ITEM 1. BUSINESS
General
Gleason Corporation was incorporated in the State of Delaware in 1984 and in May of 1984, by virtue of a merger, became a holding company which owns all the outstanding stock of The Gleason Works. The Gleason Works was incorporated in New York State in 1903 as successor to the businesses of two corporations and has, with its predecessors, been in business since 1865. As used herein, unless the context otherwise indicates, "Company" includes Gleason Corporation and its subsidiaries and divisions.
In 1997, the Company completed the acquisition of the Hermann Pfauter Group ("Pfauter"), a world leader in cylindrical gear production equipment based in Ludwigsburg, Germany, which included Pfauter-Maag, a leading cutting tool manufacturer based in Rockford, Illinois. Further information regarding this acquisition is presented in Note 3 of the Notes to the Consolidated Financial Statements in the Company's Annual Report to Stockholders for the year ended December 31, 1997, which is incorporated herein by reference.
In 1995, the Company acquired certain assets and technology of Hurth Maschinen und Werkzeuge GmbH ("Hurth"), a Munich, Germany-based leader in the design and production of cylindrical gear machinery and tooling. Further information regarding the acquisition is presented in Note 3 of the Notes to the Consolidated Financial Statements in the Company's Annual Report to Stockholders for the year ended December 31, 1997, which is incorporated herein by reference.
In 1994, the Company ceased operations at Alliance Metal Stamping and Fabricating (one of the Company's former Components Group divisions) and sold the machinery and equipment located at this division's facility. Further information regarding discontinued operations is presented in Note 4 of the Notes to the Consolidated Financial Statements in the Company's Annual Report to Stockholders for the year ended December 31, 1997, which is incorporated herein by reference.
In the fourth quarter of 1993, the Company sold its former Belgian manufacturing operation to a new company owned by former employees of the Company. The successor company serves as a contract manufacturer for some of the Company's products.
Description of Business
The Company operates within one business segment. The Company's principal business activity is the development, manufacture and sale of gear production machinery and related equipment. The Company has manufacturing operations 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.
Foreign and domestic operations, export sales and major customer financial information is presented in Note 15 of the Notes to the Consolidated Financial Statements in the Company's Annual Report to Stockholders for the year ended December 31, 1997, which is incorporated herein by reference.
Products
The gear production industry is comprised of two markets, the bevel gear market and the cylindrical gear market.
Bevel Gear Products
The Company believes it is the world leader in the technology, design, application and methods of production of hypoid and other bevel gears, and in the manufacture of machines for the production of these gears.
Hypoid and other bevel gears are used to transmit mechanical power at an angle, such as from the drive shaft to the rear-driven axle of an automobile. The gears produced by Gleason machines are used in drive trains of automobiles, sport utility vehicles, trucks, buses, aircraft, marine, agricultural and construction machinery, and must meet a wide range of complex specifications which are determined by the function required of a particular gear set.
The Company sells over 30 models of machines for the production and testing of hypoid and other bevel gears. Some of these machines can produce gears as small as 6mm in diameter, weighing only 1/2 ounce, while others can produce gears as large as 1,000mm in diameter, weighing more than 1,000 pounds. The latest design of these machines incorporates full computer numerical controls (CNC) which contribute to improved quality and productivity.
In December 1989, the Company sold its first PHOENIX (Registered Trademark) gear production machine. This line of machines incorporates state-of-the-art, full CNC design for the production of spiral bevel and hypoid gears. CNC machine features include the elimination of manual set-ups, permitting a significant reduction in the overall cost of manufacturing spiral bevel and hypoid gears. PHOENIX products now account for the vast majority of bevel gear machine sales.
The Company designs and produces tooling, including cutting tools and workholding equipment, for use on its bevel gear production machines. Other products include spare parts, service, and gear design and inspection software.
Cylindrical Gear Products
The Company also manufactures machines for the production of spur and helical gears ranging from 6mm to 4,000mm in diameter. Spur and helical or cylindrical gears are used for the straight-line or parallel transmission of mechanical power. This type of gearing has a broad range of applications, such as the main drive axles of passenger cars with front-wheel-drive and transverse mounted engines, automotive transmissions, speed reducers, pumps and gear motors.
In 1993, the Company began making shipments of its first PHOENIX machine for cylindrical gear production. This machine, the 125GH gear hobber has significantly increased the Company's sales in this market.
