORPORATION NOTES TO PRO FORMA FINANCIAL INFORMATION--(CONTINUED) (UNAUDITED) (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. (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. 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. F-32 INSIDE BACK COVER - ARTWORK [Photographs of various company products.] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR ANY OTHER PERSON 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 IN- FORMATION OR REPRESENTATIONS MUST NOT BE 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 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. NEITHER THE DE- LIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER AT ANY TIME IMPLIES THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 8 Use of Proceeds.......................................................... 11 Capitalization........................................................... 11 Price Range of Common Stock.............................................. 12 Management's Discussion and Analysis of Results of Operations and Financial Condition..................................................... 13 Business................................................................. 20 Management............................................................... 31 Principal and Selling Stockholders....................................... 33 Description of Capital Stock............................................. 34 Certain Anti-Takeover Provisions......................................... 35 Underwriting............................................................. 39 Legal Matters............................................................ 40 Experts.................................................................. 40 Available Information.................................................... 40 Incorporation of Certain Documents by Reference.......................... 41 Index to Financial Statements............................................ F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1,600,000 SHARES LOGO GLEASON CORPORATION COMMON STOCK (PAR VALUE $1.00 PER SHARE) ---------------- PROSPECTUS ---------------- FURMAN SELZ MCDONALD & COMPANY SECURITIES, INC. ABN AMRO CHICAGO CORPORATION , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 by the Company in connection with the issuance and distribution of the shares of Common Stock being registered hereby, other than underwriting discounts and commissions. All amounts shown are estimates, except the SEC Registration fee: SEC Registration Fees.............................................. $ 4,152 Printing and Engraving Expenses.................................... 20,000 Legal Fees and Expenses............................................ 40,000 Accounting Fees and Expenses....................................... 50,000 Miscellaneous...................................................... 15,848 -------- Total............................................................ $130,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law (the "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 that they may be successful in defending any such action. The statute also permits the purchase of liability insurance by the Company on behalf of its officers and directors. Article VII of the Company's Bylaws 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 is permitted by its Bylaws purchase liability insurance on behalf of its directors and officers and has done so. Reference is made to the 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 the 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 ITEM 16. EXHIBITS. The following exhibits are filed herewith:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 1 Form of Underwriting Agreement 3(a) Restated Certificate of Incorporation of the Company(1) 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) Bylaws of the Company, as amended(1) 4(a) Specimen of Common Stock Certificate Gleason Corporation Preferred Stock Purchase Rights Agreement, as 4(b) amended(1) 5 Opinion of Nixon, Hargrave, Devans & Doyle LLP 23(a) Consent of Nixon, Hargrave, Devans & Doyle LLP(2) 23(b) Consent of Ernst & Young LLP 23(c) Consent of Schitag Ernst & Young Deutsche Allgemeine Treuhand AG Wirtschaftspruefungsgesellschaft (formerly Ernst & Young GmbH) 23(d) Consent of Dugan & Lopatka, CPAs, PC Powers of Attorney (contained in the signature page of the original 24 filing)
- -------- (1) Incorporated herein by reference to the registrant's Form 8-K dated October 2, 1997 and filed with the Commission on October 3, 1997. (2) Included in Exhibit 5 hereto. 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. 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 II-2 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 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 NEW YORK, STATE OF NEW YORK, ON THIS DECEMBER 3, 1997. GLEASON CORPORATION /s/ John J. Perrotti By: _________________________________ NAME: JOHN J. PERROTTI OFFICE: VICE PRESIDENT--FINANCE AND CHIEF FINANCIAL 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 Executive December 3, JAMES S. GLEASON Officer and 1997 Director Vice President-- /s/ John J. Perrotti Finance and Chief December 3, - ------------------------------------- Financial Officer 1997 JOHN J. PERROTTI (PRINCIPAL FINANCIAL OFFICER) * Controller - ------------------------------------- (PRINCIPAL December 3, JOHN W. PYSNACK ACCOUNTING OFFICER) 1997 * Director - ------------------------------------- December 3, MARTIN L. ANDERSON 1997 * Director - ------------------------------------- December 3, JULIAN W. ATWATER 1997 * Director - ------------------------------------- December 3, ROBERT W. BJORK 1997 II-4 SIGNATURE TITLE DATE * Director - ------------------------------------- December 3, DAVID J. BURNS 1997 * Director - ------------------------------------- December 3, J. DAVID CARTWRIGHT 1997 * Director - ------------------------------------- December 3, JOHN W. GUFFY, JR. 1997 * Director - ------------------------------------- December 3, DONALD D. LENNOX 1997 * Director - ------------------------------------- December 3, WILLIAM P. MONTAGUE 1997 * Director - ------------------------------------- December 3, ROBERT A. SHERMAN 1997 * Director - ------------------------------------- December 3, ROBERT L. SMIALEK 1997 /s/ John J. Perrotti, *By: ________________________________ JOHN J. PERROTTI, ATTORNEY-IN-FACT II-5 EX-1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 R&W DRAFT 12/2/97 1,600,000 SHARES GLEASON CORPORATION COMMON STOCK (PAR VALUE $1.00 PER SHARE) UNDERWRITING AGREEMENT ---------------------- , 1997 --------------- FURMAN SELZ LLC MCDONALD & COMPANY SECURITIES, INC. ABN AMRO CHICAGO CORPORATION c/o Furman Selz LLC 230 Park Avenue New York, New York 10169 Dear Sirs: 1. INTRODUCTION. Gleason Corporation, a Delaware corporation (the "Company"), proposes to issue and sell to you (the "Underwriters") an aggregate of 400,000 shares (the "Company Shares") of the Company's Common Stock, par value $1.00 per share (the "Common Stock"). The stockholders listed in Schedule II hereto (the "Selling Stockholders") propose severally to sell to the several Underwriters an aggregate of 1,200,000 outstanding shares of Common Stock. The 400,000 shares of Common Stock to be sold by the Company and the 1,200,000 shares of Common Stock to be sold by the Selling Stockholders are referred to herein as the "Firm Shares." The Company also grants to the several Underwriters the option to purchase up to an aggregate of not more than 60,000 additional shares of Common Stock. One of the Selling Stockholders also grants to the several Underwriters the option to purchase up to an aggregate of not more than 64,484 additional shares of Common Stock. The 60,000 additional shares of Common Stock to be sold by the Company and the 64,484 additional shares of Common Stock to be sold by one of the Selling Stockholders are collectively referred to herein as the "Additional Shares." The Firm Shares and the Additional Shares are collectively referred to herein as the "Shares." The Company and each of the Selling Stockholders hereby severally agree with the several Underwriters as follows: 2. REPRESENTATIONS AND WARRANTIES. (a) The Company represents, warrants and agrees with each of the Underwriters that: (i) Two registration statements on Form S-3 (File Nos. 333-37083 and 333-37085) under the Securities Act of 1933 as amended (the "Act"), with respect to the Shares, including a form of prospectus subject to completion, have been prepared by the Company in conformity with the requirements of the Act and the rules and regulations of the Securities and Exchange Commission (the "Commission") thereunder (the "Rules and Regulations"). Such registration statements have been filed with the Commission under the Act, and one or more amendments to such registration statements also have been so filed. After the execution of this Agreement, the Company shall file with the Commission either (A) if such registration statements, as they may have been amended, have been declared by the Commission to be effective under the Act, a prospectus in the form most recently included in an amendment to such registration statements filed with the Commission, with such insertions and changes as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act as shall have been provided to and approved by the Underwriters prior to the filing thereof, or (B) if either such registration statement, as amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Underwriters prior to the filing thereof. As used in this Agreement: the term "Registration Statement" means each such registration statement, as amended at the time when it was or is declared effective, including all financial schedules and exhibits thereto and to documents incorporated therein by reference; each Registration Statement shall be deemed to include any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined) and any registration statement filed pursuant to Rule 462(b) under the Act to increase the number of Shares; the term "Preliminary Prospectus" means each prospectus subject to completion contained in a registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in a Registration Statement or any amendment thereto or filed pursuant to Rule 424(a) under the Act at the time it was or is declared effective); and the term "Prospectus" means the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act or, if no prospectus is required to be filed pursuant to said Rule 424(b), such term means the prospectus included in each Registration Statement. References herein to any document or other information incorporated by reference in a Registration Statement shall include documents or other information incorporated by reference in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus). Reference made herein to any Preliminary Prospectus or the Prospectus shall be deemed to include all documents and information incorporated by reference therein and shall be deemed to refer to and include any documents and information filed after the date of such Preliminary Prospectus or Prospectus, as the case may be, which are so incorporated by reference, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 2 (ii) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus and has not instituted or threatened to institute any proceedings with respect to such an order. When any Preliminary Prospectus provided by the Company to the Underwriters for distribution to the public was filed with the Commission it (A) contained all statements required to be stated therein in accordance with, and complied in all material respects with the requirements of, the Act and the Rules and Regulations and (B) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. When each Registration Statement or any amendment thereto was or is declared effective, it (A) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the Rules and Regulations and (B) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus and when any amendment or supplement thereto is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or such amendment or supplement is not required to be so filed, when each Registration Statement and when any amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and at all times subsequent thereto up to and including the Closing Date (as defined in Section 3 hereof) and the Option Closing Date (as defined in Section 9 hereof), the Prospectus, as amended or supplemented at any such time, (A) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the Rules and Regulations and (B) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (ii) shall not apply to statements or omissions made in any Preliminary Prospectus, any Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon, and in conformity with, information furnished in writing to the Company by or on behalf of the Underwriters expressly for use therein. The documents which are incorporated by reference in any Preliminary Prospectus provided by the Company to the Underwriters for distribution to the public or the Prospectus or from which information is so incorporated by reference, when they became effective or were filed with the Commission, as the case may be, complied in all material respects with the requirements of the Act and the Rules and Regulations or the Exchange Act and the rules and regulations thereunder, as applicable, and did not, when such documents were so filed, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and any documents so filed and incorporated by reference subsequent to the effective date of each Registration Statement shall, when they are filed with the Commission, conform in all material respects with the requirements of the Act and the Rules and Regulations and the Exchange Act and the rules and regulations thereunder, as applicable. 