The acquisitions of Pfauter and Hurth have added complementary product lines which have significantly strengthened the Company's position
in the cylindrical gear equipment market. Pfauter is recognized as a leader in cylindrical gear production equipment and cylindrical gear cutting tools. Hurth has been a leader in the technology and production processes for shaving and fine finishing of cylindrical gears. Similar to the Company's other gear equipment, the Company offers tooling, spare parts and field service for its cylindrical gear machines.
Marketing
The Company's sales and service functions in North America, Europe, India, China and Australia are generally performed directly by employees of the Company. Sales in other territories are generally handled by independent foreign machinery dealers.
In 1994, the Company acquired a 20 percent interest in OGA Corporation, its exclusive sales and service representative in Japan and Taiwan, in order to strengthen its presence and enhance growth in that region.
Overseas markets are important to the Company. The percentage of sales outside the United States was 64 percent and 73 percent in 1997 and 1996, respectively. The majority of overseas sales were to European and Asian customers. Sales to markets outside of the United States in 1997 were lower as a percentage of total sales primarily due to higher shipments to customers within the United States and lower shipments to the Asia-Pacific and South American regions.
The domestic and foreign automotive and truck industries accounted for approximately 73 percent of sales in 1997 and 76 percent of sales in 1996. The acquisition of Pfauter expanded the Company's customer base to include a broader range of non-automotive customers.
The Company has no contracts or subcontracts with U.S. government agencies that are significant.
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 through their own product development efforts. Competition is also encountered from alternative manufacturing processes for the production of gears, such as forging, forming and molding of plastic or powder metal. The Company believes its product lines compete effectively in its markets.
Backlog
Backlog (unshipped orders), is an important measure of short- term business activity. Because of the nature of the industry, backlog is subject to fluctuation. As of December 31, 1997 backlog totaled $177.7 million compared to $122.8 million as of December 31, 1996. Backlog at December 31, 1997, excluding Pfauter operations, declined to $108.9 million. The Company expects substantially all of the December 31, 1997 backlog to be shipped by the end of 1998.
Research and Development
Amounts expended for research and development are presented in the Consolidated Statements of Operations in the Company's Annual Report to Stockholders for the year ended December 31, 1997, which is incorporated herein by reference.
Patents
The Company owns a substantial number of United States and foreign patents and patent applications. The Company is not significantly dependent upon any one patent or group of patents for its business.
Employees
At December 31, 1997, the Company had 2,656 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 operations in Germany and Italy, the Company's employees are not represented by any collective bargaining agent.
Other Information
Certain of the components used in the Company's products are purchased from third parties and are available from a limited number of sources. 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.
The Company is not aware of any federal, state or local provisions which have been enacted or adopted regarding discharge of material into the environment, compliance with which might have a material effect on the consolidated capital expenditures, earnings or competitive position of the Company. The Company makes expenditures for environmental control equipment on an ongoing basis in its efforts to comply with applicable environmental regulations.
ITEM 2.
ITEM 2. 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; Bologna and Porretta Terme, Italy; Plymouth, England; Bangalore, India; and Biel, Switzerland.
A table of the major facilities and products manufactured is displayed below:
The Munich 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 in various locations around the world. The Company leases the land and building of a former subsidiary to the new owners of that business.
The Company's plants consist of well-lighted, well-maintained buildings and provide good working conditions. Production machinery and equipment are generally owned by the Company and suited to its manufacturing requirements.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries is a party to any material pending legal proceedings required to be disclosed under this item.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information regarding the market for the Company's Common Stock and related stockholder matters presented in the Company's Annual Report to Stockholders for the year ended December 31, 1997 is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented in the Five Year Review in the Company's Annual Report to Stockholders for the year ended December 31, 1997 is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion of Financial Condition and Results of Operations is presented in the Company's Annual Report to Stockholders for the year ended December 31, 1997 and is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and supplementary data of the Company and its subsidiaries presented in the Company's Annual Report to Stockholders for the year ended December 31, 1997 are incorporated herein by reference:
Consolidated Statements of Operations - Years ended December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets - December 31, 1997 and 1996.
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements - December 31, 1997.