3 (iii) Each of the Company and its subsidiaries (the "Subsidiaries") (A) is a duly organized and validly existing corporation or limited partnership in good standing under the laws of its jurisdiction of organization with full power and authority (corporate, partnership and other) to own or lease its properties and to conduct its business as described in each Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); and (B) is duly qualified to do business and is in good standing in each jurisdiction (x) in which the conduct of its business requires such qualification and (y) in which it owns or leases property (in each case except for those jurisdictions in which the failure so to qualify has not had and will not have a Material Adverse Effect. "Material Adverse Effect" means, when used in connection with the Company or its Subsidiaries, any development, change or effect that is materially adverse to the business, properties, assets, net worth, condition (financial or other), results of operations or prospects of the Company and its Subsidiaries taken as a whole. (iv) The Company has the duly authorized and validly outstanding capitalization as of September 30, 1997 set forth under the caption "Capitalization" in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and will have the adjusted capitalization as of September 30, 1997 set forth therein on the Closing Date and the Option Closing Date, based on the assumptions set forth therein. The securities of the Company conform to the descriptions thereof contained in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). The outstanding shares of Common Stock have been duly authorized and validly issued by the Company and are fully paid and nonassessable. Except as created hereby or referred to in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no outstanding options, warrants, rights or other arrangements requiring the Company at any time to issue any capital stock. No holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Shares and neither the filing of the registration statements nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to, the registration of any securities of the Company. The Shares have been duly authorized and are validly issued, fully paid and nonassessable; and, after payment therefor and transfer thereof in accordance with this Agreement, good and marketable title to the Company Shares will pass to the Underwriters on the Closing Date or the Option Closing Date (as the case may be) free and clear of any lien, encumbrance, security interest, claim or other restriction whatsoever. All the outstanding shares of capital stock or partnership interests of each Subsidiary have been duly authorized and validly issued, are fully paid and nonassessable (in the case of corporate Subsidiaries only), except as provided in Section 630 of the New York Business Corporation Law, and in each case are owned directly by the Company or another Subsidiary, free and clear of any lien, encumbrance, security interest, claim or other restriction whatsoever. The Shares are listed on The New York Stock Exchange and the Company knows of no reason or set of facts which is likely to adversely affect such listing. 4 (v) The financial statements and the related notes and schedules thereto included in each Registration Statement or incorporated therein by reference and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present the financial condition, results of operations, stockholders' equity and cash flows of the Company and its Subsidiaries at the dates and for the periods specified therein. Such financial statements and the related notes and schedules thereto have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise noted therein) and such financial statements as are audited have been examined by Ernst & Young LLP, Schitag Ernst & Young Deutsche Allgmeine Treuhand AG Wirtschaftsprufung-sgesellschaft or Dugan & Lopatka, all of whom are independent public accountants within the meaning of the Act and the Rules and Regulations, as indicated in their reports filed therewith. The selected financial information and statistical data set forth under the captions "Prospectus Summary -- Summary Consolidated Financial Data," "Capitalization," "Management's Discussion and Analysis of Results of Operations and Financial Condition" and "Business" in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) have been prepared on a basis consistent with the financial statements of the Company and its Subsidiaries. The pro forma financial statements of the Company and its Subsidiaries, and the related notes thereto, set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence the most recent Preliminary Prospectus), have been prepared in conformity with the requirements of the Act and the Rules and Regulations and present fairly the information shown therein; and the pro forma adjustments on such pro forma financial statements have been properly applied on the basis described in the related notes thereto. The pro forma financial data set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), under the captions "Prospectus Summary -- Summary Consolidated Financial Data," "Capitalization" and "Management's Discussion and Analysis of Results of Operations and Financial Condition," have been prepared on a basis consistent with the pro forma consolidated financial statements of the Company and its Subsidiaries. (vi) The Company and each of its Subsidiaries has filed all necessary United States federal, state and local, and all necessary foreign, income, franchise and other material tax returns and has paid all taxes shown as due thereunder, and the Company has no knowledge of any tax deficiency which might be assessed against the Company or any of its Subsidiaries which, if so assessed, may have a Material Adverse Effect. (vii) The Company and each of its Subsidiaries maintains insurance of the types and in amounts which they reasonably believe to be adequate for their business. (viii) Except as disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there is no pending action, suit, proceeding or investigation or threatened action, suit, proceeding or investigation before or by any court, regulatory body or administrative agency or any other 5 governmental agency or body, domestic or foreign, which (A) questions the validity of the capital stock of the Company or this Agreement or of any action taken or to be taken by the Company pursuant to or in connection with this Agreement, (B) is required to be disclosed in either Registration Statement which is not so disclosed (and such proceedings, if any, as are summarized in each Registration Statement or incorporated therein by reference are accurately summarized in all respects), or (C) could reasonably be expected to have a Material Adverse Effect. (ix) The Company has full legal right, power and authority to enter into this Agreement and to consummate the transactions provided for herein. This Agreement has been duly authorized, executed and delivered by the Company, and none of the Company's execution or delivery of this Agreement, its performance hereunder, its consummation of the transactions contemplated herein, its application of the net proceeds of the offering in the manner set forth under the caption "Use of Proceeds" or the conduct of its business as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), conflicts or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a default under, causes or will cause (or permits or will permit) the maturation or acceleration of any liability or obligation or the termination of any right under, or result in the creation or imposition of any lien, charge, or encumbrance upon, any property or assets of the Company or any of its Subsidiaries pursuant to the terms of (A) the certificate of incorporation or by-laws of the Company or any of its Subsidiaries, (B) any indenture, mortgage, deed of trust, voting trust agreement, stockholders' agreement, note agreement or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of them are or may be bound or to which any of their respective property is or may be subject or (C) any statute, judgment, decree, order, rule or regulation applicable to the Company or any of its Subsidiaries of any government, arbitrator, court, regulatory body or administrative agency or other governmental agency or body, domestic or foreign, having jurisdiction over the Company, any of its Subsidiaries or any of their respective activities or properties. (x) All agreements filed or incorporated by reference as exhibits to each Registration Statement to which the Company or any of its Subsidiaries is a party or by which any of them are or may be bound or to which any of their assets, properties or businesses is or may be subject have been duly and validly authorized, executed and delivered by the Company or such Subsidiary, as the case may be, and constitute the legal, valid and binding agreements of the Company or such Subsidiary, as the case may be, enforceable against each of them in accordance with their respective terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to enforcement of creditors' rights generally, and general equitable principles relating to the availability of remedies, and except as rights to indemnity or contribution may be limited by federal or state securities laws and the public policy underlying such laws). The descriptions in each Registration Statement or incorporated therein by reference of contracts and other documents are accurate and fairly present the information required to be shown with respect thereto by the Act and 6 the Rules and Regulations, and there are no contracts or other documents which are required by the Act or the Rules and Regulations to be described in either Registration Statement or filed as exhibits to either Registration Statement which are not described or filed as required or incorporated therein by reference, and the exhibits which have been filed are complete and correct copies of the documents of which they purport to be copies. (xi) Subsequent to the most recent respective dates as of which information is given in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and except as expressly contemplated therein, neither the Company nor any of its Subsidiaries has incurred, other than in the ordinary course of its business, any material liabilities or obligations, direct or contingent, purchased any of its outstanding capital stock, paid or declared any dividends or other distributions on its capital stock or entered into any material transactions not in the ordinary course of business, and there has been no material change in capital stock or debt or any material adverse change in the business, properties, assets, net worth, condition (financial or other), or results of operations or prospects of the Company and its Subsidiaries taken as a whole. Neither the Company nor any of its Subsidiaries (and the manner in which any of them conducts its business) is in breach or violation of, or in default under, any term or provision of (A) its certificate of incorporation or bylaws, (B) any indenture, mortgage, deed of trust, voting trust agreement, stockholders' agreement, note agreement or other agreement or instrument to which it is a party or by which it is or may be bound or to which any of its property is or may be subject, or any indebtedness, the effect of which breach or default singly or in the aggregate could reasonably be expected to have a Material Adverse Effect, or (C) any statute, judgment, decree, order, rule or regulation applicable to the Company or any of its Subsidiaries or of any arbitrator, court, regulatory body, administrative agency or any other governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its Subsidiaries or any of their respective activities or properties and the effect of which breach or default singly or in the aggregate could reasonably be expected to have a Material Adverse Effect. (xii) No labor disturbance by the employees of the Company or any of its Subsidiaries exists or is imminent which could reasonably be expected to have a Material Adverse Effect. (xiii) Each of the Company and its Subsidiaries owns, or is licensed or otherwise has sufficient right to use, the material proprietary knowledge, inventions, patents, trademarks, service marks, trade names, logo marks and copyrights used in or necessary for the conduct of its business (collectively "Rights") as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). No claims have been asserted against the Company or any of its Subsidiaries by any person with respect to the use of any such Rights or challenging or questioning the validity or effectiveness of any such Rights. The use, in connection with the business and operations of the Company of such Rights does not, to the Company's best knowledge, infringe on the rights of any person. 7 (xiv) No consent, approval, authorization or order of or filing with any court, regulatory body, administrative agency or any other governmental agency or body, domestic or foreign, is required for the performance of this Agreement or the consummation of the transactions contemplated hereby, except such as have been or may be obtained under the Act or may be required under state securities or Blue Sky laws in connection with the Underwriters' purchase and distribution of the Shares. (xv) Neither the Company nor, to the best knowledge of the Company, any of its officers, directors or affiliates (within the meaning of the Rules and Regulations) has taken, directly or indirectly, any action designed to stabilize or manipulate the price of any security of the Company, or which has constituted or which could reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company, to facilitate the sale or resale of the Shares or otherwise. (xvi) Each of the Company and its Subsidiaries has good and marketable title to, or valid and enforceable leasehold interests in, all properties and assets owned or leased by it, free and clear of all liens, encumbrances, security interests, claims, restrictions, equities, claims and defects, except (A) such as are described in each Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), or such as do not materially adversely affect the value of any of such properties or assets taken as a whole and do not materially interfere with the use made and proposed to be made of any of such properties or assets, and (B) liens for taxes not yet due and payable as to which appropriate reserves have been established and reflected in the financial statements included or incorporated by reference in each Registration Statement. The Company owns or leases all such properties as are necessary to its operations as now conducted, and as proposed to be conducted as set forth in each Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and the properties and business of the Company and its Subsidiaries conform in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). All the material leases and subleases of the Company and its Subsidiaries, and under which the Company or any Subsidiary holds material properties or assets as lessee or sublessee, constitute valid leasehold interests of the Company or such Subsidiary free and clear of any lien, encumbrance, security interest, restriction, equity, claim or defect, are in full force and effect, and neither the Company nor any Subsidiary is in default in respect of any of the material terms or provisions of any such material leases or subleases, and neither the Company nor any Subsidiary has notice of any claim which has been asserted by anyone adverse to the Company's or any of its Subsidiary's rights as lessee or sublessee under either the material lease or sublease, or affecting or questioning the Company's or any Subsidiary's right to the continued possession of the leased or subleased premises under any such material lease or sublease, which may have a Material Adverse Effect. (xvii) Neither the Company nor any Subsidiary has violated any applicable environmental, safety, health or similar law applicable to the business of the 8 Company, nor any foreign or United States federal or state law relating to discrimination in the hiring, promotion, or pay of employees, nor any applicable federal or state wages and hours law, nor any provisions of ERISA or the rules and regulations promulgated thereunder, the consequences of which violation could reasonably be expected to have a Material Adverse Effect. (xviii) Each of the Company and its Subsidiaries holds all material franchises, licenses, permits, approvals, certificates and other authorizations from foreign and United States federal, state and other governmental or regulatory authorities necessary to the ownership, leasing and operation of its properties or required for the present conduct of its business, and such material franchises, licenses, permits, approvals, certificates and other governmental authorizations are in full force and effect and the Company and its Subsidiaries are in compliance therewith except where the failure so to obtain, maintain or comply with could not reasonably be expected to have a Material Adverse Effect. (xix) No Subsidiary of the Company is currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such Subsidiary's capital stock, from repaying to the Company any loans or advances to such Subsidiary from the Company or from transferring any of such Subsidiary's property or assets to the Company or any other Subsidiary of the Company, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and except where such prohibition could not reasonably be expected to have a Material Adverse Effect. (xx) The Company meets the requirements for use of Form S-3 under the Rules and Regulations. (b) Each Selling Stockholder severally represents and warrants to, and agrees with, the several Underwriters that: (i) Such Selling Stockholder has full legal right, power and authority to enter into this Agreement. This Agreement has been duly executed and delivered by such Selling Stockholder. (ii) None of the execution, delivery or performance of this Agreement and the consummation of the transactions herein contemplated, will conflict with or result in a breach of, or default under, any indenture, mortgage, deed of trust, voting trust agreement, stockholders' agreement, note agreement, or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is or may be bound or to which any of his or its property is or may be subject, or any statute, judgment, decree, order, rule or regulation applicable to such Selling Stockholder of any government, arbitrator, court, regulatory body or administrative agency or other governmental agency or body, domestic or foreign, having jurisdiction over such Selling Stockholder or any of his activities or properties. 9 (iii) At the date hereof such Selling Stockholder has, and at the time of delivery of the Shares to be sold by such Selling Stockholder to the several Underwriters, such Selling Stockholder will have, full right, power and authority to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder hereunder. At the date hereof such Selling Stockholder is, and at the time of delivery of the Shares to be sold by such Selling Stockholder, such Selling Stockholder will be, the lawful owner of and has and will have, good and marketable title to such Shares free and clear of any liens, encumbrances, security interests, claims, community property rights, restrictions on transfer or other defects in title. Upon delivery of and payment for the Shares to be sold by such Selling Stockholder hereunder, good and marketable title to such Shares will pass to the Underwriters, free and clear of any liens, encumbrances, security interests, claims, community property rights, restrictions on transfer or other defects in title. Except as described in each Registration Statement and the Prospectus (or, if there is no Prospectus, the most recent Preliminary Prospectus) or created hereby, there are no outstanding options, warrants, rights, or other agreements or arrangements requiring such Selling Stockholder at any time to transfer any Common Stock to be sold hereunder by such Selling Stockholder. (iv) At the time when each Registration Statement becomes or became effective, and at all times subsequent thereto up to and including the Closing Date and the Option Closing Date, each Registration Statement and any amendments thereto will not contain any untrue statement of a material fact regarding such Selling Stockholder or omit to state a material fact regarding such Selling Stockholder required to be stated therein or necessary in order to make the statements therein regarding such Selling Stockholder not misleading, and the Prospectus (and any supplements thereto) (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) will not contain any untrue statement of a material fact regarding such Selling Stockholder or omit to state a material fact regarding such Selling Stockholder required to be stated therein or necessary in order to make the statements therein regarding such Selling Stockholder, in light of the circumstances under which they were made, not misleading. (v) Such Selling Stockholder has not taken, directly or indirectly, any action designed to stabilize or manipulate the price of any security of the Company, or which has constituted or which might in the future reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company, to facilitate the sale or resale of the Shares or otherwise. (vi) There is not pending or threatened against such Selling Stockholder any action, suit or proceeding which (A) questions the validity of this Agreement or of any action taken or to be taken by such Selling Stockholder pursuant to or in connection with this Agreement or (B) is required to be disclosed in either Registration Statement which is not so disclosed, and such actions, suits or proceedings as are summarized in each Registration Statement, if any, are accurately summarized. 3. PURCHASE, SALE AND DELIVERY OF THE SHARES. On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms 10 and conditions herein set forth, (A) the Company agrees to sell to each Underwriter and each Underwriter, severally and not jointly, agrees to purchase from the Company at a purchase price of $_____ per Share, the number of Firm Shares set forth opposite the name of such Underwriter in Column (1) of Schedule I hereto and (B) each Selling Stockholder, severally and not jointly, agrees to sell to each Underwriter, and each Underwriter, severally and not jointly, agrees to purchase from such Selling Stockholder at the same purchase price per Share, the number of Firm Shares equal to the number of Firm Shares set forth opposite the name of such Underwriter in Column (2) of Schedule I, multiplied by the number of Firm Shares set forth opposite the name of such Selling Stockholder in Column (1) of Schedule II and divided by the total number of Firm Shares to be sold by all Selling Stockholders, in each case subject to such adjustments as are necessary to eliminate any fractional shares. Delivery of certificates, and payment of the purchase price, for the Firm Shares shall be made at the offices of Furman Selz LLC at 230 Park Avenue, New York, New York 10169, or such other location as shall be agreed upon by the Company and the Underwriters. Such delivery and payment shall be made at 10:00 a.m., New York City time, on __________, 1997 or at such other time and date not more than ten business days thereafter as shall be agreed upon by the Underwriters and the Company. The time and date of such delivery and payment are herein called the "Closing Date." Delivery of the certificates for the Firm Shares shall be made to the Underwriters for the respective accounts of the several Underwriters against payment by the several Underwriters of the purchase price for the Firm Shares by wire transfer of same day funds to an account of the Company in the case of Firm Shares sold by it and the Selling Stockholders in the case of Firm Shares sold by the Selling Stockholders. The certificates for the Firm Shares to be so delivered will be in definitive, fully registered form, will bear no restrictive legends and will be in denominations and registered in such names as the Underwriters shall request not less than two full business days prior to the Closing Date. The certificates for the Firm Shares will be made available to Furman Selz LLC at such office or such other place as Furman Selz LLC may designate for inspection, checking and packaging not later than 9:30 a.m., New York time on the business day prior to the Closing Date. 4. PUBLIC OFFERING OF THE SHARES. It is understood that the Underwriters propose to make a public offering of the Shares at the price and upon the other terms set forth in the Prospectus. 5. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. (a) The Company covenants and agrees with each of the Underwriters that: (i) The Company will use its best efforts to cause each Registration Statement, if not effective at the time of execution of this Agreement, and any amendments thereto to become effective as promptly as practicable. If required, the Company will file the Prospectus and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rule 424(b) under the 11 Act. During any time when a prospectus relating to the Shares is required to be delivered under the Act, the Company (A) will comply with all requirements imposed upon it by the Act and the Rules and Regulations to the extent necessary to permit the continuance of sales of or dealings in the Shares in accordance with the provisions hereof and of the Prospectus, as then amended or supplemented, and (B) will not file with the Commission the prospectus or the amendment referred to in the third sentence of Section 2(a)(i) hereof, any amendment or supplement to such prospectus or any amendment to either Registration Statement of which the Underwriters shall not previously have been advised and furnished with a copy a reasonable period of time prior to the proposed filing and as to which filing the Underwriters shall not have given their consent. (ii) As soon as the Company is advised or obtains knowledge thereof, the Company will advise the Underwriters (A) when each Registration Statement, as amended, has become effective; if the provisions of Rule 430A promulgated under the Act will be relied upon, when the Prospectus has been filed in accordance with said Rule 430A and when any post-effective amendment to either Registration Statement becomes effective; (B) of any request made by the Commission for amending either Registration Statement, for supplementing any Preliminary Prospectus or the Prospectus or for additional information; or (C) of the issuance by the Commission of any stop order suspending the effectiveness of either Registration Statement or any post-effective amendment thereto or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto or the institution or threat of any investigation or proceeding for that purpose, and will use its best efforts to prevent the issuance of any such order and, if issued, to obtain the lifting thereof as soon as possible. (iii) The Company consents to the use of the Prospectus (and any amendment or supplement thereto) by the Underwriters and all dealers to whom the Shares may be sold, in connection with the offering or sale of the Shares and for such period of time thereafter as the Prospectus is required by law to be delivered in connection therewith. If, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event occurs as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, or if it becomes necessary at any time to amend or supplement the Prospectus to comply with the Act or the Rules and Regulations, the Company promptly will so notify the Underwriters and, subject to Section 5(a)(i) hereof, will prepare and file with the Commission an amendment to each Registration Statement or an amendment or supplement to the Prospectus which will correct such statement or omission or effect such compliance, each such amendment or supplement to be reasonably satisfactory to counsel to the Underwriters. (iv) As soon as practicable, but in any event not later than 45 days after the end of the 12-month period beginning on the day after the end of the fiscal quarter of the Company during which the effective date of the Registration Statements occur (90 days in the event that the end of such fiscal quarter is the end of the 12 Company's fiscal year), the Company will make generally available to its security holders, in the manner specified in Rule 158(b) of the Rules and Regulations, and to the Underwriters, an earnings statement which will be in the detail required by, and will otherwise comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations, which statement need not be audited unless required by the Act or the Rules and Regulations, covering a period of at least 12 consecutive months after the effective date of the Registration Statements. (v) During a period of five years after the date hereof, the Company will furnish to its stockholders, as soon as practicable, annual reports (including financial statements audited by independent public accountants) and unaudited quarterly reports of earnings, and will concurrently deliver to the Underwriters copies of such reports and any other material furnished to the Company's stockholders. (vi) The Company will maintain a Transfer Agent and, if necessary under the jurisdiction of incorporation of the Company, a Registrar (which may be the same entity as the Transfer Agent) for its Common Stock. (vii) The Company will furnish, without charge, to the Underwriters or on the Underwriters' order, at such place as the Underwriters may designate, copies of the each Preliminary Prospectus, each Registration Statement and any pre-effective or post-effective amendments thereto (two of which copies will be signed and will include all financial statements and exhibits) and the Prospectus, and all amendments and supplements thereto, in each case as soon as available and in such quantities as the Underwriters may reasonably request. (viii) The Company will not, directly or indirectly, without the prior written consent of the Underwriters, issue, offer, sell, grant any option to purchase or otherwise dispose (or announce any issuance, offer, sale, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 180 days after the date hereof, except pursuant to this Agreement, except for issuances in connection with an acquisition, merger or similar business combination transaction or issuances pursuant to the exercise of stock options outstanding on or granted subsequent to the date hereof, pursuant to (i) a stock option or other employee benefit plan in existence on the date hereof, (ii) the Company's Plan for the Deferral of Directors Fees and (iii) except as contemplated by the Prospectus. (ix) The Company will use its best efforts to maintain the listing of the Shares on The New York Stock Exchange. (x) The Company will apply the net proceeds of the offering received by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. 13 (b) Each Selling Stockholder covenants and agrees with each of the Underwriters that: (i) Each Selling Stockholder will not, directly or indirectly, without the prior written consent of the Underwriters, offer, sell, grant any option to purchase or otherwise dispose (or announce any offer, sale, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 90 days after the date hereof, except pursuant to this Agreement, and will not take during such period, directly or indirectly, any action designed to, or which could in the foreseeable future reasonably be expected to cause or result in, stabilization or manipulation of the price of any securities of the Company. (ii) Each Selling Stockholder consents to the use of the Prospectus and any amendment or supplement thereto by the Underwriters and all dealers to whom the Shares may be sold, both in connection with the offering or sale of the Shares and for such period of time thereafter as the Prospectus is required by law to be delivered in connection therewith. 6. EXPENSES. (a) Regardless of whether the transactions contemplated in this Agreement are consummated, and regardless of whether for any reason this Agreement is terminated, the Company and the Selling Stockholders will pay, and hereby agree to indemnify each Underwriter against, all fees and expenses incident to the performance of the obligations of the Company and the Selling Stockholders under this Agreement, including, but not limited to: (i) fees and expenses of accountants and counsel for the Company and the Selling Stockholders, (ii) all costs and expenses incurred in connection with the preparation, duplication, printing, filing, delivery and shipping of copies of the Registration Statements and any pre-effective or post-effective amendments thereto, any Preliminary Prospectus and the Prospectus and any amendments or supplements thereto (including postage costs related to the delivery by any financial printer selected by the Company to persons identified by the Underwriters of any Preliminary Prospectus or Prospectus, or any amendment or supplement thereto, but excluding postage costs related to the delivery of any such materials or other materials by the Underwriters independently of deliveries made by a financial printer selected by the Company), this Agreement and all other documents in connection with the transactions contemplated herein, including the cost of all copies thereof, (iii) filing fees of the Commission and the NASD relating to the Shares, (iv) any fees and expenses in connection with the listing of the Shares on The New York Stock Exchange, (v) costs and expenses incident to the preparation, issuance and delivery to the Underwriters of any certificates evidencing the Shares, including transfer agent's and registrar's fees and any applicable transfer taxes incurred in connection with the delivery to the Underwriters of the Shares to be sold by the Company and the Selling Stockholders pursuant to this Agreement, and (vi) costs and expenses relating to travel by representatives of the Company which is incident to any meetings with prospective investors in the Shares (other than as shall have been specifically approved by the Underwriters to be paid for by the Underwriters). 14 (b) If the purchase of the Shares as herein contemplated is not consummated for any reason other than the Underwriters' default under this Agreement or other than by reason of Section 11(a), the Company and the Selling Stockholders shall reimburse the several Underwriters for their out-of-pocket expenses (including reasonable counsel fees and disbursements) in connection with any investigation made by them, and any preparation made by them in respect of marketing of the Shares or in contemplation of the performance by them of their obligations hereunder; provided, however, that the maximum amount for which the Company and the Selling Stockholders shall be liable pursuant to this Section 6(b) is $150,000. 