Quarterly Results of Operations.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information required to be furnished by Items 401 and 405 of Regulation S-K are described in a definitive proxy statement which will be filed with the Securities and Exchange Commission pursuant to Regulation 14-A within 120 days after the close of the fiscal year ended December 31, 1997, which information is incorporated herein by reference. Additional information required to be furnished by Item 401 of Regulation S-K is as follows:
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be furnished by Item 402 of Regulation S-K is included in a definitive proxy statement which will be filed with the Securities and Exchange Commission pursuant to Regulation 14-A within 120 days after the end of the fiscal year ended December 31, 1997, which information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain information regarding security ownership of certain beneficial owners and management required to be furnished by Item 403 of Regulation S-K is included in a definitive proxy statement which will be filed with the Securities and Exchange Commission pursuant to Regulation 14-A within 120 days after the end of the fiscal year ended December 31, 1997, which information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding relationships is included in a definitive proxy statement which will be filed with the Securities and Exchange Commission pursuant to Regulation 14-A within 120 days after the end of the fiscal year ended December 31, 1997, which information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following is a list of the consolidated financial statements of the Company and its subsidiaries and Report of Independent Auditors presented in its Annual Report to Stockholders for the year ended December 31, 1997 which are incorporated herein by reference:
Consolidated Statements of Operations - Years ended December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets - December 31, 1997 and 1996.
Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity - Years ended December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements - December 31, 1997.
Report of Independent Auditors.
(2) The following consolidated financial statement schedules of Gleason Corporation and subsidiaries are included in Item 14(d): Schedule II - Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(3) Exhibits required to be listed including exhibits incorporated by reference under this Item and filed as exhibits under (c) of this Item 14 pursuant to Item 601 Table I of Regulation S-K are as follows:
(3) Articles of Incorporation and By-Laws.
(a) The Restated Certificate of Incorporation of Gleason Corporation, as filed with the Delaware Secretary of State on May 5, 1987, is incorporated by reference to Exhibit A of Gleason Corporation Form 10-Q for the quarter ended March 31, 1987.
(b) The Certificate of Amendment of the Certificate of Incorporation of Gleason Corporation as filed with the Delaware Secretary of State on May 8, 1996 is incorpo- rated by reference to Exhibit 3 of Gleason Corporation Form 10-Q for the quarter ended March 31, 1996.
(c) By-laws, as amended, are incorporated by reference to Exhibit 3(b) of Gleason Corporation Form 10-K, file number 1-8782, for the year ended December 31, 1991.
(4) Instruments defining the rights of security holders, including indentures.
(a) See 3(a), 3(b) and 3(c) above.
(b) Gleason Corporation Preferred Stock Purchase Rights Agreement, dated as of June 8, 1989, as amended, is incorporated by reference to Gleason Corporation Form 8-A Registration Statement dated June 8, 1989, Form 8 Amendment No. 1, dated March 2, 1990, and Form 8 Amendment No. 2, dated February 6, 1992.
(10) Material contracts.
(a) Credit Agreement dated July 31, 1997 among Gleason Corporation, and its affiliates named therein, as Borrowers, The Chase Manhattan Bank as Administrative Agent, and The Chase Manhattan Bank, Corestates Bank, N.A., The Bank of Nova Scotia, First Union National Bank, Marine Midland Bank, Manufacturers and Traders Trust Company, PNC Bank N.A., Sudwestdeutsche Landesbank, Mellon Bank and Banca Monte Paschi di Siena, SpA, as Lenders, is incorporated by reference to Exhibit 10 of Gleason Corporation Form 8-K, file number 1-8782, dated August 14, 1997.
(b) The Company's 1992 Stock Plan, as amended, is incorpo- rated by reference to Exhibit 3 of Gleason Corporation Form 10-Q, file number 1-8782, for the quarter ended March 31, 1997.
(c) Gleason Corporation Annual Management Incentive Compen- sation Plan is incorporated by reference to Exhibit 10(a) of Gleason Corporation Form 10-K, file number 1-8782, for the year ended December 31, 1994.
(d) Gleason Corporation Supplemental Retirement Plan, as restated, is incorporated by reference to Exhibit 10(c) of Gleason Corporation Form 10-K, file number 1-8782, for the year ended December 31, 1993.
(e) Executive Agreement between the Company and its executive officers (for which there are identical agreements for those officers listed in Part III, Item 10 of this Form 10-K) is incorporated by reference to Exhibit 10(c) of Gleason Corporation Form 10-K, file number 1-8782, for the year ended December 31, 1991.
(f) The Company's 1981 Stock Plan, as amended January 23, 1990, is incorporated by reference to Exhibit I of Gleason Corporation Form 10-K, file number 1-8782, for the year ended December 31, 1989.
(g) Trust Agreement for Gleason Corporation executive agree- ments and Supplemental Retirement Plan is incorporated by reference to Exhibit L of Gleason Corporation Form 10-K, file number 1-8782, for the year ended December 31, 1989.