7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligation of each Underwriter to purchase and pay for the Shares set forth opposite the name of such Underwriter in Schedule I is subject to the continuing accuracy of the representations and warranties of the Company and the Selling Stockholders herein as of the date hereof and as of the Closing Date as if they had been made on and as of the Closing Date; the accuracy on and as of the Closing Date of the statements of officers of the Company and the Selling Stockholders made pursuant to the provisions hereof; the performance by the Company and the Selling Stockholders on and as of the Closing Date of their respective covenants and agreements hereunder; and the following additional conditions: (a) If the Company has elected to rely on Rule 430A under the Act, the Registration Statements shall have been declared effective, and the Prospectus (containing the information omitted pursuant to Rule 430A) shall have been filed with the Commission not later than the Commission's close of business on the second business day following the date hereof or such later time and date to which the Underwriters shall have consented; if the Company does not elect to rely on Rule 430A, the Registration Statement shall have been declared effective not later than 11:00 A.M., New York time, on the date hereof or such later time and date to which the Underwriters shall have consented; if required, in the case of any changes in or amendments or supplements to the Prospectus in addition to those contemplated above, the Company shall have filed such Prospectus as amended or supplemented with the Commission in the manner and within the time period required by Rule 424(b) under the Act; no stop order suspending the effectiveness of each Registration Statement or any amendment thereto shall have been issued, and no proceedings for that purpose shall have been instituted or threatened or, to the knowledge of the Company or the Underwriters, shall be contemplated by the Commission; and the Company shall have complied in all material respects with any request of the Commission for additional information (to be included in each Registration Statement or the Prospectus or otherwise). (b) Neither Registration Statement, or any amendment thereto, contains an untrue statement of fact which, in the Underwriters' reasonable opinion, is material, or omits to state a fact which, in the Underwriters' reasonable opinion, is material and is required to be stated therein or is necessary to make the statements therein not misleading, or that the Prospectus, or any supplement thereto, contains an untrue statement of fact which, in the Underwriters' reasonable opinion, is material, or omits to state a fact which, in the Underwriters' reasonable opinion, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 15 (c) On or prior to the Closing Date, the Underwriters shall have received from counsel to the Underwriters, such opinion or opinions with respect to the issuance and sale of the Firm Shares, each Registration Statement and the Prospectus and such other related matters as the Underwriters reasonably may request and such counsel shall have received such documents and other information as they request to enable them to pass upon such matters. (d) On the Closing Date the Underwriters shall have received the opinion, dated the Closing Date, of Nixon, Hargrave, Devans & Doyle LLP, counsel to the Company ("Company Counsel"), to the effect set forth below: (i) Each of the Company and its U.S. Subsidiaries (A) is duly organized and validly existing as a corporation or limited partnership in good standing under the laws of its jurisdiction of formation with full power and authority (corporate, partnership and other) to own or lease its properties and to conduct its business as described in the Prospectus, and (B) is duly qualified to do business as a foreign entity and is in good standing in each jurisdiction (x) in which the conduct of its business requires such qualification and (y) in which it owns or leases property (in each case except for those jurisdictions in which the failure so to qualify can be cured without having a Material Adverse Effect); (ii) The Company has authorized capital stock as set forth in the Prospectus; the securities of the Company conform in all material respects to the description thereof contained in the Prospectus; the outstanding shares of Common Stock have been duly authorized and validly issued by the Company, are fully paid and nonassessable, and are free of any preemptive or, to such counsel's knowledge, any other rights to subscribe for any of the Shares; the Company has duly authorized the sale of the Shares to be sold by it hereunder; such Shares, are validly issued, fully paid and nonassessable and conform in all material respects to the description thereof contained in the Prospectus and are not be subject to any preemptive, or, to such counsel's knowledge, any subscription or other similar rights; and the Shares are listed on The New York Stock Exchange; (iii) Such counsel has been advised by the Commission that each Registration Statement is effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and such counsel has no knowledge that any stop order suspending the effectiveness of either Registration Statement or any amendment thereto has been issued, or that proceedings for that purpose have been instituted, are pending or are threatened or contemplated under the Act; each Registration Statement and each amendment thereto and the Prospectus and, if any, each amendment and supplement thereto (except for the financial statements, schedules and other financial data included therein, as to which such counsel need not express any opinion), complied as to form in all material respects with the requirements of the Act and the Rules and Regulations; the descriptions contained and summarized in the Registration Statement and the Prospectus of contracts and other documents, are accurate and fairly represent in all material respects the information 16 required to be shown by the Act and the Rules and Regulations with respect to such contracts and other documents; such counsel is not aware of any contracts or documents which are required by the Act to be described in the Registration Statements or the Prospectus or to be filed as exhibits to the Registration Statements which are not described or filed as required by the Act and the Rules and Regulations; such counsel is not aware of any action, suit, proceeding or investigation before or by any court, regulatory body, or administrative agency or any other governmental agency or body, domestic or foreign, pending or threatened against the Company and of a character required to be disclosed in the Registration Statements or the Prospectus which is not so disclosed therein; and the statements set forth under the headings "Description of Capital Stock" and "Certain Anti-Takeover Provisions," in the Prospectus, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, provide an accurate summary of such legal matters, documents and proceedings; (iv) The Company has full legal right, power, and authority to enter into this Agreement and to consummate the transactions provided for herein; this Agreement has been duly authorized, executed and delivered by the Company; (v) Upon the delivery of the Company Shares and payment therefor in accordance with the terms of this Agreement and assuming that each of the Underwriters which has severally purchased such Company Shares acquires such Company Shares without notice of any adverse claim (within the meaning of the Uniform Commercial Code), such Underwriter will have acquired all of the rights of the Company to such Company Shares and will have acquired title to such Company Shares free and clear of any adverse claim. (vi) None of the Company's execution or delivery of this Agreement, its performance hereof, its consummation of the transactions contemplated herein or its application of the net proceeds of the offering in the manner set forth under the caption "Use of Proceeds," conflicts or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon, any property or assets of the Company or any of its U.S. Subsidiaries pursuant to the terms of the certificate of incorporation or by-laws of the Company or any of its U.S. Subsidiaries; the terms of any agreement or other document which is an exhibit to either Registration Statement or any document incorporated by reference in either Registration Statement; any statute, rule or regulation of any regulatory body or administrative agency or other governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its Subsidiaries or any of their respective activities or properties; or any judgment, decree or order, known to such counsel after reasonable investigation, of any government, arbitrator, court, regulatory body or administrative agency or other governmental agency or body, domestic or foreign, having such jurisdiction; and such counsel is not aware that any consent, approval, authorization or order of any court, regulatory body or administrative agency or other governmental agency or body, domestic or foreign, has been or is required for the Company's performance of this 17 Agreement or the consummation of the transactions contemplated hereby, except such as have been obtained under the Act or may be required under state securities or blue sky laws in connection with the purchase and distribution by the Underwriters of the Shares; (vii) The issued shares of capital stock of each of the U.S. Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable and are owned by the Company free and clear of any perfected security interests or, to the best knowledge of such counsel, any other liens, encumbrances, claims or security interests; and (viii) Such counsel is not aware of any claims, except those described in the Prospectus, which have been asserted against the Company or any of its Subsidiaries by any person challenging or questioning the validity or effectiveness of any Rights used in, or necessary for, the conduct of its business as described in the Prospectus or alleging that the business and operations of the Company and its Subsidiaries using such Rights infringe on the rights of any person. In addition, such counsel shall state that in the course of the preparation of the Registration Statements and the Prospectus, such counsel has participated in conferences with officers and representatives of the Company and with the Company's independent public accountants, at which conferences such counsel made inquiries of such officers, representatives and accountants and discussed the contents of the Registration Statements and the Prospectus and (without taking any further action to verify independently the statements made in the Registration Statements and the Prospectus and, except as stated in the foregoing opinion, without assuming responsibility for the accuracy, completeness or fairness of such statements) nothing has come to such counsel's attention that causes such counsel to believe that (i) either Registration Statement as of the date it is declared effective and as of the Closing Date, or (ii) the Prospectus as of the date thereof and as of the Closing Date contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading (it being understood that such counsel need not express any opinion with respect to the financial statements, schedules and other financial data included in either Registration Statement or the Prospectus). In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and public officials. In addition, where an opinion is qualified by "the best knowledge of such counsel," that such counsel is "not aware of" or other words of similar import, such opinion is based solely upon the conscious awareness of facts or other information by the attorneys at such counsel's firm who have had active involvement in the transactions contemplated by this Agreement and such opinion shall not imply that such counsel has undertaken any independent investigation to determine whether or not such fact, circumstance or other information is true or exists. References to the Registration Statements and the Prospectus in this paragraph (d) shall include any amendment or supplement thereto at the date of such opinion. 