(h) Gleason Corporation Plan for Deferral of Directors Fees is incorporated by reference to Exhibit J of Gleason Corporation Form 10-K, file number 1-8782, for the year ended December 31, 1988.
(i) Gleason Corporation Executive Life Insurance Program is incorporated by reference to Exhibit L of Gleason Corporation Form 10-K, file number 1-8782, for the year ended December 31, 1987.
(j) Gleason Corporation Long Term Disability Plan is incorp- orated by reference to Exhibit I of Gleason Corporation Form 10-K, file number 1-8782, for the year ended Decem- ber 31, 1986.
(k) Gleason Corporation 1986 Deferred Compensation Plan is incorporated by reference to Exhibit J of Gleason Corpor- ation Form 10-K, file number 1-8782, for the year ended December 31, 1986.
(13) Annual Report to Stockholders of the Registrant for the year ended December 31, 1997. Except for those portions of such Annual Report to Stockholders expressly incorporated by reference into this Report, such Annual Report to Stockholders is furnished solely for the information of the Securities and Exchange Commission and shall not be deemed a "filed" document. Refer to the Index to Exhibits.
(21) Subsidiaries of the Registrant. Refer to the Index to Exhibits.
(23) Consent of Independent Auditors. Refer to the Index to Exhibits.
(24) Power of Attorney. Refer to the Index to Exhibits.
(27) Financial Data Schedules. Refer to the Index to Exhibits.
(b) Reports on Form 8-K filed in the fourth quarter of 1997:
Amendment No. 2 to the Current Report on Form 8-K dated August 14, 1997 was filed on Form 8-K/A dated October 2, 1997 for Items 7(a) and (b) related to the Company's acquisition of Hermann Pfauter GmbH & Co. including the following financial statements: Hermann Pfauter GmbH & Co. Audited Financial Statements Report of Ernst & Young GmbH Reports of Dugan & Lopatka Consolidated Balance Sheets as of December 31, 1996 and 1995 Consolidated Income Statements for the Years Ended December 31, 1996, 1995 and 1994 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996 and 1995 Notes to the Consolidated Financial Statements Directors' Report - Review of 1994 through 1996
Pro Forma Consolidated Financial Statements of Gleason Corporation and Hermann Pfauter GmbH & Co (Unaudited)
Balance Sheet at June 30, 1997 Statement of Operations for the Year Ended December 31, 1996 Statement of Operations for the Six Months Ended June 30, 1997 Notes to Pro Forma Consolidated Financial Statements
The Company's Current Report on Form 8-K dated October 2, 1997 for Item 5 was filed on October 3, 1997.
(c) Exhibits required by Item 601 of Regulation S-K and required by Article 5 of Regulation S-X under Item 8 are filed as exhibits to this Report on Form 10-K.
(d) Financial Statement Schedules:
PHOENIX is a registered trademark of The Gleason Works.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Gleason Corporation Registrant
James S. Gleason James S. Gleason Chairman and President
John J. Perrotti John J. Perrotti Vice President - Finance and Treasurer
John W. Pysnack John W. Pysnack Controller
Date: March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, each of the following named directors has personally authorized the signing of this report on their behalf by the Attorney in Fact named below.
Martin L. Anderson ) Julian W. Atwater ) Robert W. Bjork ) David J. Burns ) J. David Cartwright ) Directors James S. Gleason ) John W. Guffey, Jr. ) Donald D. Lennox ) William P. Montague ) Robert A. Sherman ) Robert L. Smialek )
By: Ralph E. Harper Ralph E. Harper Attorney in Fact
Date: March 26, 1998
GLEASON CORPORATION AND SUBSIDIARIES INDEX TO EXHIBITS
Certain exhibits to this report on Form 10-K have been incorporated by reference. For a list of these exhibits, see Item 14 hereof.
The following exhibits are being filed herewith:
Exhibit No.
(13) Annual Report to Stockholders of the Registrant for the year ended December 31, 1997
(21) Subsidiaries of the Registrant
(23) Consents of Experts and Counsel
(a) Consent of Ernst & Young LLP, Independent Auditors
(24) Power of Attorney
(27) Financial Data Schedules
(a) Financial Data Schedule for the Year Ended December 31, 1997
(b) Financial Data Schedule for the Year Ended December 31, 1996
(c) Financial Data Schedule for the Year Ended December 31, 1995