18 (e) On or prior to the Closing Date, counsel to the Underwriters shall have been furnished such documents, certificates and opinions as they may reasonably request in order to evidence the accuracy, completeness or satisfaction of any of the representations or warranties of the Company or the Selling Stockholders, or conditions herein contained. (f) At the time that this Agreement is executed by the Company the Underwriters shall have received from Ernst & Young LLP a letter as of the date this Agreement is executed by the Company in form and substance satisfactory to you (the "Original Letter"), and on the Closing Date the Underwriters shall have received from such firm a letter dated the Closing Date stating that, as of a specified date not earlier than five (5) days prior to the Closing Date, nothing has come to the attention of such firm to suggest that the statements made in the Original Letter are not true and correct. (g) On the Closing Date, the Underwriters shall have received a certificate, dated the Closing Date, of the principal executive officer and the principal financial or accounting officer of the Company to the effect that each of such persons has carefully examined the Registration Statements and the Prospectus and any amendments or supplements thereto and this Agreement, and that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date, and the Company has complied with all agreements and covenants and satisfied all conditions contained in this Agreement on its part to be performed or satisfied at or prior to the Closing Date; and (ii) To the best knowledge of each of such persons, no stop order suspending the effectiveness of either Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending or are contemplated or threatened under the Act, and any and all filings required by Rule 424 and Rule 430A have been timely made. References to the Registration Statements and the Prospectus in this paragraph (g) are to such documents as amended and supplemented at the date of the certificate. (h) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus up to and including the Closing Date there has not been (i) any change or decrease specified in the letter or letters referred to in paragraph (f) of this Section 7 or (ii) any change, or any development involving a prospective change, in the business or properties of the Company or its Subsidiaries which change or decrease in the case of clause (i) or change or development in the case of clause (ii) makes it impractical or inadvisable in the Underwriters' reasonable judgment to proceed with the public offering or the delivery of the Shares as contemplated by the Prospectus. (i) On the Closing Date, the Underwriters shall have received the opinion, dated the Closing Date, of Nixon, Hargrave, Devans & Doyle LLP in its capacity as counsel for the Selling Stockholders, to the effect set forth below: 19 (i) Each Selling Stockholder has full legal right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver in the manner provided herein the Shares sold by such Selling Stockholder; this Agreement has been duly executed and delivered by such Selling Stockholder; and (ii) None of the execution, delivery or performance of this Agreement by such Selling Stockholder and the consummation by such Selling Stockholder of the transactions herein contemplated, conflict with or result in a breach of, or default under, any material indenture, mortgage, deed of trust, voting trust agreement, stockholders agreement, note agreement or other agreement or other instrument of which such counsel is aware to which such Selling Stockholder is a party or by which such Selling Stockholder is bound or to which any of the property of any of the Selling Stockholders is subject, or the charter or by-laws of any of the Selling Stockholders that are corporations, and nothing has come to such counsel's attention which causes such counsel to believe that such actions will result in any violation of any law, rule, administrative regulation or court decree applicable to such Selling Stockholder (other than state securities or blue sky laws or regulations, as to which such counsel need not express any opinion); and (iii) Upon the delivery of the Shares to be sold hereunder by the Selling Stockholders and payment therefor in accordance with the terms of this Agreement and assuming that each of the Underwriters which has severally purchased such Shares acquires such Shares without notice of any adverse claim (within the meaning of the Uniform Commercial Code), such Underwriter will have acquired all of the rights of such Selling Stockholder to the Shares sold by such Selling Stockholder hereunder, and in addition will have acquired title to such Shares free and clear of any adverse claim. In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Selling Stockholders and public officials. In addition, where an opinion is qualified by "the best knowledge of such counsel," that such counsel is "not aware of" or other words of similar import, such opinion is based solely upon the conscious awareness of facts or other information by the attorneys at such counsel's firm who have had active involvement in the transactions contemplated by this Agreement and such opinion shall not imply that such counsel has undertaken any independent investigation to determine whether or not such fact, circumstance or other information is true or exists. References to the Registration Statement and the Prospectus in this paragraph (i) shall include any amendment or supplement thereto at the date of such opinion. (j) On the Closing Date, the Underwriters shall have received the opinion, dated the Closing Date, of Beiten, Burkhardt, Mittl & Wegner in its capacity as counsel for Gleason-Hurth Maschinen und Werkzeuge Corporation, Gleason-Pfauter Maschinenfabrik GmbH and Hermann Pfauter GmbH & Co. (together, the "German Subsidiaries") to the effect set forth below: 20 (i) Each of the German Subsidiaries is duly organized, registered and validly existing as a limited liability company or limited partnership under the laws of the Federal Republic of Germany; (ii) Each German Subsidiary has the capacity as a legal entity under German law to own property and other assets and to enter into and perform contracts. (iii) All of the capital stock of the German Subsidiaries is owned by the Company or one of its direct or indirect wholly-owned Subsidiaries, and, to the knowledge of such counsel, such capital stock is owned free and clear of any pledges, liens or other encumbrances or restrictions whatsoever, except that 65% of the capital stock of each of the German Subsidiaries has been pledged to the Chase Manhattan Bank and certain other lenders under the Credit Agreement dated as of July 31, 1997 among Gleason Corporation et al., as Borrowers, The Chase Manhattan Bank, as Administrative Agent, the Lenders named therein and Corestates Bank, N.A. et al., as co-agents; (iv) To the best knowledge of such counsel, the share capital of each German Subsidiary has been fully paid in, has not been paid back and no obligation to effect additional contributions exists in respect of its shares. (v) Such counsel is not aware of any action, suit, proceeding or investigation before or by any court, regulatory body, or administrative agency or any other governmental agency, pending or threatened against any German Subsidiary which, if determined adversely to such German Subsidiary, could be reasonably expected to have a Material Adverse Effect. (k) On the Closing Date, the Underwriters shall have received a certificate, dated the Closing Date, from each Selling Stockholder to the effect that such Selling Stockholder has carefully examined the Registration Statement and the Prospectus and this Agreement, and that the representations and warranties of such Selling Stockholder in this Agreement are true and correct, as if made at and as of the Closing Date, and such Selling Stockholder has complied with all the agreements and satisfied all the conditions to be performed or satisfied by such Selling Stockholder at or prior to the Closing Date. (l) The Underwriters shall have received from James Gleason an agreement to the effect that Mr. Gleason will not, directly or indirectly, without the prior written consent of the Underwriters, offer, sell, grant any option to purchase or otherwise dispose (or announce any offer, sale, grant of an option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 90 days after the date of this Agreement, except for sales of Common Stock made by Mr. Gleason in order to pay income taxes incurred as a result of the exercise of options to purchase Common Stock. (m) The Company and the Selling Stockholders shall have furnished the Underwriters with such further certificates or documents as you or counsel for the Underwriters 21 may reasonably request. All opinions, certificates, letters and documents to be furnished by the Company and the Selling Stockholders will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Underwriters and to counsel for the Underwriters. The Company and the Selling Stockholders shall furnish the Underwriters with conformed copies of such opinions, certificates, letters and documents in such quantities as you reasonably request. The certificates delivered under this Section 7 shall constitute representations, warranties and agreements of the Company and the Selling Stockholders, as the case may be, as to all matters set forth therein as fully and effectively as if such matters had been set forth in Section 2 of this Agreement. (n) The Shares shall be listed on The New York Stock Exchange. 8. INDEMNIFICATION. (a) The Company and the Selling Stockholders, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several (and actions in respect thereof), to which such Underwriter or such controlling person may become subject, under the Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or the Prospectus or any Preliminary Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements not misleading and will reimburse, as incurred, such Underwriter or such controlling persons for any legal or other expenses incurred by such Underwriter or such controlling persons in connection with investigating, defending or appearing as a third party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the obligations of each of the Selling -------- ------- Stockholders pursuant to this Section 8(a) shall apply only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with information furnished in writing by such Selling Stockholder expressly for use in such documents, and provided, further, that the Company and such Selling Stockholder will not be - -------- ------- liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any of such documents in reliance upon and in conformity with information furnished in writing to the Company on behalf of such Underwriter expressly for use therein, and provided, further, that such indemnity with respect to any Preliminary -------- ------- Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) from whom the person asserting any such loss, claim, damage, liability or action purchased Shares which are the subject thereof to the extent that any such loss, claim, damage, liability or action (i) results from the fact that such Underwriter failed to send or give a copy of the Prospectus (as amended or supplemented) to such person at or prior to the confirmation of the sale of such Shares to such person in any case where such delivery is required by the Act and (ii) arises out of or is based upon an untrue statement or 22 omission of a material fact contained in such Preliminary Prospectus that was corrected in the Prospectus (as amended and supplemented), unless such failure resulted from non-compliance by the Company with Section 5(a)(viii) hereof. The Company and the Underwriters acknowledge that the statements with respect to the Selling Stockholders set forth under the heading "Principal and Selling Stockholders" in the Prospectus have been furnished in writing by the Selling Stockholders for inclusion in the Prospectus and constitute the only information furnished in writing by or on behalf of the Selling Stockholders for inclusion in the Prospectus. The indemnity agreement in this paragraph (a) shall be in addition to any liability which the Company and the Selling Stockholders may otherwise have. (b) Each of the Underwriters agrees severally, but not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statements, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and each Selling Stockholder and each person, if any, who controls a Selling Stockholder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act against any and all losses, claims, damages or liabilities, joint or several (and actions in respect thereof) to which the Company or any such Selling Stockholder, director, officer, or controlling person may become subject, under the Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or actions arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in either Registration Statement or the Prospectus or any Preliminary Prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with information furnished in writing by that Underwriter to the Company expressly for use therein; and will reimburse, as incurred, all legal or other expenses reasonably incurred by the Company or any such Selling Stockholder, director, officer, controlling person in connection with investigating or defending any such loss, claim, damage, liability or action. The Company and the Selling Stockholders acknowledge that the statements with respect to the public offering of the Shares set forth under the heading "Underwriting" and the stabilization legend in the Prospectus have been furnished by the Underwriters to the Company expressly for use therein and constitute the only information furnished in writing by or on behalf of the Underwriters for inclusion in the Prospectus. The indemnity agreement contained in this subsection (b) shall be in addition to any liability which the Underwriters may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against one or more indemnifying parties under this Section 8, notify such indemnifying party or parties of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to any indemnified party otherwise than under subsection (a) or (b) of this Section 8 or to the extent that the indemnifying party was not adversely affected by such omission. In case any such action is brought against an indemnified party and it notifies an indemnifying party or parties of the 23 commencement thereof, the indemnifying party or parties against which a claim is to be made will be entitled to participate therein and, to the extent that it or they may wish, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if the -------- ------- defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party has reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and otherwise to participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses (other than the reasonable costs of investigation) subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party has employed such counsel in connection with the assumption of such different or additional legal defenses in accordance with the proviso to the immediately preceding sentence, (ii) the indemnifying party has not employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized in writing the employment of counsel for the indemnified party at the expense of the indemnifying party; provided, in each case, that the indemnifying party shall not be liable for the fees and expenses of more than one counsel for all indemnified parties and the indemnifying party shall only be liable for reasonable fees and expenses. (d) If the indemnification provided for in this Section 8 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a) or (b) above in respect of any losses, claims, damages, expenses or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) (i) in such proportion as is appropriate to reflect the relative benefits received by each of the contributing parties, on the one hand, and the party to be indemnified, on the other hand, from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each of the contributing parties, on the one hand, and the party to be indemnified, on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. In any case where the Company and/or any Selling Stockholder are contributing parties and the Underwriters are the indemnified party, the relative benefits received by the Company and/or the Selling Stockholders on the one hand, and the Underwriters, on the other, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Shares (before deducting expenses) bear to the total underwriting discounts received by the Underwriters hereunder, in each case as set forth in the table on the cover page of the Prospectus. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Stockholders or by the Underwriters, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement 24 or omission. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this paragraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this paragraph (d), the Underwriters shall not be required to contribute any amount in excess of the underwriting discount applicable to the Shares purchased by the Underwriters hereunder. The Underwriters' obligations to contribute pursuant to this paragraph (d) are several in proportion to their respective underwriting obligations, and not joint. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this paragraph (d), (i) each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter and (ii) each director of the Company, each officer of the Company who has signed each Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and each of the Selling Stockholders and each person, if any, who controls the Selling Stockholders within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Company, subject in each case to this paragraph (d). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect to which a claim for contribution may be made against another party or parties under this paragraph (d), notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any other obligation (x) it or they may have hereunder or otherwise than under this paragraph (d) or (y) to the extent that such party or parties were not adversely affected by such omission. The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may otherwise have. 9. RIGHT TO INCREASE OFFERING. At anytime during a period of 30 days from the date of the Prospectus, the Underwriters, by no less than two business days prior notice to the Company and the Selling Stockholders may designate a closing (which may be concurrent with, and part of the closing on the Closing Date with respect to the Firm Shares or may be a second closing held on a date subsequent to the Closing Date, in either case such date shall be referred to herein as the "Option Closing Date") at which the Underwriters may purchase all or less than all of the Additional Shares in accordance with the provisions of this Section 9 at the purchase price per share to be paid for the Firm Shares. In no event shall the Option Closing Date be later than 10 business days after written notice of election to purchase Additional Shares is given. The Company and Gleason Foundation agree, severally and not jointly, to sell to the several Underwriters the respective numbers of Additional Shares obtained by multiplying the number of Shares specified in such notice by a fraction, of which the numerator is, in the case of the Company, the maximum number of Additional Shares offered by it, and, in the case of Gleason Foundation the maximum number of Additional Shares offered by Gleason Foundation, and the denominator is the total number of Additional Shares (subject to adjustment by you to eliminate fractions). Such Additional Shares shall be purchased from the Company 25 and Gleason Foundation for the account of each Underwriter in the same proportion as the number of Firm Shares set forth opposite the name of such Underwriter in Column (3) of Schedule I bears to the total number of Firm Shares (subject to adjustment by you to eliminate fractions) and may be purchased by the Underwriters only for the purpose of covering over-allotments made in connection with the sale of the Firm Shares. No Additional Shares shall be sold or delivered unless the Firm Shares previously have been, or simultaneously are, sold and delivered. The right to purchase the Additional Shares or any portion thereof may be surrendered and terminated at any time upon notice by you to the Company and the Selling Stockholders. Except to the extent modified by this Section 9, all provisions of this Agreement relating to the transactions contemplated to occur on the Closing Date for the sale of the Firm Shares shall apply, mutatis mutandis, to the Option Closing Date for the sale of the Additional Shares. 10. REPRESENTATIONS, ETC. TO SURVIVE DELIVERY. The respective representations, warranties, agreements, covenants, indemnities and statements of, and on behalf of, the Company and its officers, the Selling Stockholders and the Underwriters, respectively, set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Underwriters, and will survive delivery of and payment for the Shares. 11. TERMINATION. (a) This Agreement (except for the provisions of Sections 6 and 8 hereof) may be terminated by the Underwriters by notice to the Company and the Selling Stockholders in the event that the Company or either of the Selling Stockholders has failed to comply in any respect with any of the provisions of this Agreement required on their respective parts to be performed at or prior to the Closing Date or the Option Closing Date, or if any of the representations or warranties of the Company or the Selling Stockholders is not accurate in any respect or if the covenants, agreements or conditions of, or applicable to the Company or the Selling Stockholders herein contained has not been complied with in any respect or satisfied within the time specified on the Closing Date or the Option Closing Date, respectively, or if between the date hereof and the Closing Date or the Option Closing Date: (i) the Company or any of its Subsidiaries shall have sustained a loss by strike, fire, flood, accident or other calamity of such a character as to interfere materially with the conduct of the business and operations of the Company and its Subsidiaries taken as a whole regardless of whether or not such loss was insured; (ii) trading in the Common Stock shall have been suspended by the Commission or The New York Stock Exchange or trading in securities generally on the New York Stock Exchange shall have been suspended or a material limitation on such trading shall have been imposed or minimum or maximum prices shall have been established on any such exchange or market system; 26 (iii) a banking moratorium shall have been declared by New York or United States authorities; (iv) (A) there shall have been an outbreak or escalation of hostilities between the United States and any foreign power or an outbreak or escalation of any other insurrection or armed conflict involving the United States or (B) there shall have been a material adverse change in general economic, political or financial conditions or (C) there shall have been a material adverse change in the present or prospective business or condition (financial or other) of the Company and its Subsidiaries taken as a whole that, in the case of (A), (B) or (C), in the Underwriters' reasonable judgment makes it impracticable or inadvisable to make or consummate the public offering, sale or delivery of the Company's Shares on the terms and in the manner contemplated in the Prospectus and the Registration Statement. (b) Termination of this Agreement under this Section 11 or Section 12 after the Firm Shares have been purchased by the Underwriters hereunder shall be applicable only to the Additional Shares. Termination of this Agreement shall be without liability of any party to any other party other than as provided in Sections 6 and 8 hereof. 12. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 7 or 11 hereof) to purchase and pay for (a) in the case of the Closing Date, the number of Firm Shares agreed to be purchased by such Underwriter or Underwriters upon tender to you of such Firm Shares in accordance with the terms hereof or (b) in the case of the Option Closing Date, the number of Additional Shares agreed to be purchased by such Underwriter or Underwriters upon tender to you of such Additional Shares in accordance with the terms hereof, and the number of such Shares shall not exceed 10% of the Firm Shares or Additional Shares required to be purchased on the Closing Date or the Option Closing Date, as the case may be, then, each of the non-defaulting Underwriters shall purchase and pay for (in addition to the number of such Shares which it has severally agreed to purchase hereunder) that proportion of the number of Shares which the defaulting Underwriter or Underwriters shall have so failed or refused to purchase on such Closing Date or Option Closing Date, as the case may be, which the number of Shares agreed to be purchased by such non-defaulting Underwriter bears to the aggregate number of Shares so agreed to be purchased by all such non-defaulting Underwriters on such Closing Date or Option Closing Date, as the case may be. In such case, you shall have the right to postpone the Closing Date or the Option Closing Date, as the case may be, to a date not exceeding seven full business days after the date originally fixed as such Closing Date or the Option Closing Date, as the case may be, pursuant to the terms hereof in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If one or more of the Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 7 or 11 hereof) to purchase and pay for (a) in the case of the Closing Date, the number of Firm Shares agreed to be purchased by such Underwriter or Underwriters upon tender to you of such Firm Shares in accordance with the terms hereof or (b) in the case of the Option Closing Date, the 27 number of Additional Shares agreed to be purchased by such Underwriter or Underwriters upon tender to you of such Additional Shares in accordance with the terms hereof, and the number of such Shares shall exceed 10% of the Firm Shares or Additional Shares required to be purchased by all the Underwriters on the Closing Date or the Option Closing Date, as the case may be, then (unless within 48 hours after such default arrangements to your satisfaction shall have been made for the purchase of the defaulted Shares by an Underwriter or Underwriters) and subject to the provisions of Section 11(b) hereof, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or on the part of the Company or the Selling Stockholders except as otherwise provided in Sections 6 and 8 hereof. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this paragraph. Nothing in this Section 12, and no action taken hereunder, shall relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement, including liability for losses resulting from any termination of this Agreement caused by, or permitted as a result of, the defaulting Underwriter's default. 13. NOTICES. All communications hereunder shall be in writing and shall be mailed or delivered or telegraphed and confirmed by letter or telecopied and confirmed by letter, if sent to the Underwriters, to c/o Furman Selz LLC at 230 Park Avenue, New York, New York 10169, Attention: Syndicate Department or, if sent to the Company or any Selling Stockholder, to the Company at 1000 University Avenue, Rochester, New York 14692-2970, Attention: Ralph E. Harper, Esq. 14. SUCCESSORS. This Agreement shall inure to the benefit of and be binding upon the Company, the Selling Stockholders, and each Underwriter and the Company's, the Selling Stockholders' and each Underwriter's respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person, except that the representations, warranties, indemnities and contribution agreements of the Company and the Selling Stockholders contained in this Agreement shall also be for the benefit of any person or persons, if any, who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and except that the Underwriters' indemnity and contribution agreements shall also be for the benefit of the directors of the Company, the officers of the Company who have signed either Registration Statement, any person or persons, if any, who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, the Selling Stockholders and any person or persons, if any, who control a Selling Stockholder within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Shares from the Underwriters will be deemed a successor because of such purchase. 15. APPLICABLE LAW; JURISDICTION. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to the choice of law or conflict of law principles thereof. Each party hereto consents to the jurisdiction of the state and federal courts sitting in New York and agrees to accept, either directly or through an agent, service of process of each such court. 28 16. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which together shall be deemed to be one and the same instrument. 29 If the foregoing correctly sets forth our understanding, please indicate the Underwriters' acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us. Very truly yours, GLEASON CORPORATION By: ------------------------------ Name: Title: SELLING STOCKHOLDERS: GLEASON FOUNDATION By: ------------------------------ Name: Title: THE RETIREMENT PLAN OF THE GLEASON WORKS By: ------------------------------ Name: Title: 30 Accepted as of the date first above written: FURMAN SELZ LLC By: ------------------------------ Title: --------------------------- MCDONALD & COMPANY SECURITIES, INC. By: ------------------------------ Title: --------------------------- ABN AMRO CHICAGO CORPORATION By: ------------------------------ Title: --------------------------- 31 SCHEDULE I UNDERWRITERS Underwriting Agreement dated __________, 1997
(1) (2) (3) Number of Firm Number of Firm Shares to be Aggregate Shares to be Purchased from Number of Firm Purchased from the Selling Shares to be the Company Stockholders Purchased -------------- -------------- -------------- Name and Address - ---------------- Furman Selz LLC...................... ---------- ---------- ---------- McDonald & Company Securities, Inc... ---------- ---------- ---------- ABN AMRO Chicago Corporation......... ---------- ---------- ---------- Total................................ 400,000 1,200,000 1,600,000 ========== ========== ==========
32 SCHEDULE II SELLING STOCKHOLDERS
(2) (1) Maximum Number of Name and Address of Firm Shares Additional Shares Selling Stockholder to be Sold to be Sold - ------------------- ----------- ----------------- The Retirement Plan of The Gleason Works 770,104 0 Gleason Foundation 429,896 64,484 Total..................................... 1,200,000 64,484 ========= ======
33 EX-4 3 SPECIMEN OF COMMON STOCK CERTIFICATE EXHIBIT 4(a) NUMBER SHARES COMMON STOCK COMMON STOCK CUSIP 377339 10 6 SEE REVERSE SIDE FOR CERTAIN DEFINITIONS GLEASON CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE This is to certify that _______________________________________________________ is the owner of _______________________________________________________________ FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF Gleason Corporation transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Dated: ________________ /s/ Ralph E. Harper /s/ James S. Gleason Secretary Chairman of the Board Countersigned and Registered: AMERICAN STOCK TRANSFER & TRUST COMPANY (New York) Transfer Agent and Registrar By _____________________________________ Authorized Signature GLEASON CORPORATION This certificate also evidences and entitles the holder hereof to certain rights as set forth in a Rights Agreement between Gleason Corporation and Chase Lincoln First Bank, N.A., dated as of June 8, 1989, as heretofore and hereafter amended (as amended, the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of Gleason Corporation. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Gleason Corporation will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights issued to, or held by, any Person who is, was or becomes an Acquiring Person or an Affiliate or Associate thereof (as defined in the Rights Agreement) and certain related persons, whether currently held by or on behalf of such Person or by any subsequent holder, may become null and void. Effective December 16, 1991, American Stock Transfer & Trust Company was appointed successor Rights Agent and became vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent, and all references contained in the Rights Agreement (and in any exhibits thereto) to Chase Lincoln First Bank, N.A. as Rights Agent are deemed references to American Stock Transfer & Trust Company as of such date. The Corporation, upon request to it or to the Transfer Agent named in this Certificate, will furnish to any shareholder without charge a full statement of the designations, relative rights, preferences and limitations of the shares of each class of stock authorized to be issued and, so far as have been fixed, of each series of preferred shares authorized to be issued in series. The Board of Directors is authorized from time to time, before issuance, to designate and fix the relative rights, preferences and limitations of other series of said preferred shares. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - __________ Custodian TEN ENT - as tenants by the entireties __________ under JT TEN - as joint tenants with right Uniform Gifts to of survivorship and not as Minors Act _________ tenants in common
Additional abbreviations may also be used though not in the above list. For value received, _______________ hereby sell, assign and transfer unto _________________________________________________________________ ________________________________________________________________________ Shares of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ____________________________________________ Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated_______________ ____________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER EX-5 4 OPINION OF NIXON, HARGRAVE EXHIBIT 5 Nixon, Hargrave, Devans & Doyle LLP Attorneys and Counsellors at Law Clinton Square Post Office Box 1051 Rochester, New York 14603-1051 (716) 263-1000 FAX: (716) 263-1600 December 3, 1997 Gleason Corporation 1000 University Avenue Rochester, New York 14692 Re: Registration Statements on Form S-3, Registration Nos. 333-37083 and 333-37085 Gentlemen: We have acted as counsel to Gleason Corporation, a Delaware corporation (the "Company"), in connection with two Registration Statements on Form S-3, as amended (the "Registration Statements"), filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act), to register an aggregate of 1,800,000 shares of Common Stock of the Company, $1.00 par value per share (the "Common Stock"). This opinion is being delivered to you in connection with the Registration Statements. In connection with the foregoing, we have examined the Registration Statements and the Preliminary Prospectus contained in the Registration Statements (the "Preliminary Prospectus"). We also have examined originals or copies, certified or otherwise identified to our satisfaction, of such corporate records, certificates and other documents, and have made such investigations of law, as we have deemed necessary or appropriate as a basis for the opinion expressed below. In rendering the following opinion, we have assumed, without investigation, the authenticity of all documents or other instruments submitted to us as originals, the conformity to the originals of all documents or other instruments submitted to us as copies, the genuineness of all signatures on such originals or copies, and the legal capacity at the time of execution thereof of natural persons who executed any such document or instrument. Gleason Corporation December 3, 1997 Page 2 We have also assumed, as contemplated by footnote (2) to the table set forth under the caption "Capitalization" in the Preliminary Prospectus, that the shares of Common Stock registered for sale by the Company are shares presently held by the Company as treasury shares. Based upon and subject to the foregoing, and the other qualifications and limitations contained herein, we are of the opinion that the shares of Common Stock registered pursuant to the Registration Statements are duly authorized, validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statements and to the use of our name as it appears under the caption "Legal Matters" in the Prospectus contained in the Registration Statements. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission thereunder. This opinion is intended for your benefit in connection with the transactions described above and, except as provided in the immediately preceding paragraph, may not be otherwise communicated to, reproduced, filed publicly or relied upon by, any other person or entity for any other purpose without our express prior written consent. This opinion is limited to the matters stated herein, and no opinion or belief is implied or may be inferred beyond the matters expressly stated herein. Julian W. Atwater, whose professional corporation is a partner in our firm, is a director of the Company and owns 5,000 shares of Common Stock, options to purchase 24,000 shares of Common Stock and 2,295 hypothetical shares granted under the Company's Plan for the Deferral of Directors' Fees. Very truly yours, EX-23.B 5 CONSENT OF ERNST & YOUNG EXHIBIT 23(b) CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 30, 1997 (except for Note 19, as to which the date is October 1, 1997) in Amendment No. 3 to the Registration Statement (Form S-3 No. 333-37085) and related Prospectus of Gleason Corporation for the registration of 500,000 shares of its common stock. /s/ Ernst & Young LLP Syracuse, New York December 2, 1997 EX-23.C 6 CONSENT OF SCHITAG, ERNST & YOUNG DEUTSCHE EXHIBIT 23(c) CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in Amendment No. 3 to the Registration Statement (Form S-3 No. 333-37085) and related Prospectus of Gleason Corporation for the registration of 500,000 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. Stuttgart, Germany December 2, 1997 Schitag Ernst & Young Deutsche Allgemeine Treuhand AG Wirtschaftspruefungsgesellschaft (formerly Ernst & Young GmbH) /s/ Jantz Hahn EX-23.D 7 CONSENT OF DUGAN & LOPATKA, CPAS, PC EXHIBIT 23(d) CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" in Amendment No. 3 to the Registration Statement (Form S-3 No. 333-37085) and related Prospectus of Gleason Corporation for the registration of 500,000 shares of its common stock and to the incorporation by reference therein of our reports dated January 31, 1996 with respect to the financial statements of Pfauter-Maag Cutting Tools Limited Partnership and Pfauter Cutting Tools, Inc. and to the incorporation by reference therein of our reports dated February 22, 1996 with respect to the financial statements of American Pfauter Limited Partnership and 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, PC Wheaton, Illinois December 2, 1997 -----END PRIVACY-ENHANCED MESSAGE-----